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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 1998
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
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-0993790
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Elm and Lee Streets, Conshohocken, Pennsylvania 19428 - 0809
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-832-4000
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Not Applicable
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Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Number of Shares of Common Stock
Outstanding on October 31, 1998 8,807,413
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PART I. FINANCIAL INFORMATION
QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION
The following condensed financial statements are filed as part of this
quarterly report on Form 10-Q:
Consolidated Balance Sheet at September 30, 1998 and
December 31, 1997
Consolidated Statement of Income for the nine months
ended September 30, 1998 and 1997
Consolidated Statement of Income for the three months
ended September 30, 1998 and 1997
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1998 and 1997.
* * * * * * * * * *
NOTE TO 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 presentation 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 presentation 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.
2
Quaker Chemical Corporation
Consolidated Balance Sheet
(dollars in thousands)
September 30, December 31,
1998 1997
(Unaudited) *
Assets
Current assets
Cash and cash equivalents $ 11,789 $ 18,416
Accounts receivable 56,120 48,625
Inventories
Raw materials and supplies 13,092 10,316
Work in process and finished goods 13,368 11,365
Deferred income taxes 6,952 5,729
Prepaid expenses and other current assets 6,459 3,675
--------- ---------
Total current assets 107,780 98,126
--------- ---------
Investments in and advances to associated companies 4,681 4,925
--------- ---------
Property, plant and equipment, at cost
Land 5,842 5,751
Buildings and improvements 37,310 31,523
Machinery and equipment 62,991 58,532
Construction in progress 4,660 1,213
--------- ---------
110,803 97,019
Less accumulated depreciation 61,257 56,365
--------- ---------
Total property, plant and equipment 49,546 40,654
Goodwill, net 21,413 14,500
Deferred income taxes 9,143 9,090
Other noncurrent assets 2,912 3,345
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Total noncurrent assets 83,014 67,589
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$195,475 $170,640
========= =========
* Condensed from audited financial statements.
3
Quaker Chemical Corporation
Consolidated Balance Sheet
(dollars in thousands)
September 30, December 31,
1998 1997
(Unaudited) *
Liabilities
Current liabilities
Short-term borrowings $ 7,646 $ -
Accounts payable 22,274 22,871
Dividends payable 1,673 1,570
Accrued liabilities 22,944 20,824
Estimated taxes on income 3,585 2,494
--------- --------
Total current liabilities 58,122 47,759
--------- --------
Long-term debt 25,394 25,203
Deferred income taxes 3,644 3,752
Accrued postretirement benefits 8,965 8,934
Other noncurrent liabilities 5,938 5,825
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Total noncurrent liabilities 43,941 43,714
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Total liabilities 102,063 91,473
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Minority interest in equity of subsidiaries 8,710 3,525
--------- --------
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 1,303 928
Retained earnings 85,832 80,749
Unearned compensation (331) (528)
Foreign currency translation adjustments 2,034 (208)
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98,502 90,605
Treasury stock, shares held at cost;
1998 - 860,344, 1997 - 943,552 (13,800) (14,963)
--------- --------
Total shareholders' equity 84,702 75,642
--------- --------
$195,475 $170,640
========= ========
* Condensed from audited financial statements
4
Quaker Chemical Corporation
Consolidated Statement of Income
Nine Months Ended September 30,
Unaudited
(dollars in thousands
except per share data)
1998 1997
Net sales $193,581 $ 177,542
-------- ---------
Costs and expenses
Cost of goods sold 107,114 99,519
Selling, administrative and
general expenses 69,917 64,908
Gain on sale of European pulp
and paper business (2,621)
-------- ---------
177,031 161,806
-------- ---------
Income from operations 16,550 15,736
Other income, net 1,023 1,414
Interest expense (1,531) (1,168)
Interest income 430 200
-------- ---------
Income before taxes 16,472 16,182
Taxes on income 6,589 6,342
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9,883 9,840
Equity in net income of associated
companies 781 941
Minority interest in net income of
subsidiaries (745) (238)
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Net income $ 9,919 $ 10,543
======== =========
Per share data:
Net income - basic $1.13 $1.22
Net income - diluted $1.12 $1.22
Dividends declared $0.55 $0.53
Based on weighted average number
of shares outstanding:
Basic 8,773,478 8,661,836
Diluted 8,848,304 8,667,797
5
Quaker Chemical Corporation
Consolidated Statement of Income
Three Months Ended September 30,
Unaudited
(dollars in thousands
except per share data)
