EXHIBIT 13
QUAKER CHEMICAL CORPORATION
Financial Review
1996 Annual Report
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 16
Consolidated Statement of Operations.................................... 19
Consolidated Balance Sheet.............................................. 20
Consolidated Statement of Cash Flows.................................... 21
Consolidated Statement of Shareholders' Equity.......................... 22
Notes to Consolidated Financial Statements.............................. 23
Report of Independent Accountants....................................... 31
Eleven-Year Financial Summary........................................... 32
Supplemental Financial Information...................................... 34
15
QUAKER CHEMICAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1996 Repositioning of Operations
and Impairment of Long-Lived Assets
In 1996, Quaker Chemical Corporation (the "Company") announced and
implemented a series of measures designed to improve manufacturing capacity
utilization, responsiveness to customers, operating efficiencies, and
return on assets. The consolidated statement of operations for 1996
included total pre-tax charges of $24.5 million ($16.9 million after tax,
or $1.96 per share) related to these initiatives. Of the total charges,
$19.2 million was reflected as "Repositioning charges" and the remaining
amount was shown net of tax ($3.4 million) under the caption "Asset
impairment charge on equity investment."
The plan of action included (i) the closure of one of two
manufacturing plants in the U.S., (ii) the closure of a sales and
distribution office and streamlining of research and other functional
activities in Europe, and (iii) other workforce reductions. The closure of
a manufacturing facility in the U.S. and a sales and distribution office in
Europe were substantially completed in 1996. The completion of the plan
will result in workforce reductions of approximately 90 employees by the
end of 1997. The Company expects annualized pre-tax cost savings in the
range of $4 million (approximately one fourth of which will be reduced
depreciation expense) from these measures, a portion of which will be
realized in 1997.
In addition, the charges also included an asset impairment on goodwill
related to a Spanish subsidiary. The asset impairment charge against the
equity investment represents the write-down of the Company's investment in
its Fluid Recycling Services Company ("FRS") joint venture.
Asset impairments represent charges arising from the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." The charge related to a Spanish subsidiary resulted from the
evaluation of the Company's ability to recover asset costs given changes in
local market conditions, current and projected capacity utilization, and
other strategic factors. The determination to write down the Company's
investment in FRS was made after extensive analysis of FRS's past
performance and future prospects compared to the Company's level of
investment. In evaluating both of these operations, management did not
believe that future cash flows would be adequate to recover the carrying
value of these assets.
The components of the pre-tax charges as well as balances remaining at
December 31, 1996, were as follows:
Amounts Charged
---------------------------
Amount Remaining
(Dollars in thousands) Cash Non-cash Total utilized liability
- ---------------------------------------------------------------------------
Severance, other
employee
benefits, and
facility closure
costs................ $7,705 $ 7,705 $ 2,355 $5,350
Asset write-offs $10,332 10,332 10,332
Goodwill
impairment........... 1,193 1,193 1,193
------ ------- ------- ------- -------
Subtotal........... 7,705 11,525 19,230 13,880 5,350
FRS investment
impairment........... 5,225 5,225 5,225
------ ------- ------- ------- -------
Total repositioning
charges.............. $7,705 $16,750 $24,455 $19,105 $5,350
====== ======= ======= ======= ======
Of the remaining liability at December 31, 1996, which principally
consists of payments for termination benefits related to the workforce
reductions, approximately $5 million was classified as current.
Liquidity and Capital Resources
Management believes that the Company is capable of generating adequate
cash to meet the needs of current operations and to fund strategic
initiatives.
Net cash flow provided by operating activities amounted to $28.0
million in 1996 compared to $7.3 million in 1995. The increase principally
resulted from higher operating earnings (excluding the impact of
repositioning and asset impairment charges) and improved management of
working capital.
Net cash used in investing activities decreased to $6.3 million in
1996 from $17.5 million in 1995. The decrease was due mainly to declines in
both business acquisition spending (none in 1996 compared to $7.7 million
in 1995) and expenditures for property, plant, and equipment ($6.9 million
in 1996 versus $9.8 million in 1995). Investments and advances of
approximately $2.0 million during 1996 in the Company's FRS joint venture
were about the same as 1995.
16
In addition to the items noted above, the Company made payments of
$12.2 million in 1996 to reduce outstanding debt and $1.6 million to
purchase 125,000 shares of the Company's common stock as part of a share
repurchase program. As a result, the Company's net cash position (cash and
cash equivalents less short-term borrowings and current portion of long-
term debt, notes payable, and capital leases) increased $9.4 million in
1996 compared to a decrease of $21.6 million in 1995. The current
ratio was 1.4 to 1 in both 1996 and 1995.
The majority of expenditures for property, plant, and equipment in
1996 included upgrades of manufacturing capabilities at various locations.
Capital expenditures for 1997 are expected to be in the range of $7-9
million and include various upgrades of manufacturing capabilities in the
U.S. and Europe, and an estimated $1 million for environmental and
regulatory compliance. Also, as outlined above, cash outlays associated
with the 1996 repositioning program are anticipated to be approximately $5
million in 1997.
The Company has $10 million in a line of credit and believes that
additional borrowings through banks or the private placement market could
be negotiated at competitive rates, based on its debt-equity ratio and
current levels of operating performance.
Operations
Comparison of 1996 with 1995
Consolidated net sales for 1996 increased $13.2 million (6%) over
1995. The sales growth was a result of (i) a 3% increase in volume, (ii) a
4% improvement in price/mix resulting primarily from better pricing, mainly
in Europe, and an overall positive shift in sales mix, (iii) a 1% increase
associated with a 1995 acquisition in Brazil, offset by (iv) a 2% negative
impact from currency translation (fluctuations in foreign currency exchange
rates used to translate local currency statements to U.S. dollars). The
volume improvement for the year was attributable primarily to continued
sales growth in the Asia/Pacific markets and increased sales in certain
markets in the U.S. Sales in the major U.S. markets were steady throughout
most of the year, but slowed somewhat in the fourth quarter. In Europe,
sales were steady during the first three quarters and then picked up in the
fourth quarter primarily as a result of strong demand from the European
steel industry.
Operating income (excluding repositioning charges in 1996) increased
to $15.2 million from $11.4 million in 1995. The improvement was due in
large part to the higher level of net sales combined with an increased
gross margin percentage. The Company's gross margin as a percentage of net
sales improved 2.2% points, when compared to 1995, mainly as a result of
the benefits of pricing initiatives, particularly in Europe, a more
favorable sales mix, and stable raw material costs. Selling,
administrative, and general expenses as a percentage of net sales increased
approximately 1% point primarily as a result of increased spending in
geographic and product growth areas, other strategic initiatives, and an
additional provision of $1.3 million in the fourth quarter of 1996 for
estimated future remediation costs related to certain soil and groundwater
contamination at a subsidiary's facility in California.
The increase in equity in net income from associated companies for
both the fourth quarter and full year was due primarily to higher earnings
from the Company's Mexican and Venezuelan affiliates and reduced business
development costs in the Company's FRS joint venture. The negative
influence of currency translation on net income in 1996 was approximately
$.08 per share compared to a positive impact of $.07 per share in 1995.
Comparison of 1995 with 1994
Consolidated net sales for 1995 increased $32.4 million (17%) over
1994. The sales growth was a result of (i) a 5% increase in volume, (ii) a
4% improvement in price/mix primarily resulting from a series of price
increases, (iii) a 5% positive impact from currency translation, and (iv) a
3% increase associated with acquisitions in Europe and Brazil. The volume
improvement for the year was attributable primarily to increased core
market sales in Europe and continued sales growth in the Asia/Pacific
markets. Sales in the major U.S. markets were strong in the first half of
1995, but slowed somewhat in the second half as customer production levels
declined in order to work down earlier buildups of inventories. In Europe,
sales were strong throughout most of the year (despite a strike in France
in the latter part of the fourth quarter) due to the strength of the
economies in that region.
