SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------FORM 10-Q
[X]x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2002March 31, 2003OR
[_]o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
____________to____________________________ to ________________Commission file number 0-7154
------QUAKER CHEMICAL CORPORATION
- -------------------------------------------------------------------------------- (Exact(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.) One Quaker Park, 901 Hector Street, Conshohocken, Pennsylvania 19428 - 0809 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's
Pennsylvania
(State or other jurisdiction of
incorporation or organization)23-0993790
(I.R.S. Employer
Identification No.)
One Quaker Park, 901 Hector Street,
Conshohocken, Pennsylvania
(Address of principal executive offices)
19428 – 0809
(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
Xx No___ ---oIndicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock, as of the latest practicable date.Number of Shares of Common Stock Outstanding on October 31, 2002 9,322,639
Number of Shares of Common Stock
Outstanding on April 30, 2003
9,355,206QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
--------------------------------------------------------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheet at September 30, 2002 and December 31, 2001 Condensed Consolidated Statement of Income for the Three and Nine Months ended September 30, 2002 and 2001 Condensed Consolidated Statement of Cash Flows for the Nine Months ended September 30, 2002 and 2001 Notes to Condensed Consolidated
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
Condensed Consolidated Balance Sheet at March 31, 2003 and December 31, 2002
3
Condensed Consolidated Statement of Income for the Three Months ended March 31, 2003 and 2002
4
Condensed Consolidated Statement of Cash Flows for the Three Months ended March 31, 2003 and 2002
5
6
* * * * * * * * * *
Condensed Consolidated Balance Sheet
Unaudited
(dollars
(dollars in thousands)
September 30, December 31, 2002 2001 * -------------------- --------------------ASSETS Current assets Cash and cash equivalents $ 23,044 $ 20,549 Accounts receivable, net 54,583 44,787 Inventories Raw materials and supplies 11,389 9,673 Work-in-process and finished goods 11,217 9,112 Prepaid expenses and other current assets 12,156 8,809 -------------------- -------------------- Total current assets 112,389 92,930 -------------------- -------------------- Property, plant and equipment, at cost 111,606 97,367 Less accumulated depreciation 64,123 59,123 -------------------- -------------------- Total property, plant and equipment 47,483 38,244 Goodwill 21,267 14,960 Other intangible assets 6,059 1,442 Investments in associated companies 8,765 9,839 Deferred income taxes 8,693 9,085 Other assets 14,046 13,166 -------------------- -------------------- $ 218,702 $ 179,666 ==================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long-term debt $ 26,117 $ 2,858 Accounts and other payables 24,681 20,196 Accrued compensation 9,801 8,109 Other current liabilities 17,471 14,343 -------------------- -------------------- Total current liabilities 78,070 45,506 Long-term debt 19,452 19,380 Deferred income taxes 1,212 1,233 Other noncurrent liabilities 25,795 24,212 -------------------- -------------------- Total liabilities 124,529 90,331 -------------------- -------------------- Minority interest in equity of subsidiaries 8,411 8,436 -------------------- -------------------- 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 631 357 Retained earnings 107,996 103,953 Unearned compensation (1,334) (1,597) Accumulated other comprehensive (loss) (26,497) (24,075) -------------------- -------------------- 90,460 88,302 Treasury stock, shares held at cost; 2002-344,947, 2001-526,865 (4,698) (7,403) -------------------- -------------------- Total shareholders' equity 85,762 80,899 -------------------- -------------------- $ 218,702 $ 179,666 ==================== ====================
March 31,
2003
December 31,
2002 *
ASSETS
Current assets
Cash and cash equivalents
$
12,044
$
13,857
Accounts receivable, net
54,911
53,353
Inventories
Raw materials and supplies
12,996
11,342
Work-in-process and finished goods
12,673
12,294
Prepaid expenses and other current assets
14,529
12,827
Total current assets
107,153
103,673
Property, plant and equipment, at cost
117,569
113,207
Less accumulated depreciation
67,594
64,695
Net property, plant and equipment
49,975
48,512
Goodwill
22,308
21,927
Other intangible assets
5,639
5,852
Investments in associated companies
7,247
9,060
Deferred income taxes
10,545
10,609
Other assets
14,457
14,225
Total Assets
$
217,324
$
213,858
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
16,015
$
12,205
Accounts and other payables
29,340
29,423
Accrued compensation
6,283
10,254
Other current liabilities
12,711
14,262
Total current liabilities
64,349
66,144
Long-term debt
16,590
16,590
Deferred income taxes
1,529
1,518
Other noncurrent liabilities
34,145
33,889
Total liabilities
116,613
118,141
Minority interest in equity of subsidiaries
8,489
7,662
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
720
626
Retained earnings
111,591
110,448
Unearned compensation
(1,087
)
(1,245
)
Accumulated other comprehensive (loss)
(24,483
)
(27,078
)
96,405
92,415
Treasury stock, shares held at cost; 2003 - 310,720, 2002 - 324,109
(4,183
)
(4,360
)
Total shareholders’ equity
92,222
88,055
$
217,324
$
213,858
The accompanying notes are an integral part of these condensed consolidated financial statements.
*
Condensed from audited financial statements.
1Condensed Consolidated Statement of Income
Unaudited (dollars in thousands, except per share data) Three Months ended September 30, Nine Months ended September 30, ----------------------------------------- -------------------------------------- 2002 2001 2002 2001 ----------------- ---------------------- ---------------- ---------------------Net sales $ 73,268 $ 63,514 $ 202,652 $ 192,802 Cost of goods sold 43,869 38,371 119,934 114,752 ----------------- ---------------------- ---------------- --------------------- Gross margin 29,399 25,143 82,718 78,050 Selling, general and administrative expenses 22,697 19,065 66,000 58,914 Restructuring and nonrecurring expenses - 3,225 - 3,225 ----------------- ---------------------- ---------------- --------------------- Operating income 6,702 2,853 16,718 15,911 Other income (expense), net 942 (469) 1,194 690 Interest expense (491) (427) (1,318) (1,418) Interest income 22 222 571 699 ----------------- ---------------------- ---------------- --------------------- Income before taxes 7,175 2,179 17,165 15,882 Taxes on income 2,296 675 5,493 4,923 ----------------- ---------------------- ---------------- --------------------- 4,879 1,504 11,672 10,959 Equity in net income of associated companies 130 244 314 740 Minority interest in net income of subsidiaries (720) (632) (2,103) (2,456) ----------------- ---------------------- ---------------- --------------------- Net income $ 4,289 $ 1,116 $ 9,883 $ 9,243 ================= ====================== ================ ===================== Per share data: Net income - basic $ 0.47 $ 0.12 $ 1.08 $ 1.02 Net income - diluted $ 0.45 $ 0.12 $ 1.05 $ 1.02 Dividends declared $ 0.21 $ 0.205 $ 0.63 $ 0.615 Based on weighted average number of shares outstanding: Basic 9,222,050 9,115,591 9,149,337 9,028,096 Diluted 9,453,208 9,174,754 9,433,279 9,088,547
Unaudited
(dollars in thousands, except per share data)
Three Months ended March 31,
2003
2002
Net sales
$
73,337
$
59,927
Cost of goods sold
44,971
35,570
Gross margin
28,366
24,357
Selling, general and administrative expenses
22,685
20,024
Operating income
5,681
4,333
Other income, net
88
280
Interest expense
(350
)
(419
)
Interest income
211
253
Income before taxes
5,630
4,447
Taxes on income
1,858
1,423
3,772
3,024
Equity in net income (loss) of associated companies
86
(17
)
Minority interest in net income of subsidiaries
(751
)
(649
)
Net income
$
3,107
$
2,358
Per share data:
Net income - basic
$
0.34
$
0.26
Net income - diluted
$
0.33
$
0.26
Dividends declared
$
0.21
$
0.21
Based on weighted average number of shares outstanding:
Basic
9,270,775
9,154,303
Diluted
9,508,593
9,212,700
The accompanying notes are an integral part of these condensed consolidated financial statements.
