Artificial Intelligence driven Marketing Communications
CONSHOHOCKEN, Pa.,– Quaker Chemical Corporation (“the Company”, also known as Quaker Houghton) (NYSE: KWR) today announced third quarter results including net sales of $325.1 million, which represented an increase of 46% compared to the prior year period. The Company completed its combination with Houghton International, Inc. (“Houghton”), herein referred to as “the Combination”, on August 1, 2019. Therefore, two months of Houghton’s operations are included in the Company’s third quarter results described in this press release. Excluding Houghton’s net sales, which amounted to $119.5 million, current quarter net sales would have declined 7%, primarily due to a decrease in sales volumes of approximately 4% and a negative impact from foreign currency translation of 2%. On a pro-forma basis, Quaker Houghton estimates net sales of approximately $386 million for the three months ended September 30, 2019, which also reflects a decline of 7% compared to approximately $417 million for the three months ended September 30, 2018, primarily due to similar negative volume and foreign exchange declines, noted above.
On a reported basis, the Company’s third quarter of 2019 net loss was $13.1 million or $0.80 per diluted share compared to third quarter of 2018 net income of $19.7 million or $1.47 per diluted share. Excluding one-time costs associated with the Combination, restructuring expenses and all other non-core items in each period, the Company’s third quarter of 2019 non-GAAP net income and earnings per diluted share were $25.3 million and $1.56, respectively, compared to $21.8 million and $1.63, respectively, in the prior year third quarter. Both GAAP and non-GAAP earnings per diluted share reflect the timing of the Combination’s close and its related increase to the Company’s share count on August 1, 2019 and two months of Houghton’s earnings. The Company’s current quarter adjusted EBITDA of $51.4 million, which also includes two months of Houghton’s earnings, increased 56% compared to $33.0 million in the third quarter of 2018 due to the Combination. On a pro forma basis, Quaker Houghton estimates a net loss of approximately $20 million in the third quarter of 2019 compared to net income of approximately $23 million in the prior year period. Pro forma adjusted EBITDA of approximately $61 million in the third quarter of 2019 increased 3% compared to approximately $59 million in the third quarter of 2018, primarily due to improved gross margin, lower SG&A and an increase in foreign exchange transaction gains partially offset by lower net sales, discussed above, and the negative impact of foreign exchange translation.
Michael F. Barry, Chairman, Chief Executive Officer and President, commented, “We experienced challenging market conditions in the third quarter. Our sales were negatively impacted by weaker end market conditions and more significant foreign exchange headwinds than projected last quarter. This was largely driven by the compounding conditions of a weak global automotive market, a generally weaker industrial environment in most parts of the world, some customer inventory corrections and the continued strength of the U.S. dollar. However, there are positives as well. We continued to take market share which partially offset the declines in our markets, we achieved our targeted gross margin, and we have made good progress with our integration and are on track to achieve our targeted integration cost synergies. Despite the 7% decrease in our pro forma net sales, these positive developments all contributed to our pro forma adjusted EBITDA growing 3% in the third quarter compared to the prior year. Overall, I continue to be confident in our future as Quaker Houghton and we remain committed to delivering on our two-year targets for synergies, adjusted EBITDA and leverage. Also, I reaffirm our previous guidance for the full year 2019 pro forma Quaker Houghton adjusted EBITDA, which results in expected pro forma adjusted EBITDA in the fourth quarter to be in the range of between $52 million and $59 million.”
Third Quarter 2019 Consolidated Results
Net sales were $325.1 million in the third quarter of 2019 compared to $222.0 million in the third quarter of 2018. The net sales increase of 46% quarter-over-quarter includes additional net sales from Houghton of $119.5 million. Excluding Houghton’s net sales, current quarter net sales would have declined 7%, reflecting a decrease in sales volumes of approximately 4%, a negative impact from foreign currency translation of 2% and a decline in selling price and product mix of 1%.
Gross profit in the third quarter of 2019 increased $24.0 million compared to the third quarter of 2018 due primarily to the additional net sales from Houghton, noted above. The Company’s reported gross margin in the current quarter was 32.3%, which includes a $10.2 million expense associated with selling Houghton’s inventory during the third quarter of 2019 which was adjusted to fair value in accordance with purchase accounting. Excluding this one-time increase to cost of goods sold (“COGS”), the Company estimates that its gross margin would have been 35.5% in the current quarter compared to 36.5% in the third quarter of 2018. This decrease in gross margin quarter-over-quarter was primarily the result of price and product mix due to lower gross margins in the Houghton business.
