SEC Filing - Quaker Houghton

================================================================================ 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 June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________to____________ Commission file number 0-7154 QUAKER CHEMICAL CORPORATION --------------------------- (Exact name of Registrant as specified in its charter) Pennsylvania 23-0993790 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Elm and Lee Streets, Conshohocken, Pennsylvania 19428 - 0809 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 610-832-4000 Not Applicable 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, 1999 8,920,489

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet at June 30, 1999 (unaudited) and December 31, 1998 Condensed Consolidated Statement of Income for the six months ended June 30, 1999 and 1998 (unaudited) Condensed Consolidated Statement of Income for the three months ended June 30, 1999 and 1998 (unaudited) Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 1999 and 1998 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) * * * * * * * * * * 2

Quaker Chemical Corporation Condensed Consolidated Balance Sheet (dollars in thousands) June 30, 1999 December 31, (Unaudited) 1998 * ----------- ------------ ASSETS Current assets Cash and cash equivalents $ 10,612 $ 10,213 Accounts receivable 53,720 52,448 Inventories Raw materials and supplies 11,027 12,616 Work in process and finished goods 10,652 11,901 Prepaid expenses and other current assets 10,276 8,890 -------- -------- Total current assets 96,287 96,068 Investments in and advances to associated companies 6,201 5,280 Property, plant and equipment, at cost 107,582 111,963 Less accumulated depreciation 61,621 62,341 -------- -------- Total property, plant and equipment 45,961 49,622 Goodwill 16,807 21,366 Other noncurrent assets 19,309 17,567 -------- -------- $184,565 $189,903 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term borrowings $ 9,956 $ 1,420 Accounts payable 23,201 27,825 Accrued compensation 6,430 9,967 Other current liabilities 14,209 11,220 -------- -------- Total current liabilities 53,796 50,432 Long-term debt 25,539 25,344 Other noncurrent liabilities 23,952 22,061 -------- -------- Total liabilities 103,287 97,837 Minority interest in equity of subsidaries 7,290 8,331 SHAREHOLDERS' EQUITY Common stock $1 par value; authorized 30,000,000 shares; issued (including treasury shares) 9,664,009 shares 9,664 9,664 Capital in excess of par value 868 910 Retained earnings 88,280 84,873 Accumulated other comprehensive income (loss) (12,940) 582 -------- -------- 85,872 96,029 Treasury stock, shares held at cost; 1999-747,100, 1998-770,059 (11,884) (12,294) -------- -------- Total shareholders' equity 73,988 83,735 -------- -------- $184,565 $189,903 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements * Condensed from audited financial statements. 3

Quaker Chemical Corporation Condensed Consolidated Statement of Income For the period ended June 30, Unaudited (dollars in thousands, except per share date) Second Quarter Six Months ------------------ --------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $64,025 $65,355 $124,927 $127,590 ------- ------- -------- -------- Cost and expenses Cost of goods sold 34,543 36,177 66,792 70,675 Selling, administrative and general expenses 23,081 23,419 46,759 46,188 ------- ------- -------- -------- 57,624 59,596 113,551 116,863 Income from operations 6,401 5,759 11,376 10,727 Other income, net 561 248 852 539 Interest expense, net (485) (312) (938) (562) ------- ------- -------- -------- Income before taxes 6,477 5,695 11,290 10,704 Taxes on income 2,591 2,278 4,516 4,282 ------- ------- -------- -------- 3,886 3,417 6,774 6,422 Equity in net income of associated companies 264 273 496 502 Minority interest in net income of subsidiaries (347) (220) (469) (560) ------- ------- -------- --------- Net income $ 3,803 $ 3,470 $ 6,801 $ 6,364 ======= ======= ======== ======== Per share data: Net income - basic $0.42 $0.40 $0.76 $0.73 Net income - diluted $0.42 $0.39 $0.76 $0.72 Dividends declared $0.19 $0.18 $0.38 $0.36 The accompanying notes are an integral part of these condensed consolidated financial statements 4

