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CONSHOHOCKEN, Pa., Oct. 28 /PRNewswire-FirstCall/ -- Quaker Chemical Corporation (NYSE: KWR) today announced record quarterly sales of $99.7 million and diluted earnings per share of $0.12 for the third quarter of 2004.
Third Quarter Summary
Net sales for the third quarter of 2004 were $99.7 million, up 11% from $89.7 million for the third quarter of 2003. Foreign exchange rate translation and the Company's 2003 acquisitions favorably impacted net sales by $2.4 million and $3.9 million, respectively. The remaining net sales increase of approximately 4% was attributable to growth in the North and South American regions, tempered by lower sales in Europe.
Net income for the third quarter decreased to $1.2 million versus $4.1 million for the third quarter of 2003. Significantly higher raw material cost, which was the single most important factor, and higher selling, general and administrative costs were largely responsible for the shortfall in earnings compared to the prior year.
Gross margin as a percentage of sales declined from 34.3% for the third quarter of 2003 to 31.8% for the third quarter of 2004. While the Company benefited from the implementation of price increases during the quarter, these gains were more than offset by the continued escalation of raw material prices, particularly crude oil. Unfavorable product and regional sales mix also contributed to the decline in gross margin percentage.
Selling, general and administrative expenses for the quarter increased $4.8 million compared to the third quarter of 2003. The third quarter of 2003 is unusually low as a comparison period due to a reduction in incentive compensation in that quarter. The incentive compensation adjustment, foreign exchange rate translation, and the Company's 2003 acquisitions accounted for approximately two-thirds of the increase. The majority of the remaining increase was due to costs associated with important strategic initiatives, as well as a range of administrative costs such as insurance and Sarbanes-Oxley compliance.
Ronald J. Naples, Chairman and Chief Executive Officer, commented, "Needless to say, our third quarter earnings are very disappointing. We did a fine job on the revenue line, even in the face of weakening demand in some of our steel markets, but were unable to turn that into the earnings progress we had expected. The size and speed of raw material cost increases accelerated considerably in the third quarter, particularly crude oil, and outpaced the effect of the pricing actions we had underway. But we're not letting these factors distract us from our focus on the value of strong market positions, and we continue to push important business-building initiatives, from CMS product conversions to market development in China, as well as pricing imperatives driven by our extraordinary raw material experience."
Net sales for the first nine months of the year increased to $296.5 million, up 20% from $246.5 million for the first nine months 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 $10.8 million, $15.1 million and $17.1 million, respectively. The remaining net sales increase of approximately 3% was attributable to growth in the Asia/Pacific and North and South American regions, partially offset by lower sales in Europe.
Net income was $7.3 million versus $10.7 million for the first nine months of 2003 due to significantly higher raw material costs, and higher selling, general and administrative costs. Earnings per diluted share decreased from $1.11 per diluted share to $0.73 per diluted share.
Gross margin as a percentage of sales declined from 35.7% in 2003 to 32.6% in 2004. The Company's new CMS contracts have caused different relationships between margins and revenue than in the past. At the majority of 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 nine months of 2004 versus the prior year related to the new CMS contracts is approximately 1.6 percentage points. The remaining decline in gross margin as a percentage of sales is primarily due to increased raw material costs. Unfavorable product and regional mix also contributed to the decline.
Selling, general and administrative expenses for the first nine months of the year increased $12.7 million compared to the first nine months of 2003. Foreign exchange rate translation and the Company's 2003 acquisitions accounted for approximately 40% of the increase. The majority of the remaining increase was due to the same expense factors noted in the third quarter summary, as well as higher commissions related to higher sales.
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 its growth initiatives. The Company's net debt-to-total capital ratio is 29% at the end of third quarter compared to 25% at the end of 2003. The Company's credit lines total $70.0 million, $40.0 committed and $30.0 uncommitted. At September 30, 2004, the Company had approximately $55.0 million outstanding on its credit lines.
Mr. Naples observed, "We're very pleased with our strong revenue growth and firmly believe that the customer expansion and penetration it represents are the real keys to continuing the long record of solid financial performance we've put together over the past eight years. We're in a very tough period right now, as evidenced by the third quarter, driven by a number of factors already mentioned, but especially by dramatic price behavior in crude oil markets, as well as volatility in other important raw material markets, such as vegetable oils and animal fats. Further, the demand for the consumer durables that drive much of the demand for our products and services shows some softness in parts of the world due to economic uncertainties. While we expect the fourth quarter to be better than the third quarter, we've concluded that right now with these factors in mind, quarter-to-quarter financial results cannot be forecasted reliably with a high degree of precision, especially with virtually unprecedented raw material behavior."
Mr. Naples added, "We continue to work with our customers to implement pricing actions that would mitigate continually increasing raw material costs. We are building our position in growth areas such as China and investing in new business development. We believe that CMS will be an increasingly significant contributor to our earnings. We are challenging many aspects of our cost base. Most important for the future, we're convinced we're on the right strategic track that calls for us to create a unique competitive position with our customers through our focus on value, and to maintain that differentiation through operating around the world as a globally integrated whole and harnessing our global knowledge and learning for the benefit of our customers. Our current strong market positions flow from these strategic imperatives, and it is these that will allow us to emerge from this difficult period stronger than ever."
