CONSHOHOCKEN, Pa., Feb. 25 /PRNewswire-FirstCall/ -- Quaker Chemical Corporation (NYSE: KWR) today announced net sales for the fourth quarter 2008 of $116.2 million, and a net loss of $2.7 million, or $0.25 per diluted share. Included in fourth quarter 2008 results is a pre-tax restructuring charge of $2.9 million, or approximately $0.18 per diluted share.
Michael F. Barry, Chief Executive Officer and President, commented, "After starting the year with three strong quarters of sales and profits, 2008 finished with disappointing results due to a dramatic falloff in customer demand around the globe and continued raw material price escalation in certain regions. However, we have taken aggressive actions to reduce our cost structure given the market realities we are facing. In addition, we have recently amended our credit facility to provide more financial flexibility during this uncertain period."
Mr. Barry continued, "We expect our overall demand for products to be lower in 2009 as a result of the global recession with gradual improvement in our volumes as the year progresses. Fortunately, we entered this significant downturn at the end of the third quarter with a strong balance sheet position as our net debt level was at the lowest point since 2005. While 2009 will be a challenging year for Quaker and our customers, we remain confident that our business model, strong associate base, key growth initiatives and solid balance sheet will get us through this difficult period in a profitable manner and position us well for the future."
Fourth Quarter Summary
Net sales for the fourth quarter were $116.2 million, down 18% compared to $142.4 million for the fourth quarter of 2007. The decrease in net sales was primarily due to volume declines in all of the Company's regions, as the global economic downturn began to impact the Company. Volumes were down approximately 25%, which were partially offset by a favorable 11% in selling price and mix. Selling price increases were realized, in part, as a result of an ongoing effort to offset higher raw material costs. Foreign exchange rate translation also decreased revenues by approximately 4%.
Gross margins were down approximately $15.5 million, or 36%, compared to the fourth quarter of 2007, reflective of the above-noted volume declines. The gross margin percentage of 24.2% was also lower than the fourth quarter 2007 gross margin percentage of 30.6%. The decline in gross margin was primarily related to continued high raw material costs which were only partially offset by higher selling prices. The remaining decline in gross margin percentage was due to the impact of manufacturing and other costs being spread over reduced volumes, as well as product and regional sales mix.
Selling, general and administrative expenses ("SG&A") decreased $8.7 million, compared to the fourth quarter of 2007. Investments in higher growth areas were more than offset by significantly lower incentive compensation, lower commissions on lower sales, as well as favorable foreign exchange rate translation. SG&A as a percentage of sales decreased to 23% compared to 25% in the fourth quarter of 2007.
In response to the significant volume declines, Quaker implemented a restructuring program in the fourth quarter of 2008, which eliminated more than 80 positions and included provisions for severance for 57 employees totaling $2.9 million. In a further effort to reduce operating costs, as volume declines continued in the U.S. and Europe and extended to other regions, Quaker implemented an additional restructuring program in the first quarter of 2009, which is expected to include provisions for severance for approximately 50 employees totaling approximately $2.5 to $3 million.
The decrease in other income was primarily the result of foreign exchange losses recorded in the fourth quarter of 2008, compared to gains in the same period of the prior year. The higher net interest expense was due to higher average borrowings and lower interest income.
Full Year Summary
Net sales for 2008 were $581.6 million, up 7% from $545.6 million for 2007. Foreign exchange rate translation increased revenues by approximately 4%. Selling price increases realized across all regions and market segments were partially offset by the fourth quarter volume declines noted above.
Gross margins were down approximately $4.9 million, or 3%, compared to 2007. The gross margin percentage of 28% was also lower than the 2007 gross margin percentage 30.8%. The decline in gross margin percentage was due to increased raw material costs partially offset by price increases, as well as product and regional sales mix.
SG&A for 2008 decreased $2.7 million compared to 2007. Investments in higher growth areas, inflationary increases and unfavorable foreign exchange rate translation were more than offset by lower incentive compensation and lower legal and environmental costs.
Effective October 3, 2008, Ronald J. Naples, Chairman, retired as Quaker's Chief Executive Officer. As further discussed in the Company's Form 8-K filed on May 13, 2008, the Company is recognizing certain accelerated and other costs, in accordance with Mr. Naples' Employment, Transition and Consulting Agreement, which are expected to total $5.8 million over the 2008-2010 period. Incremental costs incurred in 2008 totaled $3.5 million, or approximately $0.22 per diluted share.
