Exhibit 13
Financial Review
1998 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
Exhibit 13 Page 15
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
Management continues to believe 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 $12.6 million in
1998 compared to $15.2 million in 1997. The decrease principally resulted from
changes in working capital.
Net cash used in investing activities increased to $16.8 million in 1998
from $1.4 million in 1997. The increase was due mainly to an increase in
expenditures for property, plant, and equipment ($8.1 million in 1998 versus
$5.6 million in 1997) and the $9.4 million purchase price for companies acquired
in 1998 versus $3.5 million in proceeds from the sale of the European pulp and
paper business in 1997.
The majority of the expenditures for property, plant, and equipment in 1998
included upgrades of manufacturing capabilities at various locations with $1.1
million for environmental and regulatory compliance. Capital expenditures for
1999 are expected to be in the range of $7-9 million and include various
upgrades to manufacturing capabilities in the U.S. and Europe and an estimated
$1 million for environmental and regulatory compliance. The Company believes
that funds generated internally should be sufficient to finance payments for
capital expenditures.
The Company has available $10 million in a line of credit and believes that
additional bank borrowings could be negotiated at competitive rates, based on
its debt to equity ratio and current levels of operating performance. The
Company believes that it is capable of supporting its operating requirements
during 1999, payment of dividends to shareholders, possible acquisition
opportunities and possible resolution of contingencies (see Note 13 to the
consolidated financial statements) through internally generated funds
supplemented with debt as needed.
Operations
Comparison of 1998 with 1997
Consolidated net sales for 1998 increased $15.6 million (6%) over 1997. The
sales growth was the net result of (i) a 4% increase in volume, (ii) a 1%
improvement in price/ mix, (iii) a 2% increase associated with the 1998
acquisition in Brazil, offset by a 1% negative impact from foreign currency
translation (fluctuation in foreign currency exchange rates used to translate
local currency statements to U.S. dollars). The volume improvement for the year
was mainly attributable to metalworking process chemical sales growth in the
U.S., Asia/Pacific and South America mainly due to the strong demand from the
steel industry and the mid-year acquisition in Brazil, and increased coatings
sales to aircraft producers. Sales in Europe decreased slightly versus the prior
year due to the negative impact of changes in foreign currency exchange rates.
Operating income (excluding the 1998 repositioning and integration charge)
increased to $22.5 million from $18.5 million (excluding the gain on the sale of
the European pulp and paper business in 1997). The improvement was due in large
part to the higher level of sales combined with an increased gross margin
percentage. The Company's gross margin percentage improved 0.9%, when compared
to 1997, mainly due to lower raw material costs, a more favorable sales mix and
the continued focus on reducing costs throughout the organization. Selling,
administrative, and general expenses as a percentage of sales were slightly
below last year's level.
Other income decreased mainly due to the absence of favorable transactional
exchange gains which occurred in 1997. The Company's issuance of $20 million of
long-term debt in the fourth quarter of 1997 resulted in higher interest expense
during 1998. Equity in net income of associated companies decreased primarily as
a result of lower earnings from associated companies in South America. The
negative impact of currency translation on net income in 1998 was approximately
$.05 per share.
Repositioning, Integration and Asset Impairment Charges
In the fourth quarter of 1998, the Company announced and implemented a
repositioning and integration plan to better align its organizational structure
with market demands, improve operational performance, and reduce costs. The
Company recorded a pre-tax charge of $5.3 million ($2.9 million after-tax and
minority interest, or $0.33 per share) in connection therewith. The
repositioning and integration charge included workforce reductions
(approximately 70 employees) in the Company's U.S., South American and European
operations and integration costs associated with the closure of a leased
facility as a result of the Company's recent acquisition in Brazil (see Note 12
to the consolidated financial statements).
Exhibit 13 Page 16
The components of the 1998 pre-tax repositioning and integration charge
included severance and other benefit costs of $4 million and early pension and
postemployment benefits of $1.3 million. During 1998, $1 million of severance
benefits was paid to affected employees. The remaining termination benefits
liability at December 31, 1998 of $3 million will be paid out during 1999. The
liabilities for early pension and postemployment benefits are included in the
Company's pension and postretirement benefits obligations (see Note 7 to the
consolidated financial statements).
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. In connection with
these plans, the Company recorded pre-tax charges of $24.5 million ($16.9
million after-tax, or $1.96 per share) comprised of repositioning and asset
impairment charges of $19.3 million and an impairment charge of $5.2 million
($3.4 million after-tax) related to an equity investment.
