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 June 30, 2003 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________to____________
o 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(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.)
OneQuakerPark,901HectorStreet,
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 oAPPLICABLE 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
NumberofSharesofCommonStock
Outstanding on July 31, 2003
9,459,380QUAKER 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
PARTI.
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
Condensed Consolidated Balance Sheet at June 30, 2003 and December 31, 2002
3
Condensed Consolidated Statement of Income for the Three and Six Months ended June 30, 2003 and 2002
4
Condensed Consolidated Statement of Cash Flows for the Six Months ended June 30, 2003 and 2002
5
6
* * * * * * * * * *
Quaker Chemical Corporation
Condensed Consolidated Balance SheetUnaudited (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 ==================== ====================
Unaudited
(dollars in thousands,
except par value)
June 30,
2003
December 31,
2002 *
ASSETS
Current assets
Cash and cash equivalents
$
15,098
$
13,857
Accounts receivable, net
67,964
53,353
Inventories
Raw materials and supplies
13,352
11,342
Work-in-process and finished goods
14,739
12,294
Prepaid expenses and other current assets
12,298
12,827
Total current assets
123,451
103,673
Property, plant and equipment, at cost
123,125
113,207
Less accumulated depreciation
70,540
64,695
Net property, plant and equipment
52,585
48,512
Goodwill
24,155
21,927
Other intangible assets
5,771
5,852
Investments in associated companies
5,420
9,060
Deferred income taxes
10,566
10,609
Other assets
15,093
14,225
Total Assets
$
237,041
$
213,858
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
$
19,987
$
12,205
Accounts and other payables
33,828
29,423
Accrued compensation
6,192
10,254
Other current liabilities
13,471
14,262
Total current liabilities
73,478
66,144
Long-term debt
16,620
16,590
Deferred income taxes
1,700
1,518
Other noncurrent liabilities
36,006
33,889
Total liabilities
127,804
118,141
Minority interest in equity of subsidiaries
9,585
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
1,174
626
Retained earnings
113,083
110,448
Unearned compensation
(931
)
(1,245
)
Accumulated other comprehensive (loss)
(20,410
)
(27,078
)
102,580
92,415
Treasury stock, shares held at cost; 2003 – 213,566, 2002 - 324,109
(2,928
)
(4,360
)
Total shareholders’ equity
99,652
88,055
$
237,041
$
213,858
The accompanying notes are an integral part of these condensed consolidated financial statements.
* Condensed from audited financial statements. 1
* Condensed from audited financial statements. Condensed 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 June 30,
Six Months ended June 30,
2003
2002
2003
2002
Net sales
$
83,453
$
69,457
$
156,790
$
129,384
Cost of goods sold
54,506
40,495
99,477
76,065
Gross margin
28,947
28,962
57,313
53,319
Selling, general and administrative expenses
23,223
23,279
45,908
43,303
Operating income
5,724
5,683
11,405
10,016
Other income (expense), net
447
(28
)
535
252
Interest expense
(387
)
(407
)
(737
)
(826
)
Interest income
152
295
363
548
Income before taxes
5,936
5,543
11,566
9,990
Taxes on income
1,843
1,774
3,701
3,197
4,093
3,769
7,865
6,793
Equity in net income of associated companies
169
201
255
184
Minority interest in net income of subsidiaries
(787
)
(734
)
(1,538
)
(1,383
)
Net income
$
3,475
$
3,236
$
6,582
$
5,594
Per share data:
Net income – basic
$
0.37
$
0.35
$
0.71
$
0.61
Net income – diluted
$
0.36
$
0.35
$
0.69
$
0.60
Dividends declared
$
0.21
$
0.21
$
0.42
$
0.42
Based on weighted average number of shares outstanding:
Basic
9,323,895
9,249,925
9,297,482
9,202,378
Diluted
9,671,578
9,308,678
9,593,466
9,262,025
The accompanying notes are an integral part of these condensed consolidated financial statements.
