PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
(Unaudited).
Quaker Chemical
Corporation
Condensed
Consolidated Statements of Income
(Dollars in thousands, except per share data)
|
|
Unaudited
|
|
|
Three Months
Ended March 31,
|
|
|
2016
|
|
2015
|
Net sales
|
$
|
178,077
|
|
$
|
181,330
|
Cost of goods sold
|
|
110,202
|
|
|
115,002
|
Gross profit
|
|
67,875
|
|
|
66,328
|
Selling, general and administrative
expenses
|
|
48,641
|
|
|
48,464
|
Operating income
|
|
19,234
|
|
|
17,864
|
Other income (expense), net
|
|
706
|
|
|
(194)
|
Interest expense
|
|
(741)
|
|
|
(587)
|
Interest income
|
|
348
|
|
|
320
|
Income before taxes and equity in net
income of associated companies
|
|
19,547
|
|
|
17,403
|
Taxes on income before equity in net
income of associated companies
|
|
6,305
|
|
|
5,359
|
Income before equity in net income of
associated companies
|
|
13,242
|
|
|
12,044
|
Equity in net income (loss) of
associated companies
|
|
102
|
|
|
(1,437)
|
Net income
|
|
13,344
|
|
|
10,607
|
Less: Net income attributable to
noncontrolling interest
|
|
398
|
|
|
229
|
Net income attributable to Quaker
Chemical Corporation
|
$
|
12,946
|
|
$
|
10,378
|
Per share data:
|
|
|
|
|
|
|
Net income attributable to Quaker
Chemical Corporation common shareholders – basic
|
$
|
0.98
|
|
$
|
0.78
|
|
Net income attributable to Quaker
Chemical Corporation common shareholders – diluted
|
$
|
0.98
|
|
$
|
0.78
|
|
Dividends declared
|
$
|
0.32
|
|
$
|
0.30
|
The accompanying notes are an
integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Condensed
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
|
|
|
Unaudited
|
|
|
|
Three Months
Ended March 31,
|
|
|
|
|
2016
|
|
|
2015
|
Net income
|
$
|
13,344
|
|
$
|
10,607
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net
of tax
|
|
|
|
|
|
|
Currency translation adjustments
|
|
4,733
|
|
|
(11,083)
|
|
Defined benefit retirement plans
|
|
187
|
|
|
2,478
|
|
Unrealized gain on available-for-sale
securities
|
|
456
|
|
|
70
|
|
|
Other comprehensive income (loss)
|
|
5,376
|
|
|
(8,535)
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
18,720
|
|
|
2,072
|
Less: Comprehensive income attributable
to noncontrolling interest
|
|
(460)
|
|
|
(259)
|
Comprehensive income attributable to
Quaker Chemical Corporation
|
$
|
18,260
|
|
$
|
1,813
|
The accompanying notes are an
integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Condensed
Consolidated Balance Sheets
(Dollars in
thousands, except par value and share amounts)
|
|
|
Unaudited
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
ASSETS
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
94,374
|
|
$
|
81,053
|
|
Accounts
receivable, net
|
|
188,218
|
|
|
188,297
|
|
Inventories
|
|
|
|
|
|
|
|
Raw
materials and supplies
|
|
37,322
|
|
|
36,876
|
|
|
Work-in-process
and finished goods
|
|
40,898
|
|
|
38,223
|
|
Prepaid
expenses and other current assets
|
|
20,537
|
|
|
21,404
|
|
|
Total
current assets
|
|
381,349
|
|
|
365,853
|
Property,
plant and equipment, at cost
|
|
236,811
|
|
|
231,164
|
|
Less
accumulated depreciation
|
|
(149,576)
|
|
|
(143,545)
|
|
|
Net
property, plant and equipment
|
|
87,235
|
|
|
87,619
|
Goodwill
|
|
80,003
|
|
|
79,111
|
Other
intangible assets, net
|
|
72,464
|
|
|
73,287
|
Investments
in associated companies
|
|
21,194
|
|
|
20,354
|
Non-current
deferred tax assets
|
|
19,916
|
|
|
23,468
|
Other
assets
|
|
32,405
|
|
|
32,218
|
|
|
Total
assets
|
$
|
694,566
|
|
$
|
681,910
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
Short-term
borrowings and current portion of long-term debt
|
$
|
645
|
|
$
|
662
|
|
Accounts
and other payables
|
|
69,748
|
|
|
71,543
|
|
Accrued
compensation
|
|
13,626
|
|
|
19,166
|
|
Accrued
restructuring
|
|
5,969
|
|
|
6,303
|
|
Other
current liabilities
|
|
25,397
|
|
|
26,881
|
|
|
Total
current liabilities
|
|
115,385
|
|
|
124,555
|
Long-term
debt
|
|
97,620
|
|
|
81,439
|
Non-current
deferred tax liabilities
|
|
11,071
|
|
|
11,400
|
Other
non-current liabilities
|
|
78,964
|
|
|
83,273
|
|
|
Total
liabilities
|
|
303,040
|
|
|
300,667
|
Commitments
and contingencies (Note 15)
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Common
stock $1 par value; authorized 30,000,000 shares; issued and
|
|
|
|
|
|
|
|
outstanding
2016 – 13,236,040 shares; 2015 – 13,288,113 shares
|
|
13,236
|
|
|
13,288
|
|
Capital
in excess of par value
|
|
107,950
|
|
|
106,333
|
|
Retained
earnings
|
|
329,684
|
|
|
326,740
|
|
Accumulated
other comprehensive loss
|
|
(68,002)
|
|
|
(73,316)
|
|
|
Total
Quaker shareholders’ equity
|
|
382,868
|
|
|
373,045
|
Noncontrolling
interest
|
|
8,658
|
|
|
8,198
|
Total
equity
|
|
391,526
|
|
|
381,243
|
|
|
Total
liabilities and equity
|
$
|
694,566
|
|
$
|
681,910
|
The accompanying notes are an
integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Condensed
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
|
|
Unaudited
|
|
|
|
|
For the Three
Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
2015
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
13,344
|
|
$
|
10,607
|
|
Adjustments to reconcile net income to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
3,157
|
|
|
3,071
|
|
|
Amortization
|
|
1,777
|
|
|
1,627
|
|
|
Equity in undistributed earnings of
associated companies, net of dividends
|
|
(27)
|
|
|
1,437
|
|
|
Deferred compensation and other, net
|
|
980
|
|
|
1,091
|
|
|
Stock-based compensation
|
|
1,798
|
|
|
1,685
|
|
|
Gain on disposal of property, plant and
equipment and other assets
|
|
(20)
|
|
|
(21)
|
|
|
Insurance settlement realized
|
|
(279)
|
|
|
(115)
|
|
|
Pension and other postretirement
benefits
|
|
(2,685)
|
|
|
10
|
|
Increase (decrease) in cash from changes
in current assets and current
|
|
|
|
|
|
|
|
liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
2,602
|
|
|
3,428
|
|
|
Inventories
|
|
(1,800)
|
|
|
(2,584)
|
|
|
Prepaid expenses and other current
assets
|
|
1,183
|
|
|
(2,634)
|
|
|
Accounts payable and accrued liabilities
|
|
(8,647)
|
|
|
(9,516)
|
|
|
Change in restructuring liabilities
|
|
(509)
|
|
|
—
|
|
|
|
Net cash provided by operating
activities
|
|
10,874
|
|
|
8,086
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Investments in property, plant and
equipment
|
|
(2,172)
|
|
|
(2,414)
|
|
|
Payments related to acquisitions, net of
cash acquired
|
|
(1,384)
|
|
|
528
|
|
|
Proceeds from disposition of assets
|
|
26
|
|
|
80
|
|
|
Insurance settlement interest earned
|
|
8
|
|
|
10
|
|
|
Change in restricted cash, net
|
|
271
|
|
|
105
|
|
|
|
Net cash used in investing activities
|
|
(3,251)
|
|
|
(1,691)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
14,687
|
|
|
—
|
|
|
Repayment of long-term debt
|
|
(159)
|
|
|
(1,327)
|
|
|
Dividends paid
|
|
(4,243)
|
|
|
(3,990)
|
|
|
Stock options exercised, other
|
|
(253)
|
|
|
(50)
|
|
|
Payments for repurchase of common stock
|
|
(5,859)
|
|
|
—
|
|
|
Excess tax benefit related to stock
option exercises
|
|
104
|
|
|
287
|
|
|
|
Net cash provided by (used in) financing
activities
|
|
4,277
|
|
|
(5,080)
|
Effect of exchange rate changes on cash
|
|
1,421
|
|
|
(1,708)
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
13,321
|
|
|
(393)
|
|
|
Cash and cash equivalents at beginning
of period
|
|
81,053
|
|
|
64,731
|
|
|
Cash and cash equivalents at end of
period
|
$
|
94,374
|
|
$
|
64,338
|
The accompanying notes are an
integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
Note
1 – Condensed Financial Information
The condensed consolidated financial statements
included herein are unaudited and have been prepared in accordance with
generally accepted accounting principles in the United States (“U.S. GAAP”) for
interim financial reporting and the United States Securities and Exchange
Commission (“SEC”) regulations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S. GAAP
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments
(consisting only of normal recurring adjustments, except certain material
adjustments, as discussed below) which are necessary for a fair statement of
the financial position, results of operations and cash flows for the interim
periods. The results for the three months ended March 31, 2016 are not
necessarily indicative of the results to be expected for the full year. These
financial statements should be read in conjunction with the Company’s Annual
Report filed on Form 10-K for the year ended December 31, 2015.
During the first quarter of 2016, the Company
revised its Condensed Consolidated Balance Sheet for December 31, 2015,
reducing non-current deferred tax assets and non-current deferred tax
liabilities by $3.6 million each, to correct for offsetting deferred tax
balances within related taxing jurisdictions. The Company considers such
revision to be immaterial and the revision had no impact on reported equity,
net income or net cash provided by operating activities.
Venezuela’s economy
has been considered hyper inflationary under U.S. GAAP since 2010, at which
time the Company’s Venezuela equity affiliate, Kelko Quaker Chemical, S.A.