17
Operating income decreased from $13 million (after a $.5 million
repositioning credit recorded in 1994) to $11.4 million in 1995. The
decrease was due to a range of factors, the most significant of which were
reduced margins associated with raw material cost inflation not covered by
selling price increases, a less favorable sales mix, and increased
expenses, particularly in the fourth quarter, related to staff reductions
in some areas and regional growth initiatives in others. The Company's
gross profit margin as a percentage of net sales decreased 2.8% points,
when compared to 1994, mainly as a result of the aforementioned raw
material cost inflation, which did not show any abatement until well into
the second half of 1995. Selling, administrative, and general expenses as a
percentage of net sales decreased 1.1% points as the positive leverage
effect of higher sales offset the above-noted increases in expense.
Net interest costs rose due to increased financing costs associated with
the decline in the Company's net cash position. The decrease in equity in
net income from associated companies for both the fourth quarter and full
year was due primarily to business development investments in the Company's
relatively new FRS joint venture. The positive influence of currency
translation on net income was approximately $.07 per share and $.01 per
share in 1995 and 1994, respectively.
General
The Company is involved in environmental clean-up activities or
litigation in connection with an existing plant location and former waste
disposal sites (see Note 11). This involvement is not expected to have, a
material effect on the Company's results of operations or financial
condition.
The Company does not use financial instruments which expose it to
significant risk involving foreign currency transactions; however, the size
of non-U.S. activities has a significant impact on reported operating
results and the attendant net assets. During the past three years, sales by
non-U.S. subsidiaries accounted for approximately 50-57% of the
consolidated sales. In the same period, these subsidiaries accounted for
approximately 59-81% of consolidated operating profit (see Note 9). The
greater profitability of non-U.S. sales during this period is attributable
to higher unit selling prices and lower fixed overhead and selling costs.
18
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
--------------------------------------
(Dollars in thousands except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------
Net sales $240,251 $227,038 $194,676
Costs and expenses:
Cost of goods sold.............................. 138,199 135,490 110,732
Selling, administrative, and general expenses... 86,853 80,115 70,955
Repositioning charges (credits)................. 19,230 (525)
-------- -------- --------
244,282 215,605 181,162
-------- -------- --------
Operating (loss) income........................... (4,031) 11,433 13,514
Other income, net (Note 1)........................ 1,508 2,090 2,253
Interest expense.................................. (1,906) (1,712) (1,303)
Interest income................................... 432 286 457
-------- -------- --------
(Loss) income before taxes........................ (3,997) 12,097 14,921
Taxes on income................................... 466 4,887 5,916
-------- -------- --------
(4,463) 7,210 9,005
Equity in net income (loss) of associated companies 480 (78) 779
Asset impairment charge on equity investment....... (3,445)
Minority interest in net income of subsidiaries.... (171) (444) (382)
-------- -------- --------
Net (loss) income................................ $(7,599) $ 6,688 $ 9,402
Per share data:
Net (loss) income................................ $(.88) $.76 $1.03
Dividends........................................ .69 .68 .63 1/2
The accompanying notes are an integral part of these financial statements.
19
CONSOLIDATED BALANCE SHEET
December 31,
----------------------
(Dollars in thousands except per share amounts) 1996 1995
- -----------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (Note 1)................................... $ 8,525 $ 7,230
Accounts receivable, less allowances for doubtful accounts
of $1,005 in 1996 and $939 in 1995................................. 45,564 46,965
Inventories (Notes 1 and 4)
Raw materials and supplies......................................... 9,094 10,964
Work in process and finished goods................................. 11,947 10,669
Deferred income taxes (Note 5)....................................... 4,840 1,415
Prepaid expenses and other current assets............................ 6,582 10,132
------- -------
Total current assets............................................. 86,552 87,375
------- -------
Investments in and advances to associated companies (Notes 1 and 3).... 3,941 10,058
------- -------
Property, plant, and equipment, at cost (Note 1)
Land................................................................. 6,586 7,279
Buildings and improvements........................................... 32,680 40,232
Machinery and equipment.............................................. 58,220 70,010
Construction in progress............................................. 1,476 1,068
------- -------
98,962 118,589
Less accumulated depreciation........................................ 55,002 62,280
------- -------
Total property, plant, and equipment, net........................ 43,960 56,309
------- -------
Goodwill (Note 1)...................................................... 16,222 18,973
Deferred income taxes (Note 5)......................................... 9,278 5,349
Other noncurrent assets (Note 1)....................................... 5,655 7,344
------- -------
Total noncurrent assets.......................................... 31,155 31,666
------- -------
Total assets................................................... $165,608 $185,408
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings, current portion of long-term debt,
notes payable, and capital leases (Note 7)......................... $ 17,404 $ 25,548
Accounts payable..................................................... 23,386 20,969
Dividends payable.................................................... 1,508 1,473
Accrued liabilities..................................................
Compensation....................................................... 7,097 5,671
Other (Note 2)..................................................... 12,746 6,721
Accrued taxes on income (Note 5)..................................... 1,893 486
------- -------
Total current liabilities........................................ 64,034 60,868
------- -------
Long-term debt, notes payable, and capital leases (Note 7)............. 5,182 9,300
Deferred income taxes (Note 5)......................................... 3,222 2,977
Accrued postretirement benefits (Note 6)............................... 8,898 8,809
Other noncurrent liabilities (Note 2).................................. 6,255 6,432
------- -------
Total noncurrent liabilities..................................... 23,557 27,518
------- -------
Total liabilities.............................................. 87,591 88,386
------- -------
Minority interest in equity of subsidiaries (Note 1)................... 3,763 3,030
------- -------
Commitments and contingencies (Notes 1 and 11).........................
Shareholders' equity (Note 8)
Common stock, $1.00 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....................................... 634 780
Retained earnings.................................................... 74,317 87,852
Unearned compensation................................................ (459) (722)
Foreign currency translation adjustments............................. 6,475 12,333
------- -------
90,631 109,907
Treasury stock, shares held at cost; 1996-1,044,452, 1995-999,924.... 16,377 15,915
------- -------
Total shareholders' equity....................................... 74,254 93,992
------- -------
Total liabilities and shareholders' equity..................... $165,608 $185,408
======== ========
The accompanying notes are an integral part of these financial statements.
20
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
----------------------------------
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net (loss) income............................................. $ (7,599) $ 6,688 $ 9,402
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation............................................... 6,347 6,764 6,524
Amortization............................................... 2,361 1,883 726
Equity in net (income) loss of associated companies........ (480) 78 (779)
Minority interest in earnings of subsidiaries.............. 171 444 382
Proceeds from insurance settlement......................... 2,500
Deferred income taxes...................................... (3,658) (499) (159)
Deferred compensation and other postretirement benefits.... 952 (585) (421)
Repositioning and asset impairment charges, net............ 21,534 (1,546) (3,643)
Other, net................................................. 541 (464) (485)
Increase (decrease) in cash from changes in current assets and
current liabilities, net of acquisitions and divestitures:
Accounts receivable........................................ 305 (1,513) (7,341)
Inventories................................................ 132 (2,771) (2,126)
Prepaid expenses and other current assets.................. (148) (2,389) (1,837)
Accounts payable and accrued liabilities................... 6,017 (1,357) 4,211
Accrued taxes on income.................................... 1,475 58 (25)
-------- -------- --------
Net cash provided by operating activities................ 27,950 7,291 4,429
-------- -------- --------
Cash flows from investing activities
Short-term investments........................................ 1,000
Dividends from associated companies........................... 1,406 565 1,022
Investments in property, plant, equipment, and other assets... (6,923) (9,833) (9,255)
Companies/businesses acquired excluding cash.................. (7,728) (1,800)
Investments in and advances to associated companies........... (2,039) (1,970) (4,482)
Proceeds from sale of patent, production technology,
and other assets............................................ 830 2,000 2,591
Proceeds from sale of subsidiary.............................. 10,864
Other, net.................................................... 428 (576) 463
-------- -------- --------
Net cash (used in) provided by investing activities....... (6,298) (17,542) 403
-------- -------- --------
Cash flows from financing activities
Net (decrease) increase in short-term borrowings.............. (7,438) 15,923 2,999
Long-term debt, notes payable, and capital leases incurred.... 2,155
Repayment of long-term debt, notes payable, and capital leases (4,796) (3,857) (3,904)
Dividends paid................................................ (5,936) (5,973) (5,695)
Treasury stock issued......................................... 979 1,439 617
Treasury stock acquired....................................... (1,587) (3,594) (8,241)
-------- -------- --------
Net cash (used in) provided by financing activities....... (18,778) 6,093 (14,224)
-------- -------- --------
Effect of exchange rate changes on cash....................... (1,579) 43 1,444
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 1,295 (4,115) (7,948)
Cash and cash equivalents at beginning of year.............. 7,230 11,345 19,293
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 8,525 $ 7,230 $ 11,345
======== ======== ========
Supplemental cash flow disclosures
Cash paid during the year for:
Income taxes................................................ $ 5,497 $ 5,048 $ 5,685
Interest.................................................... 2,040 1,776 1,419
The accompanying notes are an integral part of these financial statements.
