CONSHOHOCKEN, Pa., Oct. 28 /PRNewswire-FirstCall/ -- Quaker Chemical Corporation today announced net sales for the third quarter 2008 of $159.5 million, a quarterly record, and net income of $4.4 million, increases of 13% and 40%, respectively, compared to the third quarter of 2007. Earnings per diluted share were $0.41 for the third quarter of 2008, an increase of $0.10 per diluted share, compared to the third quarter of 2007. Included in third quarter 2008 results is a charge of approximately $1.6 million of incremental expense, or approximately $0.10 per diluted share, related to the retirement of the Company's former chief executive officer. Included in third quarter 2007 results is a charge of $3.3 million related to an environmental litigation settlement, or approximately $0.21 per diluted share.
Michael F. Barry, Chief Executive Officer and President, commented, "We had a strong third quarter in sales and profits, despite lower volume. Raw material costs were higher in the quarter as many of our raw material suppliers put in place large price increases. While crude prices declined throughout the third quarter, our raw material costs did not show a significant improvement due to lag effects and other factors. Despite the increase in our raw material costs, we did make progress with margin recovery during the quarter and we expect this improvement to continue into the fourth quarter."
Mr. Barry continued, "We are certainly mindful of the challenges of the current economic environment as many of our steel and automotive customers in the U.S. and Europe have announced significant production reductions for the fourth quarter. Given what we know today, our fourth quarter results are expected to be the lowest quarterly earnings of the year. However, we will continue to manage Quaker for the long term, while managing the short-term realities that we are facing. Nothing that has happened over the past few weeks has changed our commitment to our key growth initiatives, and we continue to be confident in our future."
Third Quarter Summary
Net sales for the third quarter were $159.5 million, up 13% compared to $140.7 million for the third quarter of 2007. The increase in net sales was primarily due to higher sales prices and foreign exchange rate translation. Volume growth in Asia/Pacific and South America was more than offset by volume declines in the Company's other regions. Foreign exchange rate translation increased revenues by approximately 5%. Selling price increases were realized, in part, as a result of an ongoing effort to offset higher raw material costs.
Gross margin dollars were up by approximately $3.4 million or 8% over the third quarter of 2007. The gross margin percentage of 29.2% was lower than the third quarter of 2007 at 30.7% but represented an improvement versus the 28.3% in the second quarter of 2008. The Company's larger mix of CMS contracts reported on a gross versus pass-through basis and lower Quaker product sales due to lower customer production levels resulted in a gross margin percentage decline of approximately 0.6 percentage points. The remaining decline in the gross margin percentage is due to increased raw material costs partially offset by price increases, as well as product and regional sales mix.
Selling, general and administrative expenses ("SG&A") increased $1.7 million, compared to the third quarter of 2007, due to foreign exchange rate translation. Investments in higher growth areas, as well as inflationary increases, were offset by lower legal, environmental and other costs. SG&A as a percentage of sales was 24% versus 26% in the third quarter of 2007.
Effective October 3, 2008, Ronald J. Naples, Chairman, retired as Quaker's Chief Executive Officer. As further discussed in the Company's 8-K filed on May 13, 2008, the Company is recognizing certain accelerated and other costs, in accordance with Mr. Naples' Employment, Transition and Consulting Agreement, which are expected to total $5.8 million over the 2008-2010 period. Of the $3.5 million, or approximately $0.22 per diluted share, in incremental costs incurred in 2008, $1.6 million, or approximately $0.10 per diluted share, was recognized in the third quarter of 2008.
In the third quarter of 2007, the Company recorded environmental charges of $3.3 million. The charges consisted of $2.0 million related to the settlement of environmental litigation involving AC Products, Inc., a wholly owned subsidiary, as well as an additional $1.3 million charge for the estimated remaining remediation costs. The third quarter and year-to-date 2007 results also include an out of period non-cash tax benefit adjustment of $1.0 million related to the deferred tax accounting for the Company's foreign pension plans and intangible assets regarding one of the Company's acquisitions.
