Item 1. Business
Item 1.
Business.
General Description
The Company was organized in 1918, incorporated as a Pennsylvania
business corporation in 1930, and in August 2019
completed the Combination with Houghton to form Quaker Houghton.
Quaker Houghton is the global leader in industrial process
fluids.
With a presence around the world, includi
ng operations in over 25 countries, the Company’s
customers include thousands of
the world’s most advanced and specialized
steel, aluminum, automotive, aerospace, offshore, can,
mining, and metalworking
companies.
Quaker Houghton develops, produces, and markets a broad range of formulated
chemical specialty products and offers
chemical management services (which we refer to as “Fluidcare
TM
”) for various heavy industrial and manufacturing applications
throughout its four segments: Americas; Europe, Middle East and Africa
(“EMEA”); Asia/Pacific; and Global Specialty Businesses.
The major product lines of Quaker Houghton include metal removal fluids,
cleaning fluids, corrosion inhibitors, metal drawing
and forming fluids, die cast mold releases, heat treatment and quenchants,
metal forging fluids, hydraulic fluids, specialty greases,
offshore sub-sea energy control fluids, rolling
lubricants, rod and wire drawing fluids and surface treatment chemicals.
The following
are the respective contributions to consolidated net sales of each of our principal
product lines representing more than 10% of
consolidated net sales for any of the past three years based on the Company’s
current product line segmentation:
2021
2020
2019
Metal removal fluids
23.4
%
23.9
%
19.9
%
Rolling lubricants
22.2
%
21.8
%
21.9
%
Hydraulic fluids
13.6
%
13.3
%
13.0
%
Sales Revenue
A substantial portion of the Company’s
sales worldwide are made directly through its own employees and its Fluidcare
TM
programs, with the balance sold through distributors and agents.
The Company’s employees typically
visit the plants of customers
regularly, work on
site, and through training and experience, identify production needs which can be resolved
or otherwise addressed
either by utilizing the Company’s existing
products or by applying new formulations developed in its laboratories.
As part of the Company’s Fluidcare
TM
business, certain third-party product sales to customers are managed by the
Company.
Where the Company acts as principal, revenues are recognized on
a gross reporting basis at the selling price negotiated with its
customers.
Where the Company acts as an agent for its customers, revenue is recognized on
a net reporting basis at the amount of the
administrative fee earned by the Company for ordering the goods.
See Note 5 of Notes to Consolidated Financial Statements in Item 8
of this Report.
Competition
The specialty chemical industry comprises a number of companies similar in
size to the Company, as well
as companies larger
and smaller than Quaker Houghton.
The Company cannot readily determine its precise competitive position
in every industry it
serves.
However, the Company estimates it holds a leading
global position in the market for industrial process fluids including
significant global positions in the markets for process fluids in portions of
the automotive and industrial markets, and a leading
position in the market for process fluids to produce sheet steel and aluminum.
The offerings of many of the Company’s
competitors
differ from those of Quaker Houghton; some offer
a broad portfolio of fluids, including general lubricants, while others have more
specialized product ranges.
All competitors provide different levels of technical
services to individual customers.
Competition in the
industry is based primarily on the ability to supply products that meet the needs of
the customer and provide technical services and
laboratory assistance to the customer, and
to a lesser extent, on price.
Major Customers and Markets
In 2021, Quaker Houghton’s
five largest customers (each composed of multiple subsidiaries or divisions
with semi-autonomous
purchasing authority) accounted for approximately 10% of
consolidated net sales, with its largest customer accounting for
approximately 3% of consolidated net sales.
A significant portion of the Company’s
revenues are realized from the sale of process
fluids and services to manufacturers of steel, aluminum, automobiles,
aircraft, industrial equipment, and durable goods and, therefore,
Quaker Houghton is subject to the same business cycles as those experienced
by these manufacturers and their customers.
3
The Company’s financial
performance is generally correlated to the volume of global production within
the industries it serves, rather
than directly related to the financial performance of its customers.
Furthermore, steel and aluminum customers typically have limited
manufacturing locations compared to metalworking customers and
generally use higher volumes of products at a single location.
Raw Materials
Quaker Houghton uses approximately 3,000
raw materials, including animal fats, vegetable oils, mineral oils, oleochemicals,
ethylene, solvents, surfactant agents, various chemical compounds
that act as additives to our base formulations, and a wide variety of
other organic and inorganic compounds and
various derivatives of the foregoing.
