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
May 2, 2019
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. ¨
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $1 par value | KWR | New York Stock Exchange |
INFORMATION TO BE INCLUDED IN THE REPORT
| Item 2.02. | Results of Operations and Financial Condition. |
On May 2, 2019, Quaker Chemical Corporation (“Quaker Chemical”) announced its results of operations for the first quarter ended March 31, 2019 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 May 2, 2019. |
| 99.2 | Supplemental Information related to first quarter ended March 31, 2019. |
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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: May 2, 2019 | 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 investor@quakerchem.com T. 1.610.832.4000 |
 |
| For Release: Immediate |
QUAKER CHEMICAL ANNOUNCES FIRST QUARTER 2019 RESULTS
| · | Volume growth of 3% results in relatively flat sales of $211.2 million despite a 5% negative foreign exchange impact and challenging end market conditions |
| · | Reported net income of $13.8 million or $1.03 per diluted share |
| · | Non-GAAP earnings per diluted share of $1.41 comparable to the prior year despite an approximately $0.06 per diluted share negative foreign exchange impact |
| · | Combination with Houghton continues to progress and closing expected in the next couple of months |
May 2, 2019
CONSHOHOCKEN, PA – Quaker Chemical Corporation (NYSE: KWR) today announced first quarter of 2019 net sales of $211.2 million compared to $212.1 million in the prior year first quarter. The Company’s current quarter net sales benefitted from higher volumes of 3% as well as increases from selling price and product mix of 1%, but were negatively impacted by foreign currency translation of approximately 5%. The Company increased its gross profit quarter-over-quarter as a result of a higher gross margin of 35.9% in the first quarter of 2019 compared to 35.6% in the prior year.
The Company’s first quarter of 2019 net income was $13.8 million or $1.03 per diluted share compared to first quarter of 2018 net income of $12.7 million or $0.95 per diluted share. Both the first quarter of 2019 and 2018 results were impacted by expenses related to the Company’s pending combination with Houghton International, Inc. (“Houghton”). Excluding Houghton costs and all other non-core items in each period, the Company’s adjusted EBITDA decreased slightly to $29.6 million in the first quarter of 2019 compared to $30.9 million in the prior year, due primarily to the negative impact from foreign exchange on earnings of approximately 4% in the current quarter. Despite the negative foreign exchange impact, the Company’s non-GAAP earnings per diluted share was $1.41 in both the first quarters of 2019 and 2018.
Michael F. Barry, Chairman, Chief Executive Officer and President, commented, “I am proud of our first quarter results given the inherent market challenges we faced. We estimate that our underlying markets declined in the first quarter and also currency negatively impacted our results in a meaningful way. Despite these significant headwinds, we were able to produce consistent top and bottom line results. We achieved this through our market share gains, which drove 3% volume growth in a negative market environment, as well as our incremental gains in gross margin. Going forward, we expect foreign exchange headwinds and underlying market challenges to continue in the second quarter. However, we expect more favorable comparisons in the second half of 2019 as many of the foreign exchange and market headwinds we faced in the first quarter of 2019 began near the end of the second quarter of 2018 and gradually worsened throughout the year. Related to gross margin, we expect to continue to make incremental improvement next quarter and be in the low to mid 36% range. For the full year 2019, we expect Quaker to have top and bottom line growth despite these various market challenges.”
Mr. Barry continued, “With respect to the Houghton combination, we are continuing to make progress and expect to close the combination in the next couple of months. Overall, I continue to be confident in our future given our continued ability to achieve market share gains that will help offset the underlying challenges in our markets, and I remain excited for the future benefits we will achieve through our upcoming combination with Houghton.”
Quaker Chemical Corporation
One Quaker Park, 901 E. Hector Street, Conshohocken, PA 19428-2380 USA
P: 1.610.832.4000 F: 1.610.832.8682
quakerchem.com
First Quarter of 2019 Summary
Net sales were $211.2 million in the first quarter of 2019 compared to $212.1 million in the first quarter of 2018. Net sales decreased less than 1% or approximately $0.8 million quarter-over-quarter as the benefit from increases in volume of 3% and selling price and product mix of 1% were offset by the negative impact from foreign currency translation of approximately 5% or $9.6 million.
Gross profit in the first quarter of 2019 increased $0.3 million compared to the first quarter of 2018, primarily due to a higher gross margin of 35.9% in the first quarter of 2019 compared to 35.6% in the prior year. The increase in the Company’s current quarter gross margin was primarily due to pricing initiatives and the mix of certain products sold.
