Quaker Chemical Corporation — 2012 Form 10-K Summary
Business context and reporting period
Quaker develops and markets specialty chemical products, process fluids, coatings, and chemical management services for steel, automotive, aerospace, metalworking, and other heavy industrial markets. The filing covers the fiscal year ended December 31, 2012; fourth-quarter results are included but this is an annual report, not a standalone quarterly filing. Approximately 60%–65% of sales are generated by non-U.S. subsidiaries.
Metalworking process chemicals represented approximately 93% of 2012 net sales, coatings approximately 6%, and other chemical products approximately 1%. The five largest customers accounted for approximately 19% of consolidated sales, including approximately 9% from Arcelor-Mittal Group.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $708.2 million | $683.2 million | Up 4% |
| Gross profit | Approximately $238.7 million | Approximately $222.7 million | Up 7% |
| Gross margin | 33.7% | 32.6% | Up 110 basis points |
| Operating income | $63.2 million | $57.9 million | Up 9% |
| Net income attributable to Quaker | $47.4 million | $45.9 million | Up 3% |
| Diluted EPS | $3.63 | $3.66 | Down $0.03 |
| Net cash from operating activities | $62.9 million | $19.7 million | Up $43.2 million |
| Capital expenditures | $12.7 million | $12.1 million | Up $0.6 million |
| Dividends paid | $12.6 million | $11.6 million | Up $1.0 million |
Sales growth reflected approximately 5% growth from product volumes, including acquisitions, and approximately 3% from pricing and selling mix, partly offset by approximately $26.8 million of unfavorable foreign-exchange translation. SG&A increased 7% to $175.5 million and rose to 24.8% of sales from 24.1%.
Cash and cash equivalents were $32.5 million at year-end versus $16.9 million in 2011. Working capital was $170.0 million, total assets were $536.6 million, and total equity was $289.7 million. Debt totaled approximately $31.5 million, including $12.2 million outstanding under the revolving credit facility; long-term debt was $30.0 million. Management stated that cash exceeded debt at year-end.
The $175.0 million unsecured credit facility matures in June 2014 and may be increased to $225.0 million subject to lender approval and conditions. The company reported approximately $160.0 million of additional borrowing capacity at December 31, 2012, and a consolidated leverage ratio below 1.0 to 1.0 versus a 3.50 to 1.0 covenant limit.
Material changes versus the prior comparable period
- Revenue reached a record level despite weaker demand in several regions and a stronger U.S. dollar.
- Gross margin improved as raw-material cost pressure stabilized late in 2012; 2011 margins had been compressed by rising commodity costs.
- Operating cash flow improved substantially because of higher earnings and better management of receivables and inventories.
- Debt declined from approximately $47.3 million to $31.5 million, while cash increased by $15.6 million.
- Quaker acquired NP Coil Dexter Industries, S.r.l. for approximately $2.7 million in July 2012, adding European metal-surface-treatment products.
- The company changed its accounting for its Primex captive-insurance investment from the cost method to the equity method. Prior periods were retrospectively recast; 2011 net income increased by $2.3 million and diluted EPS by $0.19.
- Diluted EPS declined despite higher net income, partly because the 2011 equity offering increased the share count and had an estimated $0.11 per-share dilutive effect in 2012.
- Other income included favorable fair-value adjustments of approximately $1.7 million for contingent consideration and $1.0 million for an acquisition-related liability. A $2.2 million tax benefit resulted from derecognition of uncertain tax positions.
Guidance, outlook, risks, contingencies, and unusual items
Management expected 2013 to be another good year, citing continued recovery in North America and China, strategic initiatives, and acquisition-related growth. Management also anticipated challenging conditions in Europe and potentially higher raw-material costs driven by crude-oil pricing.
- Raw-material volatility, particularly for mineral oils, animal fats, and vegetable oils, could pressure margins. A one-percentage-point change in gross margin would have affected 2012 pretax earnings by approximately $7.1 million.
- Demand is tied to steel, automotive, aerospace, appliance, and other cyclical industries. Customer shutdowns, bankruptcies, or loss of a major steel mill could materially affect results.
- Foreign-exchange exposure is significant. A 10% change in the Brazilian real, euro, and Chinese renminbi against the U.S. dollar would have affected 2012 revenue and pretax earnings by approximately $31.2 million and $3.7 million, respectively.
- The company recorded a $1.254 million charge for two U.S. customer bankruptcies, $0.609 million of CFO transition costs, and $1.936 million of other uncommon charges, largely severance and brand-launch costs.
- Environmental remediation liabilities at the AC Products site were estimated at approximately $0.7 million to $1.2 million and were adequately reserved, according to management. Other environmental reserves were approximately $0.2 million.
- An inactive subsidiary remains involved in asbestos litigation. Restricted insurance settlement proceeds were $26.4 million at year-end, and management believed material losses to the parent were not probable, although additional losses could not be estimated reliably.
- Potential remaining VAT exposure was estimated at $0 to $12.0 million, net of anticipated refunds and assuming future amnesty programs or settlements; exposure could be higher if those programs are unavailable.
- Pension and other postretirement liabilities were significant. The company expected 2013 pension contributions of approximately $6.6 million and other postretirement contributions of approximately $0.7 million.
- Goodwill and indefinite-lived intangible assets were tested for impairment in the third quarter of 2012, with no impairment charge required.
- Management and the independent auditor concluded that internal control over financial reporting was effective, excluding the newly acquired NP Coil Dexter entity from management’s assessment.
Most important facts for an investor to verify
- Whether 2013 pricing actions will offset expected raw-material inflation without causing customer losses.
- The renewal or refinancing of the $175.0 million credit facility before its June 2014 maturity.
- The sustainability of the 2012 improvement in operating cash flow and working-capital efficiency.
- The effect of foreign-exchange movements and European economic weakness on reported sales and earnings.
- The status and ultimate cost of asbestos litigation, VAT assessments, environmental remediation, and uncertain tax positions.
- The integration and financial contribution of NP Coil Dexter and other recent acquisitions.
- The effect of pension funding requirements and future changes in discount rates on equity and cash flow.
- The extent to which reported earnings benefited from nonrecurring fair-value adjustments and tax-position releases.