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, 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
--- ---
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, 2000 8,820,173
<PAGE>
QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at June 30, 2000 (unaudited) and
December 31, 1999
Condensed Consolidated Statement of Income for the Three and Six
Months ended June 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statement of Cash Flows for the Six Months
ended June 30, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
* * * * * * * * * *
<PAGE>
Quaker Chemical Corporation
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
(dollars in thousands)
June 30,
2000 December 31,
(Unaudited) 1999*
--------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 14,932 $ 8,677
Accounts receivable 58,529 55,132
Inventories
Raw materials and supplies 11,521 12,140
Work-in-process and finished goods 9,922 11,217
Prepaid expenses and other current assets 8,865 9,075
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Total current assets 103,769 96,241
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Property, plant and equipment, at cost 107,269 108,924
Less accumulated depreciation 64,146 64,172
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Total property, plant and equipment 43,123 44,752
Intangible assets 18,749 15,994
Investments in associated companies 6,147 5,773
Other assets 19,482 19,453
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$ 191,270 $ 182,213
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 398 $ 431
Accounts and other payables 25,456 24,092
Accrued compensation 7,054 8,749
Other current liabilities 18,597 11,385
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Total current liabilities 51,505 44,657
Long-term debt 25,124 25,122
Other noncurrent liabilities 24,185 23,117
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Total liabilities 100,814 92,896
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Minority interest in equity of subsidiaries 8,968 8,118
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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 794 832
Retained earnings 99,261 93,655
Accumulated other comprehensive (loss) (14,986) (11,378)
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94,733 92,773
Treasury stock, shares held at cost;
2000-851,690, 1999-729,986 (13,245) (11,574)
--------- ---------
Total shareholders' equity 81,488 81,199
--------- ---------
$ 191,270 $ 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 June 30,
<TABLE>
<CAPTION>
Unaudited
(dollars in thousands, except per share data)
Three Months Six Months
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 67,267 $ 64,025 $ 132,269 $ 124,927
Cost of goods sold 38,039 35,829 75,153 69,633
----------- ----------- ----------- -----------
Gross margin 29,228 28,196 57,116 55,294
Selling, general and
administrative expenses 22,208 21,795 43,844 43,918
Net gain on exit of businesses (1,473) - (1,473) -
Litigation charge 1,500 - 1,500 -
----------- ----------- ----------- -----------
Operating income 6,993 6,401 13,245 11,376
Other income, net 638 561 1,367 852
Interest expense, net (322) (485) (612) (938)
----------- ----------- ----------- -----------
Income before taxes 7,309 6,477 14,000 11,290
Taxes on income 2,266 2,591 4,340 4,516
----------- ----------- ----------- -----------
5,043 3,886 9,660 6,774
Equity in net income of associated
companies 404 264 671 496
Minority interest in net income of
subsidiaries (776) (347) (1,289) (469)
----------- ----------- ----------- -----------
Net income $ 4,671 $ 3,803 $ 9,042 $ 6,801
=========== =========== =========== ===========
Per share data:
Net income - basic and diluted $0.53 $0.42 $1.02 $0.76
Dividends declared $0.195 $0.19 $0.39 $0.38
Based on weighted average number of
shares outstanding:
Basic 8,808,181 8,909,013 8,835,458 8,903,783
Diluted 8,873,810 8,955,452 8,901,102 8,950,264
</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 Six Months ended June 30,
<TABLE>
<CAPTION>
Unaudited
(dollars in thousands)
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 9,042 $ 6,801
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 2,511 2,629
Amortization 672 528
Equity in net income of associated companies (671) (496)
Minority interest in earnings of subsidiaries 1,289 469
Deferred compensation and other postretirement benefits 786 422
Litigation charge 1,500 -
Net gain on exit of businesses (1,473) -
Other, net (5) (109)
Increase (decrease) in cash from changes in current assets and
current liabilities:
Accounts receivable, net (5,718) (4,372)
Inventories 993 1,208
Prepaid expenses and other current assets (918) (2,077)
Accounts payable and accrued liabilities 1,745 (1,153)
Change in repositioning liabilities (166) (1,703)
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Net cash provided by operating activities 9,587 2,147
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Cash flows from investing activities
Investments in property, plant and equipment (2,208) (3,052)
Proceeds from sale of business 5,200 -
Other, net (219) (602)
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Net cash provided by (used in) investing activities 2,773 (3,654)
-------- --------
Cash flows from financing activities
Net (decrease) increase in short-term borrowings (24) 8,590
Dividends paid (3,459) (3,394)
Treasury stock repurchased (1,961) -
Other, net 255 511
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Net cash (used in) provided by financing activities (5,189) 5,707
-------- --------
Effect of exchange rate changes on cash (916) (3,801)
-------- --------
Net increase in cash and cash equivalents 6,255 399
Cash and cash equivalents at beginning of period 8,677 10,213
-------- --------
Cash and cash equivalents at end of period $ 14,932 $ 10,612
======== ========
</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 Six Months Ended
June 30 June 30
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Basic Diluted Basic Diluted
--------- --------- --------- ---------
2000 8,808,181 8,873,810 8,835,458 8,901,102
1999 8,909,013 8,955,452 8,903,783 8,950,264
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.