2Condensed Consolidated Statement of Cash Flows
For the
NineSix Monthsended SeptemberEnded June 30,
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
$
6,582
$
5,594
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
3,394
2,327
Amortization
438
325
Equity in net income of associated companies
(255
)
(184
)
Minority interest in earnings of subsidiaries
1,538
1,383
Deferred compensation and other postretirement benefits
(382
)
(329
)
Pension and other, net
2,798
1,096
Increase (decrease) in cash from changes in current assets and current liabilities:
Accounts receivable, net
(11,380
)
(4,532
)
Inventories
(2,789
)
(798
)
Prepaid expenses and other current assets
1,204
(2,293
)
Accounts payable and accrued liabilities
(2,467
)
2,750
Change in restructuring liabilities
(866
)
(1,167
)
Net cash (used in) provided by operating activities
(2,185
)
4,172
Cash flows from investing activities
Investments in property, plant and equipment
(4,859
)
(5,060
)
Dividends and distributions from associated companies
3,890
307
Payments related to acquisitions
(1,105
)
(21,576
)
Other, net
53
(9
)
Net cash (used in) investing activities
(2,021
)
(26,338
)
Cash flows from financing activities
Net increase in short-term borrowings
7,747
22,009
Dividends paid
(3,924
)
(3,802
)
Treasury stock issued
1,697
2,404
Distributions to minority shareholders
(609
)
(1,335
)
Other, net
3
85
Net cash provided by financing activities
4,914
19,361
Effect of exchange rate changes on cash
533
572
Net increase (decrease) in cash and cash equivalents
1,241
(2,233
)
Cash and cash equivalents at beginning of period
13,857
20,549
Cash and cash equivalents at end of period
$
15,098
$
18,316
The accompanying notes are an integral part of these condensed consolidated financial statements.
3Quaker 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 three andninesix months endedSeptemberJune 30,20022003 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 customers. 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 transferredunder these arrangementswhere the Company acts as an agent and revenue is recorded net totaled$20,363$13,440 and$15,552$14,187 for theninesix months endedSeptemberJune 30, 2003 and 2002,and 2001,respectively.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. Effective July 1, 2002, the Company acquired a controlling interest of Quaker Chemical South Africa (Pty.) Ltd (South Africa), a previously 50% owned joint venture. As a result, South Africa, previously reported using the equity method, is now a fully consolidated 51% owned subsidiary. The effect of this change was not material to the financial statements. 4Note 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”) No. 51, “Consolidated Financial Statements.” FIN 46 addresses the application of ARB No. 51 to VIEs, and generally would require that assets, liabilities and results of the activities of a VIE be consolidated into the financial statements of the enterprise that is considered the primary beneficiary. FIN 46 is effective for interim periods beginning after June 15, 2003 to VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has preliminarily determined that its real estate joint venture is a VIE and that the Company is not the primary beneficiary.In January 2001, the Company contributed its Conshohocken, Pennsylvania property and buildings (the “Site”) to this real estate joint venture (the “Venture”) in exchange for a 50% interest in the Venture. The Venture did not assume any debt or other obligations of the Company. The Venture renovated certain of the existing buildings at the Site, as well as built new office space (the “Project”). In December 2000, the Company entered into an agreement with the Venture to lease approximately 38% of the Site’s available office space for a 15-year period commencing February 2002, with multiple renewal options. As of June 30, 2003, approximately 93% of the Site’s office space was under lease and the Site (including improvements thereon) was subject to encumbrances securing indebtedness of the Venture in the amount of $27,045. The Company has not guaranteed nor is it obligated to pay any principal, interest or penalties on the indebtedness of the Venture, even in the event of default by the Venture. At June 30, 2003, the Venture had property with a net book value of $26,412, total assets of $29,024, and total liabilities of $27,362.
In April 2003, the FASB issued
SFASStatement of Financial Accounting Standards (“SFAS”) No.143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This standard amends and clarifies financial accounting and reporting forobligations associated with the retirementderivative instruments and hedging activities, primarily as a result oftangible long-lived assets and the associated retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of this new standard. In July 2001,decisions made by the FASBissued SFAS No. 144, "Impairment or Disposal of Long-Lived Assets." The provisions of this statement provide a single 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 impactDerivatives Implementation Group subsequent to thefinancial 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 provisionsoriginal issuance of SFAS No.145133 and in connection with other FASB projects. This standard is generally effectiveJanuary 1,prospectively for contracts and hedging relationships entered into or modified after June 30, 2003. The Company is currently evaluating the impact of this standard, but does not expect the adoptionof this statement.to have a material impact on the financial statements. The Company is not currently a party to any derivative financial instruments.In
July 2002,May 2003, the FASB issued SFAS No.146, "Accounting150 “Accounting forCosts AssociatedCertain Financial Instruments withExit or Disposal Activities", which nullified EITF Issue No. 94-3.Characteristics of both Liabilities and Equity.” SFAS No.146150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or mezzanine equity, by now requiring those same instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requiresthat a liabilitydisclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective fora cost associated with an exitall financial instruments entered into ordisposal activity be recognized when the liabilitymodified after May 31, 2003, and isincurred, whereas EITF No 94-3 had recognized the liabilityotherwise effective at thecommitment date to an exit plan.beginning of the first interim period beginning afterJune 15, 2003. The Company is
requiredin the process of evaluating this standard, but does not expect the adoption toadopthave a material impact on the financial statements.Note 3 – Stock-Based Compensation
In December 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. 123, “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 148, the Company continues to account for stock 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 an exercise price equal to the market value of the underlying stock on the grant date. 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 effective for exit or disposal activities initiated after December 31, 2002. 5123.
