UNITED STATES

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

 

 

 

 

FORM 10-Q

 

 

 

 

 

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

 

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)

 

 

 

 

 

 

 

 

 

Pennsylvania

 

23-0993790

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

 

One Quaker Park, 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

 

Not Applicable

Former name, former address and former fiscal year, if changed since last report.

 

 

 

 

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     [X]      No   [  ]     

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).            Yes    [X]     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  [X] 

 

Accelerated filer  [  ]

 

 

Non-accelerated filer  [  ] (Do not check if a smaller reporting company)

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [  ]    No  [X] 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

Number of Shares of Common Stock

Outstanding on September 30, 2017

 

 

13,299,294

 


 

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES

 

 

 

 

 

 

  

 

Page

PART I.

  

FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements (unaudited)

 

 

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017
and September 30, 2016

2

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended
September 30, 2017 and September 30, 2016

3

 

 

Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016

4

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017
and September 30, 2016

5

 

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

30

Item 4.

  

Controls and Procedures

31

PART II.

  

OTHER INFORMATION

32

Item 1.

 

Legal Proceedings

32

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 6.

  

Exhibits

33

Signatures

33

1


 

PART I

FINANCIAL INFORMATION

 

Item 1.                        Financial Statements (Unaudited).

 

Quaker Chemical Corporation

Condensed Consolidated Statements of Income

(Dollars in thousands, except per share data)

 

 

 

 

Unaudited

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30, 

 

 

 

2017

 

2016

 

2017

 

2016

Net sales

$

212,918

 

$

190,428

 

$

609,010

 

$

555,420

Cost of goods sold

  

138,142

 

  

119,531

 

  

391,512

 

  

345,141

Gross profit

  

74,776

 

  

70,897

 

  

217,498

 

  

210,279

Selling, general and administrative expenses

  

51,092

 

  

47,877

 

  

148,740

 

  

144,720

Combination-related expenses

 

9,675

 

 

1,157

 

 

23,088

 

 

1,157

Operating income

  

14,009

 

 

21,863

 

  

45,670

 

  

64,402

Other income (expense), net

  

249

 

  

(10)

 

  

(1,427)

 

  

(245)

Interest expense

  

(793)

 

  

(758)

 

  

(2,229)

 

  

(2,226)

Interest income

  

762

 

  

551

 

  

1,825

 

  

1,444

Income before taxes and equity in net income of associated

 

 

 

 

 

 

 

 

 

 

 

 

companies

  

14,227

 

  

21,646

 

  

43,839

 

  

63,375

Taxes on income before equity in net income of associated

 

 

 

 

 

 

 

 

 

 

 

 

companies

  

3,140

 

  

6,121

 

  

14,229

 

  

19,664

Income before equity in net income of associated companies

  

11,087

 

  

15,525

 

  

29,610

 

  

43,711

Equity in net income of associated companies

  

617

 

  

826

 

  

2,049

 

  

1,389

Net income

 

11,704

 

 

16,351

 

 

31,659

 

 

45,100

Less: Net income attributable to noncontrolling interest

 

562

 

 

343

 

 

1,619

 

 

1,131

Net income attributable to Quaker Chemical Corporation

$

11,142

 

$

16,008

 

$

30,040

 

$

43,969

Per share data:

  

 

 

  

 

 

  

 

 

  

 

 

Net income attributable to Quaker Chemical Corporation 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shareholders – basic

$

0.84

 

$

1.21

 

$

2.26

 

$

3.32

 

Net income attributable to Quaker Chemical Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shareholders – diluted

$

0.83

 

$

1.21

 

$

2.25

 

$

3.32

 

Dividends declared

$

0.355

 

$

0.345

 

$

1.055

 

$

1.010

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


 

Quaker Chemical Corporation

Condensed Consolidated Statements of Comprehensive Income

(Dollars in thousands)

  

 

 

 

 

Unaudited

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2017

 

2016

 

2017

 

2016

Net income

$

11,704

 

$

16,351

 

$

31,659

 

$

45,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

5,764

 

 

(715)

 

 

18,528

 

 

(1,074)

 

Defined benefit retirement plans

 

62

 

 

460

 

 

2,171

 

 

1,641

 

Unrealized gain on available-for-sale securities

 

286

 

 

195

 

 

453

 

 

808

 

 

Other comprehensive income (loss)

 

6,112

 

 

(60)

 

 

21,152

 

 

1,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

17,816

 

 

16,291

 

 

52,811

 

 

46,475

Less: Comprehensive income attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

interest

 

(409)

 

 

(520)

 

 

(2,037)

 

 

(1,217)

Comprehensive income attributable to Quaker Chemical

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

$

17,407

 

$

15,771

 

$

50,774

 

$

45,258

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Quaker Chemical Corporation

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value and share amounts)

  

 

 

 

 

Unaudited

 

 

 

September 30,

 

December 31,

 

 

 

2017

 

2016

ASSETS

  

  

 

  

  

Current assets

  

  

 

  

  

 

Cash and cash equivalents

$

109,088

 

$

88,818

 

Accounts receivable, net

  

218,243

 

  

195,225

 

Inventories

  

 

 

  

 

 

 

Raw materials and supplies

  

44,300

 

  

37,772

 

 

Work-in-process and finished goods

  

45,952

 

  

39,310

 

Prepaid expenses and other current assets

  

24,272

 

  

15,343

 

 

Total current assets

  

441,855

 

  

376,468

Property, plant and equipment, at cost

  

253,548

 

  

236,006

 

Less accumulated depreciation

  

(167,270)

 

  

(150,272)

 

 

Net property, plant and equipment

  

86,278

 

  

85,734

Goodwill

  

85,816

 

  

80,804

Other intangible assets, net

  

73,514

 

  

73,071

Investments in associated companies

  

25,191

 

  

22,817

Non-current deferred tax assets

  

22,229

 

  

24,382

Other assets

  

29,644

 

  

28,752

 

 

Total assets

$

764,527

 

$

692,028

  

 

 

  

 

 

  

 

LIABILITIES AND EQUITY

  

 

 

  

 

Current liabilities

  

 

 

  

 

 

Short-term borrowings and current portion of long-term debt

$

700

 

$

707

 

Accounts and other payables

  

95,584

 

  

82,164

 

Accrued compensation

  

20,470

 

  

19,356

 

Accrued restructuring

 

 

 

670

 

Other current liabilities

  

39,367

 

  

24,514

 

 

Total current liabilities

  

156,121

 

  

127,411

Long-term debt

  