2Condensed Consolidated Statement of Cash Flows
For theNineThree Months endedSeptember 30,March 31,
Unaudited (dollars in thousands) 2002 2001 ---------- ----------Cash flows from operating activities Net income $ 9,883 9,243 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,571 3,549 Amortization 576 1,091 Equity in net income of associated companies (314) (740) Minority interest in earnings of subsidiaries 2,103 2,456 Deferred compensation and other postretirement benefits 290 690 Restructuring and nonrecurring expenses - 3,225 Other, net (221) 867 Increase (decrease) in cash from changes in current assets and current liabilities: Accounts receivable, net (3,375) (230) Inventories (2,543) 1,460 Prepaid expenses and other current assets (846) (1,540) Accounts payable and accrued liabilities 5,914 (4,093) Change in restructuring liabilities (1,763) (443) ---------- ---------- Net cash provided by operating activities 13,275 15,535 ---------- ---------- Cash flows from investing activities Investments in property, plant and equipment (7,642) (4,980) Payments related to acquisitions (21,285) (1,532) Dividends from associated companies 307 902 Other, net (443) 261 ---------- ---------- Net cash (used in) investing activities (29,063) (5,349) ---------- ---------- Cash flows from financing activities Net increase in short-term borrowings 23,121 (54) Dividends paid (5,756) (5,215) Treasury stock issued 2,618 2,664 Distributions to minority shareholders (1,514) (2,175) Other, net - 28 ---------- ---------- Net cash provided by (used in) financing activities 18,469 (4,752) ---------- ---------- Effect of exchange rate changes on cash (186) (1,943) ---------- ---------- Net increase in cash and cash equivalents 2,495 3,491 Cash and cash equivalents at beginning of period 20,549 16,552 ---------- ---------- Cash and cash equivalents at end of period $ 23,044 20,043 ========== ========== Noncash investing activities: Contribution of property, plant & equipment to real estate joint venture $ - 4,358
Unaudited
(dollars in thousands)
2003
2002 *
Cash flows from operating activities
Net income
$
3,107
$
2,358
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
1,646
1,229
Amortization
215
82
Equity in net income of associated companies
(86
)
17
Minority interest in earnings of subsidiaries
751
649
Deferred compensation and other postretirement benefits
77
(260
)
Other, net
481
388
Increase (decrease) in cash from changes in current assets and current liabilities:
Accounts receivable, net
(399
)
(2,471
)
Inventories
(1,389
)
981
Prepaid expenses and other current assets
(1,342
)
(1,918
)
Accounts payable and accrued liabilities
(5,927
)
391
Change in restructuring liabilities
(699
)
(865
)
Net cash (used in) provided by operating activities
(3,565
)
581
Cash flows from investing activities
Investments in property, plant and equipment
(2,113
)
(1,527
)
Dividends and distributions from associated companies
1,800
—
Payments related to acquisitions
—
(13,676
)
Other, net
(40
)
66
Net cash (used in) investing activities
(353
)
(15,137
)
Cash flows from financing activities
Net increase in short-term borrowings
3,791
11,994
Repayment of long-term debt
(7
)
(30
)
Dividends paid
(1,961
)
(1,872
)
Treasury stock issued
86
442
Distributions to minority shareholders
(213
)
(497
)
Net cash provided by financing activities
1,696
10,037
Effect of exchange rate changes on cash
409
(112
)
Net (decrease) in cash and cash equivalents
(1,813
)
(4,631
)
Cash and cash equivalents at beginning of period
13,857
20,549
Cash and cash equivalents at end of period
$
12,044
$
15,918
The accompanying notes are an integral part of these condensed consolidated financial statements.
3*
Certain reclassifications of prior year data have been made to improve comparability.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements(Dollars
(Dollars in Thousands)
(Unaudited)Note 1
-– Condensed Financial InformationThe 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
20022003 presentation. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods. The results for the threeand ninemonths endedSeptember 30, 2002March 31, 2003 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Annual Report filed on Form 10-K for the year ended December 31,2001.2002.As part of the
Company'sCompany’s chemical management services, certain third party products are transferred tocustomerscustomers. Where the Company acts as a principal, revenues are recognized on a gross reporting basis atno gross profit and accordingly, these transactions are notthe selling price negotiated with clients. Where the Company acts as an agent, such revenue is recordedinusing netsales or expense.reporting as service revenues, at the amount of the administrative fee earned by the Company for ordering the goods. Third party products transferred under these arrangements and recorded net totaled$20,363$7,287 and$15,552$6,186 for theninethree months endedSeptember 30,March 31, 2003 and 2002,and 2001,respectively.Sales and cost of sales for the third quarter and nine months of 2002 are approximately $575 higher thanAs previously
reported in its October 30, 2002 press release. The change is due to a review and determination that a recent chemical management service arrangement should be reporteddisclosed, ona gross basis based on the nature of the integrated product and service offering versus net as an agent. This reclassification had no effect on gross margin and accordingly net income. Effective JulyMarch 1, 2002, the Company acquireda controlling interestcertain assets and liabilities ofQuaker Chemical South Africa (Pty.United Lubricants Corporation (“ULC”)Ltd (South Africa), a previously 50% owned joint venture. As a result, South Africa, previously reported usingand on April 22, 2002, theequity method, isCompany acquired 100% of the outstanding stock of Epmar Corporation (“Epmar”). The allocation of purchase price of assets and liabilities recorded for the acquisitions are nowa fully consolidated 51% owned subsidiary. The effect of thisfinal and did not materially changewas not material tofrom thefinancial statements. 4amounts disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Note 2
-– Recently Issued Accounting StandardsIn
June 2001,January 2003, the Financial Accounting Standards Board("FASB"(“FASB”), issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Certain Variable Interest Entities, (“VIEs”), which is an interpretation of Accounting Research Bulletin (“ARB”)issued SFASNo.143, "Accounting for Asset Retirement Obligations." SFAS51, “Consolidated Financial Statements.” FIN 46 addresses the application of ARB No.143 addresses accounting51 to VIEs, andreporting for obligations associated withgenerally would require that assets, liabilities and results of theretirementactivities oftangible long-lived assets anda VIE be consolidated into theassociated retirement costs. This statementfinancial statements of the enterprise that is considered the primary beneficiary. FIN 46 is effective forfiscal yearsinterim periods beginning after June 15,2002. The Company is currently assessing the impact of this new standard. In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of Long-Lived Assets." The provisions of this statement provide2003 to VIEs in which an enterprise holds asingle accounting model for impairment of long-lived assets. The statement is effective for fiscal years beginning after December 15, 2001. The Company adopted this standard on January 1, 2002. Management has assessed the impact of the new standard and determined there to be no material impact to the financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13 and Technical Corrections." For most companies, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. The statement also amended SFAS No. 13 for certain sales-leaseback and sublease accounting. The Company is required to adopt the provisions of SFAS No. 145 effective Januaryvariable interest that it acquired before February 1, 2003. The Company is currentlyevaluatingin theimpactprocess ofadoptionreviewing the provisions ofthis statement.FIN 46, particularly in relation to the Company’s real estate joint venture previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, to determine if the joint venture must be consolidated effective July 1, 2003.Note 3 – Stock-Based Compensation
In