(“Kelko Venezuela”), changed its functional currency from the bolivar fuerte
(“BsF”) to the U.S. dollar. Accordingly, all gains and losses resulting from
the remeasurement of Kelko Venezuela’s monetary assets and liabilities to
published exchange rates are required to be recorded directly to the Condensed
Consolidated Statement of Income. As of December 31, 2014, there were three
legally available exchange rates in Venezuela, the CADIVI (or the official
rate, 6.3 BsF per U.S. dollar), the SICAD I and the SICAD II. Kelko Venezuela
had access to the CADIVI for imported goods, had not been invited to
participate in any SICAD I auctions and had limited access to the SICAD II
mechanism. Accordingly, the Company measured its equity investment and other
related assets with Kelko Venezuela at the CADIVI exchange rate at December 31,
2014. During the three months ended March 31, 2015, the Venezuela government
announced changes to its foreign exchange controls. There continued to be
three exchange mechanisms, however, they consisted of the CADIVI, a combined
SICAD I and SICAD II auction mechanism (the “SICAD”) and a newly created,
marginal currency system (the “SIMADI”). In light of the first quarter of 2015
changes to Venezuela’s foreign exchange controls and the on-going economic
challenges in Venezuela, the Company re-assessed Kelko Venezuela’s access to
U.S. dollars, the impact on the operations of Kelko Venezuela, and the impact
on the Company’s equity investment and other related assets, which resulted in
revaluing its equity investment in Kelko Venezuela and other related assets to
the SIMADI exchange rate of approximately
193
BsF per U.S. dollar as of
March 31, 2015
. This resulted in
a charge of
$2.8
million, or $0.21
per diluted share, recorded in the three months ended March 31,
2015. As of December 31, 2015, the Company’s equity investment in Kelko
Venezuela was $0.2 million, and continued to be valued at the SIMADI exchange
rate, which was approximately 198 BsF per U.S. dollar.
During the three months ended March 31, 2016, the Venezuela
government announced further changes to its foreign exchange controls,
including eliminating the CADIVI, SICAD and SIMADI exchange rate mechanisms and
replacing them with a new dual foreign exchange rate system. The Company
understands that the new dual foreign exchange rate system now consists of a
protected “DIPRO” exchange rate, with a rate fixed at 10 Bsf per U.S. dollar
and, also, a floating supplementary market exchange rate known as the “DICOM.”
The DIPRO rate will only be available for payment of certain imports of
essential goods in the food and health sectors while the DICOM will govern all
other transactions not covered by DIPRO. As of
March 31, 2016
,
the published rate for the DICOM was
approximately
273
BsF
per U.S. dollar. In light of these changes to the foreign exchange controls
during the three months ended March 31, 2016, the Company again re-assessed
Kelko Venezuela’s access to U.S. dollars, the impact on the operations of Kelko
Venezuela, and the impact on the Company’s equity investment and other related
assets. The Company does not believe it currently has access to the DIPRO and,
therefore, believes the DICOM is currently the exchange rate system available
to Kelko Venezuela, which resulted in a currency conversion charge of $0.1
million, or $0.01 per diluted share, during the three months ended March 31,
2016.
As of March 31,
2016, the Company’s equity investment in Kelko Venezuela was $0.2 million,
valued at the DICOM exchange rate.
As part of the Company’s chemical management services,
certain third-party product sales to customers are managed by the Company.
Where the Company acts as the principal, revenue is recognized on a gross
reporting basis at the selling price negotiated with customers. Where the
Company acts as an agent, such revenue is recorded using net reporting of
service revenue, at the amount of the administrative fee earned by the Company
for ordering the goods.
Third-party products transferred under
arrangements resulting in net reporting totaled $11.1 million and $11.9 million
for the three months ended March 31, 2016 and 2015, respectively.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
Note 2 –
Recently Issued Accounting Standards
The Financial Accounting
Standards Board ("FASB") issued an accounting standard update in
March 2016 involving several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards
as either equity or liabilities, use of a forfeiture rate, and classification
on the statement of cash flows. The guidance within this accounting standard
update is effective for annual and interim periods beginning after December 15,
2016. Early adoption is permitted, however, if early adoption is elected, all
amendments in the update must be adopted in the same period. When adopted,
application of the guidance will vary based on each aspect of the update;
including on a retrospective, modified retrospective or prospective basis. The
Company has not early adopted and is currently evaluating the potential impact
of this guidance and considering the appropriate implementation strategy.
The FASB
issued an accounting standard update in February 2016 regarding the accounting
and disclosure for leases. Specifically, the update will require entities that
lease assets to recognize the assets and liabilities for the rights and
obligations created by those leases on the balance sheet, in most instances.
The guidance within this accounting standard update is effective for annual and
interim periods beginning after December 15, 2018, and should be applied on a
modified retrospective basis for the reporting periods presented. Early
adoption is permitted. The Company has not early adopted and is currently
evaluating the potential impact of this guidance and considering the
appropriate implementation strategy.
The FASB issued an accounting standard update in November 2015
regarding the classification of deferred taxes on the balance sheet. The
update requires that all deferred tax assets and liabilities, along with any
related valuation allowance, be classified as noncurrent on the balance
sheet. The update does not change the existing requirement that only
permits offsetting within a jurisdiction. The guidance within this
accounting standard update is effective for annual and interim periods
beginning after December 15, 2016, and may be applied either prospectively, for
all deferred tax assets and liabilities, or retrospectively. Early
adoption is permitted.
The Company has not early adopted.
Adoption of the guidance will
not have an impact on the Company’s earnings or cash flow but will result in a
balance sheet reclassification between current and long-term assets and
liabilities.
The FASB issued an accounting standard update in July 2015
regarding simplifying the measurement of inventory. The guidance is
applicable for entities that measure inventory using the FIFO or average cost
methods. Specifically, the update requires that inventory be measured at
lower of cost or net realizable value. Net realizable value is the
estimated selling price in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation. The
amendments in this update are effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years.
This guidance should be applied prospectively with early adoption permitted.
As of March 31, 2016, the Company has elected to early adopt this guidance
without a material impact.
The FASB issued an
accounting standard update in May 2015 regarding the required disclosures for
entities that elect to measure the fair value of certain investments using the
net asset value per share (or its equivalent) practical expedient in accordance
with the fair value measurement authoritative guidance. The update
removes the requirement to categorize within the fair value hierarchy, and also
limits the requirement to make certain other disclosures, for all such
investments. The amendments in this update are effective for fiscal years
beginning after December 15, 2015, and interim periods within those fiscal
years, and should be applied on a retrospective basis for the periods
presented. Early adoption was permitted.
As of March 31, 2016, the
Company has adopted this guidance without a material impact.
The FASB issued an
accounting standard update in April 2015 regarding the presentation of debt
issuance costs on the balance sheet. The update requires capitalized debt
issuance costs be presented on the balance sheet as a reduction to debt, rather
than recorded as a separate asset. The amendments in this update are
effective for annual and interim periods beginning after December 15, 2015 and
should be applied on a retrospective basis for the periods presented.
Early adoption was permitted. Also, in June 2015, the SEC staff announced
that the guidance within this accounting standard update was not applicable to
revolving debt arrangements or credit facilities.
As of March 31,
2016, the Company has adopted this guidance without a material impact.
The FASB issued an accounting
standard update in May 2014 regarding the accounting for and disclosure of
revenue recognition. Specifically, the update outlined a single
comprehensive model for entities to use in accounting for revenue arising from
contracts with customers, which will be common to both U.S. GAAP and
International Financial Reporting Standards (“IFRS”). The guidance was
effective for annual and interim periods beginning after December 15, 2016, and
allowed for full retrospective adoption of prior period data or a modified
retrospective adoption. Early adoption was not permitted. In August
2015, the FASB issued an accounting standard update to delay the effective date
of the new revenue standard by one year, or, in other words, to be effective
for annual and interim periods beginning after December 15, 2017.
Entities will be permitted to adopt the new revenue standard early but not
before the original effective date. In March 2016, the FASB issued an
accounting standard update to clarify the implementation guidance on principal
versus agent considerations. In April 2016, the FASB issued an accounting
standard update to clarify the identification of performance obligations and
the licensing implementation guidance, while retaining the related principles
for those
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
areas. The amendments in these 2016 updates
do not change the core principle of the previously issued guidance in May
2014. The Company is currently evaluating the potential impact of the new
revenue recognition guidance and considering the appropriate implementation
strategy.
Note 3 –
Restructuring and Related Activities
In response to
continued weak economic conditions and market declines in many regions,
Quaker’s management approved a global restructuring plan (the “2015 Program”)
in the fourth quarter of 2015 to reduce its operating costs. The 2015 Program
includes the re-organization of certain commercial functions, the closure of
certain distribution, lab and administrative offices, and other related
severance charges. In addition to these actions, the Company made a decision
to make available for sale certain technology of one of its existing
businesses, which also resulted in employee severance and $0.3 million of
intangible assets being reclassified to other current assets as of December 31,
2015. During the three months ended March 31, 2016, there has been no further
update and the intangible assets continue to be available for sale and included
in other current assets.
The 2015 Program
includes provisions for the reduction of total headcount by approximately 65
employees globally. Employee separation benefits varied depending on local
regulations within certain foreign countries and included severance and other benefits.
The Company continues to expect to substantially complete all of the
initiatives under the 2015 Program during 2016 and expects settlement of these
charges to occur primarily in 2016 as well. The Company did not incur
additional restructuring expenses in connection with the 2015 Program during
the first quarter of 2016, and, at this time, the Company does not expect
material, additional restructuring expenses beyond customary and routine
adjustments to initial estimates for employee separation benefits.
Restructuring
activity recognized in connection with the 2015 Program is as follows:
|
|
North
|
|
|
|
|
|
|
|
South
|
|
|
|
|
|
America
|
|
EMEA
|
|
Asia/Pacific
|
|
America
|
|
Total
|
Accrued restructuring as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
$
|
1,867
|
|
$
|
4,265
|
|
$
|
135
|
|
$
|
36
|
|
$
|
6,303
|
|
Cash payments
|
|
(284)
|
|
|
(54)
|
|
|
(132)
|
|
|
(39)
|
|
|
(509)
|
|
Currency translation adjustments
|
|
—
|
|
|
175
|
|
|
(3)
|
|
|
3
|
|
|
175
|
Accrued restructuring as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
$
|
1,583
|
|
$
|
4,386
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,969
|
Note 4 – Business Segments
The
Company’s reportable operating segments are organized by geography as follows:
(i) North America, (ii) Europe, Middle East and Africa (“EMEA”), (iii)
Asia/Pacific and (iv) South America.
Operating earnings, excluding indirect operating expenses,
for the Company’s reportable operating segments are comprised of revenues less
costs of goods sold and selling, general and administrative expenses (“SG&A”)
directly related to the respective region’s product sales. The indirect
operating expenses consist of SG&A related expenses that are not directly
attributable to the product sales of each respective reportable operating
segment. Other items not specifically identified with the Company’s reportable
operating segments include interest expense, interest income, license fees from
non-consolidated affiliates and other income (expense).
