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CONSHOHOCKEN, Pa., Jul 29, 2004 /PRNewswire-FirstCall via COMTEX/ -- Quaker Chemical Corporation (NYSE: KWR) today announced record quarterly sales of $98.7 million and diluted earnings per share of $0.29 for the second quarter of 2004. The earnings level is consistent with the public announcement made on July 23, 2004.
Second Quarter Summary
Net sales for the second quarter of 2004 were a record $98.7 million, up 18% from $83.5 million for the second quarter of 2003. Foreign exchange rate translation, the Company's 2003 acquisitions, and the Company's new chemical management services (CMS) contracts favorably impacted net sales by $1.9 million, $5.6 million and $4.0 million, respectively. The remaining net sales increase of approximately 4% was primarily due to double-digit growth in the Asia/Pacific and South American regions with lower sales in Europe tempering increases in the U.S.
Net income for the second quarter was $2.8 million versus $3.5 million for the second quarter of 2003. Despite record sales in the quarter, higher raw material prices and lower than expected performance in the Company's new CMS business were largely responsible for the shortfall in earnings compared to our expectations. Earnings per diluted share were $0.29 per diluted share versus $0.36 per diluted share for the second quarter of 2003.
Gross margins as a percentage of sales declined from 34.7% for the second quarter of 2003 to 33.0% for the second quarter of 2004. Approximately one-half of the decline in the gross margin percentage was due to higher raw material costs. The Company has announced and implemented a number of price increases and surcharges to help offset increases in raw material costs, and the positive impact from these actions is expected to be realized in the second half of 2004.
Selling, general and administrative expenses for the quarter increased $4.0 million compared to the second quarter of 2003. Foreign exchange rate translation and the Company's 2003 acquisitions accounted for approximately one-third of the increase. The majority of the remaining increase was due to higher expenses associated with the Company's ERP implementation, Sarbanes- Oxley compliance, as well as inflationary increases. In addition, the Company added infrastructure to support its growth initiatives in CMS and the Asia/Pacific region.
Ronald J. Naples, Chairman and Chief Executive Officer, commented, "The story of our second quarter really revolves around strong sales growth, high raw material prices, and our new CMS contracts. We have seen good growth this year especially in Asia and South America. In addition, our acquisitions continue to perform as expected. However, continued high raw material costs have negatively impacted our bottom line relative to the prior year. Over the past few months, we have taken steps to implement price increases which should positively affect our margins in the second half of the year."
Mr. Naples continued, "Another factor in our deviation from our expectations was due to the performance in our new CMS contracts. While the new contracts made a profit contribution, they were behind our expectations in both product conversions and product usage reduction. Though we've been delayed, we did make considerable progress in both areas and expect to see the benefits in the second half."
Net sales for the first half of the year increased to $196.8 million, up 26% from $156.8 million for the first half of 2003. Foreign exchange rate translation, the Company's 2003 acquisitions, and the Company's new CMS contracts favorably impacted net sales by $8.4 million, $11.3 million and $13.7 million, respectively. The remaining net sales increase of approximately 4% was due to double-digit growth in the Asia/Pacific and South American regions with lower sales in Europe offsetting increases in the U.S.
Net income for the first half of the year was $6.2 million versus $6.6 million for the first half of 2003. Earnings per diluted share decreased from $0.69 per diluted share to $0.62 per diluted share as a result of the items discussed in the second quarter summary.
Gross margin as a percentage of sales declined from 36.6% in 2003 to 33.0% in 2004. As previously disclosed, the Company's new CMS contracts, which commenced in the second quarter of 2003, have caused different relationships between margins and revenue than in the past. At the majority of current CMS sites, the Company effectively acts as an agent and records revenue and costs from these sales on a net sales or "pass-through" basis. The new CMS contracts have a different structure, which results in the Company recognizing in reported revenue the gross revenue received from the CMS site customer, and in cost of goods sold the third party product purchases. The negative impact to gross margin for the first half of the year related to the new CMS contracts is approximately 2.6 percentage points. The remaining decline in gross margin as a percentage of sales is primarily due to increased raw material costs.
Selling, general and administrative expenses for the first half of the year increased $7.9 million compared to the first half of 2003. Foreign exchange rate translation and the Company's 2003 acquisitions accounted for approximately half of the increase. The majority of the remaining increase was due to higher expenses associated with the Company's ERP implementation, Sarbanes-Oxley compliance, as well as inflationary increases. In addition, the Company added infrastructure to support its growth initiatives in CMS and the Asia/Pacific region.
Balance Sheet and Cash Flow Items
The Company's net debt has increased since year-end primarily to fund the working capital needs associated with our growth initiatives. The Company's net debt-to-total capital ratio remains strong at 30% at the end of second quarter compared to 25% at the end of 2003.
In the first half of 2004, capital expenditures were $4.9 million. Major projects included the Company's U.S. lab renovation, global ERP implementation and a capital expansion project related to our Vulcan acquisition. The Company is near completion on the U.S. lab renovation. The capital expansion project related to the Vulcan acquisition is completed. The Vulcan expansion project has allowed the Company to move essentially all of the production from Vulcan to other facilities and reduce external manufacturing costs. Capital spending related to the Company's ERP implementation has been considerably less in 2004 than in the past. Overall, we are expecting our total 2004 capital expenditures to be slightly under $10 million, or a more than 20% reduction from the 2003 capital expenditure levels.