Three Months ended
June 30,
Six Months ended
June 30,
2003
2002
2003
2002
Net Income – as reported
$
3,475
$
3,236
$
6,582
$
5,594
Add: Stock-based employee compensation expense included in net income, net of related tax effects
(23
)
174
152
275
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax
(115
)
(302
)
(334
)
(505
)
Pro forma net income
$
3,337
$
3,108
$
6,400
$
5,364
Earnings per share:
Basic – as reported
$
0.37
$
0.35
$
0.71
$
0.61
Basic – pro forma
$
0.36
$
0.34
$
0.69
$
0.58
Diluted – as reported
$
0.36
$
0.35
$
0.69
$
0.60
Diluted – pro forma
$
0.35
$
0.33
$
0.67
$
0.58
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. 6calculations:
Three Months Ended
June 30,
Six Months Ended
June 30,
2003
2002
2003
2002
Numerator for basic EPS and diluted EPS– net income
$
3,475
$
3,236
$
6,582
$
5,594
Denominator for basic EPS–weighted average shares
9,324
9,250
9,297
9,202
Effect of dilutive securities, primarily employee stock options
348
59
296
60
Denominator for diluted EPS–weighted average shares and assumed conversions
9,672
9,309
9,593
9,262
Basic EPS
$
.37
$
.35
$
.71
$
.61
Diluted EPS
$
.36
$
.35
$
.69
$
.60
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.
(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
ninesix 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 June 30, :
Metalworking
Process
Chemicals
Coatings
Other
Chemical
Products
Total
2003
Net sales
$
142,974
$
11,565
$
2,251
$
156,790
Operating income
25,751
3,016
438
29,205
2002
Net sales
$
117,902
$
9,383
$
2,099
$
129,384
Operating income
25,194
2,397
582
28,173
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
ninesix months endedSeptemberJune 30, 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
$
29,205
$
28,173
Non-operating expenses
(17,362
)
(17,832
)
Amortization
(438
)
(325
)
Interest expense
(737
)
(826
)
Interest income
363
548
Other income, net
535
252
Consolidated income before taxes
$
11,566
$
9,990
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 ========= ======== 8income:
Three Months Ended
June 30,
Six Months Ended
June 30,
2003
2002
2003
2002
Net income
$
3,475
$
3,236
$
6,582
$
5,594
Foreign currency translation adjustments
4,073
2,746
6,668
443
Comprehensive income
$
7,548
$
5,982
$
13,250
$
6,037
Note
6 -7 – Restructuring andNonrecurring ExpensesRelated ActivitiesIn
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 ofSeptemberJune 30,2002,2003, Quaker had completed4950 of the planned 53 employee separations under the 2001 plans. During the fourth quarter of 2002, the Company completed 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 thedispositionsale of its manufacturing facility in France, by themanufacturing facilities, by midend of 2003.Accrued restructuring balances,
as of September 30, 2002included in other current liabilities, 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 ======= ======= ====== ======= - -------------------------------------------------------------------------------- 9
Balance
December 31,
2002
Payments
Currency
translation
and other
Balance
June 30,
2003
Employee separations
$
1,274
$
(735
)
$
14
$
553
Facility rationalization
869
(131
)
11
749
Total
$
2,143
$
(866
)
$
25
$
1,302
Note
7 -8 – BusinessAcquisitions On March 1, 2002,AcquisitionIn May 2003, the Company acquired
certain assetsa range of cleaners, wet temper fluids andliabilities of United Lubricants Corporation ("ULC"), a North American manufacturer and distributor of specialty lubricantother productsand chemical management services,from KS Chemie, located in Dusseldorf, Germany for approximately$14,038. The$1,100. This acquisitionof ULCstrategically strengthens theCompany'sCompany’s global leadershipsupplyposition as a process fluids supplier to the steel industry. Thefollowing table shows the preliminary fair valueCompany recorded $345 of intangible assetsand liabilitiescomprised of product line technology to be amortized over a range of five to ten years. The Company also recordedfor 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$715 of goodwill, which was assigned to the Metalworking process chemicalssegment, and the entire amount is expected to be deductible for income tax purposes.segment. 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-formapro forma results of operations have not been provided because the effectsarewere 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. 11Note