21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Foreign
Capital in currency
(Dollars in thousands Common excess of Retained Unearned translation Treasury
except per share amounts) stock par value earnings compensation adjustments stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993.... $9,664 $ 529 $83,498 $ 3,577 $ (5,885) $91,383
Net income.................... 9,402 9,402
Dividends ($.63 1/2 per share) (5,763) (5,763)
Shares acquired under
repurchase program.......... (8,241) (8,241)
Shares issued for employee
stock purchase plan......... 106 409 515
Translation adjustment........ 6,279 6,279
Other......................... 14 88 102
------ ----- ------- ----- ------ -------- -------
Balance at December 31, 1994.... 9,664 649 87,137 9,856 (13,629) 93,677
Net income.................... 6,688 6,688
Dividends ($.68 per share).... (5,973) (5,973)
Shares acquired under
repurchase program.......... (3,594) (3,594)
Shares issued upon exercise
of options.................. (141) 141
Shares issued for employee
stock purchase plan......... 68 370 438
Restricted stock bonus........ 175 $(722) 700 153
Translation adjustment........ 2,477 2,477
Other......................... 29 97 126
------ ----- ------- ----- ------ -------- -------
Balance at December 31, 1995.... 9,664 780 87,852 (722) 12,333 (15,915) 93,992
Net loss...................... (7,599) (7,599)
Dividends ($.69 per share).... (5,936) (5,936)
Shares acquired under
repurchase program.......... (1,587) (1,587)
Shares issued upon exercise
of options.................. (146) 681 535
Shares issued for employee
stock purchase plan......... 444 444
Amortization of restricted
stock bonus................. 263 263
Translation adjustment........ (5,858) (5,858)
------ ----- ------- ----- ------ -------- -------
Balance at December 31, 1996.... $9,664 $ 634 $74,317 $(459) $ 6,475 $(16,377) $74,254
====== ===== ======= ===== ======= ======== =======
The accompanying notes are an integral part of these financial statements.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except share and per share amounts)
Note 1 - Significant Accounting Policies
Principles of consolidation: All majority-owned subsidiaries are
included in the Company's consolidated financial statements, with
appropriate elimination of intercompany balances and transactions. The
consolidated balance sheet includes total assets of $102,665 and $103,307
and total liabilities of $31,801 and $27,995 in 1996 and 1995,
respectively, of non-U.S. subsidiaries. The consolidated statement of
operations includes net income of non-U.S. subsidiaries of $4,415, $7,290,
and $4,372 in 1996, 1995, and 1994, respectively. Investments in associated
(less than majority owned) companies are stated at the Company's equity in
their underlying net assets.
Translation of foreign currency: Assets and liabilities of non-U.S.
subsidiaries and associated companies are translated into U.S. dollars at
the respective rates of exchange prevailing at the end of the year. Income
and expense accounts are translated at average exchange rates prevailing
during the year. Translation adjustments resulting from this process are
recorded directly in shareholders' equity and will be included in income
only upon sale or liquidation of the underlying investment.
Cash and cash equivalents: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents.
Inventories: Inventories of the parent Company are valued at the lower
of cost or market value, with cost determined using the last-in, first-out
("LIFO") cost method. Inventories of subsidiaries are valued primarily
using the first-in, first-out ("FIFO") cost method, but not in excess of
market value.
Property, plant, and equipment: Property, plant, and equipment are
recorded at cost, and capital leases are recorded at the present value of
future minimum lease payments. Depreciation is computed using the straight-
line method on an individual asset basis over the following estimated
useful lives: buildings and improvements, 10 to 45 years; machinery and
equipment, 3 to 15 years; and capital leases are depreciated over the
remaining life of the lease. At December 31, 1996 and 1995, $1,214 of
leased equipment and accumulated depreciation thereon in the amount of
$1,156 and $1,006 in 1996 and 1995, respectively, are included in property,
plant, and equipment.
Expenditures for renewals and betterments which increase the estimated
useful life or capacity of the assets are capitalized; expenditures for
repairs and maintenance are charged to expense.
Goodwill: Goodwill consists primarily of intangible assets arising
from acquisitions which are being amortized on a straight-line basis over
periods of 5 to 40 years (5 to 20 years on acquisitions subsequent to
1991). At December 31, 1996 and 1995, accumulated goodwill amortization
amounted to $3,574 and $2,476, respectively.
Capitalization of software: The Company capitalizes certain computer
software costs which are amortized utilizing the straight-line method over
their estimated economic lives, not to exceed three years. At December 31,
1996 and 1995, the amount capitalized was $3,372 and $3,369; accumulated
amortization thereon amounted to $1,702 and $788, respectively.
Pension and postretirement benefit plans: The Company's policy is to
fund pension costs allowable for income tax purposes. See Note 6 for the
accounting policies for pension and other postretirement benefits.
Revenue recognition: Sales are recorded primarily when products are
shipped to customers. Other income, principally license fees and royalties
offset by miscellaneous expenses, is recorded when earned. License fees
from nonconsolidated non-U.S. associates and royalties from third parties
amounted to $1,505, $2,293, and $2,364 in 1996, 1995, and 1994,
respectively.
Research and development costs: Research and development costs are
expensed as incurred. Company sponsored research and development expenses
during 1996, 1995, and 1994 were $11,181, $11,307, and $9,919,
respectively.
Earnings per share: Earnings per share calculations are based on the
weighted average number of shares outstanding during the year.
Concentration of credit risk: Financial instruments, which potentially
subject the Company to a concentration of credit risk, principally consist
of cash equivalents, short-term investments, and trade receivables. The
Company invests temporary and excess cash in money market securities and
financial instruments having maturities typically within 90 days. The
Company has not experienced losses from the aforementioned investments.
The Company sells its principal products to major steel, automotive,
and related companies around the world. The Company maintains allowances
for potential credit losses. Historically, the Company has experienced some
losses related to bankruptcy proceedings of major steel companies in the
U.S., however, such losses have not been material.
23
Environmental liabilities and expenditures: Accruals for environmental
matters are recorded when it is probable that a liability has been incurred
and the amount of the liability can be reasonably estimated. Accrued
liabilities are exclusive of claims against third parties and are not
discounted. Environmental costs and remediation costs are capitalized if
the costs increase the value of the property from the date acquired or
constructed and/or mitigate or prevent future contamination.
Reclassifications: Certain reclassifications of prior years' data have
been made to improve comparability.