72,374

 

  

65,769

Non-current deferred tax liabilities

  

12,618

 

  

12,008

Other non-current liabilities

  

71,355

 

  

74,234

 

 

Total liabilities

  

312,468

 

  

279,422

Commitments and contingencies (Note 16)

 

 

 

 

 

Equity

  

 

 

  

 

 

Common stock, $1 par value; authorized 30,000,000 shares; issued and

  

 

 

  

 

 

 

outstanding 2017 – 13,299,294 shares; 2016 – 13,277,832 shares

 

13,299

 

 

13,278

 

Capital in excess of par value

  

113,129

 

  

112,475

 

Retained earnings

  

380,421

 

  

364,414

 

Accumulated other comprehensive loss

  

(66,673)

 

  

(87,407)

 

 

Total Quaker shareholders’ equity

  

440,176

 

  

402,760

Noncontrolling interest

 

11,883

 

 

9,846

Total equity

 

452,059

 

 

412,606

 

 

Total liabilities and equity

$

764,527

 

$

692,028

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Quaker Chemical Corporation

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

 

 

Unaudited

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

 

2017

 

2016

Cash flows from operating activities

  

  

  

  

  

 

Net income

$

31,659

 

$

45,100

 

Adjustments to reconcile net income to net cash provided by operating activities:

  

 

 

  

 

 

 

Depreciation

  

9,464

 

  

9,469

 

 

Amortization

  

5,490

 

  

5,319

 

 

Equity in undistributed earnings of associated companies, net of dividends

  

(1,919)

 

  

(1,314)

 

 

Deferred compensation and other, net

  

(1,190)

 

  

3,083

 

 

Stock-based compensation

  

3,269

 

  

4,942

 

 

(Gain) loss on disposal of property, plant, equipment and other assets

  

(50)

 

  

44

 

 

Insurance settlement realized

  

(542)

 

  

(809)

 

 

Combination-related expenses, net of payments

 

10,367

 

 

1,157

 

 

Pension and other postretirement benefits

  

608

 

  

(3,373)

 

(Decrease) increase in cash from changes in current assets and current

 

 

  

 

 

 

 

liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

  

(12,946)

 

  

(5,926)

 

 

Inventories

  

(9,272)

 

  

(3,741)

 

 

Prepaid expenses and other current assets

  

(5,217)

 

  

(868)

 

 

Accounts payable and accrued liabilities

  

11,755

 

  

4,088

 

 

Restructuring liabilities

 

(675)

 

 

(4,194)

 

 

   

Net cash provided by operating activities

  

40,801

 

  

52,977

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

  

 

 

  

 

 

 

Investments in property, plant and equipment

  

(8,032)

 

  

(6,311)

 

 

Payments related to acquisitions, net of cash acquired

  

(5,363)

 

  

(3,244)

 

 

Proceeds from disposition of assets

 

67

 

 

54

 

 

Insurance settlement interest earned

  

35

 

  

24

 

 

Change in restricted cash, net

  

507

 

  

785

 

 

   

Net cash used in investing activities

  

(12,786)

 

  

(8,692)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

  

 

 

  

 

 

 

Proceeds from long-term debt

  

4,472

 

  

 

 

Repayments of long-term debt

  

(488)

 

  

(6,842)

 

 

Dividends paid

  

(13,893)

 

  

(13,052)

 

 

Stock options exercised, other

  

(2,594)

 

  

64

 

 

Payments for repurchase of common stock

 

 

 

(5,859)

 

 

Excess tax benefit related to stock option exercises

 

 

 

167

 

 

   

Net cash used in financing activities

  

(12,503)

 

  

(25,522)

Effect of foreign exchange rate changes on cash

  

4,758

 

  

(792)

 

 

Net increase in cash and cash equivalents

  

20,270

 

  

17,971

 

 

Cash and cash equivalents at beginning of period

  

88,818

 

  

81,053

 

 

Cash and cash equivalents at end of period

$

109,088

 

$

99,024

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements 

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

Note 1 – Condensed Financial Information

The condensed consolidated financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial reporting and the United States Securities and Exchange Commission (“SEC”) regulations.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and SEC regulations.  In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments, except certain material adjustments, as discussed below) which are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods.  The results for the three and nine months ended September 30, 2017, respectively, are not necessarily indicative of the results to be expected for the full year.  These financial statements should be read in conjunction with the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2016.  During the first quarter of 2017, the Company early adopted an accounting standard update regarding the classification of pension costs.  The guidance in this accounting standard update was required to be applied retrospectively, which resulted in a reclassification to the Company’s Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2016, respectively.  See Note 3 of Notes to Condensed Consolidated Financial Statements.  

Venezuela’s economy has been considered hyper inflationary under U.S. GAAP since 2010, at which time the Company’s Venezuela equity affiliate, Kelko Quaker Chemical, S.A. (“Kelko Venezuela”), changed its functional currency from the bolivar fuerte (“BsF”) to the U.S. dollar.  Accordingly, all gains and losses resulting from the remeasurement of Kelko Venezuela’s monetary assets and liabilities to published exchange rates are required to be recorded directly to the Condensed Consolidated Statements of Income.  During the first quarter of 2016, the Venezuela government announced changes to its foreign exchange controls, including eliminating the CADIVI, SICAD and SIMADI exchange rate mechanisms and replacing them with a dual exchange rate system, which consists of a protected DIPRO exchange rate, with a rate fixed at 10 BsF per U.S. dollars and, also, a floating exchange rate known as the DICOM.  The DIPRO rate is only available for payment of certain imports of essential goods in the food and health sectors while the DICOM governs all other transactions not covered by the DIPRO.  In light of these changes to the foreign exchange controls, during the first quarter of 2016 the Company re-assessed Kelko Venezuela’s access to U.S. dollars, the impact on the operations of Kelko Venezuela, and the impact on the Company’s equity investment and other related assets.  The Company did not believe it had access to the DIPRO and, therefore, believed the DICOM to be the exchange rate system available to Kelko Venezuela, which resulted in a currency conversion charge of $0.1 million in the first quarter of 2016.  Due to ongoing economic and political instability in Venezuela, the DICOM BsF per U.S dollar exchange rate has continued to devalue during 2017.  This resulted in the Company recording a currency conversion charge of less than $0.1 million and $0.4 million in the three and nine months ended September 30, 2017, respectively, to write down the Company’s equity investment to the current DICOM exchange rate.  These currency conversion charges were recorded through equity in net income of associated companies in the Company’s Condensed Consolidated Statement of Income for each period, respectively.  As of September 30, 2017, the Company’s equity investment in Kelko Venezuela was $0.1 million, valued at the current DICOM exchange rate of approximately 3,341 BsF per U.S. dollar. 

