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Michael F. Barry, Chairman, Chief Executive Officer and President, stated, "We had a strong quarter in a very challenging global environment as our volumes continue to be well below prior periods. Our aggressive actions over the past year have enabled our profitability despite the lower volumes caused by the global recession. In the third quarter, we experienced a modest recovery in most end markets as our volumes improved from the second quarter. Over the longer term, we expect our volumes to continue to increase but it will take time to get back to historical levels as there is still a great deal of uncertainty in our end markets, especially over the next several quarters. While I am pleased with the sequential improvement in our quarterly earnings over the past year, our profitability is still not at the level where we need it to be over the longer term."
Mr. Barry added, "The third quarter was also another strong quarter in 2009 for cash flow generation. Since the beginning of the year, we generated nearly $35 million of operating cash flow and have now paid down our debt by 24%. Over this challenging period, we have also maintained our dividend and are near completion of the largest capital expenditure in our history -- our Middletown, Ohio plant expansion. We remain committed to investing in our key growth initiatives for our customers and continue to be confident in our future."
Third Quarter Summary
Net sales for the third quarter were $118.9 million, down 25% from $159.5 million for the third quarter of 2008. The decrease in net sales was primarily due to volume declines in all of the Company's regions and market segments, with the exception of modest growth in Asia/Pacific, as the global economic downturn continued to impact the Company. Volumes were down approximately 22% and foreign exchange rate translation decreased net sales by approximately 3%. However, third quarter 2009 volumes were approximately 18% higher than the second quarter of 2009.
Gross margins were down approximately $2.1 million, or 4%, compared to the third quarter of 2008. The gross margin percentage of 37.4% represents considerable improvement over the 29.2% reported for the third quarter of 2008. This margin percentage expansion was primarily the result of cost reduction actions taken, a more favorable raw material cost environment, and reduced automotive chemical management services revenue reported on a gross basis.
Selling, general and administrative expenses ("SG&A") decreased $3.6 million, or 9%, compared to the third quarter of 2008. Savings from the Company's restructuring programs, lower commissions, lower travel and entertainment expenses, and other cost savings measures, partially offset by the timing of incentive compensation accruals, accounted for more than 70% of the decline. Changes in foreign exchange rates accounted for the remainder.
The Company incurred charges related to the former CEO's supplemental retirement plan of approximately $2.4 million for the first nine months of 2009, which represents the total amount for 2009, and expects to incur a final charge of $1.0 million in 2010. The CEO transition costs incurred in the third quarter of 2009 totaled approximately $1.3 million, or approximately $0.07 per diluted share, compared to $1.6 million, or approximately $0.10 per diluted share, for the third quarter of 2008.
The increase in equity income is due to stronger financial performance from all the Company's associated companies.
Year-to-Date Summary
Net sales for the first nine months of 2009 were $319.8 million, down 31% from $465.4 million for the first nine months of 2008. The decrease in net sales was primarily due to volume declines in all of the Company's regions and market segments. Volumes were down approximately 30%, which were partially offset by a favorable 3% increase in selling price and mix. Foreign exchange rate translation also decreased revenues by approximately 4%.
Gross margins were down approximately $25.7 million, or 19%, compared to the first nine months of 2008, reflective of the above-noted volume declines. The gross margin percentage improved to 34.2% for the first nine months of 2009 from 29.0% for the first nine months of 2008. This gross margin percentage expansion from the first nine months of 2008 was primarily the result of cost reduction actions taken, a more favorable raw material cost environment, and reduced automotive chemical management services revenue reported on a gross basis.
SG&A decreased $19.5 million, or 18%, compared to the first nine months of 2008. Savings from the Company's restructuring programs, lower commissions, lower travel and entertainment expenses, and other cost savings measures accounted for more than 70% of the decline. Changes in foreign exchange rates accounted for the remainder.
Other income for the first nine months of 2009 includes a $1.2 million gain related to the disposition of excess land in Europe, while other income for the first nine months of 2008 includes a net arbitration award of approximately $1.0 million related to litigation with one of the former owners of the Company's Italian subsidiary. The increase in net interest expense was primarily due to lower interest income, as lower average debt balances were offset by higher interest rates.
Balance Sheet and Cash Flow Items
The Company's net debt-to-total-capital ratio at September 30, 2009 was 21%, compared to 32% as of December 31, 2008. The improvement in the Company's net debt-to-total-capital ratio was primarily due to year-to-date cash flows from operations of $34.7 million. Operating cash flow improved $7.9 million, compared to the second quarter of 2009, largely due to higher net income and further improvements in working capital.
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 28, 2009 at 2:30 p.m. (ET). Access the conference by calling 877-269-7756 or visit Quaker's Web site at www.quakerchem.com for a live webcast.