Accounting estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, and disclosure of contingencies at the date
of the financial statements and the reported amounts of net sales, and
expenses during the reporting period. Differences from those estimates are
recorded in the period they become known.
Income taxes: Income taxes are provided in accordance with SFAS No.
109, "Accounting for Income Taxes."
Accounting standard change: In 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). See Note 2 for the effect of
adoption. SFAS 121 establishes accounting standards for determining the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill. The statement prescribes that an impairment loss is to be
recognized in the event that facts and circumstances indicate that the
carrying amount of an asset may not be recoverable, and the estimate of
future undiscounted cash flows is less than the carrying amount of the
asset. Impairment is then recorded based on an estimate of future
discounted cash flows.
Note 2 - Repositioning of Operations
and Impairment of Long-Lived Assets
In 1996, the Company announced and implemented a series of measures
designed to improve manufacturing capacity utilization, responsiveness to
customers, operating efficiencies, and return on assets. The consolidated
statement of operations for 1996 included total pre-tax charges of $24,455
($16,912 after tax, or $1.96 per share) related to these initiatives. Of
the total charges, $19,230 was shown as "Repositioning charges" in income
before tax and the remaining $5,225, was shown net of tax ($3,445) under
the caption "Asset impairment charge on equity investment."
The plan of action related to the repositioning charges included (i)
the closure of one of two manufacturing plants in the U.S., (ii) the
closure of a sales and distribution office and streamlining of research and
other functional activities in Europe, and (iii) other workforce
reductions. The closure of a manufacturing facility in the U.S. and a sales
and distribution office in Europe were substantially completed in 1996. The
completion of the plan will result in workforce reductions of approximately
90 employees by the end of 1997.
In addition, the charges also include an asset impairment on goodwill
related to a Spanish subsidiary. The asset impairment charge against the
equity investment represents the write-down of the Company's investment in
its FRS joint venture.
Asset impairments represent charges arising from the adoption of SFAS
121. The charge related to a Spanish subsidiary resulted from the
evaluation of the Company's ability to recover asset costs given changes in
local market conditions, current and projected capacity utilization, and
other strategic factors. The determination to write down the Company's
investment in FRS was made after extensive analysis of FRS's past
performance and future prospects compared to the Company's level of
investment. In evaluating both of these operations, management did not
believe that future cash flows would be adequate to recover the carrying
value of these assets.
The components of the pre-tax charges as well as the balances
remaining at December 31, 1996 were as follows:
Amounts Charged
----------------------------
Amount Remaining
Cash Non-cash Total utilized liability
- ---------------------------------------------------------------------------
Severance, other
employee
benefits, and
facility closure
costs............... $7,705 $ 7,705 $ 2,355 $5,350
Asset write-offs...... $10,332 10,332 10,332
Goodwill
impairment.......... 1,193 1,193 1,193
------ ------- ------- ------- ------
Subtotal.......... 7,705 11,525 19,230 13,880 5,350
FRS investment
impairment.......... 5,225 5,225 5,225
------ ------- ------- ------- ------
Total repositioning
charges............. $7,705 $16,750 $24,455 $19,105 $5,350
====== ======= ======= ======= ======
Of the remaining liability at December 31, 1996, which principally
consists of payments for termination benefits related to the workforce
reductions, approximately $5,000 was classified as current.
During 1994, the Company substantially completed actions associated
with a prior repositioning program. These actions included the
consolidation of certain facilities in the U.S.
24
and Europe; the sale of manufacturing facilities in Pomona, California and
Verona, Italy; the divestment of the Quaker Construction Products, Inc.
("QCP") business, and workforce reductions. As of December 31, 1994, it was
determined that the repositioning activities would be accomplished for less
than originally anticipated and, accordingly, the Company reduced operating
expenses by $525 ($347 after tax, or $.04 per share). As of December 31,
1996, cash outlays of approximately $392 and $1,482 remained in accrued
liabilities and other noncurrent liabilities, respectively, and principally
consist of payments for termination benefits related to the workforce
reductions.
Note 3 - Associated Companies
Summarized financial information of the associated companies (less
than majority owned), in the aggregate, for 1996, 1995, and 1994 is as
follows:
1996 1995 1994
- ---------------------------------------------------------------------------
Current assets.......................... $20,848 $22,319 $25,377
Noncurrent assets....................... 7,291 8,273 8,960
Current liabilities..................... 12,647 14,136 15,030
Noncurrent liabilities.................. 2,763 1,806 1,111
Net sales............................... $53,481 $54,710 $49,949
Operating income........................ 3,412 2,689 4,293
Income before taxes..................... 2,289 929 3,242
Net income.............................. 1,252 9 1,725
Note 4 - Inventories
Inventories valued under the LIFO method amounted to $6,792 and $6,387
at December 31, 1996 and 1995, respectively. The estimated replacement
costs for these inventories using the FIFO method were approximately $7,268
and $7,259, respectively.
Note 5 - Taxes on Income
Taxes on income included in the consolidated statement
of operations consist of the following for the year ended December 31:
1996 1995 1994
- ---------------------------------------------------------------------------
Current
Federal............................... $(3,838) $ 872 $1,708
State................................. 193 53 122
Foreign............................... 4,359 4,399 4,984
------- ------ ------
714 5,324 6,814
Deferred
Federal............................... (488) 103 (495)
Foreign............................... 240 (540) (403)
------- ------ ------
Total................................... $ 466 $4,887 $5,916
======= ====== ======
Total deferred tax assets and liabilities are comprised of the
following at December 31:
1996 1995
- ---------------------------------------------------------------------------
Non- Non-
Current current Current current
- ---------------------------------------------------------------------------
Retirement benefits........... $ 311 $ 238
Allowance for doubtful
accounts.................... 342 319
FRS impairment................ 1,780
Insurance and litigation
reserves.................... 1,192 647
Postretirement benefits....... $3,025 $2,995
Supplemental retirement
benefits.................... 677 637
Performance incentives........ 204
Alternative minimum
tax carryforward............ 683 432
Amortization.................. 833 524
Repositioning
charges..................... 849 3,498 151 622
R&D expenses
capitalized for tax......... 245
Other......................... 366 113 60 139
------ ------ ------ ------
Total deferred
tax assets.................. $4,840 $9,278 $1,415 $5,349
====== ====== ====== ======
Depreciation.................. $2,698 $2,829
Other......................... 524 148
------ ------
Total deferred tax
liabilities................. $3,222 $2,977
====== ======
The following is a reconciliation of income taxes at the Federal
statutory rate with income taxes recorded by the Company for the year ended
December 31:
1996 1995 1994
- ---------------------------------------------------------------------------
Income tax (benefit)
provision at the Federal
statutory tax rate.................... $(1,359) $4,113 $5,073
State income tax
provisions, net....................... 54 35 81
Non-deductible
entertainment and business
meal expense.......................... 200 177 176
Prior year tax settlement............... 710
Non-deductible divestiture
charges............................... 503
Foreign taxes on earnings
at rates different than the
Federal statutory rate................ 1,280 30 143
Miscellaneous items, net................ 291 29 (267)
------- ------ ------
Taxes on income......................... $ 466 $4,887 $5,916
======= ====== ======
25
U.S. income taxes have not been provided on the undistributed earnings
of non-U.S. subsidiaries since it is the Company's intention to continue to
reinvest these earnings in those subsidiaries for working capital and
expansion needs. The amount of such undistributed earnings at December 31,
1996 was approximately $69,000. Any income tax liability which might result
from ultimate remittance of these earnings is expected to be substantially
offset by foreign tax credits.
The benefits of net operating loss carryforwards approximating $600,
expiring from 1997 to 2001, have been recorded.
