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The Company also reported record sales in the fourth quarter 2007 of $142.4 million and net income of $4.6 million, or $0.46 per diluted share, compared to fourth quarter 2006 sales of $115.5 million and net income of $3.0 million, or $0.30 per diluted share.
"Our strong fourth quarter caps an outstanding year for Quaker in both earnings and cash generation," observed Ronald J. Naples, Chairman and Chief Executive Officer. "Strong volume growth, continued work with our customers on the pricing front in the face of continued escalation in raw material costs, and improved SG&A leverage were important parts of our profit growth this year. Beyond just the financials, we made considerable progress this year on a number of strategic initiatives, from customer penetration to new business development."
Fourth Quarter 2007 Summary
Net sales for the fourth quarter were $142.4 million, up 23.3% from $115.5 million for the fourth quarter 2006. The increase in net sales was primarily attributable to a combination of volume growth and higher sales prices. Volume growth was realized across all the Company's regions, including higher revenue related to the Company's CMS channel. Foreign exchange rate translation increased revenues by approximately 8% for the fourth quarter of 2007, compared to the same period in 2006. Selling price increases were realized across the Company's regions and market segments, in part as a result of an ongoing effort to offset higher raw material costs. CMS revenues were higher due to additional CMS accounts, as well as the renewal and restructuring of several of the Company's CMS contracts.
Higher selling prices and additional contribution from the Company's CMS channel helped drive a 17% increase in gross margin in dollar terms. Gross margin as a percentage of sales was 30.6% for the fourth quarter of 2007, compared to 32.3% for the fourth quarter of 2006, due to higher raw material costs and sales mix from the restructured CMS contracts that were partially offset by price increases.
Selling, general and administrative expenses for the quarter increased $3.2 million, compared to the fourth quarter of 2006. Foreign exchange rate translation accounted for approximately two-thirds of the increase. Other major contributors were planned spending in higher growth areas, such as China, and higher commissions as a result of higher sales. These were offset in part by lower legal and environmental and incentive compensation costs.
The increase in other income was primarily the result of foreign exchange gains recorded in the fourth quarter of 2007, compared to losses in the same period of the prior year. The lower net interest expense is due to lower average borrowings and higher interest income during the fourth quarter of 2007, compared to the prior year period.
The effective tax rate was 43.6% in the fourth quarter of 2007 versus 28.2% in the prior year quarter. The higher tax rate was due in part to a tax law change, resulting in a revaluation of previously established deferred tax assets, as well as a change in the mix of earnings from lower to higher tax rate jurisdictions.
Full Year Summary
Net sales for 2007 were $545.6 million, up 18.5% from $460.5 million for 2006. The increase in net sales was attributable to a combination of higher sales prices and volume growth. Volume growth in Asia/Pacific and Europe, higher CMS revenues, and selling price increases realized across all regions and market segments were the primary reasons for the increase in net sales. Foreign exchange rate translation increased revenues by approximately 5% for 2007 compared to 2006.
Gross margin in dollar terms was higher by more than $25.0 million, or 18%, consistent with the increased sales. Gross margin as a percentage of sales was 30.8% for 2007, as compared to 31% for 2006. Higher selling prices and a stronger performance from the Company's CMS channel helped improve margins in dollar terms, while higher raw material costs and sales mix resulted in a slightly lower gross margin percentage.
Selling, general and administrative expenses for 2007 increased $18.5 million compared to 2006. Foreign exchange rate translation accounted for approximately $5.6 million of the increase over the prior year. Also negatively affecting the comparison with the prior year was a pension gain of $0.9 million recorded in the first quarter of 2006, due to a legislative change. The remainder of the increase was due to continued planned spending in higher growth areas, primarily China, higher incentive compensation as a result of higher earnings, higher commissions as a result of higher sales, higher legal and environmental costs, and inflationary increases. In addition, during the third quarter of 2007, the Company recorded two charges totaling $1.2 million related to certain customer bankruptcies and a discontinued strategic initiative.
