Higher Costs Erode Earnings


Higher raw material costs ate away at profits of two metalworking fluid suppliers during the first quarter of 2005. Quaker Chemical Corp. said last week that its operating income fell 75 percent compared to the same period of 2004, while Milacron Inc. reported a 44 percent decline in earnings for its Industrial Fluids segment.

Quaker Chemical had sales revenue of $104.1 million for the first three months of the year, up 6.1 percent from the same period a year ago. The increase, though, was mainly due to favorable fluctuations in exchange rates. Moreover, costs of goods sold rose almost twice as much – 11.5 percent – primarily because of higher costs for crude oil, chemical derivatives, energy and transportation.

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Operating income for the Conshohocken, Pa., company slid from $5.9 million to $1.5 million. The bottom line did receive a $4.2 million boost from the sale of property and proceeds from a real estate joint venture. Net income for the first quarter dipped 5.5 percent to $3.1 million.

Quaker Chemical management expressed disappointment in the results.

With crude oil prices escalating above $55 per barrel in the first quarter, and with shortages in key raw materials resulting in further upward price pressure, our costs ran well ahead of our plans, which were based on more stable raw material prices than weve seen, Chairman and Chief Executive Officer Ronald J. Naples said. Even so, the company remains cautiously optimistic about prospects for the rest of the year.

Looking ahead, weve not changed our expectation that operating earnings for the year will improve over 2004, Naples said, but there are a lot of moving parts without a completely clear direction, especially demand strength and raw material price stability.

Quarterly sales revenue for Milacrons fluids business climbed 3 percent to $27 million, likewise due to exchange rate fluctuation. Higher expenses reduced segment earnings to $1.4 million, down from $2.5 million in the first quarter of 2004. But the Cincinnati-based company also remained upbeat.

As our recently introduced price increases take hold, this segment is expected to return to double-digit operating margins beginning in the second quarter, the company said.

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