JulyDecember 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This standard amends the transition and disclosure requirements of SFAS No.146, "Accounting123, “Accounting forCosts Associated with Exit or Disposal Activities", which nullified EITF Issue No. 94-3.Stock-Based Compensation.” As permitted by SFAS No.146 requires that a liability148, the Company continues to account fora cost associatedstock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized for stock options since all options granted had anexit or disposal activity be recognized whenexercise price equal to theliability is incurred, whereas EITF No 94-3 had recognizedmarket value of theliability atunderlying stock on thecommitment date to an exit plan.grant date. The Companyis requiredtypically issues the majority of its stock options annually during the first quarter. Therefore, the Company expects there toadoptbe little to no pro-forma impact to earnings per share for the subsequent 2003 quarters. The following tables illustrate the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No.146 effective123 as well as the assumptions used in the calculation forexit or disposal activities initiated after Decemberthe three months ended March 31,2002. 5:
2003
2002
Net Income – as reported
$
3,107
$
2,358
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax
489
537
Pro forma net income
$
2,618
$
1,821
Earnings per share:
Basic – as reported
$
0.34
$
0.26
Basic – pro forma
$
0.28
$
0.20
Diluted – as reported
$
0.33
$
0.26
Diluted – pro forma
$
0.27
$
0.20
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the three months ended March 31, :
2003
2002
Dividend yield
3.9
%
3.9
%
Expected volatility
23.9
%
23.9
%
Risk-free interest rate
3.00
%
3.00
%
Expected life (years)
5
5
Note
3 --Earnings4 – Earnings Per ShareThe following table summarizes earnings per share (EPS) calculations for the three months ended
September 30, 2002 and 2001: 2002 2001 ---- ---- Numerator for basic EPS and diluted EPS-- net income .......................................... $ 4,289 $ 1,116 ------- ------- Denominator for basic EPS--weighted average shares ..................................................... 9,222 9,116 Effect of dilutive securities, primarily employee stock options .............................. 231 59 ------- ------- Denominator for diluted EPS--weighted average shares and assumed conversions. ........................................ 9,453 9,175 ======= ======= Basic EPS ............................................ $ .47 $ .12 Diluted EPS .......................................... $ .45 $ .12 The following table summarizes earnings per share (EPS) calculations for the nine months ended September 30, 2002 and 2001: 2002 2001 ---- ---- Numerator for basic EPS and diluted EPS-- net income .......................................... $ 9,883 $ 9,243 ------- ------- Denominator for basic EPS--weighted average shares 9,149 9,028 ..................................................... Effect of dilutive securities, primarily employee stock options .............................. 284 61 ------- ------- Denominator for diluted EPS--weighted average shares and assumed conversions. ........................................ 9,433 9,089 ======= ======= Basic EPS ............................................ $ 1.08 $ 1.02 Diluted EPS .......................................... $ 1.05 $ 1.02 In September 2002, the Company refined its methodology for computing shares outstanding for purposes calculating earnings per share. The effect of the change was not material on current and prior calculations of earnings per share. 6March 31, :
2003
2002
Numerator for basic EPS and diluted EPS– net income
$
3,107
$
2,358
Denominator for basic EPS–weighted average shares
9,271
9,154
Effect of dilutive securities, primarily employee stock options
238
59
Denominator for diluted EPS–weighted average shares and assumed conversions
9,509
9,213
Basic EPS
$
.34
$
.26
Diluted EPS
$
.33
$
.26
Note
4 -5 – Business SegmentsThe
Company'sCompany’s reportable segments are as follows:(1)
Metalworking process chemicals - products used as lubricants for various heavy industrial and manufacturing applications.
(2)
Coatings - temporary and permanent coatings for metal and concrete products and chemical milling maskants.
(3)
Other chemical products
-– other various chemical products.Segment data includes direct segment costs as well as general operating costs.
The table below presents information about the reported segments for the
ninethree monthsending September 30: Metalworking Other Process Chemical Chemicals Coatings Products Total ----------------------------------------------------- 2002 Net sales $ 183,711 $ 15,593 $ 3,348 $ 202,652 Operating income 38,994 4,058 884 43,936 2001 Net sales $ 174,821 $ 14,731 $ 3,250 $ 192,802 Operating income 37,208 4,159 1,033 42,400ended March 31, :
Metalworking
Process
Chemicals
Coatings
Other
Chemical
Products
Total
2003
Net sales
$
66,983
$
5,259
$
1,095
$
73,337
Operating income
13,089
1,305
276
14,670
2002
Net sales
$
55,574
$
3,552
$
801
$
59,927
Operating income
11,479
829
209
12,517
Operating income comprises revenue less related costs and expenses. Non-operating items 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
ninethree months endedSeptember 30March 31, is as follows:72002 2001 ---- ---- Total operating income for Reportable segments $ 43,936 $ 42,400 Non-operating expenses (26,642) (22,173) Restructuring and nonrecurring expenses - (3,225) Amortization (576) (1,091) Interest expense (1,318) (1,418) Interest income 571 699 Other income, net 1,194 690 --------- -------- Consolidated income before taxes $ 17,165 $ 15,882 ========= ========
2003
2002
Total operating income for reportable segments
$
14,670
$
12,517
Non-operating expenses
(7,128
)
(6,873
)
Depreciation and amortization
(1,861
)
(1,311
)
Interest expense
(350
)
(419
)
Interest income
211
253
Other income, net
88
280
Consolidated income before taxes
$
5,630
$
4,447
Note
5 -6 – Comprehensive IncomeThe following table summarizes comprehensive income for the three months ended
September 30: 2002 2001 ---- ---- Net income $ 4,289 $ 1,116 Unrealized (loss) on available-for-sale - (269) securities Foreign currency translation adjustments (2,865) 1,397 --------- -------- Comprehensive income $ 1,424 $ 2,244 ========= ======== The following table summarizes comprehensive income for the nine months ended September 30: 2002 2001 ---- ---- Net income $ 9,883 $ 9,243 Unrealized (loss) on available-for-sale securities - (269) Foreign currency translation adjustments (2,422) (5,826) --------- -------- Comprehensive income $ 7,461 $ 3,148 ========= ======== 8March 31, :
2003
2002
Net income
$
3,107
$
2,358
Foreign currency translation adjustments
2,595
(2,303
)
Comprehensive income
$
5,702
$
55
Note
6 -7 – Restructuring and Nonrecurring ExpensesIn
the third and fourth quarters of2001,Quaker'sQuaker’s management approved restructuring plans to realign its organization and reduce operating costs.Quaker'sQuaker’s restructuring plansincludeincluded the closure and sale of its manufacturing facilities in the U.K. and France. In addition, Quaker consolidated certain functions within its global business units and reduced administrative functions, as well as expensed costs related to abandoned acquisitions. Included in thethird and fourth quarterrestructuring charges are provisions for the severance of16 and 37 employees, respectively.53 employees.Restructuring and related charges of
$2,958 and $2,896$5,854 wereexpensed during the third and fourth quarters of 2001, respectively.recognized in 2001. Thethird quartercharge comprised$520$2,644 related to employee separations,$2,038$2,613 related to facility rationalization charges and$400 related to abandoned acquisitions. The fourth quarter charge comprised $2,124 related to employee separations, $575 related to facility rationalization charges and $197$597 related to abandoned acquisitions. Employee separation benefits under each plan varied depending on local regulations within certain foreign countries and included severance and other benefits. As ofSeptember 30, 2002,March 31, 2003, Quaker had completed4950 of the planned 53 employee separations under the 2001 plans. During the fourth quarter of 2002, the Companycompleted the sale of its U.K. manufacturing facility. Quaker closed this facility at the end of 2001. Quaker expects to substantially complete the initiatives contemplated under the restructuring plans, including the
dispositionsale of its manufacturing facility in France, by themanufacturing facilities, by midend of 2003.Accrued restructuring balances, included in other current liabilities, as of
