Quaker Chemical Corporation Announces Third Quarter 2011 Results
CONSHOHOCKEN, Pa., Oct. 25, 2011
o Higher sales and net income
o Strong volume with market share gain
o Gross margin improvement from Q2 2011
o Two strategic acquisitions since July
Quaker Chemical Corporation (NYSE: KWR) today announced net sales of $182.3 million for the third quarter of 2011, compared to net sales of $137.7 million for the third quarter of 2010. Net income was $13.4 million in the third quarter of 2011, or earnings per diluted share of $1.03, compared to net income of $6.3 million, or earnings per diluted share of $0.55 for the third quarter of 2010. For the first nine months of 2011, the Company reported net sales of $510.0 million and net income of $33.8 million, compared to net sales of $402.0 million and net income of $24.9 million in the first nine months of 2010. The third quarter 2011 results include a $0.22 per diluted share non-cash gain related to the Company's purchase of the remaining interest in its Mexican affiliate, while the third quarter 2010 results included a $0.21 per diluted share charge related to a non-income tax contingency and an $0.08 per diluted share charge related to the retirement of the Company's former CEO.
Michael F. Barry, Chairman, Chief Executive Officer and President, commented, "We are pleased with our third quarter results, especially in light of the challenging global environment. Our product volumes were an all-time record even excluding our 2011 acquisitions. While demand in some countries has softened, our overall volumes have grown as we have increased our market share. In addition, we are making progress in restoring our margins. While our raw material costs remain at or near record levels, we implemented additional price increases in the third quarter and are finally seeing sequential improvement in our gross margin. Looking ahead to the fourth quarter, we expect good volumes, with some seasonality impact around the holidays. There is also a greater amount of uncertainty in the world economies, especially in Europe, but so far this has not significantly impacted us."
Mr. Barry continued, "In addition to the expansion of our base business through market share gain, I am also pleased with our growth via acquisitions. Over the past 16 months, we have made four strategic acquisitions. Three of the acquisitions were U.S. companies, providing us with adjacent product line opportunities (aluminum hot rolling products, specialty greases and die casting lubricants) that we can grow through leveraging our global platform. The other acquisition provides us with 100% ownership in our former joint venture business in the fast-growing market of Mexico. While each acquisition is relatively small, we are excited about the shareholder value that can be created with each of them. In addition, our balance sheet remains very strong which gives us the financial flexibility to take advantage of other growth opportunities as they arise."
Third Quarter 2011 Summary
Net sales for the third quarter of 2011 were $182.3 million, an increase of 32% from the third quarter of 2010. Product volumes were higher by approximately 16%, including acquisitions. Selling prices and mix increased revenues by approximately 11%, as the Company implemented price increases across the globe to help offset higher raw material costs. Foreign exchange rates also increased revenues by approximately 5%.
Gross profit increased by $10.5 million, or 21%, from the third quarter of 2010, but gross margin decreased from 35.6% to 32.6%. Overall raw material costs were significantly higher than the previous year, and the Company has implemented selling price increases to help restore margins. On a sequential quarterly basis, the Company's gross margin increased from the second quarter of 2011.
Selling, general and administrative expenses ("SG&A") increased approximately $7.3 million compared to the third quarter of 2010. Higher selling costs on increased business activity, acquisition-related activity and foreign exchange rate translation accounted for the majority of the increase. In addition, higher inflationary and other costs were partially offset by lower incentive compensation. SG&A as a percentage of sales decreased to 23.0% in the third quarter of 2011 from 25.2% in the third quarter of 2010, and was consistent with the second quarter of 2011.
Net interest expense decreased due to lower interest rates and lower average borrowings. Other income includes a $2.7 million, or $0.22 per diluted share, non-cash gain representing the revaluation of the Company's previously held ownership interest in its Mexican equity affiliate to its fair value related to the July 2011 purchase of the remaining interest in this entity. Equity in net income of associated companies decreased compared to the third quarter of 2010, as a result of the Company's acquisition of the remaining ownership interest in its Mexican equity affiliate.
Year-to-Date Summary
Net sales for the first nine months of 2011 were $510.0 million, an increase of 27% from $402.0 million in the first nine months of 2010. Product volumes were higher by approximately 12%, including the effects of acquisitions. Selling prices and mix increased revenues by approximately 10%, as the Company implemented price increases across the globe to help offset higher raw material costs. Foreign exchange rates also increased revenues by approximately 5%.
Gross profit increased by approximately $21.1 million, or 15%, from the first nine months of 2010, but gross margin decreased from 36.0% in the first nine months of 2010 to 32.5% in the first nine months of 2011, as raw material costs continued to escalate.
SG&A increased approximately $16.0 million compared to the first nine months of 2010. Higher selling costs on increased business activity, acquisition-related activity and foreign exchange rate translation accounted for approximately 62% of the increase. Higher inflationary and other costs, partially offset by lower incentive compensation, accounted for the remainder of the increase. SG&A as a percentage of sales decreased to 23.4% in the first nine months of 2011 from 25.7% in the first nine months of 2010.
Net interest expense decreased due to lower average interest rates and lower average borrowings. Other income reflects the revaluation to fair value of the Company's previously held ownership interest in its Mexican equity affiliate, as discussed above.
The Company's year-to-date 2011 effective tax rate of 27.1% was higher than the year-to-date 2010 effective tax rate of 25.8%. The year-to-date effective tax rates for 2011 and 2010 reflect a decrease in reserves for uncertain tax positions due to the expiration of applicable statutes of limitations for certain tax years of approximately $0.14 and $0.15 per diluted share, respectively. The most significant other item affecting the comparison in the year-to-date effective tax rates is a change in the mix of income from lower tax rate jurisdictions to higher tax rate jurisdictions.
Balance Sheet and Cash Flow Items
The Company completed an equity offering of approximately 1.3 million shares in the second quarter of 2011, resulting in approximately $48.1 million of net cash proceeds, which were used to repay a portion of its revolving credit line. The third quarter 2011 and year-to-date 2011 earnings per diluted share of $1.03 and $2.73 reflect an approximate $0.09 and $0.13 dilutive effect, respectively, as a result of this equity offering. Operating cash flow of $4.4 million was generated in the third quarter of 2011, led by the Company's third quarter net income, which was partially offset by higher working capital investment and other items. In July 2011, the Company purchased the remaining ownership interest in its Mexican equity affiliate. Cash consideration of $10.5 million was paid for the 60% interest not previously owned by Quaker, with an additional $2.0 million payable in July 2012, subject to certain conditions.
Recent Developments
In October 2011, the Company acquired G.W. Smith & Sons, Inc., a leading North American manufacturer and distributor of die cast lubricants, metalworking lubricants, and machining fluids. The acquired business has annual net sales of approximately $14 million.
Conference Call
As previously announced, Quaker Chemical's investor conference call to discuss third quarter results is scheduled for October 26, 2011 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 Web site at www.quakerchem.com. You can also access the conference call by dialing 877-269-7756.
About Quaker
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, aluminum, 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.