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
The
following table presents information about the performance of the Company’s
reportable operating segments for the
three months ended March 31, 2016 and 2015:
|
|
|
Three Months
Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
North America
|
$
|
82,372
|
|
$
|
83,002
|
|
|
|
EMEA
|
|
47,649
|
|
|
43,185
|
|
|
|
Asia/Pacific
|
|
41,512
|
|
|
45,000
|
|
|
|
South America
|
|
6,544
|
|
|
10,143
|
|
|
Total net sales
|
$
|
178,077
|
|
$
|
181,330
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings, excluding indirect
operating expenses
|
|
|
|
|
|
|
|
|
North America
|
$
|
18,632
|
|
$
|
17,825
|
|
|
|
EMEA
|
|
8,053
|
|
|
6,571
|
|
|
|
Asia/Pacific
|
|
11,048
|
|
|
10,434
|
|
|
|
South America
|
|
(315)
|
|
|
1,252
|
|
|
Total operating earnings, excluding
indirect operating expenses
|
|
37,418
|
|
|
36,082
|
|
|
Indirect operating expenses
|
|
(16,407)
|
|
|
(16,591)
|
|
|
Amortization expense
|
|
(1,777)
|
|
|
(1,627)
|
|
|
Consolidated operating income
|
|
19,234
|
|
|
17,864
|
|
|
Other income (expense), net
|
|
706
|
|
|
(194)
|
|
|
Interest expense
|
|
(741)
|
|
|
(587)
|
|
|
Interest income
|
|
348
|
|
|
320
|
|
|
Consolidated income before taxes and
equity in net income of associated companies
|
$
|
19,547
|
|
$
|
17,403
|
|
Inter-segment revenues for the three months ended March 31,
2016 and 2015 were $1.8 million and $2.0 million for North America, $3.9 million
and $4.8 million for EMEA, $0.3 million and $0.1 million for Asia/Pacific,
respectively, and less than $0.1 million for South America in both periods.
However, all inter-segment transactions have been eliminated from each
reportable operating segment’s net sales and earnings for all periods presented
above.
Note 5 – Stock-Based Compensation
The
Company recognized the following stock-based compensation expense in SG&A
in its Condensed Consolidated Statements of Income for the three months ended
March 31, 2016 and 2015:
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
2015
|
|
|
Stock options
|
$
|
201
|
|
$
|
185
|
|
|
Nonvested stock awards and restricted
stock units
|
|
848
|
|
|
752
|
|
|
Employee stock purchase plan
|
|
23
|
|
|
18
|
|
|
Non-elective and elective 401(k)
matching contribution in stock
|
|
689
|
|
|
699
|
|
|
Director stock ownership plan
|
|
37
|
|
|
31
|
|
|
Total stock-based compensation expense
|
$
|
1,798
|
|
$
|
1,685
|
|
The Company’s estimated taxes payable as of March 31, 2016 and 2015,
respectively, were sufficient to fully recognize $0.1 million and $0.3 million of
excess tax benefits related to stock option exercises as cash inflows from
financing activities in its Condensed Consolidated Statements of Cash Flows,
for the three months ended March 31, 2016 and 2015, respectively.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
Stock option
activity under all plans is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
Number of
|
|
Exercise
Price
|
|
Contractual
|
|
Intrinsic
|
|
|
|
|
Options
|
|
(per option)
|
|
Term
(years)
|
|
Value
|
|
|
Options outstanding at December 31, 2015
|
99,671
|
|
$
|
71.73
|
|
|
|
|
|
|
|
|
Options granted
|
67,444
|
|
|
72.12
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2016
|
167,115
|
|
$
|
71.89
|
|
5.7
|
|
$
|
2,317
|
|
|
Options expected to vest at March 31,
2016
|
103,040
|
|
$
|
75.82
|
|
6.4
|
|
$
|
1,027
|
|
|
Options exercisable at March 31, 2016
|
64,075
|
|
$
|
65.57
|
|
4.4
|
|
$
|
1,290
|
|
There were no options
exercised during the three months ended March 31, 2016. The total intrinsic
value of options exercised during the three months ended March 31, 2015 was $0.2
million. Intrinsic value is calculated as the difference between the current
market price of the underlying security and the strike price of a related
option.
A summary of the Company’s outstanding stock options
at March 31, 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Remaining
|
|
Average
|
|
Number
|
|
Average
|
|
|
Range of
|
|
of Options
|
|
Contractual
|
|
Exercise
Price
|
|
of Options
|
|
Exercise
Price
|
|
|
Exercise
Prices
|
|
Outstanding
|
|
Term (years)
|
|
(per option)
|
|
Exercisable
|
|
(per option)
|
|
|
$
|
—
|
|
-
|
|
$
|
10.00
|
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|
$
|
10.01
|
|
-
|
|
$
|
20.00
|
|
2,367
|
|
0.8
|
|
|
18.82
|
|
2,367
|
|
|
18.82
|
|
|
$
|
20.01
|
|
-
|
|
$
|
30.00
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
$
|
30.01
|
|
-
|
|
$
|
40.00
|
|
6,317
|
|
2.9
|
|
|
38.13
|
|
6,317
|
|
|
38.13
|
|
|
$
|
40.01
|
|
-
|
|
$
|
50.00
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
$
|
50.01
|
|
-
|
|
$
|
60.00
|
|
21,055
|
|
3.9
|
|
|
58.26
|
|
21,055
|
|
|
58.26
|
|
|
$
|
60.01
|
|
-
|
|
$
|
70.00
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
$
|
70.01
|
|
-
|
|
$
|
80.00
|
|
101,230
|
|
6.2
|
|
|
72.57
|
|
22,281
|
|
|
73.47
|
|
|
$
|
80.01
|
|
-
|
|
$
|
90.00
|
|
36,146
|
|
5.9
|
|
|
87.30
|
|
12,055
|
|
|
87.30
|
|
|
|
|
|
|
|
|
|
|
167,115
|
|
5.7
|
|
|
71.89
|
|
64,075
|
|
|
65.57
|
|
As of March 31, 2016, unrecognized compensation
expense related to options granted during 2014, 2015, and 2016 was $0.2 million,
$0.5 million, and $1.0 million, respectively.
During the first quarter of 2016, the Company granted
stock options under its LTIP plan that are subject only to time vesting over a
three-year period. For the purposes of determining the fair value of stock
option awards, the Company uses the Black-Scholes option pricing model and the assumptions
set forth in the table below:
|
|
2016
|
|
|
Number of options granted
|
67,444
|
|
|
|
Dividend yield
|
1.49
|
%
|
|
|
Expected volatility
|
28.39
|
%
|
|
|
Risk-free interest rate
|
1.08
|
%
|
|
|
Expected term (years)
|
4.0
|
|
|
Less than $0.1 million of expense was recorded on
these options during the three months ended March 31, 2016. The fair value of
these awards is amortized on a straight-line basis over the vesting period of
the awards.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
Activity
of nonvested shares granted under the Company’s LTIP plan is shown below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
Number of
|
|
Date Fair
Value
|
|
|
|
|
Shares
|
|
(per share)
|
|
|
Nonvested awards, December 31, 2015
|
113,910
|
|
$
|
72.91
|
|
|
|
Granted
|
23,661
|
|
$
|
72.22
|
|
|
|
Vested
|
(17,785)
|
|
$
|
58.97
|
|
|
Nonvested awards, March 31, 2016
|
119,786
|
|
$
|
74.84
|
|
The fair value of the nonvested stock is based on the
trading price of the Company’s common stock on the date of grant. The Company
adjusts the grant date fair value for expected forfeitures based on historical
experience for similar awards. As of March 31, 2016, unrecognized compensation
expense related to these awards was $4.5 million to be recognized over a
weighted average remaining period of 2.0 years.
Activity of nonvested restricted stock units granted
under the Company’s LTIP plan is shown below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
Number of
|
|
Date Fair
Value
|
|
|
|
|
Units
|
|
(per unit)
|
|
|
Nonvested awards, December 31, 2015
|
6,174
|
|
$
|
74.14
|
|
|
|
Granted
|
1,841
|
|
$
|
72.12
|
|
|
|
Vested
|
(1,418)
|
|
$
|
58.26
|
|
|
Nonvested awards, March 31, 2016
|
6,597
|
|
$
|
76.99
|
|
The fair value of the nonvested restricted stock units
is based on the trading price of the Company’s common stock on the date of
grant. The Company adjusts the grant date fair value for expected forfeitures
based on historical experience for similar awards. As of March 31, 2016, unrecognized
compensation expense related to these awards was $0.2 million to be recognized
over a weighted average remaining period of 2.1 years.
Employee Stock Purchase Plan
In
2000, the Board adopted an Employee Stock Purchase Plan (“ESPP”) whereby
employees may purchase Company stock through a payroll deduction plan.
Purchases are made from the plan and credited to each participant’s account at
the end of each month (the “Investment Date”). The purchase price of the stock
is
85
% of the fair market value
on the Investment Date. The plan is compensatory and the
15
% discount is expensed on
the Investment Date. All employees, including officers, are eligible to
participate in this plan. A participant may withdraw all uninvested payment
balances credited to a participant’s account at any time.
An employee whose stock ownership of
the Company exceeds five percent of the outstanding common stock is not
eligible to participate in this plan.
2013 Director Stock Ownership
Plan
In
2013, the Company adopted the 2013 Director Stock Ownership Plan (the “Plan”)
,
to encourage the Directors to
increase their investment in the Company, which was approved at the Company’s
May 2013 shareholders’ meeting. The Plan authorizes the issuance of up to
75,000
shares of Quaker common
stock in accordance with the terms of the Plan in payment of all or a portion
of the annual cash retainer payable to each of the Company’s non-employee
directors in 2013 and subsequent years during the term of the Plan.
Under the Plan, each director who, on
May 1 of the applicable calendar year, owns less than 400% of the annual cash
retainer for the applicable calendar year, divided by the average of the
closing price of a share of Quaker Common Stock as reported by the composite
tape of the New York Stock Exchange for the previous calendar year (the
“Threshold Amount”), is required to receive 75% of the annual cash retainer in
Quaker common stock and 25% of the retainer in cash, unless the director elects
to receive a greater percentage of Quaker common stock (up to 100%) of the
annual cash retainer for the applicable year. Each director who owns more than
the Threshold Amount may elect to receive common stock in payment of a
percentage (up to 100%) of the annual cash retainer.