September 30,March 31, 2003 and December 31, 2002 are as follows:- -------------------------------------------------------------------------------- Balance Currency Balance December 31, translation September 30, 2001 Payments and other 2002 ---- -------- ----------- ------------- - -------------------------------------------------------------------------------- Employee separations $ 2,534 $(1,071) $ 40 $ 1,503 - -------------------------------------------------------------------------------- Facility rationalization 1,439 (555) 83 967 ------- ------- ------ ------- - -------------------------------------------------------------------------------- Total $ 3,973 $(1,626) $ 123 $ 2,470 ======= ======= ====== ======= - -------------------------------------------------------------------------------- 9Note 7 - Business Acquisitions On March 1, 2002, the Company acquired certain assets and liabilities of United Lubricants Corporation ("ULC"), a North American manufacturer and distributor of specialty lubricant products and chemical management services, for approximately $14,038. The acquisition of ULC strategically strengthens the Company's global leadership supply position to the steel industry. The following table shows the preliminary fair value of assets and liabilities recorded for the acquisition: Receivables $ 4,456 Inventories 828 Property, plant and equipment 4,155 Goodwill 5,437 Intangible assets 2,350 Other assets 74 ------- 17,300 ------- Accounts payable 2,148 Accrued expenses and other current liabilities 265 Other current liabilities 849 ------- 3,262 ------- Cash paid for acquisition $14,038 ======= The $5,437 of goodwill was assigned to the Metalworking process chemicals segment, and the entire amount is expected to be deductible for income tax purposes. The $2,350 of intangible assets comprised $1,400 of branded customer lists, $700 of formulations, $200 of trademarks and $50 in non-compete agreements. These intangibles are being amortized over a five-year period. The cash paid for acquisition increased approximately $362 during the third quarter of 2002 related to transaction costs incurred and post closing adjustments. Such costs have been allocated to goodwill. Further, goodwill has also increased for working capital adjustments and refinements of estimates of assets acquired and liabilities assumed. The results of operations of ULC are included in the consolidated statement of income beginning March 1, 2002. Pro-forma results of operations have not been provided because the effects are not material. 10On April 22, 2002, the Company acquired one hundred percent of the outstanding stock of Epmar Corporation ("Epmar"), a North American manufacturer of polymeric coatings, sealants, adhesives, and various other compounds, for approximately $7,611 and the assumption of $400 of debt. The acquisition of Epmar provides technological capability that is directly related to the Company's coatings business. The following table shows the preliminary fair value of assets and liabilities recorded for the acquisition: Receivables $ 848 Inventories 472 Property, plant and equipment 967 Goodwill 3,279 Intangible assets 2,920 Other assets 39 ------- 8,525 ------- Accounts payable 406 Accrued expenses and other current liabilities 108 Other noncurrent liabilities 400 ------- 914 ------- Cash paid for acquisition $ 7,611 ======= The $3,279 of goodwill was assigned to the Coatings segment, and the entire amount is expected to be deductible for income tax purposes. The $2,920 of intangible assets comprised: $1,600 of customer lists to be amortized over twenty years, $720 of product line technology to be amortized over ten years, and $600 of trademarks which have indefinite lives and will not be amortized. The cash paid for acquisition increased approximately $111 during the third quarter of 2002 related to transaction costs incurred and post closing adjustments. Such costs have been allocated to goodwill. This increase in goodwill was partially offset due to refinements of estimates of assets acquired and liabilities assumed. The results of operations of Epmar are included in the consolidated statement of income beginning April 22, 2002. Pro-forma results of operations have not been provided because the effects are not material. 11
Balance
December 31,
2002
Payments
Currency
translation
and other
Balance
March 31,
2003
Employee separations
$
1,274
$
(641
)
$
5
$
638
Facility rationalization
869
(58
)
(10
)
801
Total
$
2,143
$
(699
)
$
(5
)
$
1,439
Note 8
-– Goodwill and Other Intangible AssetsIn June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 established new guidelines for accounting for goodwill and other intangible assets. Upon adoption, goodwill is no longer amortized, but instead assessed for impairment at least on an annual basis. Accordingly, on January 1, 2002, the Company ceased amortizing its goodwill. The Company completed impairment assessment of its goodwill and did not incur an impairment charge related to the adoption of SFAS No. 142. Further, the Company completed its annual impairment assessment as of the end of the third quarter 2002 and no impairment charge was warranted. The following is a reconciliation of previously reported financial information to pro-forma amounts exclusive of goodwill amortization for the three months ended September 30, 2001: Net income $1,116 Goodwill amortization expense, net of tax 168 ------ Pro-forma net income $1,284 ====== Earnings per share, basic and diluted $ 0.12 Goodwill amortization expense, net of tax 0.02 ------ Pro-forma earnings per share, basic and diluted $ 0.14 ====== The following is a reconciliation of previously reported financial information to pro-forma amounts exclusive of goodwill amortization for the nine months ended September 30, 2001: Net income $9,243 Goodwill amortization expense, net of tax 524 ------ Pro-forma net income $9,767 ====== Earnings per share, basic and diluted $ 1.02 Goodwill amortization expense, net of tax 0.06 ------ Pro-forma earnings per share, basic and diluted $ 1.08 ======The changes in carrying amount of goodwill for the
ninethree months endedSeptember 30, 2002March 31, 2003 are as follows:12Metalworking process chemicals Coatings Total ---------------------------------------- Balance as of January 1, 2002 $11,081 $3,879 $14,960 Goodwill additions 5,532 3,279 8,811 Currency translation adjustments (2,504) -- (2,504) ------- ------ ------- Balance as of September 30, 2002 $14,109 $7,158 $21,267 ======= ====== ======= Goodwill additions are subject to post-closing adjustments.
Metalworking
process chemicals
Coatings
Total
Balance as of January 1, 2003
$
14,658
$
7,269
$
21,927
Currency translation adjustments
381
—
381
Balance as of March 31, 2003
$
15,039
$
7,269
$
22,308
Gross carrying amounts and accumulated amortization for intangible assets as of
September 30, 2002,March 31, 2003, are as follows:Gross carrying Accumulated Amount Amortization ------------------------------ Amortized intangible assets Customer lists and rights to sell $3,850 $ 286 Trademarks and patents 2,300 1,526 Formulations and product technology 1,420 110 Other 1,464 1,053 ------ ------ Total $9,034 $2,975 ====== ======
Gross carrying
Amount
Accumulated
Amortization
Amortized intangible assets Customer lists and rights to sell
$
3,850
$
491
Trademarks and patents
2,300
1,543
Formulations and product technology
1,420
218
Other
1,494
1,173
Total
$
9,064
$
3,425
Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows:
For the year ended December 31, 2002 $695 For the year ended December 31, 2003 $835 For the year ended December 31, 2004 $698 For the year ended December 31, 2005 $696 For the year ended December 31, 2006 $696 For the year ended December 31, 2007 $327 13
For the year ended December 31, 2003
$
842
For the year ended December 31, 2004
$
692
For the year ended December 31, 2005
$
684
For the year ended December 31, 2006
$
684
For the year ended December 31, 2007
$
277
For the year ended December 31, 2008
$
189
Note 9
- Debt In April 2002, the Company entered into a $20.0 million committed credit facility, with a bank, which expires in April 2003. At the Company's option, the interest rate for borrowings under the agreement may be based on the lender's cost of funds plus a margin, LIBOR plus a margin, or on the prime rate. The provisions of the agreement require that the Company maintain certain financial ratios and covenants, all of which the Company was in compliance with as of September 30, 2002. A total of $13.0 million in borrowings was outstanding under this facility as of September 30, 2002 at an average borrowing rate of approximately 2.4%. In April 2002, the Company entered into a $10.0 million uncommitted demand credit facility with the same lender under similar terms. A total of $10.0 million in borrowings under this facility was outstanding as of September 30, 2002 at an average borrowing rate of approximately 2.4%. These facilities replaced an uncommitted facility in the amount of $18.0 million, which was terminated in July 2002, with all balances outstanding repaid through borrowings under the new facilities discussed above. Note 10 -– Commitments and ContingenciesThe Company is involved in environmental clean-up activities and litigation in connection with an existing plant location and former waste disposal sites. The Company identified certain soil and groundwater contamination at AC Products, Inc.
