Quaker Chemical Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; comparable periods ended September 30, 2011. Financial statements are unaudited. Quaker provides process fluids, chemical specialties, and technical services primarily to steel, aluminum, automotive, mining, aerospace, tube and pipe, and other industrial customers.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $180.9 million | $182.3 million | $535.4 million | $510.0 million |
| Gross profit | $59.1 million | $59.5 million | $179.6 million | $166.0 million |
| Gross margin | 32.7% | 32.6% | 33.5% | 32.5% |
| Operating income | $15.9 million | $17.5 million | $49.5 million | $46.5 million |
| Net income attributable to Quaker | $10.5 million | $13.4 million | $33.0 million | $33.8 million |
| Diluted EPS | $0.80 | $1.03 | $2.52 | $2.73 |
| Operating cash flow | Not separately provided | Not separately provided | $41.8 million | $4.5 million |
Q3 SG&A was $43.3 million, or 23.9% of sales versus 23.0% in the prior-year quarter. Nine-month SG&A was $130.0 million, or 24.3% of sales versus 23.4%. The nine-month effective tax rate was 26.9%, compared with 27.1%.
At September 30, 2012, cash and cash equivalents were $30.2 million versus $16.9 million at December 31, 2011. Total debt was approximately $38.6 million, consisting of $0.6 million of current debt and $38.0 million of long-term debt, compared with approximately $47.3 million at year-end 2011. The company had approximately $20.0 million outstanding under its $175.0 million syndicated multicurrency credit facility, which expires in 2014; its leverage ratio was below 1.0-to-1 versus a 3.50-to-1 covenant limit.
Nine-month investing cash outflows were $10.1 million, including $8.8 million of capital expenditures and $2.6 million for acquisitions. Financing cash outflows were $17.8 million, including $9.7 million of debt repayment and $9.4 million of dividends. Dividends declared increased to $0.245 per share in Q3 from $0.24.
Material Changes Versus Prior Comparable Period
- Q3 sales declined less than 1% because a 6% foreign-exchange translation headwind more than offset 5% volume growth, including acquisitions. Management reported record quarterly product volumes.
- Nine-month sales increased 5%; volume, including acquisitions, rose approximately 6%, pricing and mix contributed approximately 4%, and foreign exchange reduced sales by approximately 5%.
- Gross margin improved for the nine-month period to 33.5% from 32.5%, reflecting price increases and favorable mix. Q3 gross margin was broadly stable.
- Q3 operating income declined approximately 9%, and diluted EPS declined from $1.03 to $0.80. The prior-year quarter included a $2.7 million non-cash gain from revaluing the previously held interest in a Mexican affiliate; excluding that gain, prior-year Q3 EPS was $0.81.
- Nine-month operating income rose approximately 6%, while reported diluted EPS declined because of the prior-year Mexican revaluation gain and other income differences.
- Metalworking process chemicals represented approximately 93% of Q3 sales. Q3 segment sales declined 1% and operating income decreased approximately $3.7 million. Coatings sales increased 8% and operating income increased $0.6 million, primarily from aerospace-related chemical milling maskants.
- In July 2012, Quaker acquired NP Coil Dexter Industries, a European supplier of metal surface treatment products, for approximately $2.7 million, including assumed debt. The acquisition added $2.2 million of goodwill and $3.8 million of intangible assets.
- Working-capital performance materially improved cash generation. Nine-month operating cash flow increased to $41.8 million from $4.5 million.
Outlook, Risks, Contingencies, and Unusual Items
Management expected the challenging global economic environment and holiday seasonality to affect the fourth quarter, but stated that full-year expectations and guidance were unchanged and that 2012 was expected to be another good year. Management cited continued weakness in Europe, China, Brazil, and India, along with a strengthening U.S. dollar, while emphasizing growth from new business and acquisitions.
- Q3 included approximately $0.05 per diluted share of uncommon SG&A expenses, primarily severance and brand-launch costs. Nine-month SG&A also included approximately $0.06 per diluted share for U.S. customer bankruptcies, $0.03 for CFO transition costs, and $0.05 for other charges.
- In Q2, Quaker recorded a $1.2 million allowance charge related to the bankruptcies of two U.S. customers.
- The company completed its annual goodwill impairment assessment with no impairment charge required.
- Gross unrecognized tax benefits, including interest and penalties, were approximately $15.9 million at September 30, 2012. Management estimated a $1.7 million to $1.8 million reduction in gross unrecognized tax benefits during 2012 from expiring statutes of limitations.
- An Italian transfer-pricing audit proposed adjustments; management believed it should prevail and recorded no related uncertain-tax-position reserve. The IRS completed its 2009 federal audit without changes.
- Environmental liabilities related to the ACP groundwater remediation program were estimated at $0.9 million to $1.9 million and were considered adequately reserved. Other environmental accruals were approximately $0.2 million.
- An inactive subsidiary faces asbestos claims. Management projected approximately $4.9 million of subsidiary liability over the next 50 years, excluding defense costs, but stated that it did not believe the parent was likely to incur material losses. Additional losses cannot be estimated reliably.
- Potential remaining VAT exposure at a subsidiary was estimated at $0 to $16.9 million net of refunds, assuming future amnesty programs or settlements; exposure could be higher without them. The filing states that this matter could materially affect financial position, liquidity, capital resources, and results of operations.
- The company’s $15 million interest-rate swaps matured during Q3 2012. No derivatives designated as hedges remained at September 30, 2012.
- Key risks include dependence on customer production levels, cyclical industrial markets, raw-material cost increases, foreign-exchange volatility, global economic and political conditions, and customer shutdowns.
Important Facts for Investors to Verify
- Whether foreign-exchange pressure and weakness in Europe, China, Brazil, and India persist and offset volume, pricing, and acquisition growth.
- Whether improved working-capital conversion and operating cash flow are sustainable while the company continues acquisitions, capital spending, dividends, and debt repayment.
- The performance and integration of NP Coil Dexter and the earnings contribution from recent acquisitions.
- The ultimate cash exposure from uncertain taxes, VAT assessments, environmental remediation, asbestos claims, and acquisition-related earnouts or holdbacks.
- The effect of elevated SG&A, severance, brand-launch costs, customer bankruptcies, and other unusual items on future margins.
- Management’s unchanged full-year outlook, noting that interim results are not necessarily indicative of full-year performance.