The price of mineral oil and its derivatives can be
affected by the price of crude oil and industry refining
capacity.
Animal fat and vegetable oil prices, as well as the prices of other raw
materials, are impacted by their own unique supply and demand factors,
and by biodiesel consumption which is affected by the price
of crude oil.
Accordingly, significant fluctuations
in the price of crude oil can have a material impact on the cost of these raw
materials.
In addition, many of the raw materials used by Quaker Houghton are
commodity chemicals which can experience
significant price volatility.
As experienced during 2021, the Company’s
earnings have been and could continue to be affected by
market changes in raw material prices.
Reference is made to the disclosure contained in Item 7A of this Report.
Patents and Trademarks
Quaker Houghton has a limited number of patents and patent applications including
patents issued, applied for, or acquired in the
U.S. and in various foreign countries, some of which may prove to be material
to its business, with the earliest patent expiry in 2024.
The Company principally relies on its proprietary formulae and its applications
know-how and experience to meet customer needs.
Quaker Houghton products are identified by numerous trademarks that
are registered throughout its marketing area.
Research and Development—Laboratories
The Company maintains approximately thirty separate laboratory
facilities worldwide that are primarily devoted to applied
research and development.
In addition, the Company maintains quality control labs at each of its manufacturing
facilities.
Quaker
Houghton research and development is directed primarily
toward applied technology since the nature of the Company’s
business
requires continual modification and improvement of formulations to provide
specialty chemicals to satisfy customer requirements.
If
problems are encountered which cannot be resolved by local laboratories,
the problem is referred to one of our ten principal
laboratories, located in Conshohocken, Pennsylvania; Valley
Forge, Pennsylvania; Aurora, Illinois; Santa Fe Springs, California;
Uithoorn, the Netherlands; Coventry,
United Kingdom; Dortmund, Germany; Barcelona, Spain; Turin,
Italy or Qingpu, China.
Research and development costs are expensed as incurred.
Research and development expenses during the years ended
December 31, 2021, 2020 and 2019 were $44.9 million, $40.0 million and
$32.1 million, respectively.
Recent Acquisition Activity
The Company has completed several recent acquisitions that expand its strategic product
offerings and increase the Company's
presence in its core industries.
The Company's 2021 and 2022 acquisitions consist of:
●
In January 2022, the Company acquired a business related to the sealing
and impregnation of metal castings for the
automotive sector, as well as impregnation resin
and impregnation systems for metal parts for approximately $1.4 million.
This business expands the Company's geographic presence in Germany
as well as broadens its product offerings and service
capabilities within its existing impregnation business that was initially entered into
as part of its past acquisition of Norman
Hay.
●
In January 2022, the Company acquired a business that provides pickling
inhibitor technologies for the steel industry,
drawing lubricants and stamping oil for metalworking, and various other
lubrication, rust preventative, and cleaner
applications, for approximately $8.0 million.
This business broadens the Company’s
product offerings within its existing
metals and metalworking business in the Americas
region.
●
In November 2021, the Company acquired a business that provides hydraulic
fluids, coolants, cleaners, and rust preventative
oils for approximately $3.7 million.
This business expands the Company’s
geographic presence in Turkey as well as
broadens its product offerings within its existing metalworking
business.
●
In November 2021, the Company acquired Baron Industries ("Baron"),
a U.S. based privately held company that provides
vacuum impregnation services of castings, powder metal and electrical components
for an initial payment of approximately
$7.1 million.
Baron expands the Company's geographic presence as well as broadens its product
offerings and service
capabilities within its existing impregnation business.
●
In September 2021, the Company acquired the remaining interest in Grindaix-GmbH
(“Grindaix”), a Germany-based, high-
tech provider of coolant control and delivery systems for approximately $2.9
million.
Previously, in February 2021,
the
Company acquired a 38% ownership interest in Grindaix for approximately $1.7
million.
Grindaix expands the Company's
geographic presence in Germany and broadens its product offerings
and service capabilities within its equipment solutions
and fluid intelligence business.
4
●
In June 2021, the Company acquired certain assets for the Company’s
chemical milling maskants product line for
approximately $2.8 million.
●
In February 2021, the Company acquired a tin-plating solutions business for
the steel end market for approximately $25.0
million.
This business broadens the Company’s product
offerings within its existing metals business globally.
Impact of COVID-19
The global outbreak of COVID-19, and its variants, has negatively impacted
all locations where the Company does business.
