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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 March 31, 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
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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 April 30, 1999 8,907,637
<PAGE>
QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet at March 31, 1999 (unaudited) and
December 31, 1998
Condensed Consolidated Statement of Income for the three months ended
March 31, 1999 and 1998 (unaudited)
Condensed Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
* * * * * * * * * *
2
<PAGE>
Quaker Chemical Corporation
Condensed Consolidated Balance Sheet
(dollars in thousands)
March
1999 December 31,
(Unaudited) 1998 *
----------- ------
ASSETS
Current assets
Cash and cash equivalents $ 8,959 $ 10,213
Accounts receivable 52,745 52,448
Inventories
Raw materials and supplies 10,482 12,616
Work-in-process and finished goods 11,284 11,901
Prepaid expenses and other current assets 9,985 8,890
-------- --------
Total current assets 93,455 96,068
Investments in and advances to associated companies 5,789 5,280
Property, plant and equipment, at cost 107,687 111,963
Less accumulated depreciation 61,273 62,341
-------- --------
Total property, plant and equipment 46,414 49,622
Goodwill 17,369 21,366
Other noncurrent assets 17,244 17,567
-------- --------
$180,271 $189,903
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 6,971 $ 1,420
Accounts payable 25,056 27,825
Accrued compensation 5,325 9,967
Other current liabilities 13,244 11,220
-------- --------
Total current liabilities 50,596 50,432
Long-term debt 25,534 25,344
Other noncurrent liabilities 22,046 22,061
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Total liabilities 98,176 97,837
-------- --------
Minority interest in equity of subsidiaries 7,100 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 872 910
Retained earnings 86,178 84,873
Accumulated other comprehensive income (loss) (9,625) 582
-------- --------
87,089 96,029
Treasury stock, shares held at cost;
1999 - 759,388, 1998 - 770,059 (12,094) (12,294)
-------- --------
Total shareholders' equity 74,995 83,735
-------- --------
$180,271 $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
Three Months Ended March 31
Unaudited
(dollars in thousands
except per share data)
1999 1998
---- ----
Net sales $60,902 $62,235
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Costs and expenses
Cost of goods sold 32,249 34,498
Selling, administrative and general expenses 23,678 22,769
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55,927 57,267
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Income from operations 4,975 4,968
Other income, net 291 291
Interest expense (543) (447)
Interest income 90 197
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Income before taxes 4,813 5,009
Taxes on income 1,925 2,004
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2,888 3,005
Equity in net income of associated companies 232 229
Minority interest in net income of subsidiaries (122) (340)
------- -------
Net income $ 2,998 $ 2,894
======= =======
Per share data:
Net income - basic and diluted $0.34 $0.33
Dividends declared $0.19 $0.18
Based on weighted average number of
shares outstanding:
Basic 8,898,495 8,735,875
Diluted 8,945,019 8,833,700
The accompanying notes are an integral part of these condensed
consolidated financial statements
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<PAGE>
<TABLE>
<CAPTION>
Quaker Chemical Corporation
Condensed Consolidated Statement of Cash Flows
For the Three Months Ended March 31
Unaudited
(dollars in thousands)
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,998 $ 2,894
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,606 1,878
Equity in net income of associated companies (232) (229)
Minority interest in earnings of subsidiaries 123 328
Deferred compensation and other postretirement benefits 260 338
Other, net 93 78
Increase (decrease) in cash from changes in current assets
and liabilities, net of acquisitions and divestitures:
Accounts receivable (2,564) (1,619)
Inventories 1,417 (3,054)
Prepaid expenses and other current assets (1,641) (1,171)
Accounts payable and other current liabilities (3,145) 196
Change in repositioning liabilities (1,496) (959)
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Net cash used by operating activities (2,581) (1,320)
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Cash flows from investing activities
Investments in property, plant, equipment and other assets (1,470) (1,473)
Other, net (409) 71
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Net cash used in investing activities (1,879) (1,402)
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Cash flows from financing activities
Net increase in short-term borrowings 5,654 561
Dividends paid (1,693) (1,581)
Other, net 363 122
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Net cash provided by (used in) financing activities 4,324 (898)
------- -------
Effect of exchange rate changes on cash (1,118) (670)
------- -------
Net decrease in cash and cash equivalents (1,254) (4,290)
Cash and cash equivalents at beginning of period 10,213 18,416
------- -------
Cash and cash equivalents at end of period $ 8,959 $14,126
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements
</TABLE>
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<PAGE>
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Amounts 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
Three Months Ended
March 31
---------------------
Basic Diluted
----- -------
1999 8,898,495 8,945,019
1998 8,735,875 8,833,700
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.