Note 6 - Employee Benefits
Pension plans: The Company maintains various noncontributory
retirement plans covering substantially all of its employees in the U.S.
and certain other countries. The benefits for the plans are based on a
number of factors, the most significant of which are years of service and
levels of compensation either during employment or near retirement. The
plans of the remaining non-U.S. subsidiaries are, for the most part, either
fully insured or integrated with the local governments' plans and are not
subject to the provisions of SFAS No. 87, "Employers' Accounting for
Pensions" ("SFAS 87").
On January 1, 1995, after determining that the plans of the Company's
subsidiaries in the Netherlands are subject to the provisions of SFAS 87,
the Company commenced reporting under this standard for these subsidiaries.
The effect of adoption was not material.
The pension costs for all plans include the following components:
1996 1995 1994
- ---------------------------------------------------------------------------
Service cost-benefits earned
during the period...................... $1,305 $1,149 $ 880
Interest cost on projected
benefit obligation..................... 3,347 3,314 2,449
Net investment (income)
loss on plan assets:
Actual............................... (5,755) (7,837) (283)
Deferral of difference
between actual and
expected income.................... 1,897 4,373 (2,576)
Other amortization, net.................. (373) (320) (63)
------ ------ ------
Net pension costs of plans
subject to SFAS 87..................... 421 679 407
Pension costs of plans not
subject to SFAS 87..................... 274 98 962
------ ------ ------
Total pension costs...................... $ 695 $ 777 $1,369
====== ====== ======
The following table summarizes the funded status of the Company's
defined benefit pension plans, the largest of which is in the U.S., and the
related amounts recognized in the Company's consolidated balance sheets as
of December 31:
1996 1995
- --------------------------------------------------------------------------------
Assets Accumulated Assets Accumulated
exceed benefits exceed benefits
accumulated exceed accumulated exceed
benefits assets(a) benefits assets(a)
- --------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit
obligation.............. $40,720 $ 2,583 $39,839 $ 2,556
------- ------- ------- -------
Accumulated benefit
obligation.............. 40,895 2,630 40,026 2,640
------- ------- ------- -------
Projected benefit
obligation (PBO) ......... 45,772 2,693 44,788 2,817
Plan assets at
market value ............. 51,336 47,857
------- ------- ------- -------
Plan assets greater
(less) than PBO........... 5,564 (2,693) 3,069 (2,817)
------- ------- ------- -------
Unrecognized
cumulative net
(gain) loss............... (3,699) 756 (1,792) 961
------- ------- ------- -------
Unrecognized prior
service costs............. 1,318 1,722
------- ------- ------- -------
Unrecognized transition
obligation................ (3,275) (6) (4,041) (7)
------- ------- ------- -------
Accrued
pension costs............. $ (92) $(1,943) $(1,042) $(1,863)
======= ======= ======= =======
(a) Substantially all of this relates to nonqualified, unfunded supplemental
pension plans.
The U.S. funded plan is the largest plan. The significant assumptions
for the U.S. plan were as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
Discount rate for projected
benefit obligation.................... 7.375% 7.375% 8.0%
Assumed long-term rates of
compensation increases................ 5.5% 5.5% 5.5%
Long-term rate of return
on plan assets........................ 9.25% 9.25% 9.25%
All other pension plans used assumptions in determining the actuarial
present value of the projected benefit obligations that are consistent with
(but not identical to) those of the U.S. plan.
Profit sharing plan: The parent Company also maintains a qualified
profit sharing plan covering all employees other than those who are
compensated on a commission basis. Contributions were $405 and $367 for
1996 and 1994, respectively. No contributions were made in 1995.
26
Other postretirement and postemployment benefits: The Company has
postretirement benefit plans that provide medical and life insurance
benefits for certain retired employees of the parent Company. These
benefits vary based on age, years of service, and retirement date. Coverage
of health benefits under the plan may require the retiree to make payments
where the insured equivalent costs exceed the Company's fixed contribution.
The cost of the life insurance benefit plan, which provides a flat $2,000
per retiree, is noncontributory. Both the medical and life insurance plans
are currently unfunded.
The components of periodic postretirement benefit costs are as
follows:
1996 1995 1994
- ---------------------------------------------------------------------------
Service cost-benefits
attributed to service
during the period..................... $ 77 $ 65 $ 67
Interest cost on accumulated
benefit obligation
and amortization...................... 571 594 572
---- ---- ----
Postretirement benefit costs............ $648 $659 $639
==== ==== ====
The status of the plan at December 31, 1996 and 1995 is as follows:
1996 1995
- ---------------------------------------------------------------------------
Retirees.......................................... $6,672 $6,877
Fully eligible active participants................ 45 59
Other participants................................ 1,379 1,199
------ ------
Total accumulated postretirement
benefit obligation.............................. 8,096 8,135
Unrecognized actuarial gain....................... 802 674
------ ------
Net unfunded postretirement
benefit liability................................ $8,898 $8,809
====== ======
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.375% in both 1996 and 1995.
In valuing costs and liabilities, different health care cost trend
rates were used for retirees under and over age 65. The average assumed
rate for medical benefits for all retirees was 8.3% in 1996, gradually
decreasing to 5.5% over 10 years. A 1% increase in the health care cost
trend rate would increase aggregate service cost for 1996 by $39 and the
accumulated postretirement benefit obligation as of December 31, 1996 by
$573.
The parent Company maintains a plan under which the Company will
provide, in certain cases, supplemental retirement benefits to officers of
the parent Company. Benefits payable under the plan are based on a
combination of years of service and existing postretirement benefits.
Included in total pension costs are charges of $262, $276, and $353 in
1996, 1995, and 1994, respectively, representing the annual accrued
benefits under this plan.
Note 7 - Debt, Notes Payable, and Capital Leases
Long-term debt, notes payable, and capital leases consisted of the
following at December 31:
1996 1995
- ---------------------------------------------------------------------------
Industrial development authority
monthly floating rate (3.85%
at December 31, 1996) demand
bonds maturing in 2014.......................... $5,000 $ 5,000
6.64% notes payable due July 8, 1997.............. 3,333 6,667
Non-interest bearing notes
payable due 1997................................ 728 2,126
Capital leases.................................... 54 112
Other debt obligations due 1997 to 1998,
interest rates ranging to 10.8%................. 356 394
------ -------
9,471 14,299
Less current portion.............................. 4,289 4,999
------ -------
$5,182 $ 9,300
====== =======
The 6.64% notes payable require semiannual principal payments of
$1,667 beginning July 8, 1993 through 1997. The long-term financing
agreements require the maintenance of certain financial covenants with
which the Company is in compliance.
During the next five years, payments of long-term debt and notes
payable are as follows: $4,289 in 1997, $182 in 1998, and $0 in 1999, 2000,
and 2001.
At December 31, 1996, the Company had outstanding short-term
borrowings with banks under non-confirmed lines of credit in the aggregate
of $13,115. The weighted average interest rate on such borrowings was 5.7%
during 1996. The parent Company also has available a $10,000 unsecured line
of credit that is renewed annually. Any borrowings under this line of
credit will be at the bank's most competitive rate of interest in effect at
that time.
At December 31, 1996 and 1995, the value at which these financial
instruments are recorded is not materially different from their fair market
value.
27
Note 8 - Shareholders' Equity
Treasury stock is held for use by the various Company plans which
require the issuance of the Company's common stock.
The Company is authorized to issue 10,000,000 shares of preferred
stock, $1.00 par value, subject to approval by the Board of Directors. The
Board of Directors may designate one or more series of preferred stock and
the number of shares, rights, preferences, and limitations of each series.
No preferred stock has been issued.
Under provisions of a stock purchase plan which permits employees to
purchase shares of stock at 85% of the market value, 31,193 shares, 26,933
shares, and 29,736 shares were issued from treasury in 1996, 1995, and
1994, respectively. The number of shares that may be purchased by an
employee in any year is limited by factors dependent upon the market value
of the stock and the employee's base salary. At December 31, 1996, 159,054
shares are available for purchase.