8 -9 – 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
ninesix months endedSeptemberJune 30,20022003 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
Goodwill additions
779
—
779
Currency translation adjustments
1,449
—
1,449
Balance as of June 30, 2003
$
16,886
$
7,269
$
24,155
Gross carrying amounts and accumulated amortization for intangible assets as of
SeptemberJune 30,2002,2003, 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
$
(602
)
Trademarks and patents
2,300
(1,553
)
Formulations and product technology
1,765
(278
)
Other
1,513
(1,224
)
Total
$
9,428
$
(3,657
)
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,
For the year ended December 31, 2003
$
882
For the year ended December 31, 2004
$
793
For the year ended December 31, 2005
$
760
For the year ended December 31, 2006
$
741
For the year ended December 31, 2007
$
337
For the year ended December 31, 2008
$
254
Note 10 – Debt
In June 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 13Note 9 - Debt In April 2002,the Company entered into a$20.0 million$10,000 committed credit facility with a bank, which expires inApril 2003.June 2004. At theCompany'sCompany’s option, the interest rate for borrowings under the agreement may be based on thelender's cost of funds plus a margin, LIBOReurodollar rate plus a margin oronthe primerate.rate plus a margin. 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 ofSeptemberJune 30,2002. A total of $13.0 million in borrowings was outstanding under2003. In July 2003, an amendment increased this committed credit facilityas of September 30, 2002 at an average borrowing rate of approximately 2.4%.to $15,000.In
April 2002,June 2003, the Company entered into a$10.0 million$10,000 uncommitted demand credit facility, with a different bank. At thesame 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 borrowingCompany’s option, the interest rateof 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 throughfor borrowings under thenewagreement may be based on the prime rate or the LIBOR rate plus a margin.As a result of these agreements, the Company increased its credit facilities
discussed above.from $15,000 committed and $10,000 uncommitted at the end of March 2003 to its current position of $30,000 committed and $20,000 uncommitted. The Company had approximately $17,100 and $22,048 outstanding on its credit facilities as of June 30, 2003 and 2002, respectively.Note
10 -11 – 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$800 to$2,100,$1,500, 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 $15,000 (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 the Company 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 damagesand 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 hasadditional 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's Discussion and AnalysisNote 12 – Subsequent Event
In July 2003, the Company acquired all of
Financial Condition and Resultsthe outstanding stock ofOperationsEural S.r.l., a privately held company located in Tradate, Italy for $5,700. Eural manufactures a variety of specialty metalworking fluids primarily for the Italian market. The Company is currently assessing the allocation of the purchase price. Pro-forma results of operations have not been presented because the effects were not material.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources
Quaker’s cash and cash equivalents increased to $15.1 million at June 30, 2003 from $13.9 million at December 31, 2002. The increase resulted primarily from $2.2 million cash used in operating activities, $2.0 million cash used in investing activities, offset by $4.9 million cash provided by financing activities.
