<PAGE>
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 September 30, 2000
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 ___
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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, 2000 8,827,751
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QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 30, 2000 (unaudited)
and December 31, 1999
Condensed Consolidated Statement of Income for the Three and Nine
Months ended September 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statement of Cash Flows for the Nine Months
ended September 30, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
* * * * * * * * * *
2
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Quaker Chemical Corporation
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
(dollars in thousands)
September 30,
2000 December 31,
(Unaudited) 1999 *
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 15,292 $ 8,677
Accounts receivable 56,933 55,132
Inventories
Raw materials and supplies 12,318 12,140
Work-in-process and finished goods 10,513 11,217
Prepaid expenses and other current assets 7,991 9,075
--------------- ----------------
Total current assets 103,047 96,241
--------------- ----------------
Property, plant and equipment, at cost 104,786 108,924
Less accumulated depreciation 63,351 64,172
--------------- ----------------
Total property, plant and equipment 41,435 44,752
Intangible assets 17,940 15,994
Investments in associated companies 6,407 5,773
Other assets 18,765 19,453
--------------- ----------------
$ 187,594 $ 182,213
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 1,435 $ 431
Accounts and other payables 23,604 24,092
Accrued compensation 10,026 8,749
Other current liabilities 14,081 11,385
--------------- ----------------
Total current liabilities 49,146 44,657
Long-term debt 25,167 25,122
Other noncurrent liabilities 24,723 23,117
--------------- ----------------
Total liabilities 99,036 92,896
--------------- ----------------
Minority interest in equity of subsidiaries 7,794 8,118
--------------- ----------------
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 772 832
Retained earnings 102,135 93,655
Accumulated other comprehensive (loss) (18,797) (11,378)
--------------- ----------------
93,774 92,773
Treasury stock, shares held at cost;
2000-838,415, 1999-729,986 (13,010) (11,574)
--------------- ----------------
Total shareholders' equity 80,764 81,199
--------------- ----------------
$ 187,594 $ 182,213
=============== ================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
* Condensed from audited financial statements.
<PAGE>
Quaker Chemical Corporation
Condensed Consolidated Statement of Income
For the period ended September 30,
<TABLE>
<CAPTION>
Unaudited
(dollars in thousands, except per
share data)
Three Months Nine Months
---------------------------- ------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 66,043 $ 67,795 $ 198,312 $ 192,722
Cost of goods sold 37,914 37,135 113,067 106,768
------------ ----------- ------------ -------------
Gross margin 28,129 30,660 85,245 85,954
Selling, general and
administrative expenses 21,731 22,721 65,575 66,639
Net gain on exit of businesses - - (1,473) -
Litigation charge - - 1,500 -
------------ ----------- ------------ -------------
Operating income 6,398 7,939 19,643 19,315
Other income, net 885 417 2,252 1,269
Interest expense, net (276) (611) (888) (1,549)
------------ ----------- ------------ -------------
Income before taxes 7,007 7,745 21,007 19,035
Taxes on income 2,172 3,098 6,512 7,614
------------ ----------- ------------ -------------
4,835 4,647 14,495 11,421
Equity in net income of associated
companies 364 268 1,035 764
Minority interest in net income of
subsidiaries (516) (651) (1,805) (1,120)
------------ ----------- ------------ -------------
Net income $ 4,683 $ 4,264 $ 13,725 $ 11,065
============ =========== ============ =============
Per share data:
Net income - basic $0.53 $0.48 $1.55 $1.24
Net income - diluted $0.53 $0.48 $1.54 $1.24
Dividends declared $0.205 $0.195 $0.595 $0.575
Based on weighted average number of
shares outstanding:
Basic 8,821,017 8,920,148 8,830,609 8,909,298
Diluted 8,886,501 8,969,095 8,896,199 8,956,610
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
Quaker Chemical Corporation
Condensed Consolidated Statement of Cash Flows
For the Nine Months ended September 30,
<TABLE>
<CAPTION>
Unaudited
(dollars in thousands)
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 13,725 $ 11,065
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 3,682 3,961
Amortization 1,048 789
Equity in net income of associated companies (1,035) (764)
Minority interest in earnings of subsidiaries 1,805 1,120
Deferred compensation and other postretirement benefits 1,354 691
Litigation charge 1,500 -
Net gain on exit of businesses (1,473) -
Other, net 338 777
Increase (decrease) in cash from changes in current assets and current
liabilities:
Accounts receivable, net (5,848) (6,406)
Inventories (1,060) (412)
Prepaid expenses and other current assets (596) (5,304)
Accounts payable and accrued liabilities 3,330 4,964
Change in repositioning liabilities (308) (1,883)
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Net cash provided by operating activities 16,462 8,598
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Cash flows from investing activities
Investments in property, plant and equipment (2,988) (4,057)
Proceeds from sale of business 5,200 -
Payments related to acquisitions (3,500) -
Other, net (1,216) (184)
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Net cash used in investing activities (2,504) (4,241)
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Cash flows from financing activities
Net increase in short-term borrowings 1,016 4,817
Dividends paid (5,179) (5,076)
Treasury stock repurchased (1,961) -
Other, net 131 210
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Net cash used in financing activities (5,993) (49)
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Effect of exchange rate changes on cash (1,350) (2,862)
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Net increase in cash and cash equivalents 6,615 1,446
Cash and cash equivalents at beginning of period 8,677 10,213
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Cash and cash equivalents at end of period $ 15,292 $ 11,659
============= ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
Note 1 - Condensed Financial Information
The condensed consolidated financial statements included herein are unaudited
and have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and Securities and Exchange
Commission regulations. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Certain prior year amounts have been reclassified to conform to
the 2000 presentation. In the opinion of management, the financial statements
reflect all adjustments (of a normal and recurring nature) which are necessary
to present fairly the financial position, results of operations and cash flows
for the interim periods. These financial statements should be read in
conjunction with the Annual Report to Shareholders and Form 10-K for the year
ended December 31, 1999.
