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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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, 1999
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
---------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-0993790
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Elm and Lee Streets, Conshohocken, Pennsylvania 19428 - 0809
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-832-4000
Not Applicable
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, 1999 8,920,489
<PAGE>
QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at June 30, 1999 (unaudited) and
December 31, 1998
Condensed Consolidated Statement of Income for the six months ended
June 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statement of Income for the three months ended
June 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statement of Cash Flows for the six months
ended June 30, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
* * * * * * * * * *
2
<PAGE>
Quaker Chemical Corporation
Condensed Consolidated Balance Sheet
(dollars in thousands)
June 30,
1999 December 31,
(Unaudited) 1998 *
----------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 10,612 $ 10,213
Accounts receivable 53,720 52,448
Inventories
Raw materials and supplies 11,027 12,616
Work in process and finished goods 10,652 11,901
Prepaid expenses and other current assets 10,276 8,890
-------- --------
Total current assets 96,287 96,068
Investments in and advances to associated companies 6,201 5,280
Property, plant and equipment, at cost 107,582 111,963
Less accumulated depreciation 61,621 62,341
-------- --------
Total property, plant and equipment 45,961 49,622
Goodwill 16,807 21,366
Other noncurrent assets 19,309 17,567
-------- --------
$184,565 $189,903
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term borrowings $ 9,956 $ 1,420
Accounts payable 23,201 27,825
Accrued compensation 6,430 9,967
Other current liabilities 14,209 11,220
-------- --------
Total current liabilities 53,796 50,432
Long-term debt 25,539 25,344
Other noncurrent liabilities 23,952 22,061
-------- --------
Total liabilities 103,287 97,837
Minority interest in equity of subsidaries 7,290 8,331
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 868 910
Retained earnings 88,280 84,873
Accumulated other comprehensive income (loss) (12,940) 582
-------- --------
85,872 96,029
Treasury stock, shares held at cost;
1999-747,100, 1998-770,059 (11,884) (12,294)
-------- --------
Total shareholders' equity 73,988 83,735
-------- --------
$184,565 $189,903
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
* Condensed from audited financial statements.
3
<PAGE>
Quaker Chemical Corporation
Condensed Consolidated Statement of Income
For the period ended June 30,
Unaudited
(dollars in thousands, except per share date)
Second Quarter Six Months
------------------ ---------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $64,025 $65,355 $124,927 $127,590
------- ------- -------- --------
Cost and expenses
Cost of goods sold 34,543 36,177 66,792 70,675
Selling, administrative and
general expenses 23,081 23,419 46,759 46,188
------- ------- -------- --------
57,624 59,596 113,551 116,863
Income from operations 6,401 5,759 11,376 10,727
Other income, net 561 248 852 539
Interest expense, net (485) (312) (938) (562)
------- ------- -------- --------
Income before taxes 6,477 5,695 11,290 10,704
Taxes on income 2,591 2,278 4,516 4,282
------- ------- -------- --------
3,886 3,417 6,774 6,422
Equity in net income of associated
companies 264 273 496 502
Minority interest in net income of
subsidiaries (347) (220) (469) (560)
------- ------- -------- ---------
Net income $ 3,803 $ 3,470 $ 6,801 $ 6,364
======= ======= ======== ========
Per share data:
Net income - basic $0.42 $0.40 $0.76 $0.73
Net income - diluted $0.42 $0.39 $0.76 $0.72
Dividends declared $0.19 $0.18 $0.38 $0.36
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
<PAGE>
<TABLE>
<CAPTION>
Quaker Chemical Corporation
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended June 30
Unaudited
(dollars in thousands)
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 6,801 $ 6,364
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,157 3,631
Equity in net income of associated companies (496) (502)
Minority interest in earnings of subsidiaries 469 560
Other, net 313 172
Increase (decrease) in cash from changes in current assets
and liabilities net of acquisitions and divestitures:
Accounts receivable (4,372) (3,721)
Inventories 1,208 (2,364)
Prepaid expenses and other current assets (2,077) (2,551)
Accounts payable and accrued liabilities (1,153) 727
Change in repositioning liabilities (1,703) (532)
------- -------
Net cash provided by operating activities 2,147 1,784
------- -------
Cash flows from investing activities
Investments in property, plant, equipment and other assets (3,052) (3,908)
Companies acquired - (9,350)
Other, net (602) 70
------- -------
Net cash used in investing activities (3,654) (13,188)
------- -------
Cash flows from financing activities
Net increase in short-term borrowings 8,590 5,048
Dividends paid (3,394) (3,162)
Other, net 511 346
------- -------
Net cash provided by financing activities 5,707 2,232
------- -------
Effect of exchange rate changes on cash (3,801) (317)
------- -------
Net increase (decrease) in cash and cash equivalents 399 (9,489)
Cash and cash equivalents at beginning of period 10,213 18,416
------- -------
Cash and cash equivalents at end of period $10,612 $ 8,927
======= =======
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements
</FN>
</TABLE>
5
<PAGE>
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Note 1 - Condensed Financial Information
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 statement 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 statement 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
----- ------- ----- -------
1999 8,903,783 8,950,264 8,909,013 8,955,452
1998 8,763,610 8,842,466 8,785,898 8,849,511
The difference between basic and diluted weighted average shares outstanding
results from the assumption that dilutive stock options outstanding were
exercised.
