Quaker Chemical Corporation — Q2 2016 Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2016. Financial statements are unaudited and presented under U.S. GAAP. Quaker provides process fluids, specialty chemicals and technical services globally to industries including steel, automotive, mining, aerospace and related manufacturing markets.
Financial Performance and Position
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $186.9 million | $183.7 million | $365.0 million | $365.1 million |
| Gross profit | $71.2 million | $70.6 million | $139.1 million | $136.9 million |
| Gross margin | 38.1% | 38.4% | 38.1% | 37.5% |
| Operating income | $22.1 million | $21.4 million | $41.3 million | $39.3 million |
| Net income attributable to Quaker | $15.0 million | $15.0 million | $28.0 million | $25.4 million |
| Diluted EPS | $1.13 | $1.13 | $2.11 | $1.90 |
| Adjusted EBITDA | $27.7 million | $26.2 million | $52.6 million | $49.5 million |
- Q2 operating margin was approximately 11.8%, compared with 11.7% in the prior-year quarter. Six-month operating margin was approximately 11.3%, compared with 10.8%.
- Q2 net sales increased 2%, driven by 6% volume growth, including Verkol acquisition volume, partly offset by $5.3 million of unfavorable foreign-currency translation and lower selling prices and product mix.
- Q2 effective tax rate increased to 32.6% from 27.1%; the six-month rate increased to 32.5% from 28.8%, primarily because a subsidiary was taxed at 25% pending recertification of a 15% concessionary rate.
- Cash and cash equivalents were $96.2 million at June 30, 2016, versus $81.1 million at December 31, 2015. Total assets were $692.3 million and total equity was $400.2 million.
- Six-month operating cash flow was $36.0 million, up from $27.3 million. Capital expenditures were $4.4 million, acquisition-related cash payments were $3.3 million, dividends paid were $8.5 million and share repurchases were $5.9 million.
- Debt consisted primarily of $65.3 million outstanding under credit facilities and other obligations, compared with $62.9 million at year-end. The $300 million credit facility matures in June 2018; leverage was below 1.0-to-1 and all covenants were satisfied.
- The declared dividend increased to $0.345 per share from $0.320 per share in the comparable quarter. The company repurchased 83,879 shares for $5.9 million during the first six months.
Material Changes Versus the Prior Comparable Period
- EMEA was the principal growth region: Q2 sales increased 29% to $53.1 million and segment operating earnings increased 30% to $8.9 million, supported by Verkol and organic volume growth.
- North America Q2 sales declined 3% to $83.1 million, while operating earnings were broadly stable at $20.1 million.
- Asia/Pacific Q2 sales declined 10% to $43.2 million and operating earnings declined 9% to $11.1 million, reflecting currency, volume and pricing pressures.
- South America Q2 sales declined 13% to $7.6 million and operating earnings declined 55% to $0.3 million amid weak economic conditions, lower volumes and currency depreciation.
- Six-month sales were essentially flat because 6% volume growth and acquisition contributions were offset by $13.3 million of unfavorable currency translation and lower price and mix.
- Six-month operating income rose 5%, helped by higher volumes, lower raw-material costs and a 60-basis-point gross-margin improvement.
- Equity income improved to $0.6 million from a $1.4 million loss, primarily because the prior-year period included a $2.6 million Venezuela currency conversion charge. Q2 2016 had no comparable Venezuela conversion charge.
- The company acquired a North American dust-control-products business for approximately $1.9 million in May 2016. The purchase-price allocation remained preliminary at June 30.
Outlook, Commentary, Risks and Unusual Items
- Management continued to forecast 2016 growth in both revenue and earnings and expected increases in non-GAAP earnings and adjusted EBITDA for the seventh consecutive year.
- Management expected some gross-margin decline in the remainder of 2016 because of timing differences between raw-material cost changes and customer pricing adjustments.
- The 2015 global restructuring program targets approximately 65 employee reductions. No additional restructuring expense was recorded in the first six months of 2016; projected pretax savings were approximately $3 million in 2016 and $6 million annually thereafter.
- Management estimated a third-quarter 2016 effective tax rate of 29% to 31% and maintained a full-year estimate of approximately 28% to 30%, subject to the expected tax-rate recertification.
- Key risks include cyclical demand from steel, automotive, aircraft, appliance and durable-goods customers; customer production shutdowns or financial weakness; raw-material cost increases; foreign-exchange volatility; global economic and political conditions; and execution of acquisitions and restructuring.
- Uncertain tax positions, including interest and penalties, totaled approximately $15.0 million gross at June 30. Management expects approximately $2.0 million of unrecognized tax benefits to expire during 2016, before considering new or offsetting exposures.
- Environmental remediation liabilities at the ACP site were estimated at $0.2 million to $0.9 million and were sufficiently reserved. Potential remaining VAT exposure was estimated at $0 to $1.4 million assuming future amnesty or settlement programs.
- An acquired inactive subsidiary remains involved in asbestos litigation. Management believes the company is unlikely to incur losses, but stated that additional losses cannot be reliably estimated if subsidiary assets and insurance coverage become insufficient.
- Venezuela remained subject to severe currency controls and hyperinflation. The company’s Venezuela equity investment was approximately $0.1 million at June 30, valued using the DICOM exchange rate.
Investor Verification Points
- Verify whether volume growth and EMEA acquisition benefits offset continuing weakness in Asia/Pacific and South America.
- Monitor gross-margin performance as raw-material savings and customer price changes normalize.
- Confirm recertification of the subsidiary’s concessionary tax rate and assess its effect on the full-year tax rate and EPS.
- Review foreign-currency exposure, particularly in emerging markets and Venezuela.
- Assess the remaining restructuring liabilities, projected savings and execution timeline.
- Review debt maturity and covenant capacity before additional acquisitions, repurchases or dividend increases.
- Track environmental, asbestos and VAT contingencies, including changes in insurance coverage or regulatory assessments.
- Distinguish GAAP EPS of $1.13 in Q2 from non-GAAP EPS of $1.11 and review the company’s reconciliation of adjusted EBITDA and other non-GAAP measures.