("ACP"(“ACP”), a wholly owned subsidiary. In coordination with the Santa Ana California Regional Water Quality Board, ACP is remediating the contamination. During the second quarter of 2000, it was discovered during an internal environmental audit that ACP had failed to properly report its air emissions. In response, an internal investigation of all environmental, health, and safety matters at ACP was conducted. ACP has voluntarily disclosed these matters to regulators and has taken steps to correct all environmental, health and safety issues discovered. In connection with these activities the Company recorded pre-tax charges totaling $500 and $1,500 in 2001 and 2000, respectively. The Company believes that the remaining potential-known liabilities associated with these matters ranges from approximately$1,200$900 to$2,100,$1,600, for which the Company has sufficient reserves. Notwithstanding the foregoing, the Company cannot be certain that liabilities in the form of remediation expenses, fines, penalties, and damages will not be incurred in excess of the amount reserved.Additionally, although there can be no assurance regarding the outcome of other environmental matters, the Company believes that it has made adequate accruals for costs associated with other environmental problems of which it is aware. Approximately $226 and $260 was accrued at September 30, 2002 and December 31, 2001, respectively, to provide for such anticipated future environmental assessments and remediation costs. A non-operatingAn inactive subsidiary of the Company that was acquired in 1978
hadsold certain products containing asbestos,containing products. This subsidiaryprimarily on an installed basis, and isa co-defendantamong the defendants inclaims filed by multiple claimantsnumerous lawsuits alleging injury due to exposure to asbestos.Effective October 31, 1997,The subsidiary discontinued operations in 1991 and has no remaining assets other than its existing insurance policies. To date, thesubsidiary's insurance carriersoverwhelming majority of these claims have been disposed of without payment and there have been no adverse judgments against the subsidiary. Based on an initial analysis of the existing and anticipated future claims against this subsidiary, it is currently projected that the subsidiary’s total liability over the next 50 years for these claims is approximately $15 million (excluding the costs of defense). Although the Company has also been named as a defendant in certain of these cases, no claims have been actively pursued against theCompany and the Company has not contributed to the defense or settlement of any of these cases pursued against the subsidiary. These cases have been handled to date by the subsidiary’s primary insurers who agreed to pay all defense costs and be responsible for all damages
and costs (including attorneys' fees)assessed against the subsidiary arising out ofallexisting and future asbestos claims up toapplicable policy limits. Although there can be no assurance regardingthepotential liabilities associated withaggregate limits of theexistingpolicies. A significant portion of this primary insurance coverage was provided by an insurer that is now insolvent, and the other primary insurers have recently asserted that the aggregate limits of their policies have been exhausted. The subsidiary is challenging the applicability of these limits to the claimsproceedings,being brought against the subsidiary. The subsidiary has additional coverage under its excess policies. The Company believes, however, that if the coverage issues under the primary policies are resolved adversely to the subsidiary,believes that it has adequate primary and excessthe subsidiary’s insurance coveragefor its potentialwill likely be exhausted within the next three to five years. As a result, liabilitiesrelatedin respect of claims not yet asserted may exceed coverage available toclaims of which it is aware.the subsidiary.If the
subsidiarysubsidiary’s insurance coverage were to beeverexhausted, claimants of the subsidiary may actively pursue claims against the Company because of the parent-subsidiary relationship. Although asbestos litigation is particularly difficult to predict, especially with respect to claims that are currently notrequiredbeing actively pursued against the Company, the Company does not believe that such claims would have merit or that the Company would be held to have liability for any unsatisfied obligations of the subsidiary as a result of such claims. After evaluating the nature of the claims filed against the subsidiary andwill not fundthesubsidiary's liabilitiessmall number of such claims that have resulted inexcessany payment, the potential availability ofcoverage. In the absence ofadditional insurance coverage at the subsidiary level,asbestos claimants might pursue derivative or otherthe additional availability of the Company’s own insurance coverage and the Company’s strong defenses to claimsagainstthat it should be held responsible for the subsidiary’s obligations because of the parent-subsidiary relationship, the Companyin an effort to hold it liable forbelieves that theacts and/inactive subsidiary’s liabilities will not have a material impact on the Company’s financial condition, cash flows oromissions, if any,results ofthe subsidiary. The Company believes, although it can give no assurances, that it would be successful defending any such claims.operations.The Company is party to other litigation which management currently believes will not have a material adverse effect on the
Company'sCompany’s results of operations, cash flows or financial condition.14Item 2.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
Quaker’s cash and cash equivalents decreased to $12.0 million at March 31, 2003 from $13.9 million at December 31, 2002. The decrease resulted primarily from $3.6 million cash used in operating activities, $0.4 million cash used in investing activities, offset by $1.7 million cash provided by financing activities.