Comparison of 1997 with 1996
Consolidated net sales for 1997 increased $1.3 million (.5%) over 1996. The
sales growth was the net result of (i) a 6% increase in volume, and (ii) a 1.5%
improvement in price/mix resulting primarily from better pricing, mainly in
Europe, and an overall positive shift in sales mix, offset by (iii) a 1%
decrease associated with the 1997 divestiture of the European pulp and paper
business, and (iv) a 6% 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 to sales
growth in Europe, mainly attributable to the strong demand from the European
steel industry, increased sales to aircraft producers, and increased demand from
the South American steel and metalworking markets. Sales in the major U.S.
markets were steady throughout most of the year. In Asia/Pacific, sales were
hurt in the first half of 1997 due to a decrease in customer production levels
in order to work down earlier buildups of inventories but increased in the
second half of the year.
Operating income (excluding the gain on the sale of the European pulp and
paper business in 1997) increased to $18.5 million from $15.2 million (excluding
the repositioning charge in 1996). The improvement was due in large part to the
higher level of sales combined with an increased gross margin percentage. The
Company's gross margin as a percentage of sales improved 1.6%, when compared to
1996 mainly as a result of the benefits associated with the consolidation of
manufacturing operations in the U.S., pricing initiatives implemented over the
past year, and a more favorable sales mix. Selling, administrative, and general
expenses as a percent of sales were near last year's level.
The $2 million litigation charge related to a reserve established in the
fourth quarter of 1997 for the Company's potential liability in a legal
proceeding (see Note 13 to the consolidated financial statements) which was
subsequently settled on May 11, 1998 for an undisclosed amount not exceeding the
reserve previously taken. Net interest costs decreased as a result of the
increase in the Company's net cash position. The increase in equity in net
income from associated companies was due primarily to improved profitability in
the Company's FRS joint venture. The negative influence of currency translation
on net income in 1997 was approximately $.21 per share compared to $.08 per
share in 1996.
General
The Company is involved in environmental clean-up activities and litigation
in connection with an existing plant location and former waste disposal sites
(see Note 13 to the consolidated financial statements). This involvement has not
historically had, nor is it 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 54-57% of the consolidated sales. In
the same period, these subsidiaries accounted for approximately 74-81% of
consolidated operating profit (see Note 11 to the consolidated financial
statements).
The Company is actively engaged in assessing and solving its Year 2000
problem. The Company completed a comprehensive assessment of all key systems
(both IT and non-IT systems). As to systems found to be non-Year 2000 compliant,
the Company initiated a program of systems replacements and updates. The Company
completed the majority of this program during 1998 and expects that the
remaining work will be completed in 1999. The systems work includes
Exhibit 13 Page 17
the appropriate level of testing to ensure Year 2000 compliance. Expenditures
(historical and future) to be incurred in addressing any Year 2000 problems in
the Company's systems are not expected to be material and are currently
estimated to be approximately $750 thousand, including amounts which may be
capitalized as long-term assets. In addition to this effort, the Company, with
the assistance of an outside consultant, is undertaking a second complete
assessment of all its IT and non-IT systems. This assessment will be completed
in 1999.
The Company is also actively seeking from its third-party providers written
assurances that each will be Year 2000 compliant on a timely basis. To date, the
Company has received affirmative responses from a majority of its third-party
providers and will continue to pursue responses from its material third-party
providers who have failed to respond to the initial inquiry. In addition, the
Company intends to seek assurances as to Year 2000 compliance from its key
customers and plans on contacting these customers in 1999. There can be no
assurance, however, that (i) the systems of the Company's material third-party
providers or key customers will be Year 2000 compliant and (ii) such
non-compliance will not have a material adverse effect on the Company.
The Company believes it is taking reasonable steps to prevent major
interruptions in its business resulting from Year 2000 related issues. However,
potential sources of risk specific to the Company are mainly external
(third-party providers and customers) and include, but are not limited to, the
inability of principal suppliers to be Year 2000 compliant. This could result in
delays in product deliveries from such suppliers. The Company is still
developing a reasonable worst case scenario as it relates to the Year 2000
problem and therefore has not developed a contingency plan to cover any
unforeseen problems. The Company plans to complete the worst case analysis and
its contingency plan in the first half 1999.
Euro
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency -- the euro. The euro will trade on
currency exchanges and may be used in business transactions. Beginning in
January 2002, new euro-denominated bills and coins will be issued, and legacy
currencies will be withdrawn from circulation. The Company's operating
subsidiaries affected by the euro conversion have established plans to address
the systems and business issues raised by the euro currency conversion. The
Company anticipates that the euro conversion will not have a material adverse
impact on its financial condition or results of operations.
Forward-Looking and Cautionary Statements
Except for historical information and discussions, statements contained in
this Annual Report may constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements
involve a number of risks, uncertainties and other factors that could cause
actual results to differ materially from those projected in such statements.
