Quaker Chemical Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. The interim financial statements are unaudited and prepared under U.S. GAAP. Quaker provides industrial process fluids, chemical specialties, and technical services globally across North America, EMEA, Asia/Pacific, and South America.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $190.4 million | $189.2 million | $555.4 million | $554.3 million |
| Gross profit | $70.8 million | $71.3 million | $209.9 million | $208.3 million |
| Gross margin | 37.2% | 37.7% | 37.8% | 37.6% |
| Operating income | $21.3 million | $18.7 million | $62.7 million | $58.0 million |
| Net income attributable to Quaker | $16.0 million | $14.4 million | $44.0 million | $39.8 million |
| Diluted EPS | $1.21 | $1.08 | $3.32 | $2.98 |
| Adjusted EBITDA | $28.3 million | $26.8 million | $80.9 million | $76.3 million |
| Adjusted EBITDA margin | 14.9% | 14.2% | 14.6% | 13.8% |
Q3 operating margin was approximately 11.2% versus 9.9% in the prior-year quarter; reported net margin attributable to Quaker was approximately 8.4% versus 7.6%. SG&A declined $3.2 million year over year, more than offsetting lower gross profit. The effective tax rate increased to 28.3% in Q3 from 24.4% and to 31.0% for the first nine months from 27.3%.
Cash flow, balance sheet, debt, and liquidity
- Cash provided by operating activities was $53.0 million for the first nine months, up from $50.8 million. Q3 operating cash flow was approximately $17.0 million.
- Capital expenditures were $6.3 million; acquisition-related cash payments were $3.2 million, versus $24.0 million in the prior-year period.
- Financing activities used $25.5 million, including $6.8 million of debt repayments, $13.1 million of dividends, and $5.9 million of share repurchases.
- Cash and cash equivalents increased to $99.0 million at September 30, 2016, from $81.1 million at December 31, 2015.
- Total debt was approximately $76.3 million, consisting of $75.6 million of long-term debt and $0.7 million of current borrowings, compared with approximately $82.1 million at year-end 2015.
- The company had a $300 million multicurrency credit facility maturing in June 2018, with approximately $57.5 million outstanding. The leverage ratio was below 1.0-to-1 versus a 3.50-to-1 covenant limit, and all covenants were satisfied.
- Current assets were $394.1 million versus current liabilities of $124.8 million at September 30, 2016.
Material changes versus the prior comparable period
- Q3 sales increased 1%, reflecting 2% organic volume growth and 2% acquisition-related growth, partly offset by a 2% foreign-exchange impact and approximately 1% lower selling price and product mix.
- For the first nine months, sales increased less than 1%; volume growth of 5%, including Verkol, was largely offset by a $17.0 million foreign-exchange translation headwind and lower price and mix.
- Q3 gross margin declined 50 basis points to 37.2% because of raw-material costs and product mix. Nine-month gross margin improved 20 basis points to 37.8%.
- Operating income increased 14% in Q3 and 8% for the first nine months, driven principally by lower SG&A and cost savings.
- EMEA was the strongest region, with Q3 sales up 8% and segment operating earnings up 17%; North America sales declined 4% and operating earnings declined 7%. Asia/Pacific sales were essentially flat with earnings up 4%, while South America sales rose 20% and earnings rose 161% in Q3.
- The company acquired a North American dust-control-products business for $1.9 million in May 2016. The acquisition allocation remained preliminary at September 30, 2016.
- The company repurchased 83,879 shares for $5.9 million during the first nine months; no shares were repurchased under the public program during Q3.
Guidance, outlook, risks, and unusual items
- Management expected Q4 gross margin to remain near Q3 levels and continued to expect 2016 growth in sales and earnings, higher non-GAAP earnings and adjusted EBITDA, and a seventh consecutive year of growth in those non-GAAP measures.
- The 2015 restructuring program was expected to be substantially completed in 2016. Management projected approximately $3 million of pretax savings in 2016 and $6 million annually thereafter. Remaining restructuring payments were expected to be approximately $2.2 million, primarily in Q4 2016.
- Management expected the full-year 2016 effective tax rate to decline to approximately 28%–30%, subject to recertification of a concessionary tax rate expected in Q4.
- Q3 included $1.2 million of uncommon transaction-related expenses, compared with $2.8 million in Q3 2015. Non-GAAP EPS was $1.25 versus $1.19, and adjusted EBITDA was $28.3 million versus $26.8 million.
- Foreign exchange, raw-material costs, product mix, customer demand, industrial production cycles, customer financial condition, political and economic conditions, and tax-rate changes remain principal risks.
- The company’s Venezuela affiliate remained exposed to severe currency devaluation and foreign-exchange controls. Its equity investment was $0.1 million at September 30, 2016, valued using the DICOM rate.
- Gross unrecognized tax benefits, including interest and penalties, totaled $10.1 million. The company estimated that payment of the entire liability could be reduced by up to $5.0 million through offsetting tax benefits.
- Environmental remediation exposure at the ACP site was estimated at $0.1 million to $0.8 million, with reserves considered sufficient. Potential remaining VAT exposure in one jurisdiction was estimated at $0 to $1.4 million, potentially higher without future amnesty or settlement programs.
- Asbestos litigation involving an inactive subsidiary could exceed available subsidiary assets and insurance, although management does not believe a loss to the parent is probable and cannot estimate any additional potential loss.
- The annual goodwill impairment test produced no impairment charge; reporting-unit fair values substantially exceeded carrying values.
Important facts for investors to verify
- Whether the expected Q4 tax-rate recertification occurs and whether the projected 28%–30% full-year effective tax rate is achieved.
- Whether gross margin stabilizes as expected and whether raw-material costs, pricing, and product mix affect profitability.
- Progress and realized savings from the 2015 restructuring program, including remaining cash payments.
- Organic volume growth and the sustainability of EMEA and Asia/Pacific performance after accounting for foreign exchange and acquisitions.
- Foreign-exchange and operating developments in Venezuela and other emerging markets.
- Resolution and cash requirements related to uncertain tax positions, environmental remediation, VAT matters, and asbestos litigation.
- Availability and refinancing implications of the credit facility maturing in June 2018.