Quaker Houghton Announces First Quarter 2023 Results

Quaker Houghton

CONSHOHOCKEN, PA Quaker Houghton (NYSE: KWR) recently announced its first quarter 2023 results.

Three Months Ended
March 31,

($ in thousands, except per share data)

2023

2022

Net sales

$           500,148

$           474,171

Net income attributable to Quaker Chemical Corporation

29,534

19,816

Net income attributable to Quaker Chemical Corporation common shareholders – diluted

1.64

1.11

Non-GAAP net income *

33,992

25,470

Non-GAAP Earnings per diluted share *

1.89

1.42

Adjusted EBITDA *

78,791

60,444

*  Refer to the Non-GAAP Measures and Reconciliations section below for additional information

First Quarter 2023 Consolidated Results

First quarter of 2023 net sales were a record $500.1 million, an increase of 5% compared to $474.2 million in the first quarter of 2022 primarily due to an increase in selling price and product mix of approximately 19% partially offset by an 11% decrease in sales volumes and a 3% unfavorable impact from foreign currency translation. selli The increase in selling price and product mix was primarily attributable to double-digit increases in selling prices in all segments to offset the significant inflationary pressures on the business.  The decline in sales volumes was primarily attributable to a continuation of softer market conditions, especially in Asia/Pacific and EMEA, and the impact of the war in Ukraine.

The Company reported net income in the first quarter of 2023 of $29.5 million, or $1.64 per diluted share, compared to net income of $19.8 million or $1.11 per diluted share in the first quarter of 2022.  Excluding non-recurring and non-core items in each period, the Company’s first quarter of 2023 non-GAAP net income and earnings per diluted share were $34.0 million and $1.89 respectively compared to $25.5 million and $1.42 respectively in the prior year quarter. The Company generated adjusted EBITDA of $78.8 million in the first quarter of 2023, an increase of 30% compared to $60.4 million in the first quarter of 2022, primarily due to an increase in net sales and a recovery in gross margins compared to the prior year quarter.

Andy Tometich, Chief Executive Officer and President, commented, “The first quarter was a strong start to the year for Quaker Houghton, as we continued to execute on our key financial and operational priorities.  We achieved record net sales, continued margin recovery, a double-digit improvement in earnings and generated solid cash flow.  Our results underscore the resilience of our people and our portfolio and the commitment to strengthening our business to continue to deliver profitable growth ahead of the market.

“We are encouraged by our results in the first quarter despite the complexities and uncertainties in the current operating environment, which are likely to persist as we progress through 2023. We will continue to prioritize investments in our strategic initiatives to increase customer solutions, lead in sustainability and enhance our differentiated customer intimate model.  We believe these actions, and our commitment to a recovery in margins and cash flow generation, will best position the Company for long-term success.”

First Quarter 2023 Segment Results

During the first quarter of 2023, the Company reorganized its executive management team to align with its new business structure. The Company’s new structure includes three reportable segments: (i) Americas; (ii) EMEA; and (iii) Asia/Pacific. Prior to the Company’s reorganization, the Company’s historical reportable segments were: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty Businesses. Prior period information has been recast to align with the Company’s business structure as of January 1, 2023.

The Company’s first quarter of 2023 operating performance of each of its three reportable segments, (i) Americas; (ii) EMEA; and (iii) Asia/Pacific, are further described below.

Three Months Ended
March 31,

2023

2022

Net Sales *

Americas

$         251,413

$         212,091

EMEA

152,449

146,819

Asia/Pacific

96,286

115,261

Total net sales

$         500,148

$         474,171

Segment operating earnings *

Americas

$           66,125

$           45,022

EMEA

27,571

23,247

Asia/Pacific

27,652

24,501

Total segment operating earnings

$         121,348

$           92,770

*  Refer to the Segment Measures and Reconciliations section below for additional information

In the first quarter of 2023, the Americas segment once again delivered double-digit year-over-year net sales growth driven by increases in selling price and product mix, partially offset by a modest decline in sales volumes primarily related to softer market conditions.  Net sales growth in the EMEA segment was similarly a result of double-digit increases in selling price and product mix, partially offset by a decline in sales volumes primarily due to the ongoing war in Ukraine, softer market conditions and the wind-down of the tolling agreement for products previously divested related to the Quaker Houghton combination, and a headwind from foreign currency translation.  Net sales in the Asia/Pacific segment declined compared to the prior year quarter as a decline in sales volumes, driven by softer market conditions and the Company’s value based pricing actions, and a headwind from foreign currency translation offset double-digit increases in selling price and product mix. Compared to the fourth quarter of 2022, net sales and sales volumes increased in the Americas and EMEA segment but declined in Asia/Pacific.

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Operating earnings increased in all three segments in the first quarter of 2023 compared to the prior year, primarily driven by an improvement in operating margins in all segments and partially offset by continued inflationary pressures on the Company’s business and the ongoing war in Ukraine on its EMEA segment. All segments also delivered an improvement in operating margins compared to the fourth quarter of 2022.