SG&A increased $1.4 million in the first quarter of 2019 compared to the first quarter of 2018 primarily due to the impact of higher labor-related costs, including annual merit increases, and professional fees, partially offset by a positive impact from foreign currency translation.
During the first quarter of 2019, the Company incurred $4.5 million of costs related to the pending combination with Houghton, primarily for legal, financial and other advisory and consultant expenses for integration planning and regulatory approvals. Comparatively, the Company incurred $5.2 million of similar combination-related expenses during the first quarter of 2018.
Operating income in the first quarter of 2019 was $19.8 million compared to $20.2 million in the first quarter of 2018. Excluding Houghton combination-related expenses, the Company’s current quarter non-GAAP operating income decreased to $24.3 million compared to $25.4 million in the prior year due primarily to the negative impact from foreign currency translation.
Other expense, net, was $0.6 million in the first quarter of 2019 compared to $0.4 million in the first quarter of 2018. This quarter-over-quarter increase was primarily driven by an increase in non-service pension and postretirement benefit costs.
Interest expense decreased $0.5 million during the first quarter of 2019 compared to the first quarter of 2018, primarily due to lower average outstanding borrowings on the Company’s existing credit facility during the current quarter. Interest income was relatively consistent quarter-over-quarter.
The Company’s effective tax rates for the first quarters of 2019 and 2018 were 26.8% and 29.8%, respectively. These effective tax rates include the impacts of Houghton combination-related expenses, certain of which were non-deductible. Excluding the impact of Houghton combination-related expenses and all other non-core items in each quarter, the Company estimates that its first quarters of 2019 and 2018 effective tax rates would have been approximately 24% and 26%, respectively. The Company’s lower first quarter of 2019 effective tax rate was largely driven by a positive impact from changes in uncertain tax positions and a shift in earnings to entities with lower effective tax rates quarter-over-quarter, which more than offset higher current quarter tax expense related to the Company recording earnings in one of its subsidiaries at a statutory tax rate of 25% during the first quarter of 2019 while it awaits recertification of a concessionary 15% tax rate. The concessionary 15% tax rate was available to the Company’s subsidiary in all periods of 2018.
Equity in net income (loss) of associated companies increased $0.7 million in the first quarter of 2019 compared to the first quarter of 2018, primarily due to earnings from the Company’s interest in a captive insurance company during the first quarter of 2019 compared to a loss in the prior year.
The Company’s net income attributable to noncontrolling interest was consistent at $0.1 million in both the first quarters of 2019 and 2018.
Foreign exchange negatively impacted the Company’s first quarter of 2019 earnings by approximately 4% or $0.06 per diluted share, primarily due to the negative impact from foreign currency translation.
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Balance Sheet and Cash Flow Items
The Company had net operating cash flow of less than $0.1 million in the first quarter of 2019 compared to $2.7 million in the first quarter of 2018. The approximately $2.7 million decrease in net operating cash flow quarter-over-quarter was primarily due to higher cash tax payments as well as an increase in cash payments, net of expenses incurred, related to the pending Houghton combination which more than offset a working capital improvement in the current quarter compared to the prior year. In addition, the Company paid a $4.9 million dividend to its shareholders during the first quarter of 2019, a 4% increase compared to the prior year. Overall, the Company’s liquidity and balance sheet remain strong, as its cash position exceeded its debt at March 31, 2019 by $59.6 million.
The Company adopted new guidance regarding the accounting and disclosure for leases in the first quarter of 2019, as required. Adoption of this lease accounting guidance did not have a material impact on the Company’s reported earnings or cash flows, however, adoption did result in a material impact to the Company’s balance sheet to establish right of use lease assets and associated lease liabilities. As of March 31, 2019, the Company had right of use lease assets of $26.1 million and associated short-term and long-term lease liabilities of $5.3 million and $20.2 million, respectively.