The annual retainer is
$0.1 million and the retainer payment date is June 1.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
Note 6 – Pension and Other
Postretirement Benefits
The components of net periodic benefit cost for the
three months ended March 31, 2016 and 2015 are as follows:
|
|
Three Months
Ended March 31,
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Service cost
|
$
|
670
|
|
$
|
773
|
|
$
|
4
|
|
$
|
5
|
|
|
Interest cost
|
|
1,111
|
|
|
1,262
|
|
|
39
|
|
|
50
|
|
|
Expected return on plan assets
|
|
(1,344)
|
|
|
(1,402)
|
|
|
—
|
|
|
—
|
|
|
Actuarial loss amortization
|
|
808
|
|
|
881
|
|
|
15
|
|
|
26
|
|
|
Prior service cost amortization
|
|
(25)
|
|
|
(26)
|
|
|
—
|
|
|
—
|
|
|
Net periodic benefit cost
|
$
|
1,220
|
|
$
|
1,488
|
|
$
|
58
|
|
$
|
81
|
|
As of December 31, 2015, the Company elected to use a split
discount rate (spot-rate approach) for the U.S. plans and certain foreign plans,
which includes the method used to estimate the service and interest
components of net periodic benefit cost for pension and other postretirement
benefits beginning in the three months ended March 31, 2016. This change resulted
in a decrease in the service and interest components for pension cost in the three
months ended March 31, 2016 compared to the three months ended March 31, 2015. Historically,
the Company estimated service and interest cost components utilizing a single
weighted-average discount rate derived from a specific yield curve used to
measure the benefit obligation at the beginning of the period. Under
the spot-rate approach, service and interest cost components have been
estimated based on the application of the spot rates on a given yield
curve at each future year to each plan's projected cash flows to measure the
benefit obligation at the beginning of the period. We have made this
change to provide a more precise measurement of service and interest costs by
improving the correlation between projected benefit cash flows and the
corresponding spot yield curve rates. We have accounted for this as a
change in accounting estimate and, accordingly, have accounted for it
prospectively.
Employer Contributions
The Company
previously disclosed in its financial statements for the year ended
December 31, 2015, that it expected to make minimum cash contributions of $7.5
million to its pension plans and $0.5 million to its other postretirement
benefit plan in 2016. As of March 31, 2016, $3.6 million and $0.2 million of contributions
have been made to the Company’s pension plans and its postretirement benefit
plans, respectively.
Note 7 – Other Income (Expense), Net
The components of other income
(expense), net for the three months ended March 31, 2016 and 2015 are as
follows:
|
|
|
Three Months
Ended
|
|
|
|
|
March 31,
|
|
|
|
2016
|
|
2015
|
|
|
Income from third party license fees
|
$
|
272
|
|
$
|
254
|
|
|
Foreign exchange gains (losses), net
|
|
312
|
|
|
(594)
|
|
|
Gain on fixed asset disposals, net
|
|
5
|
|
|
52
|
|
|
Non-income tax refunds and other related
credits
|
|
21
|
|
|
69
|
|
|
Other non-operating income
|
|
124
|
|
|
72
|
|
|
Other non-operating expense
|
|
(28)
|
|
|
(47)
|
|
|
Total other income (expense), net
|
$
|
706
|
|
$
|
(194)
|
|
Note 8 – Income Taxes and Uncertain Income Tax
Positions
The Company’s three months ended March 31, 2016 effective tax rate
was 32.3% compared to three months ended March 31, 2015 effective tax rate of
30.8%. The increase in the first quarter of 2016 effective tax rate was
primarily due to the Company recording earnings in one of its subsidiaries at a
statutory tax rate of 25% during the first quarter of 2016, while it awaits
recertification of a concessionary 15% tax rate, which was available to the
Company during the first quarter of 2015.
As of March 31,
2016, the Company’s cumulative liability for gross unrecognized tax benefits
was $11.4 million. At December 31, 2015, the Company’s cumulative liability
for gross unrecognized tax benefits was $11.0 million.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
The Company continues to recognize interest and penalties
associated with uncertain tax positions as a component of taxes on income
before equity in net income of associated companies in its Condensed
Consolidated Statements of Income. The Company recognized ($0.1) million for interest
and less than ($0.1) million for penalties in its Condensed Consolidated
Statement of Income for the three months ended March 31, 2016, and recognized
($0.2) million for interest and $0.1 million for penalties in its Condensed
Consolidated Statement of Income during the three months ended March 31, 2015.
As of March 31, 2016, the Company had accrued $1.5 million for cumulative
interest and $1.9 million for cumulative penalties in its Condensed
Consolidated Balance Sheets, compared to $1.5 million for cumulative interest
and $1.9 million for cumulative penalties accrued at December 31, 2015.
During the three
months ended March 31, 2016 and 2015, the Company recognized a decrease of $0.8
million and $0.7 million, respectively, in its cumulative liability for gross
unrecognized tax benefits due to the expiration of the applicable statutes of
limitations for certain tax years.
The Company
estimates that during the year ending December 31, 2016 it will reduce its
cumulative liability for gross unrecognized tax benefits by approximately $1.9 million
to $2.0 million due to the expiration of the statute of limitations with regard
to certain tax positions. This estimated reduction in the cumulative liability
for unrecognized tax benefits does not consider any increase in liability for
unrecognized tax benefits with regard to existing tax positions or any increase
in cumulative liability for unrecognized tax benefits with regard to new tax
positions for the year ending December 31, 2016.
The Company and
its subsidiaries are subject to U.S. Federal income tax, as well as the income
tax of various state and foreign tax jurisdictions. Tax years that remain
subject to examination by major tax jurisdictions include Brazil from 2000,
Italy from 2007, France from 2008, the Netherlands and the United Kingdom from
2010, Spain from 2011, China and the United States from 2012, and various
domestic state tax jurisdictions from 1993.
The Italian tax authorities have assessed
additional tax due from the Company’s subsidiary, Quaker Italia S.r.l.,
relating to the tax years 2007, 2008, 2009 and 2010.
I
n the first quarter of 2016, the Italian
tax authorities delivered an audit report to Quaker Italia S.r.l. for the tax
years 2011, 2012 and 2013 alleging additional tax due.
In the fourth quarter of 2015,
the D
utch tax authorities assessed the Company’s subsidiary,
Quaker Chemical B.V., for additional income taxes related to the 2011 tax year
and Quaker Chemical B.V. filed a protest of such assessment.
In the first
quarter of 2016, the French tax authorities gave notice that they were auditing
the Company’s subsidiary, Quaker Chemical S.A.
As of March 31, 2016, the Company believes
it has adequate reserves, where merited, for uncertain tax positions with
respect to all of these audits.
Note 9 – Earnings Per Share
The following table summarizes earnings per share
calculations for the three months ended March 31, 2016 and 2015:
|
|
|
Three Months
Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
Net income attributable to Quaker
Chemical Corporation
|
$
|
12,946
|
|
$
|
10,378
|
|
|
|
Less: income allocated to participating
securities
|
|
(113)
|
|
|
(96)
|
|
|
|
Net income available to common
shareholders
|
$
|
12,833
|
|
$
|
10,282
|
|
|
|
Basic weighted average common shares
outstanding
|
|
13,116,807
|
|
|
13,188,761
|
|
|
Basic earnings per common share
|
$
|
0.98
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
|
|
|
|
|
|
|
Net income attributable to Quaker
Chemical Corporation
|
$
|
12,946
|
|
$
|
10,378
|
|
|
|
Less: income allocated to participating
securities
|
|
(113)
|
|
|
(96)
|
|
|
|
Net income available to common
shareholders
|
$
|
12,833
|
|
$
|
10,282
|
|
|
|
Basic weighted average common shares
outstanding
|
|
13,116,807
|
|
|
13,188,761
|
|
|
|
Effect of dilutive securities
|
|
12,587
|
|
|
19,896
|
|
|
|
Diluted weighted average common shares
outstanding
|
|
13,129,394
|
|
|
13,208,657
|
|
|
Diluted earnings per common share
|
$
|
0.98
|
|
$
|
0.78
|
|
The following aggregate numbers of stock options and
restricted stock units are not included in the diluted earnings per share
calculation since the effect would have been anti-dilutive: 11,742 and 4,497 for
the three months ended March 31, 2016 and 2015, respectively.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
Note 10 – Goodwill and Other
Intangible Assets
The Company completes its
annual impairment test as of the end of the third quarter of each year, or more
frequently if triggering events indicate a possible impairment in one or more
of its reporting units. The Company continually evaluates financial performance,
economic conditions and other relevant developments in assessing if an interim
period impairment test for one or more of its reporting units is necessary.
The Company has recorded no impairment
charges in its past. Changes in the carrying amount of goodwill for the three months
ended March 31, 2016 were as follows:
|
|
North
|
|
|
|
|
|
|
|
South
|
|
|
|
|
|
America
|
|
EMEA
|
|
Asia/Pacific
|
|
America
|
|
Total
|
Balance as of December 31, 2015
|
$
|
42,443
|
|
$
|
19,280
|
|
$
|
15,244
|
|
$
|
2,144
|
|
$
|
79,111
|
|
Goodwill additions (reductions)
|
|
—
|
|
|
(153)
|
|
|
—
|
|
|
—
|
|
|
(153)
|
|
Currency translation adjustments
|
|
9
|
|
|
678
|
|
|
165
|
|
|
193
|
|
|
1,045
|
Balance as of March 31, 2016
|
$
|
42,452
|
|
$
|
19,805
|
|
$
|
15,409
|
|
$
|
2,337
|
|
$
|
80,003
|
Gross carrying amounts and accumulated amortization
for definite-lived intangible assets as of March 31, 2016 and December 31, 2015
were as follows:
|
|
Gross Carrying
|
|
Accumulated
|
|
|
Amount
|
|
Amortization
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Customer lists and rights to sell
|
$
|
68,180
|
|
$
|
67,435
|
|
$
|
17,030
|
|
$
|
15,806
|
Trademarks and patents
|
|
23,533
|
|
|
23,147
|
|
|
6,087
|
|
|
5,538
|
Formulations and product technology
|
|
5,808
|
|
|
5,808
|
|
|
4,128
|
|
|
4,082
|
Other
|
|
5,869
|
|
|
5,788
|
|
|
4,781
|
|
|
4,565
|
Total definite-lived intangible assets
|
$
|
103,390
|
|
$
|
102,178
|
|
$
|
32,026
|
|
$
|
29,991
|
The Company recorded $1.8 million and $1.6 million of
amortization expense for the three months ended March 31, 2016 and 2015,
respectively. Estimated annual aggregate amortization expense for the current
year and subsequent five years is as follows:
|
For the year ended December 31, 2016
|
$
|
6,895
|
|
|
For the year ended December 31, 2017
|
|
6,523
|
|
|
For the year ended December 31, 2018
|
|
6,303
|
|
|
For the year ended December 31, 2019
|
|
6,201
|
|
|
For the year ended December 31, 2020
|
|
5,924
|
|
|
For the year ended December 31, 2021
|
|
5,557
|
|
The Company has two indefinite-lived intangible assets
totaling $1.1 million for trademarks at March 31, 2016 and December 31, 2015.
Note 11 – Debt
The Company’s primary credit facility is a $300.0 million
syndicated multicurrency credit agreement with a group of lenders, which
matures in June 2018. The maximum amount available under this credit facility
can be increased to $400.0 million at the Company’s option if the lenders agree
and the Company satisfies certain conditions. Borrowings under this credit
facility generally bear interest at a base rate or LIBOR rate plus a margin.
