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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 September 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
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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
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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 October 31, 1999 8,929,145
<PAGE>
QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 30, 1999 (unaudited)
and December 31, 1998
Condensed Consolidated Statement of Income for the three and nine
months ended September 30, 1999 and 1998 (unaudited)
Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
* * * * * * * * * *
2
<PAGE>
Quaker Chemical Corporation
Condensed Consolidated Balance Sheet
(dollars in thousands)
September 30,
1999 December 31,
(Unaudited) 1998 *
------------ -----------
ASSETS
Current assets
Cash and cash equivalents $ 11,659 $ 10,213
Accounts receivable, net 56,345 52,448
Inventories
Raw materials and supplies 11,253 12,616
Work in process and finished goods 12,044 11,901
Prepaid expenses and other current assets 13,695 8,890
-------- --------
Total current assets 104,996 96,068
Investments in and advances to associated companies 5,982 5,280
Property, plant and equipment, at cost 109,659 111,963
Less accumulated depreciation 63,823 62,341
-------- --------
Total property, plant and equipment 45,836 49,622
Goodwill, net 16,112 21,366
Other noncurrent assets 18,313 17,567
-------- --------
$191,239 $189,903
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 6,182 $ 1,420
Accounts payable 24,991 27,825
Accrued compensation 9,502 9,967
Other current liabilities 14,458 11,220
-------- --------
Total current liabilities 55,133 50,432
Long-term debt 25,112 25,344
Other noncurrent liabilities 25,458 22,061
-------- --------
Total liabilities 105,703 97,837
Minority interest in equity of subsidaries 7,426 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 856 910
Retained earnings 90,811 84,873
Accumulated other comprehensive income (loss) (11,488) 582
-------- --------
89,843 96,029
Treasury stock, shares held at cost;
1999-738,636, 1998-770,059 (11,733) (12,294)
-------- --------
Total shareholders' equity 78,110 83,735
-------- --------
$191,239 $189,903
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements
* Condensed from audited financial statements.
3
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<TABLE>
<CAPTION>
Quaker Chemical Corporation
Condensed Consolidated Statement of Income
For the period ended September 30,
Unaudited
(dollars in thousands, except per share data)
Third Quarter Nine Months
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 67,795 $ 65,991 $192,722 $193,581
-------- -------- -------- --------
Costs and expenses
Cost of goods sold 35,729 36,439 102,521 107,114
Selling, administrative and
general expenses 24,127 23,729 70,886 69,917
-------- -------- -------- --------
59,856 60,168 173,407 177,031
Income from operations 7,939 5,823 19,315 16,550
Other income, net 417 484 1,269 1,023
Interest expense, net (611) (539) (1,549) (1,101)
-------- -------- -------- --------
Income before taxes 7,745 5,768 19,035 16,472
Taxes on income 3,098 2,307 7,614 6,589
-------- -------- -------- --------
4,647 3,461 11,421 9,883
Equity in net income of associated
companies 268 279 764 781
Minority interest in net income of
subsidiaries (651) (185) (1,120) (745)
-------- -------- -------- --------
Net income $ 4,264 $ 3,555 $ 11,065 $ 9,919
======== ======== ======== ========
Per share data:
Net income - basic $0.48 $0.40 $1.24 $1.13
Net income - diluted $0.48 $0.40 $1.24 $1.12
Dividends declared $0.195 $0.19 $0.575 $0.55
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Quaker Chemical Corporation
Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended September 30,
Unaudited
(dollars in thousands)
1999 1998
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<S> <C> <C>
Cash flows from operating activities
Net income $11,065 $ 9,919
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,750 5,459
Equity in net income of associated companies (764) (781)
Minority interest in earnings of subsidiaries 1,120 745
Other, net 1,468 431
Increase (decrease) in cash from changes in current assets
and liabilities net of acquisitions and divestitures:
Accounts receivable, net (6,406) (6,246)
Inventories (412) (3,073)
Prepaid expenses and other current assets (5,304) (4,159)
Accounts payable and accrued liabilities 4,964 3,570
Repositioning liabilities (1,883) (1,077)
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Net cash provided by operating activities 8,598 4,788
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Cash flows from investing activities
Investments in property, plant, equipment and other assets (4,057) (6,401)
Companies acquired - (9,350)
Other, net (184) 329
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Net cash used in investing activities (4,241) (15,422)
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Cash flows from financing activities
Net increase in short-term borrowings 4,817 7,673
Dividends paid (5,076) (4,836)
Other, net 210 590
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Net cash (used in) provided by financing activities (49) 3,427
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Effect of exchange rate changes on cash (2,862) 580
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Net increase (decrease) in cash and cash equivalents 1,446 (6,627)
Cash and cash equivalents at beginning of period 10,213 18,416
------- -------
Cash and cash equivalents at end of period $11,659 $11,789
======= =======
<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.
