Dear Shareholders, Customers and Associates:
In 2016, we returned solid results despite facing many challenges in the global marketplace. Our business model, based on customer intimacy and a balanced approach to growth, continues to work well for Quaker.
One measure of our success is that we continue to gain market share. In 2016, we increased share in our key markets. Throughout the year, we generated strong cash flow and our balance sheet had a net cash position at the end of the year, despite making 12 acquisitions since 2010.
2016 marked Quaker’s seventh consecutive year of achieving record results for non-GAAP earnings and adjusted EBITDA. Non-GAAP earnings per diluted share increased 4% to $4.60 compared to $4.43 in 2015 and adjusted EBITDA increased 5% to $106.6 million compared to $101.6 million in 2015, despite earnings being negatively impacted 4% by foreign exchange. Sales of $746.7 million, driven by strong product volume growth, were up slightly from the prior year, even as world currency translations negatively impacted the US dollar value. With net operating cash flow for the year of $73.8 million, Quaker has more cash than debt and our balance sheet remains strong. This gives us the ability to support future growth initiatives, make acquisitions and return cash to our shareholders.
CREATING VALUE FOR SHAREHOLDERS. Our total shareholder return in 2016 was 68%. Our average 2016 share price rose to $94.7, another historic high for Quaker, representing a 14% increase over $83.3 in 2015. We also increased our dividend in July, making this the 45th consecutive year Quaker has maintained or increased the dividend paid to our shareholders. We take a balanced approach to cash allocation by evaluating acquisitions, dividends and stock repurchases. Our top priority is to make acquisitions that grow and strengthen our business because we believe this is the best source of value creation. However, if the right acquisition opportunities do not arise, dividends and Quaker’s stock repurchase program are our next best choices for using available cash to return value to shareholders. In 2016, we purchased nearly $6 million of shares at an average price of roughly $70 per share.
In 2016, Quaker continued to benefit from the 2015 restructuring program and other cost streamlining initiatives that decreased our selling, general and administrative expenses (SG&A). We remain committed to being disciplined in managing our costs.
TAKING A BALANCED APPROACH TO GROWTH. In 2016, Quaker faced ongoing uncertainties in global markets, including slower growth in China and a weak economy in Brazil. In addition, global growth in steel production, our largest market, was relatively flat in 2016. To offset these negative forces, we utilized our balanced, multi-pronged approach to growth, which draws upon a variety of strategically developed sources that allow us to surpass typical market growth rates. Our strategy includes being well-positioned in growing markets, increasing share in our markets, and making new acquisitions, while at the same time leveraging the acquisitions we have already made. All of this together helps us make gains even while an industry, region or customer group is experiencing a slowdown. This approach served us well in 2016.
Late last year, Quaker acquired Lubricor Inc., a Canadian metalworking company. Lubricor’s customer base will help strengthen our position with key automotive component suppliers. At the same time, the acquisition gives Quaker access to new technologies we can leverage elsewhere. In addition, in 2016, we continued to make progress rolling out the new technologies we gained from our acquisitions in specialty grease, aluminum hot rolling, die casting, passivation and tin plating. Although these rollouts take time and are still in the early stages, we are beginning to realize the benefits of using our existing customer base and global footprint in growing these businesses.
Four years ago, for example, Quaker acquired a small, relatively young business with tin plating technologies and application expertise. At the time of the acquisition, this business had won contracts for four tin plating production lines and had proven they could deliver greater value to manufacturers than their competitors. As part of Quaker, team members found the power of our brand recognition and business model strengthened their competitive advantage and made it easier for them to win business. Now that this acquisition is fully integrated into Quaker, we are taking market share in tin plating. As of 2016, Quaker has converted 16 tin plating lines and has five more scheduled for 2017—for a total of 21. We believe that we can keep growing this market globally.
With our acquisition of a specialty grease manufacturer in 2015, we opened new opportunities for Quaker in a market estimated at more than $1 billion. In 2016, we had some notable successes. We won a large steel customer’s grease bid in North America, replacing another key supplier, and entered the aluminum hot rolling segment in China by winning business at four mills. We are continuing to win critical pieces of business around the globe that allow us to showcase our capabilities in grease. Leveraging this and other newly acquired technologies is a key component to our overall growth and a driver of our financial success.
PARTNERING WITH CUSTOMERS EVERY STEP OF THE WAY. Quaker’s customer intimacy model remains a key factor in our ability to outperform the competition and grow market share. We believe in partnering with our customers, establishing solid relationships at all levels and providing exceptional products and service. Doing this helps differentiate us strongly from our competitors, as some have cut back their service levels in response to market downturns.
In 2016, we took our commitment to our customer intimacy model to a new level by making an investment to develop better processes and tools for all customer-facing associates. We call this OneQuaker. Through this effort, we have synthesized all the best practices, principles and thinking that have worked so well for us into a single account management approach. By October 2016, OneQuaker had been implemented in every region, with a total of more than 400 associates trained in seven languages. OneQuaker improves our ability to win and accelerate growth by making collaboration, already a Quaker strength, easier and more effective. Improved collaboration puts our associates in a better position than ever as they proactively strive to deliver the most valuable solutions to our customers. We will begin to see the results of this investment in 2017 and beyond.
RECOGNIZING THE VALUE OF OUR PEOPLE. Quaker’s success in 2016 was also a direct result of the quality and commitment of our people. We’ve been fortunate to attract people from different organizations who bring with them different ways of thinking and approaches to new challenges. At the same time, Quaker benefits from a low turnover rate, which is critical to the long-term relationships we aim to build with customers. Once again, it’s a balanced approach that works for us. Now that all associates who work with customers have been trained in OneQuaker, we are confident they will be able to do even more to strengthen those relationships.
LOOKING AHEAD. As Quaker enters 2017, we look forward to a bright future. We expect to achieve growth despite ongoing challenges in global markets. We have so much going for us: a strong balance sheet, a proven business model, a balanced approach to growth that combines diverse strategies, and a workforce that is better equipped than ever to initiate and build solid relationships with customers. I am confident in Quaker’s ability to sustain our track record of growth in the coming years.
Michael F. Barry
Chairman of the Board, Chief Executive Officer and President