Houghton Combination
In April 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 has and will only incur certain interest costs to maintain the banks’ capital commitment. During the first quarter of 2019, the Company extended the bank commitment through July 15, 2019. 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 held during 2017. Also, the Combination was subject to regulatory approvals in the United States (“U.S.”), Europe, China and Australia. The Company received regulatory approval from China and Australia in 2017. The European Commission (“EC”) conditionally approved the Combination in December 2018 including the remedy proposed by Quaker and Houghton. Quaker expects to receive final approval from the EC once certain conditions are met, including their review and approval of the final purchase agreement between Quaker, Houghton, and the buyer of the divested product lines, which was finalized and signed at the end of March 2019. Quaker continues to be in productive discussions with the U.S. Federal Trade Commission (“FTC”), although the process is taking longer than anticipated. Given the time lapse since Quaker’s initial filing, the FTC requested updated information as part of their approval process late in the fourth quarter of 2018. In addition, the government shutdown in the U.S. late in the fourth quarter of 2018 and early in 2019 extended the timeline to receive the final approval. The proposed remedy being discussed with the FTC and conditionally approved by the EC is consistent with Quaker’s previous guidance that the total divested product lines will be approximately 3% of the combined company’s revenue. Given current information, the Company expects that final approval from the FTC and EC and closing of the combination will occur in the next couple of months.
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Non-GAAP Measures
The information included in this public release includes non-GAAP (unaudited) financial information that includes EBITDA, adjusted EBITDA, non-GAAP operating income, non-GAAP net income and non-GAAP earnings per diluted share. 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 indicative of future operating performance or 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 Company presents EBITDA which is calculated as net income attributable to the Company before depreciation and amortization, interest expense, net, and taxes on income before equity in net income (loss) of associated companies. The Company also presents adjusted EBITDA which is calculated as EBITDA plus or minus certain items that are not indicative of future operating performance or not considered core to the Company’s operations. In addition, the Company presents non-GAAP operating income which is calculated as operating income plus or minus certain items that are not indicative of future operating performance or not considered core to the Company’s operations. Adjusted EBITDA margin and non-GAAP operating margin are calculated as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales, respectively. The Company believes these non-GAAP measures provide transparent and useful information and are widely used by analysts, investors, and competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.
Additionally, the Company presents non-GAAP net income and non-GAAP earnings per diluted share as additional performance measures. Non-GAAP net income is calculated as adjusted EBITDA, defined above, less depreciation and amortization, interest expense, net - adjusted, and taxes on income before equity in net income (loss) of associated companies - adjusted, as applicable, for any depreciation, amortization, interest or tax impacts resulting from the non-core items identified in the reconciliation of net income attributable to the Company to adjusted EBITDA. Non-GAAP earnings per diluted share is calculated as non-GAAP net income per diluted share as accounted for under the “two-class share method.” The Company believes that non-GAAP net income and non-GAAP earnings per diluted share provide transparent and useful information and are widely used by analysts, investors, and competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.
During the first quarter of 2019, the Company updated its calculation methodology to include the use of interest expense net of interest income in the reconciliation of EBITDA and adjusted EBITDA, compared to the historical use of only interest expense, and also to include the non-service component of the Company’s pension and postretirement benefit costs in the reconciliation of adjusted EBITDA, non-GAAP net income attributable to Quaker Chemical Corporation and non-GAAP earnings per diluted share. Prior year amounts have been recast for comparability purposes and the change in calculation methodology does not produce materially different results. The Company believes these updated calculations better reflect its underlying operating performance and better aligns the Company’s calculations to those commonly used by analysts, investors, and competitors in our industry.
