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, 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 April 24, 2000 8,805,639
<PAGE>
QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at March 31, 2000 (unaudited) and
December 31, 1999
Condensed Consolidated Statement of Income for the three months ended
March 31, 2000 and 1999 (unaudited)
Condensed Consolidated Statement of Cash Flows for the three months
ended March 31, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
* * * * * * * * * *
<PAGE>
Quaker Chemical Corporation
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999*
----------- ------------
(Unaudited)
(dollars in thousands)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 9,379 $ 8,677
Accounts receivable 55,024 55,132
Inventories
Raw materials and supplies 11,524 12,140
Work-in-process and finished goods 10,814 11,217
Prepaid expenses and other current assets 8,362 9,075
--------- ---------
Total current assets 95,103 96,241
Property, plant and equipment, at cost 108,095 108,924
Less accumulated depreciation 64,069 64,172
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Total property, plant and equipment 44,026 44,752
Intangible assets 15,747 15,994
Investments in associated companies 5,879 5,773
Other assets 19,494 19,453
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$ 180,249 $ 182,213
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 1,045 $ 431
Accounts and other payable 25,297 24,092
Accrued compensation 5,196 8,749
Other current liabilities 11,793 11,385
--------- ---------
Total current liabilities 43,331 44,657
Long-term debt 25,134 25,122
Other noncurrent liabilities 23,536 23,117
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Total liabilities 92,001 92,896
Minority interest in equity of subsidiaries 8,589 8,118
SHAREHOLDERS' EQUITY
Common stock $1 par value; authorized
30,000,000 shares; issued (including
treasury shares) 9,664,009 shares 9,664 9,664
Capital in excess of par value 802 832
Retained earnings 96,309 93,655
Accumulated other comprehensive (loss) (13,750) (11,378)
--------- ---------
93,025 92,773
Treasury stock, shares held at cost;
2000-858,370, 1999-729,986 (13,366) (11,574)
--------- ---------
Total shareholders' equity 79,659 81,199
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$ 180,249 $ 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 Three Months Ended March 31
First Quarter
-----------------------------
2000 1999
----------- -----------
Unaudited
(dollars in thousands,
except per share data)
Net sales $ 65,002 $ 60,902
Cost of goods sold 37,114 33,804
----------- -----------
Gross Margin 27,888 27,098
Selling, general and administrative 21,636 22,123
----------- -----------
Operating income 6,252 4,975
Other income, net 729 291
Interest expense, net (290) (453)
----------- -----------
Income before taxes 6,691 4,813
Taxes on income 2,074 1,925
----------- -----------
4,617 2,888
Equity in net income of associated
companies 267 232
Minority interest in net income of
subsidiaries (513) (122)
----------- -----------
Net income $ 4,371 $ 2,998
=========== ===========
Per share data:
Net income - basic and diluted $ 0.49 $ 0.34
Dividends declared $ 0.195 $ 0.19
Based on weighted average number of
shares outstanding:
Basic 8,862,735 8,898,495
Diluted 8,928,394 8,945,019
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 Three Months Ended March 31
<TABLE>
<CAPTION>
2000 1999
-------- --------
Unaudited
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,371 $ 2,998
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,295 1,340
Amortization 285 266
Equity in net income of associated companies (267) (232)
Minority interest in earnings of subsidiaries 513 123
Deferred compensation and other postretirement benefits 350 260
Other, net (88) 93
Increase (decrease) in cash from changes in current assets and liabilities:
Accounts receivable, net (899) (2,564)
Inventories 741 1,417
Prepaid expenses and other current assets (323) (1,641)
Accounts payable and accrued liabilities (455) (3,145)
Change in repositioning liabilities (30) (1,496)
-------- --------
Net cash provided by (used in) operating activities 5,493 (2,581)
-------- --------
Cash flows from investing activities
Investments in property, plant and equipment (1,198) (1,470)
Other, net -- (409)
-------- --------
Net cash used in investing activities (1,198) (1,879)
-------- --------
Cash flows from financing activities
Net increase in short-term borrowings 612 5,654
Dividends paid (1,741) (1,693)
Treasury stock repurchased (1,961) --
Other, net 148 363
-------- --------
Net cash (used in) provided by financing activities (2,942) 4,324
-------- --------
Effect of exchange rate changes on cash (651) (1,118)
