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CONSHOHOCKEN, Pa., May 5 /PRNewswire-FirstCall/ -- Quaker Chemical Corporation (NYSE: KWR - News) today announced record quarterly sales of $73.3 million and net income growth of 32% for the first quarter ended March 31, 2003.
1st Quarter 2003 Summary
Net income for the first quarter was $3.1 million versus $2.4 million for the first quarter 2002. The earnings per diluted share of $0.33 was a 27% improvement over the first quarter 2002 result of $0.26 per diluted share.
Net sales for the first quarter were a record $73.3 million versus $59.9 million for the first quarter 2002. Foreign exchange rate translation and the timing of the Company's 2002 acquisitions favorably impacted net sales for the quarter by approximately $2.0 million and $5.6 million, respectively. Excluding the impact of foreign exchange rate translation and the timing of the Company's 2002 acquisitions, net sales would have been $65.7 million or 9.6% above the prior year. Net sales in all regions except Europe increased on a local currency basis, showing improvements in both volume and price/mix.
Gross margin as a percentage of sales declined from 40.6% for the first quarter 2002 to 38.7% for the first quarter 2003 primarily due to increased raw material costs and product mix. As previously disclosed, the Company expects raw material prices to be higher in 2003, especially in the first half, due to higher oil prices experienced earlier in the year.
Selling, general and administrative expenses increased $2.7 million over the first quarter 2002. Timing of the Company's 2002 acquisitions and foreign exchange rate translation accounted for approximately two-thirds of the increase. As previously disclosed, increased costs related to pension, insurance, and the Company's ERP implementation, accounted for the remaining increase.
Ronald J. Naples, Chairman and Chief Executive Officer, commented, "This first quarter gets us off to a good start in 2003, a year that still looks to us as one that will be characterized by shifting and uncertain manufacturing demand. We have seen some recent softness in key markets that could negatively affect our volumes, and higher raw material costs will continue to be a factor. We expect the stronger euro will help us out, though, as will cost control. On balance, we continue to expect year-over-year earnings growth in 2003. We expect that the second quarter will contribute to this improvement over prior year, if only slightly given the CMS contract start-up costs expected in the quarter that are linked to our recently announced GM award."
New CMS Contracts
As previously announced in the Company's April 11, 2003 press release, Quaker has been awarded a series of multi-year contracts to provide chemical management services (CMS) for General Motors Powertrain manufacturing sites. These contracts will be implemented during the second quarter of 2003. In addition, DaimlerChrysler has also recently awarded the Company a CMS contract for its Trenton Engine plant.
Mr. Naples stated that, "This new business is an important step in building the Company's share and leadership position in the automotive process fluids market and will position the Company well for penetration of CMS opportunities in other metalworking manufacturing markets. Over the next few months, we may have to absorb the transition and start-up costs of these contracts, which will hurt a bit, but the long-term prospects of creating value for our customers and us is very real."
For 2003, the earnings impact due to the new CMS sites is expected to be immaterial due to transition and start-up costs, largely in the second quarter. Future profitability of the contracts will be based on Quaker's ability to identify and implement cost reduction programs and product conversions. In addition, the new contracts will result in an increased investment of working capital estimated to be $4 million, although this amount will be dependent on the final terms negotiated with suppliers.
These new contracts will cause future income statements to show different relationships between margins and revenue than in the past. At the majority of current CMS sites, the Company effectively acts as an agent for the customer whereby it purchases chemicals from other companies and resells the product to the customer at little or no margin. The revenue and costs from these sales are reported on a net sales or "pass-through" basis. The structure of the new GM Powertrain site contracts is different in that the Company's revenue received from the customer will be in the nature of a fee for products and services provided to the customer, which are indirectly related to the actual costs incurred. As a result, the Company will recognize in reported revenues the gross revenue received from the CMS site customer, and in cost of goods sold, the third party product purchases, which will substantially offset each other. This will result in a significant increase in the Company's reported revenue, estimated to be approximately $35-$40 million on an annualized basis, the profitability of which will be dependent upon Quaker's ability to identify and implement cost reduction programs and product conversions.
In addition, the Company is currently negotiating similar contract structures for some of its existing CMS sites. It is possible that this will also require the Company to recognize an additional $10-$15 million in annualized sales starting in the second quarter.
Quaker Chemical Corporation, headquartered in Conshohocken, Pennsylvania, is a worldwide developer, producer, and marketer of custom-formulated chemical specialty products and a provider of chemical management services for manufacturers around the globe, primarily in the steel and automotive industries.
This release contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Such risks and uncertainties include, but are not limited to, further downturns in our customers' businesses, significant increases in raw material costs, worldwide economic and political conditions, the impact of SARS, foreign currency fluctuations, and future terrorist attacks such as those that occurred on September 11, 2001.
