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, 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 ------ 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, 2000 8,820,173

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) * * * * * * * * * *

Quaker Chemical Corporation Condensed Consolidated Balance Sheet (dollars in thousands) June 30, 2000 December 31, (Unaudited) 1999* --------- ------------ 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 --------- --------- Total current assets 103,769 96,241 --------- --------- Property, plant and equipment, at cost 107,269 108,924 Less accumulated depreciation 64,146 64,172 --------- --------- 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 --------- --------- $ 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 --------- --------- Total current liabilities 51,505 44,657 Long-term debt 25,124 25,122 Other noncurrent liabilities 24,185 23,117 --------- --------- Total liabilities 100,814 92,896 --------- --------- Minority interest in equity of subsidiaries 8,968 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 794 832 Retained earnings 99,261 93,655 Accumulated other comprehensive (loss) (14,986) (11,378) --------- --------- 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 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. * Condensed from audited financial statements.

Quaker Chemical Corporation Condensed Consolidated Statement of Income For the period ended June 30, Unaudited (dollars in thousands, except per share data) Three Months Six Months ----------------------------- ----------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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 The accompanying notes are an integral part of these condensed consolidated financial statements.

Quaker Chemical Corporation Condensed Consolidated Statement of Cash Flows For the Six Months ended June 30, Unaudited (dollars in thousands) ----------------------- 2000 1999 -------- -------- 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) -------- -------- Net cash provided by operating activities 9,587 2,147 -------- -------- 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) -------- -------- 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 -------- -------- 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 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements.

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 --------------------------- --------------------------- 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.

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: Metalworking Other Process Chemical Chemicals Coatings Products Total -------------------------------------------------------------------------------------- 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 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 ------- -------- 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 ------- ------- Consolidated income before taxes $14,000 $11,290 ======= =======

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) ------- ------- 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,

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

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.

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.

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.

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. * * * * * * * * *

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 ---------------

5 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 14,932 0 59,673 1,144 21,443 103,769 107,269 64,146 191,270 51,505 5,000 0 0 9,664 71,824 191,270 132,269 132,269 75,153 119,024 0 0 (612) 14,000 4,340 9,042 0 0 0 9,042 1.02 1.02