Note 3 - Business Segments
The company's reportable segments are as follows:
(1) Metalworking process chemicals - produces products used as lubricants for
various heavy industrial and manufacturing applications and provides
chemical management services.
(2) Coatings - produces temporary and permanent coatings for metal products and
chemical milling maskants.
(3) Other chemical products - primarily includes chemicals used in the
manufacturing of paper as well as other various chemical products.
Segment data includes direct segment costs as well as general operating costs,
including depreciation, allocated to each segment based on net sales.
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The table below presents information about the reported segments for the six
months ending June 30:
Metalworking Other
Process Chemical
Chemicals Coatings Products Total
-------------------------------------------------------
1999
Net Sales $109,675 $ 8,920 $ 6,332 $124,927
Operating Income 16,447 2,212 (83) 18,576
1998
Net Sales $111,631 $ 9,862 $ 6,097 $127,590
Operating Income 15,752 2,831 (95) 18,488
Operating income comprises revenue less related costs and expenses. Nonoperating
expenses primarily consist of general corporate expenses identified as not being
a cost of operation, interest expense, interest income, and license fees from
nonconsolidated associates.
A reconciliation of total segment operating income to total consolidated income
before taxes, for the six months ended June 30, 1999 and 1998 is as follows:
1999 1998
---- ----
Total operating income for
reportable segments $18,576 $18,488
Nonoperating charges (4,043) (4,130)
Depreciation and amortization (3,157) (3,631)
Interest expense (1,117) (917)
Interest income 179 355
Other income, net 852 539
------- -------
Consolidated income before taxes $11,290 $10,704
======= =======
Note 4 - Comprehensive Income
The following table summarizes comprehensive (loss) income for the six months
ended June 30, 1999 and 1998:
1999 1998
---- ----
Net income $6,801 $ 6,364
Foreign currency translation adjustments (13,522) (970)
------- -------
Comprehensive (loss) income $(6,721) $ 5,394
======= =======
7
<PAGE>
The following table summarizes comprehensive income for the three months ended
June 30, 1999 and 1998:
1999 1998
---- ----
Net income $ 3,803 $ 3,470
Foreign currency translation adjustments (3,315) 568
------- -------
Comprehensive income $ 488 $ 4,038
======= =======
Item 2. 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 $2.1 million in
the first six months of 1999 compared to $1.8 million in the same period of
1998. The increase was principally due to a reduction in inventory levels offset
by payments related to the 1998 repositioning program as well as other changes
in working capital.
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 $8.1 million primarily as a result of seasonal cash needs related to
the annual payment of employee incentives and payments related to the 1998
repositioning program. The current ratio decreased to 1.8 to 1 at June 30, 1999
as compared to 1.9 to 1 at December 31, 1998 due principally to the decrease in
the Company's net cash position.
Operations
- ----------
Comparison of Six Months 1999 with Six Months 1998
- --------------------------------------------------
Consolidated net sales for the first half of 1999 decreased by 2% over the
first half of 1998. The decrease in sales was the net result of a 3% decrease
due to foreign currency exchange rates, a 1% decrease in pricing of certain
products, partially offset by a 2% increase in volume. Net sales of the
metalworking process chemicals segment were down 2% versus last year due mainly
to foreign steel imports into the U.S. and Europe as well as temporary shutdowns
of metalworking and steel facilities at the end of 1998 that extended into
January of 1999. Sales in the coatings segment were down 10% due primarily to
lower maskant sales into the aircraft industry caused by lower aircraft
production as a result of the downturn in the Asian economy. The other chemical
products segment sales were up 4% due to higher sales in Brazil, as a result of
the mid-year 1998 acquisition.
