Quaker Chemical Corporation — 2013 Q1 Form 10-Q Summary
Business Context and Reporting Period
Quaker Chemical Corporation provides process fluids, chemical specialties and technical services to industrial markets including steel, aluminum, automotive, mining, aerospace, tube and pipe, and related industries. The filing reports unaudited results for the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $176.2 million | $177.6 million | Down less than 1% |
| Gross profit | $62.6 million | $59.8 million | Up approximately 5% |
| Gross margin | 35.5% | 33.7% | Up 180 basis points |
| Operating income | $17.4 million | $16.7 million | Up approximately 4% |
| Net income | $14.2 million | $13.1 million | Up approximately 8% |
| Net income attributable to Quaker | $13.6 million | $12.4 million | Up approximately 10% |
| Diluted EPS | $1.04 | $0.95 | Up $0.09 |
| Net cash from operating activities | $11.3 million | $6.7 million | Up $4.6 million |
Operating margin was approximately 9.9% in Q1 2013 versus 9.4% in Q1 2012. The effective tax rate increased to 24.1% from 21.5%. The company declared a quarterly dividend of $0.245 per share, compared with $0.24 in the prior-year quarter.
At March 31, 2013, cash and cash equivalents were $35.3 million. Total debt, including short-term borrowings and the current portion of long-term debt, was approximately $29.6 million. The company had approximately $10.0 million outstanding under its $175.0 million syndicated multicurrency credit facility, which expires in June 2014. The consolidated leverage ratio was below 1.0-to-1 versus a covenant limit of 3.50-to-1.
Total assets were $540.6 million and total equity was $302.0 million at March 31, 2013. The company generated sufficient operating cash flow to fund capital expenditures of $2.7 million, acquisition payments of $0.6 million, dividends paid of $3.2 million and debt repayments of $2.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable: foreign-exchange translation reduced sales by approximately $2.2 million, partially offset by favorable selling and price mix. Volumes, including acquisitions, were consistent with Q1 2012.
- Gross margin improved materially as management continued its initiative to restore margins to more acceptable levels.
- SG&A increased by approximately $2.1 million due primarily to acquisitions, higher incentive compensation, selling costs, inflation and labor costs, partly offset by favorable foreign-exchange effects.
- Interest expense declined to $0.7 million from $1.2 million because of lower average borrowings and lower interest rates.
- Equity income from associated companies increased to $1.1 million from $0.6 million, including a $1.0 million out-of-period adjustment related to Primex, a captive insurance affiliate. The company did not restate prior periods.
- Comprehensive income attributable to Quaker declined to $13.7 million from $17.4 million, primarily because Q1 2013 included a $1.8 million currency translation loss versus a $4.0 million gain in Q1 2012.
- The Metalworking Process Chemicals segment produced $164.9 million of sales and $32.0 million of segment operating income. Coatings sales increased 2% to $10.7 million, while Other Chemical Products sales declined to $0.5 million because of lower oil and gas market activity.
Guidance, Outlook, Risks and Unusual Items
Management remained optimistic that 2013 would be another good year but stated that global market conditions remained challenging, particularly in Europe. Management expected the full-year 2013 effective tax rate to be in the high-twenty-percent range, above the first-quarter rate. No specific revenue or earnings guidance was provided.
- Management expects continued exposure to customer production cycles, especially in steel, automotive, aircraft, appliance and other durable-goods industries.
- Key risks include weaker global economic and political conditions, customer shutdowns, raw-material cost increases and foreign-currency fluctuations.
- The company recorded an approximately $0.03 per diluted share charge related to the February 2013 Venezuelan Bolivar devaluation.
- The Primex accounting correction increased Q1 2013 equity income by $1.038 million and was not considered material enough to require a prior-period restatement.
- A January 2013 acquisition of a chemical milling maskants distribution network required approximately $0.647 million of cash consideration, plus a $0.1 million holdback liability.
- An Italian excise-tax refund of approximately $2.0 million, collected in April 2013, will be recorded as other income in Q2 2013.
- Environmental remediation liabilities at the AC Products site were estimated at approximately $0.6 million to $1.0 million and were adequately reserved. Other environmental reserves were approximately $0.245 million.
- Asbestos claims involving an inactive subsidiary had projected liability of approximately $3.3 million over 50 years, excluding defense costs. Management believed material losses to the parent were not probable, but noted that liabilities could exceed the subsidiary’s assets and insurance coverage.
- Potential additional VAT exposure, net of refunds, was estimated at $0 to $12.5 million assuming future amnesty programs or settlements; exposure could be higher if those programs are unavailable.
- Gross uncertain tax positions, including interest and penalties, were $14.4 million at March 31, 2013. The company estimated that up to $9.9 million could be offset by benefits in other tax jurisdictions.
Most Important Facts for Investors to Verify
- Whether the improved 35.5% gross margin is sustainable after the company’s margin-restoration initiatives.
- Whether stable volumes and market-share gains offset continued weakness in Europe and other industrial markets.
- The recurring versus nonrecurring components of the $1.0 million Primex adjustment, captive-insurance income and the Venezuelan devaluation charge.
- Progress on the pending Chinese high-tech enterprise recertification and its potential effect on the tax rate.
- The status and ultimate cost of VAT exposures, asbestos claims and environmental remediation obligations.
- Use of the credit facility, debt maturities and compliance with the 3.50-to-1 leverage covenant.
- Whether the $2.0 million Italian excise-tax refund is recognized in Q2 2013 as disclosed.