UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
October 26, 2017
Date of Report (Date of earliest event reported)
QUAKER CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
Commission File Number 001-12019
| PENNSYLVANIA | No. 23-0993790 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
One Quaker Park
901 E. Hector Street
Conshohocken, Pennsylvania 19428
(Address of principal executive offices)
(Zip Code)
(610) 832-4000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the exchange Act. ¨
INFORMATION TO BE INCLUDED IN THE REPORT
| Item 2.02. | Results of Operations and Financial Condition. |
On October 26, 2017, Quaker Chemical Corporation (“Quaker Chemical”) announced its results of operations for the third quarter ended September 30, 2017 in a press release, the text of which is included as Exhibit 99.1 hereto. Supplemental information related to the same period is also included as Exhibit 99.2 hereto.
| Item 9.01. | Financial Statements and Exhibits. |
The following exhibits are included as part of this report:
| Exhibit No. | |
| 99.1 | Press Release of Quaker Chemical Corporation dated October 26, 2017. |
| 99.2 |
Supplemental Information related to third quarter ended September 30, 2017. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| QUAKER CHEMICAL CORPORATION | |||
| Registrant | |||
| Date: October 26, 2017 | By: | /s/ Mary Dean Hall | |
|
Mary Dean Hall Vice President, Chief Financial Officer and Treasurer |
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Exhibit 99.1
|
NEWS Contact: Mary Dean Hall Vice President, Chief Financial Officer and Treasurer Hallm@quakerchem.com T. 610.832.4160 |
 |
|
For Release: Immediate |
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 |
October 26, 2017
CONSHOHOCKEN, PA – 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.”
Quaker Chemical Corporation
One Quaker Park, 901 E. Hector Street, Conshohocken, PA 19428-2380 USA
P: 610.832.4000 F: 610.832.8682
quakerchem.com
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.
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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.
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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 committment. 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.
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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, |
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| 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.
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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.
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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 | ||||||||
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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 | ||||
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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 | ||||
Exhibit 99.2
1 Third Quarter 2017 Results Investor Conference Call October 27, 2017 Quaker Chemical Corporation
Regulation G The attached charts include C ompany information that does not conform to generally accepted accounting principles ( “GAAP”). Management believes that an analysis of this data is meaningful to investors because it provides insight with respect to ongoing operating results of the Company and allows investors to better evaluate the financial results of the Company. These measures should not be viewed as an alternative to GAAP measures of performance. Furthermore, these measures may not be consis tent with similar measures provided by other companies. This data should be read in conjunction with the Company’s most recent annual report filed on Form 10-K as well as the third quarter earnings news release dated October 26, 2017, which has been furnished to the SEC on Form 8-K and the Company’s Form 10-Q for the quarterly period ended September 30, 2017, which has been filed with the SEC. Forward-Looking Statements This presentation 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 s tatements. 