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News Release


Quaker Chemical Announces Third Quarter 2017 Results

- 12% growth in net sales primarily driven by strong volume increase of 7%
- Net income of $11.1 million and earnings per diluted share of $0.83 includes the impact of $9.7 million or $0.52 per diluted share of Houghton combination-related expenses
- 6% increase in non-GAAP earnings per diluted share to $1.32
- Solid earnings drives 4% increase in adjusted EBITDA to $29.4 million

CONSHOHOCKEN, Pa., Oct. 26, 2017 /PRNewswire/ -- Quaker Chemical Corporation (NYSE: KWR) today announced a net sales increase of 12% to $212.9 million in the third quarter of 2017 compared to $190.4 million in the third quarter of 2016, driven by organic and acquisition volume growth of 5% and 2%, respectively.  These strong volumes drove a 5% increase in gross profit quarter-over-quarter, despite lower gross margin in the third quarter of 2017 primarily attributable to higher raw material costs and changes in the mix of certain products sold.  In addition, current quarter operating income benefited from the Company's continued discipline in managing selling, general and administrative expenses ("SG&A"), leveraging its significant sales growth in the current quarter. 

The Company's third quarter of 2017 net income was $11.1 million and its earnings per diluted share was $0.83, which includes $9.7 million, or $0.52 per diluted share, of expenses incurred related to the Company's previously announced pending combination with Houghton International, Inc ("Houghton").  The Company's third quarter of 2016 net income was $16.0 million and its earnings per diluted share was $1.21, which included $1.2 million, or $0.08 per diluted share, of similar combination-related expenses.  Excluding these combination-related expenses and other non-core items, the Company's operating performance, coupled with a lower current quarter effective tax rate, drove non-GAAP earnings per diluted share to $1.32, a 6% increase compared to $1.25 in the prior year period.  The Company's adjusted EBITDA of $29.4 million in the third quarter of 2017 represented a 4% increase compared to $28.3 million in the third quarter of 2016.  Also, the Company's strong performance drove solid operating cashflows of $20.0 million in the third quarter of 2017.   

Michael F. Barry, Chairman, Chief Executive Officer and President, commented, "We are pleased with our third quarter results, despite higher raw material costs which continued to increase more than we had expected in the quarter.  We were able to grow our organic volumes by 5% 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 this decline with savings realized from our previously announced restructuring program and other cost streamlining initiatives.  Overall, we achieved a 4% increase in adjusted EBITDA and a 6% increase in non-GAAP earnings. "

Mr. Barry continued, "Looking forward, we expect our gross margins to trend upwards over the next few quarters, gradually heading back to our 37% target.  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 line and bottom line, excluding Houghton-related costs, with earnings growth in all regions.  Overall, we 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 remain truly excited for the close of our previously announced combination with Houghton, as it will create long-term sustainable value for our customers and shareholders.  The deal still remains on track to close by the end of this year or the first quarter of 2018."

Third Quarter of 2017 Summary

Net sales in the third quarter of 2017 were $212.9 million compared to $190.4 million in the third quarter of 2016.  The $22.5 million or 12% increase in net sales was due to a 5% increase in organic volumes, a 2% increase from acquisitions, a 3% increase due to changes in price and product mix and the positive impact from foreign currency translation of $3.8 million or 2%.

Gross profit in the third quarter of 2017 increased $3.9 million or 5% from the third quarter of 2016, primarily due to the increase in sales volumes, noted above, partially offset by a lower gross margin of 35.1% in the third quarter of 2017 compared to 37.2% in the prior year quarter.  The decrease in the Company's gross margin was primarily due to higher raw material costs compared to the prior year and changes in the mix of certain products sold.

SG&A increased $3.2 million during the third quarter of 2017 compared to the third quarter of 2016 due to the net impact of several factors.  Specifically, the Company's SG&A increased as a result of higher labor-related costs, primarily due to annual compensation increases and the timing of certain incentive compensation accruals, additional SG&A associated with the Company's fourth quarter of 2016 Lubricor Inc. acquisition, and an increase due to the impact of foreign currency translation.  These increases in SG&A quarter-over-quarter were partially offset by decreases from certain cost savings efforts, including the Company's 2015 global restructuring program.