Note 2 - Weighted Average Shares Outstanding
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- --------------------------
Basic Diluted Basic Diluted
----------- ----------- ----------- -----------
2000 8,821,017 8,886,501 8,830,609 8,896,199
1999 8,920,148 8,969,095 8,909,298 8,956,610
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.
6
<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:
<TABLE>
<CAPTION>
Metalworking Other
Process Chemical
Chemicals Coatings Products Total
---------------------------------------------------
<S> <C> <C> <C> <C>
2000
Net sales $180,048 $13,126 $5,138 $198,312
Operating 45,309 3,297 (630) 47,976
income(loss)
1999
Net sales $169,285 $13,998 $9,439 $192,722
Operating income 40,133 4,457 483 45,073
</TABLE>
Operating income comprises revenue less related costs and expenses. Non-
operating expenses primarily consist of general corporate expenses identified as
not being a cost of operation, interest expense, interest income, and license
fees from non-consolidated associates.
A reconciliation of total segment operating income to total consolidated income
before taxes, for the nine months ended September 30 is as follows:
2000 1999
-------- --------
Total operating income for
reportable segments $ 47,976 $ 45,073
Non-operating expenses (23,576) (21,008)
Net gain on exit of businesses 1,473 -
Litigation charge (1,500) -
Depreciation and amortization (4,730) (4,750)
Interest expense (1,529) (1,815)
Interest income 641 266
Other income, net 2,252 1,269
-------- --------
Consolidated income before taxes $ 21,007 $ 19,035
======== ========
7
<PAGE>
Note 4 - Comprehensive Income
The following table summarizes comprehensive income for the three months ended
September 30:
2000 1999
-------- ------
Net income $ 4,683 $4,264
Foreign currency translation adjustments (3,812) 1,452
------- ------
Comprehensive income $ 871 $5,716
======= ======
The following table summarizes comprehensive income (loss) for the nine months
ended September 30:
2000 1999
-------- --------
Net income $13,725 $ 11,065
Foreign currency translation adjustments (7,419) (12,070)
------- --------
Comprehensive income (loss) $ 6,306 $ (1,005)
======= ========
Note 5 - Repositioning and Integration Charges
In the fourth quarter of 1998, the Company announced and implemented a
repositioning and integration plan to better align its organizational structure
with market demands, improve operational performance and reduce costs.
8
<PAGE>
The components of the 1998 pre-tax repositioning and integration charge
included severance and other benefit costs, and early pension and other
postretirement benefits. The liabilities for early pension and other
postretirement benefits are included in the Company's pension and postretirement
benefits obligations.
The activity in the repositioning accrual follows:
Repositioning accruals at December 31, 1999 $ 572
Benefit payments in 2000 (308)
--------
Remaining liability at September 30, 2000 $ 264
========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
-------------------------------
Net cash flows provided by operating activities were $16.5 million in the
first nine months of 2000 compared to cash flows provided by operating
activities of $8.6 million in the same period of 1999. The increase was
primarily due to higher operating income, as well as changes in several working
capital items.
Net cash flows used in investing activities were $2.5 million in the first
nine months of 2000 compared to cash flows used in investing activities of $4.2
million in the same period of 1999. This decrease was primarily related to
proceeds from the sale of the U.S. pulp and paper business, and a decrease in
investments in property, plant and equipment, offset by a contingent purchase
payment related to the 1998 Brazilian acquisition.
Net cash flows used in financing activities were $6.0 million for the first
nine months of 2000 compared with net cash flows used in financing activities of
$0.1 million for the same period of the prior year. The net change was primarily
due to a $3.8 million reduction in short-term borrowings and approximately $2.0
million paid to purchase shares of stock under the Company's stock repurchase
program.