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 cust omer 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 condi tions, 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 (“the Combination”), could also adversely affect us including, but not limited to: • the risk that a required regulatory approval will not be obtained or is subject to conditions that are not anticipated or acceptable to us; • the potential for regulatory authorities to require divestitures in connection with the Combination, which would result in a smaller than anticipated combined business; • the risk that a closing condition to the Combination may not be satisfied in a timely manner; • risks associated with the financing of the Combination; • the occurrence of any event, c hange or other circumstance that could give rise to the termination of the share purchase agreement; • potential adverse effects on Quaker Chemical’s business, properties or operations caused by the implementation of the Combination; • Quaker Chemical’s ability to promptly, efficiently and effectively integrate the operations of Houghton International and Quaker Chemical; • risks related to each company’s distraction from ongoing business operations due to the Combination; and, • the outcome of any legal proceedi ngs that may be instituted against the companies following announcement of the share purchase agreement and transactions contemplated therein. Therefore, we caution you not to place undue reliance on our forward-looking statements. 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 . We do not intend to, and we disclaim any duty or obligation to, update or revise any forward -looking statements to reflect new information or future events or for any other reason . This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. Risks and Uncertainties Statement
Speakers Michael F. Barry Chairman of the Board, Chief Executive Officer & President Mary Dean Hall Vice President, Chief Financial Officer & Treasurer Robert T. Traub Vice President, General Counsel & Corporate Secretary Chart #1
Third Quarter 2017 Headlines ▪ 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 Chart #2
Chairman Comments Third Quarter 2017 ▪ Third Quarter 2017 x Net sales of $212.9 million driven by increases in organic volume on continued market share gains and increased production in some end markets x Strong volumes drove higher gross profit despite a decline in gross margin primarily due to higher raw material costs and changes in product mix x Operating income benefited from continued discipline in managing SG&A, leveraging significant net sales growth in the quarter x Strong operating performance coupled with a lower tax rate drove a 6% increase in non - GAAP earnings per diluted share to $1.32 and a 4% increase in adjusted EBITDA to $29.4 million ▪ 2017 Outlook x Market share gains and leveraging of past acquisitions will continue to help offset market challenges x Expect gross margins to trend upwards over the next few quarters, gradually heading back to the 37% target Chart #3 Overall, we 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
▪ Net sales increase of 12% due to organic volume growth of 5%, increases primarily from the Q4’16 acquisition of Lubricor of 2%, an increase from changes in price and product mix of 3% and a positive impact from FX of 2% ▪ Lower gross margin of 35.1% in Q3’17 compared to 37.2% in Q3’16 primarily due to changes in raw material costs and the mix of certain products sold ▪ Houghton combination - related expenses of $9.7 million or $0.52 per diluted share in Q3’17 compared to $1.2 million or $0.08 per diluted share in Q3’16 ▪ Operating income benefited from continued discipline in managing SG&A costs, leveraging significant sales growth ▪ Lower effective tax rate of 22.1% due to a current year accounting standard adoption ▪ Positive impact from FX translation of approximately 1% or $0.02 per diluted share ▪ Non - GAAP EPS of $1.32 up 6% and adjusted EBITDA of $29.4 million up 4% ▪ Year - to - date net operating cash flow of $40.8 million compared to $53.0 million in the prior year period, primarily due to outflows of $12.7 million for Houghton combination - related expenses in the current year and higher levels of cash invested in working capital due to Company’s strong sales growth Chart #4 Financial Highlights Third Quarter 2017
Chart #5 Financial Snapshot ($ Millions unless otherwise noted) Q3 2017 Q3 2016 YTD 2017 YTD 2016 Net Sales 212.9 190.4 609.0 555.4 Gross Profit 74.8 70.9 217.5 210.3 Gross Margin 35.1% 37.2% 35.7% 37.9% SG&A 51.1 47.9 148.7 144.7 Combination-related expenses 9.7 1.2 23.1 1.2 Operating Income 14.0 21.9 45.7 64.4 Operating Margin 6.6% 11.5% 7.5% 11.6% Net Income Attributable to Quaker Chemical Corporation 11.1 16.0 30.0 44.0 Earnings Per Diluted Share 0.83 1.21 2.25 3.32 Non-GAAP Earnings Per Diluted Share 1.32 1.25 3.74 3.34 Adjusted EBITDA 29.4 28.3 85.6 80.9 Adjusted EBITDA Margin 13.8% 14.9% 14.1% 14.6% Net Cash 36.0 22.7 --- --- Net Operating Cash Flow 20.0 17.0 40.8 53.0 Effective Tax Rate 22.1% 28.3% 32.5% 31.0%