During the third quarter of 2017, the Company incurred $9.7 million or $0.52 per diluted share of expenses related to its previously announced combination with Houghton, including certain legal, financial, and other advisory and consultant expenses related to integration planning, regulatory and shareholder approvals associated with the combination.  In the third quarter of 2016 the Company incurred $1.2 million or $0.08 per diluted share of due diligence expenses related to this combination.

Operating income in the third quarter of 2017 was $14.0 million compared to $21.9 million in the third quarter of 2016.  The decrease in operating income was primarily due to higher combination-related expenses and higher levels of SG&A not related to the Houghton combination, which more than offset gross profit increases on strong volume growth.

Other income (expense), net, increased $0.3 million quarter-over-quarter primarily due to higher foreign currency transaction gains realized in the third quarter of 2017 compared to the third quarter of 2016. 

Interest expense was relatively consistent during the third quarter of 2017 compared to the third quarter of 2016.  Interest income increased $0.2 million quarter-over-quarter 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 third quarters of 2017 and 2016 were 22.1% and 28.3%, respectively.  The Company's relatively low third quarter of 2017 effective tax rate was driven by the favorable impact of an accounting standard that was adopted in the current year.  Comparatively, the third quarter of 2016 effective tax rate reflected earnings taxed at one of the Company's subsidiaries at a statutory tax 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 throughout 2017.  Both the third quarters of 2017 and 2016 effective tax rates included the tax benefit of changes in uncertain tax positions, which were more favorable to the effective tax rate in the prior year quarter as compared to the current quarter. 

Equity in net income of associated companies ("equity income") decreased $0.2 million quarter-over-quarter primarily driven by lower earnings from the Company's interest in a captive insurance company. 

The Company's net income attributable to noncontrolling interest increased $0.2 million quarter-over-quarter primarily due to an improvement in performance of certain consolidated affiliates in the Company's Asia/Pacific region.

In addition to the foreign currency transaction gains realized in other income noted above, the impacts from foreign currency translation also positively impacted the Company's third quarter of 2017 results by approximately 1%, or $0.02 per diluted share.

Year-to-Date 2017 Summary

Net sales in the first nine months of 2017 were $609.0 million compared to $555.4 million in the first nine months of 2016.  The $53.6 million or 10% increase in net sales was due to a 6% increase in organic volumes, a 2% increase from acquisitions and a 2% increase due to changes in price and product mix.  Foreign currency translation negatively impacted net sales by less than 1% or $1.2 million.

Gross profit in the first nine months of 2017 increased $7.2 million or 3% from the first nine months of 2016, primarily due to the increase in sales volumes, noted above, partially offset by a lower gross margin of 35.7% in the first nine months of 2017 compared to 37.9% in the prior year.  The decrease in the Company's gross margin during the first nine months of 2017 was primarily due to higher raw material costs compared to the prior year and a change in the mix of certain products sold. 

SG&A increased $4.0 million in the first nine months of 2017 compared to the prior year primarily due to the Company's prior year Lubricor Inc. acquisition and higher overall labor related costs, partially offset by the impact of foreign currency translation and the Company's past cost savings efforts.    

During the first nine months of 2017, the Company incurred $23.1 million or $1.47 per diluted share of expenses related to its previously announced combination with Houghton.  Similarly, the Company incurred $1.2 million or $0.08 per diluted share of combination-related expenses in the first nine months of 2016.

Operating income in the first nine months of 2017 was $45.7 million compared to $64.4 million in the first nine months of 2016.  The decrease in operating income was primarily due to the Houghton combination-related expenses along with slightly higher levels of SG&A not related to the Houghton combination, which more than offset gross profit increases on strong volume growth. 

The Company had other expense of $1.4 million in the first nine months of 2017 compared to $0.2 million in the first nine months of 2016.  The increase in other expense was primarily driven by a second quarter of 2017 U.S. pension plan settlement charge, partially offset by slightly higher foreign currency transaction gains and an increase in receipts of local municipality-related grants in one of the Company's regions year-over-year.