In the third quarter of 2007, the Company also recorded environmental charges of $3.3 million as disclosed in its press release dated October 23, 2007. The charges consist of $2.0 million related to the settlement of environmental litigation involving AC Products, Inc., a wholly owned subsidiary, as well as an additional $1.3 million charge for the estimated future remediation costs.
The increase in other income was primarily due to foreign exchange gains recorded in 2007, compared to losses in the prior year. The increase in net interest expense was attributable to higher average borrowings and higher interest rates.
The Company's effective tax rate was 29.3% for 2007, compared to 33.8% in the prior year. The lower effective tax rate includes a higher refund of taxes in China as a result of the Company's increased investment with $0.7 million received in 2007 versus $0.4 million received in 2006. In addition, the lower effective tax rate includes a non-cash out-of-period tax benefit adjustment of $1.0 million related to certain deferred tax items. The effective tax rate was also affected by a changing mix of income among tax jurisdictions, as well as the Company's first quarter 2007 adoption of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
Balance Sheet and Cash Flow Items
The Company's net debt decreased from December 31, 2006, primarily as a result of reduced working capital investments during 2007, with operations generating positive cash flow of $27.5 million. The $27.5 million of cash provided by operating activities is the highest level the Company has achieved in the past 11 years. The Company's net debt-to-total-capital ratio was 32% at December 31, 2007, compared to 40% at December 31, 2006. In connection with the first quarter 2007 adoption of FIN 48, the Company recorded a non- cash charge to shareholders' equity of $5.5 million, which negatively impacted the Company's net debt-to-total-capital ratio by approximately 1 percentage point.
Mr. Naples further commented, "We had a great year in 2007, not only because of our earnings improvement, but because of our progress on other fronts as well. We crossed the half a billion dollar sales mark and strengthened our position in a number of faster-growing markets. With the environmental settlement reached by our AC Products subsidiary in the third quarter of 2007, we removed a significant uncertainty and financial exposure. In addition, our operating cash flow reached its highest level in more than 10 years, providing more resources for growth. We are optimistic about our long- term future and about prospects for continued earnings growth in 2008."
Quaker Chemical Corporation is a leading global provider of process chemicals, chemical specialties, services, and technical expertise to a wide range of industries - including steel, automotive, mining, aerospace, tube and pipe, coatings, and construction materials. Our products, technical solutions, and chemical management services enhance our customers' processes, improve their product quality, and lower their costs. Quaker's headquarters is located near Philadelphia in Conshohocken, Pennsylvania.
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. A major risk is that the Company's demand is largely derived from the demand for its customers' products, which subjects the Company 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, and future terrorist attacks such as those that occurred on September 11, 2001. Other factors could also adversely affect us. 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.
As previously announced, Quaker Chemical's investor conference call to discuss fourth quarter and year-end results is scheduled for February 27, 2008 at 3:30 p.m. (ET). Access the conference by calling 877-269-7756 or visit Quaker's Web site at www.quakerchem.com for a live webcast.