As previously announced, Quaker Chemical's investor conference to discuss first quarter earnings results is scheduled for May 6, 2003, at 2:30 p.m. (ET). Access the conference by calling 800-922-0755 or visit Quaker's Web site at www.quakerchem.com for a live webcast.
Quaker Chemical Corporation Condensed Consolidated Statement of Income For the period ended March 31, Unaudited Dollars in thousands, except per share data First Quarter 2003 2002 Net sales $73,337 $59,927 Cost of goods sold 44,971 35,570 Gross margin 28,366 24,357 % 38.7% 40.6% Selling, general and administrative 22,685 20,024 Operating income 5,681 4,333 % 7.7% 7.2% Other income, net 88 280 Interest expense, net (139) (166) Income before taxes 5,630 4,447 Taxes on income 1,858 1,423 3,772 3,024 Equity in net income (loss) of associated companies 86 (17) Minority interest in net income of subsidiaries (751) (649) Net income $3,107 $2,358 % 4.2% 3.9% Per share data: Net income - basic $0.34 $0.26 Net income - diluted $0.33 $0.26 Shares Outstanding: Basic 9,270,775 9,154,303 Diluted 9,508,593 9,212,700 Quaker Chemical Corporation Condensed Consolidated Balance Sheet Unaudited (Dollars in thousands) March 31, December 31, 2003 2002 ASSETS Current assets Cash and cash equivalents $12,044 $13,857 Accounts receivable, net 54,911 53,353 Inventories Raw materials and supplies 12,996 11,342 Work-in-process and finished goods 12,673 12,294 Prepaid expenses and other current assets 14,529 12,827 Total current assets 107,153 103,673 Property, plant and equipment, at cost 117,569 113,207 Less accumulated depreciation 67,594 64,695 Net property, plant and equipment 49,975 48,512 Goodwill 22,308 21,927 Other intangible assets 5,639 5,852 Investments in associated companies 7,247 9,060 Deferred income taxes 10,545 10,609 Other assets 14,457 14,225 Total assets $217,324 $213,858 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long-term debt $16,015 $12,205 Accounts and other payables 29,340 29,423 Accrued compensation 6,283 10,254 Other current liabilities 12,711 14,262 Total current liabilities 64,349 66,144 Long-term debt 16,590 16,590 Deferred income taxes 1,529 1,518 Other noncurrent liabilities 34,145 33,889 Total liabilities 116,613 118,141 Minority interest in equity of subsidiaries 8,489 7,662 Shareholders' Equity Common stock $1 par value; authorized 30,000,000 shares; issued (including treasury shares) 9,664,009 shares 9,664 9,664 Capital in excess of par value 720 626 Retained earnings 111,591 110,448 Unearned compensation (1,087) (1,245) Accumulated other comprehensive (loss) (24,483) (27,078) 96,405 92,415 Treasury stock, shares held at cost; 2003 - 310,720, 2002 - 324,109 (4,183) (4,360) Total shareholders' equity 92,222 88,055 $217,324 $213,858 Quaker Chemical Corporation Condensed Consolidated Statement of Cash Flows For the Three Months ended March 31, Unaudited (Dollars in thousands) 2003 2002* Cash flows from operating activities Net income $3,107 $2,358 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,646 1,229 Amortization 215 82 Equity in net income of associated companies (86) 17 Minority interest in earnings of subsidiaries 751 649 Deferred compensation and other postretirement benefits 77 (260) Other, net 481 388 Increase (decrease) in cash from changes in current assets and current liabilities: Accounts receivable, net (399) (2,471) Inventories (1,389) 981 Prepaid expenses and other current assets (1,342) (1,918) Accounts payable and accrued liabilities (5,927) 391 Change in restructuring liabilities (699) (865) Net cash (used in) provided by operating activities (3,565) 581 Cash flows from investing activities Investments in property, plant and equipment (2,113) (1,527) Dividends and distributions from associated companies 1,800 - Payments related to acquisitions - (13,676) Other, net (40) 66 Net cash (used in) investing activities (353) (15,137) Cash flows from financing activities Net increase in short-term borrowings 3,791 11,994 Repayment of long-term debt (7) (30) Dividends paid (1,961) (1,872) Treasury stock issued 86 442 Distributions to minority shareholders (213) (497) Net cash provided by financing activities 1,696 10,037 Effect of exchange rate changes on cash 409 (112) Net (decrease) in cash and cash equivalents (1,813) (4,631) Cash and cash equivalents at beginning of period 13,857 20,549 Cash and cash equivalents at end of period $12,044 $15,918
Certain reclassifications of prior year data have been made to improve comparability.