1998 1997
Net sales $ 65,991 $ 58,687
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Costs and expenses
Cost of goods sold 36,439 32,362
Selling, administrative and
general expenses 23,729 21,260
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60,168 53,622
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Income from operations 5,823 5,065
Other income, net 484 432
Interest expense (614) (374)
Interest income 75 95
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Income before taxes 5,768 5,218
Taxes on income 2,307 2,081
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3,461 3,137
Equity in net income of associated
companies 279 321
Minority interest in net income of
subsidiaries (185) (139)
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Net income $ 3,555 $ 3,319
========== ==========
Per share data:
Net income - basic $0.40 $0.38
Net income - diluted $0.40 $0.38
Dividends declared $0.19 $0.18
Based on weighted average number
of shares outstanding:
Basic 8,798,561 8,704,525
Diluted 8,861,941 8,735,811
6
Quaker Chemical Corporation
Consolidated Statement of Cash Flows
For the Nine Months Ended September 30,
Unaudited
(dollars in thousands)
1998 1997
Cash flows from operating activities
Net income $ 9,919 $10,543
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 3,847 3,630
Amortization 1,612 1,435
Equity in net income of associated companies (780) (941)
Minority interest in earnings of subsidiaries 751 210
Deferred income taxes (22) 33
Deferred compensation and other postretirement benefits 1,013 592
Gain on sale of European pulp and paper business (2,621)
Net change in repositioning liabilities (1,077) (2,767)
Other, net (567) 428
Increase (decrease) in cash from changes in current assets
and liabilities net of acquisitions and divestitures:
Accounts receivable (6,246) (4,547)
Inventories (3,073) (577)
Prepaid expenses and other current assets (4,159) (3,904)
Accounts payable and accrued liabilities 2,473 4,519
Estimated taxes on income 1,097 2,758
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Net cash provided by operating activities 4,788 8,791
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Cash flows from investing activities
Dividends from associated companies 837 603
Investments in property, plant, equipment and other assets (6,401) (3,753)
Investments in and advances to associated companies (516) (318)
Companies acquired (9,350) -
Proceeds from the sale of European pulp and paper business - 3,053
Other, net 8 (146)
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Net cash used in investing activities (15,422) (561)
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Cash flows from financing activities
Net increase in short-term borrowings and notes payable 7,673 821
Repayment of long-term debt - (4,090)
Dividends paid (4,836) (4,608)
Treasury stock issued 590 1,506
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Net cash provided by (used in) financing activities 3,427 (6,371)
-------- -------
Effect of exchange rate changes on cash 580 (530)
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Net (decrease) increase in cash and cash equivalents (6,627) 1,329
Cash and cash equivalents at beginning of period 18,416 8,525
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Cash and cash equivalents at end of period $ 11,789 $ 9,854
======== =======
Supplemental cash flow information
Cash paid during the year for:
Income taxes $ 8,579 $ 5,802
Interest 1,877 1,265
7
Quaker Chemical Corporation
Notes to Consolidated Financial Statements
(Amounts in Thousands)
(Unaudited)
Note 1 - Weighted Average Shares Outstanding
Nine Months Ended Three Months Ended
September 30 September 30
------------ ------------
Basic Diluted Basic Diluted
----- ------- ----- -------
1998 8,773,478 8,848,304 8,798,561 8,861,941
1997 8,661,836 8,667,797 8,704,525 8,735,811
The difference between basic and diluted weighted average shares outstanding
results from the assumption that dilutive stock options outstanding were
exercised.
Note 2 - Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130 - Reporting Comprehensive Income. SFAS No. 130
requires that the components of comprehensive income be reported in the
financial statements. The following table summarizes comprehensive income for
the nine months ended September 30, 1998 and 1997:
1998 1997
---- ----
Net income $9,919 $10,543
Foreign currency translation adjustments
(net of tax) 2,242 (5,859)
------- ------
Comprehensive income $12,161 $4,684
======= ======
8
Quaker Chemical Corporation
Notes to Consolidated Financial Statements
(Amounts in Thousands)
(Unaudited)
The following table summarizes comprehensive income for the three months ended
September 30, 1998 and 1997:
1998 1997
---- ----
Net income $3,555 $ 3,319
Foreign currency translation adjustments
(net of tax) 3,212 1,161
------ -------
Comprehensive income $6,767 $ 4,480
====== =======
9
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
Net cash flow provided by operating activities amounted to $4.8 million
in the first nine months of 1998 compared to $8.8 million in the same period of
1997. The decrease was principally due to changes in working capital offset in
part by a reduction in the amount of payments in 1998 related to the
repositioning programs.