Although the Company has now operated in this COVID-19 environment
for almost two years, the full extent of the outbreak and
related business impacts continue to remain uncertain and volatile.
This outbreak has significantly disrupted the operations of the
Company and those of its suppliers and customers.
Management continues to monitor the impact that the COVID-19 pandemic
is
having on the Company,
the overall specialty chemical industry,
and the economies and markets in which the Company operates.
Regulatory Matters
In order to facilitate compliance
with applicable federal, state, and local statutes and regulations relating
to occupational health
and safety and protection of the environment, the Company has an ongoing
program of site assessment for the purpose of identifying
capital expenditures or other actions that may be necessary to comply with
such requirements.
The program includes periodic
inspections of each facility by the Company and/or independent
experts, as well as ongoing inspections and training by on-site
personnel.
Such inspections address operational matters, record keeping, reporting requirements
and capital improvements.
Capital
expenditures directed solely or primarily to regulatory compliance amounted
to approximately $4.2
million, $3.7 million and $4.4
million during the years ended December 31, 2021, 2020 and 2019,
respectively.
Company Segmentation
The Company’s operating
segments, which are consistent with its reportable segments, reflect the structure of the
Company’s
internal organization, the method by which the Company’s
resources are allocated and the manner by which the chief operating
decision maker assesses the Company’s
performance.
The Company has four reportable segments: (i) Americas; (ii) EMEA; (iii)
Asia/Pacific; and (iv) Global Specialty Businesses.
See Note 4 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Non-U.S. Activities
Since significant revenues and earnings are generated by non-U.S. operations,
the Company’s financial results are
affected by
currency fluctuations, particularly between the U.S. dollar and the
euro, the British pound sterling, the Brazilian real, the Mexican
peso, the Chinese renminbi and the Indian rupee, and the impact of those currency
fluctuations on the underlying economies.
Reference is made to (i) the foreign exchange risk information
contained in Item 7A of this Report, (ii) the geographic information in
Note 4 of Notes to Consolidated Financial Statements included
in Item 8 of this Report, and (iii) information regarding risks attendant
to foreign operations included in Item 1A of this Report.
Number of Employees
On December 31, 2021, Quaker Houghton had approximately 4,700
full-time employees globally of whom approximately 1,200
were employed by the parent company and its U.S. subsidiaries, and approximately
3,500 were employed by its non-U.S. subsidiaries.
Associated companies of Quaker Houghton (in which it owns 50% or less and has
significant influence) employed approximately 600
people on December 31, 2021.
Core Values
Quaker Houghton considers its employees as its greatest strength in differentiating
our business and strengthening our market
positions.
We have established
core values that are inclusive of embracing diversity and creating a culture
where we learn from and
are inspired by the many cultures, backgrounds and knowledge of our
team members.
The Company’s goal is to have
an organization
that is inclusive of all its people and is representative of the communities
in which we operate.
The Company’s core values
are (i) live safe; (ii) act with integrity; (iii) drive results; (iv) exceed customer
expectations; (v)
embrace diversity; and (vi) do great things together.
Our core values embody who we are as a company,
guide our decisions and
inspire us.
Our commitment to these values, in words and actions, builds a safer,
stronger Quaker Houghton, and these values guide
the Company’s internal conduct
and its relationship with the outside world.
By fostering a culture and environment that exemplifies
our core values, we gain, as a company,
unique perspectives, backgrounds and varying experiences to ensure
continued long-term
success.
The Company respects and values all of its employees and believes inclusion,
diversity and equality are essential pillars to
drive the Company’s success.
Sustainability Report
We report our
progress on Environmental, Social, and Governance (“ESG”) milestones in our
sustainability report, which is
published annually and is available free of charge on our corporate
website at home.quakerhoughton.com/sustainability.
The
Company’s 2020 Sustainability
Report reflects the most recent available data on a variety of topics, including
specific information
5
relating to the Company’s:
(i) environmental footprint and climate change commitments;
(ii) diversity initiatives; (iii) safety initiatives
and performance;
and (iv) training courses our employees have completed.
Information in these sustainability reports and on our
website are not incorporated by reference in this Report and, accordingly,
should not be considered part of this Report.
Environmental Strategy
In 2020, we established the Board Sustainability Committee, which has specific
responsibility to assist the Board of Directors (the
“Board”) in its assessment, evaluation, and oversight of the Company’s
sustainability programs and initiatives pertaining to the
Company’s business, operations,
and employees.