Such risks and uncertainties include, but are not limited to, significant
increase in raw material costs, worldwide economic and political conditions, and
foreign currency fluctuations that may affect worldwide results of operations.
Furthermore, the Company is subject to the same business cycles as those
experienced by steel, automobile, appliance or durable goods manufacturers.
Exhibit 13 Page 18
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
------------------------------------
(Dollars in thousands except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Net sales........................................................... $257,100 $241,534 $240,251
-------- -------- --------
Costs and expenses:
Cost of goods sold............................................... 141,459 134,943 138,199
Selling, administrative, and general expenses.................... 93,110 88,064 86,853
Repositioning, integration, and asset impairment charges (Note 2) 5,261 19,230
Gain on sale of European pulp and paper business (Note 12).......... (2,621)
-------- -------- --------
239,830 220,386 244,282
-------- -------- --------
Operating income (loss)............................................. 17,270 21,148 (4,031)
Other income, net (Note 1).......................................... 1,116 1,805 1,508
Litigation charge (Note 13)......................................... (2,000)
Interest expense.................................................... (2,151) (1,547) (1,906)
Interest income..................................................... 562 329 432
-------- -------- --------
Income (loss) before taxes.......................................... 16,797 19,735 (3,997)
Taxes on income..................................................... 6,719 7,893 466
-------- -------- --------
10,078 11,842 (4,463)
Equity in net income of associated companies........................ 961 1,161 480
Impairment charge on equity investment (Note 2)..................... (3,445)
Minority interest in net income of subsidiaries..................... (389) (392) (171)
-------- -------- --------
Net income (loss)................................................... $ 10,650 $ 12,611 $ (7,599)
======== ======== =========
Per share data (Note 10):
Net income (loss)-basic.......................................... $1.21 $1.45 $(.88)
Net income (loss)-diluted........................................ 1.20 1.45 (.88)
Dividends........................................................ .74 .71 .69
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Exhibit 13 Page 19
CONSOLIDATED BALANCE SHEET
December 31,
------------------------
(Dollars in thousands except per share amounts) 1998 1997
- ----------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (Note 1)................................... $ 10,213 $ 18,416
Accounts receivable, less allowances for doubtful accounts
of $2,004 in 1998 and $1,085 in 1997 52,448 48,625
Inventories (Notes 1 and 4).......................................... 24,517 21,681
Deferred income taxes (Note 6)....................................... 4,828 3,460
Prepaid expenses and other current assets............................ 4,062 3,675
-------- --------
Total current assets.......................................... 96,068 95,857
Investments in associated companies (Notes 1 and 3)..................... 5,280 4,925
Property, plant, and equipment, net (Notes 1 and 5)..................... 49,622 40,654
Intangible assets (Note 1).............................................. 21,366 14,500
Deferred income taxes (Note 6).......................................... 10,794 11,359
Other noncurrent assets (Notes 1 and 7)................................. 6,773 5,168
-------- --------
Total assets.............................................. $189,903 $172,463
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings and current portion of long-term debt (Note 8) $ 1,420 $ --
Accounts payable..................................................... 26,135 22,871
Dividends payable.................................................... 1,690 1,570
Accrued compensation................................................. 9,967 9,723
Other current liabilities (Notes 2 and 7)............................ 11,220 13,595
-------- --------
Total current liabilities........................................ 50,432 47,759
Long-term debt (Note 8)................................................. 25,344 25,203
Deferred income taxes (Note 6).......................................... 3,896 3,752
Accrued postretirement benefits (Note 7)................................ 9,866 9,564
Other noncurrent liabilities (Notes 2 and 7)............................ 8,299 7,684
-------- --------
Total liabilities............................................. 97,837 93,962
-------- --------
Minority interest in equity of subsidiaries (Note 1).................... 8,331 3,525
-------- --------
Commitments and contingencies (Note 13).................................