Access to this credit facility is
dependent on meeting certain financial and other covenants, but primarily
depends on the Company’s consolidated leverage ratio calculation, which cannot
exceed 3.50 to 1.
At
March 31, 2016 and December 31, 2015, the Company’s consolidated leverage ratio
was below 1.0 to 1, and the Company was also in compliance with all of the
other covenants.
At March 31, 2016 and December 31, 2015, the Company had
$79.1 million and $62.9 million outstanding, respectively, under its credit facilities.
The Company’s other debt obligations were primarily industrial development
bonds and municipality-related loans as of March 31, 2016 and December 31,
2015.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
Note 12 – Equity
In May 2015, the Company’s
Board of Directors authorized a share repurchase program for the repurchase of
up to $100.0 million of Quaker Chemical Corporation common stock (the “2015
Share Repurchase Program”). The 2015 Share Repurchase Program has no
expiration date. The 2015 Share Repurchase Program provides a framework of
conditions under which management can repurchase shares of the Company’s common
stock. The Company intends to repurchase shares to at least offset the
dilutive impact of shares issued each year as part of its employee benefit and
share based compensation plans, and could repurchase more if the Company
considers the share price to be at an amount that it considers an advantageous
return for its shareholders. The purchases may be made in the open market or
in private and negotiated transactions, in accordance with applicable laws,
rules and regulations. In connection with the 2015 Share Repurchase Program,
the remaining unutilized 1995 and 2005 Board of Directors authorized share
repurchase programs were terminated.
In
connection with the 2015 Share Repurchase Program, the Company acquired 83,879
shares of common stock, for $5.9 million, during the three months ended March
31, 2016, and had no repurchases during the three months ended March 31, 2015.
The Company has elected not to hold treasury shares, and, therefore, has
retired the shares as they are repurchased. It is the Company’s accounting
policy to record the excess paid over par value as a reduction in retained
earnings for all shares repurchased.
The following tables present
the changes in equity, net of tax, for the three months ended March 31, 2016
and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
Excess of
|
|
Retained
|
|
Comprehensive
|
|
Noncontrolling
|
|
|
|
|
|
|
Stock
|
|
Par Value
|
|
Earnings
|
|
Loss
|
|
Interest
|
|
Total
|
Balance at December 31, 2015
|
$
|
13,288
|
|
$
|
106,333
|
|
$
|
326,740
|
|
$
|
(73,316)
|
|
$
|
8,198
|
|
$
|
381,243
|
|
Net income
|
|
—
|
|
|
—
|
|
|
12,946
|
|
|
—
|
|
|
398
|
|
|
13,344
|
|
Amounts reported in other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,314
|
|
|
62
|
|
|
5,376
|
|
Repurchases of common stock
|
|
(84)
|
|
|
—
|
|
|
(5,775)
|
|
|
—
|
|
|
—
|
|
|
(5,859)
|
|
Dividends ($0.32 per share)
|
|
—
|
|
|
—
|
|
|
(4,227)
|
|
|
—
|
|
|
—
|
|
|
(4,227)
|
|
Share issuance and equity-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans
|
|
32
|
|
|
1,513
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,545
|
|
Excess tax benefit from stock option
exercises
|
|
—
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
104
|
Balance at March 31, 2016
|
$
|
13,236
|
|
$
|
107,950
|
|
$
|
329,684
|
|
$
|
(68,002)
|
|
$
|
8,658
|
|
$
|
391,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
$
|
13,301
|
|
$
|
99,056
|
|
$
|
299,524
|
|
$
|
(54,406)
|
|
$
|
7,660
|
|
$
|
365,135
|
|
Net income
|
|
—
|
|
|
—
|
|
|
10,378
|
|
|
—
|
|
|
229
|
|
|
10,607
|
|
Amounts reported in other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss) income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,565)
|
|
|
30
|
|
|
(8,535)
|
|
Dividends ($0.30 per share)
|
|
—
|
|
|
—
|
|
|
(4,000)
|
|
|
—
|
|
|
—
|
|
|
(4,000)
|
|
Share issuance and equity-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans
|
|
31
|
|
|
1,604
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,635
|
|
Excess tax benefit from stock option
exercises
|
|
—
|
|
|
287
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
287
|
Balance at March 31, 2015
|
$
|
13,332
|
|
$
|
100,947
|
|
$
|
305,902
|
|
$
|
(62,971)
|
|
$
|
7,919
|
|
$
|
365,129
|
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
The following
tables show the reclassifications from and resulting balances of accumulated
other comprehensive loss (“AOCI”) for the three months ended March 31, 2016 and
2015:
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Currency
|
|
Defined
|
|
Gain (Loss)
in
|
|
|
|
|
|
|
|
Translation
|
|
Benefit
|
|
Available-for-
|
|
|
|
|
|
|
|
Adjustments
|
|
Pension Plans
|
|
Sale
Securities
|
|
Total
|
Balance at December 31, 2015
|
|
$
|
(38,544)
|
|
$
|
(35,251)
|
|
$
|
479
|
|
$
|
(73,316)
|
|
Other comprehensive income (loss) before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassifications
|
|
|
4,671
|
|
|
(477)
|
|
|
192
|
|
|
4,386
|
|
Amounts reclassified from AOCI
|
|
|
—
|
|
|
798
|
|
|
498
|
|
|
1,296
|
|
Current period other comprehensive
income
|
|
|
4,671
|
|
|
321
|
|
|
690
|
|
|
5,682
|
|
Related tax amounts
|
|
|
—
|
|
|
(134)
|
|
|
(234)
|
|
|
(368)
|
|
Net current period other comprehensive
income
|
|
|
4,671
|
|
|
187
|
|
|
456
|
|
|
5,314
|
Balance at March 31, 2016
|
|
$
|
(33,873)
|
|
$
|
(35,064)
|
|
$
|
935
|
|
$
|
(68,002)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
$
|
(14,312)
|
|
$
|
(41,551)
|
|
$
|
1,457
|
|
$
|
(54,406)
|
|
Other comprehensive (loss) income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassifications
|
|
|
(11,113)
|
|
|
2,498
|
|
|
270
|
|
|
(8,345)
|
|
Amounts reclassified from AOCI
|
|
|
—
|
|
|
881
|
|
|
(164)
|
|
|
717
|
|
Current period other comprehensive
(loss) income
|
|
|
(11,113)
|
|
|
3,379
|
|
|
106
|
|
|
(7,628)
|
|
Related tax amounts
|
|
|
—
|
|
|
(901)
|
|
|
(36)
|
|
|
(937)
|
|
Net current period other comprehensive
(loss) income
|
|
|
(11,113)
|
|
|
2,478
|
|
|
70
|
|
|
(8,565)
|
Balance at March 31, 2015
|
|
$
|
(25,425)
|
|
$
|
(39,073)
|
|
$
|
1,527
|
|
$
|
(62,971)
|
Approximately 70% and 30% of the amounts reclassified from
accumulated other comprehensive loss to the Condensed Consolidated Statement of
Income for defined benefit retirement plans during the three months ended March
31, 2016 and 2015 were recorded in SG&A and cost of goods sold,
respectively. See Note 6 of Notes to Condensed Consolidated Financial
Statements for further information. All reclassifications related to
unrealized gain (loss) in available-for-sale securities relate to the Company’s
equity interest in a captive insurance company and are recorded in equity in
net income of associated companies. The amounts reported in other
comprehensive income for non-controlling interest are related to currency
translation adjustments.
Note 13 – Business
Acquisitions
In July 2015, the Company acquired Verkol, S.A. (“Verkol”), a
leading specialty grease and other lubricants manufacturer based in northern
Spain, included in its EMEA reportable operating segment, for 37.7 million EUR,
or approximately $41.4 million. This includes a post-closing adjustment of 1.3
million EUR, or approximately $1.4 million that was accrued as of December 31,
2015 and paid during the first quarter of 2016. The purchase included cash
acquired of 14.1 million EUR, or approximately $15.4 million, and assumed
long-term debt of 2.2 million EUR, or approximately $2.4 million.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
During the
first quarter of 2016, the Company identified and recorded an adjustment to the
allocation of the purchase price for the Verkol acquisition. The adjustment was
the result of the Company assessing additional information related to assets
acquired during the one-year measurement period following the acquisition. As
of March 31, 2016, the allocation of the purchase price for the Verkol
acquisition has not been finalized and the one-year measurement period has not
ended. Further adjustments may be necessary as a result of the Company’s
on-going assessment of additional information related to the fair value of
assets acquired and liabilities assumed. The following table presents the
current allocation of the purchase price of the assets acquired and liabilities
assumed:
|
Verkol Acquisition
|
|
|
|
|
Current assets (includes cash acquired)
|
$
|
31,151
|
|
|
Property, plant and equipment
|
|
7,941
|
|
|
Intangibles
|
|
|
|
|
|
Customer lists and rights to sell
|
|
6,146
|
|
|
|
Trademarks and patents
|
|
5,378
|
|
|
|
Other intangibles
|
|
219
|
|
|
Goodwill
|
|
5,012
|
|
|
Other long-term assets
|
|
158
|
|
|
|
Total assets purchased
|
|
56,005
|
|
|
Current liabilities
|
|
(6,681)
|
|
|
Long-term debt
|
|
(2,400)
|
|
|
Other long-term liabilities
|
|
(5,531)
|
|
|
|
Total liabilities assumed
|
|
(14,612)
|
|
|
|
Gross cash paid for acquisition
|
$
|
41,393
|
|
|
|
Less: cash acquired
|
|
15,423
|
|
|
|
Net cash paid for acquisition
|
$
|
25,970
|
|
In November 2014, the Company acquired Binol AB, a leading
bio-lubricants producer primarily serving the Nordic region, included in its
EMEA reportable operating segment, for 136.5 million SEK, or approximately $18.5
million, which is net of 4.4 million SEK, or approximately $0.5 million,
received by the Company as part of a post-closing adjustment in the first
quarter of 2015.
The results of operations of the acquired businesses and assets
are included in the Condensed Consolidated Statements of Income from their
respective acquisition dates. Transaction expenses associated with these
acquisitions are included in SG&A in the Company’s Condensed Consolidated
Statements of Income. Certain pro forma and other information are not
presented, as the operations of the acquired businesses are not material to the
overall operations of the Company for the periods presented.