In 2007, the Company recorded environmental charges of $3.3 million. The charges consisted of $2.0 million related to the settlement of environmental litigation involving AC Products, Inc., a wholly owned subsidiary, as well as an additional $1.3 million charge for the estimated remaining remediation costs.
The decrease in other income was primarily the result of foreign exchange losses recorded in 2008, compared to gains in the prior year. Other income for 2008 also includes a net arbitration award of approximately $1.0 million, or approximately $0.04 per diluted share, related to litigation with one of the former owners of the Company's Italian subsidiary.
The Company's effective tax rate was 29.9% for 2008, compared to 29.3% in the prior year. The 2008 effective tax rate was affected by a changing mix of income among jurisdictions, as well as the derecognition of several uncertain tax positions due to the expiration of applicable statutes of limitations for certain tax years. The effective tax rate for 2007 includes an out of period non-cash tax benefit adjustment of $1.0 million related to the deferred tax accounting for the Company's foreign pension plans and intangible assets regarding one of the Company's acquisitions.
Balance Sheet and Cash Flow Items
The Company's net debt-to-total-capital ratio remained strong at 32% at both December 31, 2008 and 2007, respectively. As discussed in the Form 8-K filed on February 20, 2009, the Company has also amended its credit facility to provide covenant relief related to the 2008 and 2009 restructuring programs and the CEO transition costs. In addition, the amendment temporarily increases the maximum permitted leverage ratio from 3.5 to 4.0 from June 30, 2009 to September 30, 2009, and to 3.75 from December 31, 2009 to March 31, 2010. In February 2009, the Company also amended two Industrial Revenue Bonds totaling $15.0 million to allow for the same changes in terms as the credit facility. On a pro-forma basis, the estimated consolidated leverage ratio as of December 31, 2008 is approximately 2.2.
Quaker Chemical Corporation is a leading global provider of process chemicals, chemical specialties, services, and technical expertise to a wide range of industries - including steel, automotive, mining, aerospace, tube and pipe, coatings and construction materials. Our products, technical solutions, and chemical management services enhance our customers' processes, improve their quality, and lower their costs. Quaker's headquarters is located near Philadelphia in Conshohocken, Pennsylvania.
This release contains forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in such statements. A major risk is that the Company's demand is largely derived from the demand for its customers' products, which subjects the Company to downturns in a customer's business and unanticipated customer production shutdowns. Other major risks and uncertainties include, but are not limited to, significant increases in raw material costs, customer financial stability, worldwide economic and political conditions, foreign currency fluctuations, and future terrorist attacks such as those that occurred on September 11, 2001. Other factors could also adversely affect us. Therefore, we caution you not to place undue reliance on our forward-looking statements. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
As previously announced, Quaker Chemical's investor conference call to discuss fourth quarter and full year results is scheduled for February 26, 2009 at 3:30 p.m. (ET). Access the conference by calling 877-269-7756 or visit Quaker's Web site at www.quakerchem.com for a live webcast.
