Quaker Chemical Announces Third Quarter 2016 Results

Operating income in the third quarter of 2016 was $21.3 million, which increased 14% compared to $18.7 million in the third quarter of 2015.  The increase in operating income was primarily due to the increase in sales volumes and the decrease in SG&A quarter-over-quarter, partially offset by the decline in gross margin, noted above.

Other income was $0.5 million in the third quarter of 2016 compared to $0.2 million in the third quarter of 2015.  The increase in other income was primarily driven by foreign currency transaction gains realized in the third quarter of 2016 compared to foreign currency transaction losses in the third quarter of 2015.

Interest expense was relatively consistent on comparable average borrowings outstanding in the third quarter of 2016 compared to the third quarter of 2015.  Interest income was $0.1 million higher in the third quarter of 2016 compared to the third quarter of 2015, primarily due to an increase in the level of the Company's invested cash.

The Company's effective tax rates for the third quarters of 2016 and 2015 were 28.3% and 24.4%, respectively.  The increase in the third 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 the recertification of a concessionary 15% tax rate, which was available to the Company during the third quarter of 2015.  The Company still expects to receive this recertification and to record the full year cumulative benefit of the reduced rate in the fourth quarter of 2016. 

Equity in net income of associated companies ("equity income") increased $0.1 million in the third quarter of 2016 compared to the third quarter of 2015, primarily due to higher earnings from the Company's interest in a captive insurance company in the third quarter of 2016 compared to the prior year quarter.

Net income attributable to noncontrolling interest decreased $0.1 million in the third quarter of 2016 compared to the prior year quarter, primarily due to lower earnings attributable to the Company's India affiliate. 

Changes in foreign exchange rates negatively impacted the Company's third quarter of 2016 net income by approximately 3%, or $0.04 per diluted share. 

Year-to-Date 2016 Summary

Net sales in the first nine months of 2016 were $555.4 million compared to $554.3 million in the first nine months of 2015.  The slight increase in net sales was primarily the result of a 5% increase in volumes, including acquisitions, largely offset by the negative impact of foreign currency translation of $17.0 million, or 3%, and declines in selling price and product mix of 1%.

Gross profit in the first nine months of 2016 increased $1.6 million, or 1%, from the first nine months of 2015, primarily driven by the increase in sales volumes, noted above, on relatively consistent gross margins of 37.8% in the first nine months of 2016 compared to 37.6% in the first nine months of 2015. 

SG&A decreased $3.0 million during the first nine months of 2016, primarily due to a decrease from foreign currency translation, lower uncommon transaction-related expenses and the cost savings efforts, noted above, which more than offset higher overall labor-related costs, including incremental costs associated with the Company's acquisition of Verkol. 

Operating income in the first nine months of 2016 was $62.7 million, which increased 8% compared to $58.0 million in the first nine months of 2015.  The increase in operating income during the first nine months of 2016 was primarily driven by higher sales volumes on consistent gross margin levels and the decrease in SG&A year-over-year, noted above.    

Other income was $1.5 million in the first nine months of 2016 compared to other expense of $0.1 million in the first nine months of 2015.  The increase in other income was primarily driven by foreign currency transaction gains realized in the first nine months of 2016 compared to foreign currency transaction losses in the first nine months of 2015.

Interest expense was $0.3 million higher in the first nine months of 2016 compared to the first nine months of 2015, primarily due to increased average borrowings outstanding during the first nine months of 2016 as a result of the Verkol acquisition.  Interest income was $0.3 million higher in the first nine months of 2016 compared to the first nine months of 2015, primarily due to an increase in the level of the Company's invested cash and increased interest received on certain tax-related credits during the first nine months of 2016.

The Company's effective tax rates for the first nine months of 2016 and 2015 were 31.0% and 27.3%, respectively.  The increase in the first nine months 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 the recertification of a concessionary 15% tax rate, which was available to the Company during the first nine months of 2015.  However, the Company still expects to receive its recertification during the fourth quarter of 2016, as noted above, and estimates its full year 2016 effective tax rate will decrease to approximately 28% to 30%. 

Equity income increased $2.1 million in the first nine months of 2016 compared to the first nine months 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 nine months of 2016 compared to the first nine months of 2015, related to changes in Venezuela's foreign exchange markets and currency controls in both periods.  In addition, equity income includes earnings from the Company's interest in a captive insurance company, which was lower in the first nine months of 2016 compared to the first nine months of 2015.

The Company had a $0.1 million increase in net income attributable to noncontrolling interest in the first nine months of 2016 compared to the first nine months 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 nine months of 2016 net income by approximately 3%, or $0.11 per diluted share. 

Balance Sheet and Cash Flow Items

The Company's net operating cash flow of $17.0 million in the third quarter of 2016 increased its year-to-date net operating cash flow to $53.0 million, a 4% increase compared to $50.8 million in the first nine months of 2015.  The increase was driven by the Company's solid operating performance and lower cash invested in its working capital.  In addition, the Company paid approximately $4.6 million in cash dividends during the third quarter of 2016, increasing its total dividends paid to $13.1 million in the first nine months of 2016.  The Company also repurchased approximately 84,000 shares of its common stock for $5.9 million in the first nine months of 2016.  Overall, the Company's liquidity and balance sheet remain strong, as its cash position exceeded its debt at September 30, 2016 and the Company's consolidated leverage ratio continued to be less than one times EBITDA.

Non-GAAP Measures

Included in this public release 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 financial 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 September 30,						Nine Months Ended September 30,
	2016		2015				2016		2015
Net income attributable to Quaker Chemical Corporation	$ 16,008		$ 14,371				$ 43,969		$ 39,787
Depreciation and amortization	4,868		4,863				14,788		14,227
Interest expense	758		697				2,226		1,891
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