Net cash flows used in operating activities were $3.6 million in the first quarter of 2003 compared to cash flows provided by operating activities
were $13.3 million in the first nine monthsof2002 compared to $15.5$0.6 million in the same period of2001.2002. The decrease was primarily due toincreases in the changes inincreased cash out flows of working capital accountsreceivable, inventories, and decreases in restructuring liabilities,offset byincreaseshigher net income, depreciation and amortization. Increased inventory levels were caused by higher business activity, higher raw material costs and the build up of additional inventory inthe changes inBrazil to provide protection against foreign exchange rate differentials. Decreased cash flows from accounts payable and accruedliabilities.liabilities were due to higher annual incentive compensation payments as well as timing related to higher levels of accounts payable. The change in cash flows from accounts receivable in the first quarter of 2002 is reflective of the generally poor economic conditions experienced by the Company’s customers in late 2001 and early 2002.Net cash flows used in investing activities were
$29.1$0.4 million in the firstnine monthsquarter of20022003 compared to$5.3$15.1 million in the same period of2001.2002. Theincreasedecrease was primarily related topayments$13.7 million used in the first quarter of$21.3 million in2002related tofor theacquisitionsacquisition of certain assets and liabilities of United Lubricants Corporation("ULC"(“ULC”)and Epmar Corporation ("Epmar"), compared. During the first quarter of 2003 the Company received a $1.8 million priority distribution from its real estate joint venture. The Company expects toa payment of $1.5receive an additional $2.2 millionrelated to an acquisitionpriority distribution later in2001. See also Note 7 Business Acquisitions.2003.Expenditures for property, plant, and equipment totaled
$7.6$2.1 million in the firstnine monthsquarter of20022003 compared to$5.0$1.5 million in the same period of2001.2002. The increasein spending wasis primarily due to increased capital expenditures related to theresultCompany’s ERP implementation, upgrades to the Company’s Conshohocken laboratory facility, and the timing of theproject to implement a global transaction system and the move into new corporate headquarters. Capital expenditures forCompany’s 2002are expected to be approximately $12 million.acquisitions.Net cash flows provided by financing activities were
$18.5$1.7 million for the firstnine monthsquarter of20022003 compared witha net cash use of $4.8$10.0 million for the same period of the prior year. The net change was primarily due toapproximately $23.0$12.0 million of short-term borrowings incurred in the firstquarter of 2002 primarily used to finance the ULC
and Epmar acquisitions. In April 2002, the Company entered into a $20.0acquisition versus $3.8 millioncommitted credit facility, with a bank, which expiresof short-term borrowings inApril 2003. At the Company's option, the interest rate for borrowings under the agreement may be based on the lender's cost of funds plus a margin, LIBOR plus a margin, or on the prime rate.2003 used to fund working capital needs.The
provisions of the agreement require that the Company maintain certain financial ratios and covenants, all of which the Company was in compliance with as of September 30, 2002. A total of $13.0 million in borrowings was outstanding under this facility as of September 30, 2002 at an average borrowing rate of approximately 2.4%. 15In April 2002, the Company entered into a $10.0 million uncommitted demand credit facility with the same lender under similar terms. A total of $10.0 million in borrowings under this facility was outstanding as of September 30, 2002 at an average borrowing rate of approximately 2.4%. These facilities replaced an uncommitted facility in the amount of $18.0 million, which was terminated in July 2002, with all balances outstanding repaid through borrowings under the new facilities discussed above. Despite the Company's acquisitions, theCompany believes that its balance sheet remains strong withapproximately $23 milliona debt to total capital ratio ofcash26% as of the March 31, 2003 compared to 25% at the end ofSeptember. It is the intent2002 and 30% as ofthe Company to utilize some of this cash to pay down a portion of the Company's short term borrowings in the fourth quarter ofMarch 31, 2002. The Company further believesthat its current credit facilities, which expire in April of 2003, will be renewed or replaced at competitive rates upon their termination in 2003. Accordingly, the Company believes, that in 2002 and 2003,it is capable of supporting its operating requirementspaymentsincluding pension plan contributions, payment of dividends to shareholders, possible acquisition and business opportunities, and possible resolution of contingencies, through internally generated funds supplemented with debt as needed.Financial market declines have reduced the asset value of the Company's pension plans and will likely result in a non-cash charge to equity in the fourth quarter. The amount of the charge will depend on 2002 investment returns. The charge will have no effect on 2002 net income. In addition, in 2003, the Company is likely to have mandatory cash contributions to its plan that are approximately $2 million higher than 2002 levels.Operations
Sales and cost of sales for the third quarter and nine months of 2002 are approximately $575 higher than previously reported in its October 30, 2002 press release. The change is due to a review and determination that a recent chemical management service arrangement should be reported on a gross basis based on the nature of the integrated product and service offering versus net as an agent. This reclassification had no effect on gross margin and accordingly net income.Comparison of First
Nine Months 2002Quarter 2003 with FirstNine Months 2001Quarter 2002Consolidated net sales for the first
nine monthsquarter of20022003 were$202.7 million,a record $73.3, a 22% increase compared to$192.8 million inthe firstnine monthsquarter of2001. The sales comparison was2002. Foreign exchange rate translation and the timing of the Company’s 2002 acquisitions favorably impacted net sales for the quarter by approximately $2.0 million and $5.6 million respectively. Excluding theinclusionimpact ofrevenues fromforeign exchange rate translation and theacquisitionstiming ofULC and Epmar earlier this year, as well asthepurchase of a controlling interest in the Company's South Africa joint venture, which was effective July 1, 2002. Sales increases were also partially offset by unfavorable foreign currency translations. At constant exchange rates and excluding revenue fromCompany’s 2002 acquisitions,consolidatednet sales would have beenessentially flat compared$65.7 million or 9.6% above the prior year. A Non-GAAP measure of net sales, which excluded the impact of foreign exchange rate translation and the timing of the Company’s 2002 acquisitions, has been included because the Company believes it is helpful to2001. 16the reader in comparing performance in the current year first quarter to the comparable period in the prior year. Net sales in all regions except Europe increased on a local currency basis demonstrating improvements in both volume and price/mix. Overall, Quaker realized somewhat of a rebound from the softness in the Company’s global markets experienced during the first quarter of 2002. Cost of sales
decreasedincreased as a percentage of sales from59.5%59.4% in2001the first quarter of 2002 to59.2%61.3% in2002.the first quarter of 2003. Theimprovement wasincrease is primarily a result oflowerincreased raw materialcosts.costs and product mix. The Company expects raw material prices to be higher in 2003, especially in the first half, due to higher oil prices experienced earlier in the year.Selling , general and administrative (SG&A) expenses
of $66.0increased $2.7 millioninover the firstnine monthsquarter of 2002. Timing of the Company’s 2002wereacquisitions and foreign exchange rate translation accounted for approximately12% higher thantwo thirds of the$58.9 million reported in the first nine months of 2001. The increase was primarily the result of SG&A expenses of ULC, Epmar and South Africa, and higherincrease. As previously disclosed, increased costs such as pension, insurance, andother administrative costs. The first nine months of 2002 were also favorably impacted bytheadoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Upon adoption of SFAS No. 142,Company’s ERP implementation, accounted for thecompany no longer amortizes goodwill. The Company reported approximately $0.8 million of goodwill amortization in the first nine months of 2001. In addition, in the third quarter of 2001 the Company recorded an additional reserve for doubtful accounts of $0.5 million related to the poor financial condition of certain U.S. steel customers that filed for bankruptcy protection under the provisions of Chapter 11. In the third quarter of 2001, the Company recorded restructuring and nonrecurring charges totaling $3.2 million on a pre-tax basis. These charges consist of restructuring charges of $3.0 million, primarily related to plans to close and sell our manufacturing facilities in the U.K. and France, as well as other cost reduction efforts. Nonrecurring organizational consulting expenses of $0.2 million were also incurred. See also Note 6 Restructuring and Nonrecurring Expenses.remainingincrease.