Quaker Chemical Corporation Condensed Consolidated Statement of Income (Dollars in thousands, except per share data and share amounts) (Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, 2007 2006 2007 2006 Net sales $142,393 $115,527 $545,597 $460,451 Cost of goods sold 98,783 78,251 377,661 317,850 Gross margin 43,610 37,276 167,936 142,601 % 30.6% 32.3% 30.8% 31.0% Selling, general and administrative expenses 35,499 32,333 139,429 120,969 Environmental charges - - 3,300 - Operating income 8,111 4,943 25,207 21,632 % 5.7% 4.3% 4.6% 4.7% Other income, net 960 205 2,578 1,259 Interest expense, net (829) (1,016) (5,050) (4,451) Income before taxes 8,242 4,132 22,735 18,440 Taxes on income 3,592 1,166 6,668 6,224 4,650 2,966 16,067 12,216 Equity in net income of associated companies 226 317 783 773 Minority interest in net income of subsidiaries (253) (289) (1,379) (1,322) Net income $4,623 $2,994 $15,471 $11,667 % 3.2% 2.6% 2.8% 2.5% Per share data: Net income - basic $0.46 $0.30 $1.55 $1.19 Net income - diluted $0.46 $0.30 $1.53 $1.18 Shares Outstanding: Basic 10,035,630 9,828,377 9,986,347 9,778,745 Diluted 10,154,388 9,902,451 10,106,918 9,854,100 Quaker Chemical Corporation Condensed Consolidated Balance Sheet (Dollars in thousands, except par value and share amounts) (Unaudited) December 31, December 31, 2007 2006 ASSETS Current assets Cash and cash equivalents $20,195 $16,062 Accounts receivable, net 118,135 107,340 Inventories, net 60,738 51,984 Prepaid expenses and other current assets 14,433 10,855 Total current assets 213,501 186,241 Property, plant and equipment, net 62,287 60,927 Goodwill 43,789 38,740 Other intangible assets, net 7,873 8,330 Investments in associated companies 7,323 7,044 Other assets 64,276 56,100 Total assets $399,049 $357,382 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long-term debt $4,288 $4,950 Accounts payable 65,202 54,212 Dividends payable 2,178 2,133 Accrued compensation 17,287 15,225 Other current liabilities 17,396 13,659 Total current liabilities 106,351 90,179 Long-term debt 78,487 85,237 Deferred income taxes 7,583 5,317 Accrued pension and postretirement benefits 30,699 38,430 Other non-current liabilities 41,023 23,353 Total liabilities 264,143 242,516 Minority interest in equity of subsidiaries 4,513 4,035 Shareholders' equity Common stock, $1 par value; authorized 30,000,000 shares; issued 10,147,239 shares 10,147 9,926 Capital in excess of par value 10,104 5,466 Retained earnings 115,767 114,498 Accumulated other comprehensive loss (5,625) (19,059) Total shareholders' equity 130,393 110,831 Total liabilities and shareholders' equity $399,049 $357,382 Quaker Chemical Corporation Condensed Consolidated Statement of Cash Flows For the twelve months ended December 31, (Dollars in thousands) (Unaudited) 2007 2006 Cash flows from operating activities Net income $15,471 $11,667 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 11,686 10,136 Amortization 1,197 1,427 Equity in net income of associated companies, net of dividends (219) (348) Minority interest in earnings of subsidiaries 1,379 1,322 Deferred income tax and FIN 48 1,223 404 Deferred compensation and other, net (85) (507) Stock-based compensation 1,550 857 Environmental charges 3,300 - (Gain) loss on disposal of property, plant and equipment (40) 34 Insurance settlement realized (1,854) (544) Pension and other postretirement benefits (3,596) (4,247) Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions: Accounts receivable (4,093) (8,947) Inventories (5,182) (4,146) Prepaid expenses and other current assets 122 (140) Accounts payable and accrued liabilities 7,612 5,440 Change in restructuring liabilities - (4,033) Estimated taxes on income (970) (192) Net cash provided by operating activities 27,501 8,183 Cash flows from investing activities Capital expenditures (9,165) (12,379) Payments related to acquisitions (2,373) (1,684) Proceeds from disposition of assets 259 64 Insurance settlement received and interest earned 5,705 7,836 Change in restricted cash, net (3,851) (7,292) Net cash used in investing activities (9,425) (13,455) Cash flows from financing activities Proceeds from short-term debt 2,250 1,897 Net decrease in short-term borrowings (3,198) (3,384) Proceeds from long-term debt - 15,283 Repayments of long-term debt (8,345) (940) Dividends paid (8,654) (8,444) Stock options exercised, other 3,309 1,235 Distributions to minority shareholders (1,265) (1,490) Net cash (used in) provided by financing activities (15,903) 4,157 Effect of exchange rate changes on cash 1,960 1,056 Net increase (decrease) in cash and cash equivalents 4,133 (59) Cash and cash equivalents at the beginning of the period 16,062 16,121 Cash and cash equivalents at the end of the period $20,195 $16,062
SOURCE Quaker Chemical Corporation