(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 quarter
ending March 31:
Metalworking Other
Process Process
Chemicals Coatings Chemicals Total
----------------------------------------------------
1999
Net Sales $ 53,386 $ 4,136 $ 3,381 $ 60,903
Operating Income 7,173 970 (60) 8,083
1998
Net Sales $ 54,464 $ 4,897 $ 2,874 $ 62,235
Operating Income 7,284 1,397 (213) 8,468
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 three months ended March 31, 1999 and 1998 is as follows:
1999 1998
---- ----
Total operating income for reportable segments $8,083 $8,468
Nonoperating charges (1,502) (1,622)
Depreciation and amortization (1,606) (1,878)
Interest expense (543) (447)
Interest income 90 197
Other income, net 291 291
------ ------
Consolidated income before taxes $4,813 $5,009
====== ======
Note 4. - Comprehensive Income
The following table summarizes comprehensive income for the three months ended
March 31, 1999 and 1998:
1999 1998
---- ----
Net income $2,998 $2,894
Foreign currency translation adjustments (10,207) (1,539)
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Comprehensive (loss) income $(7,209) $1,355
======= ======
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
Net cash flow used in operating activities amounted to $2.6 million in the
first three months of 1999 compared to $1.3 million in the same period of 1998.
The increase was principally due to 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 $6.8 million primarily as a result of seasonal cash needs related to
the annual payment of employee incentives. The current ratio decreased to 1.8 to
1 at March 31, 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 First Quarter 1999 with First Quarter 1998
Consolidated net sales for the first quarter of 1999 decreased by 2% over
the first quarter of 1998. The decrease in sales was the net result of a 2%
decrease due to foreign currency exchange rates, a 1% decrease in pricing,
offset by a 1% 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 business segment were down 16% 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 18% due to higher environmental products sales.
7
<PAGE>
Operating income improved slightly despite the decrease in sales primarily
due to lower raw material costs as well as cost reduction initiatives throughout
the organization. The Company's gross profit margin as a percentage of sales
increased 2.4% primarily as a result of lower raw material costs, improved sales
mix and lower manufacturing expenses. Selling, administrative and general
expenses increased 4% as compared to 1998 primarily due to growth in chemical
management services, growth in the Company's Brazil business as a result of the
mid-year 1998 acquisition and higher costs in Europe due to currency
translation. These additional costs were partially offset by cost savings from
the 1998 repositioning and integration program.
Net interest costs increased versus March 31, 1998 due to increased debt
levels associated with the Company's mid-year 1998 acquisition in Brazil.
Minority interest decreased as a result of lower net income of the Company's
consolidated joint ventures. Earnings per share of $.34 (basic and diluted) were
3% higher than the prior year.
Other Significant Items:
The Company is 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. The Company
completed the majority of this program during 1998 and expects that the
remaining work will be completed in 1999. The systems work includes the
appropriate level of testing to ensure Year 2000 compliance. Expenditures
(historical and future) 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, is undertaking a second complete
assessment of all its IT and non-IT systems. This assessment will be completed
in 1999.
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
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
8
<PAGE>
delays in product deliveries from such suppliers. The Company is still
developing a reasonable worst case scenario as it relates to the Year 2000
issue and therefore has not developed a contingency plan to cover any
unforeseen issues. The Company plans to complete the worst case analysis and
its contingency plan in the first 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 March 31, 1999,
Quaker had $6,770 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 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 immaterial, and there are no
contracts or options outstanding at March 31, 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, appliance or durable good manufacturers.
9
<PAGE>
PART II. OTHER INFORMATION
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: May 14, 1999
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10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,959
<SECURITIES> 0
<RECEIVABLES> 54,421
<ALLOWANCES> 1,676
<INVENTORY> 21,766
<CURRENT-ASSETS> 93,455
<PP&E> 107,687
<DEPRECIATION> 61,273
<TOTAL-ASSETS> 180,271
<CURRENT-LIABILITIES> 50,596
<BONDS> 5,000
<COMMON> 9,664
0
0
<OTHER-SE> 65,331
<TOTAL-LIABILITY-AND-EQUITY> 180,271
<SALES> 60,902
<TOTAL-REVENUES> 60,902
<CGS> 32,249
<TOTAL-COSTS> 55,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 543
<INCOME-PRETAX> 4,813
<INCOME-TAX> 1,925
<INCOME-CONTINUING> 2,998
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,998
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