In formulating our environmental strategy,
our Executive Leadership Team
(“ELT”)
and Board consider certain risks and uncertainties that may materially impact
our financial condition and results of operations.
These
risks and uncertainties are further described in Item 1A of this Report.
In 2021, we set a target to achieve carbon neutrality in our global
operations by 2030 and net zero emissions across our entire
value chain by 2050.
The Company established 15 long-term goals,
based on the results of the Company's 2020 materiality
assessment, which was completed with input from customers, investors, suppliers,
and internal stakeholders.
Our 15 long-term goals
are closely aligned with the United Nations Sustainable Development Goals.
We also identified short
-
and medium-term milestones
that may help support the achievement of our 2030 targets.
Talent
Management and Retention
Maintaining a robust pipeline of talent is crucial to our continued
success and is a key aspect of succession planning efforts across
the organization.
Our ELT
and human resources teams are responsible for attracting and retaining top talent by facilitating
an
environment where employees want to show up to work and do great
things together.
To achieve sustained high performance,
management invests in the development, safety,
and wellbeing of our employees.
Among other metrics, we measure training hours,
turnover, time to hire, and diversity hiring
to assess our progress in these areas.
Additionally, we
regularly evaluate our compensation and benefits packages
for our employees, including health and wellness
benefits, paid-time off policies, monetary compensation,
and educational reimbursements, to ensure that our total compensation and
benefits packages are aligned with our business strategy,
organizational culture, and diversity and inclusion philosophy
while ensuring
that we remain competitive in the markets we serve while following
local and statutory wage and benefits laws and guidelines.
Diversity, Equity,
and Inclusion
As a global company,
we want to build an organization that is inclusive of all people and representative of
the communities in
which we operate.
Quaker Houghton provides equal employment opportunities and does not discriminate
based on age, ethnicity,
gender identity,
disability / medical, race, religion, or sexual orientation.
We believe that diversity and
inclusion are embodied by
having working norms and cultural familiarities whereby employees
feel included, engaged, and rewarded, regardless of their
background or where they sit in the organization.
Inclusion and diversity begin with the Board and ELT.
The Board is comprised of twelve individuals with diverse experience and
credentials, selected for their business acumen and ability to challenge and add
value to management.
Our current Board composition
includes two female and four racially diverse directors out of a total of
twelve directors.
For additional information on the Company’s
leadership, refer to Item 4(a) Information about our Executive Officers
and Item 10.
Directors, Executive Officers and Corporate
Governance.
We published
our workforce demographics in our Sustainability Report.
By publicly disclosing our workforce demographics, we
increase transparency in the composition of our workforce as well as facilitate accountability
in achieving progress in our diversity
goals, including ensuring that diverse candidates are actively considered
for roles throughout the organization.
Workplac
e
Safety
We are committed
to maintaining a strong safety culture and to emphasizing the importance of
our employees’ role in identifying,
mitigating and communicating safety risks.
We maintain policies and
operational practices that communicate a culture where all
levels of employees are responsible for safety.
We believe that
the achievement of superior safety performance is both an important
short-term and long-term strategic goal in managing our operations.
We emphasize ten
“lifesaving” rules which make a significant
difference in preventing serious injuries and fatalities.
We also require
all employees to regularly complete safety training.
Additionally, our
ELT is closely involved
in our safety programs and conducts regular reviews of safety performance
metrics and
reviews the Company’s safety
performance during Company-wide meetings.
Quaker Houghton on the Internet
Financial results, news and other information about Quaker Houghton
can be accessed from the Company’s
website at
https://www.quakerhoughton.com
.
This site includes important information on the Company’s
locations, products and services,
financial reports, news releases and career opportunities.
The Company’s periodic and current reports
on Forms 10-K, 10-Q, 8-K, and
other filings, including exhibits and supplemental schedules filed therewith,
and amendments to those reports, filed with the Securities
and Exchange Commission (“SEC”) are available on the Company’s
website, free of charge, as soon as reasonably practicable after
they are electronically filed with or furnished to the SEC.
Information contained on, or that may be accessed through, the Company’s
website is not incorporated by reference in this Report and, accordingly,
you should not consider that information part of this Report.
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Factors that May Affect Our Future Results
(Cautionary Statements under the Private Securities Litigation Reform
Act of 1995)
Certain information included in this Report and other materials filed or
to be filed by Quaker Chemical Corporation with the SEC,
as well as information included in oral statements or other written statements made
or to be made by us, contain or may contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
These statements can be identified by the fact that they do not relate strictly to
historical or current facts.