Selling, general and administrative expenses (“SG&A”) in the third quarter of 2019 increased $27.5 million compared to the third quarter of 2018 due primarily to additional SG&A from Houghton, partially offset by lower SG&A due to foreign currency translation, the impact of the sales decline, noted above, on direct selling costs, and the initial benefits of realized cost savings associated with the Combination.
During the third quarter of 2019, the Company incurred $14.7 million of Houghton combination and other acquisition-related expenses, primarily for legal, financial, and other advisory and consultant expenses for integration planning and regulatory approvals as well as professional fees associated with closing the Combination on August 1, 2019. Comparatively, the Company incurred $2.9 million of expenses in the prior year, primarily due to various professional fees related to integration planning and regulatory approval.
The Company initiated a restructuring program and recorded restructuring expense during the third quarter of 2019 of $24.0 million as part of its global plan to realize cost synergies associated with the Combination. The Company expects reductions in headcount and site closures to occur over the next two years under this program.
Operating loss in the third quarter of 2019 was $14.5 million compared to operating income of $24.9 million in the third quarter of 2018. Excluding the Combination and other acquisition-related charges, restructuring expenses and other non-core items, the Company’s current quarter non-GAAP operating income increased to $34.5 million compared to $27.8 million in the prior year, primarily due to additional net sales and operating income from Houghton. Also, the Company estimates that during the third quarter of 2019 it achieved approximately $2 million in synergies related to the Combination, on a combined company pro-forma basis as compared to the prior year. The Company continues to estimate that total anticipated cost synergies related to the Combination, including cost savings from the restructuring program, noted above, will be $60 million once all cost savings actions have been implemented by the second year after close.
The Company had other income, net, of $0.2 million in the third quarter of 2019 compared to other expense, net, of $0.5 million in the third quarter of 2018. The quarter-over-quarter change was primarily driven by foreign currency transaction gains of $0.4 million in the current quarter compared to losses of $0.3 million in the third quarter of 2018.
Interest expense, net, increased $5.1 million compared to the prior year as a result of additional borrowings under the Company’s new term loans and revolving credit facility to finance the closing of the Combination on August 1, 2019, described further in the Balance Sheet and Cashflow Highlights section, below.
The Company’s effective tax rates for the third quarters of 2019 and 2018 were 27.6% and 18.5%, respectively. The current quarter effective tax rate was affected by the Combination and other acquisition-related charges and restructuring expenses incurred which resulted in a loss before taxes. Excluding the impact of these and other non-core items in each quarter, the Company estimates that its effective tax rates for the third quarters of 2019 and 2018 would have been approximately 20% and 22%, respectively. The Company’s lower current quarter effective tax rate was due primarily to a cumulative year-to-date tax benefit recorded during the third quarter of 2019 as a result of one of its subsidiaries receiving approval for the renewal of a concessionary 15% tax rate compared to its 25% statutory tax rate. The concessionary tax rate was available to the Company’s subsidiary during all quarters of 2018.
Equity in net income of associated companies increased $1.1 million in the third quarter of 2019 compared to the third quarter of 2018, primarily due to additional earnings from Houghton’s 50% interest in a joint venture in Korea and slightly higher earnings from the Company’s interest in a captive insurance company.
Foreign exchange positively affected the Company’s third quarter of 2019 earnings by approximately 1% or $0.01 per diluted share, primarily due to the current quarter benefit of foreign exchange transaction gains compared to foreign exchange losses in the prior year, partially offset by a negative impact from foreign currency translation of approximately 1% due to the strengthening of the U.S. dollar in the current quarter.
Balance Sheet and Cash Flow Highlights
The Company had net operating cash flow of $35.5 million in the first nine months of 2019 compared to $50.9 million in the first nine months of 2018. The decrease in net operating cash flow year-over-year was primarily due to higher Combination-related payments, including costs incurred prior to close of the Combination related to integration planning, legal and other professional fees as well as various payments triggered by the closing of the deal, such as certain executive and non-executive compensation packages and legal, advisory and other professional fees. This was partially offset by improved working capital primarily due to accounts receivable on lower net sales and inventory levels due to prior year restocking and lower net sales.
The Company paid approximately $797.6 million, net of approximately $75.8 million of cash acquired, to close the Combination in the third quarter of 2019, which included $170.8 million in cash as well as the Company’s refinancing of $702.6 million of Houghton’s indebtedness at closing. The Company also issued an aggregate of 4.3 million shares of its common stock to the selling shareholders of Houghton, comprising approximately 24.5% of the common stock of the Company as of September 30, 2019.
