Quaker Chemical Corporation 2015 Form 10-K Summary
Business Context and Reporting Period
Quaker Chemical develops, manufactures and markets specialty process fluids, chemical products and chemical management services for steel, metalworking, automotive, aerospace, mining, construction and other industrial customers. Reportable segments are North America, EMEA, Asia/Pacific and South America. This Form 10-K covers the fiscal year ended December 31, 2015, with comparative 2014 and 2013 results.
Approximately 60% of sales were generated by non-U.S. subsidiaries. The five largest customers represented approximately 18% of 2015 net sales, including approximately 8% from the Arcelor-Mittal Group.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $737.6 million | $765.9 million | Down 4% |
| Gross margin | 37.6% | 35.7% | Up 1.9 points |
| Operating income | $71.3 million | $77.4 million | Down 8% |
| Income before taxes | $70.2 million | $78.3 million | Down 10% |
| Net income attributable to Quaker | $51.2 million | $56.5 million | Down 9% |
| Diluted EPS | $3.84 | $4.26 | Down 10% |
| Adjusted EBITDA | $101.6 million | $99.8 million | Up 2% |
| Non-GAAP diluted EPS | $4.43 | $4.26 | Up 4% |
| Cash flow from operations | $73.4 million | $54.7 million | Up $18.7 million |
| Cash and equivalents | $81.1 million | $64.7 million | Up $16.3 million |
| Long-term debt | $81.4 million | $75.3 million | Up $6.1 million |
Cost of goods sold declined to $460.5 million from $492.7 million, while SG&A increased to $199.0 million from $195.9 million. The effective tax rate decreased to 25.3% from 30.1%. Working capital increased to $241.3 million from $226.6 million, and total equity increased to $381.2 million from $365.1 million.
Cash Flow, Liquidity and Capital Allocation
- Operating cash flow was $73.4 million, supported by improved collections and lower cash invested in working capital.
- Investing cash flow used $34.2 million, including $24.1 million for acquisitions and $11.0 million for capital expenditures.
- Financing cash flow used $16.9 million, including $16.5 million of dividends and $7.3 million of share repurchases.
- The primary credit facility provides $300 million of unsecured multicurrency capacity, expandable to $400 million subject to conditions, and matures in June 2018.
- Borrowings under credit facilities totaled $62.9 million at a weighted-average rate of 1.38%. The consolidated leverage ratio was below 1.0-to-1 versus a covenant maximum of 3.50-to-1, and the Company was in compliance with its covenants.
- Approximately $77.2 million of cash was held by foreign subsidiaries and may be subject to repatriation limitations.
Material Changes Versus 2014
- Reported sales declined primarily because of a $53.6 million foreign-currency translation headwind and approximately 1% of selling-price and product-mix pressure. Product volume and acquisition-related growth increased 4%.
- Gross margin improved because of the timing of raw-material cost reductions.
- Foreign exchange reduced 2015 net income by approximately 7%, or $0.31 per diluted share, excluding the Venezuelan currency conversion charge.
- North America sales increased 3% and operating earnings increased 17%; Asia/Pacific sales decreased 3% while operating earnings increased 3%.
- EMEA sales decreased 8% and operating earnings decreased 14%, largely because of currency translation and price and mix pressure.
- South America sales decreased 35% and operating earnings decreased 58%, reflecting Brazil’s economic downturn, lower production volumes and currency weakness.
- Quaker acquired Verkol S.A. in July 2015 for approximately $41.4 million, including assumed debt and cash acquired. The acquisition added specialty grease and lubricant capabilities in Spain and generated $2.8 million of transaction expenses.
Guidance, Outlook and Unusual Items
- Management expected 2016 sales and earnings growth despite currency headwinds, continued pricing pressure, uncertain conditions in South America and China, and a strong U.S. dollar.
- Management expected adjusted EBITDA and non-GAAP earnings to increase for a seventh consecutive year.
- A global restructuring program recorded $6.8 million of charges in the fourth quarter, or $0.36 per diluted share, and targeted a reduction of approximately 65 employees and closure of certain non-manufacturing locations.
- Management projected approximately $3 million of pretax savings in 2016 and approximately $6 million of annual savings thereafter. Remaining restructuring cash payments were expected primarily in 2016.
- Other 2015 unusual items included a $2.8 million Venezuelan currency conversion charge, $2.8 million of Verkol transaction expenses, $0.3 million of customer bankruptcy costs, $0.2 million of South American cost-streamlining charges and $2.1 million of after-tax captive-insurance equity income.
- Management expected the full-year 2016 effective tax rate to increase to 28%–30% and estimated a first-quarter 2016 rate of 31%–33%.
Risks, Contingencies and Other Matters
- Demand is tied to global production in steel, automotive, aerospace, appliances and other cyclical industries. Customer shutdowns, bankruptcies or loss of major sites could materially affect results.
- Raw-material costs are exposed to crude oil, biodiesel demand, commodity pricing and supply disruptions. A one-percentage-point change in gross margin would affect 2015 pretax earnings by approximately $7.4 million.
- A 10% change in major currencies would have changed 2015 revenue by approximately $35.7 million and pretax earnings by approximately $5.0 million.
- The Company had $7.8 million of allowance for doubtful accounts at year-end, up from $6.5 million, and recorded a $1.5 million increase in doubtful-account provisions.
- Environmental remediation liabilities at the AC Products site were estimated at approximately $0.4 million to $1.0 million and were reserved. Potential asbestos-related liability of an inactive subsidiary was projected at less than $3.0 million over 50 years, excluding defense costs, although additional losses cannot be estimated.
- Potential remaining VAT exposure was estimated at $0 to $0.7 million assuming future amnesty programs or settlements.
- Gross uncertain tax positions, including interest and penalties, totaled $14.4 million. The Company expected to reduce gross unrecognized tax benefits by approximately $1.9 million to $2.0 million during 2016 through statute-of-limitations expirations, before considering new or revised positions.
- The Company’s goodwill impairment test identified no impairment and no reporting unit was considered at risk under the applicable test.
- Management and the independent auditor concluded that internal control over financial reporting was effective. Verkol, acquired in July 2015, was excluded from management’s and the auditor’s control assessment and represented approximately 6% of consolidated assets and 2% of consolidated revenue.
Most Important Facts for Investors to Verify
- Whether restructuring savings materialize and offset ongoing currency, pricing and volume pressures.
- 2016 sales, adjusted EBITDA and non-GAAP EPS performance after excluding unusual items.
- Progress integrating Verkol and the extent of acquisition-related revenue, margins and cash returns.
- Exposure to South American and Chinese economic weakness, global steel production and major-customer concentration.
- Foreign-exchange sensitivity and the impact of currency translation on reported sales, earnings and equity.
- Compliance with the credit facility and the timing of the approximately $66.9 million debt payment scheduled for 2018.
- Developments in asbestos litigation, environmental remediation, VAT matters and uncertain tax positions.
- The source filing’s reconciliation of GAAP results to non-GAAP EPS and adjusted EBITDA, because management’s outlook relies substantially on those measures.