Note 14 – Fair Value
Measurements
The Company has valued its
company-owned life insurance policies at fair value. The Company’s assets
subject to fair value measurement were as follows:
|
|
|
|
|
Fair Value
Measurements at March 31, 2016
|
|
|
|
Total
|
|
Using Fair
Value Hierarchy
|
Assets
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Company-owned life insurance
|
$
|
1,343
|
|
$
|
—
|
|
$
|
1,343
|
|
$
|
—
|
Total
|
$
|
1,343
|
|
$
|
—
|
|
$
|
1,343
|
|
$
|
—
|
|
|
|
|
|
Fair Value
Measurements at December 31, 2015
|
|
|
|
Total
|
|
Using Fair
Value Hierarchy
|
Assets
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Company-owned life insurance
|
$
|
1,336
|
|
$
|
—
|
|
$
|
1,336
|
|
$
|
—
|
Total
|
$
|
1,336
|
|
$
|
—
|
|
$
|
1,336
|
|
$
|
—
|
The fair values of Company-owned life insurance assets are based
on quotes for like instruments with similar credit ratings and terms. The
Company did not hold any Level 3 investments as of March 31, 2016 or December
31, 2015, respectively, so related disclosures have not been included.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
Note 15 –
Commitments and Contingencies
In 1992, the Company
identified certain soil and groundwater contamination at AC Products, Inc.
(“ACP”), a wholly owned subsidiary. In voluntary coordination with the Santa
Ana California Regional Water Quality Board (“SACRWQB”), ACP has been
remediating the contamination, the principal contaminant of which is
perchloroethylene (“PERC”). In 2004, the Orange County Water District (“OCWD”)
filed a civil complaint against ACP and other parties seeking to recover
compensatory and other damages related to the investigation and remediation of
the contamination in the groundwater. Pursuant to a settlement agreement with
OCWD, ACP agreed, among other things, to operate the two groundwater treatment
systems to hydraulically contain groundwater contamination emanating from ACP’s
site until the concentrations of PERC released by ACP fell below the current
Federal maximum contaminant level for four consecutive quarterly sampling
events. In February 2014, ACP ceased operation at one of its two groundwater
treatment systems, as it had met the above condition for closure. Based on the
most recent modeling, it is estimated that the remaining system will operate
for another
nine months to thirty
three months
.
As of March 31, 2016, the
Company believes that the range of potential-known liabilities associated with
the balance of the ACP water remediation program is approximately $0.2 million to
$0.9 million, for which the Company has sufficient reserves. The low and high
ends of the range are based on the length of operation of the treatment system
as determined by groundwater modeling. Costs of operation include the
operation and maintenance of the extraction well, groundwater monitoring and
program management.
The Company believes, although
there can be no assurance regarding the outcome of other unrelated
environmental matters, that it has made adequate accruals for costs associated
with other environmental problems of which it is aware. Approximately $0.2 million
and $0.3 million was accrued at March 31, 2016 and December 31, 2015,
respectively, to provide for such anticipated future environmental assessments
and remediation costs.
An inactive subsidiary of the
Company that was acquired in 1978 sold certain products containing asbestos,
primarily on an installed basis, and is among the defendants in numerous
lawsuits alleging injury due to exposure to asbestos. The subsidiary
discontinued operations in 1991 and has no remaining assets other than the
proceeds received from insurance settlements. To date, the overwhelming
majority of these claims have been disposed of without payment and there have
been no adverse judgments against the subsidiary. Based on a continued
analysis of the existing and anticipated future claims against this subsidiary,
it is currently projected that the subsidiary’s total liability over the next
50 years for these claims is less than $3.0 million (excluding costs of
defense). Although the Company has also been named as a defendant in certain
of these cases, no claims have been actively pursued against the Company, and
the Company has not contributed to the defense or settlement of any of these
cases pursued against the subsidiary. These cases were handled by the
subsidiary’s primary and excess insurers who had agreed in 1997 to pay all
defense costs and be responsible for all damages assessed against the
subsidiary arising out of existing and future asbestos claims up to the
aggregate limits of their policies. A significant portion of this primary
insurance coverage was provided by an insurer that is insolvent, and the other
primary insurers asserted that the aggregate limits of their policies have been
exhausted. The subsidiary challenged the applicability of these limits to the
claims being brought against the subsidiary.
In response, two of the three carriers
entered into separate settlement and release agreements with the subsidiary in
2005 and 2007 for $15.0 million and $20.0 million, respectively. The proceeds
of both settlements are restricted and can only be used to pay claims and costs
of defense associated with the subsidiary’s asbestos litigation. In 2007, the
subsidiary and the remaining primary insurance carrier entered into a Claim
Handling and Funding Agreement, under which the carrier is paying 27% of
defense and indemnity costs incurred by or on behalf of the subsidiary in
connection with asbestos bodily injury claims. The agreement continues until
terminated and can only be terminated by either party by providing a minimum of
two years prior written notice. As of March 31, 2016, no notice of termination
has been given under this agreement. At the end of the term of the agreement,
the subsidiary may choose to again pursue its claim against this insurer
regarding the application of the policy limits
.
The Company believes
that, if the coverage issues under the primary policies with the remaining
carrier are resolved adversely to the subsidiary and all settlement proceeds
were used, the subsidiary may have limited additional coverage from a state
guarantee fund established following the insolvency of one of the subsidiary’s
primary insurers. Nevertheless, liabilities in respect of claims may exceed
the assets and coverage available to the subsidiary.
If the subsidiary’s assets and
insurance coverage were to be exhausted, claimants of the subsidiary could
actively pursue claims against the Company because of the parent-subsidiary
relationship. The Company does not believe that such claims would have merit
or that the Company would be held to have liability for any unsatisfied
obligations of the subsidiary as a result of such claims. After evaluating the
nature of the claims filed against the subsidiary and the small number of such
claims that have resulted in any payment, the potential availability of
additional insurance coverage at the subsidiary level, the additional
availability of the Company’s own insurance and the Company’s strong defenses
to claims that it should be held responsible for the subsidiary’s obligations
because of the parent-subsidiary relationship, the Company believes it is not
probable that the Company will incur losses. The Company has been successful
to date having claims naming it dismissed during initial proceedings. Since
the Company may be in this early stage of litigation for some time, it is not
possible to estimate additional losses or range of loss, if any.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial
Statements
- Continued
(Dollars in thousands, except share and per
share amounts, unless otherwise stated)
(Unaudited)
As
initially disclosed in 2010, one of the Company’s subsidiaries may have paid
certain value-added-taxes (“VAT”) incorrectly and, in certain cases, may not
have collected sufficient VAT from certain customers. The VAT rules and
regulations at issue are complex, vary among the jurisdictions and can be
contradictory, in particular as to how they relate to the subsidiary’s products
and to sales between jurisdictions. Since its inception, the subsidiary had
been consistent in its VAT collection and remittance practices and had never
been contacted by any tax authority relative to VAT. The subsidiary later
determined that for certain products, a portion of the VAT was incorrectly paid
and that the total VAT due exceeded the amount originally collected and
remitted by the subsidiary. In response, the subsidiary modified its VAT
invoicing and payment procedures to eliminate or mitigate future exposure.
In 2010, three jurisdictions
contacted the subsidiary and, since then, the subsidiary has either
participated in an amnesty program or entered into a settlement whereby it paid
a reduced portion of the amounts owed in resolution of those jurisdictions’
claims. In 2013, an additional jurisdiction issued an assessment against the
subsidiary for certain tax years. During the fourth quarter of 2015, the
subsidiary participated in an amnesty program whereby it paid a reduced portion
of the amounts owed in resolution of the jurisdictions’ claims. As a result,
the Company had no remaining accruals for these or any other related tax
assessments at March 31, 2016 or December 31, 2015.
In analyzing the subsidiary’s
exposure, it is difficult to estimate both the probability and the amount of
any potential liabilities due to a number of factors, including: the decrease
in exposure over time due to applicable statutes of limitations and actions
taken by the subsidiary, the joint liability of customers and suppliers for a
portion of the VAT, the availability of a VAT refund for VAT incorrectly paid
through an administrative process, any amounts which may have been or will be
paid by customers, as well as the timing and structure of any tax amnesties or
settlements. In addition, interest and penalties on any VAT due can be a
multiple of the base tax. The subsidiary may contest any tax assessment
administratively and/or judicially for an extended period of time, but may
ultimately resolve its disputes through participation in tax amnesty programs,
which are a common practice for settling tax disputes in the jurisdictions in
question and which have historically occurred on a regular basis, resulting in
significant reductions of interest and
penalties. Also, the timing of
payments and refunds of VAT may not be contemporaneous, and, if additional VAT
is owed, it may not be fully recoverable from customers. As of March 31, 2016,
the Company believes there is one potentially impacted jurisdiction remaining,
and if the jurisdiction were to initiate audits and issue assessments, the
remaining exposure, net of refunds, could be from $0 million to $1.0 million,
assuming the continued availability of future amnesty programs or settlements
to reduce the interest and penalties. If there are future assessments but no
such future amnesty programs or settlements, the potential exposure could be
higher.
The Company is party to other
litigation which management currently believes will not have a material adverse
effect on the Company’s results of operations, cash flows or financial
condition.
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
.
Executive Summary
Quaker Chemical
Corporation 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.
The Company delivered solid operating
results in the first quarter of 2016 despite various challenges that continue
in its global end-markets. Net sales were $178.1 million in the first quarter
of 2016 compared to $181.3 million in the first quarter of 2015. Acquisition
and base volume-related net sales growth of 5% quarter-over-quarter was more
than offset by the negative impact of foreign currency translation of $8.0
million, or approximately 5%, and declines in selling price and product mix of
2%. Gross profit increased 2%, primarily from an expansion of gross margin to
38.1% in the first quarter of 2016 compared to 36.6% in the first quarter of
2015, as the Company’s gross margin continued to benefit from the timing of
certain raw material cost decreases. Selling, general and administrative
expenses (“SG&A”) increased $0.2 million in the first quarter of 2016
compared to the first quarter of 2015, primarily due to incremental costs
associated with the Company’s 2015 Verkol S.A. (“Verkol”) acquisition and
higher overall labor-related costs, largely offset by decreases from foreign
currency translation. Operating income increased approximately 8% in the first
quarter of 2016 to $19.2 million, compared to $17.9 million in the first
quarter of 2015, primarily due to the expansion of gross margin noted above, as
well as the relatively consistent level of SG&A quarter-over-quarter. This
drove the Company’s adjusted EBITDA to increase 8% to $25.0 million in the
first quarter of 2016 compared to $23.2 million in the first quarter of 2015.
The Company’s solid operating performance in the first quarter of 2016, as well
as the impact of other non-operating items, partially offset by a higher tax
rate, resulted in earnings per diluted share of $0.98 in the first quarter of
2016 compared to $0.78 in the first quarter of 2015, with non-GAAP earnings per
diluted share increasing 4% to $0.98 in the first quarter of 2016 compared to
$0.94 in the first quarter of 2015. Notably, the first quarter of 2015
reported results included a larger non-GAAP currency conversion charge of $2.8
million, or $0.21 per diluted share, related to changes in Venezuela’s foreign
exchange markets and currency controls. The Company was able to achieve these
reported and non-GAAP results in the first quarter of 2016 despite negative
impacts from foreign exchange of $0.02 per diluted share, or 2%, and continued
weakness in global steel production. See the Non-GAAP Measures section of this
Item, below, as well as other items discussed in the Company’s Consolidated
Operations Review, in the Operations section of this Item, below.