9
<PAGE>
Operations
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Comparison of Nine Months 2000 with Nine Months 1999
----------------------------------------------------
Consolidated net sales for the first nine months of 2000 increased by
approximately three percent over 1999 results. Sales would have shown an
additional five percent increase absent the impact of foreign currency
fluctuations experienced in 2000. The increase was primarily due to strong
demand in metalworking process chemicals markets in all regions, particularly in
Brazil. This increase was offset by lost revenues related to the sale of the
U.S. pulp and paper business and by reductions in the coatings segment revenues,
resulting from lower maskant sales due to reduced aircraft production.
Cost of sales increased as a percent of sales from 55 percent to 57
percent as a result of raw material increases and product mix changes in non-
core business lines.
Minority interest was significantly higher in the first nine months of 2000
compared with the same period last year, due to higher net income from the joint
ventures in Brazil and China. Lower interest expense in 2000 compared with 1999
reflects lower overall short-term borrowings and increased interest income.
Other income reflects increased rental income and foreign exchange gains in 2000
versus 1999.
The effective tax rate for 2000 is 31% compared with 40% in 1999. The
decrease in the effective tax rate is primarily due to the implementation of
several global tax planning initiatives, the most significant of which is
related to the Company's net operating loss carryforward position in Brazil.
The impact of the tax planning initiatives in Brazil are being magnified as
these operations become more profitable. The estimated tax rate for the year
2000 is dependent on many factors, including but not limited to the
profitability of the Company's foreign operations.
Comparison of Third Quarter 2000 with Third Quarter 1999
--------------------------------------------------------
Consolidated net sales for the third quarter of 2000 decreased by
approximately three percent compared to 1999 results, primarily due to
unfavorable foreign currency translations and the sale of the U.S. pulp and
paper business. Without the impacts of the stronger dollar and the sale of the
U.S. pulp and paper business, consolidated net sales would have increased five
percent, with broad-based growth in all regions.
Cost of sales increased as a percent of sales as a result of increases in
raw material and freight costs, as well as non-recurring charges in U.S.
manufacturing.
Overall selling, general and administrative expenses were approximately
four percent lower in the third quarter of 2000 compared to the same period in
1999. This was due to continued cost containment programs and positive foreign
exchange impacts, offset by inflation, organizational development activities,
and new market development initiatives.
10
<PAGE>
Minority interest was lower in the third quarter of 2000 compared with the
same period last year, primarily due to lower net income from the joint venture
in Brazil. Lower interest expense in 2000 compared with 1999 reflects lower
overall short-term borrowings and increased interest income. Other income
reflects increased license revenue.
Other Significant Items
As part of the Company's ongoing review of the strategic position of
certain business units and related assets to be substantially completed by the
end of this year, the Company recorded valuation reserves for certain assets of
$0.9 million in the second quarter 2000. Additionally, on May 31, 2000, the
Company completed the sale of its U.S. pulp and paper business for $5.2 million
in cash. The Company recorded a gain on the sale of $2.4 million. Effective May
31, 2000, the Company recorded an accrual of $1.0 million for the involuntary
termination of twenty-three employees. As of September 30, 2000 the remaining
balance of that accrual was $0.5 million.
During the latter part of the second quarter of 2000, it was discovered
during an internal environmental audit that AC Products, Inc. had failed to
properly report its air emissions. In response, (i) an internal investigation of
all environmental, health and safety matters at AC Products, Inc. was conducted
and (ii) AC Products, Inc. has voluntarily disclosed to regulators and taken
steps to correct all environmental, health and safety issues discovered to date.
AC Products, Inc. has established a reserve of $1.5 million to cover estimated
past fees, underpayment penalties, expenses, and other quantifiable liabilities
associated with this matter. Though the reserve taken is currently expected to
cover known liabilities to date, the Company cannot be certain liabilities in
the form of fines, penalties and damages will not be incurred in excess of the
amount reserved.
On October 16, 2000, the Company sold its Quaker Computer Solutions (QCS)
business. The sale of QCS is not expected to have a material effect on future
results.
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
conversion will not have a material adverse impact on its financial condition or
results of operations.
11
<PAGE>
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
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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Quaker is exposed to the impact of changes in 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. Most 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 26, respectively, of the Registrant's 1999 Annual Report to Shareholders,
the incorporated portion of which is included as Exhibit 13 to the 1999 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,
2000, Quaker had $1.4 million in short-term borrowings.
Foreign Exchange Risk. A significant portion of Quaker's revenues and
earnings is 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 28 and 29 of the Registrant's 1999 Annual Report to
Shareholders, the incorporated portion of which is included as Exhibit 13 to the
1999 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 E.U. euro. As
exchange rates vary, Quaker's results can be materially adversely affected.
12
<PAGE>
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, 2000. 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 22
of the Registrant's 1999 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's 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.
PART II. OTHER INFORMATION
Items 1,2,3,4 and 5 of Part II 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.
13
<PAGE>
* * * * * * * * *
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 14, 2000
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14
