Annual Report

Dear Shareholders, Customers and Colleagues:

In 2019, we faced a number of challenges in the global marketplace including a weakness in the global automotive market, general softening of industrial markets in most parts of the world and foreign exchange headwinds. Despite this tough environment, we continued to grow at a rate that exceeded that of the markets we serve. Our differentiated business model continued to help us gain market share and achieve our target gross margins. We have significant opportunities ahead, many of which are made possible by our combination with Houghton International, another global leader in specialty chemical solutions. As we continue to move forward together as Quaker Houghton, we are determined to create even greater value for our shareholders. After I review our financial performance for 2019, I will discuss this exciting strategic combination and provide an update on the progress we’ve made in our integration so far.

Transition-year performance.

Our reporting for 2019 represents seven months of financial data from Quaker prior to the Quaker Houghton combination on August 1, 2019. The remainder of the year represents results for the combined company and includes three months of results from Norman Hay, a strategic acquisition the company made on October 1, 2019, which I’ll discuss in greater detail later in my letter. In 2019, adjusted EBITDA increased 38% to $173.1 million compared to $125.8 million in 2018. The non-GAAP earnings per diluted share was $5.83 compared to $6.17 in 2018. Net sales were $1,133.5 million compared to $867.5 million in 2018. This 31% year-over-year increase includes additional net sales from Houghton and Norman Hay.

Michael F. Barry
Michael F. BarryChairman of the Board, Chief Executive Officer and President

Our average share price was $181.71 per share compared to $168.20 per share in 2018, a $14 increase. In July, we increased our dividend, making this the 48th consecutive year we have maintained or increased the dividend paid to our shareholders.

An unprecedented opportunity to create value.

When we combined Quaker and Houghton, we immediately doubled our revenues and our adjusted EBITDA. That’s exciting, but that’s not what we found most compelling about the opportunity to combine our two strong companies. We knew that, together, we could capture new opportunities for growth and innovation that neither organization could have achieved on its own. Our primary goal was simple: to create value for all of you.

As Quaker Houghton, we are confident we can achieve greater value through a number of concrete advantages:

Accelerated growth opportunities:

Through the combination, we have greatly increased our opportunities to cross-sell. We can now offer an expanded technology portfolio to a larger customer base into more market channels. Within our base of 15,000 customers, the opportunities are many, as there were only 1,000 customers that our legacy companies shared prior to the combination. We’ve already engaged many of our customers in conversations about our expanded portfolio and expertise and have had some early wins. By tapping into these opportunities, we expect Quaker Houghton to continue the company’s historic growth rate of 2 to 4 percent above our base markets after year one.

Increased size and scale:

With the combination, we are now the global leader in industrial process fluids. Our leadership position, along with size and scale, provides us with many financial and operational advantages that will increase our profitability. The combined company is expected to generate well above $300 million adjusted EBITDA by 2022 as compared to Quaker’s 2018 year-end adjusted EBITDA of $125.8 million. As we scale up our infrastructure, we anticipate that operating margins will continue to improve as well.

Significant cost synergies:

We project we will achieve annual cost synergies of at least $60 million, which will be realized on a run-rate basis by August 2021. This includes lower costs in areas such as raw materials, freight and warehousing, and the company’s manufacturing footprint, along with operating efficiencies in corporate structure and supply chain. We have already begun to see results from the restructuring program we initiated in the third quarter of 2019.

A thoughtful and robust integration process.

Early in 2017, we began developing an integration plan with the guidance of one of the world’s leading integration planning firms. As a first step in the planning, we established a global team that included a diverse range of disciplines and colleagues from both companies. The quality of collaboration we saw gave us a clear idea of what it would be like to work together. This promising beginning gave us validation that, just as we thought, the cultural fit was going to be a good one. The reason: we share a business model where everyone is focused on one thing—the customer. When Quaker Houghton became official in August, we were in an excellent position to hit the ground running. We were ready to execute our strategies to integrate our people, systems and processes in ways that will allow us to capture the full value of the combination in the coming years.

I’m very pleased with the success of our integration work so far. A major focus for us this year was to work on creating the kind of company we want to become. We don’t just want to be a larger company; we want to be a company that is well positioned to seize the upsides over the long term—and one that continues to be differentiated from competitors.

The process has been nearly seamless for our customers—we’ve had no supply issues, no disruption. And we have not lost any significant business. We are working hard to ensure every customer benefits from the breadth of products and expertise the combination has brought us.

For me, another important measure of success is how our colleagues are doing during integration. From the very beginning, we were mindful of managing change internally. Everyone has had an opportunity to participate in some way in helping build a strong, shared culture—one that enables our colleagues to be productive and engaged.

Our people: committed, disciplined and resilient.

Speaking of our people, I have often said the strength of a company is its people, and that is even more true for Quaker Houghton. Our people are the key to making our brand come alive for customers and it’s only because of their commitment and discipline that we can implement our differentiated business model based on customer intimacy. This model has worked very well for both companies and we have never been more committed to it. Through strong relationships and customer-specific expertise, we ensure that our technologies and solutions consistently deliver true, tangible value. And now with a larger workforce of highly skilled people on the ground who are able to assist more customers at a local level, I believe we have the best service organization in our industry.

I’d like to extend thanks to all our colleagues for their commitment, discipline and resilience. They have done a great job staying focused on delivering profitable results even as many of them moved to new facilities, took on new roles and worked to execute integration plans on top of their regular responsibilities.