Concurrent with closing of the Combination on August 1, 2019, the Company replaced its previous revolving credit facility with a new syndicated and secured credit facility (the “New Credit Facility”) and borrowed $750.0 million in term loans and $180.0 million from the multicurrency revolver available in the New Credit Facility. As of September 30, 2019, the Company had outstanding borrowings under the New Credit Facility of $857.2 million. In addition, the Company paid $23.7 million in financing-related fees during the third quarter of 2019 in connection with the New Credit Facility, which the Company has capitalized on its balance sheet as of September 30, 2019. Also, the Company’s total net indebtedness as of September 30, 2019 was $749.8 million, excluding financing related fees recorded as a reduction of long-term debt, which represents a total net indebtedness to trailing twelve month pro forma adjusted EBITDA ratio of approximately 3.3 to 1 as of September 30, 2019.
The Company has paid $15.0 million of cash dividends to its shareholders during the first nine months of 2019, a 4% increase compared to the prior year.
As previously announced, subsequent to the date of the unaudited financial statements included herein, on October 1, 2019, the Company closed its acquisition of the operating divisions of Norman Hay plc, a private U.K. company that provides specialty chemicals, operating equipment and services to various industrial end markets for a purchase price of 80 million GBP, subject to post-closing adjustments. The Company continues to expect the acquired divisions to have pro-forma full year 2019 net sales and adjusted EBITDA of approximately 63 million GBP and approximately 11.3 million GBP, respectively.
Non-GAAP and Pro Forma Measures
The information included in this public release includes non-GAAP (unaudited) financial information that includes EBITDA, adjusted EBITDA, non-GAAP operating income, non-GAAP net income, non-GAAP earnings per diluted share and pro forma 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 indicative of future operating performance of the Company, and facilitate a comparison among fiscal periods, as the non-GAAP financial measures exclude items that are not indicative of future operating performance or 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 Company presents EBITDA which is calculated as net income attributable to the Company before depreciation and amortization, interest expense, net, and taxes on income before equity in net income of associated companies. The Company also presents adjusted EBITDA which is calculated as EBITDA plus or minus certain items that are not indicative of future operating performance or not considered core to the Company’s operations. In addition, the Company presents non-GAAP operating income which is calculated as operating income plus or minus certain items that are not indicative of future operating performance or not considered core to the Company’s operations. Adjusted EBITDA margin and non-GAAP operating margin are calculated as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales, respectively. The Company believes these non-GAAP measures provide transparent and useful information and are widely used by analysts, investors, and competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.
Additionally, the Company presents non-GAAP net income and non-GAAP earnings per diluted share as additional performance measures. Non-GAAP net income is calculated as adjusted EBITDA, defined above, less depreciation and amortization, interest expense, net – adjusted, and taxes on income before equity in net income of associated companies – adjusted, as applicable, for any depreciation, amortization, interest or tax impacts resulting from the non-core items identified in the reconciliation of net income attributable to the Company to adjusted EBITDA. Non-GAAP earnings per diluted share is calculated as non-GAAP net income per diluted share as accounted for under the “two-class share method.” The Company believes that non-GAAP net income and non-GAAP earnings per diluted share provide transparent and useful information and are widely used by analysts, investors, and competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.
During the first quarter of 2019, the Company updated its calculation methodology to include the use of interest expense net of interest income in the reconciliation of EBITDA and adjusted EBITDA, compared to its historical use of only interest expense, and also to include the non-service component of the Company’s pension and postretirement benefit costs in the reconciliation of adjusted EBITDA, non-GAAP net income attributable to Quaker Chemical Corporation and non-GAAP earnings per diluted share. Prior year amounts have been recast for comparability purposes and the change in calculation methodology does not produce materially different results. The Company believes these updated calculations better reflect its underlying operating performance and better aligns the Company’s calculations to those commonly used by analysts, investors, and competitors in our industry.
As it relates to the full year expected results for the Company’s acquisition of the operating divisions of Norman Hay plc, described above, as well as the Company’s forward looking guidance for the fourth quarter of 2019, the Company has not provided guidance for GAAP measures or a quantitative reconciliation of forward-looking non-GAAP financial measures to the most directly comparable U.S. GAAP measure because it is unable to predict with reasonable certainty the ultimate outcome of certain significant items necessary to calculate such measures without unreasonable effort. These items include, but are not limited to, certain non-recurring or non-core items the Company may record that could materially impact net income, such as Combination and other acquisition-related expenses and restructuring expenses, as well as income taxes. These items are uncertain, depend on various factors, and could have a material impact on the U.S. GAAP reported results for the guidance period.