The following tables reconcile the non-GAAP financial measures (unaudited) to their most directly comparable GAAP (unaudited) financial measures (dollars in thousands unless otherwise notes, except per share amounts):
Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Operating income | $ | 19,829 | $ | 20,231 | ||||
| Houghton combination-related expenses | 4,483 | 5,209 | ||||||
| Non-GAAP operating income | $ | 24,312 | $ | 25,440 | ||||
| Non-GAAP operating margin (%) | 11.5 | % | 12.0 | % | ||||
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Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Net income attributable to Quaker Chemical Corporation | $ | 13,844 | $ | 12,732 | ||||
| Depreciation and amortization | 4,859 | 5,047 | ||||||
| Interest expense, net | 776 | 1,203 | ||||||
| Taxes on income before equity in net income (loss) of associated companies | 4,929 | 5,556 | ||||||
| EBITDA | $ | 24,408 | $ | 24,538 | ||||
| Equity (income) loss in a captive insurance company | (346 | ) | 372 | |||||
| Houghton combination-related expenses | 4,483 | 5,209 | ||||||
| Pension and postretirement benefit costs, non-service components | 896 | 576 | ||||||
| Currency conversion impacts of hyper-inflationary economies | 194 | 218 | ||||||
| Adjusted EBITDA | $ | 29,635 | $ | 30,913 | ||||
| Adjusted EBITDA margin (%) | 14.0 | % | 14.6 | % | ||||
| Adjusted EBITDA | $ | 29,635 | $ | 30,913 | ||||
| Less: Depreciation and amortization | 4,859 | 5,047 | ||||||
| Less: Interest expense, net - adjusted (a) | (86 | ) | 339 | |||||
| Less: Taxes on income before equity in net income (loss) of associated | ||||||||
| companies - adjusted (b) | 6,040 | 6,659 | ||||||
| Non-GAAP net income | $ | 18,822 | $ | 18,868 | ||||
Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders | $ | 1.03 | $ | 0.95 | ||||
| Equity (income) loss in a captive insurance company per diluted share | (0.03 | ) | 0.03 | |||||
| Houghton combination-related expenses per diluted share | 0.35 | 0.38 | ||||||
| Pension and postretirement benefit costs, non-service components per diluted share | 0.05 | 0.03 | ||||||
| Currency conversion impacts of hyper-inflationary economies per diluted share | 0.01 | 0.02 | ||||||
| Non-GAAP earnings per diluted share | $ | 1.41 | $ | 1.41 | ||||
| (a) | Interest expense, net – adjusted excludes $0.9 million of interest costs the Company incurred to maintain the bank commitment related to the pending combination during both the three months ended March 31, 2019 and 2018. |
| (b) | Taxes on income before equity in net income (loss) of associated companies – adjusted includes the Company’s tax expense adjusted for the impact of any current and deferred income tax expense (benefit), as applicable, of the reconciling items presented in the reconciliation of net income attributable to Quaker Chemical Corporation to adjusted EBITDA, above, determined utilizing the applicable rates in the taxing jurisdictions in which these adjustments occurred, subject to deductibility. |
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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 could also adversely affect us, including those related to the previously announced pending Houghton combination and the risk that the transaction may not receive regulatory approval or that regulatory approval may include conditions or other terms not acceptable to 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, 2018, the proxy statement the Company filed on July 31, 2017 and in our quarterly and other reports filed from time to time with the Securities and Exchange 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 first quarter of 2019 results is scheduled for May 3, 2019 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 over 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 March 31, | ||||||||
| 2019 | 2018 | |||||||
| Net sales | $ | 211,210 | $ | 212,055 | ||||
| Cost of goods sold | 135,443 | 136,608 | ||||||
| Gross profit | 75,767 | 75,447 | ||||||
| % | 35.9 | % | 35.6 | % | ||||
| Selling, general and administrative expenses | 51,455 | 50,007 | ||||||
| Combination-related expenses | 4,483 | 5,209 | ||||||
| Operating income | 19,829 | 20,231 | ||||||
| % | 9.4 | % | 9.5 | % | ||||
| Other expense, net | (635 | ) | (369 | ) | ||||
| Interest expense | (1,214 | ) | (1,692 | ) | ||||
| Interest income | 438 | 489 | ||||||
| Income before taxes and equity in net income (loss) of associated companies | 18,418 | 18,659 | ||||||