Chart #6 Strong organic volumes continue to drive top line growth Product Volume by Quarter and Year in Thousands of Kilograms 115,000 135,000 155,000 175,000 195,000 215,000 235,000 255,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 65,000 70,000 Full Year Volume Quarter Volume Quarter Volume Full Year Volume
28.1% 35.0% 35.6% 32.7% 33.8% 35.9% 35.8% 37.7% 37.5% 20.0% 25.0% 30.0% 35.0% 40.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Gross Margin Percentage 37.2% 36.5% 36.4% 35.7% 35.1% 20.0% 25.0% 30.0% 35.0% 40.0% Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Gross Margin Percentage Chart #7 Gross margins challenged due to changes in raw material costs and mix of products sold, but expect to trend upwards over the next few quarters gradually heading back to the 37% target Gross Margin Percentage Trends
$40.1 $44.2 $66.8 $73.0 $80.9 $89.6 $99.8 $101.6 $106.6 $106.2 $111.3 6.9% 9.8% 12.3% 10.7% 11.4% 12.3% 13.0% 13.8% 14.3% 14.4% 13.9% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Trailing Twelve Months Q3 2016 Trailing Twelve Months Q3 2017 Adjusted EBITDA ($ Mils.) Adjusted EBITDA Margin (%) FY 2008 – Q3 2017 CAGR: 12.4% +700 Margin bps Chart #8 Adjusted EBITDA Baseline Historical Performance
-$120 -$80 -$40 $0 $40 $80 $120 2008 2009 2010 2011 2012 2013 2014 2015 2016 Q3 2017 $ Millions Cash ST/LT Debt Net Cash (Debt) Chart #9 Continued strong cash flow generation and balance sheet Balance Sheet Cash and Debt
APPENDIX
Chart #10 Non - GAAP EPS Reconciliation Q3 2017 Q3 2016 YTD 2017 YTD 2016 GAAP earnings per diluted share 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$
Chart #11 Adjusted EBITDA Reconciliation Q3 2017 Q3 2016 YTD 2017 YTD 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%
Chart #12 Adjusted EBITDA Reconciliation 2008 2009 2010 2011 2012 2013 2014 2015 2016 Net income 9,833 16,058 32,120 45,892 47,405 56,339 56,492 51,180 61,403 Depreciation 10,879 9,525 9,867 11,455 12,252 12,339 12,306 12,395 12,557 Amortization 1,177 1,078 988 2,338 3,106 3,445 4,325 6,811 7,009 Interest expense 5,509 5,533 5,225 4,666 4,283 2,922 2,371 2,585 2,889 Taxes on income before equity in net income of associated companies 4,977 7,065 12,616 14,256 15,575 20,489 23,539 17,785 23,226 Equity loss (income) from a captive insurance company 1,299 162 (313) (2,323) (1,812) (5,451) (2,412) (2,078) (1,688) Non-cash gain from the purchase of an equity affiliate - - - (2,718) - - - - - Equity affiliate out of period charge - - 564 - - - - - - Restructuring expense (credit) 2,916 2,289 - - - - - 6,790 (439) Transition costs related to key employees 3,505 2,443 1,317 - 609 - - - - Houghton combination-related expenses - - - - - - - - 1,531 Verkol transaction-related expenses - - - - - - - 2,813 - U.K. pension plan amendment - - - - - - 902 - - Customer bankruptcy costs - - - - 1,254 - 825 328 - Cost streamlining initiatives - - - - - 1,419 1,166 173 - Non-income tax contingency charge - - 4,132 - - 796 - - - Change in acquisition-related earnout liability - - - (595) (1,737) (497) - - - Mineral oil excise tax refund - - - - - (2,540) - - - Currency conversion impacts of the Venezuelan Bolivar - - 322 - - 357 321 2,806 88 Adjusted EBITDA 40,095 44,153 66,838 72,971 80,935 89,618 99,835 101,588 106,576 Adjusted EBITDA Margin (%) 6.9% 9.8% 12.3% 10.7% 11.4% 12.3% 13.0% 13.8% 14.3%
TTM Adjusted EBITDA Reconciliation Chart #13 I = G + H H G = F - D F E = C + D D C = B - A B A Trailing Twelve Months Q3 2017 YTD Q3 2017 Last Three Months 2016 FY 2016 Trailing Twelve Months Q3 2016 YTD Q3 2016 Last Three Months 2015 FY 2015 YTD Q3 2015 Net income 47,474 30,040 17,434 61,403 55,362 43,969 11,393 51,180 39,787 Depreciation 12,552 9,464 3,088 12,557 12,635 9,469 3,166 12,395 9,229 Amortization 7,180 5,490 1,690 7,009 7,132 5,319 1,813 6,811 4,998 Interest expense 2,892 2,229 663 2,889 2,920 2,226 694 2,585 1,891 Taxes on income before equity in net income of associated companies 17,791 14,229 3,562 23,226 21,825 19,664 2,161 17,785 15,624 Equity income from a captive insurance company (2,163) (1,427) (736) (1,688) (1,809) (952) (857) (2,078) (1,221) Restructuring (credit) expense (439) - (439) (439) 6,790 - 6,790 6,790 Houghton combination-related expenses 23,462 23,088 374 1,531 1,157 1,157 - - - Verkol transaction-related expenses - - - - - - - 2,813 2,813 Customer bankruptcy costs - - - - 149 - 149 328 179 U.S. pension plan settlement charge 1,860 1,860 - - - - - - - Cost streamlining initiatives 286 286 - - - - - 173 173 Currency conversion impacts of the Venezuelan bolivar fuerte 375 375 - 88 88 88 - 2,806 2,806 Adjusted EBITDA 111,270 85,634 25,636 106,576 106,249 80,940 25,309 101,588 76,279 Adjusted EBITDA Margin (%) 13.9% 14.1% 13.4% 14.3% 14.4% 14.6% 13.8% 13.8% 13.8%