-------- --------
Net increase (decrease) in cash and cash equivalents 702 (1,254)
Cash and cash equivalents at beginning of period 8,677 10,213
-------- --------
Cash and cash equivalents at end of period $ 9,379 $ 8,959
======== ========
</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
March 31
---------------------------
Basic Diluted
--------- ---------
2000 8,862,735 8,928,394
1999 8,898,495 8,945,019
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 three
months ending March 31:
Metalworking Other
Process Chemical
Chemicals Coatings Products Total
------------ -------- -------- -------
2000
Net Sales $58,249 $3,973 $ 2,780 $65,002
Operating Income 14,076 1,031 (25) 15,082
1999
Net Sales $53,382 $4,136 $ 3,384 $60,902
Operating Income 12,136 1,326 155 13,617
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 three months ended March 31 is as follows:
2000 1999
------- -------
Total operating income for reportable segments $15,082 $13,617
Non-operating expenses (7,250) (7,036)
Depreciation and amortization (1,580) (1,606)
Interest expense (478) (543)
Interest income 188 90
Other income, net 729 291
-------- -------
Consolidated income before taxes $ 6,691 $ 4,813
======== =======
<PAGE>
Note 4 - Comprehensive Income
The following table summarizes comprehensive income for the three months ended
March 31:
2000 1999
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Net income $ 4,371 $ 2,998
Foreign currency translation adjustments (2,372) (10,207)
------- --------
Comprehensive income (loss) $ 1,999 $ (7,209)
======= ========
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 was $5.5 million in the
first three months of 2000 compared to cash flows used in operating activities
of $2.6 million in the same period of 1999. The increase was primarily due to
higher net income.
Net cash flows used in investing activities decreased to $1.2 million in
2000 from $1.9 million in 1999, primarily reflecting lower spending in property,
plant and equipment.
Net cash flows used in financing activities was $2.9 million for the first
quarter of 2000 compared with net cash flows provided of $4.3 million for the
same period of prior year, primarily due to approximately $2.0 million
associated with the Company's stock repurchase plan and a $5.0 million
reduction in short-term borrowings.
<PAGE>
Operations
Comparison of First Quarter 2000 with First Quarter 1999
Consolidated net sales for the first three months of 2000 increased by
approximately seven percent over 1999 results, primarily due to metalworking and
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.
Minority interest was significantly higher in the first quarter 2000
compared with the same period last year, due to higher net income from our 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 and lower foreign exchange losses in Europe
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 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.
<PAGE>
Other Significant Items:
During the first quarter of 2000 the Company began to perform a
comprehensive review of the strategic position of certain individual business
units and related assets, which may result in the consolidation or sale of
certain assets. In connection with this study, the Company will assess the
carrying value of certain tangible assets and goodwill, with the possible
outcome being a write-down of selected assets. The Company expects to
substantially complete its study by the third quarter of 2000.
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.
<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 good
manufacturers.
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 relate 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 March 31, 2000,
Quaker had $1.0 million 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 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
<PAGE>
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 March 31, 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 1,2,3,4, 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: May 2, 2000
-----------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,379
<SECURITIES> 0
<RECEIVABLES> 56,167
<ALLOWANCES> 1,143
<INVENTORY> 22,338
<CURRENT-ASSETS> 95,103
<PP&E> 108,095
<DEPRECIATION> 64,069
<TOTAL-ASSETS> 180,249
<CURRENT-LIABILITIES> 43,331
<BONDS> 5,000
0
0
<COMMON> 9,664
<OTHER-SE> 69,995
<TOTAL-LIABILITY-AND-EQUITY> 180,249
<SALES> 65,002
<TOTAL-REVENUES> 65,002
<CGS> 37,114
<TOTAL-COSTS> 58,750
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (290)
<INCOME-PRETAX> 6,691
<INCOME-TAX> 2,074
<INCOME-CONTINUING> 4,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,371
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.20
</TABLE>