| Taxes on income before equity in net income (loss) of associated companies | 4,929 | 5,556 | ||||||
| Income before equity in net income (loss) of associated companies | 13,489 | 13,103 | ||||||
| Equity in net income (loss) of associated companies | 411 | (316 | ) | |||||
| Net income | 13,900 | 12,787 | ||||||
| Less: Net income attributable to noncontrolling interest | 56 | 55 | ||||||
| Net income attributable to Quaker Chemical Corporation | $ | 13,844 | $ | 12,732 | ||||
| % | 6.6 | % | 6.0 | % | ||||
| Share and per share data: | ||||||||
| Basic weighted average common shares outstanding | 13,291,589 | 13,245,026 | ||||||
| Diluted weighted average common shares outstanding | 13,338,490 | 13,278,606 | ||||||
| Net income attributable to Quaker Chemical Corporation Common Shareholders - basic | $ | 1.04 | $ | 0.96 | ||||
| Net income attributable to Quaker Chemical Corporation Common Shareholders - diluted | $ | 1.03 | $ | 0.95 | ||||
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Quaker Chemical Corporation
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value and share amounts)
| (Unaudited) | ||||||||
| March 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 71,960 | $ | 104,147 | ||||
| Accounts receivable, net | 208,003 | 202,139 | ||||||
| Inventories, net | 92,947 | 94,090 | ||||||
| Prepaid expenses and other current assets | 18,403 | 18,134 | ||||||
| Total current assets | 391,313 | 418,510 | ||||||
| Property, plant and equipment, net | 82,316 | 83,923 | ||||||
| Right of use lease assets | 26,069 | - | ||||||
| Goodwill | 83,204 | 83,333 | ||||||
| Other intangible assets, net | 61,421 | 63,582 | ||||||
| Investments in associated companies | 22,726 | 21,316 | ||||||
| Non-current deferred tax assets | 9,333 | 6,946 | ||||||
| Other assets | 32,141 | 32,055 | ||||||
| Total assets | $ | 708,523 | $ | 709,665 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities | ||||||||
| Short-term borrowings and current portion of long-term debt | $ | 661 | $ | 670 | ||||
| Accounts and other payables | 91,145 | 92,754 | ||||||
| Accrued compensation | 15,959 | 25,727 | ||||||
| Other current liabilities | 39,743 | 32,319 | ||||||
| Total current liabilities | 147,508 | 151,470 | ||||||
| Long-term debt | 11,720 | 35,934 | ||||||
| Long-term lease liabilities | 20,231 | - | ||||||
| Non-current deferred tax liabilities | 9,194 | 10,003 | ||||||
| Other non-current liabilities | 73,507 | 75,889 | ||||||
| Total liabilities | 262,160 | 273,296 | ||||||
| Equity | ||||||||
| Common stock, $1 par value; authorized 30,000,000 shares; issued and outstanding 2019 - 13,333,668 shares; 2018 - 13,338,026 shares | 13,334 | 13,338 | ||||||
| Capital in excess of par value | 96,832 | 97,304 | ||||||
| Retained earnings | 413,992 | 405,125 | ||||||
| Accumulated other comprehensive loss | (79,167 | ) | (80,715 | ) | ||||
| Total Quaker shareholders' equity | 444,991 | 435,052 | ||||||
| Noncontrolling interest | 1,372 | 1,317 | ||||||
| Total equity | 446,363 | 436,369 | ||||||
| Total liabilities and equity | $ | 708,523 | $ | 709,665 | ||||
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Quaker Chemical Corporation
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
| (Unaudited) | ||||||||
| Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | 13,900 | $ | 12,787 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | 3,047 | 3,194 | ||||||
| Amortization | 1,812 | 1,853 | ||||||
| Equity in undistributed earnings of associated companies, net of dividends | (186 | ) | 511 | |||||
| Deferred compensation, deferred taxes and other, net | (6,842 | ) | 428 | |||||
| Share-based compensation | 1,012 | 1,083 | ||||||
| Gain on disposal of property, plant, equipment and other assets | (9 | ) | (52 | ) | ||||
| Insurance settlement realized | (190 | ) | (85 | ) | ||||
| Combination-related expenses, net of payments | (1,012 | ) | 2,161 | |||||
| Pension and other postretirement benefits | (1,346 | ) | (2,632 | ) | ||||
| (Decrease) increase in cash from changes in current assets and current liabilities, net of acquisitions: | ||||||||
| Accounts receivable | (5,470 | ) | (5,827 | ) | ||||
| Inventories | 946 | (7,758 | ) | |||||
| Prepaid expenses and other current assets | 366 | (1,055 | ) | |||||
| Accounts payable and accrued liabilities | (6,008 | ) | (1,862 | ) | ||||
| Net cash provided by operating activities | 20 | 2,746 | ||||||
| Cash flows from investing activities | ||||||||
| Investments in property, plant and equipment | (2,537 | ) | (3,449 | ) | ||||
