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News Release


Quaker Chemical Announces First Quarter 2017 Results

Supporting Materials:
-- Strong organic volume growth of 10% drives a net sales increase of 9% despite continued FX headwinds
-- Net income of $7.0 million and earnings per diluted share of $0.52 reflect costs related to the Houghton combination, which was previously announced on April 5, 2017
-- Non-GAAP earnings per diluted share increases 20% to $1.18
-- Solid operating leverage drives a 13% increase in adjusted EBITDA to $28.2 million

 

 

CONSHOHOCKEN, Pa., May 1, 2017 /PRNewswire/ -- Quaker Chemical Corporation (NYSE: KWR) today announced a net sales increase of 9% to $194.9 million in the first quarter of 2017 compared to $178.1 million in the first quarter of 2016, as its organic and acquisition volume growth of 10% and 1%, respectively, overcame a negative impact from foreign currency translation of 2%.  These strong volumes drove higher gross profit quarter-over-quarter, despite lower gross margin in the first quarter of 2017, primarily attributable to certain raw material cost increases.  In addition, the current quarter operating margin benefited from the Company's ability to maintain a consistent level of selling, general and administrative expenses ("SG&A") on strong volume growth. 

The Company's first quarter of 2017 net income was $7.0 million and its earnings per diluted share was $0.52, which includes $9.1 million or $0.69 per diluted share of costs incurred with the Company's previously announced combination with Houghton International, Inc ("Houghton").  Excluding the current quarter combination-related costs and other non-core items, the Company's solid operating performance drove non-GAAP earnings per diluted share to $1.18 in the first quarter of 2017, a 20% increase compared to $0.98 in the prior year period.  In addition, the Company's adjusted EBITDA increased 13% to $28.2 million in the first quarter of 2017 compared to $25.0 million in the prior year period.  The Company was able to achieve these reported and non-GAAP results in the first quarter of 2017 despite negative foreign exchange impacts of $0.04 per diluted share, or 3%.   

Michael F. Barry, Chairman, Chief Executive Officer and President, commented, "We are pleased with our first quarter results, despite continued foreign exchange headwinds.  We were able to grow our organic volumes by 10% on continued market share gains, as well as from increased production in some of our end markets.  While our gross margins declined due to raw material price increases, we were able to partially offset the decline with savings realized from our previously announced restructuring program and other cost streamlining initiatives.  Overall, we achieved a 13% increase in adjusted EBITDA and a 20% increase in non-GAAP earnings despite foreign exchange negatively impacting earnings by 3%. "

Mr. Barry continued, "Looking forward, we expect foreign exchange and raw materials to continue to be headwinds that may ratably decline as the year progresses.  We remain committed to our strategy and believe our ability to take market share and leverage our past acquisitions will continue to help offset market challenges.  Our 2017 plans continue to indicate growth in both the top and bottom lines, despite expected currency headwinds, with earnings growth in all regions.  Overall, I continue to remain confident in our future and expect 2017 to be another good year for Quaker, as we expect to increase non-GAAP earnings and adjusted EBITDA for the eighth consecutive year.  In addition, we believe our previously announced intention to combine with Houghton will create long-term sustainable value for our customers and shareholders, and we continue to expect closing by the end of the year or in the first quarter of 2018."

First Quarter of 2017 Summary

Net sales in the first quarter of 2017 were $194.9 million compared to $178.1 million in the first quarter of 2016.  The $16.8 million or 9% increase in net sales was primarily due to a 10% increase in organic volumes and a 1% increase from acquisitions, partially offset by a negative impact from foreign currency translation of 2% or $2.7 million.

Gross profit in the first quarter of 2017 increased $2.9 million or 4% from the first quarter of 2016, primarily due to the increase in sales volumes, noted above, partially offset by a lower gross margin of 36.4% in the first quarter of 2017 compared to 38.2% in the prior year quarter.  The decrease in the Company's first quarter of 2017 gross margin was attributable to product mix and certain raw material cost increases. 

SG&A decreased $0.1 million during the first quarter of 2017 due to the net impact of several factors.  Specifically, the Company's SG&A decreased as a result of certain cost savings efforts, including the 2015 global restructuring program, and decreases due to foreign currency translation, partially offset by additional SG&A quarter-over-quarter associated with the Company's prior year Lubricor Inc. acquisition and an increase in labor-related costs primarily due to annual compensation increases.   

During the first quarter of 2017, the Company incurred $9.1 million or $0.69 per diluted share of costs related to its previously announced combination with Houghton, including certain legal, regulatory, environmental, financial, and other advisory and consultant expenses.  There were no similar combination-related costs incurred in the first quarter of 2016.

Operating income in the first quarter of 2017 was $13.8 million compared to $19.8 million in the first quarter of 2016.  The decrease in operating income was due to the Houghton combination expenses, noted above, which offset strong volume and gross profit increases on relatively consistent levels of SG&A not related to the Houghton combination.    