Other income variance primarily reflects
increasedforeign exchange losses in the first quarter of 2003 compared with gains in the firstnine monthsquarter of2002 compared with the first nine months of 2001, offset by lower license fee revenue in 2002 compared with 2001.2002. Net interest expensewas favorable in the first nine months of 2002 compared tois slightly below the prior yeardespite increased borrowingsprimarily due tofund the ULC and Epmar acquisitions, due todecreased debt levels, lower borrowing rates and the impact of principal payments made on theCompany'sCompany’s higher rate long-term debt. Equity incomeinis higher for the firstnine monthsquarter of20022003 compared to the firstnine monthsquarter of2001 reflects lower income year over year from the Company's joint venture in Mexico, the start up2002, due to improved results ofthe Company'sour real estatejoint venture in Conshohocken, PA and the consolidation of the Company's South Africajoint venture. Minority interest waslower inhigher for the firstnine monthsquarter of20022003 compared with the same period last year, primarily due tolower net income fromtheCompany's subsidiarypurchase of a controlling interest inBrazil. 17our South African joint venture, which was effective July 1, 2002. The effective tax rate for
20022003 is currently32%33%, compared to31%32% in the prior year. The effective tax rate is dependent on many internal and external factors, and is assessed by the Company on a regular basis.The CompanyOther Significant Items
As previously announced in the Company’s April 11, 2003 press release, Quaker has been
assessed approximately $2.6 millionawarded a series ofadditional taxesmulti-year contracts to provide chemical management services (CMS) for General Motors Powertrain manufacturing sites. These contracts will be implemented during the second quarter of 2003. In addition, Daimler-Chrysler has also recently awarded the Company a CMS contract for its Trenton Engine plant.For 2003, the earnings impact due to the new CMS sites is expected to be immaterial due to transition and start-up costs, largely in the second quarter. Future profitability of the contracts will be based on Quaker’s ability to identify and implement cost reduction programs and product conversions. In addition, the new contracts will result in an
auditincreased investment ofcertainworking capital estimated to be $4 million, although this amount will be dependent on the final terms negotiated with suppliers.These new contracts will cause future income statements to show different relationships between margins and revenue than in the past. At the majority of
its subsidiariescurrent CMS sites, the Company effectively acts as an agent forprior years.the customer whereby it purchases chemicals from other companies and resells the product to the customer at little or no margin. TheCompany has initiated an appeal process related to this assessmentrevenue andcurrently believes its reservescosts from these sales areadequate. Comparison of Third Quarter 2002 with Third Quarter 2001 Consolidatedreported on a net sales or “pass-through” basis. The structure of the new GM Powertrain site contracts is different in that the Company’s revenue received from the customer will be in the natureof a fee for
the third quarter of 2002 were a record $73.3 million, a 15% increase comparedproducts and services provided to thethird quarter of 2001. The sales comparison was favorably impacted by the inclusion of revenues from ULC, Epmar and South Africa. The impact of foreign currency translations was not material to the quarterly comparison, as the strengthening Euro was largely offset by the weakening Brazilian Real and Argentine Peso. At constant exchange rates and excluding ULC, Epmar and South Africa revenues, consolidated net sales would have been up approximately 5% compared to 2001. Cost of sales decreased as a percentage of sales from 60.4% in the third quarter of 2001 to 59.9% in the third quarter of 2002. The improvement was primarily a result of lower raw material costs. Selling, general and administrative (SG&A) expenses in the third quarter of 2002 were up $3.6 million from the third quarter of 2001. SG&A expenses of ULC, Epmar and South Africa accounted for approximately one half of the quarterly increase. Higher pension, insurance, and other administrative costs were also factors. The third quarter of 2002 was also favorably impacted by the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Upon adoption of SFAS No. 142, the company no longer amortizes goodwill. The Company reported approximately $0.2 million of goodwill amortization in the third quarter of 2001. In addition, in the third quarter of 2001 the Company recorded an additional reserve for doubtful accounts of $0.5 millioncustomer, which are indirectly related to thepoor financial conditionactual costs incurred. As a result, the Company will recognize in reported revenues the gross revenue received from the CMS site customer, and in cost ofcertain U.S. steel customers that filed for bankruptcy protection under the provisions of Chapter 11. Ingoods sold, the thirdquarter of 2001,party product purchases, which will substantially offset each other. This will result in a significant increase in theCompany recorded restructuring and nonrecurring charges totaling $3.2Company’s reported revenue, estimated to be approximately $35-$40 million ona pre-tax basis. These charges consist of restructuring charges of $3.0 million, primarily relatedan annualized basis, income from which will be dependent upon Quaker’s ability toplansprofitably manage these contracts, tocloseidentify andsell our manufacturing facilities in the U.K. and France, as well as other 18implement cost reduction efforts. Nonrecurring organizational consulting expenses of $0.2 million were also incurred. See also Note 6 Restructuringprograms andNonrecurring Expenses. Other income variance primarily reflects foreign exchange gains in the third quarter of 2002 compared with foreign exchange losses in the third quarter of 2001. Net interest expense was unfavorable in the third quarter of 2002 comparedtothe prior year, due to increased borrowings to fund the ULC and Epmar acquisitions. Equity income in the third quarter of 2002 was down compared to equity income in the third quarter 2001 due to the consolidation of South Africa. Minority interest was higher in the third quarter of 2002 compared with the same period last year, as a result of the consolidation of South Africa The uncertain global economic and political environment and rising raw material prices creates uncertainty regarding fourth quarter earnings. However, the Company currently expects to achieve similar earnings in the fourth quarter as the third quarter, which provides the prospect that earnings for the full year 2002 will slightly exceed 2001 full-year earnings, which exclude the 2001 special items. Earnings for the full-year 2001, excluding special items, were $1.49 per share. Special items totaling $0.65 per share are inclusive of the following: $0.20 for facility rationalization costs, $0.20 for severance costs, $0.04 for costs related to abandoned acquisitions, $0.15 for additional provisions for doubtful accounts, $0.02 for organizational structure costs and $0.04 for increases in environmental reserves. Regarding 2003,implement product conversions.In addition, the Company is
anticipating U.S. pension costscurrently negotiating similar contract structures for some of its existing CMS sites. It is possible that this willbe $0.08 to $0.12 higher per share, depending on 2002 investment returns. In addition, raw material prices are expected to be higher in 2003. The Company is currently in the midst of the budget process and a full year 2003 forecast is not yet available. However, it is the goal ofalso require the Company tohave increased earnings yearrecognize an additional $10-$15 million in annualized sales starting in the second quarter.The impact on gross margin due to these developments in CMS is estimated to be approximately 4 to 6 percentage points over
year. Other Significant Items On March 1, 2002,the next several months. As the Companyacquired certain assetsbegins to implement cost reduction programs andliabilities of United Lubricants Corporation for approximately $14.0 million. The acquisition resulted inproduct conversions, this should begin to reduce therecognition of approximately $5.4 million of goodwill and $2.4 million of intangible assets. Pro-forma results of operations have not been presented because the effects were not material. 19On April 22, 2002, the Company acquired all of the outstanding stock of Epmar Corporation for $7.6 million and the assumption of $0.4 million of debt. The acquisition resulted in the recognition of approximately $3.3 million of goodwill and $2.9 million of intangible assets. Pro-forma results of operations have not been presented because the effects were not material. Effective July 1, 2002, the Company acquired a controlling interest in Quaker Chemical South Africa (Pty.) Ltd (South Africa), a previously fifty-percent owned joint venture. As a result, South Africa, previously reported using the equity method, is now a fully consolidated subsidiary. The effect of this change was not material to the financial statements. 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. In January 2002, new euro-denominated bills and coins were issued, and legacy currencies were withdrawn from circulation. The Company's operating subsidiaries affected by the euro conversion executed plans to address the systems and business issues raised by the euro currency. The euro conversion did not have a material adverse impact on the Company's financial condition or results of operations. Forward-Looking andnegative gross margin impact.Factors that May Affect our Future Results
(Cautionary Statements
Except for historical information and discussions, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning ofUnder the Private Securities Litigation Reform Act of1995. These statements involve a number of risks, uncertainties1995)Certain information included in this Report and other
factorsmaterials filed or to be filed by Quaker with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These Statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including:•
Statements relating to our business strategy;
•
Our current and future results and plans; and
•
Statements that include the words “may,” “could,” “should,”
“would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions.
Such statements include information relating to current and future business activities, operational matters, capital spending, and financing sources.