Quaker Chemical Corporation
----------------------------
Condensed Consolidated Statement of Income
------------------------------------------
(Dollars in thousands, except per share data)
---------------------------------------------
(Unaudited)
------------
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
2009 2008 2009 2008
---- ---- ---- ----
Net sales $118,922 $159,506 $319,764 $465,412
Cost of goods sold 74,450 112,981 210,541 330,466
------ ------- ------- -------
Gross margin 44,472 46,525 109,223 134,946
% 37.4% 29.2% 34.2% 29.0%
Selling, general and
administrative expenses 34,646 38,278 90,393 109,935
Restructuring and related charges - - 2,289 -
CEO Transition Costs 1,250 1,625 2,443 3,505
----- ----- ----- -----
Operating income 8,576 6,622 14,098 21,506
% 7.2% 4.2% 4.4% 4.6%
Other income (expense), net 217 (96) 2,027 1,752
Interest expense, net (1,178) (1,044) (3,585) (3,205)
------ ------ ------ ------
Income before taxes and equity
in net income of associated
companies 7,615 5,482 12,540 20,053
Taxes on income 2,747 967 4,063 5,848
----- --- ----- -----
Income before equity in net
income of associated companies 4,868 4,515 8,477 14,205
Equity in net income of
associated companies 555 191 640 490
--- --- --- ---
Net income 5,423 4,706 9,117 14,695
Less: Net income attributable to
noncontrolling interest 371 266 829 841
--- --- --- ---
Net income attributable to
Quaker Chemical Corporation $5,052 $4,440 $8,288 $13,854
====== ====== ====== =======
% 4.2% 2.8% 2.6% 3.0%
Per share data:
---------------
Net income attributable to
Quaker Chemical
Corporation, Common
Shareholders - basic $0.46 $0.41 $0.76 $1.33
Net income attributable to
Quaker Chemical
Corporation, Common
Shareholders - diluted $0.45 $0.41 $0.75 $1.31
Quaker Chemical Corporation
----------------------------
Condensed Consolidated Balance Sheet
-------------------------------------
(Dollars in thousands, except par value and share amounts)
----------------------------------------------------------
(Unaudited)
-----------
September 30, December 31,
2009 2008
---- ----
ASSETS
Current assets
Cash and cash equivalents $25,369 $20,892
Construction fund (restricted cash) 3,805 8,281
Accounts receivable, net 100,926 98,702
Inventories, net 47,163 57,419
Prepaid expenses and other current assets 11,229 15,532
------ ------
Total current assets 188,492 200,826
Property, plant and equipment, net 66,504 60,945
Goodwill 46,362 40,997
Other intangible assets, net 5,852 6,417
Investments in associated companies 8,676 7,987
Deferred income taxes 36,456 34,179
Other assets 38,776 34,088
------ ------
Total assets $391,118 $385,439
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current
portion of long-term debt $2,835 $4,631
Accounts and other payables 55,495 51,341
Accrued restructuring and related activities 232 2,198
Accrued compensation 13,652 7,741
Accrued pension and postretirement benefits 1,869 7,380
Other current liabilities 16,114 10,573
------ ------
Total current liabilities 90,197 83,864
Long-term debt 64,875 84,236
Deferred income taxes 9,055 7,156
Accrued pension and postretirement benefits 35,946 37,638
Other non-current liabilities 44,746 42,670
------ ------
Total liabilities 244,819 255,564
------- -------
Quaker shareholders' equity
Common stock, $1 par value; authorized
30,000,000 shares; issued 11,072,352
shares 11,072 10,833
Capital in excess of par value 26,937 25,238
Retained earnings 117,757 117,089
Accumulated other comprehensive loss (14,515) (27,237)
------- -------
Total Quaker shareholders' equity 141,251 125,923
------- -------
Noncontrolling interest 5,048 3,952
----- -----
Total shareholders' equity 146,299 129,875
------- -------
Total liabilities and shareholders'
equity $391,118 $385,439
======== ========
Quaker Chemical Corporation
----------------------------
Condensed Consolidated Statement of Cash Flows
-----------------------------------------------
For the nine months ended September 30,
---------------------------------------
(Dollars in thousands)
----------------------
(Unaudited)
-----------
2009 2008
---- ----
Cash flows from operating activities
Net income $9,117 $14,695
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 6,948 8,279
Amortization 797 906
Equity in net income of associated companies, net
of dividends (610) (490)
Deferred compensation and other, net (30) 840
Stock-based compensation 1,585 3,642
Restructuring and related charges 2,289 -
Gain on disposal of property, plant and equipment (1,194) (3)
Insurance settlement realized (1,104) (981)
Pension and other postretirement benefits (5,877) (3,541)
Increase (decrease) in cash from changes in current
assets and current liabilities, net of
acquisitions:
Accounts receivable 951 (3,723)
Inventories 12,547 (8,550)
Prepaid expenses and other current assets 3,283 (863)
Accounts payable and accrued liabilities 10,273 788
Change in restructuring liabilities (4,240) -
------ ---
Net cash provided by operating activities 34,735 10,999
------ ------
Cash flows from investing activities
Capital expenditures (9,811) (9,198)
Payments related to acquisitions (1,000) (1,000)
Proceeds from disposition of assets 1,640 139
Insurance settlement received and interest earned 5,164 5,234
Change in restricted cash, net 416 (13,578)
Net cash used in investing activities (3,591) (18,403)
------ -------
Cash flows from financing activities
Net decrease in short-term borrowings (1,796) (1,389)
Proceeds from long-term debt 3,500 10,000
Repayments of long-term debt (22,875) (3,165)
Dividends paid (7,565) (6,994)
Stock options exercised, other 353 13,974
Distributions to noncontrolling shareholders (274) (252)
---- ----
Net cash (used in) provided by financing
activities (28,657) 12,174
------- ------
Effect of exchange rate changes on cash 1,990 (899)
Net increase in cash and cash equivalents 4,477 3,871
Cash and cash equivalents at the beginning of the
period 20,892 20,195
------ ------
Cash and cash equivalents at the end of the period $25,369 $24,066
======= =======
SOURCE Quaker Chemical Corporation
http://www.quakerchem.com
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