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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_______________________
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission file number 0-7154
QUAKER CHEMICAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-0993790
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Elm and Lee Streets, Conshohocken, Pennsylvania 19428 - 0809
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-832-4000
Not Applicable
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Number of Shares of Common Stock
Outstanding on July 31, 1998 8,793,427
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<PAGE>
PART I. FINANCIAL INFORMATION
Quaker Chemical Corporation And Consolidated Subsidiaries
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Condensed Financial Information
-------------------------------
The following condensed financial statements are filed as part of this
quarterly report on Form 10-Q:
Consolidated Balance Sheet at June 30, 1998 and
December 31, 1997
Consolidated Statement of Income for the six months
ended June 30, 1998 and 1997
Consolidated Statement of Income for the three months
ended June 30, 1998 and 1997
Consolidated Statement of Cash Flows for the six months
ended June 30, 1998 and 1997.
* * * * * * * * * *
2
<PAGE>
Quaker Chemical Corporation
Consolidated Balance Sheet
(dollars in thousands)
June 30, December 31,
1998 1997
(Unaudited) *
Assets
Current assets
Cash and cash equivalents $ 8,927 $ 18,416
Accounts receivable 52,010 48,625
Inventories
Raw materials and supplies 12,754 10,316
Work in process and finished goods 12,463 11,365
Deferred income taxes 5,824 5,729
Prepaid expenses and other current assets 5,748 3,675
-------- --------
Total current assets 97,726 98,126
-------- --------
Investments in and advances to associated companies 4,834 4,925
-------- --------
Property, plant and equipment, at cost
Land 5,653 5,751
Buildings and improvements 35,911 31,523
Machinery and equipment 60,981 58,532
Construction in progress 3,304 1,213
-------- --------
105,849 97,019
Less accumulated depreciation 58,409 56,365
-------- --------
Total property, plant and equipment 47,440 40,654
Goodwill, net 21,132 14,500
Deferred income taxes 9,152 9,090
Other noncurrent assets 3,084 3,345
-------- --------
Total noncurrent assets 80,808 67,589
-------- --------
$183,368 $170,640
======== ========
* Condensed from audited financial statements.
3
<PAGE>
Quaker Chemical Corporation
Consolidated Balance Sheet
(dollars in thousands)
June 30, December 31,
1998 1997
(Unaudited) *
Liabilities
Current liabilities
Short-term borrowings $ 5,034 $ -
Accounts payable 21,837 22,871
Dividends payable 1,582 1,570
Accrued liabilities 19,550 20,824
Estimated taxes on income 3,836 2,494
-------- --------
Total current liabilities 51,839 47,759
-------- --------
Long-term debt 25,230 25,203
Deferred income taxes 3,622 3,752
Accrued postretirement benefits 8,951 8,934
Other noncurrent liabilities 5,809 5,825
-------- --------
Total noncurrent liabilities 43,612 43,714
-------- --------
Total liabilities 95,451 91,473
-------- --------
Minority interest in equity of subsidiaries 8,614 3,525
-------- --------
Shareholders' equity
Common stock, $1 par value; authorized
30,000,000 shares; issued (including
treasury shares) 9,664,009 shares 9,664 9,664
Capital in excess of par value 1,246 928
Retained earnings 83,951 80,749
Unearned compensation (397) (528)
Foreign currency translation adjustments (1,178) (208)
-------- --------
93,286 90,605
Treasury stock, shares held at cost;
1998 - 868,452, 1997 - 943,552 (13,983) (14,963)
-------- --------
Total shareholders' equity 79,303 75,642
-------- --------
$183,368 $170,640
======== ========
* Condensed from audited financial statements
4
<PAGE>
Quaker Chemical Corporation
Consolidated Statement of Income
Six Months Ended June 30,
Unaudited
(dollars in thousands
except per share data)
1998 1997
Net sales $ 127,590 $ 118,855
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Costs and expenses
Cost of goods sold 70,675 67,157
Selling, administrative and
general expenses 46,188 43,648
Gain on sale of European pulp
and paper business (2,621)
---------- ----------
116,863 108,184
---------- ----------
Income from operations 10,727 10,671
Other income, net 539 982
Interest expense (917) (794)
Interest income 355 105
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Income before taxes 10,704 10,964
Taxes on income 4,282 4,261
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6,422 6,703
Equity in net income of associated
companies 502 620
Minority interest in net income of
subsidiaries (560) (99)
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Net income $ 6,364 $ 7,224
========== ==========
Per share data:
Net income - basic $0.73 $0.84
Net income - diluted $0.72 $0.84
Dividends declared $0.36 $0.35