Quaker Chemical Corporation Condensed Consolidated Statement of Operations (Dollars in thousands, except per share data and share amounts) (Unaudited) Three Months Ended Twelve Months Ended December 31, December 31, 2008 2007 2008 2007 Net sales $116,229 $142,393 $581,641 $545,597 Cost of goods sold 88,114 98,783 418,580 377,661 Gross margin 28,115 43,610 163,061 167,936 % 24.2% 30.6% 28.0% 30.8% Selling, general and administrative expenses 26,762 35,499 136,697 139,429 Restructuring and related charges 2,916 - 2,916 - CEO transition costs - - 3,505 - Environmental charges - - - 3,300 Operating (loss) income (1,563) 8,111 19,943 25,207 % -1.3% 5.7% 3.4% 4.6% Other income, net (657) 960 1,095 2,578 Interest expense, net (1,204) (829) (4,409) (5,050) (Loss) income before taxes (3,424) 8,242 16,629 22,735 Taxes on income (871) 3,592 4,977 6,668 (2,553) 4,650 11,652 16,067 Equity in net (loss) income of associated companies (102) 226 388 783 Minority interest in net income of subsidiaries (67) (253) (908) (1,379) Net (loss) income $(2,722) $4,623 $11,132 $15,471 % -2.3% 3.2% 1.9% 2.8% Per share data: Net (loss) income - basic $(0.25) $0.46 $1.07 $1.55 Net (loss) income - diluted $(0.25) $0.46 $1.05 $1.53 Shares Outstanding: Basic 10,729,049 10,035,630 10,419,654 9,986,347 Diluted 10,729,049 10,154,388 10,553,325 10,106,918 Quaker Chemical Corporation Condensed Consolidated Balance Sheet (Dollars in thousands, except par value and share amounts) (Unaudited) December 31, December 31, 2008 2007 ASSETS Current assets Cash and cash equivalents $20,892 $20,195 Construction fund (restricted cash) 8,281 - Accounts receivable, net 98,702 118,135 Inventories, net 57,419 60,738 Deferred income taxes 4,948 4,042 Prepaid expenses and other current assets 10,584 10,391 Total current assets 200,826 213,501 Property, plant and equipment, net 60,945 62,287 Goodwill 40,997 43,789 Other intangible assets, net 6,417 7,873 Investments in associated companies 7,987 7,323 Deferred income taxes 34,179 30,257 Other assets 34,088 34,019 Total assets $385,439 $399,049 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long-term debt $4,631 $4,288 Accounts payable 48,849 65,202 Dividends payable 2,492 2,178 Accrued compensation 7,741 17,287 Accrued pension and postretirement benefits 7,380 1,726 Other current liabilities 12,771 15,670 Total current liabilities 83,864 106,351 Long-term debt 84,236 78,487 Deferred income taxes 7,156 7,583 Accrued pension and postretirement benefits 37,638 30,699 Other non-current liabilities 42,670 41,023 Total liabilities 255,564 264,143 Minority interest in equity of subsidiaries 3,952 4,513 Shareholders' equity Common stock, $1 par value; authorized 30,000,000 shares; issued 2008 - 10,833,325 shares 10,833 10,147 Capital in excess of par value 25,238 10,104 Retained earnings 117,089 115,767 Accumulated other comprehensive loss (27,237) (5,625) Total shareholders' equity 125,923 130,393 Total liabilities and shareholders' equity $385,439 $399,049 Quaker Chemical Corporation Condensed Consolidated Statement of Cash Flows For the twelve months ended December 31, (Dollars in thousands) (Unaudited) 2008 2007 Cash flows from operating activities Net income $11,132 $15,471 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 10,879 11,686 Amortization 1,177 1,197 Equity in net income of associated companies, net of dividends (275) (219) Minority interest in earnings of subsidiaries 908 1,379 Deferred income tax 1,014 (354) Uncertain tax positions (non- deferred portion) 211 1,577 Deferred compensation and other, net 819 (85) Stock-based compensation 3,901 1,550 Restructuring and related charges 2,916 - Environmental charges - 3,300 (Gain) loss on disposal of property, plant and equipment (10) (40) Insurance settlement realized (1,556) (1,854) Pension and other postretirement benefits (3,527) (3,596) Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions: Accounts receivable 15,582 (4,093) Inventories (73) (5,182) Prepaid expenses and other current assets (181) 122 Accounts payable and accrued liabilities (27,892) 7,612 Change in restructuring liabilities (749) - Estimated taxes on income (885) (970) Net cash provided by operating activities 13,391 27,501 Cash flows from investing activities Capital expenditures (11,742) (9,165) Payments related to acquisitions (1,859) (2,373) Proceeds from disposition of assets 177 259 Insurance settlement received and interest earned 5,306 5,705 Change in restricted cash, net (12,031) (3,851) Net cash used in investing activities (20,149) (9,425) Cash flows from financing activities Proceeds from short-term debt - 2,250 Net increase (decrease) in short-term borrowings 743 (3,198) Proceeds from long-term debt 10,000 - Repayments of long-term debt (3,401) (8,345) Dividends paid (9,503) (8,654) Stock options exercised, other 11,919 3,309 Distributions to minority shareholders (404) (1,265) Net cash provided by (used in) financing activities 9,354 (15,903) Effect of exchange rate changes on cash (1,899) 1,960 Net increase in cash and cash equivalents 697 4,133 Cash and cash equivalents at the beginning of the period 20,195 16,062 Cash and cash equivalents at the end of the period $20,892 $20,195