As part of the Company’s chemical management services, certain third-party product sales to customers are managed by the Company.  Where the Company acts as a principal, revenue is recognized on a gross reporting basis at the selling price negotiated with customers.  Where the Company acts as an agent, such revenue is recorded using net reporting of service revenue, at the amount of the administrative fee earned by the Company for ordering the goods.  Third-party products transferred under arrangements resulting in net reporting totaled $11.2 million and $33.0 million for the three and nine months ended September 30, 2017, respectively.  Comparatively, third-party products transferred under arrangements resulting in net reporting totaled $10.7 million and $32.8 million for the three and nine months ended September 30, 2016, respectively.

 

Note 2 – Houghton Combination

On April 4, 2017, Quaker entered into a share purchase agreement with Gulf Houghton Lubricants, Ltd. to purchase the entire issued and outstanding share capital of Houghton International, Inc. (“Houghton”) (herein referred to as “the Combination”).  The shares will be bought for aggregate purchase consideration consisting of: (i) $172.5 million in cash; (ii) a number of shares of common stock, $1.00 par value per share, of the Company comprising 24.5% of the common stock outstanding upon the closing of the Combination; and (iii) the Company’s assumption of Houghton’s net indebtedness as of the closing of the Combination, which was approximately $690 million at signing.  At closing, the total aggregate purchase consideration is dependent on the Company’s stock price and the level of Houghton’s indebtedness. 

The Company secured $1.15 billion in commitments from Bank of America Merrill Lynch and Deutsche Bank to fund the Combination and to provide additional liquidity, and has since replaced these commitments with a syndicated bank agreement (“the New Credit Facility”) with a group of lenders for $1.15 billion.  The New Credit Facility is contingent upon and will not be effective until the closing of the Combination.  The New Credit Facility currently includes a $400.0 million multicurrency revolver, a $575.0

6


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

million USD term loan and a $175.0 million EUR equivalent term loan, each with a five year term from the date the New Credit Facility becomes effective.  The maximum amount available under the New Credit Facility can be increased by $200.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions.  Borrowings under the New Credit Facility will generally bear interest at a base rate or LIBOR rate plus a margin.  The Company currently estimates the annual floating rate cost will be in the 3.0% to 3.5% range based on current market interest rates.  The New Credit Facility will be subject to certain financial and other covenants, including covenants that the Company’s consolidated net debt to adjusted EBITDA ratio cannot exceed 4.25 to 1 and the Company’s consolidated adjusted EBITDA to interest expense ratio cannot be lower than 3.0 to 1.  Both the USD and EUR equivalent term loans will have quarterly principal amortization during their respective five year terms, with 5% amortization of the principal balance due in years 1 and 2, 7.5% in year 3, and 10% in years 4 and 5, with the remaining principal amounts due at maturity.   Until closing, the Company will only incur certain interest costs paid to maintain the banks’ committed capital (“ticking fees”), which began to accrue on September 29, 2017.  The ticking fees will bear an interest rate of 0.30% per annum.

In addition, the issuance of the Company’s shares at closing of the Combination was subject to approval by Quaker’s shareholders under the rules of the New York Stock Exchange, and approval was received at a meeting of the Company’s shareholders during the third quarter of 2017.  Also, the Combination is subject to regulatory approval in the United States, Europe, China and Australia.  The Company received regulatory approval from China in July 2017 and from Australia in October 2017.  Depending on the remaining regulatory approvals and other customary terms and conditions set forth in the share purchase agreement, the Company currently estimates closing of the Combination to occur either late in the fourth quarter of 2017 or the first quarter of 2018. 

The Company incurred costs of $9.7 million and $23.1 million during the three and nine months ending September 30, 2017, respectively, and $1.2 million during the three and nine months ending September 30, 2016, respectively, for certain legal, environmental, financial, and other advisory and consultant costs related to due diligence, regulatory and shareholder approvals as well as integration planning associated with the Combination.  As of September 30, 2017 and December 31, 2016, the Company had current liabilities related to the Combination of $11.4 million and $0.5 million, respectively, primarily recorded within other current liabilities on its Condensed Consolidated Balance Sheets.  In addition, the Company has made certain reclassifications to prior year disclosures regarding combination-related items to conform with the current period presentation. 

Note 3 – Recently Issued Accounting Standards

The Financial Accounting Standards Board ("FASB") issued an accounting standard update in August 2017 to increase transparency of the economics related to risk management activities within the financial statements and enhance transparency and understandability of hedge results. This accounting standard update eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item.  The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2018.  All transition requirements and elections should be applied to hedging relationships existing on the date of adoption.  For cash flow and net investment hedges existing at the date of adoption, the Company should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that the Company adopts. The amended presentation and disclosure guidance is required only prospectively. Early adoption is permitted including adoption in any interim period for which financial statements have not been issued or made available for issuance.  The Company does not currently use any derivative instruments designated as hedges, but may choose to in the future. The Company has not early adopted the guidance and will evaluate the potential impact of this guidance on future transactions, as applicable.

 

The FASB issued an accounting standard update in May 2017 to clarify when changes to the terms or conditions of a share-based payment award must be accounted for as modifications.  This accounting standard update will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications.  This accounting standard update will allow companies to make certain changes to awards without accounting for them as modifications and an entity is not required to estimate the value of the award immediately before and after the change if the change doesn’t affect any of the inputs to the model used to value the award.  The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017.  The guidance within this accounting standard update should be applied prospectively to awards modified on or after the adoption date.  Early adoption is permitted including adoption in any interim period for which financial statements have not been issued or made available for issuance.  During the second quarter of 2017, the Company elected to early adopt this guidance with no impact to its financial statements.