| Payments related to acquisitions, net of cash acquired | (500 | ) | (500 | ) | ||||
| Proceeds from disposition of assets | 8 | 29 | ||||||
| Insurance settlement interest earned | 65 | 19 | ||||||
| Net cash used in investing activities | (2,964 | ) | (3,901 | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from long-term debt | - | 8,166 | ||||||
| Repayments of long-term debt | (23,948 | ) | (197 | ) | ||||
| Dividends paid | (4,935 | ) | (4,724 | ) | ||||
| Stock options exercised, other | (1,489 | ) | (866 | ) | ||||
| Distributions to noncontrolling affiliate shareholders | - | (834 | ) | |||||
| Net cash (used in) provided by financing activities | (30,372 | ) | 1,545 | |||||
| Effect of foreign exchange rate changes on cash | 1,004 | 2,246 | ||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (32,312 | ) | 2,636 | |||||
| Cash, cash equivalents and restricted cash at the beginning of the period | 124,425 | 111,050 | ||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 92,113 | $ | 113,686 | ||||
Exhibit 99.2
1 First Quarter 2019 Results Investor Conference Call May 3, 2019 Quaker Chemical Corporation
Risks and Uncertainties Statement 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 first quarter earnings news release dated May 2, 2019, which has been furnished to the Securities and Exchange Commission (“SEC”) on Form 8-K and the Company’s Form 10-Q for the period ended March 31, 2019, 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 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 could also adversely affect us, including factors related to the previously announced pending Houghton combination and the risk that the transaction may not receive regulatory approval or that regulatory approval may include conditions or other terms not acceptable to us. Other factors beyond those discussed in this Report, including those related to 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 that regulatory authorities may require that we make divestitures in connection with the Combination of a greater amount than we anticipated, 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, change or other circumstance that could give rise to a material change in 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 and Quaker Chemical; risks related to each company’s distraction from ongoing business operations due to the Combination; and, the outcome of any legal proceedings that may be instituted against the companies related to the Combination. 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, 2018 as well as the proxy statement the Company filed on July 31, 2017 and in our quarterly and other reports filed from time to time with the SEC. 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.
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
▪ Volume growth of 3% results in relatively flat sales of $211.2 million despite a 5% negative foreign exchange impact and challenging end market conditions ▪ Reported net income of $13.8 million or $1.03 per diluted share ▪ Non - GAAP earnings per diluted share of $1.41 comparable to the prior year despite an approximately $0.06 per diluted share negative foreign exchange impact ▪ Combination with Houghton continues to progress and closing expected in the next couple of months Chart #2 First Quarter 2019 Headlines
Chairman Comments ▪ First Quarter 2019 • Non - GAAP earnings per diluted share of $1.41 comparable to the prior year • Net sales of $211.2 million benefited from increases in volume of 3% and selling price and product mix of 1%, but were offset by a negative impact from foreign currency translation of approximately 5% • Gross margin of 35.9% in Q1’19 increased compared to 35.6% in Q1’18 primarily due to pricing initiatives and the mix of certain products sold • Continued market share gains and incremental gains in gross margin offset declines in our underlying markets and approximately 4% or $0.06 per diluted share of negative foreign exchange ▪ 2019 Outlook • Expect foreign exchange headwinds and market challenges to continue in Q2’19, but also expect more favorable comparisons in the second half of 2019 as the headwinds we faced in Q1’19 began near the end of Q2’18 and gradually worsened throughout 2018 • Expect full year net sales and earnings growth for Quaker despite these market challenges • With respect to the Houghton combination, we expect to receive final regulatory approval and close the combination in the next couple of months Chart #3 “ Overall , I continue to be confident in Quaker’s future and I remain excited for the future benefits we will achieve through our upcoming combination with Houghton. ” – Michael F. Barry
