Quaker Chemical Corporation — 2013 Form 10-K Summary
Business context and reporting period
Quaker develops, manufactures and markets specialty chemical products and chemical management services for steel, automotive, metalworking, aerospace, construction and other heavy industrial applications. Operations are reported by geography: North America, EMEA, Asia/Pacific and South America. The filing covers the fiscal year ended December 31, 2013; quarterly information includes the fourth quarter ended December 31, 2013.
During 2013, Quaker acquired a tin-plating business and a chemical-milling-maskants distribution network for aggregate net consideration of approximately $2.5 million. The Company also changed its reportable segments from product categories to geographic regions and recast prior-period information.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $729.4 million | $708.2 million | +3% |
| Gross profit | $261.1 million | $238.7 million | +9% |
| Gross margin | 35.8% | 33.7% | +210 bps |
| Operating income | $71.2 million | $63.2 million | +13% |
| Net income attributable to Quaker | $56.3 million | $47.4 million | +19% |
| Diluted EPS | $4.27 | $3.63 | +18% |
| Adjusted EBITDA | $89.6 million | $80.9 million | +11% |
| Cash flow from operations | $73.8 million | $62.9 million | +17% |
Reported operating margin was approximately 9.8% and net margin attributable to Quaker was approximately 7.7%. Management attributed the improvement primarily to higher product volumes, acquisitions, market-share gains and recovery of product margins. SG&A increased 8% to $189.8 million, reflecting higher labor, selling and acquisition-related costs.
Cash and cash equivalents increased to $68.5 million from $32.5 million. Investing cash outflows were $12.4 million, including $11.4 million of capital expenditures and $2.5 million of acquisition payments. Financing cash outflows were $26.2 million, including $13.0 million of dividends and $12.8 million of debt repayments.
Total debt was $18.7 million at year-end, including $17.3 million of long-term debt. Quaker had no borrowings under its revolving credit facility, which was amended in June 2013 to increase capacity from $175 million to $300 million, with potential expansion to $400 million subject to conditions. The facility matures in June 2018, and the Company’s consolidated leverage ratio was below 1.0 to 1. Working capital was $198.0 million versus $170.0 million in 2012.
Non-U.S. subsidiaries held approximately $48.6 million of cash that may be subject to repatriation limitations. The Company declared dividends of $0.995 per share for 2013, compared with $0.975 in 2012.
Material changes versus the prior comparable period
- Sales growth was driven primarily by a 3% increase in product volumes, including acquisitions; foreign exchange translation reduced sales by approximately $3.1 million.
- Gross margin improved substantially as raw-material pressures moderated and product margins returned to more acceptable levels.
- North America sales declined approximately 1%, while EMEA and Asia/Pacific sales increased approximately 7% and 8%, respectively. South America sales declined approximately 4%, largely because of currency translation.
- Segment operating earnings increased in all four regions, led by EMEA, Asia/Pacific and South America.
- Equity income from the captive insurance affiliate increased to $5.5 million from $1.8 million, including a $1.0 million out-of-period adjustment related to errors in the affiliate’s 2012 estimated financial statements. Prior periods were not restated.
- Other income included approximately $2.5 million of mineral-oil excise-tax refunds and $0.5 million from a change in an acquisition-related earnout liability.
- 2013 included approximately $1.4 million of cost-streamlining charges, a $0.8 million non-income-tax contingency charge and a $0.4 million Venezuelan currency-devaluation charge. These items were partly offset by the unusual income items noted above.
Guidance, outlook, risks and unusual items
Management expected modest market growth in all regions during 2014, additional market-share gains from strategic initiatives and acquisitions, and continued revenue and earnings growth. Management also cautioned that competition remained high and raw-material costs could increase.
- Demand is closely tied to steel, automotive, aircraft, appliance and durable-goods production; customer shutdowns, downturns or bankruptcies could materially affect results.
- The five largest customers represented approximately 18% of 2013 sales, and ArcelorMittal Group represented approximately 9%.
- Mineral oils, animal fats and vegetable oils each represented at least 10% of raw-material purchases. A one-percentage-point change in gross margin would have affected 2013 pretax earnings by approximately $7.3 million.
- A 10% movement in the euro, Brazilian real, Chinese renminbi and Indian rupee against the U.S. dollar would have affected estimated 2013 revenue and pretax earnings by approximately $35.7 million and $5.5 million, respectively.
- The Company recorded a $0.8 million provision related to a VAT assessment and estimated potential remaining VAT exposure of $0 to $7.2 million for other jurisdictions, assuming future refunds and amnesty or settlement programs.
- Environmental remediation liabilities at the AC Products site were estimated at approximately $0.4 million to $0.8 million and were adequately reserved according to management. Other environmental accruals were approximately $0.2 million.
- An inactive subsidiary faces asbestos-related litigation. Management estimated the subsidiary’s projected liability over the next 50 years at approximately $2.7 million, excluding defense costs, but stated that it did not believe Quaker would incur material losses. The ultimate exposure cannot be reliably estimated.
- Gross unrecognized tax benefits, including interest and penalties, totaled approximately $16.8 million. The Company expected statutes of limitation to reduce gross unrecognized tax benefits by approximately $1.7 million to $1.8 million during 2014, before considering new or additional positions.
- The Company expected 2014 pension and other postretirement contributions of approximately $6.8 million.
- Goodwill impairment testing was completed after the change in reporting units; no impairment charge was required, and management reported substantial excess fair value over carrying value.
Most important facts for investors to verify
- Whether improved gross margins can be sustained amid raw-material inflation and the Company’s ability to recover cost increases through pricing.
- The recurring earnings contribution from the captive insurance affiliate versus the $5.5 million recorded in 2013, including the $1.0 million out-of-period adjustment.
- The status and ultimate cost of the VAT assessment, asbestos litigation, environmental remediation and uncertain tax positions.
- Customer concentration and exposure to steel and automotive production cycles, especially the approximately 9% contribution from ArcelorMittal Group.
- Cash availability and repatriation restrictions affecting the approximately $48.6 million held by foreign subsidiaries.
- Progress integrating the 2013 acquisitions and the amount and timing of the approximately $4.7 million Summit acquisition earnout liability.
- The filing states that management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2013.