The FASB issued an accounting standard update in March 2017 to improve the presentation of net periodic pension and postretirement benefit cost.  Defined benefit pension and postretirement benefit costs (“net benefit cost”) comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees.  This accounting standard update requires that an employer disaggregate the service cost component from the other components of net benefit cost, provides explicit guidance on how to present the service cost component and the other components of

7


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization.  The guidance within this accounting standard update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic benefit in assets.  This accounting standard update is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.  Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance.  During the first quarter of 2017, the Company elected to early adopt the guidance within this accounting standard update, including the use of a practical expedient which allows the Company to use amounts previously disclosed in its pension and other postretirement benefits note for the prior period as the estimation basis for applying the required retrospective presentation.  Adoption of this guidance resulted in a reclassification to the Company’s Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2016, as previously reported cost of goods sold (“COGS”) were reduced by $0.1 and $0.4 million, respectively, and selling, general and administrative expenses (“SG&A”) were reduced by $0.4 million and $1.3 million, respectively, with a corresponding increase to other expense, net, of $0.5 million and $1.7 million, respectively.  In addition, these required retrospective reclassifications resulted in an immaterial adjustment to previously reported direct operating earnings within the Company’s reportable operating segment disclosures for the three and nine months ended September 30, 2016, respectively.  See Note 4, Note 7 and Note 8 of Notes to Condensed Consolidated Financial Statements.

The FASB issued an accounting standard update in January 2017 simplifying the test for goodwill impairment by eliminating the Step 2 computation.  The accounting standard update modifies the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value.  The guidance removes the requirement to determine a goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination.  The guidance within this accounting standard update should be applied on a prospective basis, and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  During the third quarter of 2017, in connection with the Company’s 2017 annual goodwill impairment test, the Company elected to early adopt this guidance with no impact to its financial statements.

The FASB issued an accounting standard update in January 2017 to clarify the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The amendments in this accounting standard update provide a more robust framework to use in determining when a set of assets and activities is a business.  The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017.  Early adoption is permitted in limited circumstances, and the amendments in this accounting standard update should be applied prospectively, with no disclosures required at transition.  The Company does not currently meet the criteria for early application of the amendments and therefore has not early adopted the guidance.  The Company will evaluate the potential impact of this guidance on future transactions, as applicable. 

The FASB issued an accounting standard update in November 2016 requiring that the statement of cash flows explain both the change in the total cash and cash equivalents, and, also, the amounts generally described as restricted cash or restricted cash equivalents.  This will require amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending amounts shown on the statement of cash flows.  The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017.  Early adoption is permitted and the guidance requires application using a retrospective transition method to each period presented when adopted.  While permitted, the Company has not early adopted the guidance and is currently evaluating the appropriate implementation strategy.  Adoption of the guidance will not have an impact on the Company’s earnings or balance sheet but will result in changes to certain disclosures within the statement of cash flows, notably cash flows from investing activities.

The FASB issued an accounting standard update in August 2016 to standardize how certain transactions are classified in the statement of cash flows.  Specific transactions covered by the accounting standard update include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank owned life insurance policies, distributions received from equity method investments and beneficial interest in securitization transactions.  The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017.  Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method.  While permitted, the Company has not early adopted the guidance and is currently evaluating the appropriate implementation strategy.  Adoption of the guidance will not have an impact on the Company’s earnings or balance sheet but may result in certain reclassifications on the statement of cash flows, including reclassifications between cash flows from operating activities, investing activities and financing activities, respectively.

8


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

The FASB issued an accounting standard update in March 2016 involving several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, use of a forfeiture rate, and classification on the statement of cash flows.  The guidance within this accounting standard update was effective for annual and interim periods beginning after December 15, 2016.  When adopted, application of the guidance will vary based on each aspect of the update, including adoption under retrospective, modified retrospective or prospective approaches.  Early adoption was permitted.  During the first quarter of 2017, the Company adopted the guidance within the accounting standard update as required.  The impact of adoption for the Company included the elimination of recording the tax effects of deductions in excess of compensation cost through equity as the guidance in this accounting standard update requires all tax effects related to share-based payments to now be recorded through the income statement.  The tax effects of awards are required to be treated as discrete items in the interim reporting period in which the stock compensation-related tax benefits occur.  In addition, when applying the treasury stock method for computing diluted earnings per share, there are no longer assumed proceeds from the stock compensation-related tax benefits and as a result, there are fewer shares considered to be repurchased in the calculation.  This results in an assumption of more incremental shares being issued upon the exercise of share-based payment awards; therefore, equity awards will have a more dilutive effect on earnings per share.  As required, the Company has applied these changes in the guidance prospectively, beginning in the first quarter of 2017.  The result of these changes was a tax benefit of $0.6 million and $1.4 million recorded during the three and nine months ended September 30, 2017, respectively, and an immaterial number of dilutive shares added to the Company’s earnings per share calculation for the three and nine months ended September 30, 2017, respectively.  In addition, all tax-related cash flows resulting from share-based payments are now required to be reported as operating activities in the statement of cash flows under this new guidance.  Either prospective or retrospective transition of this provision was permitted, and the Company has elected to apply the cash flow classification guidance on a prospective basis, consistent with the prospective transition for the treatment of excess tax benefits in the income statement.  Lastly, the accounting standard update permitted Companies to make an accounting policy election to account for forfeitures as they occur for service condition aspects of certain share-based awards, rather than estimating forfeitures each period. While permitted, the Company has decided not to elect this accounting policy change, and instead has elected to continue utilizing a forfeiture rate assumption.  Based on historical experience, the Company has assumed a forfeiture rate of 13% on certain of its nonvested stock awards.  See Note 6, Note 9 and Note 10 of Notes to Condensed Consolidated Financial Statements.     

The FASB issued an accounting standard update in February 2016 regarding the accounting and disclosure for leases.  Specifically, the update will require entities that lease assets to recognize the assets and liabilities for the rights and obligations created by those leases on the balance sheet, in most instances.  The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2018, and should be applied on a modified retrospective basis for the reporting periods presented.  Early adoption is permitted.  The Company has not early adopted and is currently evaluating the potential impact of this guidance and an appropriate implementation strategy.  The Company has begun its impact assessment, including taking an inventory of its outstanding leases globally.  While the Company’s evaluation of this guidance is in the early stages, the Company currently expects adoption of this guidance to have an impact on its balance sheet.

The FASB issued an accounting standard update in May 2014 regarding the accounting for and disclosure of revenue recognition.  Specifically, the update outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which will be common to both U.S. GAAP and International Financial Reporting Standards.  The guidance was effective for annual and interim periods beginning after December 15, 2016, and allowed for full retrospective adoption of prior period data or a modified retrospective adoption.  Early adoption was not permitted.  In August 2015, the FASB issued an accounting standard update to delay the effective date of the new revenue standard by one year, or, in other words, to be effective for annual and interim periods beginning after December 15, 2017.  Entities are permitted to adopt the new revenue standard early but not before the original effective date.  During 2016 and 2017, the FASB issued a series of accounting standard updates to clarify and expand on the implementation guidance, including principal versus agent considerations, identification of performance obligations, licensing, other technical corrections and adding certain practical expedients.  The amendments in these 2016 and 2017 updates did not change the core principles of the guidance previously issued in May 2014.