The Company’s global restructuring program
was initiated in the fourth quarter of 2015, and, given its early stages, the
Company did not realize material cost savings during the first quarter of
2016. However, the Company continues to execute the program as initially
planned and projects pre-tax cost savings as a result of this program to be
approximately $3 million in 2016 and approximately $6 million annually in
subsequent years.
From a regional perspective, the Company’s
first quarter of 2016 operating performance was primarily driven by growth in
its three largest regions, North America, Europe, Middle East and Africa
(“EMEA”) and Asia/Pacific. All three regions had quarter-over-quarter operating
earnings growth driven by increased product volumes and higher gross margins,
which more than offset the negative impacts of foreign currency translation and
selling price pressure. Related to EMEA, the region’s results also benefited
from
the Company’s third
quarter of 2015 acquisition of Verkol. Partially offsetting the performance in
its three major regions, the Company’s smallest region,
South America, continued to be negatively affected
by weak economic conditions, lower volumes due to decreased end-user production,
as well as negative impacts from foreign currency translation. These negative
impacts on South America’s performance were partially offset by the positive
effects of selling price and product mix and lower labor-related costs as a
result of
the cost
streamlining initiatives taken in this segment in prior years. See the
Reportable Operating Segment Review, in the Operations section of this
Item, below.
The Company’s solid operating performance,
coupled with lower cash invested in the Company’s working capital, increased
net operating cash flows by approximately 34% to $10.9 million in the first
quarter of 2016 compared to $8.1 million in the first quarter of 2015. The
notable drivers of the Company’s working capital improvement are further
discussed in the Company’s Liquidity and Capital Resources section of this
Item, below.
Overall, the Company is pleased with its
solid results in the first quarter of 2016. The Company was able to grow
volumes both organically by 1% and from acquisitions by 4%, as each of the
Company’s major regions had volume growth and increased earnings, despite
continued market challenges. In addition, while the Company’s sales continued
to be impacted by downward price adjustments due to declining raw material
costs, the timing of these changes allowed the Company to further expand its
gross margin. This performance, coupled with controlled SG&A levels, drove
significant operating income growth quarter-over-quarter, which led to strong
increases in adjusted EBITDA and cash flow from the first quarter of 2015.
Notably, these results were achieved despite the negative impact from foreign
exchange on net sales and earnings of 5% and 2%, respectively, and an
approximately 3.5% decline in global steel production compared to the first
quarter of 2015.
Looking
forward to the remainder of 2016, the Company anticipates some decline in gross
margin due to timing differences between raw material price changes and our
product pricing adjustments, however, the Company expects benefits from its
global restructuring program and its track record of market share gains and
leveraging of past acquisitions will continue to help offset these market
challenges. In addition, the Company’s strong cash flow generation and balance
sheet continue to be strengths that will support future key strategic
initiatives and acquisitions. Overall, the Company remains confident in its
future and expects 2016 will continue to be another good year for Quaker, as
the Company continues to forecast growth in both its top and bottom lines
during 2016, and still expects to increase non-GAAP earnings and adjusted
EBITDA for the seventh consecutive year.
Liquidity
and Capital Resources
Quaker’s cash and cash equivalents
increased to $94.4 million at March 31, 2016 from $81.1 million at December 31,
2015. The $13.3 million increase was the net result of $10.9 million of cash
provided by operating activities, $4.3 million of cash provided by financing
activities and a $1.4 million increase due to the effect of changes in exchange
rates on cash, partially offset by $3.3 million of cash used in investing
activities.
Net cash flows provided by operating
activities were $10.9 million in the first quarter of 2016 compared to $8.1
million in the first quarter of 2015. The $2.8 million increase in cash flows
provided by operating activities was driven primarily by solid operating
performance coupled with lower cash invested in the Company’s working capital
during the first quarter of 2016 compared to the first quarter of 2015.
Partially offsetting these increases was a quarter-over-quarter increase in
cash outflows related to pension and postretirement benefits due to timing and
the level of pension contributions. The decrease in cash invested in the
Company’s working capital and other current assets and liabilities was
primarily due to the timing of payments for certain prepaid expenses and other
current assets, including prepaid taxes. In addition, the net cash outflow
from changes in accounts receivable, inventories, and accounts payable and
accrued liabilities was slightly improved in the first quarter of 2016 compared
to the first quarter of 2015, primarily due to improved working capital
management. Partially offsetting these increases in cash flow were
restructuring payments made in the first quarter of 2016, as part of the
Company’s global restructuring program initiated in the fourth quarter of
2015.
Net cash flows used in investing
activities increased from $1.7 million in the first quarter of 2015 to $3.3
million in the first quarter of 2016, primarily due to higher payments for
acquisitions. The Company had a cash outflow of $1.4 million during the first
quarter of 2016 due to a post-closing adjustment to finalize its 2015
acquisition of Verkol, compared to a cash inflow of $0.5 million during the
first quarter of 2015 due to a post-closing adjustment to finalize its 2014
acquisition of Binol AB. This higher cash outflow was partially offset by
changes in the Company’s restricted cash, which is dependent upon the timing of
claims and payments associated with a subsidiary’s asbestos litigation, as well
as lower spending related to property, plant and equipment compared to the
first quarter of 2015.
Net cash flows provided by financing
activities were $4.3 million in the first quarter of 2016 compared to cash used
in financing activities of $5.1 million in the first quarter of 2015. The $9.4
million increase in cash flows was primarily due to proceeds from long-term
debt, net of repayments, of $14.5 million in the first quarter of 2016 compared
to long-term debt repayments of $1.3 million in the first quarter of 2015.
These borrowings funded increased net cash flows used in the Company’s
investing activities, described above, increased dividend payments in the first
quarter of 2016 compared to the first quarter of 2015, and, also, cash outflows
of $5.9 million in the first quarter of 2016 to repurchase 83,879 shares of the
Company’s common stock pursuant to the Company’s share repurchase program.
The Company’s primary credit facility is a
$300.0 million syndicated multicurrency credit agreement with a group of
lenders, which matures in June 2018. The maximum
amount
available under this credit facility can be increased to $400.0 million at the
Company’s option if the lenders agree and the Company satisfies certain conditions.
Borrowings under this credit facility generally bear interest at a base rate or
LIBOR rate plus a margin. Access to this credit facility is dependent on
meeting certain financial and other covenants, but primarily depends on the
Company’s consolidated leverage ratio calculation, which cannot exceed 3.50 to
1. As of March 31, 2016 and December 31, 2015, the Company’s consolidated
leverage ratio was below 1.0 to 1, and the Company was also in compliance with
all of the other covenants. At March 31, 2016 and December 31, 2015, the
Company had $79.1 million and $62.9 million outstanding, respectively, under
its credit facilities. The Company’s other debt obligations were primarily
industrial development bonds and municipality-related loans as of March 31,
2016 and December 31, 2015.
Related to the Company’s
global restructuring program initiated in the fourth quarter of 2015, the
Company did not incur additional restructuring expenses during the first
quarter of 2016 and continues to execute the program as initially planned.
Given its early stages, the Company has not realized material cost savings to
date, but continues to project pre-tax cost savings as a result of this program
to be approximately $3 million in 2016 and approximately $6 million annually in
subsequent years. In addition, the Company still expects to substantially
complete this program during 2016, utilizing operating cash flows for the
settlement of its remaining restructuring liabilities.
At March 31, 2016, the Company’s gross liability for uncertain tax
positions, including interest and penalties, was $14.8 million. The Company
cannot determine a reliable estimate of the timing of cash flows by period
related to its uncertain tax position liability. However, should the entire
liability be paid, the amount of the payment may be reduced by up to $9.3
million as a result of offsetting benefits in other tax jurisdictions.
The Company believes it is capable of
supporting its operating requirements and funding its business objectives,
including but not limited to, pension plan contributions, payments of dividends
to shareholders, potential share repurchases, possible acquisitions and other
business opportunities, capital expenditures and possible resolution of
contingencies, through internally generated funds supplemented with debt or
equity as needed.
Non-GAAP Measures
Included in this Form 10-Q filing 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 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. 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
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
GAAP earnings per diluted share
attributable to Quaker Chemical Corporation common shareholders
|
|
$
|
0.98
|
|
$
|
0.78
|
|
Equity income in a captive insurance
company per diluted share
|
|
|
(0.01)
|
|
|
(0.06)
|
|
Cost streamlining initiative per diluted
share
|
|
|
—
|
|
|
0.01
|
|
Currency conversion impact of the
Venezuelan bolivar fuerte per diluted share
|
|
|
0.01
|
|
|
0.21
|
|
Non-GAAP earnings per diluted share
|
|
$
|
0.98
|
|
$
|
0.94
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
Net income attributable to Quaker
Chemical Corporation
|
|
$
|
12,946
|
|
$
|
10,378
|
|
Depreciation and amortization
|
|
|
4,934
|
|
|
4,698
|
|
Interest expense
|
|
|
741
|
|
|
587
|
|
Taxes on income before equity in net
income of associated companies
|
|
|
6,305
|
|
|
5,359
|
|
Equity income in a captive insurance
company
|
|
|
(52)
|
|
|
(795)
|
|
Cost streamlining initiative
|
|
|
—
|
|
|
173
|
|
Currency conversion impact of the
Venezuelan bolivar fuerte
|
|
|
88
|
|
|
2,806
|
|
Adjusted EBITDA
|
|
$
|
24,962
|
|
$
|
23,206
|
|
Operations
Consolidated Operations Review
– Comparison of the First Quarter of 2016 with the First Quarter of 2015
Net sales in the first quarter of 2016 of
$178.1 million decreased 2% from net sales of $181.3 million in the first
quarter of 2015. The decrease in net sales was primarily due to the negative
impact of foreign currency translation of $8.0 million, or approximately 5%,
and declines in selling price and product mix of 2%, which collectively offset
a 5% increase in product volume, including approximately $7.3 million of sales
attributable to the Company’s 2015 acquisition of Verkol.
Costs of goods sold in the first quarter
of 2016 of $110.2 million decreased 4% from $115.0 million in the first quarter
of 2015. This decrease was primarily due to a decline in raw material costs,
the mix of products sold, and the impact of foreign currency translation, which
were partially offset by increases in product volume, including additional cost
of goods sold attributed to the Company’s 2015 acquisition of Verkol.
