QUAKER HOUGHTON ANNOUNCES THIRD QUARTER 2021 RESULTS

CONSHOHOCKEN, Pa., Nov. 4, 2021 /PRNewswire/ -- Quaker Houghton ("the Company") (NYSE: KWR), the global leader in industrial process fluids, today announced its third quarter of 2021 results.

Third Quarter of 2021 Consolidated Results

Third quarter of 2021 net sales of $449.1 million increased 22% compared to $367.2 million in the prior year quarter primarily due to higher sales volumes of approximately 10%, which includes additional net sales from acquisitions of 4%, increases from selling price and product mix of 10% and the positive impact from foreign currency translation of 2%. The increase in organic sales volumes, which excludes the benefits of recent acquisitions, compared to the third quarter of 2020 was primarily driven by the Company's continued market share gains as well as the continued gradual improvement in end market conditions as it relates to the impacts of COVID-19. The increase in selling price and product mix is primarily the result of the Company's price increases implemented in 2021 to help offset the unprecedented increases in raw material costs the Company has experienced throughout 2021.

The Company had net income in the third quarter of 2021 of $31.1 million or $1.73 per diluted share, compared to third quarter of 2020 net income of $27.3 million or $1.53 per diluted share. Excluding costs associated with the combination with Houghton International, Inc. (the "Combination") and other non-core or non-recurring items in each period, the Company's third quarter of 2021 non-GAAP earnings per diluted share was $1.63 compared to $1.56 in the prior year third quarter. The Company's current quarter adjusted EBITDA of $66.2 million increased 3% compared to $63.9 million in the third quarter of 2020 primarily due to the increase in net sales, higher realized cost synergies from the Combination and benefits from foreign exchange gains compared to the prior year, partially offset by lower gross margins in the current quarter driven by higher raw material costs as well as higher selling, general and administrative expenses ("SG&A"). The Company's current quarter gross margin of 32.3% declined sequentially compared to 35.5% in the second quarter of 2021. While the sequential decline and continued gross margin headwinds were previously expected, the magnitude of the challenges from continued raw material cost increases and global supply chain and logistics pressures exceeded the Company's expectations. Partially helping to offset the lower gross margin, the Company estimates that it realized cost synergies associated with the Combination of approximately $19 million during the third quarter of 2021 compared to approximately $17 million during the third quarter of 2020.

Michael F. Barry, Chairman, Chief Executive Officer and President, commented, "We had record net sales for the third quarter despite being negatively impacted by the automotive semiconductor shortage and continued supply chain challenges. Good end-market demand continues to be the major contributor to our earnings performance as organic sales volumes increased 6% from the third quarter of 2020. We continued to see market share gains in the quarter as our net sales benefited 3% compared to the prior year from new business wins. The major negative trend in the quarter was the continued significant escalation of raw material costs. While we previously anticipated that our gross margins were going to be lower than the second quarter due to higher costs, since then our raw material costs have continued to escalate causing third quarter costs to be much greater than our expectations. This ultimately negatively impacted our sequential gross margins by 3.2% compared to the second quarter as our raw materials costs increased nearly 10% in the third quarter from the second quarter."

Mr. Barry continued, "Looking forward, we expect raw material costs to continue to increase in the fourth quarter but we do expect the magnitude of the increases to be lower. We have and will be implementing more price increases to address these unprecedented increases in raw material costs. Our goal is to put enough price increases in place by the end of the year so we enter 2022 at our targeted product margin levels. From a revenue perspective, in the fourth quarter we expect to see continued good demand for most of our businesses but we do expect a negative impact in China due to power restrictions and its impact on our customers' production as well as a continued negative impact due to semiconductor shortages on automotive. While we expect some top line headwinds in the fourth quarter, we also expect to have sequential improvement in our product margins and we expect our adjusted EBITDA to be in a similar range to the third quarter. Looking ahead to 2022, we expect another strong year for Quaker Houghton with net sales and earnings growth to be above our normal long-term trends as we expect good growth in our end markets, continued market share gains and higher gross margins as our pricing initiatives catch up from the lag we are experiencing in 2021 due to significant raw material inflation."

Third Quarter of 2021 Segment Results

The Company's third quarter of 2021 operating performance in each of its four reportable operating segments: (i) Americas; (ii) Europe, Middle East and Africa ("EMEA"); (iii) Asia/Pacific; and (iv) Global Specialty Businesses, reflect similar drivers to that of its consolidated performance.

All four segments had higher net sales compared to the third quarter of 2020. Each of the segments continued to benefit from higher sales volumes, including additional net sales from acquisitions, as well as the positive impact of foreign currency translation and increases in selling price and product mix. Higher organic sales volumes for generally all segments are primarily driven by the Company's continued market share gains as well as the continued gradual year-over-year improvement in end market conditions as it relates to the impacts of COVID-19. As reported, the Company's Americas and EMEA segment operating earnings were higher compared to the third quarter of 2020 reflecting the increase in net sales including the benefits of acquisitions; however, all of the Company's segment's operating earnings were negatively impacted primarily by the unprecedented raw material cost increases and the impact of disruptions in the global supply chain that continued throughout the third quarter of 2021 and to a lesser extent by higher SG&A, including an increase in direct selling expenses associated with year-over-year inflation increases and increases due to increased net sales as well as lower levels of prior year SG&A as a result of temporary cost saving measures implemented in response to COVID-19.

Cash Flow and Liquidity Highlights

The Company has no material debt maturities until August 1, 2024. As of September 30, 2021, the Company's total gross debt was $900.7 million and its cash on hand was $141.4 million. The Company's net debt was $759.3 million, and its net debt divided by its trailing twelve months adjusted EBITDA was approximately 2.7 to 1 as of September 30, 2021. The Company's consolidated net leverage ratio, as defined under its bank agreement, was approximately 2.5 to 1 as of September 30, 2021 compared to a maximum permitted leverage of 4.0 to 1. Based on current projections of future liquidity and leverage, the Company does not expect any compliance issues with its bank covenants.