Interest expense was relatively consistent year-over-year.  Interest income was $0.4 million higher in the first nine months of 2017 compared to the first nine months 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 nine months of 2017 and 2016 were 32.5% and 31.0%, respectively.  The Company's first nine months of 2017 effective tax rate was elevated due to the impact of certain non-deductible Houghton combination-related expenses, partially offset by the favorable impact of the accounting standard adoption, noted above.  The first nine months of 2016 effective tax rate was also elevated due to the temporarily inflated tax rate at one of the Company's subsidiaries, noted in the quarter summary above. 

Equity income increased $0.7 million in the first nine months of 2017 compared to the first nine months of 2016.  The increase was primarily due to higher earnings from the Company's interest in a captive insurance company in the current year.

The Company had a $0.5 million increase in net income attributable to noncontrolling interest in the first nine months of 2017 compared to the first nine months of 2016, primarily due to an improvement in performance of certain consolidated affiliates in the Company's Asia/Pacific region.

The impacts from foreign currency translation negatively impacted the Company's first nine months of 2017 results by approximately 1%, or $0.04 per diluted share, which does not include the foreign currency transaction gains realized in other income noted above.

Balance Sheet and Cash Flow Items

The Company's net operating cash flow of $20.0 million in the third quarter of 2017 increased its year-to-date net operating cash flow to $40.8 million, as compared to $53.0 million in the first nine months of 2016.  The decrease in net operating cash flow was primarily due to $12.7 million of Houghton combination-related payments in the current year and higher cash invested in the Company's working capital as a result of the Company's strong sales growth.  In addition, the Company paid $4.7 million in cash dividends during the third quarter of 2017, increasing its total dividends paid year-to-date by $0.8 million to $13.9 million, which represents a 6% increase in cash dividends paid year-over-year.  Overall, the Company's liquidity and balance sheet remain strong, as its cash position exceeded its debt at September 30, 2017 by $36.0 million and the Company's total debt continued to be less than one times its trailing twelve month adjusted EBITDA.

Houghton Combination

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 was approximately $690 million at signing.  At closing, the total aggregate purchase consideration is dependent on the Company's stock price and the level of Houghton's indebtedness.  The Company secured $1.15 billion in commitments from Bank of America Merrill Lynch and Deutsche Bank to fund the Combination and to provide additional liquidity at closing, and has since replaced these commitments with a syndicated bank agreement with customary terms and conditions.  Funding of the syndicated bank agreement is contingent upon closing of the Combination, and until then the Company will only incur certain interest costs to maintain the banks' capital commitment.  In addition, the issuance of the Company's shares at closing of the Combination was subject to approval by Quaker's shareholders under the rules of the New York Stock Exchange, and approval was received at a meeting of the Company's shareholders during the third quarter of 2017.  Also, the Combination is subject to regulatory approvals in the United States, Europe, China and Australia.  The Company received regulatory approval from China in July 2017 and from Australia in October 2017.  Depending on the remaining regulatory approvals noted above, as well as other customary terms and conditions set forth in the share purchase agreement, the Company still estimates closing of the Combination to occur either late 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

September 30,

 

Nine Months Ended

September 30,

 

2017

 

2016

 

2017

 

2016

 

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

$   0.83

 

$   1.21

 

$   2.25

 

$   3.32

 

Equity income in a captive insurance company per
diluted share

(0.03)

 

(0.04)

 

(0.11)

 

(0.07)

 

Houghton combination-related expenses per diluted
share

0.52

 

0.08

 

1.47

 

0.08

 

U.S. pension plan settlement charge per diluted share

 

 

0.09

 

 

Cost streamlining initiative per diluted share

 

 

0.01

 

 

Currency conversion impacts of the Venezuelan bolivar
fuerte per diluted share

0.00

 

 

0.03

 

0.01

 

Non-GAAP earnings per diluted share

$   1.32

 

$   1.25

 

$   3.74

 