Net cash flows used in operating activities were $2.2 million in the first six months of 2003 compared to cash flows provided by operating activities
were $13.3 million in the first nine monthsof2002 compared to $15.5$4.2 million in the same period of2001.2002. The decrease was primarily due toincreasesincreased cash out flows from working capital accounts offset by higher net income, depreciation and amortization expense. The change inthe changes incash flows from accounts receivableinventories,was primarily due to $6.7 million of sales attributable to the Company’s recently awarded chemical management services (CMS) contracts, which were effective May 1, 2003. Increased business activity as well as higher raw material costs accounted for the increased inventory levels. Increased cash flows from prepaid expenses anddecreasesother current assets versus the prior year is primarily due to a $2.6 million refund related to a settlement from a tax audit at one of our foreign entities. The change inrestructuring liabilities, offset by increases in the changes incash flows from accounts payable and accruedliabilities.liabilities is due to higher annual incentive compensation payments as well as timing related to high levels of accounts payable at December 31, 2002.Net cash flows used in investing activities were
$29.1$2.0 million in the firstninesix months of20022003 compared to$5.3$26.3 million in the same period of2001.2002. Theincreasedecrease was primarily related topayments$21.6 million cash used in the first six months of$21.3 million in2002related tofor the acquisitions of United Lubricants Corporation("ULC"(“ULC”) and Epmar Corporation("Epmar"(“Epmar”), comparedversus $1.1 million used in 2003 for the acquisition of certain product lines from KS Chemie. Reference is made toa paymentNote 8 of$1.5the notes to condensed consolidated financial statements which appears in Item 1 of this Quarterly Report on Form 10-Q. In addition, the Company also received $4.2 millionrelated to an acquisition in 2001. See also Note 7 Business Acquisitions. Expenditures for property, plant, and equipment totaled $7.6 millionof priority cash distributions from its real estate joint venture in the firstninesix months of2002 compared to $5.0 million in the same period of 2001. The increase in spending was primarily the result of the project to implement a global transaction system and the move into new corporate headquarters. Capital expenditures for 2002 are expected to be approximately $12 million.2003.Net cash flows provided by financing activities were
$18.5$4.9 million for the firstninesix months of20022003 comparedwith a net cash use of $4.8to $19.4 million for the same period of the prior year. The net change was primarily due toapproximately $23.0$22.0 million of short-term borrowings incurred in the first six months of 2002primarilyused to finance the Company’s acquisitions of ULC and Epmaracquisitions.versus $7.7 of short-term borrowings in 2003 used to fund working capital needs.In
April 2002,June 2003, the Company entered into a$20.0$10.0 million committed credit facility with a bank, which expires inApril 2003.June 2004. At theCompany'sCompany’s option, the interest rate for borrowings under the agreement may be based on thelender's cost of funds plus a margin, LIBOReurodollar rate plus a margin oronthe primerate.rate plus a margin. 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 ofSeptemberJune 30,2002. A total of $13.0 million in borrowings was outstanding under2003. In July 2003, an amendment increased this committed credit facilityas of September 30, 2002 at an average borrowing rate of approximately 2.4%. 15to $15.0 million. In
April 2002,June 2003, the Company entered into a $10.0 million uncommitted demand credit facility, with a different bank. At thesame 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 borrowingCompany’s option, the interest rateof 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 throughfor borrowings under thenewagreement may be based on the prime rate or the LIBOR rate plus a margin.As a result of these agreements, the Company has increased its credit facilities
discussed above. Despitefrom $15.0 million committed and $10.0 million uncommitted at theCompany's acquisitions, theend of March 2003 to its current position of $30.0 million committed and $20.0 million uncommitted. The Company had approximately $17.1 and $22.0 million outstanding on its credit facilities as of June 30, 2003 and 2002, respectively.The Company believes that its balance sheet remains strong with
approximately $23 milliona debt to total capital ratio ofcash27% at June 30, 2003 compared to 25% at the end ofSeptember. It is the intent of the Company to utilize some of this cash to pay down a portion of the Company's short term borrowings in the fourth quarter of2002 and 34% at June 30, 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
NineSix Months20022003 with FirstNineSix Months20012002Consolidated net sales for the first
ninesix months of2002 were $202.7the year increased to a record $156.8 million,compared to $192.8up 21% from $129.4 millioninfor the firstninesix months of2001. The sales comparison was2002. Foreign exchange rate translation and the timing of the Company’s 2002 acquisitions favorably impacted net sales bythe inclusion of revenues from the acquisitions of ULC$6.3 million andEpmar earlier this year, as well as the purchase 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 from acquisitions,$8.1 million, respectively. Year-to-date 2003 consolidated net saleswould have been essentially flat compared to 2001. 16Cost of sales decreasedalso include $6.7 million from the Company’s recently awarded Chemical Management Services (CMS) contracts, which were effective May 1, 2003.Gross margin as a percentage of sales declined from