Other expense was $0.1 million in the first quarter of 2017 compared to other income of $0.1 million in the first quarter of 2016.  The increase in other expense was primarily driven by foreign currency transaction losses realized in the first quarter of 2017 compared to foreign currency transaction gains in the first quarter of 2016, partially offset by higher receipts of local municipality-related grants in one of the Company's regions in the current quarter. 

Interest expense was $0.1 million lower in the first quarter of 2017 compared to the first quarter of 2016, primarily due to lower average borrowings outstanding in the first quarter of 2017.  Interest income was $0.2 million higher in the first quarter of 2017 compared to the first quarter of 2016, primarily due to an increase in the level of the Company's invested cash in certain regions with higher returns. 

The Company's effective tax rates for the first quarters of 2017 and 2016 were 50.8% and 32.3%, respectively.  The Company's first quarter of 2017 effective tax rate includes the impact of the Houghton combination-related expenses, noted above, which were considered non-deductible for the purpose of determining the Company's current quarter effective tax rate.  Excluding these non-deductible costs, the Company's current quarter effective tax rate would have been approximately 30%.  Comparatively, the first quarter of 2016 effective tax rate was also elevated, as it reflected earnings taxed at one of the Company's subsidiaries at a statutory rate of 25% while awaiting recertification of a concessionary 15% tax rate, which the Company received and recorded the full year  benefit of during the fourth quarter of 2016.  This concessionary tax rate was available to the Company during the first quarter of 2017.  Currently, the Company continues to estimate its full year 2017 effective tax rate will approximate 28% to 30%, excluding the impact of non-deductible Houghton combination-related expenses, noted above.

Equity in net income of associated companies ("equity income") increased $0.9 million in the first quarter of 2017 compared to the first quarter of 2016.  The increase was primarily due to higher earnings from the Company's interest in a captive insurance company in the current quarter.

The Company had a $0.2 million increase in net income attributable to noncontrolling interest in the first quarter of 2017 compared to the first quarter of 2016, primarily due to an increase in performance from certain consolidated affiliates in the Company's Asia/Pacific region.

Changes in foreign exchange rates negatively impacted the Company's first quarter of 2017 non-GAAP earnings per diluted share by approximately 3%, or $0.04 per diluted share.

Balance Sheet and Cash Flow Items

The Company's net operating cash flow was $8.3 million in the first quarter of 2017 as compared to $10.9 million in the first quarter of 2016.  The decrease in net operating cash flow was primarily due to higher cash invested in the Company's working capital as a result of the Company's strong operating performance and volume growth in the current quarter.  In addition, the Company paid a $4.6 million cash dividend during the first quarter of 2017.  Overall, the Company's liquidity and balance sheet remain strong, as its cash position exceeded its debt at March 31, 2017 by $24.2 million and the Company's total debt continued to be less than one times its trailing twelve month adjusted EBITDA.

Subsequent Event

On April 4, 2017, Quaker entered into a share purchase agreement with Gulf Houghton Lubricants, Ltd. to purchase the entire issued and outstanding share capital of Houghton ("the Combination").  The shares will be bought for aggregate purchase consideration consisting of: (i) $172.5 million in cash; (ii) a number of shares of common stock, $1.00 par value per share, of the Company comprising 24.5% of the common stock outstanding upon the closing of the Combination; and (iii) the Company's assumption of Houghton's net indebtedness as of the closing of the Combination, which is estimated to be approximately $690 million.  The total purchase consideration reflects an enterprise value for Houghton of approximately $1.42 billion.  The Company has secured approximately $1.15 billion in commitments from Bank of America Merrill Lynch and Deutsche Bank to fund the Combination and provide additional liquidity.  The Company expects to replace these commitments with a syndicated bank agreement with customary terms and conditions during the second quarter of 2017.  In addition, the issuance of the Company's shares at closing of the Combination is subject to approval by Quaker's shareholders under the rules of the New York Stock Exchange.  The Company expects to seek such approval of the share issuance at a meeting of the Company's shareholders in the near future.  Also, the Combination is subject to regulatory approval in the United States, Europe and certain countries in Asia/Pacific.  Depending on shareholder and regulatory approval noted above, as well as other customary terms and conditions set forth in the share purchase agreement, Quaker currently estimates closing of the Combination to occur either in the fourth quarter of 2017 or the first quarter of 2018.  

Non-GAAP Measures

Included in this public release are two non-GAAP (unaudited) financial measures: non-GAAP earnings per diluted share and adjusted EBITDA.  The Company believes these non-GAAP financial measures provide meaningful supplemental information as they enhance a reader's understanding of the financial performance of the Company, are more indicative of future operating performance of the Company, and facilitate a better comparison among fiscal periods, as the non-GAAP financial measures exclude items that are not considered core to the Company's operations.  Non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP. 