We have based
these forward-looking statements, including statements regarding the potential
effects of the
COVID-19 pandemic and global supply chain constraints on the Company’s
business, results of operations, and financial condition,
our expectation that we will maintain sufficient liquidity and
remediate any of our material weaknesses in internal control over
financial reporting, and statements regarding the impact of increased
raw material costs and pricing initiatives on our current
expectations about future events.
These forward-looking statements include statements with respect to
our beliefs, plans, objectives, goals, expectations,
anticipations, intentions, financial condition, results of operations, future
performance, and business, including:
•
the potential benefits of the Combination and other acquisitions;
•
the impacts on our business as a result of the COVID-19 pandemic and
any projected global economic rebound or
anticipated positive results due to Company actions taken in response;
•
cost increases in prices of raw materials and the impacts of constraints and
disruptions in the global supply chain;
•
our current and future results and plans including our sustainability goals
;
and
•
statements that include the words “may,”
“could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” or similar expressions.
Such statements include information relating to current and future business activities,
operational matters, capital spending, and
financing sources.
From time to time, forward-looking statements are also included in the Company’s
other periodic reports on Forms
10-K, 10-Q and 8-K, press releases, and other materials released to,
or statements made to, the public.
Any or all of the forward-looking statements in this Report, in the Company’s
Annual Report to Shareholders for 2021 and in any
other public statements we make may turn out to be wrong.
This can occur as a result of inaccurate assumptions or as a consequence
of known or unknown risks and uncertainties.
Many factors discussed in this Report will be important in determining our future
performance.
Consequently, actual results may
differ materially from those that might be anticipated from our forward-looking
statements.
We undertake
no obligation to publicly update any forward-looking statements, whether
as a result of new information, future
events or otherwise.
However, any further disclosures made on
related subjects in the Company’s subsequent
reports on Forms 10-K,
10-Q, 8-K and other related filings should be consulted.
A major risk is that demand for the Company’s
products and services is
largely derived from the demand for our customers’ products, which
subjects the Company to uncertainties related to downturns in a
customer’s business and unanticipated customer production
slowdowns and shutdowns, including as is currently being experienced by
many automotive industry companies as a result of supply chain disruption.
Other major risks and uncertainties include, but are not
limited to, the primary and secondary impacts of the COVID-19 pandemic,
including actions taken in response to the pandemic by
various governments, which could exacerbate
some or all of the other risks and uncertainties faced by the Company,
as well as the
potential for significant increases in raw material costs, supply chain
disruptions, customer financial instability,
worldwide economic
and political disruptions such as the current conflict between Russia and Ukraine
,
foreign currency fluctuations, significant changes in
applicable tax rates and regulations, future terrorist attacks and other acts of violence.
Furthermore, the Company is subject to the
same business cycles as those experienced by our customers in the steel, automobile,
aircraft, industrial equipment, and durable goods
industries.
The ultimate impact of COVID-19 on our business will depend on,
among other things, the extent and duration of the
pandemic, the severity of the disease and the number of people infected
with the virus including new variants, the continued
uncertainty regarding global availability,
administration, acceptance and long-term efficacy
of vaccines, or other treatments for
COVID-19 or its variants, the longer-term effects on the
economy of the pandemic, including the resulting market volatility,
and by
the measures taken by governmental authorities and other third parties restricting
day-to-day life and business operations and the
length of time that such measures remain in place, as well as laws and other
governmental programs implemented to address the
pandemic or assist impacted businesses, such as fiscal stimulus and other legislation
designed to deliver monetary aid and other relief.
Other factors could also adversely affect us, including those related
to the Combination and other acquisitions and the integration of
acquired businesses.
Our forward-looking statements are subject to risks, uncertainties and
assumptions about the Company and its
operations that are subject to change based on various important factors,
some of which are beyond our control.
These risks,
uncertainties, and possible inaccurate assumptions relevant to our business
could cause our actual results to differ materially from
expected and historical results.
Therefore, we caution you not to place undue reliance on our forward-looking
statements.
For more information regarding these
risks and uncertainties as well as certain additional risks that we face,
refer to the Risk Factors section, which appears in Item 1A of
this Report and in our quarterly and other reports filed from time to time
with the SEC.
This discussion is provided as permitted by
the Private Securities Litigation Reform Act of 1995.
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