During 2016, the Company reviewed its historical accounting policies and practices to identify potential differences with the requirements of the new revenue recognition standard, as it related to the Company’s contracts and sales arrangements.  As of September 30, 2017, the Company has substantially completed its impact assessment for the implementation of the new revenue recognition guidance.  This impact assessment and work performed to date included global and cross functional interviews and questionnaires, sales agreement and other sales document reviews, as well as technical considerations for the Company’s future transactional accounting, financial reporting and disclosure requirements.  The Company expects to adopt the guidance in the first quarter of 2018, as required, using a modified retrospective adoption approach applied to those contracts which will not be completed as of December 31, 2017.  In addition, the Company will elect to apply certain of the permitted practical expedients within the revenue recognition guidance, including practical expedients around significant financing components, sales taxes and shipping and handling activities. 

9


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

The Company has begun preliminary considerations for how the new revenue recognition guidance may impact Houghton, as it pertains to the potential Combination.  The Company anticipates using the remainder of 2017 to finalize its impact assessment and to further develop its considerations for the potential Houghton Combination.  Based on information reviewed to date and the impact assessment conclusions reached so far, the Company does not expect the adoption of this revenue recognition guidance to have a material impact on its reported earnings, cash flows, or balance sheet; however, the Company does expect the adoption to increase the amount and level of disclosures concerning the Company’s net sales.

Note 4 – Business Segments

The Company’s reportable operating segments are organized by geography as follows: (i) North America, (ii) Europe, Middle East and Africa (“EMEA”), (iii) Asia/Pacific and (iv) South America.  Operating earnings, excluding indirect operating expenses, for the Company’s reportable operating segments is comprised of revenues less COGS and SG&A directly related to the respective region’s product sales.  The indirect operating expenses consist of SG&A not directly attributable to the product sales of each respective reportable operating segment.  Other items not specifically identified with the Company’s reportable operating segments include interest expense, interest income, license fees from non-consolidated affiliates, amortization expense and other income (expense), net.

The following table presents information about the performance of the Company’s reportable operating segments for the three and nine months ended September 30, 2017 and 2016:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

Net sales

  

 

  

  

  

  

  

  

  

  

  

 

North America

$

90,450

 

$

86,126

 

$

268,122

 

$

251,586

 

EMEA

  

58,775

 

  

49,825

 

  

167,209

 

  

150,582

 

Asia/Pacific

  

54,200

 

  

45,892

 

  

147,074

 

  

130,555

 

South America

  

9,493

 

  

8,585

 

  

26,605

 

  

22,697

Total net sales

$

212,918

 

$

190,428

 

$

609,010

 

$

555,420

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings, excluding indirect operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

North America

$

18,888

 

$

20,397

 

$

59,146

 

$

59,334

 

EMEA

 

8,862

 

 

8,340

 

 

26,325

 

 

25,385

 

Asia/Pacific

 

13,963

 

 

11,737

 

 

36,018

 

 

33,865

 

South America

  

965

 

  

680

 

  

2,826

 

  

703

Total operating earnings, excluding indirect operating expenses

  

42,678

 

  

41,154

 

  

124,315

 

  

119,287

Combination-related expenses

 

(9,675)

 

 

(1,157)

 

 

(23,088)

 

 

(1,157)

Nonoperating charges

 

(17,108)

 

 

(16,404)

 

 

(50,067)

 

 

(48,409)

Amortization expense

  

(1,886)

 

  

(1,730)

 

  

(5,490)

 

  

(5,319)

Consolidated operating income

 

14,009

 

 

21,863

 

 

45,670

 

 

64,402

Other income (expense), net

 

249

 

 

(10)

 

 

(1,427)

 

 

(245)

Interest expense

  

(793)

 

  

(758)

 

  

(2,229)

 

  

(2,226)

Interest income

  

762

 

  

551

 

  

1,825

 

  

1,444

Consolidated income before taxes and equity in net income of

 

 

 

 

 

 

 

 

 

 

 

 

associated companies

$

14,227

 

$

21,646

 

$

43,839

 

$

63,375

 

 

 

 

 

 

 

 

 

 

 

 

 

Inter-segment revenues for the three and nine months ended September 30, 2017 were $2.8 million and $7.4 million for North America, $6.2 million and $16.0 million for EMEA, $0.2 million and $0.3 million for Asia/Pacific, respectively, and less than $0.1 million for South America in both periods.  Inter-segment revenues for the three and nine months ended September 30, 2016 were $2.5 million and $6.3 million for North America, $5.3 million and $13.2 million for EMEA, $0.1 million and $0.5 million for Asia/Pacific, respectively, and less than $0.1 million for South America in both periods.  However, all inter-segment transactions have been eliminated from each reportable operating segment’s net sales and earnings for all periods presented above.

10


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

Note 5 – Restructuring and Related Activities

During the fourth quarter of 2015, in response to weak economic conditions and market declines in many regions, Quaker’s management approved a global restructuring plan (the “2015 Program”) to reduce its operating costs.  The 2015 Program included the re-organization of certain commercial functions, the consolidation of certain distribution, laboratory and administrative offices, and other related severance charges.  The 2015 Program included provisions for the reduction of total headcount of approximately 65 employees globally.  Employee separation benefits varied depending on local regulations within certain foreign countries and included severance and other benefits.  The Company completed all of the remaining initiatives under the 2015 Program during the second quarter of 2017 and does not expect to incur further restructuring charges under this program.

Restructuring activity recognized by reportable operating segment in connection with the 2015 Program during the nine months ended September 30, 2017 is as follows:

 

 

 

North

 

 

 

 

 

 

 

 

 

 

America

 

EMEA

 

Total

 

 

Accrued restructuring as of December 31, 2016

$

196

 

$

474

 

$

670

 

 

 

Restructuring charges and adjustments

 

(126)

 

 

126

 

 

 

 

 

Cash payments

 

(70)

 

 

(605)

 

 

(675)

 

 

 

Currency translation adjustments

  

 

 

5

 

 

5

 

 

Accrued restructuring as of September 30, 2017

$

 

$

 

$

 

Note 6 – Stock-Based Compensation

The Company recognized the following stock-based compensation expense in SG&A in its Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

Stock options

$

243

 

$

215

 

$

714

 

$

632

Nonvested stock awards and restricted stock units

 

717

 

 

773

 

 

2,314

 

 

2,366

Employee stock purchase plan

 

22

 

 

21

 

 

66

 

 

64

Non-elective and elective 401(k) matching contribution in stock

 

8

 

 

473

 

 

72

 

 

1,749

Director stock ownership plan

 

34

 

 

37

 

 

103

 

 

131

Total stock-based compensation expense

$

1,024

 

$

1,519

 

$

3,269

 

$

4,942

During the first quarter of 2017, the Company began matching non-elective and elective 401(k) contributions in cash rather than stock.  Also, the Company’s estimated taxes payable as of September 30, 2016 was sufficient to fully recognize $0.2 million of excess tax benefits related to stock option exercises as cash inflows from financing activities in its Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016.