$   3.34

 
         
 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 
 

2017

 

2016

 

2017

 

2016

 

Net income attributable to Quaker Chemical
Corporation

$11,142

 

$16,008

 

$30,040

 

$43,969

 

Depreciation and amortization

5,017

 

4,868

 

14,954

 

14,788

 

Interest expense

793

 

758

 

2,229

 

2,226

 

Taxes on income before equity in net income of
associated companies

3,140

 

6,121

 

14,229

 

19,664

 

Equity income in a captive insurance company

(400)

 

(597)

 

(1,427)

 

(952)

 

Houghton combination-related expenses

9,675

 

1,157

 

23,088

 

1,157

 

U.S. pension plan settlement charge

 

 

1,860

 

 

Cost streamlining initiative

 

 

286

 

 

Currency conversion impacts of the Venezuelan
bolivar fuerte

35

 

 

375

 

88

 

Adjusted EBITDA

$29,402

 

$28,315

 

$85,634

 

$80,940

 

Adjusted EBITDA margin (%)

13.8%

 

14.9%

 

14.1%

 

14.6%

 
                                           

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 Form 10-K for the year ended December 31, 2016, the proxy statement filed on July 31, 2017 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 third quarter of 2017 results is scheduled for October 27, 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 September 30,

 

Nine Months Ended September 30,

 

2017

 

2016

 

2017

 

2016

               

Net sales 

$           212,918

 

$           190,428

 

$           609,010

 

$           555,420

               

Cost of goods sold 

138,142

 

119,531

 

391,512

 

345,141

               

Gross profit

74,776

 

70,897

 

217,498

 

210,279

%

35.1%

 

37.2%

 

35.7%

 

37.9%

               

Selling, general and administrative expenses

51,092

 

47,877

 

148,740

 

144,720

Combination-related expenses

9,675

 

1,157

 

23,088

 

1,157

               

Operating income

14,009

 

21,863

 

45,670

 

64,402

%

6.6%

 

11.5%

 

7.5%

 

11.6%

               

Other income (expense), net

249

 

(10)

 

(1,427)

 

(245)

Interest expense

(793)

 

(758)

 

(2,229)

 

(2,226)

Interest income

762

 

551

 

1,825

 

1,444

Income before taxes and equity in net income of associated companies

14,227

 

21,646

 

43,839

 

63,375

               

Taxes on income before equity in net income of associated companies

3,140

 

6,121

 

14,229

 

19,664

Income before equity in net income of associated companies

11,087

 

15,525

 

29,610

 

43,711

               

Equity in net income of associated companies

617

 

826

 

2,049

 

1,389

               

Net income

11,704

 

16,351

 

31,659

 

45,100

               

Less: Net income attributable to noncontrolling interest

562

 

343

 

1,619

 

1,131

               

Net income attributable to Quaker Chemical Corporation

$             11,142

 

$             16,008

 

$             30,040

 

$             43,969

%

5.2%

 

8.4%

 

4.9%

 

7.9%

               

Share and per share data:

             

Basic weighted average common shares outstanding

13,217,165

 

13,143,884

 

13,196,255

 

13,128,996

Diluted weighted average common shares outstanding

13,251,693

 

13,173,844

 

13,238,073

 

13,147,825

               

Net income attributable to Quaker Chemical Corporation Common
Shareholders - basic

$                  0.84

 

$                  1.21

 

$                  2.26

 

$                 3.32

Net income attributable to Quaker Chemical Corporation Common
Shareholders - diluted

$                  0.83

 

$                  1.21

 

$                  2.25

 

$                 3.32

               
               

 

 

Quaker Chemical Corporation 

Condensed Consolidated Balance Sheets

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

       
 

(Unaudited)

 

September 30,

 

December 31,

 

2017

 

2016

ASSETS

     
       

Current assets 

     

Cash and cash equivalents 

$            109,088

 

$              88,818

Accounts receivable, net 

218,243

 

195,225

Inventories, net

90,252

 

77,082

Prepaid expenses and other current assets 

24,272

 

