Quaker Chemical Corp. Reports Operating Results (10-K)

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Mar 02, 2011
Quaker Chemical Corp. (KWR, Financial) filed Annual Report for the period ended 2010-12-31.

Quaker Chemical Corp. has a market cap of $425.1 million; its shares were traded at around $37.37 with a P/E ratio of 12.4 and P/S ratio of 1. The dividend yield of Quaker Chemical Corp. stocks is 2.5%. Quaker Chemical Corp. had an annual average earning growth of 6.9% over the past 5 years.Hedge Fund Gurus that owns KWR: Jim Simons of Renaissance Technologies LLC. Mutual Fund and Other Gurus that owns KWR: Chuck Royce of Royce& Associates, Mario Gabelli of GAMCO Investors.

Highlight of Business Operations:

In 2010, the Company completed the acquisition of D.A. Stuarts U.S. aluminum hot rolling oil business from Houghton International for approximately $6.8 million. With this acquisition, Quaker became a leading player in the U.S. aluminum hot rolling market. The Company also completed the acquisition of Summit Lubricants Inc., a leading specialty grease manufacturer and distributor of specialty greases, for approximately $29.1 million. This acquisition is complementary to the Companys existing business lines and the purchase price approximates expected 2011 sales.

Research and development costs are expensed as incurred. Research and development expenses during 2010, 2009 and 2008 were $15.7 million, $15.0 million and $16.9 million, respectively.

In order to facilitate compliance with applicable Federal, state, and local statutes and regulations relating to occupational health and safety and protection of the environment, the Company has an ongoing program of site assessment for the purpose of identifying capital expenditures or other actions that may be necessary to comply with such requirements. The program includes periodic inspections of each facility by Quaker and/or independent experts, as well as ongoing inspections and training by on-site personnel. Such inspections address operational matters, record keeping, reporting requirements and capital improvements. In 2010, capital expenditures directed solely or primarily to regulatory compliance amounted to approximately $0.7 million compared to $0.7 million and $1.7 million in 2009 and 2008, respectively. In 2011, the Company expects to incur approximately $1.9 million for capital expenditures directed primarily to regulatory compliance.

Over the past three years, Quaker has experienced significant volatility in its raw material costs, particularly crude oil derivatives. For example, the price of crude oil averaged $79 per barrel in 2010 versus $61 in 2009 and $100 in 2008 and is currently trading in the $100 per barrel range with market conditions that currently reflect the political instability in the Middle East. In addition, refining capacity has also been constrained by various factors, which further contributed to volatile raw material costs and negatively impacted margins. Animal fat and vegetable oil prices have been impacted by increased biodiesel consumption. In response, the Company has aggressively pursued price increases to offset the increased raw material costs. Although the Company has been successful in recovering a substantial amount of the raw material cost increases, it has experienced competitive as well as contractual constraints limiting pricing actions. In addition, as a result of the Companys pricing actions, customers may become more likely to consider competitors products, some of which may be available at a lower cost. Significant loss of customers could result in a material adverse effect on the Companys results of operations.

Quaker is exposed to market rate risk for changes in interest rates, due to the variable interest rate applied to the Companys borrowings under its Credit Facility. Accordingly, if interest rates rise significantly, the cost of debt to Quaker will increase, perhaps significantly, depending on the extent of Quakers borrowings under the Credit Facility. At December 31, 2010, the Company had $55.0 million outstanding under its credit facilities. The Company has entered into interest rate swaps in order to fix a portion of its variable rate debt and mitigate the risks associated with higher interest rates. The combined notional value of the swaps was $15.0 million at December 31, 2010.

At December 31, 2010, the Company had net U.S. deferred tax assets totaling $14.8 million, excluding deferred tax assets relating to additional minimum pension liabilities. In addition, at that date, the Company had $2.1 million in operating loss carryforwards primarily related to certain of its foreign operations. The Company records valuation allowances when necessary to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. However, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would be a non-cash charge to income in the period such determination was made, which could have a material adverse effect on the Companys financial statements. The Company continues to closely monitor this situation as it relates to its net deferred tax assets and the assessment of valuation allowances.

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