During the first quarter of 2017, the Company granted stock options under its long-term incentive plan (“LTIP”) that are subject only to time vesting over a three-year period.  For the purposes of determining the fair value of stock option awards, the Company used the Black-Scholes option pricing model and the assumptions set forth in the table below:

 

Number of options granted

42,477

 

 

 

Dividend yield

1.49

%

 

 

Expected volatility

25.52

%

 

 

Risk-free interest rate

1.67

%

 

 

Expected term (years)

4.0

 

 

The fair value of these options is amortized on a straight-line basis over the vesting period.  As of September 30, 2017, unrecognized compensation expense related to options granted was $1.5 million, to be recognized over a weighted average remaining period of 1.9 years.  There were no stock options granted in the second or third quarters of 2017, respectively.

During the first nine months of 2017, the Company granted 17,315 nonvested restricted shares and 1,332 nonvested restricted stock units under its LTIP plan that are subject only to time vesting, generally over a three-year period.  The fair value of these awards is based on the trading price of the Company’s common stock on the date of grant.  The Company adjusts the grant date fair value of these awards for expected forfeitures based on historical experience.  As of September 30, 2017, unrecognized compensation expense

11


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

related to the nonvested restricted shares was $2.7 million, to be recognized over a weighted average remaining period of 1.7 years, and unrecognized compensation expense related to nonvested restricted stock units was $0.2 million, to be recognized over a weighted average remaining period of 2.0 years.

Note 7 – Pension and Other Postretirement Benefits

The components of net periodic benefit cost for the three and nine months ended September 30, 2017 and 2016 are as follows:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Postretirement

 

 

 

 

 

 

 

Postretirement

 

 

Pension Benefits

 

Benefits

 

Pension Benefits

 

Benefits

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

Service cost

$

921

 

$

672

 

$

2

 

$

 

$

2,710

 

$

2,025

 

$

6

 

$

8

Interest cost

 

994

 

 

1,111

 

 

36

 

 

28

 

 

3,005

 

 

3,344

 

 

108

 

 

106

Expected return on plan assets

 

(1,276)

 

 

(1,329)

 

 

 

 

 

 

(3,857)

 

 

(4,027)

 

 

 

 

Settlement charge

 

 

 

 

 

 

 

 

 

1,860

 

 

 

 

 

 

Actuarial loss (gain) amortization

 

798

 

 

769

 

 

13

 

 

(30)

 

 

2,459

 

 

2,389

 

 

40

 

 

Prior service cost amortization

 

(28)

 

 

(25)

 

 

 

 

 

 

(76)

 

 

(76)

 

 

 

 

Net periodic benefit cost

$

1,409

 

$

1,198

 

$

51

 

$

(2)

 

$

6,101

 

$

3,655

 

$

154

 

$

114

During the second quarter of 2017, the Company’s U.S. pension plan offered a cash settlement to its vested terminated participants, which allowed them to receive the value of their pension benefits as a single lump sum payment.  As payments from the U.S. pension plan for this cash out offering exceeded the service and interest cost components of the U.S. pension plan expense for 2017, the Company recorded a settlement charge of approximately $1.9 million. This settlement charge represented the immediate recognition into expense of a portion of the unrecognized loss within accumulated other comprehensive loss (“AOCI”) on the balance sheet in proportion to the share of the projected benefit obligation that was settled by these payments.  The gross pension benefit obligation was reduced by approximately $4.0 million as a result of these payments.  The settlement charge was recognized through other expense, net, on the Company’s Condensed Consolidated Statement of Income.

Employer Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2016, that it expected to make minimum cash contributions of $7.8 million to its pension plans and $0.5 million to its other postretirement benefit plans in 2017.  As of September 30, 2017, $5.1 million and $0.3 million of contributions have been made to the Company’s pension plans and its postretirement benefit plans, respectively.

Note 8 – Other Income (Expense), Net

The components of other income (expense), net, for the three and nine months ended September 30, 2017 and 2016 are as follows:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

Income from third party license fees

$

141

 

$

264

 

$

612

 

$

713

Foreign exchange gains, net

 

545

 

 

149

 

 

580

 

 

463

Gain on fixed asset disposals, net

 

22

 

 

3

 

 

50

 

 

7

Non-income tax refunds and other related credits

 

130

 

 

72

 

 

748

 

 

133

Pension and postretirement benefit costs, non-service components

 

(537)

 

 

(524)

 

 

(3,539)

 

 

(1,736)

Other non-operating income

 

47

 

 

54

 

 

288

 

 

265

Other non-operating expense

 

(99)

 

 

(28)

 

 

(166)

 

 

(90)

Other income (expense), net

$

249

 

$

(10)

 

$

(1,427)

 

$

(245)

12


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

Note 9 – Income Taxes and Uncertain Income Tax Positions

The Company’s effective tax rate for the three months ended September 30, 2017 was 22.1% compared to 28.3% for the three months ended September 30, 2016.  The Company’s effective tax rate for the nine months ended September 30, 2017 was 32.5% compared to 31.0% for the nine months ended September 30, 2016.  The Company’s effective tax rates for the three and nine months ended September 30, 2017, respectively, include the impact of certain non-deductible Houghton combination-related expenses, as well as tax benefits for deductions in excess of compensation cost associated with stock option exercises and restricted stock vesting.  There were no comparable non-deductible combination-related expenses or stock compensation-related tax benefits recorded through tax expense during the three or nine months ended September 30, 2016.  The Company’s effective tax rates for the three and nine months ended September 30, 2016, respectively, reflect earnings taxed at one of the Company’s subsidiaries at a statutory rate of 25% while awaiting recertification of a concessionary 15% tax rate, which the Company received and recorded the full year benefit of during the fourth quarter of 2016.  This concessionary tax rate was available to the Company during the three and nine months ended September 30, 2017.  The Company’s effective tax rates for both the three and nine months ended September 30, 2017 and September 30, 2016 include the tax benefit of changes in uncertain tax positions, which were more favorable to the effective tax rate in the prior year periods as compared to the current year.   