The following tables reconcile non-GAAP earnings per diluted share (unaudited) and adjusted EBITDA (unaudited) to their most directly comparable GAAP (unaudited) financial measures:

 

Three Months Ended

March 31,

 

2017

 

2016

GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders

$   0.52

 

$   0.98

Equity income in a captive insurance company per diluted share

(0.04)

 

(0.01)

Houghton combination-related expenses per diluted share

0.69

 

Cost streamlining initiative per diluted share

0.01

 

Currency conversion impact of the Venezuelan bolivar fuerte per diluted share

 

0.01

Non-GAAP earnings per diluted share

$   1.18

 

$   0.98

   
 

Three Months Ended

March 31,

 

2017

 

2016

Net income attributable to Quaker Chemical Corporation

$   6,992

 

$   12,946

Depreciation and amortization

4,930

 

4,934

Interest expense

656

 

741

Taxes on income before equity in net income of associated companies

6,865

 

6,305

Equity income in a captive insurance company

(592)

 

(52)

Houghton combination-related expenses

9,075

 

Cost streamlining initiative

286

 

Currency conversion impact of the Venezuelan bolivar fuerte

 

88

Adjusted EBITDA

$   28,212

 

$   24,962

Adjusted EBITDA margin (%)

14.5%

 

14.0%

 

Forward-Looking Statements

This release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in such statements.  A major risk is that demand for the Company's products and services is largely derived from the demand for its customers' products, which subjects the Company to uncertainties related to downturns in a customer's business and unanticipated customer production shutdowns.  Other major risks and uncertainties include, but are not limited to, significant increases in raw material costs, customer financial stability, worldwide economic and political conditions, foreign currency fluctuations, significant changes in applicable tax rates and regulations, future terrorist attacks and other acts of violence.  Other factors, including those related to the previously announced Houghton combination, could also adversely affect us.  For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the Risk Factors detailed in Item 1A of our 2016 Form 10-K, and in our quarterly and other reports filed from time to time with the Commission.  Therefore, we caution you not to place undue reliance on our forward-looking statements.  This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. 

Conference Call

As previously announced, Quaker Chemical's investor conference call to discuss the first quarter of 2017 results is scheduled for May 2, 2017 at 8:30 a.m. (ET).  A live webcast of the conference call, together with supplemental information, can be accessed through the Company's Investor Relations website at https://www.quakerchem.com.  You can also access the conference call by dialing 877-269-7756. 

About Quaker

Quaker Chemical is a leading global provider of process fluids, chemical specialties, and technical expertise to a wide range of industries, including steel, aluminum, automotive, mining, aerospace, tube and pipe, cans, and others.  For nearly 100 years, Quaker has helped customers around the world achieve production efficiency, improve product quality, and lower costs through a combination of innovative technology, process knowledge, and customized services.  Headquartered in Conshohocken, Pennsylvania USA, Quaker serves businesses worldwide with a network of dedicated and experienced professionals whose mission is to make a difference.

 

Quaker Chemical Corporation 

Condensed Consolidated Statements of Income

(Dollars in thousands, except share and per share data)

         
 

(Unaudited)

 

Three Months Ended March 31,

 
 

2017

 

2016

 
         

Net sales 

$            194,909

 

$            178,077

 
         

Cost of goods sold 

124,022

 

110,096

 
         

Gross profit

70,887

 

67,981

 

%

36.4%

 

38.2%

 
         

Selling, general and administrative expenses

48,054

 

48,143

 

Combination-related expenses

9,075

 

-

 
         

Operating income

13,758

 

19,838

 

%

7.1%

 

11.1%

 
         

Other (expense) income, net 

(105)

 

102

 

Interest expense

(656)

 

(741)

 

Interest income

523

 

348

 

Income before taxes and equity in net income of associated companies

13,520

 

19,547

 
         

Taxes on income before equity in net income of associated companies

6,865

 

6,305

 

Income before equity in net income of associated companies

6,655

 

13,242

 
         

Equity in net income of associated companies

959

 

102

 
         

Net income

7,614

 

13,344

 
         

Less: Net income attributable to noncontrolling interest

622

 

398

 
         

Net income attributable to Quaker Chemical Corporation

$                6,992

 

$              12,946

 

%

3.6%

 

7.3%

 
         

Share and per share data:

       

Basic weighted average common shares outstanding

13,176,096

 

13,116,807

 

Diluted weighted average common shares outstanding

13,221,061

 

13,129,394

 
         

Net income attributable to Quaker Chemical Corporation Common Shareholders - basic

$                   0.53

 

$                   0.98

 

Net income attributable to Quaker Chemical Corporation Common Shareholders - diluted

$                   0.52

 

$                   0.98

 
         