The Company has a long-term incentive plan for key employees which
provides for the granting of options to purchase stock at prices not less
than market value on the date of the grant. Most options are exercisable
one year after the date of the grant for a period of time determined by the
Company not to exceed ten years from the date of grant. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-based Compensation" ("SFAS 123"). Accordingly, no compensation
expense has been recognized for the stock option plans. Had compensation
costs been determined based on the fair value at grant date for awards in
1996 and 1995 consistent with the provisions of SFAS 123, the Company's net
(loss) income and net (loss) income per share would have been reduced to
the pro forma amounts indicated below:
1996 1995
- ---------------------------------------------------------------------------
Net (loss) income-as reported.................... $(7,599) $6,688
Net (loss) income-pro forma...................... (8,139) 6,058
Net (loss) income per share-as reported.......... (.88) .76
Net (loss) income per share-pro forma............ (.95) .69
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:
1996 1995
- ---------------------------------------------------------------------------
Dividend yield................................... 3.9% 3.6%
Expected volatility.............................. 22.5% 22.5%
Risk-free interest rate.......................... 6.35% 5.53%
Expected life (years)............................ 8 8
The table below summarizes transactions in the plan during 1996, 1995,
and 1994.
1996 1995 1994
- --------------------------------------------------------------------------------
Weighted
Average
Number Exercise Number Number
of shares Price of Shares of Shares
- --------------------------------------------------------------------------------
Options outstanding at
January 1,.............. 894,854 $18.03 633,087 626,534
Options granted........... 290,070 $14.13 459,056 6,553
Options exercised......... (48,678) $11.00 (44,842)
Options expired........... (128,117) $19.49 (152,447)
Options outstanding at
December 31,............ 1,008,129 $17.06 894,854 633,087
========= ====== ======= =======
Options exercisable at
December 31,............ 689,934 $19.01 486,548 626,534
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
- --------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range Number Con- Average Number Average
of Exercise Outstanding tractual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Prices
- --------------------------------------------------------------------------------
$13.33-$21.00 93,500 1 $16.24 93,500 $16.24
$15.75-$24.20 62,000 2 $22.01 62,000 $22.01
$20.49 30,000 4 $20.49 30,000 $20.49
$12.50-$17.75 159,568 6 $15.36 159,568 $15.36
$19.75-$21.00 39,882 7 $20.99 39,882 $20.99
$15.88 553 8 $15.88 553 $15.88
$17.50-$22.50 333,306 9 $18.96 304,431 $18.96
$12.38-$15.00 289,320 10 $14.13
- ------------- --------- -------
$13.33-$24.20 1,008,129 689,934
============= ========= =======
Options were exercised for cash and the surrender of 34,555 previously
outstanding shares in 1995, resulting in the net issuance of 48,678 shares
in 1996 and 10,287 shares in 1995. No options were exercised in 1994.
Options to purchase 218,377 shares were available at December 31, 1996 for
future grants.
The plan also provides for the issuance of performance incentive
units, the value of which is determined based on operating results over
a four-year period. The effect on operations of the change in the estimated
value of incentive units during the year was $600 in 1996 and zero in 1995
and 1994, respectively.
28
On February 7, 1990, the Company declared a dividend distribution to
shareholders of record on February 20, 1990 which, after giving effect for
the three-for-two stock split effective July 30, 1990, was in the form of
two stock purchase rights (the "Rights") for each three shares of common
stock outstanding. The Rights become exercisable if a person or group
acquires or announces a tender offer which would result in such person's
acquisition of 20% or more of the Company's common stock. The Rights also
become exercisable if the Board of Directors declares a person to be an
"adverse person" and that person has obtained not less than 10% of the
outstanding shares of the Company's common stock.
Each Right, when exercisable, entitles the registered holder to
purchase one one-hundredth of a share of a newly authorized Series A
preferred stock at an exercise price of seventy-two dollars per share
subject to certain anti-dilution adjustments. In addition, if a person or
group acquires 20% or more of the outstanding shares of the Company's
common stock, without first obtaining Board of Directors' approval, as
required by the terms of the Rights Agreement, or a person is declared an
adverse person, each Right will then entitle its holder (other than such
person or members of any such group) to purchase, at the Right's then
current exercise price, a number of shares of the Company's common stock
having a total market value of twice the Right's exercise price.
In the event the Company merges with or transfers 50% or more of its
assets or earnings to any entity after the Rights become exercisable,
holders of Rights may purchase, at the Right's then current exercise price,
common stock of the acquiring entity having a value equal to twice the
Right's exercise price.
In addition, at any time after a person acquires 20% of the
outstanding shares of common stock and prior to the acquisition by such
person of 50% or more of the outstanding shares of common stock, the
Company may exchange the Rights (other than the Rights which have become
null and void), in whole or in part, at an exchange ratio of one share of
common stock or equivalent share of preferred stock, per Right.
The Board of Directors can redeem the Rights for $.01 per Right at any
time prior to the acquisition by a person or group of beneficial ownership
of 20% or more of the Company's common stock or a person being declared an
adverse person. Until a Right is exercised, the holder thereof will have no
rights as a shareholder of the Company, including without limitation, the
right to vote or to receive dividends. Unless earlier redeemed or
exchanged, the Rights will expire on February 20, 2000.
Restricted stock bonus: In 1995, the Company granted an initial stock
bonus of 50,000 shares of the Company's common stock to its chief executive
officer of which 5,000 shares were paid to him immediately, and the balance
of the shares were registered in his name, 15,000 of which were delivered
to him on October 2, 1996. The balance is being held by the Company for
delivery to him in installments of 15,000 shares each on October 2, 1997
and 1998, if he is employed by the Company on those dates.
The remaining shares are subject to forfeiture provisions, have been
recorded as unearned compensation, and are presented as a separate component
of shareholders' equity. The unearned compensation is being charged to
selling, administrative, and general expenses over the three-year vesting
period and was $263 and $153 in 1996 and 1995, respectively.
Note 9 - Business Segments
The Company operates primarily in one business segment-
the manufacture and sale of industrial chemical specialty products. The
Company has both U.S. and non-U.S. operations, which are summarized for
1996, 1995, and 1994 as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
Net sales
United States....................... $104,135 $102,651 $ 97,338
Europe.............................. 101,676 99,222 80,624
Asia/Pacific........................ 24,188 18,715 14,912
South America....................... 10,252 6,450 1,802
-------- -------- --------
Consolidated........................ $240,251 $227,038 $194,676
======== ======== ========
(Loss) income before taxes
United States....................... $ 5,558 $ 3,357 $ 7,960
Europe.............................. 17,336 13,344 11,076
Asia/Pacific........................ 2,575 2,214 1,630
South America....................... (1,113) (1,188) (1,163)
-------- -------- --------
Operating profit.................... 24,356 17,727 19,503
Repositioning
(charges) credits................. (19,230) 525
Nonoperating expenses............... (9,123) (5,630) (5,107)
Asset impairment charge
on equity investment.............. (3,445)
Equity in net income
(loss) of associated
companies......................... 480 (78) 779
Minority interest in net
income of subsidiaries............ (171) (444) (382)
-------- -------- --------
Consolidated........................ $ (7,133) $ 11,575 $ 15,318
======== ======== ========
Identifiable assets
United States....................... $ 40,540 $ 52,262 $ 51,255
Europe.............................. 63,385 66,498 65,845
Asia/Pacific........................ 12,455 11,246 8,685
South America....................... 4,380 3,989 1,426
Investments in
associated companies.............. 3,941 10,058 9,885
Nonoperating assets................. 40,907 41,355 33,076
-------- -------- --------
Consolidated........................ $165,608 $185,408 $170,172
======== ======== ========
29
Transfers between geographic areas are not material. Operating profit
comprises revenue less related costs and expenses. Nonoperating expenses
primarily consist of general corporate expenses identified as not being a
cost of operations, interest expense, interest income, and license fees
from nonconsolidated associates. Nonoperating assets, consisting primarily
of cash equivalents and short-term investments, have not been included with
identifiable assets. No single customer accounted for 10% of net sales in
1996, 1995, or 1994. A substantial portion of consolidated sales on a
global basis is made to the steel industry (see Classification of Products
by Markets Served), and as a result, accounts receivable generally reflect
a similar distribution of receivables from customers in this market.