Quaker Chemical Corporation Condensed Consolidated Statement of Cash Flows For the Six Months Ended June 30 Unaudited (dollars in thousands) 1999 1998 ---- ---- Cash flows from operating activities Net income $ 6,801 $ 6,364 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,157 3,631 Equity in net income of associated companies (496) (502) Minority interest in earnings of subsidiaries 469 560 Other, net 313 172 Increase (decrease) in cash from changes in current assets and liabilities net of acquisitions and divestitures: Accounts receivable (4,372) (3,721) Inventories 1,208 (2,364) Prepaid expenses and other current assets (2,077) (2,551) Accounts payable and accrued liabilities (1,153) 727 Change in repositioning liabilities (1,703) (532) ------- ------- Net cash provided by operating activities 2,147 1,784 ------- ------- Cash flows from investing activities Investments in property, plant, equipment and other assets (3,052) (3,908) Companies acquired - (9,350) Other, net (602) 70 ------- ------- Net cash used in investing activities (3,654) (13,188) ------- ------- Cash flows from financing activities Net increase in short-term borrowings 8,590 5,048 Dividends paid (3,394) (3,162) Other, net 511 346 ------- ------- Net cash provided by financing activities 5,707 2,232 ------- ------- Effect of exchange rate changes on cash (3,801) (317) ------- ------- Net increase (decrease) in cash and cash equivalents 399 (9,489) Cash and cash equivalents at beginning of period 10,213 18,416 ------- ------- Cash and cash equivalents at end of period $10,612 $ 8,927 ======= ======= The accompanying notes are an integral part of these condensed consolidated financial statements 5

Quaker Chemical Corporation Notes to Condensed Consolidated Financial Statements (Dollars in Thousands) (Unaudited) Note 1 - Condensed Financial Information The attached condensed financial information has been prepared in accordance with instructions for Form 10-Q and, therefore, does not include all financial note information which might be necessary for a fair statement in accordance with generally accepted accounting principles. Such condensed financial information is unaudited, but in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments and accruals, necessary for a fair statement of results for the periods indicated. The net income reported for the periods should not necessarily be regarded as indicative of net income on an annualized basis (see accompanying Management's Discussion and Analysis-Other Significant Items); however, significant variations from the results for the same period of the previous year, if any, have been disclosed in the accompanying Management's Discussion and Analysis. Note 2 - Weighted Average Shares Outstanding Six Months Ended Three Months Ended June 30 June 30 --------------------- ---------------------- Basic Diluted Basic Diluted ----- ------- ----- ------- 1999 8,903,783 8,950,264 8,909,013 8,955,452 1998 8,763,610 8,842,466 8,785,898 8,849,511 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 and provides chemical management services. (2) Coatings - produces temporary and permanent coatings for metal products and chemical milling maskants. (3) Other chemical products - primarily includes chemicals used in the manufacturing of paper as well as other various chemical products. Segment data includes direct segment costs as well as general operating costs, including depreciation, allocated to each segment based on net sales. 6

The table below presents information about the reported segments for the six months ending June 30: Metalworking Other Process Chemical Chemicals Coatings Products Total ------------------------------------------------------- 1999 Net Sales $109,675 $ 8,920 $ 6,332 $124,927 Operating Income 16,447 2,212 (83) 18,576 1998 Net Sales $111,631 $ 9,862 $ 6,097 $127,590 Operating Income 15,752 2,831 (95) 18,488 Operating income comprises revenue less related costs and expenses. Nonoperating expenses primarily consist of general corporate expenses identified as not being a cost of operation, interest expense, interest income, and license fees from nonconsolidated associates. A reconciliation of total segment operating income to total consolidated income before taxes, for the six months ended June 30, 1999 and 1998 is as follows: 1999 1998 ---- ---- Total operating income for reportable segments $18,576 $18,488 Nonoperating charges (4,043) (4,130) Depreciation and amortization (3,157) (3,631) Interest expense (1,117) (917) Interest income 179 355 Other income, net 852 539 ------- ------- Consolidated income before taxes $11,290 $10,704 ======= ======= Note 4 - Comprehensive Income The following table summarizes comprehensive (loss) income for the six months ended June 30, 1999 and 1998: 1999 1998 ---- ---- Net income $6,801 $ 6,364 Foreign currency translation adjustments (13,522) (970) ------- ------- Comprehensive (loss) income $(6,721) $ 5,394 ======= ======= 7