15,343

Total current assets 

441,855

 

376,468

       

Property, plant and equipment, net

86,278

 

85,734

Goodwill 

85,816

 

80,804

Other intangible assets, net 

73,514

 

73,071

Investments in associated companies 

25,191

 

22,817

Non-current deferred tax assets

22,229

 

24,382

Other assets 

29,644

 

28,752

Total assets 

$            764,527

 

$            692,028

       

LIABILITIES AND EQUITY

     
       

Current liabilities 

     

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

$                    700

 

$                    707

Accounts and other payables

95,584

 

82,164

Accrued compensation 

20,470

 

19,356

Accrued restructuring

-

 

670

Other current liabilities 

39,367

 

24,514

Total current liabilities 

156,121

 

127,411

Long-term debt 

72,374

 

65,769

Non-current deferred tax liabilities

12,618

 

12,008

Other non-current liabilities 

71,355

 

74,234

Total liabilities 

312,468

 

279,422

       

Equity

     
       

Common stock, $1 par value; authorized 30,000,000 shares; issued and
outstanding 2017- 13,299,294 shares; 2016 - 13,277,832 shares

13,299

 

13,278

Capital in excess of par value 

113,129

 

112,475

Retained earnings 

380,421

 

364,414

Accumulated other comprehensive loss 

(66,673)

 

(87,407)

Total Quaker shareholders' equity 

440,176

 

402,760

Noncontrolling interest

11,883

 

9,846

Total equity 

452,059

 

412,606

Total liabilities and equity 

$            764,527

 

$            692,028

       

 

 

Quaker Chemical Corporation 

Condensed Consolidated Statements of Cash Flows 

(Dollars in thousands)

       
 

(Unaudited)

 

Nine Months Ended September 30,

 

2017

 

2016

Cash flows from operating activities 

     

Net income

$              31,659

 

$              45,100

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

     

Depreciation 

9,464

 

9,469

Amortization 

5,490

 

5,319

Equity in undistributed earnings of associated companies, net of
dividends 

(1,919)

 

(1,314)

Deferred compensation and other, net 

(1,190)

 

3,083

Stock-based compensation 

3,269

 

4,942

(Gain) loss on disposal of property, plant and equipment and other assets

(50)

 

44

Insurance settlement realized 

(542)

 

(809)

Combination-related expenses, net of payments

10,367

 

1,157

Pension and other postretirement benefits

608

 

(3,373)

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

     

Accounts receivable

(12,946)

 

(5,926)

Inventories 

(9,272)

 

(3,741)

Prepaid expenses and other current assets 

(5,217)

 

(868)

Accounts payable and accrued liabilities 

11,755

 

4,088

Restructuring liabilities 

(675)

 

(4,194)

Net cash provided by operating activities 

40,801

 

52,977

       

Cash flows from investing activities 

     

Investments in property, plant and equipment

(8,032)

 

(6,311)

Payments related to acquisitions, net of cash acquired

(5,363)

 

(3,244)

Proceeds from disposition of assets

67

 

54

Insurance settlement interest earned

35

 

24

Change in restricted cash, net 

507

 

785

Net cash used in investing activities 

(12,786)

 

(8,692)

       

Cash flows from financing activities 

     

Proceeds from long-term debt 

4,472

 

-

Repayments of long-term debt 

(488)

 

(6,842)

Dividends paid 

(13,893)

 

(13,052)

Stock options exercised, other

(2,594)

 

64

Payments for repurchase of common stock

-

 

(5,859)

Excess tax benefit related to stock option exercises

-

 

167

Net cash used in financing activities 

(12,503)

 

(25,522)

       

Effect of exchange rate changes on cash 

4,758

 

(792)

Net increase in cash and cash equivalents 

20,270

 

17,971

Cash and cash equivalents at the beginning of the period 

88,818

 

81,053

Cash and cash equivalents at the end of the period

$            109,088

 

$              99,024

       

 

 

Quaker Chemical logo. (PRNewsFoto/Quaker Chemical Corporation)

 

 

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SOURCE Quaker Chemical Corporation

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