Income from operations improved 6% to $11.4 million as compared to $10.7
million in the same period of 1998, despite the decrease in sales, primarily due
to lower raw material costs as well as cost reduction initiatives throughout the
organization. The Company's cost of goods sold, as a percentage of sales,
decreased 1.9% primarily as a result of lower raw material costs, sales mix
effects and lower manufacturing expenses. Selling, administrative and general
expenses decreased slightly compared to 1998 primarily due to cost savings from
8
<PAGE>
the 1998 repositioning and integration program and a reduction in current year
bonus incentives. These cost savings were partially offset by additional costs
incurred in connection with the growth in chemical management services and
growth in the Company's Brazil business as a result of the mid-year 1998
acquisition.
Net interest costs increased versus June 30, 1998 due to increased debt
levels associated with the Company's mid-year 1998 acquisition in Brazil. The
increase in other income was due to the absence of transactional exchange rate
losses which occurred in 1998. Minority interest increased as a result of lower
net income of the Company's consolidated joint ventures. Earnings per share of
$.76 (basic and diluted) were 4% and 6% higher than the prior year,
respectively.
Comparison of Second Quarter 1999 with Second Quarter 1998
- ----------------------------------------------------------
Consolidated net sales for the second quarter of 1999 decreased by 2%
compared with the second quarter of 1998. The decrease in sales was the net
result of a 5% decrease due to foreign currency exchange rates, a 1% decrease in
pricing of certain products, offset by a 4% increase in volume.
The reasons for changes in income from operations, costs of goods sold,
other income, and interest expense in the second quarter 1999 versus the second
quarter 1998 are basically the same as those previously mentioned for the
comparative six-month periods. Earnings per share of $.42 (basic and diluted)
were 5% and 8% higher than the prior year, respectively.
Other Significant Items:
For the past two years, the Company has been actively engaged in assessing
and solving its Year 2000 issue. The Company completed a comprehensive
assessment of all key systems (both IT and non-IT systems). As to systems found
to be non-Year 2000 compliant, the Company initiated a program of systems
replacements and updates. To date, the Company has completed a substantial
portion of its program and expects that the remaining work will be completed
prior to year end. The systems work includes the appropriate level of testing to
ensure Year 2000 compliance. Expenditures (historical and future) in addressing
any Year 2000 issues in the Company's systems are not expected to be material
and are currently estimated to be approximately $750 thousand, including amounts
which may be capitalized as long-term assets. In addition to this effort, the
Company, with the assistance of an outside consultant, has undertaken a second
complete assessment of all its IT and non-IT systems. This assessment confirmed
that no significant additional actions were required.
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 continue to pursue responses from its material third-party
providers who have failed to respond to the initial inquiry. In addition, the
Company will seek assurances as to Year 2000 compliance from its key customers
9
<PAGE>
and plans on contacting these customers in 1999. There can be no assurance,
however, that (i) the systems of the Company's material third-party providers or
key customers will be Year 2000 compliant and (ii) such non-compliance will not
have a material adverse effect on the Company.
The Company believes it is taking reasonable steps to prevent major
interruptions in its business resulting from Year 2000 related issues. However,
potential sources of risk specific to the Company are mainly external
(third-party providers and customers)and include, but are not limited to, the
inability of principal suppliers to be Year 2000 compliant. This could result in
delays in product deliveries from such suppliers. The Company is still
developing worst case scenarios as it relates to the Year 2000 issue and will
finalize its contingency plans in the second half of 1999.
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency - the euro. The euro trades on currency
exchanges and may be used in business transactions. Beginning in January 2002,
new euro-denominated bills and coins will be issued, and legacy currencies will
be withdrawn from circulation. The Company's operating subsidiaries affected by
the euro conversion have established plans to address the systems and business
issues raised by the euro currency. The Company anticipates that the euro
conversion will not have a material adverse impact on its financial condition or
results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
Quaker is exposed to the impact of interest rates, foreign currency
fluctuations, and changes in commodity prices.
Interest Rate Risk. Quaker's exposure to market rate risk for changes in
interest rates relates primarily to its short and long-term debt. All of
Quaker's long-term debt has a fixed interest rate, while its short-term debt is
negotiated at market rates which can be either fixed or variable. Incorporated
by reference is the information in "Liquidity and Capital Resources" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 8 of the Notes to Consolidated Financial Statements on Pages
16 and 27, respectively, of the Registrant's 1998 Annual Report to Shareholders,
the incorporated portion of which is included as Exhibit 13 to the 1998 Form
10-K. Accordingly, if interest rates rise significantly the cost of short-term
debt to Quaker will increase. This can have a material adverse effect on Quaker
depending on the extent of Quaker's short-term borrowings. As of June 30, 1999,
Quaker had $9,816 in short-term borrowings.