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. 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 to discuss third quarter results is scheduled for October 29, 2004 at 2:30 p.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 Nine Months ended September 30, September 30, 2004 2003 2004 2003 Net sales $99,667 $89,713 $296,481 $246,503 Cost of goods sold 67,976 58,928 199,791 158,405 Gross margin 31,691 30,785 96,690 88,098 % 31.8% 34.3% 32.6% 35.7% Selling, general and administrative 29,249 24,459 83,056 70,367 Operating income 2,442 6,326 13,634 17,731 % 2.5% 7.1% 4.6% 7.2% Other income, net 422 295 1,189 830 Interest expense, net (302) (240) (966) (614) Income before taxes 2,562 6,381 13,857 17,947 Taxes on income 807 1,683 4,365 5,384 1,755 4,698 9,492 12,563 Equity in net income of associated companies 264 215 599 470 Minority interest in net income of subsidiaries (865) (777) (2,781) (2,315) Net income $1,154 $4,136 $7,310 $10,718 % 1.2% 4.6% 2.5% 4.3% Per share data: Net income - basic $0.12 $0.44 $0.76 $1.15 Net income- diluted $0.12 $0.42 $0.73 $1.11 Shares Outstanding: Basic 9,621,746 9,410,675 9,598,928 9,335,628 Diluted 9,973,920 9,856,783 9,978,583 9,687,346 Quaker Chemical Corporation Condensed Consolidated Balance Sheet (Dollars in thousands, except par value and share amounts) (Unaudited) September 30, December 31, 2004 2003 ASSETS Current assets Cash and cash equivalents $29,948 $21,915 Accounts receivable, net 85,098 78,121 Inventories, net 37,548 32,211 Prepaid expenses and other current assets 15,332 11,277 Total current assets 167,926 143,524 Property, plant, and equipment 141,610 136,448 Less accumulated depreciation 79,399 74,057 Net property, plant and equipment 62,211 62,391 Goodwill 33,495 33,301 Other intangible assets, net 8,736 9,616 Investments in associated companies 6,123 6,005 Deferred income taxes 12,852 12,846 Other assets 19,841 19,664 Total assets $311,184 $287,347 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long-term debt $58,611 $42,992 Accounts and other payables 41,576 41,259 Accrued compensation 7,724 6,816 Other current liabilities 14,725 14,738 Total current liabilities 122,636 105,805 Long-term debt 17,966 15,827 Deferred income taxes 2,861 2,688 Other non-current liabilities 42,241 40,967 Total liabilities 185,704 165,287 Minority interest in equity of subsidiaries 11,976 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 2,486 2,181 Retained earnings 118,390 117,308 Unearned compensation (421) (621) Accumulated other comprehensive loss (16,491) (15,406) 113,628 113,126 Treasury stock, shares held at cost; 2004 - 4,518, 2003 - 54,178 (124) (774) Total shareholders' equity 113,504 112,352 Total liabilities and shareholders' equity $311,184 $287,347 Quaker Chemical Corporation Condensed Consolidated Statement of Cash Flows For the nine months ended September 30, (Dollars in thousands) (Unaudited) 2004 2003 Cash flows from operating activities Net income $7,310 $10,718 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,272 5,246 Amortization 863 620 Equity in net income of associated companies (599) (470) Minority interest in earnings of subsidiaries 2,781 2,315 Deferred compensation and other, net 1,003 1,002 Pension and other postretirement benefits 653 2,250 Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions: Accounts receivable (7,315) (14,460) Inventories (5,390) (4,362) Prepaid expenses and other current assets (4,059) 1,587 Accounts payable and accrued liabilities 1,796 (2,235) Change in restructuring liabilities (480) (908) Net cash provided by operating activities $2,835 $1,303 Cash flows from investing activities Capital expenditures (6,810) (7,820) Dividends and distributions from associated companies 288 3,890 Payments related to acquisitions - (6,737) Other, net 38 (117) Net cash (used in) investing activities (6,484) (10,784) Cash flows from financing activities Net increase in short-term borrowings 15,616 16,686 Proceeds from long-term debt 2,463 - Repayments of long-term debt (299) - Dividends paid (6,170) (5,909) Stock options exercised, other 818 3,106 Distributions to minority shareholders (245) (1,018) Net cash provided by financing activities 12,183 12,865 Effect of exchange rate changes on cash (501) 740 Net increase in cash and cash equivalents 8,033 4,124 Cash and cash equivalents at the beginning of the period 21,915 13,857 Cash and cash equivalents at the end of the period $29,948 $17,981
SOURCE Quaker Chemical Corporation -0- 10/28/2004 /CONTACT: Neal E. Murphy, Vice President and Chief Financial Officer, Quaker Chemical Corporation, +1-610-832-4189/ /Web site: http://www.quakerchem.com / (KWR) CO: Quaker Chemical Corporation ST: Pennsylvania IN: CHM SU: ERN CCA MAV ERP MR -- PHTH057 -- 4249 10/28/2004 17:00 EDT http://www.prnewswire.com