Based on weighted average number
of shares outstanding:
Basic 8,763,610 8,636,599
Diluted 8,842,466 8,656,933
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<PAGE>
Quaker Chemical Corporation
Consolidated Statement of Income
Three Months Ended June 30,
Unaudited
(dollars in thousands
except per share data)
1998 1997
Net sales $ 65,355 $ 60,312
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Costs and expenses
Cost of goods sold 36,177 33,981
Selling, administrative and
general expenses 23,419 22,153
Gain on sale of European pulp
and paper business (2,621)
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59,596 53,513
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Income from operations 5,759 6,799
Other income, net 248 630
Interest expense (470) (369)
Interest income 158 45
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Income before taxes 5,695 7,105
Taxes on income 2,278 2,717
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3,417 4,388
Equity in net income of associated
companies 273 333
Minority interest in net income of
subsidiaries (220) (64)
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Net income $ 3,470 $ 4,657
=========== ===========
Per share data:
Net income - basic $0.40 $0.54
Net income - diluted $0.39 $0.54
Dividends declared $0.18 $0.175
Based on weighted average number
of shares outstanding:
Basic 8,785,898 8,650,975
Diluted 8,849,511 8,685,166
6
<PAGE>
<TABLE>
<CAPTION>
Quaker Chemical Corporation
Consolidated Statement of Cash Flows
For the Six Months Ended June 30,
Unaudited
(dollars in thousands)
1998 1997
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,364 $ 7,224
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 2,478 2,230
Amortization 1,153 1,000
Equity in net (income) loss of associated companies (502) (620)
Minority interest in earnings of subsidiaries 560 85
Deferred income taxes (126) (318)
Deferred compensation and other postretirement benefits 675 401
Gain on sale of European pulp and paper business (2,621)
Net change in repositioning liabilities (532) (3,195)
Other, net (377) (638)
Increase (decrease) in cash from changes in current assets
and liabilities net of acquisitions and divestitures:
Accounts receivable (3,721) (3,396)
Inventories (2,364) 217
Prepaid expenses and other current assets (2,551) (2,492)
Accounts payable and accrued liabilities (721) 3,694
Estimated taxes on income 1,448 1,361
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Net cash provided by operating activities 1,784 2,932
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Cash flows from investing activities
Dividends from associated companies 728 30
Investments in property, plant, equipment and other assets (3,908) (2,274)
Investments in and advances to associated companies (471) (228)
Companies acquired (9,350)
Other, net (187) (146)
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Net cash used in investing activities (13,188) (2,618)
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Cash flows from financing activities
Net increase in short-term borrowings and notes payable 5,048 5,538
Repayment of long-term debt - (2,451)
Dividends paid (3,162) (3,039)
Treasury stock issued 346 497
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Net cash provided by financing activities 2,232 545
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Effect of exchange rate changes on cash (317) (1,982)
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Net decrease in cash and cash equivalents (9,489) (1,123)
Cash and cash equivalents at beginning of period 18,416 8,525
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Cash and cash equivalents at end of period $ 8,927 $ 7,402
======== =======
Supplemental cash flow information
Cash paid during the quarter for:
Income taxes $ 175 $ 291
Interest 917 862
</TABLE>
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Quaker Chemical Corporation
Notes to Consolidated Financial Statements
(Amounts in Thousands)
(Unaudited)
Note 1
The attached condensed financial information has been prepared in accordance
with instructions for Form 10-Q and, therefore, does not include all financial
note information which might be necessary for a fair presentation in accordance
with generally accepted accounting principles. Such condensed financial
information is unaudited, but in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments and accruals,
necessary for a fair presentation of results for the periods indicated. The net
income reported for the periods should not necessarily be regarded as indicative
of net income on an annualized basis (see accompanying Management's Discussion
and Analysis-Other Significant Items); however, significant variations from the
results for the same period of the previous year, if any, have been disclosed in
the accompanying Management's Discussion and Analysis.
