Quaker Chemical Announces Third Quarter 2013 Results - 14% earnings per share growth despite challenging economic environment

- Expected $0.08 per share third quarter tax benefit delayed until fourth quarter

- Strong net operating cash flow of $24.5 million

CONSHOHOCKEN, Pa., Oct. 29, 2013 /PRNewswire/ -- Quaker Chemical Corporation (NYSE: KWR) today announced net sales of $184.1 million for the third quarter of 2013, compared to the third quarter of 2012 net sales of $180.9 million.  Earnings per diluted share for the third quarter of 2013 were $0.95 compared to $0.83 for the third quarter of 2012.  The Company had expected to receive recertification of a prior concessionary tax rate in Asia Pacific, which would have increased earnings an additional $0.08 per share in the third quarter, but the approval was delayed until earlier this month and is expected to be recognized in the fourth quarter.  For the first nine months of 2013, the Company reported net sales of $545.1 million, compared to the first nine months of 2012 net sales of $535.4 million.  Earnings per diluted share for the first nine months of 2013 were $3.21 compared to earnings per diluted share of $2.63 for the first nine months of 2012.  For Non-GAAP results, see the Non-GAAP Measures section below.

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Michael F. Barry, Chairman, Chief Executive Officer and President, commented, "We are pleased to announce another quarter of strong earnings and cash flow generation given a relatively mixed global economic environment.  Despite the weak market conditions in various parts of the world, we continue to produce solid operating results by growing our market share and leveraging our recent acquisitions as well as continuing to align our cost structure to market realities."

Mr. Barry continued, "In the fourth quarter, we expect to continue to produce good operating results, subject to typical negative seasonality impacts around the holidays at year end.  In summary, I remain confident in our future and I expect 2013 to be another strong year for Quaker in terms of earnings, cash flow generation, EBITDA growth and shareholder value creation."

Third Quarter of 2013 Summary

Net sales for the third quarter of 2013 of $184.1 million increased approximately 2% from net sales of $180.9 million in the third quarter of 2012, which primarily related to an increase in product volumes.

Gross profit increased approximately $6.9 million, or approximately 12%, from the third quarter of 2012.  The increase in gross profit was primarily driven by an improvement in gross margin to 35.9% from 32.7% in the third quarter of 2012.  The increase in gross margin reflects the return of the Company's product margins to more acceptable levels.

Selling, general and administrative expenses ("SG&A") increased $3.9 million from the third quarter of 2012, which was primarily driven by higher selling related costs on improved Company performance and higher labor related costs on general year-over-year merit increases.  In addition, non-operating related SG&A expenses increased due to certain uncommon costs.  For instance, the third quarter of 2013 SG&A includes approximately $0.7 million, or $0.04 per diluted share, of costs related to streamlining certain operations in the Company's Europe, Middle East and Africa ("EMEA") region. 

The increase in other expense in the third quarter of 2013 was primarily driven by foreign exchange transaction losses of approximately $0.6 million and a charge of approximately $0.2 million, or $0.01 per diluted share, related to the cost streamlining initiative, noted above, compared to foreign exchange transaction losses of $0.2 million in the third quarter of 2012. 

The decrease in interest expense was primarily due to lower average borrowings and lower interest rates experienced in the third quarter of 2013 as compared to the third quarter of 2012.

The increase in equity in net income of associated companies from the third quarter of 2012 was primarily due to higher earnings related to the Company's equity interest in a captive insurance company.  Earnings from this affiliate were $1.2 million, or $0.09 per diluted share, in the third quarter of 2013 compared to $0.4 million, or $0.03 per diluted share, in the third quarter of 2012.

The Company's effective tax rates for the third quarters of 2013 and 2012 were 33.8% and 28.6%, respectively.  The primary contributor to the higher effective tax rate in the current quarter was an increase in Asia Pacific's effective tax rate.  While recertification of a prior concessionary tax rate in Asia Pacific was pending renewal, the Company recorded tax expense at its statutory tax rate of 25% in the third quarter of 2013 compared to the concessionary tax rate of 15% in the prior year. (See the Recent Developments section below).