As of September 30, 2017, the Company’s cumulative liability for gross unrecognized tax benefits was $7.0 million.  As of December 31, 2016, the Company’s cumulative liability for gross unrecognized tax benefits was $6.2 million. 

The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of taxes on income before equity in net income of associated companies in its Condensed Consolidated Statements of Income.  The Company recognized a credit of less than $0.1 million and $0.1 million for interest, and an expense of $0.1 million and $0.2 million for penalties in its Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017, respectively.  The Company recognized a credit of $0.7 million and $0.6 million for interest and a credit of $0.1 million and expense of $0.2 million for penalties in its Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016, respectively.  As of September 30, 2017, the Company had accrued $0.7 million for cumulative interest and $2.0 million for cumulative penalties in its Condensed Consolidated Balance Sheets, compared to $0.7 million for cumulative interest and $1.6 million for cumulative penalties accrued at December 31, 2016.

During the nine months ended September 30, 2017 and 2016, the Company recognized a decrease of $0.8 million and $1.5 million, respectively, in its cumulative liability for gross unrecognized tax benefits due to the expiration of the applicable statutes of limitations for certain tax years.  During the nine months ended September 30, 2016, the Company recognized a decrease of $3.6 million in its cumulative liability for gross unrecognized tax benefits due to settlements with tax authorities.  There were no similar settlements during the nine months ended September 30, 2017.

The Company estimates that during the year ending December 31, 2017, it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $1.2 to $1.3 million due to the expiration of the statute of limitations with regard to certain tax positions.  This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability for unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits with regard to new tax positions for the year ending December 31, 2017.

The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign tax jurisdictions. Tax years that remain subject to examination by major tax jurisdictions include Brazil from 2000, Italy from 2007, the Netherlands and the United Kingdom from 2011, China from 2012, Spain from 2013, the United States from 2014, and various domestic state tax jurisdictions from 2007. 

As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia S.r.l., relating to the tax years 2007 through 2013.   The Company has filed for competent authority relief from these assessments under the Mutual Agreement Procedures of the Organization for Economic Co-Operation and Development for all years except 2007.  As of September 30, 2017, the Company believes it has adequate reserves, where merited, for uncertain tax positions with respect to all of these audits. 

13


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

Note 10 – Earnings Per Share

The following table summarizes earnings per share calculations for the three and nine months ended September 30, 2017 and 2016:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

Basic earnings per common share

 

   

 

 

 

 

 

   

 

 

 

 

Net income attributable to Quaker Chemical Corporation

$

11,142

 

$

16,008

 

$

30,040

 

$

43,969

 

Less: income allocated to participating securities

  

(76)

 

  

(130)

 

  

(222)

 

  

(373)

 

Net income available to common shareholders

$

11,066

 

$

15,878

 

$

29,818

 

$

43,596

 

Basic weighted average common shares outstanding

 

13,217,165

 

 

13,143,884

 

 

13,196,255

 

 

13,128,996

Basic earnings per common share

$

0.84

 

$

1.21

 

$

2.26

 

$

3.32

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Quaker Chemical Corporation

$

11,142

 

$

16,008

 

$

30,040

 

$

43,969

 

Less: income allocated to participating securities

 

(76)

 

 

(130)

 

 

(222)

 

 

(373)

 

Net income available to common shareholders

$

11,066

 

$

15,878

 

$

29,818

 

$

43,596

 

Basic weighted average common shares outstanding

 

13,217,165

 

 

13,143,884

 

 

13,196,255

 

 

13,128,996

 

Effect of dilutive securities

 

34,528

 

 

29,960

 

 

41,818

 

 

18,829

 

Diluted weighted average common shares outstanding

 

13,251,693

 

 

13,173,844

 

 

13,238,073

 

 

13,147,825

Diluted earnings per common share

$

0.83

 

$

1.21

 

$

2.25

 

$

3.32

Certain stock options and restricted stock units are not included in the diluted earnings per share calculation since the effect would have been anti-dilutive.  The calculated amount of anti-diluted shares not included were 4,300 and 4,819 for the three and nine months ended September 30, 2017, respectively, and 0 and 3,465 for the three and nine months ended September 30, 2016, respectively.

Note 11 – Goodwill and Other Intangible Assets

The Company has historically completed its annual goodwill impairment test as of the end of the third quarter of each year, or more frequently if triggering events indicate a possible impairment in one or more of its reporting units.  The Company continually evaluates financial performance, economic conditions and other relevant developments in assessing if an interim period impairment test for one or more of its reporting units is necessary.  The Company completed its annual impairment assessment as of the end of the third quarter of 2017 and no impairment charge was warranted.  In addition, the Company has recorded no impairment charges in its past.  Changes in the carrying amount of goodwill for the nine months ended September 30, 2017 were as follows:

 

 

North

 

 

 

 

 

 

 

South

 

 

 

 

 

America

 

EMEA

 

Asia/Pacific

 

America

 

Total

Balance as of December 31, 2016

$

45,490

   

$

18,189

 

$

14,566

 

$

2,559

   

$

80,804

 

Goodwill additions

 

1,832

 

 

 

 

 

 

 

 

1,832

 

Currency translation adjustments

  

373

 

 

2,111

 

 

633

 

 

63

   

 

3,180

Balance as of September 30, 2017

$

47,695

 

$

20,300

 

$

15,199

 

$

2,622

   

$

85,816

Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of September 30, 2017 and December 31, 2016 were as follows:

 

 

Gross Carrying

 

Accumulated

 

 

Amount

 

Amortization

 

 

2017

 

2016

 

2017

 

2016

Customer lists and rights to sell

$

76,671

   

$

71,454

   

$

24,176

   

$

20,043

Trademarks, formulations and product technology

  

33,022

   

  

31,436

   

  

13,782

   

  

11,748

Other

  

6,142

   

  

6,023

   

  

5,463

   

  

5,151

Total definite-lived intangible assets

$

115,835

   

$

108,913

   

$

43,421

   

$

36,942

14


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

The Company recorded $1.9 million and $5.5 million of amortization expense for the three and nine months ended September 30, 2017, respectively.  Comparatively, the Company recorded $1.7 million and $5.3 million of amortization expense for the three and nine months ended September 30, 2016, respectively.  Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows:

 

For the year ended December 31, 2017

$

7,342

 

 

For the year ended December 31, 2018

 

7,346

 

 

For the year ended December 31, 2019

 

7,243

 

 

For the year ended December 31, 2020

 

6,957

 

 

For the year ended December 31, 2021

 

6,578

 

 

For the year ended December 31, 2022

 

6,450

 

The Company has two indefinite-lived intangible assets totaling $1.1 million for trademarks at September 30, 2017 and December 31, 2016.