59.5%41.2% for the first six months of 2002 to 36.6% for the first six months of 2003. As previously disclosed, the Company’s new CMS contracts result in2001a different relationship between margins and revenue than has applied in the past for the Company’s traditional product business. At the majority of current CMS sites, the Company effectively acts as an agent and records revenue and costs from these sales on a net sales or “pass-through” basis. The new CMS contracts have a different structure that results in the Company recognizing in reported revenue the gross revenue received from the CMS site customer, and in cost of goods sold the third party product purchases, which substantially offset each other. The negative impact on gross margin for the first half of 2003 is approximately 2 percentage points. The company expects the negative impact to59.2%gross margin in2002.the second half of 2003, related to the new CMS contracts, to be approximately 4 to 5 percentage points. Theimprovementremaining decline in gross margin as a percentage of sales wasprimarily a result of lowerdue to increased raw materialcosts.costs, as well as product and regional sales mix. On a full year basis, the Company continues to expect raw material costs to be higher in 2003 versus 2002 in part due to the continued high oil prices. However, the Company also expects raw material prices to be somewhat more favorable in the second half of 2003 versus the first half of 2003.Selling, general and administrative (SG&A) expenses for the first six months of
$66.02003 increased $2.6 million from the first six months of 2002. Increases due to foreign exchange rates and the timing of the Company’s 2002 acquisitions were partially offset by reduced incentive compensation expense and cost containment efforts of the Company. Consistent with previous guidance, the Company expects increased SG&A costs for the full year 2003 partially due to increased costs associated with higher pension expense, insurance premiums and the Company’s ERP implementation.The increase in other income primarily reflects a $0.3 million positive income impact related to $4.2 million ($1.8 million received in the first
nine monthsquarter of2002 were approximately 12% higher than the $58.92003 and $2.4 millionreportedreceived in thefirst nine months of 2001. The increase was primarily the result of SG&A expenses of ULC, Epmar and South Africa, and higher pension, insurance, and other administrative costs. The first nine months of 2002 were 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 $0.8 million of goodwill amortization in the first nine months of 2001. In addition, in the thirdsecond quarter of20012003) of priority cash distributions received from theCompany 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. Other income variance primarily reflects increased foreign exchange gains in the first nine months of 2002 compared with the first nine months of 2001, offset by lower license fee revenue in 2002 compared with 2001. Net interestCompany’s real estate joint venture during 2003. Interest expensewas favorable in the first nine months of 2002 compared tois below the prior yeardespite increased borrowingsprimarily due tofund the ULCdecreased average debt levels andEpmar acquisitions,lower borrowing rates. The decrease in interest income is due to lowerborrowing rates andinterest income from theimpactCompany’s international affiliates. In the first half ofprincipal payments2002, the Company’s Brazilian entity had more cash, which was earning interest at a rate of nearly 20%. The Company madeona mid-year 2002 decision to repatriate this cash to theCompany's higher rate long-term debt. EquityU.S. due to the potential for the Real to weaken, which has resulted in decreased interest income in the firstnine monthshalf of20022003.The year-to-date 2003 effective tax rate is 32% compared to 32% in the prior year and down from 33% in the first quarter of 2003. The decrease in the effective tax rate compared to the first
nine monthsquarter of2001 reflects lower income year over year from the Company's joint venture in Mexico, the start up of the Company's real estate joint venture in Conshohocken, PA and the consolidation of the Company's South Africa joint venture. Minority interest was lower in the first nine months of 2002 compared with the same period last year,2003 is primarily due tolower net income fromtheCompany's subsidiary in Brazil. 17Company’s favorable settlement of outstanding tax audits and appeal issues related to several foreign subsidiaries. The Company currently expects the effective tax rate will be 32% for 2002 is currently 32%, compared to 31% inthepriorfull 2003 year.TheHowever, the effective tax rate is dependent on many internal and external factors, and is assessed by the Company on a regular basis.The
Company has been assessed approximately $2.6 millionincrease in equity income for the first six months ofadditional taxes based on an audit2003 is due to improved results from the Company’s real estate joint venture offset in part by the consolidation ofcertainthe Company’s South African joint venture effective July 1, 2002 and a weaker performance from the Company’s Venezuelan affiliate. The increase in minority interest was primarily due to the consolidation ofits subsidiaries for prior years. The Company has initiated an appeal process related to this assessment and currently believes its reserves are adequate.the Company’s South African joint venture.Comparison of
ThirdSecond Quarter20022003 withThirdSecond Quarter20012002Consolidated net sales for the
thirdsecond quarter of20022003 were a record$73.3 million,$83.5, a15%20% increase compared to thethirdsecond quarter of2001. The sales comparison was2002. Foreign exchange rate translation and the timing of the Company’s 2002 acquisitions favorably impactedby 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, consolidatedsecond quarter 2003 net saleswould have been up approximately 5% compared to 2001. Cost ofby $4.2 million and $2.5 million respectively. As noted above, second quarter 2003 salesdecreasedinclude $6.7 million from the Company’s recently awarded CMS contracts.Gross margin as a percentage of sales declined from
60.4% in41.7% for thethirdsecond quarter of20012002 to59.9% in34.7% for thethirdsecond quarter of2002.2003. TheimprovementCompany’s new CMS contracts negatively impacted gross margin for the second quarter 2003 by approximately 3 percentage points. The remaining decline in gross margin as a percentage of sales wasprimarily a result of lowerdue to increased raw materialcosts.costs, as well as product and regional sales mix.Selling, general and administrative (SG&A) expenses for the quarter were essentially flat with the second quarter of 2002. Increases due to foreign exchange rates and the timing of the Company’s 2002 acquisitions were offset by reduced incentive compensation expense and cost containment efforts of the Company.