<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 six
months ending June 30:
<TABLE>
<CAPTION>
Metalworking Other
Process Chemical
Chemicals Coatings Products Total
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<S> <C> <C> <C> <C>
2000
Net sales $119,360 $8,453 $4,456 $132,269
Operating
income(loss) 29,676 2,215 (339) 31,552
1999
Net sales $109,675 $8,920 $6,332 $124,927
Operating income 24,778 2,908 376 28,062
</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 six months ended June 30 is as follows:
2000 1999
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Total operating income for
reportable segments $31,552 $28,062
Non-operating expenses (15,097) (13,529)
Net gain on exit of businesses 1,473 -
Litigation charge (1,500) -
Depreciation and amortization (3,183) (3,157)
Interest expense (1,033) (1,117)
Interest income 421 179
Other income, net 1,367 852
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Consolidated income before taxes $14,000 $11,290
======= =======
<PAGE>
Note 4 - Comprehensive Income
The following table summarizes comprehensive income for the three months ended
June 30:
2000 1999
------- -------
Net income $ 4,671 $ 3,803
Foreign currency translation adjustments (1,236) (3,315)
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Comprehensive income $ 3,435 $ 488
======= =======
The following table summarizes comprehensive income (loss) for the six months
ended June 30:
2000 1999
------- -------
Net income $ 9,042 $ 6,801
Foreign currency translation adjustments (3,608) (13,522)
------- -------
Comprehensive income (loss) $ 5,434 $(6,721)
======= =======
Note 5 - Other
During the second quarter of 2000, the Company reached certain earn-out
performance targets relating to its 1998 Brazilian joint venture acquisition. In
accordance with the joint venture agreement, the Company recorded goodwill and a
liability of $3.5 million for additional consideration to be paid as a result of
meeting the performance targets. This amount was paid on August 7, 2000.
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 $9.6 million in the
first six months of 2000 compared to cash flows provided by operating activities
of $2.1 million in the same period of 1999. The increase was primarily due to
higher operating income,
<PAGE>
as well as changes in several working capital items, primarily due to accounts
payable and accrued liabilities, and a reduction in the change in repositioning
liabilities.
Net cash flows provided by investing activities increased to $2.8 million
in the first six months of 2000 compared to cash flows used in investing
activities of $3.7 million in the same period of 1999, primarily related to
proceeds received from the sale of the U.S. pulp and paper business.
Net cash flows used in financing activities were $5.2 million for the first
six months of 2000 compared with net cash flows provided by financing activities
of $5.7 million for the same period of the prior year. The net change of
approximately $10.9 million was primarily due to a $8.6 million reduction in
short-term borrowings and approximately $2.0 million associated with the
Company's stock repurchase plan.
During the second quarter of 2000, the Company reached certain earn-out
performance targets relating to its 1998 Brazilian joint venture acquisition. In
accordance with the joint venture agreement, the Company recorded goodwill and a
liability of $3.5 million for additional consideration to be paid as a result of
meeting the performance targets. This amount was paid on August 7, 2000.
Operations
Comparison of Six Months 2000 with Six Months 1999
Consolidated net sales for the first six months of 2000 increased by
approximately six 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 slightly offset by reductions in the coatings segment
revenues, resulting from lower maskant sales related to lower aircraft
production.
Cost of sales increased as a percent of sales from 56 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 six 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 license revenue and increased rental income 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
<PAGE>
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 Second Quarter 2000 with Second Quarter 1999
Consolidated net sales for the second quarter of 2000 increased by
approximately five percent over 1999 results, primarily due to metalworking
process chemicals revenues in Brazil, and increased demand in the steel
chemicals market in the US and Europe. This increase was impacted by reductions
in the Europe region due to foreign currency translation, and lower coatings
segment revenues.
Cost of sales increased as a percent of sales as a result of raw material
increases and product mix changes in non-core business lines.
Overall selling, general and administrative expenses were approximately two
percent higher in the second quarter of 2000 compared to the same period in
1999. This was due to inflation, organizational development activities, and new
market development activities, which were offset by continued cost containment
programs and positive foreign exchange impacts.
Minority interest was significantly higher in the second quarter 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 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 asset impairment charges 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 June 30, 2000 the remaining balance of that
accrual was $0.7 million.
<PAGE>
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, we cannot be certain liabilities in the form of
fines, penalties and damages will not be incurred in excess of the amount
reserved.
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.
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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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 June 30, 2000,
Quaker had $0.3 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.
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, 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.
<PAGE>
PART II. OTHER INFORMATION
Items 1,2,3, and 5 of Part II are inapplicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of the Company's shareholders was held on May 10,
2000. At the Meeting, management's nominees, Donald R. Caldwell, Robert E.
Chappell, William R. Cook, and Robert P. Hauptfuhrer were elected as Class II
Directors. Voting (expressed in number of votes) was as follows: Donald R.
Caldwell, 30,368,411 votes for, 121,041 votes against or withheld, and no
abstentions or broker non-votes; Robert E. Chappell, 30,368,411 votes for,
121,041 votes against or withheld, and no abstentions or broker non-votes;
William R. Cook, 30,374,587 votes for, 114,865 votes against or withheld, and no
abstentions or broker non-votes; and Robert P. Hauptfuhrer, 30,368,411 votes
for, 121,041 votes against or withheld, and no abstentions or broker non-votes.
At the Meeting, the shareholders also approved the adoption of the
Company's 2000 Employee Stock Purchase Plan by a vote of 28,989,297 votes for,
202,161 votes against, 295,624 abstentions, and 1,002,370 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, 2000 by
a vote of 30,343,143 votes for, 129,518 votes against, 16,791 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.
* * * * * * * * *
<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: August 14, 2000
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