Cash Flow and Liquidity Highlights

Net cash provided by operating activities was $37.8 million in the first quarter of 2023 compared to net cash used in operating activities of $6.3 million in the first quarter of 2022.  The improvement in net operating cash flow primarily reflects an improved operating performance and working capital management in the first quarter of 2023 compared to the first quarter of 2022.

As of March 31, 2023, the Company’s total gross debt was $942.8 million, and its cash and cash equivalents was $189.9 million, which resulted in net debt of approximately $752.9 million.  The Company’s net debt divided by its trailing twelve months adjusted EBITDA was approximately 2.7x.

In order to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility, in the first quarter of 2023, the Company entered into $300.0 million notional amounts of three-year interest rate swaps to convert a portion of the Company’s variable rate borrowings into an average fixed rate obligation.

Non-GAAP Measures and Reconciliations

The information included in this press release includes non-GAAP (unaudited) financial information that includes EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP earnings per diluted share.  The Company believes these non-GAAP financial measures provide meaningful supplemental information as they enhance a reader’s understanding of the financial performance of the Company, are indicative of future operating performance of the Company, and facilitate a comparison among fiscal periods, as the non-GAAP financial measures exclude items that are not indicative of future operating performance or not considered core to the Company’s operations.  Non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP. In addition, the Company’s definitions of EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP earnings per diluted share, as discussed and reconciled below to the most comparable respective GAAP measures, may not be comparable to similarly named measures reported by other companies

The Company presents EBITDA which is calculated as net income attributable to the Company before depreciation and amortization, interest expense, net, and taxes on income before equity in net income of associated companies.  The Company also presents adjusted EBITDA which is calculated as EBITDA plus or minus certain items that are not indicative of future operating performance or not considered core to the Company’s operations. In addition, the Company presents non-GAAP operating income which is calculated as operating income plus or minus certain items that are not indicative of future operating performance or not considered core to the Company’s operations. Adjusted EBITDA margin and non-GAAP operating margin are calculated as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales, respectively. The Company believes these non-GAAP measures provide transparent and useful information and are widely used by investors, analysts, and peers in the Company’s industry as well as by management in assessing the operating performance of the Company on a consistent basis.

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Additionally, the Company presents non-GAAP net income and non-GAAP earnings per diluted share as additional performance measures.  Non-GAAP net income is calculated as adjusted EBITDA, defined above, less depreciation and amortization, interest expense, net, and taxes on income before equity in net income of associated companies, in each case adjusted, as applicable, for any depreciation, amortization, interest or tax impacts resulting from the non-core items identified in the reconciliation of net income attributable to the Company to adjusted EBITDA.  Non-GAAP earnings per diluted share is calculated as non-GAAP net income per diluted share as accounted for under the “two-class share method.” The Company believes that non-GAAP net income and non-GAAP earnings per diluted share provide transparent and useful information and are widely used by investors, analysts, and peers in the Company’s industry as well as by management in assessing the operating performance of the Company on a consistent basis.

As it relates to future projections for the Company as well as other forward-looking information described further above, the Company has not provided guidance for comparable GAAP measures or a quantitative reconciliation of forward-looking non-GAAP financial measures to the most directly comparable U.S. GAAP measure because it is unable to determine with reasonable certainty the ultimate outcome of certain significant items necessary to calculate such measures without unreasonable effort.  These items include, but are not limited to, certain non-recurring or non-core items the Company may record that could materially impact net income, as well as the impact of COVID-19.  These items are uncertain, depend on various factors, and could have a material impact on the U.S. GAAP reported results for the guidance period.

The Company’s reference to trailing twelve months adjusted EBITDA within this press release refers to the twelve month period ended March 31, 2023 adjusted EBITDA of $275.5 million, which includes (i) the three months ended March 31, 2023 adjusted EBITDA of $78.8 million, as presented in the non-GAAP reconciliations below, and (ii) the twelve months ended December 31, 2022 adjusted EBITDA of $257.2 million, as presented in the non-GAAP reconciliations included in the Company’s fourth quarter and full year 2022 results press release dated February 23, 2023, less (iii) the three months ended March 31, 2022 adjusted EBITDA of $60.4 million, as presented in the non-GAAP reconciliations below.

Certain of the prior period non-GAAP financial measures presented in the following tables have been adjusted to conform with current period presentation.  The following tables reconcile the Company’s non-GAAP financial measures (unaudited) to their most directly comparable GAAP (unaudited) financial measures (dollars in thousands unless otherwise noted, except per share amounts):

Three Months Ended
March 31,

Non-GAAP Operating Income and Margin Reconciliations:

2023

2022

Operating income

$        49,929

$        29,403

Combination, integration and other acquisition-related expenses

4,053

Restructuring and related charges, net

3,972

820

Strategic planning expenses

2,087

3,088

Russia-Ukraine conflict related expenses

1,166

Other charges

305

631

Non-GAAP operating income

$        56,293

$        39,161

Non-GAAP operating margin (%)