Year-to-Date Summary

Net sales for the first nine months of 2013 of $545.1 million increased approximately 2% from $535.4 million in the first nine months of 2012, which primarily related to an increase in product volumes. 

Gross profit increased by approximately $16.4 million, or approximately 9%, from the first nine months of 2012.  The increase in gross profit was driven by an improvement in gross margin to 35.9% from 33.5% in the first nine months of 2012, reflective of the return of the Company's product margins to more acceptable levels.

SG&A increased approximately $9.9 million from the first nine months of 2012, which was primarily driven by higher selling related costs on improved Company performance, higher labor related costs on general year-over-year merit increases and costs added with our recent acquisitions.  In addition, non-operating SG&A expenses increased due to certain uncommon costs.  For instance, the nine months of 2013 SG&A includes approximately $1.1 million, or $0.06 per diluted share, of costs related to streamlining certain operations in the Company's EMEA and South America regions.  Partially offsetting these increases to SG&A were the prior year costs associated with the bankruptcies of certain U.S customers of $1.2 million, or $0.06 per diluted share, the prior year costs associated with the Company's CFO transition of $0.6 million, or $0.03 per diluted share, and lower translation due to changes in foreign exchange rates. 

Other income for the first nine months of 2013 was $2.0 million, which was primarily driven by a refund of $2.5 million, or $0.14 per diluted share, related to past excise taxes paid on certain mineral oil sales and, also, earnings from third party license fees.  Partially offsetting these contributors to other income were expenses related to an increase in the fair value of an acquisition earnout liability of $0.7 million, or $0.03 per diluted share, the cost streamlining initiative, noted above, and foreign exchange transaction losses of $0.8 million.  Comparatively, other income for the first nine months of 2012 was $0.5 million, which relates primarily to third party license fees, net of foreign exchange transaction losses of $0.8 million

Interest expense was lower in the first nine months of 2013 compared to the first nine months of 2012 primarily due to lower interest rates and lower average borrowings.

The Company's effective tax rates for the first nine months of 2013 and 2012 were 30.0% and 26.9%, respectively.  The primary contributor to the higher effective tax rate in the current year was an increase in Asia Pacific's effective tax rate, noted above.

Equity in net income of associated companies increased due to higher earnings related to the Company's equity interest in a captive insurance company in the first nine months of 2013 compared to the first nine months of 2012.  Earnings attributable to this equity interest increased from approximately $1.4 million, or $0.11 per diluted share, for the first nine months of 2012 to approximately $4.4 million, or $0.33 per diluted share, for the first nine months of 2013, which includes a non-cash out-of-period adjustment of approximately $1.0 million recorded in 2013. Partially offsetting this increase in equity in net income of associated companies was a charge of approximately $0.4 million, or $0.03 per diluted share, related to the devaluation of the Venezuelan Bolivar Fuerte during 2013.

Balance Sheet and Cash Flow Items

The Company's net operating cash flow for the third quarter of 2013 was $24.5 million, which increased its year-to-date 2013 net operating cash flow to $51.9 million as compared to $41.8 million for the first nine months of 2012.  The improvement in the Company's net operating cash flow during the first nine months of 2013 was primarily driven by increased net income and better working capital management.  During 2013, the Company revised its credit facility, expanding the amount available for borrowings under this facility from $175.0 million to $300.0 million, which provides the Company further financial flexibility for potential future initiatives.  In addition to the revised facility, the Company's current liquidity remains strong, as its cash position continued to exceed its debt at September 30, 2013 and its consolidated leverage ratio continued to be less than one times EBITDA. 