Certain reclassifications have been made to prior year condensed consolidated
financial statements to conform to those classifications used in 1999.
Note 2 - Weighted Average Shares Outstanding
Nine Months Ended Three Months Ended
September 30 September 30
------------------------------- -------------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
1999 8,909,298 8,956,610 8,920,148 8,969,095
1998 8,773,478 8,848,304 8,798,561 8,861,941
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.
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<PAGE>
Segment data includes direct segment costs as well as general operating costs,
including depreciation, allocated to each segment based on net sales.
The table below presents information about the reported segments for the nine
months ending September 30:
Metalworking Other
Process Chemical
Chemicals Coatings Products Total
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1999
Net Sales $169,285 $13,998 $9,439 $192,722
Operating Income 28,014 3,427 (330) 31,111
1998
Net Sales $169,823 $14,701 $9,057 $193,581
Operating Income 23,204 3,965 (551) 26,618
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 nine months ended September 30, 1999 and 1998 is as
follows:
1999 1998
---- ----
Total operating income for
reportable segments $31,111 $26,618
Non-operating charges (7,046) (4,609)
Depreciation and amortization (4,750) (5,459)
Interest expense (1,815) (1,531)
Interest income 266 430
Other income, net 1,269 1,023
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Consolidated income before taxes $19,035 $16,472
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<PAGE>
Note 4 - Comprehensive Income
The following table summarizes comprehensive income for the nine months
ended September 30, 1999 and 1998:
1999 1998
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Net income $11,065 $ 9,919
Foreign currency translation adjustments (12,070) 2,242
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Comprehensive (loss) income $(1,005) $12,161
======= =======
The following table summarizes comprehensive income for the three months ended
September 30, 1999 and 1998:
1999 1998
------- --------
Net income $ 4,264 $ 3,555
Foreign currency translation adjustments 1,452 3,212
------- -------
Comprehensive income $ 5,716 $ 6,767
======= =======
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 $8.6 million
in the first nine months of 1999 compared to $4.8 million in the same period of
1998. The increase was primarily due to higher operating income as well as a
reduction in the change in working capital items, primarily related to
inventory.
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 $3.4 million primarily as a result of increases in
short-term borrowings. There was no change in the current ratio of 1.9 to 1 at
September 30, 1999 as compared to December 31, 1998 due primarily to the
decrease in the Company's net cash position offset by increases in accounts
receivable and other current assets.
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<PAGE>
Operations
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Comparison of Nine Months 1999 with Nine Months 1998
- ----------------------------------------------------
Consolidated net sales for the first nine months of 1999 decreased by
less than one percent over the first nine months of 1998. The decrease in sales
was the net result of a 3% increase in volume, a 1% increase in pricing of
certain products, offset by approximately a 5% decrease due to foreign currency
exchange rates. Net sales of the metalworking process chemicals segment were
essentially flat compared to last year as higher prices and volumes were offset
by the negative impact of the stronger dollar on foreign currency translations.
Sales in the coatings segment were down 5% primarily due to lower maskant sales
into the aerospace industry. The other chemical products segment sales increased
4% primarily due to higher paper and environmental products sales.
Income from operations improved 16% to $19.3 million as compared to
$16.6 million in the same period of 1998, 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 2.1% primarily
as a result of lower raw material costs, sales mix effects and lower
manufacturing expenses. Selling, administrative and general expenses were
slightly higher compared to 1998. This increase is primarily due to additional
costs incurred in connection with the growth in the Company's chemical
management services business and the mid-year 1998 Brazilian acquisition
partially offset by cost savings from the 1998 repositioning and integration
program and a reduction in current year bonus incentives.
Net interest costs increased versus September 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 primarily as a
result of higher net income of the Company's consolidated joint venture in
Brazil. Earnings per share of $1.24 (basic and diluted) were 10% and 11% higher
than the prior year, respectively.