Note 10 - Business Acquisitions and Divestitures
In 1995 and 1994, the Company completed the acquisitions or
divestitures set forth below. Each acquisition was accounted for as a
purchase, and, accordingly, the purchase price has been allocated, where
appropriate, between the fair value of identifiable net assets acquired and
goodwill. The consolidated financial statements include the operating
results of each business acquired from the date of acquisition. Pro forma
results of operations have not been presented for any of the acquisitions
or divestitures because the effects of these transactions were not
material.
Effective May 31, 1995, the Company acquired 90% of the common stock
of Celumi S.A., a metalworking chemical specialty business in Brazil, for
approximately $7,700 in cash and notes. The excess of cost over the
estimated fair value of net assets acquired amounted to approximately
$6,500 which has been accounted for as goodwill and is being amortized over
20 years.
On March 29, 1995, the Company entered into an agreement with Wuxi Oil
Refinery, for the creation of a joint venture in the People's Republic of
China. The Company made cash contributions to the venture of approximately
$600 and $500 in 1996 and 1995, respectively.
Effective December 28, 1994, the Company acquired for approximately
$1,800 in cash certain assets relating to the formulation, manufacture, and
sale of cutting fluids from Perstorp AB, a Swedish company.
Pursuant to the plans identified in the Company's 1993 repositioning
program (see Note 2), the sales of certain of the Company's businesses and
assets were completed in 1994. Effective November 7, 1994, the Company
completed the sale of the flooring business of QCP for approximately
$2,800. In addition, effective October 20, 1994 and October 1, 1994,
respectively, the Company completed the sale of its Verona, Italy and
Pomona, California manufacturing facilities, which ceased production in
1993 and mid-1994, respectively, for approximately $2,600 in cash and $200
due within one year. Effective September 30, 1994, the Company completed
the sale of the coatings and waterproofing business of QCP for
approximately $8,100.
On March 24, 1994, the Company entered into an agreement with Fluid
Recycling Services, Incorporated for the creation of FRS, a 50/50 joint
venture. During 1996 and 1995, the Company made annual cash investments and
advances of approximately $2,000.
Note 11 - Commitments and Contingencies
A wholly-owned nonoperating subsidiary of the Company is a co-
defendant in claims filed by multiple claimants alleging injury due to
exposure to asbestos. Although there can be no assurance regarding the
outcome of existing claims proceedings, the subsidiary believes that it has
made adequate accruals for uninsured liabilities related to claims of which
it is aware. At December 31, 1996, the subsidiary has accrued approximately
$200 to provide for anticipated uninsured claims-related liabilities. In
addition, in 1995 the subsidiary received a cash payment of $2,500 from one
of its insurance carriers in settlement over certain disputed coverage.
The Company has accrued for certain environmental investigatory and
noncapital remediation costs consistent with the policy set forth in Note
1. In 1994, the Company identified certain soil and groundwater
contamination at AC Products, Inc. ("ACP"), a wholly-owned subsidiary.
Pursuant to a plan submitted to and approved by the Santa Ana California
Regional Water Quality Board, remediation efforts are being undertaken at
ACP. Currently, the Company believes that the potential uninsured liability
associated with the completion of the remediation effort ranges from $1,500
to $3,000, for which the Company has accrued approximately $2,000.
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 exposures
of which it is aware. Approximately $400 was accrued at December 31, 1996
and 1995, to provide for such anticipated future environmental assessments
and remediation costs relating to these matters.
The Company is a party to other litigation which management currently
believes will not have a material adverse effect on the Company's results
of operations or financial
condition.
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Quaker Chemical Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of Quaker
Chemical Corporation (the "Company") and its subsidiaries at December 31,
1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
30 South 17th Street
Philadelphia, Pennsylvania 19103
February 13, 1997
31
ELEVEN-YEAR FINANCIAL SUMMARY
(Dollars in thousands except per share data and number of employees)
1996(1) 1995 1994(2)
- ---------------------------------------------------------------------------------------
Summary of Operations
Net sales.......................................... $240,251 $227,038 $194,676
(Loss) income before taxes and cumulative effect
of change in accounting principle............... (7,133) 11,575 15,318
Cumulative effect of change in accounting
for postretirement benefits.....................
Net (loss) income.................................. (7,599) 6,688 9,402
Per share(4)
(Loss) income before cumulative effect
of change in accounting principle.............. (.88) .76 1.03
Cumulative effect of change in accounting
for postretirement benefits....................
Net (loss) income.................................. (.88) .76 1.03
Dividends.......................................... .69 .68 .63 1/2
Financial Position
Current assets..................................... 86,552 87,375 83,400
Current liabilities................................ 64,034 60,868 42,754
Working capital.................................... 22,518 26,507 40,646
Property, plant, and equipment, net................ 43,960 56,309 51,694
Total assets....................................... 165,608 185,408 170,172
Long-term debt, notes payable, and capital leases.. 5,182 9,300 12,207
Shareholders' equity............................... 74,254 93,992 93,677
Other Data
Current ratio...................................... 1.4/1 1.4/1 2.0/1
Capital expenditures............................... 6,923 9,833 9,255
Net (loss) income as a percentage of net sales(5).. (3.2)% 2.9% 4.8%
Return on average shareholders' equity(5).......... (9.0)% 7.1% 10.2%
Shareholders' equity per share at end of year(4)... 8.61 10.85 10.62
Common stock per share price range(4):
High............................................. 17 1/4 19 19 1/2
Low ............................................. 11 3/4 11 14 3/4
Number of shares outstanding at end of year(4)..... 8,620 8,664 8,819
Number of employees at end of year:
Consolidated subsidiaries........................ 835 870 743
Associated companies............................. 232 235 212
<FN>
(1) The results of operations for 1996 include special charges-$16,912 after tax, or
$1.96 per share. Excluding these charges, net income for 1996 was $9,313, or $1.08 per
share.
(2) The results of operations for 1994 include net repositioning credits of $347, or
$0.04 per share. Excluding these credits, net income for 1994 was $9,055, or $0.99 per
share.
(3) The results of operations for 1993 include net repositioning charges of $7,854, or
$0.85 per share. Excluding these charges, net income for 1993 was $6,096, or $0.66 per
share.
(4) Restated to give retroactive effect to a three-for-two split in 1990.
(5) Calculated for 1991 using $10,790 which is the net income before the cumulative
effect of change in accounting principle.