The increase in other income primarily reflects a $0.3 million positive income impact related to a $2.4 million priority cash distribution received from the Company’s real estate joint venture in the
thirdsecond quarter of 2003. Interest expense is slightly below the prior year primarily due to decreased average debt levels and lower borrowing rates. The decrease in interest income is due to lower interest income from the Company’s international affiliates. In the second quarter of 2002,were up $3.6 million fromthethirdCompany’s Brazilian entity had more cash, which wasearning interest at a rate of nearly 20%. The Company made a mid-year 2002 decision to repatriate this cash to the U.S. due to the potential for the Real to weaken, which has resulted in decreased interest income in the second quarter of
2001. SG&A expenses of ULC, Epmar and South Africa accounted2003.The effective tax rate for
approximately one half ofthequarterly increase. Higher pension, insurance, and other administrative costs were also factors. The thirdsecond quarter 2003 is 31% down from 32% in the second quarter of 2002was also favorably impacted by the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142, "GoodwillandOther Intangible Assets." Upon adoption of SFAS No. 142, the company no longer amortizes goodwill. The Company reported approximately $0.2 million of goodwill amortization33% in thethirdfirst quarter of2001. In addition,2003. The decrease in thethirdeffective tax rate is primarily due to the Company’s favorable settlement of outstanding tax audits and appeal issues related to several foreign subsidiaries.The decrease in equity income for the second 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,2003 is primarilyrelated to plans to close and sell our manufacturing facilities in the U.K. and France, as well as other 18cost reduction efforts. Nonrecurring organizational consulting expenses of $0.2 million were also incurred. See also Note 6 Restructuring and Nonrecurring 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 compared to the 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 2001due to the consolidation of our SouthAfrica. MinorityAfrican joint venture effective July 1, 2002 and a weaker performance from our Venezuelan affiliate, offset in part by improved results from the Company’s real estate joint venture. The increase in minority interest washigher in the third quarter of 2002 compared with the same period last year, as a result ofprimarily due to the consolidation of the Company’s SouthAfrica 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. RegardingAfrican joint venture.Other Significant Items
In May 2003, the Company
is anticipating U.S. pension costs will be $0.08acquired a range of cleaners, wet temper fluids and other products from KS Chemie, located in Dusseldorf, Germany for approximately $1.1 million. This acquisition strategically strengthens the Company’s global leadership position as a process fluids supplier to$0.12 higher per share, depending on 2002 investment returns. In addition, raw material prices are expectedthe steel industry. The Company recorded $0.3 million of intangible assets comprised of product line technology to behigher in 2003.amortized over a range of five to ten years. The Companyis currently in the midst of the budget process and a full year 2003 forecast is not yet available. However, it is the goal of the Company to have increased earnings year over year. Other Significant Items On March 1, 2002, the Company acquired certain assets and liabilities of United Lubricants Corporation for approximately $14.0 million. The acquisition resulted in the recognition of approximately $5.4also recorded $0.7 million of goodwill,and $2.4 million of intangible assets. Pro-forma results of operations have not been presented becausewhich was assigned to theeffects were not material. 19On April 22, 2002,Metalworking process chemicals segment.In July 2003, 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)Eural S.r.l., apreviously fifty-percent owned joint venture. Asprivately held company located in Tradate, Italy for $5.7 million. Eural manufactures aresult, South Africa, previously reported usingvariety of specialty metalworking fluids primarily for theequity method,Italian market. The Company isnow a fully consolidated subsidiary. The effect of this change was not material tocurrently assessing thefinancial statements. Euro Conversion On January 1, 1999, 11allocation of the15 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 andpurchase price.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; andStatements 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, 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.20Item 3. QuantitativeThese risks, uncertainties, andQualitative Disclosures About Market Risk.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 ofSeptemberJune 30,2002,2003, Quaker had$23.0$17.1 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 concerningQuaker'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 products or disputes may also result in similar issues related to the realizability of recorded accounts receivable or returned inventory. Incorporated by reference is the informationin "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.