Comparison of Third Quarter 1999 with Third Quarter 1998
- --------------------------------------------------------
Consolidated net sales for the third quarter of 1999 increased by 3%
compared with the third quarter of 1998. The increase in sales was the net
result of a 6% increase in volume, a 4% increase in pricing of certain products,
offset by a 7% decrease due to foreign currency exchange rates.
9
<PAGE>
Income from operations increased 36% to $7.9 million in the third
quarter of 1999 compared to $5.8 million in the third quarter of 1998. This
increase was the result of higher sales, lower raw material costs, and the
implementation of cost reduction initiatives throughout the organization. Other
income and net interest expense in the third quarter of 1999 were consistent
with the third quarter of 1998. Minority interest increased primarily as a
result of higher net income of the Company's consolidated joint venture in
Brazil. Earnings per share of $.48 (basic and diluted) was 20% higher than the
prior year.
Other Significant Items:
Year 2000 Readiness Disclosure
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 incurred and to be incurred 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 has sought 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 most 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. Notwithstanding the
foregoing, the Company has not done any type of on-site review or assessment of
its suppliers to determine whether they are in fact Year 2000 compliant. The
Company has also made inquiries through its sales organization with certain key
customers as to their Year 2000 status and will continue to do so through year
end. To date, all have indicated that they are Year 2000 compliant. Though the
Company does not expect there to be a failure with any of its critical third-
party providers or customers, there can be no assurance 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.
10
<PAGE>
The Company has also contacted its critical customers inquiring as to
whether additional supplies of product will be required for the December 1999 to
January 2000 time period. To date, most of these customers have indicated that
additional product will not be ordered. However, if there is a significant
unexpected increase in the order pattern for the December 1999 to January 2000
time period, it could interfere with the Company's ability to operate
efficiently and the Company may not be able to obtain the necessary materials
and services from its third-party providers, mainly raw materials and
transportation.
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 or customers to be Year 2000 compliant. The
Company has analyzed various worst case scenarios as it relates to the Year 2000
issue. Its principal exposure relates to the failure of a third-party provider
to be Year 2000 compliant, such as a critical raw material supplier, a utility
supplier or transportation company. The Company has contingency plans in place
to address failures of certain critical suppliers primarily through additional
storage for critical raw materials and finished goods as well as identifying and
qualifying alternate raw material suppliers. However, the Company's ability to
address other failures such as loss of power or lack of transportation is
limited. Accordingly, a failure of certain critical third-party providers could
have a material adverse impact on the Company.
The estimates and conclusions herein contain forward-looking statements
and are based on management's best estimates of future events. Risks to
achieving material Year 2000 compliance include the Company's ability to
discover and correct potential Year 2000 sensitive and critical problems which
could have a serious impact on the Company and the ability of suppliers and
customers which may have a material impact on the Company to bring their systems
into Year 2000 compliance.
Euro Conversion
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
11
<PAGE>
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 September 30,
1999, Quaker had $6,063 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. 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, the Brazilian real 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 September 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.
12
<PAGE>
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, those
disclosed under the heading "Year 2000 Readiness Disclosure," significant
increases 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 goods
manufacturers.
13
<PAGE>
PART II. OTHER INFORMATION
Items 1,2,3,4, and 5 are inapplicable and have been omitted.
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/ Michael F. Barry
---------------------------
Michael F. Barry, officer duly
authorized to sign this report,
Vice President and Chief Financial Officer
Date: November 12, 1999
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14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,659
<SECURITIES> 0
<RECEIVABLES> 57,938
<ALLOWANCES> 1,593
<INVENTORY> 23,297
<CURRENT-ASSETS> 104,996
<PP&E> 109,659
<DEPRECIATION> 63,823
<TOTAL-ASSETS> 191,239
<CURRENT-LIABILITIES> 55,133
<BONDS> 5,000
<COMMON> 9,664
0
0
<OTHER-SE> 68,446
<TOTAL-LIABILITY-AND-EQUITY> 191,239
<SALES> 192,722
<TOTAL-REVENUES> 192,722
<CGS> 102,521
<TOTAL-COSTS> 173,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,549
<INCOME-PRETAX> 19,035
<INCOME-TAX> 7,614
<INCOME-CONTINUING> 11,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,065
<EPS-BASIC> 1.24
<EPS-DILUTED> 1.24
</TABLE>