The following table summarizes comprehensive income for the three months ended June 30, 1999 and 1998: 1999 1998 ---- ---- Net income $ 3,803 $ 3,470 Foreign currency translation adjustments (3,315) 568 ------- ------- Comprehensive income $ 488 $ 4,038 ======= ======= Item 2. 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 $2.1 million in the first six months of 1999 compared to $1.8 million in the same period of 1998. The increase was principally due to a reduction in inventory levels offset by payments related to the 1998 repositioning program as well as other changes in working capital. The Company's net cash position (cash and cash equivalents plus short-term investments less short-term borrowings and current portion of long-term debt) decreased $8.1 million primarily as a result of seasonal cash needs related to the annual payment of employee incentives and payments related to the 1998 repositioning program. The current ratio decreased to 1.8 to 1 at June 30, 1999 as compared to 1.9 to 1 at December 31, 1998 due principally to the decrease in the Company's net cash position. Operations - ---------- Comparison of Six Months 1999 with Six Months 1998 - -------------------------------------------------- Consolidated net sales for the first half of 1999 decreased by 2% over the first half of 1998. The decrease in sales was the net result of a 3% decrease due to foreign currency exchange rates, a 1% decrease in pricing of certain products, partially offset by a 2% increase in volume. Net sales of the metalworking process chemicals segment were down 2% versus last year due mainly to foreign steel imports into the U.S. and Europe as well as temporary shutdowns of metalworking and steel facilities at the end of 1998 that extended into January of 1999. Sales in the coatings segment were down 10% due primarily to lower maskant sales into the aircraft industry caused by lower aircraft production as a result of the downturn in the Asian economy. The other chemical products segment sales were up 4% due to higher sales in Brazil, as a result of the mid-year 1998 acquisition. Income from operations improved 6% to $11.4 million as compared to $10.7 million in the same period of 1998, despite the decrease in sales, primarily due to lower raw material costs as well as cost reduction initiatives throughout the organization. The Company's cost of goods sold, as a percentage of sales, decreased 1.9% primarily as a result of lower raw material costs, sales mix effects and lower manufacturing expenses. Selling, administrative and general expenses decreased slightly compared to 1998 primarily due to cost savings from 8

the 1998 repositioning and integration program and a reduction in current year bonus incentives. These cost savings were partially offset by additional costs incurred in connection with the growth in chemical management services and growth in the Company's Brazil business as a result of the mid-year 1998 acquisition. Net interest costs increased versus June 30, 1998 due to increased debt levels associated with the Company's mid-year 1998 acquisition in Brazil. The increase in other income was due to the absence of transactional exchange rate losses which occurred in 1998. Minority interest increased as a result of lower net income of the Company's consolidated joint ventures. Earnings per share of $.76 (basic and diluted) were 4% and 6% higher than the prior year, respectively. Comparison of Second Quarter 1999 with Second Quarter 1998 - ---------------------------------------------------------- Consolidated net sales for the second quarter of 1999 decreased by 2% compared with the second quarter of 1998. The decrease in sales was the net result of a 5% decrease due to foreign currency exchange rates, a 1% decrease in pricing of certain products, offset by a 4% increase in volume. The reasons for changes in income from operations, costs of goods sold, other income, and interest expense in the second quarter 1999 versus the second quarter 1998 are basically the same as those previously mentioned for the comparative six-month periods. Earnings per share of $.42 (basic and diluted) were 5% and 8% higher than the prior year, respectively. Other Significant Items: For the past two years, the Company has been actively engaged in assessing and solving its Year 2000 issue. The Company completed a comprehensive assessment of all key systems (both IT and non-IT systems). As to systems found to be non-Year 2000 compliant, the Company initiated a program of systems replacements and updates. To date, the Company has completed a substantial portion of its program and expects that the remaining work will be completed prior to year end. The systems work includes the appropriate level of testing to ensure Year 2000 compliance. Expenditures (historical and future) in addressing any Year 2000 issues in the Company's systems are not expected to be material and are currently estimated to be approximately $750 thousand, including amounts which may be capitalized as long-term assets. In addition to this effort, the Company, with the assistance of an outside consultant, has undertaken a second complete assessment of all its IT and non-IT systems. This assessment confirmed that no significant additional actions were required. 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 9