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 $14.3 million primarily as a result of cash required
as part of the formation of a majority owned joint venture in Brazil, the
acquisition of a small business in Italy, and changes in working capital. This
acquisition also accounts for the majority of the increase in the Company's
total assets. The current ratio decreased to 1.9 to 1 at September 30, 1998 as
compared to 2.1 to 1 at December 31, 1997 due principally to the decrease in the
Company's net cash position.
Operations
Comparison of Nine Months 1998 with Nine Months 1997
Consolidated net sales for the first nine months of 1998 increased by
9% over the first nine months of 1997. The increase in sales was the net result
of an 8% increase in volume (steel, metalworking, and aircraft producer
markets), a 1% increase due to pricing initiatives and an improved sales mix, a
2% net increase due to acquisition and divestiture activity, offset by a 2%
decrease due to foreign currency translation rates.
Operating income improved 26% to $16.6 million as compared to $13.1
million (excluding the $2.6 million gain on the European pulp and paper
business) in the same period of 1997. The improvement was mainly attributable to
the higher level of sales and expanded gross margins. The Company's gross profit
margin as a percentage of sales increased 0.8% primarily as a result of an
improved sales mix and generally stable raw material costs. Selling,
administrative and general expenses as a percentage of sales decreased 0.4% as
compared to 1997 due to the upside operating leverage provided at the higher
sales level.
The decrease in other income was due to the absence of unusually high
favorable transactional exchange gains in 1997. Minority interest increased as a
result of improved performances by the Company's consolidated joint ventures in
China and Australia and earnings from the Company's consolidated joint venture
in India which was formed in the fourth quarter of 1997. Basic earnings per
share of $1.13 were 11% higher than the prior year (excluding the gain on the
sale of the European pulp and paper business) despite a negative foreign
currency translation impact of approximately $.05 per share due to the
strengthening of the dollar, primarily against the Dutch guilder.
Comparison of Third Quarter 1998 with Third Quarter 1997
Consolidated net sales for the third quarter of 1998 increased by 12%
over the third quarter of 1997. The increase in sales was the net result of a 7%
increase related to the recent acquisition in Brazil, a 3% increase in volume
(steel, metalworking, and aircraft producer markets), a 1% increase due to
service revenues and a 1% increase due to pricing initiatives.
10
The reasons for changes in operating margin percentages, other income,
and equity in net income of associated companies in the third quarter 1998
versus the third quarter 1997 are basically the same as those previously
mentioned for the comparative nine-month periods. Basic earnings per share of
$.40 were 5% higher than the prior year.
Other Significant Items:
The Company is actively engaged in assessing and solving its Year 2000
problem. 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
plans to complete the majority of this program before year end 1998 and the
remaining work in the first quarter 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 problems in
the Company's systems are not expected to be material and are currently
estimated to be no more than $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 early 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 will be 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 an 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
delays in product deliveries from such suppliers. The Company is still
developing a reasonable worst case scenario as it relates to the Year 2000
problem and therefore, has not developed a contingency plan to cover any
unforeseen problems. The Company plans to complete the worst case analysis and
its contingency plan in the first quarter 1999.
During the fourth quarter of 1998 the Company expects to finalize
integration plans and related charges for its recent acquisition in Brazil,
currently estimated to be approximately one million dollars and is evaluating
various operational improvement plans in its U.S. and foreign operations, the
cost of which may impact future earnings.
During 1997 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131 - Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 is effective in 1998. The Company is currently
assessing the impact this new standard will have on its financial statements.
SFAS No. 131 requires the disclosure of segment information utilizing the
approach that the Company uses to manage its internal organization. Also, SFAS
No. 131 requires the reporting of segment information on a condensed basis for
interim periods beginning in 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. The
standard is effective January 1, 2000. It is not expected that the adoption of
this standard will have a material impact on the Company's financial condition.
11
Forward Looking and Cautionary Statements
Except for the historical information and discussions contained herein,
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 those manufacturers and their customers
(the majority of which are automobile, appliance, or durable good manufacturers
or in the construction industry).
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
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(Registrant)
/s/ Neil E. Daniels
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Neil E. Daniels, officer duly
authorized to sign this report,
acting Treasurer.
Date: November 16, 1998
12