Mr. Naples commented, "We're really pleased with our revenue growth so far this year. Second quarter profitability was a disappointment, but we're on top of the reasons for the shortfall and have solid plans in place to get back on track. We look forward to an improved second half and are still optimistic that for 2004 we will achieve earnings around our prior year level, even though we don't anticipate raw material cost relief. Critical to making this happen are the continued economic recovery in our key markets, the contribution of announced price increases that take effect in the second half, and strong follow-through on our progress in product conversion and product usage reduction programs in our CMS business."
Mr. Naples continued, "We are convinced that we are on the right strategic track with our key imperatives of selling value rather than simply fluids, operating as a globally integrated whole, and harnessing our global knowledge and learning. These imperatives have kept us in a strong market position during the recent difficult operating environment, focusing us on bringing unique value to our customers, as well as increasing our differentiation from competitors. We also believe the five tight-fit acquisitions completed over the past two years and the new CMS contracts will be significant contributors to our revenue and earnings going forward. It is our expectation that our strong financial position will enable us to continue to grow the Company through acquisitions as well as maintain our record of annual dividend increases."
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. 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.
As previously announced, Quaker Chemical's investor conference to discuss second quarter results is scheduled for July 30, 2004 at 10:30 a.m. (ET). Access the conference by calling 877-269-7756 or visit Quaker's Web site at http://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 Six Months ended June 30, June 30, 2004 2003 2004 2003 Net sales $98,683 $83,453 $196,814 $156,790 Cost of goods sold 66,139 54,506 131,815 99,477 Gross margin 32,544 28,947 64,999 57,313 % 33.0% 34.7% 33.0% 36.6% Selling, general and administrative 27,209 23,223 53,807 45,908 Operating income 5,335 5,724 11,192 11,405 % 5.4% 6.9% 5.7% 7.3% Other income, net 208 447 767 535 Interest expense, net (349) (235) (664) (374) Income before taxes 5,194 5,936 11,295 11,566 Taxes on income 1,636 1,843 3,558 3,701 3,558 4,093 7,737 7,865 Equity in net income of associated companies 186 169 335 255 Minority interest in net income of subsidiaries (897) (787) (1,916) (1,538) Net income $2,847 $3,475 $6,156 $6,582 % 2.9% 4.2% 3.1% 4.2% Per share data: Net income - basic $0.30 $0.37 $0.64 $0.71 Net income - diluted $0.29 $0.36 $0.62 $0.69 Shares Outstanding: Basic 9,604,142 9,323,895 9,587,393 9,297,482 Diluted 9,983,809 9,671,578 9,981,999 9,593,466 Quaker Chemical Corporation Condensed Consolidated Balance Sheet (Dollars in thousands, except par value and share amounts) (Unaudited) June 30, December 31, 2004 2003 ASSETS Current assets Cash and cash equivalents $24,470 $21,915 Accounts receivable, net 81,791 78,121 Inventories, net 37,850 32,211 Prepaid expenses and other current assets 14,442 11,277 Total current assets 158,553 143,524 Property, plant, and equipment 138,565 136,448 Less accumulated depreciation 76,619 74,057 Net property, plant, and equipment 61,946 62,391 Goodwill 32,906 33,301 Other intangible assets, net 8,996 9,616 Investments in associated companies 5,923 6,005 Deferred income taxes 12,839 12,846 Other assets 19,718 19,664 Total assets $300,881 $287,347 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long-term debt $54,164 $42,992 Accounts and other payables 42,017 41,259 Accrued compensation 6,138 6,816 Other current liabilities 13,305 14,738 Total current liabilities 115,624 105,805 Long-term debt 17,946 15,827 Deferred income taxes 2,764 2,688 Other non-current liabilities 41,564 40,967 Total liabilities 177,898 165,287 Minority interest in equity of subsidiaries 11,021 9,708 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 2,489 2,181 Retained earnings 119,316 117,308 Unearned compensation (488) (621) Accumulated other comprehensive loss (18,790) (15,406) 112,191 113,126 Treasury stock, shares held at cost; 2004 - 8,832, 2003 - 54,178 (229) (774) Total shareholders' equity 111,962 112,352 Total liabilities and shareholders' equity $300,881 $287,347 Quaker Chemical Corporation Condensed Consolidated Statement of Cash Flows For the six months ended June 30, (Dollars in thousands) (Unaudited) 2004 2003 Cash flows from operating activities Net income $6,156 $6,582 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 4,098 3,394 Amortization 575 438 Equity in net income of associated companies (335) (255) Minority interest in earnings of subsidiaries 1,916 1,538 Deferred compensation and other, net 245 226 Pension and other postretirement benefits 411 2,190 Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions: Accounts receivable (4,824) (11,380) Inventories (6,110) (2,789) Prepaid expenses and other current assets (3,318) 1,204 Accounts payable and accrued liabilities (213) (2,467) Change in restructuring liabilities (327) (866) Net cash used in operating activities $(1,726) $(2,185) Cash flows from investing activities Capital expenditures (4,915) (4,859) Dividends and distributions from associated companies 233 3,890 Payments related to acquisitions - (1,105) Other, net 28 53 Net cash used in investing activities (4,654) (2,021) Cash flows from financing activities Net increase in short-term borrowings 11,165 7,747 Proceeds from long-term debt 2,208 - Dividends paid (4,091) (3,924) Treasury stock issued 716 1,697 Distributions to minority shareholders (245) (609) Other, net - 3 Net cash provided by financing activities 9,753 4,914 Effect of exchange rate changes on cash (818) 533 Net (decrease) increase in cash and cash equivalents 2,555 1,241 Cash and cash equivalents at beginning of period 21,915 13,857 Cash and cash equivalents at end of period $24,470 $15,098
SOURCE Quaker Chemical Corporation
Michael F. Barry, Vice President and Chief Financial Officer, Quaker Chemical Corporation, +1-610-832-8500