Gross profit in the first quarter of 2016
increased $1.5 million, or 2%, from the first quarter of 2015, primarily driven
by increased product volume, noted above, and higher gross margin of 38.1% in
the first quarter of 2016 compared to 36.6% in the first quarter of 2015,
partially offset by the negative impact of foreign currency translation.
The expansion in gross margin in the first
quarter of 2016 is due to continued timing of certain raw material cost
decreases.
SG&A in
the first quarter of 2016 increased $0.2 million compared to the first quarter
of 2015, which was primarily due to incremental costs associated with the
Company’s 2015 acquisition of Verkol and higher overall labor-related costs.
These increases were partially offset by decreases in foreign currency
translation and certain one-time charges incurred during the first quarter of
2015, which included
$0.2
million, or $0.01 per diluted share, related to a cost streamlining initiative
in South America and a $0.2 million, or $0.01 per diluted share charge, related
to events at the Company’s Venezuela affiliate
.
Operating income in the first quarter of
2016 was $19.2 million, which increased approximately 8% compared to $17.9
million in the first quarter of 2015. The increase in operating income was
primarily due to the expansion of gross margin in the first quarter of 2016
noted above, as well as the relatively consistent level of SG&A
quarter-over-quarter.
The Company had other income of $0.7
million in the first quarter of 2016 compared to other expense of $0.2 million
in the first quarter of 2015. The increase of $0.9 million was primarily
driven by foreign exchange transaction gains realized in the first quarter of
2016 compared to foreign exchange transaction losses in the first quarter of
2015.
Interest expense was $0.2 million higher
in the first quarter of 2016 compared to the first quarter of 2015, primarily
due to higher average borrowings outstanding in the first quarter of 2016 to
fund the Company’s recent acquisition activity. Interest income was relatively
flat in the first quarter of 2016 compared to the first quarter of 2015.
The Company’s effective tax rates for the
first quarters of 2016 and 2015 were 32.3% and 30.8%, respectively. The
increase in the first quarter of 2016 effective tax rate was primarily due to
the Company recording earnings in one of its subsidiaries at a statutory tax
rate of 25% while it awaits recertification of a concessionary 15% tax rate,
which was available to the Company during the first quarter of 2015. In
addition, the Company has experienced and expects to further experience
volatility in its effective tax rates due to the varying timing of tax audits
and the expiration of applicable statutes of limitations as they relate to
uncertain tax positions, among other factors. Given all these factors,
the Company currently estimates its second quarter of 2016 effective tax rate
will continue to be between 31% and 33%. However, the Company
still estimates its full year 2016 effective tax rate will approximate 28%
to 30%.
Equity in net income of associated
companies (“equity income”) increased by $1.5 million in the first quarter of
2016 compared to the first quarter of 2015. The increase in equity income was
primarily due to a smaller currency conversion charge recorded at the Company’s
Venezuela affiliate during the first quarter of 2016, of $0.1 million, or $0.01
per diluted share, compared to the first quarter of 2015 charge of $2.6
million, or $0.20 per diluted share. See Note 1 of Notes to Condensed
Consolidated Financial Statements. Excluding these charges, the primary
component of equity income is earnings from the Company’s interest in a captive
insurance company. Earnings attributable to this equity interest were $0.1
million, or $0.01 per diluted share, in the first quarter of 2016 compared to
$0.8 million, or $0.06 per diluted share, in the first quarter of 2015.
The Company had a $0.2 million increase in
net income attributable to noncontrolling interest in the first quarter of 2016
compared to the first quarter of 2015, primarily due to stronger performance at
its India affiliate.
Changes in foreign exchange rates, excluding
the currency conversion impacts of the Venezuelan bolivar fuerte noted above,
negatively impacted the Company’s first quarter of 2016 net income by
approximately 2%, or $0.02 per diluted share.
Reportable Operating Segment Review
The Company sells its industrial process
fluids, chemical specialties and technical expertise to a wide range of industries
in a global product portfolio throughout its four segments: (i) North America,
(ii) EMEA, (iii) Asia/Pacific and (iv) South America.
Comparison of the First Quarter of 2016 with
the First Quarter of 2015
North America
North America represented approximately
46% of the Company’s consolidated net sales in the first quarter of 2016, and
the region’s sales decreased $0.6 million, or 1%, compared to the first quarter
of 2015. The decrease in net sales was primarily due to the negative impact of
foreign currency translation of 2% and a decrease in selling price and product
mix of 2%, partially offset by higher product volumes of 3%. The foreign
exchange impact was primarily due to a weakening of the Mexican peso against
the U.S. dollar, as this exchange rate averaged 18.03 in the first quarter of
2016 compared to 14.95 in the first quarter of 2015. This reportable segment’s
operating earnings, excluding indirect expenses, increased $0.8 million, or 5%,
compared to the first quarter of 2015. The first quarter of 2016 increase was
mainly driven by higher gross profit on the increased product volume, noted
above, and margin expansion due to continued timing of certain raw material
cost decreases. These increases to operating earnings were partially offset by
higher labor-related costs on improved segment performance.
EMEA
EMEA represented approximately 27% of the
Company’s consolidated net sales in the first quarter of 2016, and the region’s
sales increased $4.5 million, or 10%, compared to the first quarter of 2015.
The increase in net sales was primarily due to higher product volumes,
including acquisitions, of 18%, partially offset by decreases in selling price
and product mix of approximately 6%, and foreign currency translation of 2%.
The foreign exchange impact was primarily due to a weakening of the euro
against the U.S. dollar,
as this exchange rate
averaged 1.10 in the first quarter of 2016 compared to an average of 1.13 in
the first quarter of 2015. This reportable segment’s operating earnings,
excluding indirect expenses, increased $1.5 million, or 23%, compared to the
first quarter of 2015. The first quarter of 2016 increase was mainly driven by
higher gross profit on the increased net sales, noted above, and margin
expansion due to continued timing of certain raw material cost decreases.
These increases to operating earnings were partially offset by incremental
operating costs from the 2015 Verkol acquisition and higher labor-related costs
on improved segment performance.
Asia/Pacific
Asia/Pacific represented approximately 23%
of the Company’s consolidated net sales in the first quarter of 2016, and the
region’s sales decreased $3.5 million, or 8%, compared to the first quarter of
2015. The decrease in net sales was primarily due to the negative impact of
foreign currency translation of 6% and a decrease in selling price and product
mix of 2%, which offset slightly positive base volume growth. The foreign
exchange impact was primarily due to the weakening of the Chinese renminbi,
Indian rupee and Australian dollar against the U.S. dollar, as these exchange
rates averaged 6.54, 67.51 and 0.72 in the first quarter of 2016 compared to
6.14, 62.24 and 0.79 in the first quarter of 2015, respectively. This
reportable segment’s operating earnings, excluding indirect expenses, increased
$0.6 million, or 6%, compared to the first quarter of 2015. The first quarter
of 2016 increase was mainly driven by higher gross profit on margin expansion
due to continued timing of certain raw material cost decreases. This increase
to operating earnings was partially offset by higher labor-related costs on
improved segment performance.
South America
South America represented approximately 4%
of the Company’s consolidated net sales in the first quarter of 2016, and the
region’s sales decreased $3.6 million, or 35%, compared to the first quarter of
2015. The decrease in net sales was primarily due to the negative impact of
foreign currency translation of approximately 27% and lower product volumes of
17%, partially offset by an increase in selling price and product mix of 9%.
The foreign exchange impact was primarily due to the weakening of the Brazilian
real and Argentinian peso against the U.S. dollar, as these exchange rates
averaged 3.90 and 14.41 in the first quarter of 2016 compared to 2.86 and 8.68
in the first quarter of 2015, respectively. This reportable segment’s operating
earnings, excluding indirect expenses, decreased $1.6 million, or 125%,
compared to the first quarter of 2015. The first quarter of 2016 decrease was
mainly driven by lower gross profit on the decreased net sales, noted above,
and lower gross margin due primarily to raw material cost increases, partially
offset by lower labor-related costs. This decrease in labor-related costs was
primarily due to the segment’s lower performance and the positive effects from
the cost streamlining initiatives taken in this segment during prior years.
Factors
That May Affect Our Future Results
(Cautionary Statements Under the Private Securities
Litigation Reform Act of 1995)
Certain
information included in this Report and other materials filed or to be filed by
Quaker with the SEC (as well as information included in oral statements or
other written statements made or to be made by us) contain or may contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements can be identified by the
fact that they do not relate strictly to historical or current facts. We have
based these forward-looking statements on our current expectations about future
events. These forward-looking statements include statements with respect to
our beliefs, plans, objectives, goals, expectations, anticipations, intentions,
financial condition, results of operations, future performance and business,
including:
·
statements relating to our business
strategy;
·
our current and future results and
plans; and
·
statements that include the words
“may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,”
“estimate,” “intend,” “plan” or similar expressions.
Such statements include information relating to current and
future business activities, operational matters, capital spending, and
financing sources. From time to time, forward-looking statements are also
included in Quaker’s other periodic reports on Forms 10-K, 10-Q and 8-K, press
releases, and other materials released to, or statements made to, the public.
Any or all of the forward-looking statements in this Report
and in any other public statements we make may turn out to be wrong. This can
occur as a result of inaccurate assumptions or as a consequence of known or
unknown risks and uncertainties. Many factors discussed in this Report will be
important in determining our future performance. Consequently, actual results
may differ materially from those that might be anticipated from our
forward-looking statements.
We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. However,
any further disclosures made on related subjects in Quaker’s subsequent reports
on Forms 10-K, 10-Q, 8-K and other related filings should be consulted. Our
forward-looking statements are subject to risks, uncertainties and assumptions
about us and our operations that are subject to change based on various
important factors, some of which are beyond our control. 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, future terrorist attacks and other
acts of violence. Furthermore, the Company is subject to the same business
cycles as those experienced by steel, automobile, aircraft, appliance, and
durable goods manufacturers. These risks, uncertainties, and possible
inaccurate assumptions relevant to our business could cause our actual results
to differ materially from expected and historical results. Other factors beyond
those discussed 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.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
We have evaluated the information required under this Item
that was disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for
the year ended December 31, 2015, and we believe there has been no material
change to that information.
Item 4. Controls and
Procedures.
Evaluation of disclosure controls and procedures.
As required by Rule
13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), our management, including our principal executive officer and principal
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. Based on
that evaluation, our principal executive officer and our principal financial
officer have concluded that as of the end of the period covered by this report
our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) were effective.
Changes in internal control
over financial reporting.
As required by Rule 13a-15(d) under the Exchange Act, our
management, including our principal executive officer and principal financial
officer, has evaluated our internal control over financial reporting to
determine whether any changes to our internal control over financial reporting
occurred during the quarter ended March 31, 2016 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting. Based on that evaluation, no such changes to our internal
control over financial reporting occurred during the quarter ended March 31,
2016.