▪ Q1’19 non - GAAP EPS of $1.41 comparable to prior year and adjusted EBITDA decreased slightly to $29.6 million compared to $30.9 million in the prior year primarily due to the negative impact from foreign exchange of approximately 4% or $0.06 per diluted share ▪ Net sales of $211.2 million decreased less than 1% as the benefit from increases in volume of 3% and selling price and product mix of 1% were offset by the negative impact from foreign currency translation of approximately 5% or $9.6 million ▪ Gross profit increased $0.3 million compared to Q1’18 on higher gross margin of 35.9% compared to 35.6% in the prior year primarily due to pricing initiatives and the mix of certain products sold ▪ SG&A increased $1.4 million in Q1’19 primarily due to the impact of higher labor - related costs and professional fees, partially offset by the positive impact from foreign currency translation ▪ Houghton combination - related costs (including interest) totaled $5.3 million or $0.35 per diluted share in Q1’19 compared to $6.1 million or $0.38 per diluted share in Q1'18 ▪ ETR of 26.8% and 29.8% in Q1'19 and Q1'18, respectively, include the impact of certain non - deductible Houghton expenses; ETR without these impacts and other non - core items in each quarter, would have been approximately 24% and 26% for Q1'19 and Q1'18, respectively ▪ Q1’19 net operating cash flow of less than $0.1 million decreased compared to $2.7 million in Q1’18 primarily due to higher cash tax payments as well as an increase in cash payments related to Houghton which more than offset a working capital improvement Financial Highlights First Quarter of 2019 Chart #4
Chart #5 Financial Snapshot ($ in Millions unless otherwise noted) Q1 2019 Q1 2018 Net Sales 211.2 212.1 Gross Profit 75.8 75.4 Gross Margin (%) 35.9% 35.6% SG&A 51.5 50.0 Combination-Related Expenses 4.5 5.2 Operating Income 19.8 20.2 Operating Margin (%) 9.4% 9.5% Non-GAAP Operating Income 24.3 25.4 Non-GAAP Operating Margin (%) 11.5% 12.0% Net Income Attributable to Quaker Chemical Corporation 13.8 12.7 GAAP Earnings Per Diluted Share 1.03 0.95 Non-GAAP Earnings Per Diluted Share 1.41 1.41 Adjusted EBITDA 29.6 30.9 Adjusted EBITDA Margin (%) 14.0% 14.6% Net Cash (Debt) 59.6 17.2 Net Operating Cash Flow 0.0 2.7 Effective Tax Rate ("ETR") (%) 26.8% 29.8%
Chart #6 Continued market share gains drive volume growth despite estimated declines in our underlying markets Product Volume by Quarter and Year in Thousands of Kilograms 100,000 140,000 180,000 220,000 260,000 300,000 30,000 40,000 50,000 60,000 70,000 80,000 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% 35.5% 36.0% 25.0% 28.0% 31.0% 34.0% 37.0% 40.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Gross Margin Percentage 35.6% 36.5% 36.5% 35.4% 35.9% 33.0% 34.0% 35.0% 36.0% 37.0% 38.0% Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Gross Margin Percentage Chart #7 Gross margin improvement quarter - over - quarter and sequentially Gross Margin Percentage Trends
FY 2008 – Q1 2019 CAGR: 11.4% +730 Margin bps Adjusted EBITDA* Baseline Historical Performance Chart #8 *Refer to Appendix and non - GAAP reconciliations; recast for changes in adjusted EBITDA presentation in Q1’19.
-$110 -$90 -$70 -$50 -$30 -$10 $10 $30 $50 $70 $90 $110 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1 2019 $ Millions Cash ST/LT Debt Net Cash (Debt) Chart #9 Continued strong balance sheet as the Company’s cash exceeded its debt ~ $60 million Balance Sheet Cash and Debt
APPENDIX
Chart #10 Non - GAAP EPS Reconciliation Q1 2019 Q1 2018 GAAP earnings per diluted share 1.03$ 0.95$ Equity (income) loss in a captive insurance company per diluted share (0.03) 0.03 Houghton combination-related expenses per diluted share 0.35 0.38 Pension and postretirement benefit costs, non-service components per diluted share 0.05 0.03 Currency conversion impacts of hyper-inflationary economies per diluted share 0.01 0.02 Non-GAAP earnings per diluted share 1.41$ 1.41$
Chart #11 Non - GAAP Operating Income Reconciliation ($ in thousands unless otherwise noted) Q1 2019 Q1 2018 Operating income 19,829$ 20,231$ Houghton combination-related expenses 4,483 5,209 Non-GAAP operating income 24,312$ 25,440$ Non-GAAP operating margin (%) 11.5% 12.0%