Non-GAAP Measures

Included in this public release is a non-GAAP financial measure of non-GAAP earnings per diluted share.  The Company believes this non-GAAP financial measure provides meaningful supplemental information as it enhances a reader's understanding of the financial performance of the Company, is more indicative of future operating performance of the Company, and facilitates a better comparison among fiscal periods, as the non-GAAP financial measure excludes items that are 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 following is a reconciliation between the non-GAAP (unaudited) financial measure of non-GAAP earnings per diluted share to its most directly comparable GAAP (unaudited) financial measure:

 



Three Months Ended

September 30,


Nine Months Ended

September 30,



2013


2012


2013


2012

GAAP earnings per diluted share attributable to Quaker Chemical Corporation Common Shareholders


 

$   0.95


 

$    0.83


 

$   3.21


 

$    2.63










CFO transition costs per diluted share





0.03










Customer bankruptcy costs per diluted share





0.06










Mineral oil excise tax refund per diluted share




(0.14)











Change in acquisition-related earnout liability per diluted share


 


 


 

0.03


 










Cost streamlining initiatives per diluted share


0.05



0.07











Devaluation of the Venezuelan Bolivar Fuerte per diluted share


 


 


 

0.03


 










Equity income in a captive insurance company per diluted share


(0.09)


(0.03)


(0.33)


(0.11)










Non-GAAP earnings per diluted share


$   0.91


$    0.80


$   2.87


$    2.61

Recent Developments

For the third quarter of 2013, the Company expected to receive recertification of a prior concessionary tax rate in Asia Pacific, which would have increased earnings an additional $0.08 per share, but was delayed until earlier this month due to a period of public notice and comment.  As of the date of this release, the period for comment has expired and the Company has not received a notice or comment challenging its approval status, so the change in the Company's effective tax rate is expected to be recognized in its financial statements in the fourth quarter of 2013, pending no other significant developments. See Note 6 to Notes to Condensed Consolidated Financial Statements in the Company's Form 10-Q for the quarterly period ended September 30, 2013.

Forward-Looking Statements

This release contains forward-looking statements that 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 the Company's demand is largely derived from the demand for its customers' products, which subjects the Company to downturns in a customer's business and unanticipated customer production shutdowns.  Other major risks and uncertainties include, but are not limited to, significant increases in raw material costs, customer financial stability, worldwide economic and political conditions, foreign currency fluctuations, future terrorist attacks and other acts of violence.  Other factors could also adversely affect us.  Therefore, we caution you not to place undue reliance on our forward-looking statements.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. 

Conference Call

As previously announced, Quaker Chemical's investor conference call to discuss the third quarter of 2013 results is scheduled for October 30, 2013 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 http://www.quakerchem.com.  You can also access the conference call by dialing 877-269-7756. 

About Quaker

Quaker Chemical is a leading global provider of process fluids, chemical specialties, and technical expertise to a wide range of industries, including steel, aluminum, automotive, mining, aerospace, tube and pipe, cans, and others.  For nearly 100 years, Quaker has helped customers around the world achieve production efficiency, improve product quality, and lower costs through a combination of innovative technology, process knowledge, and customized services. Headquartered in Conshohocken, Pennsylvania USA, Quaker serves businesses worldwide with a network of dedicated and experienced professionals whose mission is to make a difference.

 

Quaker Chemical Corporation 

Condensed Consolidated Statement of Income

(Dollars in thousands, except per share data)





















(Unaudited) 












Three Months Ended September 30, 


Nine Months Ended September 30, 



2013


2012


2013


2012










Net sales 


$         184,059


$         180,923


$         545,098


$         535,358










Cost of goods sold 


118,069


121,797


349,186


355,801










Gross profit


65,990


59,126


195,912


179,557

%


35.9%


32.7%


35.9%


33.5%










Selling, general and administrative expenses


47,183


43,263


139,901


130,009










Operating income 


18,807


15,863


56,011


49,548

%


10.2%


8.8%


10.3%


9.3%










Other (expense) income, net 


(685)


322


1,962


529

Interest expense


(717)


(1,034)


(2,223)


(3,359)

Interest income


267


149


665


409

Income before taxes and equity in net income of associated companies


17,672


15,300


56,415


47,127










Taxes on income before equity in net income of associated companies


5,972


4,373


16,933


12,692

Income before equity in net income of associated companies 


11,700


10,927


39,482


34,435










Equity in net income of associated companies


1,605


696


4,689


2,038










Net income


13,305


11,623


44,171


36,473










Less: Net income attributable to noncontrolling interest


754


698


1,918


2,075










Net income attributable to Quaker Chemical Corporation


$           12,551


$           10,925


$           42,253


$           34,398

%


6.8%


6.0%


7.8%


6.4%










Per share data:









Net income attributable to Quaker Chemical Corporation Common Shareholders - basic


$              0.95


$              0.84


$              3.21


$              2.65

Net income attributable to Quaker Chemical Corporation Common Shareholders - diluted


$              0.95


$              0.83


$              3.21


$              2.63

 

Quaker Chemical Corporation 

Condensed Consolidated Balance Sheet 

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








(Unaudited)








September 30,


December 31, 



2013


2012

ASSETS










Current assets 





Cash and cash equivalents 


$          53,945


$         32,547

Accounts receivable, net 


166,584


154,197

Inventories, net 


76,670


72,471

Prepaid expenses and other current assets


16,870


18,595

Total current assets 


314,069


277,810






Property, plant and equipment, net


84,268


85,112

Goodwill 


58,511


59,169

Other intangible assets, net 


32,028


32,809

Investments in associated companies 


17,789


16,603

Deferred income taxes 


27,284


30,673

Other assets 


36,038


34,458

Total assets 


$        569,987


$        536,634






LIABILITIES AND EQUITY










Current liabilities 





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


$           1,432


$           1,468

Accounts and other payables 


81,289


70,794

Accrued compensation 


17,027


16,842

Other current liabilities 


27,399


18,688

Total current liabilities 


127,147


107,792

Long-term debt 


17,765


30,000

Deferred income taxes 


6,127


6,383

Other non-current liabilities 


94,105


102,783

Total liabilities 


245,144


246,958






Equity





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

issued 13,187,320 shares 


13,187


13,095

Capital in excess of par value 


97,816


94,470

Retained earnings 


247,833


215,390

Accumulated other comprehensive loss


(43,238)


(41,855)

Total Quaker shareholders' equity 


315,598


281,100

Noncontrolling interest


9,245


8,576

Total equity


324,843


289,676

Total liabilities and equity 


$        569,987


$        536,634






 

Quaker Chemical Corporation 

Condensed Consolidated Statement of Cash Flows 

For the nine months ended September 30,

(Dollars in thousands)













(Unaudited)



2013


2012

Cash flows from operating activities 





Net income 


$    44,171


$    36,473

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





   Depreciation 


9,219


9,001

   Amortization 


2,621


2,283

   Equity in undistributed earnings of associated companies, net of dividends 


(2,525)


(1,854)

   Deferred compensation and other, net


(50)


1,848

   Stock-based compensation 


3,133


2,954

   Loss (gain) on disposal of property, plant and equipment


193


(75)

   Insurance settlement realized 


(731)


(1,074)

   Pension and other postretirement benefits


(561)


(1,823)

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

liabilities, net of acquisitions: 





   Accounts receivable


(13,222)


(1,381)

   Inventories 


(4,569)


(875)

   Prepaid expenses and other current assets 


1,017


(1,976)

   Accounts payable and accrued liabilities 


13,256


(1,731)

        Net cash provided by operating activities 


51,952


41,770






Cash flows from investing activities 





    Capital expenditures 


(7,330)


(8,757)

    Payments related to acquisitions , net of cash acquired


(2,478)


(2,635)

    Proceeds from disposition of assets


391


193

    Insurance settlement interest earned


40


53

    Change in restricted cash, net 


691


1,021

       Net cash used in investing activities 


(8,686)


(10,125)






Cash flows from financing activities 





   Repayments of long-term debt 


(12,289)


(9,672)

   Dividends paid 


(9,721)


(9,410)

   Stock options exercised, other


(510)


(828)

   Excess tax benefit related to stock option exercises


815


2,164

   Distributions to noncontrolling shareholders


(30)


(30)

      Net cash used in financing activities 


(21,735)


(17,776)






Effect of exchange rate changes on cash 


(133)


(606)

   Net increase in cash and cash equivalents 


21,398


13,263

   Cash and cash equivalents at the beginning of the period 


32,547


16,909

   Cash and cash equivalents at the end of the period


$    53,945


$    30,172






SOURCE Quaker Chemical Corporation



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