 

 

 

Quaker Chemical Corporation 

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value and share amounts)

       
 

(Unaudited)

 

March 31,

 

December 31,

 

2017

 

2016

ASSETS

     
       

Current assets 

     

Cash and cash equivalents 

$              90,593

 

$              88,818

Accounts receivable, net 

201,929

 

195,225

Inventories, net

87,117

 

77,082

Prepaid expenses and other current assets 

15,237

 

15,343

Total current assets 

394,876

 

376,468

       

Property, plant and equipment, net

85,233

 

85,734

Goodwill 

81,683

 

80,804

Other intangible assets, net 

71,850

 

73,071

Investments in associated companies 

24,063

 

22,817

Non-current deferred tax assets

22,460

 

24,382

Other assets 

28,841

 

28,752

Total assets 

$            709,006

 

$            692,028

       

LIABILITIES AND EQUITY

     
       

Current liabilities 

     

Short-term borrowings and current portion of long-term debt 

$                    726

 

$                    707

Accounts and other payables

90,215

 

82,164

Accrued compensation 

13,754

 

19,356

Accrued restructuring

530

 

670

Other current liabilities 

33,963

 

24,514

Total current liabilities 

139,188

 

127,411

Long-term debt 

65,649

 

65,769

Non-current deferred tax liabilities

12,101

 

12,008

Other non-current liabilities 

70,093

 

74,234

Total liabilities 

287,031

 

279,422

       

Equity

     

Common stock, $1 par value; authorized 30,000,000 shares; issued and
outstanding 2017- 13,290,807 shares; 2016 - 13,277,832 shares

13,291

 

13,278

Capital in excess of par value 

112,838

 

112,475

Retained earnings 

366,819

 

364,414

Accumulated other comprehensive loss 

(81,961)

 

(87,407)

Total Quaker shareholders' equity 

410,987

 

402,760

Noncontrolling interest

10,988

 

9,846

Total equity 

421,975

 

412,606

Total liabilities and equity 

$            709,006

 

$            692,028

       
       

 

 

 

Quaker Chemical Corporation 

Condensed Consolidated Statements of Cash Flows 

(Dollars in thousands)

       
 

(Unaudited)

 

Three Months Ended March 31,

 

2017

 

2016

Cash flows from operating activities 

     

Net income

$                7,614

 

$              13,344

Adjustments to reconcile net income to net cash provided by operating activities: 

     

Depreciation 

3,157

 

3,157

Amortization 

1,773

 

1,777

Equity in undistributed earnings of associated companies, net of dividends 

(829)

 

(27)

Deferred compensation and other, net 

(696)

 

980

Stock-based compensation 

1,153

 

1,798

Gain on disposal of property, plant and equipment and other assets

(15)

 

(20)

Insurance settlement realized 

(240)

 

(279)

Combination-related expenses

9,075

 

-

Pension and other postretirement benefits

(2,263)

 

(2,685)

(Decrease) increase in cash from changes in current assets and current liabilities, net of acquisitions: 

     

Accounts receivable

(3,813)

 

2,602

Inventories 

(8,820)

 

(1,800)

Prepaid expenses and other current assets 

755

 

1,183

Accounts payable and accrued liabilities 

2,279

 

(8,647)

Change in combination-related liabilities

(660)

 

-

Change in restructuring liabilities 

(148)

 

(509)

Net cash provided by operating activities 

8,322

 

10,874

       

Cash flows from investing activities 

     

Investments in property, plant and equipment

(2,531)

 

(2,172)

Payments related to acquisitions, net of cash acquired

-

 

(1,384)

Proceeds from disposition of assets

15

 

26

Insurance settlement interest earned

9

 

8

Change in restricted cash, net 

231

 

271

Net cash used in investing activities 

(2,276)

 

(3,251)

       

Cash flows from financing activities 

     

Proceeds from long-term debt 

-

 

14,687

Repayments of long-term debt 

(474)

 

(159)

Dividends paid 

(4,583)

 

(4,243)

Stock options exercised, other

(777)

 

(253)

Payments for repurchase of common stock

-

 

(5,859)

Excess tax benefit related to stock option exercises

-

 

104

Net cash (used in) provided by financing activities 

(5,834)

 

4,277

       

Effect of exchange rate changes on cash 

1,563

 

1,421

Net increase in cash and cash equivalents 

1,775

 

13,321

Cash and cash equivalents at the beginning of the period 

88,818

 

81,053

Cash and cash equivalents at the end of the period

$              90,593

 

$              94,374

       
       

 

 

 

 

 

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/quaker-chemical-announces-first-quarter-2017-results-300448887.html

SOURCE Quaker Chemical Corporation

Mary Dean Hall, Vice President, Chief Financial Officer and Treasurer, Hallm@quakerchem.com, T. 610.832.4160