I = G + H H G = F - D F E = C + D D C = B - A B A Trailing Twelve Months Q1 2019 YTD Q1 2019 Last Nine Months 2018 FY 2018 Trailing Twelve Months Q1 2018 YTD Q1 2018 Last Nine Months 2017 FY 2017 YTD Q1 2017 Net income 60,585$ 13,844$ 46,741$ 59,473$ 26,018$ 12,732$ 13,286$ 20,278$ 6,992$ Depreciation 12,226 3,047 9,179 12,373 12,635 3,194 9,441 12,598 3,157 Amortization 7,300 1,812 5,488 7,341 7,448 1,853 5,595 7,368 1,773 Interest, net * 3,614 776 2,838 4,041 2,428 1,203 1,225 1,358 133 Taxes on income before equity in net income of associated companies 24,423 4,929 19,494 25,050 40,344 5,556 34,788 41,653 6,865 Equity (income) loss in a captive insurance company (1,684) (346) (1,338) (966) (1,583) 372 (1,955) (2,547) (592) Houghton combination-related expenses 15,325 4,483 10,842 16,051 26,072 5,209 20,863 29,938 9,075 Pension and postretirement benefit costs, non-service components * 2,605 896 1,709 2,285 4,245 576 3,669 4,235 566 Loss on disposal of held-for-sale asset - - - - 125 - 125 125 - Insurance insolvency recovery (90) - (90) (90) (600) - (600) (600) - Cost streamlining initiative - - - - - - - 286 286 Gain on liquidation of an inactive legal entity (446) - (446) (446) - - - - - Currency conversion impacts of hyper-inflationary economies 640 194 446 664 606 218 388 388 - Adjusted EBITDA 124,498$ 29,635$ 94,863$ 125,776$ 117,738$ 30,913$ 86,825$ 115,080$ 28,255$ Adjusted EBITDA Margin (%) 14.4% 14.0% 14.5% 14.5% 14.1% 14.6% 13.9% 14.0% 14.5% Chart #12 TTM Adjusted EBITDA Reconciliation ($ in thousands unless otherwise noted) * The Company updated its calculation methodology to include the use of interest expense net of interest income compared to t he historical use of only interest expense, and also to include the non - service component of the Company’s pension and postretireme nt benefit costs. Prior year amounts have been recast for comparability purposes.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Net income 9,833$ 16,058$ 32,120$ 45,892$ 47,405$ 56,339$ 56,492$ 51,180$ 61,403$ 20,278$ 59,473$ Depreciation 10,879 9,525 9,867 11,455 12,252 12,339 12,306 12,395 12,557 12,598 12,373 Amortization 1,177 1,078 988 2,338 3,106 3,445 4,325 6,811 7,009 7,368 7,341 Interest, net * 4,409 4,805 4,024 3,585 3,691 1,936 (170) 961 852 1,358 4,041 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 41,653 25,050 Equity loss (income) in a captive insurance company 1,299 162 (313) (2,323) (1,812) (5,451) (2,412) (2,078) (1,688) (2,547) (966) 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) - - Executive transition costs 3,505 - - - 609 - - - - - - Houghton combination-related expenses - - - - - - - - 1,531 29,938 16,051 Verkol transaction-related expenses - - - - - - - 2,813 - - - Customer bankruptcy costs - - - - 1,254 - 825 328 - - - Pension and postretirement benefit costs, non-service components * 2,051 5,944 3,880 2,548 3,504 4,040 3,833 3,308 2,302 4,235 2,285 Cost streamlining initiatives - - - - - 1,419 1,166 173 - 286 - Loss on disposal of held-for-sale asset - - - - - - - - - 125 - Insurance insolvency recovery - - - - - - - - - (600) (90) 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) - - - - - Gain on liquidation of an inactive legal entity - - - - - - - - - - (446) Currency conversion impacts of hyper-inflationary economies - - 322 - - 357 321 2,806 88 388 664 Adjusted EBITDA 41,046$ 46,926$ 68,200$ 74,438$ 83,847$ 92,672$ 100,225$ 103,272$ 106,841$ 115,080$ 125,776$ Adjusted EBITDA Margin (%) 7.1% 10.4% 12.5% 10.9% 11.8% 12.7% 13.1% 14.0% 14.3% 14.0% 14.5% Chart #13 Adjusted EBITDA Reconciliation ($ in thousands unless otherwise noted) * The Company updated its calculation methodology to include the use of interest expense net of interest income compared to t he historical use of only interest expense, and also to include the non - service component of the Company’s pension and postretireme nt benefit costs. Prior year amounts have been recast for comparability purposes.
Q1 2019 Q1 2018 Net sales North America 95,253$ 91,820$ EMEA 56,288 62,055 Asia/Pacific 50,527 48,777 South America 9,142 9,403 Total net sales 211,210$ 212,055$ Q1 2019 Q1 2018 Operating earnings, excluding indirect operating expenses North America 20,872$ 20,365$ EMEA 8,782 10,293 Asia/Pacific 13,082 12,142 South America 1,197 635 Total operating earnings, excluding indirect operating expenses 43,933 43,435 Combination-related expenses (4,483) (5,209) Non-operating charges (17,733) (16,039) Depreciation of corporate assets and amortization (1,888) (1,956) Operating Income 19,829$ 20,231$ Chart #14 Segment Performance ($ in thousands)