Note 12 – Debt

The Company’s primary credit facility (“the Credit Facility”) is a $300.0 million syndicated multicurrency credit agreement with a group of lenders which matures in June 2019.  The maximum amount available under the Credit Facility can be increased to $400.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions.  Borrowings under the Credit Facility generally bear interest at a base rate or LIBOR rate plus a margin.  The Credit Facility has certain financial and other covenants, with the key financial covenant requiring that the Company’s consolidated net debt to adjusted EBITDA ratio cannot exceed 3.50 to 1.  As of September 30, 2017 and December 31, 2016, the Company’s consolidated net debt to adjusted EBITDA ratio was below 1.0 to 1, and the Company was also in compliance with all of its other covenants.  As of September 30, 2017 and December 31, 2016, the Company had total credit facility borrowings of $54.7 million and $47.9 million, respectively, primarily under the Credit Facility.  The Company’s other outstanding debt obligations as of September 30, 2017 and December 31, 2016 were primarily industrial development bonds and municipality-related loans.  At September 30, 2017 and December 31, 2016, the amounts at which the Company’s debt is recorded are not materiality different from their fair market value.    

Note 13 – Equity

In May 2015, the Company’s Board of Directors authorized a share repurchase program for the repurchase of up to $100.0 million of Quaker Chemical Corporation common stock (the “2015 Share Repurchase Program”).  The 2015 Share Repurchase Program has no expiration date.  The 2015 Share Repurchase Program provides a framework of conditions under which management can repurchase shares of the Company’s common stock.  These purchases may be made in the open market or in private and negotiated transactions and will be in accordance with applicable laws, rules and regulations.  In connection with the 2015 Share Repurchase Program, the Company acquired 83,879 shares of common stock for $5.9 million during the nine months ended September 30, 2016.  There were no share repurchases under the 2015 Share Repurchase Program during the nine months ended September 30, 2017.  The Company has elected not to hold treasury shares, and has retired the shares as they are repurchased.  It is the Company’s accounting policy to record the excess paid over par value as a reduction in retained earnings for all shares repurchased.

Prior to September 7, 2017, the Company’s Articles of Incorporation included a time-based voting system that granted special ten-for-one-voting rights to shareholders who had beneficially owned their Quaker Chemical Corporation common stock continuously for a period of at least 36 consecutive calendar months (dating from the first day of the first full calendar month on or after the date the holder acquired beneficial ownership of such common stock) before the record date for a shareholder vote.  At a meeting of the Company’s shareholders on September 7, 2017, the Company’s shareholders approved an amendment of the Company’s Articles of Incorporation that provides that every holder of Quaker Chemical Corporation common stock will be entitled to one vote for each share of common stock of the Company going forward.

15


Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

(Dollars in thousands, except share and per share amounts, unless otherwise stated)

(Unaudited)

 

The following tables present the changes in equity, net of tax, for the three and nine months ended September 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common

 

Excess of

 

Retained

 

Comprehensive

 

Noncontrolling

 

 

 

 

 

 

Stock

 

Par Value

 

Earnings

 

Loss

 

Interest

 

Total

Balance at June 30, 2017

$

13,310

 

$

113,747

 

$

374,001

 

$

(72,938)

 

$

11,474

 

$

439,594

 

Net income

 

 

 

 

 

11,142

 

 

 

 

562

 

 

11,704

 

Amounts reported in other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income (loss)

 

 

 

 

 

 

 

6,265

 

 

(153)

 

 

6,112

 

Dividends ($0.355 per share)

 

 

 

 

 

(4,722)

 

 

 

 

 

 

(4,722)

 

Share issuance and equity-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation plans

 

(11)

 

 

(618)

 

 

 

 

 

 

 

 

(629)

Balance at September 30, 2017

$

13,299

 

$

113,129

 

$

380,421

 

$

(66,673)

 

$

11,883

 

$

452,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2016

$

13,250

 

$

109,751

 

$

340,127

 

$

(71,790)

 

$

8,895

 

$

400,233

 

Net income

 

 

 

 

 

16,008

 

 

 

 

343

 

 

16,351

 

Amounts reported in other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(loss) income

 

 

 

 

 

 

 

(237)

 

 

177

 

 

(60)

 

Dividends ($0.345 per share)

 

 

 

 

 

(4,575)

 

 

 

 

 

 

(4,575)

 

Acquisition of noncontrolling interest

 

 

 

 

 

 

 

 

 

40

 

 

40

 

Share issuance and equity-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation plans

 

7

 

 

1,671

 

 

 

 

 

 

 

 

1,678

 

Excess tax benefit from stock option exercises

 

 

 

31

 

 

 

 

 

 

 

 

31

Balance at September 30, 2016

$

13,257

 

$

111,453

 

$

351,560

 

$

(72,027)

 

$

9,455

 

$

413,698

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common

 

Excess of

 

Retained

 

Comprehensive

 

Noncontrolling

 

 

 

 

 

 

Stock

 

Par Value

 

Earnings

 

Loss

 

Interest

 

Total

Balance at December 31, 2016

$

13,278

 

$

112,475

 

$

364,414

 

$

(87,407)

 

$

9,846

 

$

412,606

 

Net income

 

 

 

 

 

30,040

 

 

 

 

1,619

 

 

31,659

 

Amounts reported in other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income

 

 

 

 

 

 

 

20,734

 

 

418

 

 

21,152

 

Dividends ($1.055 per share)

 

 

 

 

 

(14,033)

 

 

 

 

 

 

(14,033)

 

Share issuance and equity-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation plans

 

21

 

 

654

 

 

 

 

 

 

 

 

675

Balance at September 30, 2017

$

13,299

 

$

113,129

 

$

380,421

 

$

(66,673)

 

$

11,883

 

$

452,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

$

13,288

 

$

106,333

 

$

326,740

 

$

(73,316)

 

$

8,198

 

$

381,243

 

Net income

 

 

 

 

 

43,969

 

 

 

 

1,131

 

 

45,100

 

Amounts reported in other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income

 

 

 

 

 

 

 

1,289