The Company had net operating cash flow of $12.1 million during the third quarter of 2021, bringing its year-to-date net operating cash flow to $2.5 million in the first nine months of 2021, as compared to a net operating cash flow of $112.0 million in the first nine months of 2020. The significant decrease in net operating cash flow year-over-year was primarily driven by a significant change in working capital, as the Company's strong current year net sales and volumes resulted in a large increase in accounts receivable coupled with an increase in inventory as a result of continued rising raw material costs as well as a build in inventory to ensure the Company has appropriate stock to meet its customer demands in anticipation of continuing stress on the Company's global supply chain.

Recent Acquisition Activity

During the third quarter of 2021 and early in the fourth quarter, the Company has completed several smaller acquisitions that expand its strategic product offerings and increase the Company's presence in its core metalworking industries. In total, the Company's initial purchase price for these acquisitions was approximately $13 million, which is subject to post-closing adjustments as well as certain earn-out provisions that could total approximately $4 million in additional consideration pending future performance or growth thresholds. The Company estimates that these acquisitions in aggregate will add full year net sales of approximately $15 million and approximately $2 million of full year adjusted EBITDA going forward. The Company's acquisitions that were completed consist of:

• Remaining interest in Grindaix, a private German business and former joint venture with Quaker Houghton, which provides solutions that precisely measure and optimize fluid applications for the metalworking industry;
• Select assets from 3-S Mühendislik A.S. ("3-S"), a private Turkish company that provides hydraulic fluids, coolants, cleaners, and rust preventative oils within Turkey. 3-S has been a distributor for Quaker Houghton in Turkey since 2003; and
• Baron Industries ("Baron"), a privately held company headquartered in Madison Heights, MI, USA, that provides vacuum impregnation services of castings, powder metal and electrical components. Baron expands the Company's geographic presence 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.

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.

The Company presents EBITDA which is calculated as net income (loss) attributable to the Company before depreciation and amortization, interest expense, net, and taxes on income (loss) 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 analysts, investors, and competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.

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 analysts, investors, and competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.

As it relates to 2021 and 2022 projected adjusted EBITDA growth for the Company, including as a result of our recent acquisitions, 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 September 30, 2021 adjusted EBITDA of $278.9 million, which includes (i) the nine months ended September 30, 2021 adjusted EBITDA of $213.4 million, as presented in the non-GAAP reconciliations below, and (ii) the twelve months ended December 31, 2020 adjusted EBITDA of $222.0 million, as presented in the non-GAAP reconciliations included in the Company's fourth quarter and full year 2020 results press release dated February 25, 2021, less (iii) the nine months ended September 30, 2020 adjusted EBITDA of approximately $156.5 million, as presented in the non-GAAP reconciliations below.

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):

Segment Measures and Reconciliations

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. The three geographic segments are composed of the net sales and operations in each respective region, excluding net sales and operations managed globally by the Global Specialty Businesses segment, which includes the Company's container, metal finishing, mining, offshore, specialty coatings, specialty grease and Norman Hay businesses. Segment operating earnings for each of the Company's reportable segments are comprised of the segment's net sales less directly related COGS and 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 income (expense), net.

The following tables reconcile the Company's reportable operating segments performance to that of the Company's (dollars in thousands):

Forward-Looking Statements

This press release contains "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 expectations that we will maintain sufficient liquidity and remain in compliance with the terms of the Company's credit facility, statements regarding remediation of our material weaknesses in internal control over financial reporting, expectations about future demand and raw material costs, 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 but not limited to the potential benefits of the Combination and other acquisitions, the impacts on our business as a result of the COVID-19 pandemic and global supply chain constraints as well as any projected global economic rebound or anticipated positive results due to Company actions taken in response, and our current and future results and plans and statements that include the words "may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "plan" or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in such statements. A major risk is that demand for the Company's products and services is largely derived from the demand for its 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 disruptions. 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, including the potential for significant increases in raw material costs, supply chain disruptions, customer financial instability, worldwide economic and political disruptions, 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 as new variants emerge, 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. All forward-looking statements included in this press release, including expectations about business conditions during 2021 and future periods, are based upon information available to the Company as of the date of this press release, which may change. 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 our Annual Report on Form 10-K for the year ended December 31, 2020, and in subsequent reports filed from time to time with the Securities and Exchange Commission. We do not intend to, and we disclaim any duty or obligation to, update or revise any forward-looking statements to reflect new information or future events or for any other reason. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

Conference Call

As previously announced, the Company's investor conference call to discuss its third quarter performance is scheduled for November 5, 2021 at 8:30 a.m. (ET). A live webcast of the conference call, together with supplemental information, can be accessed through the Company's Investor Relations website at investors.quakerhoughton.com. You can also access the conference call by dialing 877-269-7756.

About Quaker Houghton

Quaker Houghton is the global leader in industrial process fluids. With a presence around the world, including operations in over 25 countries, our customers include thousands of the world's most advanced and specialized steel, aluminum, automotive, aerospace, offshore, can, mining, and metalworking companies. Our high-performing, innovative and sustainable solutions are backed by best-in-class technology, deep process knowledge and customized services. With approximately 4,200 employees, including chemists, engineers and industry experts, we partner with our customers to improve their operations so they can run even more efficiently, even more effectively, whatever comes next. Quaker Houghton is headquartered in Conshohocken, Pennsylvania, located near Philadelphia in the United States. Visit quakerhoughton.com to learn more.

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SOURCE Quaker Houghton