I also extend thanks to our executive team and board leadership, who are just as critical to our success. A special thanks goes to a long-tenured board member who will be retiring this May. Robert E. Chappell has served on our board for 23 years and has served as Chair of the Governance Committee for the last 14 years. His understanding of our business combined with his business acumen and leadership skills have been invaluable to us. We wish him the best in his retirement.

Innovation that keeps ahead of the pace of change.

We now have more than 30 R&D technology centers worldwide and have assembled what we believe to be a critical mass in R&D expertise and capabilities. One example of how our combined capabilities complement each other: Over the years Houghton invested in front-end development—benchtop tribology and emulsion testing. Quaker invested more heavily in the proof-of-concept—pilot plants and CNC machines. Now the combined approaches will enable an accelerated innovation process to support our customers today, and as their world changes.

To leverage our strengths and develop new solutions with strong growth potential, we have created three global Centers of Innovation—Metal Rolling, Metalworking and Surface Chemistry. Within these centers, along with our regional labs, we are allocating more resources and expertise to address our customers’ ever-evolving, next-generation challenges such as the light-weighting of vehicles, green chemistry and stricter regulations. These new centers will help us speed innovations to customers, ensuring that they have access to the best product technologies available anywhere.,/p>

In addition to developing new technologies in our labs, over the years we’ve acquired many new technologies with good growth characteristics. Prior to our combination with Houghton, we made 14 acquisitions over the last 10 years that have brought innovative additions to our portfolio of products and services. This has proven to be a successful strategy for creating value. And acquisitions have helped us gain market share—by adding new customers and by driving sales of complementary technologies to existing customers. In October, we acquired the operating divisions of Norman Hay plc. This acquisition gives us increased access to attractive core market segments with high barriers to entry such as die casting, automotive OEM and aerospace. In addition, it provides us with a strategic opportunity to take advantage of external market trends such as the light-weighting of vehicles and 3D printing where we have the opportunity to leverage our global footprint and complementary geographies. Norman Hay’s engineering expertise includes robotics applications, which will strengthen our existing equipment solutions platform and advance our position in Industry 4.0. We are working jointly with the Norman Hay team to design an engineering and equipment infrastructure that will serve the whole company. And we’ve made great progress already on several commercial opportunities.

More resources to support sustainability.

An advantage of being a larger company is that we can deploy more resources to initiatives of great importance to our core values. One of these is Environmental, Social and Governance (ESG) or as we call it internally, “Sustainability.”

We continue our deep commitment to creating a positive social, environmental and economic impact on our world and those we touch. We have a long history of helping our customers meet their sustainability goals. We are diligent in providing customers with solutions that reduce waste, energy, water usage and chemical consumption, while improving operational processes, tool life and the health and safety of their workers.

Internally, we take sustainability just as seriously. Since our combination, we have been working to refresh and build upon our sustainability program. To achieve our goals going forward, we assigned additional resources to sustainability and in 2020 we established an executive Sustainability Steering Committee as well as a board Sustainability Committee to oversee the program.

We had our best safety year on record in 2019 and we achieved a total recordable incident rate (TRIR) of 0.76, which was better than our target of 0.85. So, while we are doing well, safe behavior must be continually reinforced. We all rest easier knowing that our people go home to their families safe, each and every day. That is why in 2019 we launched a global employee awareness program around one of our core values, known as “Live Safe.” This program introduced lifesaving rules that cover high-risk activities. These rules cover both universal topics that apply to everyone’s daily life, as well as more job-specific topics. Our goal is to attain and maintain industry-leading safety performance.

Our sustainability program also helps us stay focused on goals to reduce our environmental footprint and embeds a culture of safety throughout all of our facilities. For example, since 2014, Quaker has decreased its water usage globally by 16% per ton produced and also reduced fuel consumption by 17%. In addition, we help to strengthen and enrich the communities where we work and live through company-sponsored community events and by providing paid time off to colleagues who volunteer for community service.

A look ahead: challenges and opportunities.

There are a number of market forces outside of our control that will create challenges for us in 2020. We don’t yet know the full impact on industrial markets of events such as the outbreak of the coronavirus and the halt of Boeing 737 Max production. However, I believe that our combination will make us more resilient and give us more control over our future. With our new size and scale, opportunities to cross-sell to a larger customer base and proven, differentiated business model, I’m confident that we will continue to grow above the markets we participate in. In addition, the cost synergies of at least $60 million over the next two years will help us achieve strong adjusted EBITDA growth even as we face these challenges.

Over the next two years, our focus will be on achieving the benefits of the combination and paying down our debt to our target of 2.5 times net debt to adjusted EBITDA. So, what will the company look like in two years? By 2022, we expect to have achieved:

  • All our synergy targets and be a company that generates well above $300 million adjusted EBITDA
  • Organic growth, outperforming our markets by 2 to 4 percent due to cross-selling opportunities and our differentiated customer-intimacy business model
  • At least one bolt-on acquisition and be positioned for more
  • Industry-leading safety performance, and
  • A place where our customers, colleagues, and shareholders prosper.

On the next page, you’ll find our plan for growth through 2027, which reflects our management team’s perspective. I look forward to what we can accomplish as Quaker Houghton, a single company transformed by our combined strengths. As always, our priority will be to create value for our customers, our shareholders, our colleagues and our communities. We are committed to building a company that is strategically positioned for a bright future.

Best regards,

Mike Signature

Michael F. Barry
Chairman of the Board, Chief Executive Officer and President

Current Shareholder Materials

2018 Annual Report

Past Annual Reports