Foreign Exchange Risk. A significant portion of Quaker's revenues and
earnings are generated by its non-U.S. operations of its foreign subsidiaries.
Incorporated by reference is the information concerning Quaker's non-U.S.
activities appearing in Note 11 of the Notes to Consolidated Financial
Statements on Page 29 of the Registrant's 1998 Annual Report to Shareholders,
the incorporated portion of which is included as Exhibit 13 to the 1998 Form
10-K.
10
<PAGE>
All such subsidiaries use the local currency as their functional currency.
Accordingly, Quaker's financial results are affected by risks typical of
international business such as currency fluctuations, particularly between the
U.S. dollar and the Dutch guilder (and the E.U. euro). As exchange rates vary,
Quaker's results can be materially adversely affected.
In the past, Quaker has used, on a limited basis, forward exchange
contracts to hedge foreign currency transactions and foreign exchange options to
reduce exposure to changes in foreign exchange rates. The amount of any gain or
loss on these derivative financial instruments was not material, and there are
no contracts or options outstanding at June 30, 1999. Incorporated by reference
is the information concerning Quaker's Significant Accounting Policies appearing
in Note 1 of the Notes to Consolidated Financial Statements on Page 23 of the
Registrant's 1998 Annual Report to Shareholders, the incorporated portion of
which is included as Exhibit 13 to the Form 10-K.
Commodity Price Risk. Many of the raw materials used by Quaker are
commodity chemicals, and, therefore, Quaker earnings can be materially adversely
affected by market changes in raw material prices. In certain cases, Quaker has
entered into fixed-price purchase contracts having a term of up to one year.
These contracts provide for protection to Quaker if the price for the contracted
raw materials rises, however, in certain limited circumstances, Quaker will not
realize the benefit if such prices decline. Quaker has not been, nor is it
currently a party to, any derivative financial instrument relative to
commodities.
Forward-Looking and Cautionary Statements
Except for historical information and discussions, 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 steel, automobile, aircraft, appliance or durable good
manufacturers.
11
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of the Company's shareholders was held
on May 12, 1999. At the Meeting, management's nominees, Peter
A. Benoliel, Ronald J. Naples, and Robert H. Rock were elected
as Class I Directors. Voting (expressed in number of votes)
was as follows: Peter A. Benoliel, 32,122,577 votes for,
153,398 votes against or withheld, and no abstentions or
broker non-votes; Ronald J. Naples, 32,112,677 votes for
163,298 votes against or withheld, and no abstentions or
broker non-votes; and Robert H. Rock, 32,105,110 votes for,
170,865 votes against or withheld, and no abstentions or
broker non-votes.
At the Meeting, the shareholders also approved the adoption of
the 1999 Long-Term Incentive Performance Incentive Plan by a
vote of 29,288,364 votes for, 1,336,460 votes against, 661,293
abstentions, and 989,858 broker non-votes.
In addition, at the Meeting, the shareholders ratified the
appointment of PricewaterhouseCoopers LLP as the Company's
independent accountants to examine and report on its financial
statements for the year ending December 31, 1999 by a vote of
32,154,464 votes for, 113,621 votes against, 9,890
abstentions, and no broker non-votes.
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)
-------------------------------------
Michael F. Barry, officer duly
authorized to sign this report,
Vice President and Chief Financial Officer
Date: August 13, 1999
--------------
12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,612
<SECURITIES> 0
<RECEIVABLES> 55,256
<ALLOWANCES> 1,536
<INVENTORY> 21,679
<CURRENT-ASSETS> 96,287
<PP&E> 107,582
<DEPRECIATION> 61,621
<TOTAL-ASSETS> 184,565
<CURRENT-LIABILITIES> 53,796
<BONDS> 5,000
<COMMON> 9,664
0
0
<OTHER-SE> 64,324
<TOTAL-LIABILITY-AND-EQUITY> 184,565
<SALES> 124,927
<TOTAL-REVENUES> 124,927
<CGS> 66,792
<TOTAL-COSTS> 113,551
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 938
<INCOME-PRETAX> 11,290
<INCOME-TAX> 4,516
<INCOME-CONTINUING> 6,801
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,801
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.76
</TABLE>