and plans on contacting these customers in 1999. There can be no assurance, however, that (i) the systems of the Company's material third-party providers or key customers will be Year 2000 compliant and (ii) such non-compliance will not have a material adverse effect on the Company. The Company believes it is taking reasonable steps to prevent major interruptions in its business resulting from Year 2000 related issues. However, potential sources of risk specific to the Company are mainly external (third-party providers and customers)and include, but are not limited to, the inability of principal suppliers to be Year 2000 compliant. This could result in delays in product deliveries from such suppliers. The Company is still developing worst case scenarios as it relates to the Year 2000 issue and will finalize its contingency plans in the second half of 1999. On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency - the euro. The euro trades on currency exchanges and may be used in business transactions. Beginning in January 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the euro conversion have established plans to address the systems and business issues raised by the euro currency. The Company anticipates that the euro conversion will not have a material adverse impact on its financial condition or results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. ----------------------------------------------------------- Quaker is exposed to the impact of interest rates, foreign currency fluctuations, and changes in commodity prices. Interest Rate Risk. Quaker's exposure to market rate risk for changes in interest rates relates primarily to its short and long-term debt. All of Quaker's long-term debt has a fixed interest rate, while its short-term debt is negotiated at market rates which can be either fixed or variable. Incorporated by reference is the information in "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 8 of the Notes to Consolidated Financial Statements on Pages 16 and 27, respectively, of the Registrant's 1998 Annual Report to Shareholders, the incorporated portion of which is included as Exhibit 13 to the 1998 Form 10-K. Accordingly, if interest rates rise significantly the cost of short-term debt to Quaker will increase. This can have a material adverse effect on Quaker depending on the extent of Quaker's short-term borrowings. As of June 30, 1999, Quaker had $9,816 in short-term borrowings. Foreign Exchange Risk. A significant portion of Quaker's revenues and earnings are generated by its non-U.S. operations of its foreign subsidiaries. Incorporated by reference is the information concerning Quaker's non-U.S. activities appearing in Note 11 of the Notes to Consolidated Financial Statements on Page 29 of the Registrant's 1998 Annual Report to Shareholders, the incorporated portion of which is included as Exhibit 13 to the 1998 Form 10-K. 10

All such subsidiaries use the local currency as their functional currency. Accordingly, Quaker's financial results are affected by risks typical of international business such as currency fluctuations, particularly between the U.S. dollar and the Dutch guilder (and the E.U. euro). As exchange rates vary, Quaker's results can be materially adversely affected. In the past, Quaker has used, on a limited basis, forward exchange contracts to hedge foreign currency transactions and foreign exchange options to reduce exposure to changes in foreign exchange rates. The amount of any gain or loss on these derivative financial instruments was not material, and there are no contracts or options outstanding at June 30, 1999. Incorporated by reference is the information concerning Quaker's Significant Accounting Policies appearing in Note 1 of the Notes to Consolidated Financial Statements on Page 23 of the Registrant's 1998 Annual Report to Shareholders, the incorporated portion of which is included as Exhibit 13 to the Form 10-K. Commodity Price Risk. Many of the raw materials used by Quaker are commodity chemicals, and, therefore, Quaker earnings can be materially adversely affected by market changes in raw material prices. In certain cases, Quaker has entered into fixed-price purchase contracts having a term of up to one year. These contracts provide for protection to Quaker if the price for the contracted raw materials rises, however, in certain limited circumstances, Quaker will not realize the benefit if such prices decline. Quaker has not been, nor is it currently a party to, any derivative financial instrument relative to commodities. Forward-Looking and Cautionary Statements Except for historical information and discussions, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in such statements. Such risks and uncertainties include, but are not limited to, significant increase in raw material costs, worldwide economic and political conditions, and foreign currency fluctuations that may affect worldwide results of operations. Furthermore, the Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, appliance or durable good manufacturers. 11

PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The 1999 Annual Meeting of the Company's shareholders was held on May 12, 1999. At the Meeting, management's nominees, Peter A. Benoliel, Ronald J. Naples, and Robert H. Rock were elected as Class I Directors. Voting (expressed in number of votes) was as follows: Peter A. Benoliel, 32,122,577 votes for, 153,398 votes against or withheld, and no abstentions or broker non-votes; Ronald J. Naples, 32,112,677 votes for 163,298 votes against or withheld, and no abstentions or broker non-votes; and Robert H. Rock, 32,105,110 votes for, 170,865 votes against or withheld, and no abstentions or broker non-votes. At the Meeting, the shareholders also approved the adoption of the 1999 Long-Term Incentive Performance Incentive Plan by a vote of 29,288,364 votes for, 1,336,460 votes against, 661,293 abstentions, and 989,858 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, 1999 by a vote of 32,154,464 votes for, 113,621 votes against, 9,890 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. * * * * * * * * * 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) ------------------------------------- Michael F. Barry, officer duly authorized to sign this report, Vice President and Chief Financial Officer Date: August 13, 1999 -------------- 12

5 1,000 6-MOS DEC-31-1999 JUN-30-1999 10,612 0 55,256 1,536 21,679 96,287 107,582 61,621 184,565 53,796 5,000 9,664 0 0 64,324 184,565 124,927 124,927 66,792 113,551 0 0 938 11,290 4,516 6,801 0 0 0 6,801 0.76 0.76