Item 4. Controls and Procedures 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 proceduresconducted within 90 days prior toas of thedate hereof,end of the period covered by this Quarterly Report on Form 10-Q, are effective toensurereasonably assure 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 changesAs previously disclosed, the Company is in theCompany'sprocess of implementing a global ERP system. The Company completed its initial implementation of this system in the Netherlands during the fourth quarter of 2002. In the second quarter of 2003, the Company implemented the ERP system in its Spanish subsidiary. During the fourth quarter of 2003, the Company plans to implement the system in its US operations. By the end of 2003, subsidiaries representing more than 50% of consolidated revenue are expected to be operational on the global ERP system. Additional subsidiaries are planned to be implemented during 2004. The Company is taking the necessary steps to monitor and maintain the appropriate internal controlsor in other factors that could significantly affect these controls subsequent to the dateduring this period ofthe evaluation referred to above. 23change. PART II. OTHER INFORMATION
Items 1,2,3,
4and 5 of Part II are inapplicable and have been omitted.Item 6. Exhibits
Item 4: Submission of Matters to a Vote of Security Holders The 2003 Annual Meeting of the Company’s shareholders was held on May 14, 2003. At the meeting, management’s nominees, Donald R. Caldwell, Robert E. Chappell, William R. Cook, and
ReportsRobert P. Hauptfuhrer were elected Class II Directors. Voting (expressed in number of votes) was as follows: Donald R. Caldwell, 23,331,952 votes for, 276,622 votes against or withheld, and no abstentions or broker non-votes; Robert E. Chappell, 23,483,314 votes for, 125,260 votes against or withheld, and no abstentions or broker non-votes; William R. Cook, 23,336,380 votes for, 272,194 votes against or withheld, and no abstentions or broker non-votes; Robert P. Hauptfuhrer, 23,493,071 votes for, 115,503 votes against or withheld, and no abstentions or broker non-votes.In addition at the meeting, the shareholders approved the 2003 Director Stock Ownership Plan by a vote of 21,796,524 votes for, 1,101,170 votes against, 710,880 abstentions, and no 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
Form 8-K (a) Exhibits. 99.1 - Certificationits financial statements for the year ending December 31, 2003 by a vote ofRonald J. Naples 99.2 -23,347,361 for, 161,498 votes against, 99,715 abstentions, and no broker non-votes.
Item 6: Exhibits and Reports on Form 8-K (a)Exhibits.
10(qq)
– Credit Agreement between Registrant and PNC Bank, National Association in the amount of $10,000,000, dated
June 19, 2003.10(rr)
– Commercial Note between Registrant and National City Bank, National Association in the amount of
$10,000,000, dated June 19, 2003.31.1
– Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) or rule 15d-14(a) of the
Securities Exchange Act of 193431.2
– Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) or rule 15d-14(a) of the
Securities Exchange Act of 193432.1
– Certification of Ronald J. Naples Pursuant to U.S. C. Section 1350
32.2
– Certification of Michael F. Barry Pursuant to U.S. C. Section 1350
(b)Reports on Form 8-K.
No reports1. On May 5, 2003 the Company furnished on Form 8-K
were filed during the quarter for which this report is filed. 24its First Quarter 2003 Press Release. * * * * * * * * *
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: November 14, 2002 CERTIFICATION 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'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's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) 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's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant'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's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant'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 ------------------------------ 26CERTIFICATION 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'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's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) 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's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant'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's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant'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
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