Note 2 - Weighted Average Shares Outstanding
Six Months Ended Three Months Ended
June 30 June 30
------- -------
Basic Diluted Basic Diluted
----- ------- ----- -------
1998 8,763,610 8,842,466 8,785,898 8,849,511
1997 8,636,599 8,656,933 8,650,975 8,685,166
The difference between basic and diluted weighted average shares outstanding
results from the assumption that dilutive stock options outstanding were
exercised.
Note 3 - Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130 - Reporting Comprehensive Income. SFAS No. 130
requires that the components of comprehensive income be reported in the
financial statements. The following table summarizes comprehensive income for
the six months ended June 30, 1998 and 1997:
1998 1997
---- ----
Net income $6,364 $ 7,224
Foreign currency translation adjustments
(net of tax) (970) (7,020)
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Comprehensive income $5,394 $ 204
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8
<PAGE>
Quaker Chemical Corporation
Notes To Consolidated Financial Statements
(Amounts In Thousands)
(Unaudited)
The following table summarizes comprehensive income for the three months ended
June 30, 1998 and 1997:
1998 1997
---- ----
Net income $3,470 $4,657
Foreign currency translation adjustments
(net of tax) 568 (1,448)
------ ------
Comprehensive income $4,038 $3,209
====== ======
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
Net cash flow provided by operating activities amounted to $1.8 million in
the first half of 1998 compared to $2.9 million in the same period of 1997. The
decrease was principally due to changes in working capital offset by the timing
of payments related to the 1996 repositioning program.
The Company's net cash position (cash and cash equivalents plus short-term
investments less short-term borrowings and current portion of long-term debt)
decreased $14.5 million primarily as a result of cash required as part of the
formation of a majority owned joint venture in Brazil, the acquisition of a
small business in Italy, and changes in working capital. The current ratio
decreased to 1.9 to 1 at June 30, 1998 as compared to 2.1 to 1 at December 31,
1997 due principally to the decrease in the Company's net cash position. On June
25, 1998, the formation of the above mentioned joint venture with Siderquimica
Ltda. and acquisition were completed. In addition to the initial contribution,
certain earn out provisions may require additional investments. The acquisition
and the cash consideration the Company paid to obtain majority control of the
joint venture resulted in approximately $6.5 million of goodwill which is being
amortized over 20 years.
Operations
Comparison of Six Months 1998 with Six Months 1997
Consolidated net sales for the first half of 1998 increased by 7% over the
first half of 1997. The increase in sales was the net result of a 10% increase
in volume (steel, metalworking, and aircraft producer markets), a 1% increase
due to pricing initiatives and sales mix, offset by a 4% decrease due to foreign
currency translation rates.
Operating income improved 33% to $10.7 million as compared to $8.1 million
(excluding the $2.6 million gain on the European pulp and paper business) in the
same period of 1997. The improvement was mainly attributable to the higher level
of sales and expanded gross margins. The Company's gross profit margin as a
percentage of sales increased 1.1% primarily as a result of an improved sales
mix and generally stable raw material costs. Selling, administrative and general
expenses as a percentage of sales decreased 0.5% as compared to 1997 due to the
upside operating leverage provided at the higher sales level.
The decrease in other income was due to the absence of unusually high
favorable transactional exchange gains in 1997. Minority interest increased as a
result of improved performances by the Company's consolidated joint ventures in
China and Australia and earnings from the Company's consolidated joint venture
in India which was formed in the fourth quarter of 1997. Basic earnings per
share of $.73 were 14% higher than the prior year (excluding the gain on the
sale of the European pulp and paper business) despite a negative foreign
currency translation impact of approximately $.05 per share due to the
strengthening of the dollar, primarily against the Dutch guilder.
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Comparison of Second Quarter 1998 with Second Quarter 1997
Consolidated net sales for the second quarter of 1998 increased by 8% over
the first half of 1997. The increase in sales was the net result of a 9%
increase in volume (steel, metalworking, and aircraft producer markets), a 2%
increase due to pricing initiatives and sales mix, offset by a 3% decrease due
to foreign currency translation rates.