Year-to-Date Summary
Net sales for the first nine months of 2008 were $465.4 million, up 15% from $403.2 million for the first nine months of 2007. The increase in net sales was attributable to higher selling prices, higher revenue related to the Company's CMS channel and foreign exchange rate translation. Volume growth in Asia/Pacific and South America was more than offset by volume declines in the Company's other regions. Foreign exchange rate translation increased revenues by approximately 7%. Selling price increases were realized, in part, as a result of an ongoing effort to offset higher raw material costs. CMS revenues were higher due to the impact of additional CMS accounts gained in 2007, as well as the renewal and restructuring of several of the Company's CMS contracts.
Gross margin dollars were up $10.6 million, almost 9% for the first nine months of 2008, compared to the first nine months of 2007. However, the gross margin percentage was 29.0% for the first nine months of 2008, compared to 30.8% in the first nine months of 2007. The Company's larger mix of CMS contracts reported on a gross versus pass-through basis and lower Quaker product sales due to lower customer production levels resulted in a gross margin percentage decline of approximately 0.5 percentage points. The remaining decline in the gross margin percentage is due to increased raw material costs partially offset by price increases, as well as product and regional sales mix.
SG&A for the first nine months of 2008 increased $6.0 million, compared to the first nine months of 2007, due to foreign exchange rate translation. Investments in higher growth areas, as well as inflationary increases, were offset by lower legal and environmental costs and lower incentive compensation expense.
Other income for 2008 includes a net arbitration award of approximately $1.0 million, or approximately $0.04 per diluted share, related to litigation with one of the former owners of the Company's Italian subsidiary.
The decrease in interest expense is due to lower average debt balances and interest rates, as well as higher interest income.
Balance Sheet and Cash Flow Items
The Company's net debt-to-total-capital ratio has decreased to 27% from 32% at December 31, 2007, primarily on strong 2008 operating cash flow.
Quaker Chemical Corporation is a leading global provider of process chemicals, chemical specialties, services, and technical expertise to a wide range of industries - including steel, automotive, mining, aerospace, tube and pipe, coatings and construction materials. Our products, technical solutions, and chemical management services enhance our customers' processes, improve
their product quality, and lower their costs. Quaker's headquarters is located near Philadelphia in Conshohocken, Pennsylvania.
This release contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in such statements. A major risk is that the Company's demand is largely derived from the demand for its customers' products, which subjects the Company to downturns in a customer's business and unanticipated customer production shutdowns. Other major risks and uncertainties include, but are not limited to, significant increases in raw material costs, customer financial stability, worldwide economic and political conditions, foreign currency fluctuations, and future terrorist attacks such as those that occurred on September 11, 2001. Other factors could also adversely affect us. Therefore, we caution you not to place undue reliance on our forward-looking statements. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
As previously announced, Quaker Chemical's investor conference call to discuss third quarter results is scheduled for October 29, 2008 at 2:30 p.m. (ET). Access the conference by calling 877-269-7756 or visit Quaker's Web site at http://www.quakerchem.com/ for a live webcast.