The risks and uncertainties that could
cause actualimpact the Company’s future operations and resultsto differ materially from those projected in such statements. Such risks and uncertaintiesinclude, but are not limited to, further downturns in ourcustomers'customers’ businesses, significant increases in raw material costs, worldwide economic and political conditions, the impact of SARS, foreign currency fluctuations, and future security alerts and terrorist attacks such as those that occurred on September 11, 2001. Furthermore, the Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, appliance,orand durable goods manufacturers.20These risks, uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results. Other factors beyond those discussed could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Quaker is exposed to the impact of interest rates, foreign currency fluctuations, changes in commodity prices, and credit risk.
Interest Rate
Risk. Quaker'sRisk. Quaker’s exposure to market rate risk for changes in interest rates relates primarily to its short and long-term debt. Most ofQuaker'sQuaker’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 informationin "Liquidityunder the caption “Liquidity and CapitalResources"Resources” inManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and Note 8 of the Notes to Consolidated Financial Statements beginning on pages1011 and31,33, respectively, of theRegistrant's 2001Registrant’s Annual Reportfiledon Form10-K. Accordingly, if10-K for the year ended December 31, 2002 (the “2002 Form 10-K”). If interest rates rise significantly, the cost of short-term debt to Quaker will increase. This can haveana material adverse effect on Quaker depending on the extent ofQuaker'sQuaker’s short-term borrowings. As ofSeptember 30, 2002,March 31, 2003, Quaker had$23.0$13.2 million of short-termborrowings.borrowings compared to $9.3 million as of December 31, 2002.Foreign Exchange
Risk.Risk. A significant portion ofQuaker'sQuaker’s revenues and earnings is generated by its foreignsubsidiaries. These foreign subsidiaries also hold a significant portion of Quaker's assets and liabilities.operations.Incorporated by reference is the information concerning
Quaker'sQuaker’s non-U.S. activities appearing in Note 11 of the Notes to Consolidated Financial Statements beginning on page3538 of theRegistrant's 2001 Annual Report filed on2002 Form 10-K.EachAll such subsidiariesuses itsuse the local currency as their functional currency. Accordingly,Quaker'sQuaker’s financial results are affected by risks typical of global business such as currency fluctuations, particularly between the U.S. dollar, the Brazilian real and the E.U. euro. As exchange rates vary,Quaker'sQuaker’s results can be materiallyadverselyaffected.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 immaterial. Quaker is not currently a party to any derivative financial instruments.
Therefore, adoption of SFAS No. 133, as amended by SFAS No. 138, did not have a material impact on Quaker's operating results or financial position as of September 30, 2002. 21Commodity Price
Risk.Risk. Many of the raw materials used by Quaker are commodity chemicals, and, therefore,Quaker'sQuaker’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 rawmaterialmaterials rises, however, in certain limited circumstances, Quaker will not realize the benefit if suchprice declines.prices decline. Quaker has not been, nor is it currently a party to, any derivative financial instrument relative to commodities.Credit
Risk.Risk. Quaker establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition ofQuaker'sQuaker’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Downturns in the overall economic climate may also tend to exacerbate specific customer financial issues. A significant portion ofQuaker'sQuaker’s revenues is derived from sales to customers in the U.S. steel industry where a number of bankruptcies occurred during recent years. In 2000, 2001, and early 2002, Quaker recorded additional provisions for doubtful accounts primarily related to bankruptcies in the U.S. steel industry. When a bankruptcy occurs, Quaker must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process.In addition, asAs part of its terms of trade, Quaker may custom manufacture products for certain large customers and/or may ship product on a consignment basis. These practices may increase theCompany'sCompany’s exposure should a bankruptcy occur, and may require writedown or disposal of certain inventory due to its estimated obsolescence or limited marketability. Customer returns of productsor disputes may also result in similar issues related to the realizability of recorded accounts receivable or returned inventory. Incorporated by reference is the information
in "Criticalunder the captions “Critical Accounting Policies andEstimates"Estimates” and"Liquidity“Liquidity and CapitalResources"Resources” inManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations beginning on pages 8 and1011 respectively, of theRegistrant's 2001 Annual Report filed on2002 Form 10-K.22Item 4.
Controls and Procedures
a.Evaluation of disclosure controls and procedures. The
Company'sCompany’s principal executive officer and principal financial officer have concluded that theCompany'sCompany’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)), based on their evaluation of such controls and procedures conducted within 90 days prior to the date hereof, are effective to ensure that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.b.Changes in internal controls. There have been no significant changes in the
Company'sCompany’s internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies or material weaknesses, subsequent to the date of our most recent evaluation. As previously disclosed, theevaluation referredCompany is in the process of implementing a global ERP system. The Company is taking the necessary steps toabove. 23monitor and maintain the appropriate internal controls during this period of change. PART II.OTHER INFORMATION
Items
1,2,3, 41,2,3,4 and 5 of Part II are inapplicable and have been omitted.Item 6.
Exhibits and Reports on Form 8-K
(a)
Exhibits.
10(pp) – First Amendment between Quaker Chemical
Corporation and ABN Amro Bank N.V. dated March 25, 200399.1
-– Certification of Ronald J. Naples Pursuant to
U.S. C. Section 135099.2
-– Certification of Michael F. Barry Pursuant to
U.S. C. Section 1350(b)
Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this report is filed.
24* * * * * * * * *
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
QUAKER CHEMICAL CORPORATION
(Registrant)
/s/ MICHAEL F. BARRYMichael F. Barry, officer duly
authorized to sign this report,
Vice President and Chief Financial OfficerDate:
November 14, 2002May 15, 2003CERTIFICATION
I, Ronald J. Naples, the Chief Executive officer of Quaker Chemical Corporation, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Quaker Chemical Corporation;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.
The
registrant'sregistrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:25a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)
evaluated the effectiveness of the
registrant'sregistrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the"Evaluation Date"“Evaluation Date”); andc)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The
registrant'sregistrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to theregistrant'sregistrant’s auditors and the audit committee ofregistrant'sregistrant’s board of directors (or persons performing the equivalent function):a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant'sregistrant’s ability to record, process, summarize and report financial data and have identified for theregistrant'sregistrant’s auditors any material weaknesses in internal controls; andb)
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant'sregistrant’s internal controls; and6.
The
registrant'sregistrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: November 14, 2002 Signed: /s/ Ronald J. Naples ----------------- ------------------------------ Name: Ronald J. Naples ------------------------------ Title: Chief Executive Officer ------------------------------ of Quaker Chemical Corporation ------------------------------ 26
Date: May 15, 2003Signed:
/s/ RONALD J. NAPLESName:
Ronald J. Naples
Title:
Chief Executive Officer Of Quaker Chemical Corporation
CERTIFICATION
I, Michael F. Barry, the Chief Financial Officer of Quaker Chemical Corporation, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Quaker Chemical Corporation;
2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.
The
registrant'sregistrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)
evaluated the effectiveness of the
registrant'sregistrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the"Evaluation Date"“Evaluation Date”); andc)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The
registrant'sregistrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to theregistrant'sregistrant’s auditors and the audit committee ofregistrant'sregistrant’s board of directors (or persons performing the equivalent function):27a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant'sregistrant’s ability to record, process, summarize and report financial data and have identified for theregistrant'sregistrant’s auditors any material weaknesses in internal controls; andb)
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant'sregistrant’s internal controls; and6.
The
registrant'sregistrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date: November 14, 2002 Signed: /s/ Michael F. Barry ----------------- ------------------------------- Name: Michael F. Barry ------------------------------- Title: Chief Financial Officer ------------------------------- of Quaker Chemical Corporation ------------------------------- 28
| Signed: |
| |||
Name: | Michael F. Barry | ||||
Title: | Chief Financial Officer Of Quaker Chemical Corporation | ||||
25