The reasons for changes in operating margin percentages, other income, and
equity in net income of associated companies in the second quarter 1998 versus
the second quarter 1997 are basically the same as those previously mentioned for
the comparative six-month periods. Basic earnings per share of $.40 were 18%
higher than the prior year (excluding the gain on the sale of the European pulp
and paper business) despite a negative foreign currency translation impact of
approximately $.02 per share due to the strengthening of the dollar, primarily
against the Dutch guilder.
Other Significant Items:
The Company is actively engaged in assessing and solving its Year 2000
problem. Historically, certain computer programs have been written using two
digits rather than four digits to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. The Company has completed an assessment of
its key systems (both IT and non-IT systems) and expects to have these compliant
on a timely basis. Expenditures (historical and future) to be incurred in
addressing any Year 2000 problems in the Company's systems are not expected to
be material and are currently estimated to be approximately $750 thousand.
Furthermore, the Company is also actively seeking from its third-party providers
written assurances that each will be Year 2000 compliant on a timely basis. To
date, the Company has received affirmative responses from a majority of its
third-party providers and will pursue additional responses from its material
third-party providers who have failed to respond to the initial enquiry. In
addition, the Company will also be seeking similar assurance as to Year 2000
compliance from its key customers.
During 1997 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131 - Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 131 is effective in 1998. The Company is currently assessing the impact
this new standard will have on its financial statements. SFAS No. 131 requires
the disclosure of segment information utilizing the approach that the Company
uses to manage its internal organization. Also, SFAS No. 131 requires the
reporting of segment information on a condensed basis for interim periods
beginning in 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
standard is effective January 1, 2000. It is not expected that the adoption of
this standard will have a material impact on the Company's financial condition.
Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute 'forward looking
statements' within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements involve a number of risks, uncertainties and other
factors that could cause actual results to differ materially from those
projected in such statements. Such risks and uncertainties include, but are not
limited to, significant increase in raw material costs, worldwide economic and
political conditions, and foreign currency fluctuations that may affect
worldwide results of operations. Furthermore, the Company is subject to the
same business cycles as those experienced by those manufacturers and their
customers (the majority of which are automobile, appliance, or durable good
manufactures or in the construction industry).
11
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1998 Annual Meeting of the Company's shareholders was held on May 6,
1998. At the Meeting, management's nominees, Joseph B. Anderson, Jr.,
Patricia C. Barron, Edwin J. Delattre, and Ronald J. Naples were elected as
Class III Directors. Voting (expressed in number of votes) was as follows:
Joseph B. Anderson, Jr., 31,013,558 votes for, Patricia C. Barron,
31,112,946 votes for, Edwin J. Delattre, 31,016,458 votes for, and
Ronald J. Naples, 31,096,669 votes for.
At the Meeting, the shareholders ratified the appointment of Price
Waterhouse LLP as the Company's independent accountants to examine and
report on its financial statements for the year ending December 31, 1998 by
a vote of 31,043,080 votes for to 119,098 votes against.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27-Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for
which this report is filed.
* * * * * * * * *
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER CHEMICAL CORPORATION
---------------------------
(Registrant)
/s/ Richard J. Fagan
---------------------------------
Richard J. Fagan, officer duly
authorized to sign this report,
Controller, Treasurer and Principal
Financial and Chief Accounting
Officer
Date: August 14, 1998
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,927
<SECURITIES> 0
<RECEIVABLES> 53,095
<ALLOWANCES> 1,085
<INVENTORY> 25,217
<CURRENT-ASSETS> 97,726
<PP&E> 105,849
<DEPRECIATION> 58,409
<TOTAL-ASSETS> 183,368
<CURRENT-LIABILITIES> 51,839
<BONDS> 5,000
<COMMON> 9,664
0
0
<OTHER-SE> 69,639
<TOTAL-LIABILITY-AND-EQUITY> 183,368
<SALES> 127,590
<TOTAL-REVENUES> 127,590
<CGS> 70,675
<TOTAL-COSTS> 116,863
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 917
<INCOME-PRETAX> 10,704
<INCOME-TAX> 4,282
<INCOME-CONTINUING> 6,364
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,364
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.72
</TABLE>
