Quaker Chemical Corporation — FY2014 Form 10-K Summary
Business context and reporting period
Quaker develops and supplies formulated specialty chemicals, process fluids 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. The filing covers the fiscal year ended December 31, 2014, with comparative years 2013 and 2012. The fourth quarter of 2014 generated net sales of $194.0 million and diluted EPS of $0.95.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $765.9 million | $729.4 million | +5% |
| Gross profit | Approximately $273.2 million | Approximately $261.1 million | +5% |
| Gross margin | 35.7% | 35.8% | Down 0.1 percentage points |
| Operating income | $77.4 million | $71.2 million | +9% |
| Operating margin | 10.1% | 9.8% | Up 0.3 percentage points |
| Net income attributable to Quaker | $56.5 million | $56.3 million | Flat |
| Diluted EPS | $4.26 | $4.27 | Slightly lower |
| Adjusted EBITDA | $99.8 million | $89.6 million | +11% |
| Operating cash flow | $54.7 million | $73.8 million | Down $19.1 million |
| Cash and cash equivalents | $64.7 million | $68.5 million | Down $3.8 million |
| Long-term debt | $75.3 million | $17.3 million | Up $58.0 million |
| Total equity | $365.1 million | $344.7 million | +6% |
SG&A increased by approximately $6.0 million, but declined to 25.6% of sales from 26.0%. The effective tax rate increased to 30.1% from 28.1%, primarily because of higher reserves related to uncertain tax positions. Equity income from associated companies declined to $3.5 million from $6.5 million, primarily because of lower captive-insurance earnings.
Investing cash outflows were $84.5 million, including $73.5 million for acquisitions and $13.1 million for capital expenditures. Financing activities provided $30.2 million, primarily reflecting borrowings under the revolving credit facility.
Material changes versus the prior comparable period
- Sales growth was driven primarily by a 5% increase in product volumes, including approximately $12.8 million of acquisition-related sales. Foreign-currency translation reduced reported sales by approximately $10.3 million.
- North America sales increased 8% and Asia/Pacific sales increased 10%; EMEA sales increased 4%. South America sales declined 21%, reflecting lower volumes and adverse currency effects.
- South America operating earnings declined 53%, while North America, EMEA and Asia/Pacific operating earnings increased 11%, 10% and 3%, respectively.
- Quaker completed a significant acquisition program: ECLI Products for approximately $53.1 million, Binol AB for approximately $19.1 million, an Australian mining-related business for approximately $2.4 million, and the remaining 49% interest in its Australian affiliate for approximately $7.6 million.
- Reported diluted EPS was essentially unchanged because improved operating performance was offset by lower other income, a higher tax rate, reduced captive-insurance earnings, acquisition-related costs and foreign-exchange effects. Management reported non-GAAP diluted EPS of $4.26 versus $3.84 in 2013.
- Working-capital investment increased materially, including higher accounts receivable and inventory, contributing to the decline in operating cash flow.
- Debt increased primarily to fund acquisitions and related payments. Borrowings under the $300 million multicurrency credit facility were $58.4 million at year-end 2014 versus zero at year-end 2013.
Outlook, commentary, risks and unusual items
Management expected 2015 to be another good year and targeted increases in revenue, operating income and adjusted EBITDA for a sixth consecutive year. The outlook relied on continued market-share gains, benefits from recent acquisitions and strategic initiatives, while acknowledging a competitive and uncertain global environment, particularly in Brazil.
- Management stated that consolidated leverage remained below 1.0 times EBITDA at year-end, compared with a credit-facility covenant maximum of 3.50 times, and that all facility covenants were satisfied.
- Cash held by foreign subsidiaries was approximately $60.4 million and may be subject to limitations on repatriation.
- The company expects approximately $2.1 million of 2015 capital expenditures primarily for regulatory compliance. Minimum 2015 pension and other postretirement contributions were expected to total approximately $4.7 million.
- Significant nonrecurring or unusual 2014 items included $2.4 million of after-tax captive-insurance equity income, a $0.3 million after-tax Venezuelan currency charge, $1.2 million of cost-streamlining charges, a $0.9 million U.K. pension-plan amendment charge and $0.8 million of customer-bankruptcy charges.
- Key risks include cyclical demand from steel, automotive and other industrial customers; customer concentration; raw-material price volatility and supply disruptions; foreign-currency fluctuations; acquisitions and integration; variable-rate debt; regulatory and environmental matters; product liability; cybersecurity; and geopolitical or natural-disaster events.
- The five largest customers represented approximately 18% of consolidated sales, and ArcelorMittal Group represented approximately 9%.
- Environmental remediation liabilities at the AC Products site were estimated at approximately $0.4 million to $1.0 million and were reserved. Asbestos-related litigation against an inactive subsidiary remains subject to insurance, restricted settlement proceeds and potential future claims; management did not believe material losses were probable, but stated that additional losses could not be estimated.
- Potential remaining exposure from certain foreign VAT matters was estimated at $0 to $4.0 million assuming future refunds and amnesty programs; exposure could be higher if those assumptions do not hold.
Important facts for investors to verify
- Whether acquisition-related revenue and earnings contributions improve after the initial integration and fair-value accounting effects dissipate.
- Whether South American volumes, margins and foreign-exchange conditions recover, particularly in Brazil.
- Working-capital conversion and whether operating cash flow rebounds from the 2014 decline.
- Debt repayment, interest-rate exposure and compliance with the 2018 credit-facility maturity and covenants.
- Raw-material pricing, the company’s ability to recover cost changes through pricing, and the sensitivity of earnings to a one-percentage-point gross-margin change, estimated at approximately $7.7 million pretax.
- Foreign-exchange sensitivity: a 10% strengthening or weakening of specified major currencies would have affected 2014 revenue by approximately $36.6 million and pretax earnings by approximately $5.5 million.
- Uncertain tax positions, including $15.6 million of gross liability including interest and penalties and an expected 2015 reduction of approximately $1.9 million to $2.0 million from statute expirations.
- The scope and funding of pension obligations, environmental remediation, asbestos litigation and VAT contingencies.
- The exclusion of ECLI Products and Binol from management’s 2014 internal-control assessment because of their recent acquisitions; together they represented approximately 12% of consolidated assets and 1% of consolidated revenue.