11.3 %

8.3 %

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Non-GAAP Net Income
Reconciliations:

Three Months Ended
March 31,

2023

2022

Net income attributable to Quaker Chemical Corporation

$        29,534

$        19,816

Depreciation and amortization (a)(b)

20,510

20,727

Interest expense, net

13,242

5,345

Taxes on income before equity in net income of associated companies (c)

9,533

2,866

EBITDA

72,819

48,754

Equity (income) loss in a captive insurance company

(422)

244

Combination, integration and other acquisition-related expenses (a)

6,032

Restructuring and related charges, net

3,972

820

Strategic planning expenses

2,087

3,088

Russia-Ukraine conflict related expenses

1,166

Other charges

335

340

Adjusted EBITDA

$        78,791

$        60,444

Adjusted EBITDA margin (%)

15.8 %

12.7 %

Adjusted EBITDA

$        78,791

$        60,444

Less: Depreciation and amortization – adjusted (a)(b)

20,510

20,727

Less: Interest expense, net

13,242

5,345

Less: Taxes on income before equity in net income of associated companies – adjusted (c)

11,047

8,902

Non-GAAP net income

$        33,992

$        25,470

Three Months Ended
March 31,

Non-GAAP Earnings per Diluted Share Reconciliations:

2023

2022

GAAP earnings per diluted share attributable to Quaker Chemical Corporation common
shareholders

$                1.64

$                1.11

Equity (income) loss in a captive insurance company per diluted share

(0.02)

0.01

Combination, integration and other acquisition-related expenses per diluted share (a)

0.25

Restructuring and related charges, net per diluted share

0.17

0.03

Strategic planning expenses per diluted share

0.10

0.14

Russia-Ukraine conflict related expenses per diluted share

0.06

Other charges per diluted share

0.01

0.01

Impact of certain discrete tax items per diluted share

(0.01)

(0.19)

Non-GAAP earnings per diluted share

$                1.89

$                1.42

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(a) 

Combination, integration and other acquisition-related expenses include certain legal, financial, and other advisory and consultant costs incurred in connection with the Combination integration activities. These amounts also include expense associated with the Company’s other recent acquisitions, including certain legal, financial, and other advisory and consultant costs incurred in connection with due diligence.  During the three months ended March 31, 2022, the Company recorded $2.0 million of other expense related to indemnification assets.  These amounts were recorded within Other expense, net and therefore are included in the caption “Combination, integration and other acquisition-related expenses” in the reconciliation of Net income attributable to Quaker Chemical Corporation to Adjusted EBITDA and GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders to Non-GAAP earnings per diluted share, however it is excluded in the reconciliation of Operating income to Non-GAAP operating income.

(b) 

Depreciation and amortization for both the three months ended March 31, 2023 and 2022 include approximately $0.3 million of amortization expense recorded within equity in net income of associated companies in the Condensed Consolidated Statement of Income, which is attributable to the amortization of the fair value step up for the Company’s 50% interest in a joint venture in Korea as a result of required purchase accounting.

(c) 

Taxes on income before equity in net income of associated companies – adjusted includes the Company’s tax expense adjusted for the impact of any current and deferred income tax expense (benefit), as applicable, of the reconciling items presented in the reconciliation of Net income attributable to Quaker Chemical Corporation to adjusted EBITDA, above, determined utilizing the applicable rates in the taxing jurisdictions in which these adjustments occurred, subject to deductibility. This caption also includes the impact of specific tax charges and benefits in the three months ended March 31, 2023 and 2022, which the Company does not consider core to the Company’s operations or indicative of future performance.

Segment Measures and Reconciliations

Segment operating earnings for each of the Company’s reportable segments are comprised of the segment’s net sales less directly related Cost of goods sold (“COGS”) and Selling, general and administrative expenses (“SG&A”). Operating expenses not directly attributable to the net sales of each respective segment, such as certain corporate and administrative costs, Combination, integration and other acquisition-related expenses, and Restructuring and related charges, are not included in segment operating earnings. Other items not specifically identified with the Company’s reportable segments include Interest expense, net and Other expense, net.

The following table presents information about the performance of the Company’s reportable segments (dollars in thousands):

Three Months Ended
March 31,

2023

2022

Net Sales

Americas

$         251,413

$         212,091

EMEA

152,449

146,819

Asia/Pacific

96,286

115,261

Total net sales

$         500,148

$         474,171

Segment operating earnings

Americas

$           66,125

$           45,022

EMEA

27,571

23,247

Asia/Pacific

27,652

24,501

Total segment operating earnings

121,348

92,770

Combination, integration and other acquisition-related expenses

(4,053)

Restructuring and related charges

(3,972)

(820)

Non-operating and administrative expenses

(51,771)

(43,305)

Depreciation of corporate assets and amortization

(15,676)

(15,189)

Operating income

49,929

29,403

Other expense, net

(2,239)

(2,206)

Interest expense, net

(13,242)

(5,345)

Income before taxes and equity in net income of associated companies

$           34,448

$           21,852

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