Quaker Chemical Corporation Condensed Consolidated Statement of Income (Dollars in thousands, except per share data and share amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Net sales $159,506 $140,715 $465,412 $403,204 Cost of goods sold 112,981 97,547 330,466 278,878 Gross margin 46,525 43,168 134,946 124,326 % 29.2% 30.7% 29.0% 30.8% Selling, general and administrative expenses 38,278 36,602 109,935 103,930 CEO transition costs 1,625 - 3,505 - Environmental charges - 3,300 - 3,300 Operating income 6,622 3,266 21,506 17,096 % 4.2% 2.3% 4.6% 4.2% Other income, net (96) 382 1,752 1,618 Interest expense, net (1,044) (1,370) (3,205) (4,221) Income before taxes 5,482 2,278 20,053 14,493 Taxes on income 967 (1,066) 5,848 3,076 4,515 3,344 14,205 11,417 Equity in net income of associated companies 191 166 490 557 Minority interest in net income of subsidiaries (266) (350) (841) (1,126) Net income $4,440 $3,160 $13,854 $10,848 % 2.8% 2.2% 3.0% 2.7% Per share data: Net income - basic $0.42 $0.32 $1.34 $1.09 Net income - diluted $0.41 $0.31 $1.31 $1.07 Shares Outstanding: Basic 10,573,497 10,016,801 10,315,769 9,969,739 Diluted 10,796,716 10,134,909 10,544,070 10,095,945 Quaker Chemical Corporation Condensed Consolidated Balance Sheet (Dollars in thousands, except par value and share amounts) (Unaudited) September 30, December 31, 2008 2007 ASSETS Current assets Cash and cash equivalents $24,066 $20,195 Construction fund (restricted cash) 9,325 - Accounts receivable, net 119,538 118,135 Inventories, net 67,577 60,738 Prepaid expenses and other current assets 14,562 14,433 Deferred compensation 2,795 - Total current assets 237,863 213,501 Property, plant and equipment, net 62,349 62,287 Goodwill 43,300 43,789 Other intangible assets, net 6,873 7,873 Investments in associated companies 8,027 7,323 Deferred income taxes 31,542 30,257 Other assets 35,275 34,019 Total assets $425,229 $399,049 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long- term debt $2,635 $4,288 Accounts and other payables 71,196 67,380 Accrued compensation 14,034 17,287 Deferred compensation 3,006 - Other current liabilities 17,501 17,396 Total current liabilities 108,372 106,351 Long-term debt 85,364 78,487 Deferred income taxes 8,217 7,583 Other non-current liabilities 68,294 71,722 Total liabilities 270,247 264,143 Minority interest in equity of subsidiaries 4,339 4,513 Shareholders' equity Common stock, $1 par value; authorized 30,000,000 shares; issued 10,832,828 shares 10,833 10,147 Capital in excess of par value 27,034 10,104 Retained earnings 122,320 115,767 Accumulated other comprehensive loss (9,544) (5,625) Total shareholders' equity 150,643 130,393 Total liabilities and shareholders' equity $425,229 $399,049 Quaker Chemical Corporation Condensed Consolidated Statement of Cash Flows For the nine months ended September 30, (Dollars in thousands) (Unaudited) 2008 2007 Cash flows from operating activities Net income $13,854 $10,848 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 8,279 8,579 Amortization 906 900 Equity in net income of associated companies, net of dividends (490) (83) Minority interest in earnings of subsidiaries 841 1,126 Deferred compensation and other, net 840 (620) Stock-based compensation 3,642 863 Environmental charges - 3,300 (Gain) loss on disposal of property, plant and equipment (3) 33 Insurance settlement realized (981) (1,266) Pension and other postretirement benefits (3,541) (2,532) Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions: Accounts receivable (3,723) (5,795) Inventories (8,550) (3,227) Prepaid expenses and other current assets (863) (1,750) Accounts payable and accrued liabilities 788 6,009 Net cash provided by operating activities 10,999 16,385 Cash flows from investing activities Capital expenditures (9,198) (5,431) Payments related to acquisitions (1,000) (1,543) Proceeds from disposition of assets 139 176 Insurance settlement received and interest earned 5,234 5,534 Change in restricted cash, net (13,578) (4,268) Net cash used in investing activities (18,403) (5,532) Cash flows from financing activities Short-term debt borrowings - 1,305 Net decrease in short-term borrowings (1,389) (3,267) Proceeds from long-term debt 10,000 3,132 Repayments of long-term debt (3,165) (674) Dividends paid (6,994) (6,484) Stock options exercised, other 13,974 2,935 Distributions to minority shareholders (252) (864) Net cash provided by (used in) financing activities 12,174 (3,917) Effect of exchange rate changes on cash (899) 1,226 Net increase in cash and cash equivalents 3,871 8,162 Cash and cash equivalents at the beginning of the period 20,195 16,062 Cash and cash equivalents at the end of the period $24,066 $24,224