ELEVEN-YEAR FINANCIAL SUMMARY (continued)
(Dollars in thousands except per share data and number of employees)
1993(3) 1992 1991 1990
- ---------------------------------------------------------------------------------------------------
Summary of Operations
Net sales.......................................... $195,004 $212,491 $191,051 $201,474
(Loss) income before taxes and cumulative effect
of change in accounting principle................ (1,524) 19,045 16,888 22,580
Cumulative effect of change in accounting
for postretirement benefits...................... (5,675)
Net (loss) income.................................. (1,758) 12,098 5,115 14,106
Per share(4)
(Loss) income before cumulative effect
of change in accounting principle.............. (.19) 1.33 1.20 1.51
Cumulative effect of change in accounting
for postretirement benefits.................... (.63)
Net (loss) income................................ (.19) 1.33 .57 1.51
Dividends........................................ .60 1/2 .57 .53 .47
Financial Position
Current assets..................................... 84,387 85,567 82,725 84,833
Current liabilities................................ 42,642 28,126 36,592 40,342
Working capital.................................... 41,745 57,441 46,133 44,491
Property, plant, and equipment, net................ 55,541 52,179 48,661 46,315
Total assets....................................... 170,985 166,613 159,121 152,408
Long-term debt, notes payable, and capital leases.. 16,095 18,604 5,219 5,453
Shareholders' equity............................... 91,383 101,642 98,898 99,113
Other Data
Current ratio...................................... 2.0/1 3.0/1 2.3/1 2.1/1
Capital expenditures............................... 8,960 7,226 8,420 12,663
Net (loss) income as a percentage of net sales(5).. (0.9)% 5.7% 5.6% 7.0%
Return on average shareholders' equity(5).......... (1.8)% 12.1% 10.9% 14.9%
Shareholders' equity per share at end of year(4)... 9.89 11.06 10.95 11.11
Common stock per share price range(4):
High............................................. 24 5/8 26 22 1/4 19 1/4
Low.............................................. 14 1/4 18 3/4 15 12
Number of shares outstanding at end of year(4)..... 9,242 9,188 9,028 8,921
Number of employees at end of year:
Consolidated subsidiaries........................ 865 842 840 819
Associated companies............................. 141 130 187 261
<FN>
(1) The results of operations for 1996 include special charges-$16,912 after tax, or $1.96 per
share. Excluding these charges, net income for 1996 was $9,313, or $1.08 per share.
(2) The results of operations for 1994 include net repositioning credits of $347, or $0.04 per
share. Excluding these credits, net income for 1994 was $9,055, or $0.99 per share.
(3) The results of operations for 1993 include net repositioning charges of $7,854, or $0.85 per
share. Excluding these charges, net income for 1993 was $6,096, or $0.66 per share.
(4) Restated to give retroactive effect to a three-for-two split in 1990.
(5) Calculated for 1991 using $10,790 which is the net income before the cumulative effect of
change in accounting principle.
ELEVEN-YEAR FINANCIAL SUMMARY (continued)
(Dollars in thousands except per share data and number of employees)
1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------
Summary of Operations
Net sales.......................................... $181,660 $166,662 $147,455 $128,059
(Loss) income before taxes and cumulative effect
of change in accounting principle................ 19,647 18,939 17,511 14,103
Cumulative effect of change in accounting
for postretirement benefits......................
Net (loss) income.................................. 12,840 11,731 10,423 8,530
Per share(4)
(Loss) income before cumulative effect
of change in accounting principle.............. 1.35 1.21 1.05 .84
Cumulative effect of change in accounting
for postretirement benefits....................
Net (loss) income................................ 1.35 1.21 1.05 .84
Dividends........................................ .41 .37 .34 .29
Financial Position
Current assets..................................... 75,427 69,326 66,633 58,460
Current liabilities................................ 27,848 26,924 29,447 16,207
Working capital.................................... 47,579 42,402 37,186 42,253
Property, plant, and equipment, net................ 36,539 32,821 32,622 29,472
Total assets....................................... 131,430 121,125 118,367 98,512
Long-term debt, notes payable, and capital leases.. 5,665 5,000 5,000 8,735
Shareholders' equity............................... 90,440 82,884 78,079 66,654
Other Data
Current ratio...................................... 2.7/1 2.6/1 2.3/1 3.6/1
Capital expenditures............................... 7,553 5,295 3,705 5,223
Net (loss) income as a percentage of net sales(5).. 7.1% 7.0% 7.1% 6.7%
Return on average shareholders' equity(5).......... 14.8% 14.6% 14.4% 13.6%
Shareholders' equity per share at end of year(4)... 9.55 8.57 8.08 6.71
Common stock per share price range(4):
High............................................. 15 5/8 16 1/8 18 13 5/8
Low.............................................. 12 1/2 11 3/8 9 8
Number of shares outstanding at end of year(4)..... 9,473 9,669 9,644 9,935
Number of employees at end of year:
Consolidated subsidiaries........................ 829 832 824 795
Associated companies............................. 154 150 140 134
<FN>
(1) The results of operations for 1996 include special charges-$16,912 after tax, or $1.96 per
share. Excluding these charges, net income for 1996 was $9,313, or $1.08 per share.
(2) The results of operations for 1994 include net repositioning credits of $347, or $0.04 per
share. Excluding these credits, net income for 1994 was $9,055, or $0.99 per share.
(3) The results of operations for 1993 include net repositioning charges of $7,854, or $0.85 per
share. Excluding these charges, net income for 1993 was $6,096, or $0.66 per share.
(4) Restated to give retroactive effect to a three-for-two split in 1990.
(5) Calculated for 1991 using $10,790 which is the net income before the cumulative effect of
change in accounting principle.
32-33
SUPPLEMENTAL FINANCIAL INFORMATION
Classification of Products by Markets Served (unaudited)
Consolidated net sales comprise chemical specialty and other products
classified by markets served as follows:
(Dollars in thousands)
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
Steel.......... $118,988 50% $103,765 46% $ 90,549 47% $ 89,255 46% $ 94,483 44%
Metalworking... 84,657 35 85,949 38 68,576 35 57,826 30 58,719 28
Paper.......... 14,659 6 16,049 7 13,010 7 12,169 6 15,042 7
Other.......... 21,947 9 21,275 9 22,541 11 35,754 18 44,247 21
-------- --- -------- --- -------- --- -------- --- -------- ---
$240,251 100% $227,038 100% $194,676 100% $195,004 100% $212,491 100%
Information on the Company's markets appears on page 6 of this report.
Quarterly Results (unaudited)
(Dollars in thousands, except per share amounts)
First Second Third Fourth
- --------------------------------------------------------------------------------
1996
Net sales..................... $58,203 $59,786 $61,813 $60,449
Operating income (loss)(1).... 3,163 4,132 (8,719) (2,607)
Net income (loss)(2).......... 1,676 2,648 (5,881) (6,042)
Net income (loss) per share... $.19 $.31 $(.68) $(.70)
1995
Net sales..................... $54,527 $59,035 $57,872 $55,604
Operating income.............. 3,282 3,770 3,408 973
Net income.................... 1,915 2,471 2,099 203
Net income per share.......... $.22 $.28 $.24 $.02
1994
Net sales..................... $45,093 $47,347 $50,117 $52,119
Operating income(3)........... 3,356 3,213 3,754 3,191
Net income.................... 2,249 2,191 2,353 2,609
Net income per share.......... $.24 $.24 $.26 $.29
(1) The third and fourth quarters include repositioning charges of $13,100 and
$6,130, respectively.
(2) The fourth quarter includes an asset impairment charge on equity investment
of $3,445.
(3) The fourth quarter includes repositioning credits of $525.
Stock Market and Related Security Holder Matters
The Company's common stock is listed on the New York Stock Exchange
("NYSE"). Prior to August 23, 1996, the common stock was traded on the
NASDAQ National Market. The following table sets forth, for the calendar
quarters during the past two years, the range of high and low sales prices
for the common stock as quoted on the NASDAQ National Market or as reported
by the NYSE, and the quarterly dividends declared as indicated.
Range of Quotations Dividends Declared
------------------------------------ ---------------------
1996 1995 1996 1995
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First quarter $15 $12 3/4 $19 $14 1/2 $.17 $.17
Second quarter 14 1/2 11 3/4 18 14 1/2 .17
Third quarter 15 1/4 11 3/4 17 1/2 15 .34 1/2 .17
Fourth quarter 17 1/4 14 5/8 18 1/2 11 .17 1/2 .17
As of January 15, 1997 there were 1,039 shareholders of record of the
Company's common stock, $1.00 par value, its only outstanding class of
equity securities.
Copies of the Company's Form 10-K for the year ended December 31, 1996 as
filed with the Securities and Exchange Commission will be provided without
charge on request to Quaker Chemical Corporation, Attention:
Irene M. Kisleiko, Assistant Corporate Secretary, Conshohocken, PA 19428.
34