Shareholders' equity (Note 9)
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....................................... 910 928
Retained earnings.................................................... 84,873 80,749
Unearned compensation................................................ -- (528)
Accumulated other comprehensive income (loss)........................ 582 (874)
-------- --------
96,029 89,939
Treasury stock, shares held at cost; 1998-770,059, 1997-943,552...... 12,294 14,963
-------- --------
Total shareholders' equity.................................... 83,735 74,976
-------- --------
Total liabilities and shareholders' equity................ $189,903 $172,463
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Exhibit 13 Page 20
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
---------------------------------
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss)................................................. $10,650 $12,611 $(7,599)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.................................................. 5,290 5,154 6,347
Amortization.................................................. 1,821 2,110 2,361
Equity in net income of associated companies.................. (961) (1,161) (480)
Minority interest in earnings of subsidiaries................. 389 392 171
Gain on sale of European pulp and paper business.............. (2,621)
Litigation charge............................................. 2,000
Deferred income taxes......................................... (145) 541 (248)
Deferred compensation and other postretirement benefits....... 1,396 1,649 952
Repositioning, integration, and asset impairment charges...... 5,261 24,455
Increase (decrease) in cash from changes in current assets and
current liabilities, net of acquisitions and divestitures:
Accounts receivable........................................... (2,684) (6,379) 305
Inventories................................................... (1,149) (1,868) 132
Prepaid expenses and other current assets..................... (1,879) (149) (148)
Accounts payable and accrued liabilities...................... (851) 6,248 3,148
Change in repositioning liabilities........................... (1,882) (4,426) (2,921)
Estimated taxes on income..................................... (2,675) 1,109 1,475
------- ------- -------
Net cash provided by operating activities................... 12,581 15,210 27,950
------- ------- -------
Cash flows from investing activities
Dividends from associated companies............................... 1,096 654 1,406
Investments in property, plant, equipment, and other assets....... (8,099) (5,580) (6,923)
Companies acquired................................................ (9,350)
Investments in and advances to associated companies............... (621) (779) (2,039)
Proceeds from sale of European pulp and paper business............ 3,548
Proceeds from sale of patent, production technology,
and other assets ............................................... 70 1,005 830
Other, net........................................................ 63 (280) 428
------- ------- -------
Net cash used in investing activities....................... (16,841) (1,432) (6,298)
------- ------- -------
Cash flows from financing activities
Net (decrease) increase in short-term borrowings.................. 1,078 (13,090) (7,438)
Long-term borrowings.............................................. 483 20,000
Repayment of long-term debt....................................... (4,289) (4,796)
Dividends paid.................................................... (6,526) (6,179) (5,936)
Treasury stock issued............................................. 1,588 937 979
Treasury stock acquired........................................... (1,587)
------- ------- -------
Net cash used in financing activities....................... (3,377) (2,621) (18,778)
------- ------- -------
Effect of exchange rate changes on cash........................... (566) (1,266) (1,579)
------- ------- -------
Net increase (decrease) in cash and cash equivalents............ (8,203) 9,891 1,295
Cash and cash equivalents at beginning of year.................. 18,416 8,525 7,230
------- ------- -------
Cash and cash equivalents at end of year........................ $10,213 $18,416 $ 8,525
======= ======= =======
Supplemental cash flow disclosures
Cash paid during the year for:
Income taxes.................................................... $ 5,059 $ 5,920 $ 5,497
Interest........................................................ 1,945 1,568 2,040
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Exhibit 13 Page 21
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated
Capital in other
(Dollars in thousands except Common excess of Retained Unearned comprehensive Treasury
per share amounts) stock par value earnings compensation income (loss) stock Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995........ $9,664 $ 780 $87,852 $(722) $11,556 $(15,915) $93,215
-------
Net loss......................... (7,599) (7,599)
Currency translation adjustments. (5,858) (5,858)
Minimum pension liability........ 89 89
-------
Comprehensive income........... (13,368)
Dividends ($.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
------ ----- ------- ---- ------ -------- -------
Balance at December 31, 1996........ 9,664 634 74,317 (459) 5,787 (16,377) 73,566
-------
Net income....................... 12,611 12,611
Currency translation adjustments. (6,683) (6,683)
Minimum pension liability........ 22 22
-------
Comprehensive income........... 5,950
-------
Dividends ($.71 per share)....... (6,179) (6,179)
Shares issued upon exercise
of options 35 532 567
Shares issued for employee
stock purchase plan 86 392 478
Restricted stock bonus........... 173 (332) 490 331
Amortization of restricted
stock bonus 263 263
------ ----- ------- ---- ------ -------- -------
Balance at December 31, 1997........ 9,664 928 80,749 (528) (874) (14,963) 74,976
-------
Net income....................... 10,650 10,650
Currency translation adjustments. 1,788 1,788
Minimum pension liability........ (332) (332)
-------
Comprehensive income........... 12,106
-------
Dividends ($.74 per share)....... (6,526) (6,526)
Shares issued upon exercise
of options (339) 1,574 1,235
Shares issued for employee
stock purchase plan 90 395 485
Restricted stock bonus........... 231 331 700 1,262
Amortization of restricted
stock bonus 197 197
------ ----- ------- ---- ------ -------- -------
Balance at December 31, 1998........ $9,664 $ 910 $84,873 $ -- $ 582 $(12,294) $83,735
====== ===== ======= ==== ====== ======== =======
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
Exhibit 13 Page 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. Investments in associated (less than
majority-owned) companies are accounted for under the equity method.
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.
Derivative financial instruments: The Company's utilization of derivative
financial instruments is substantially limited to the use of forward exchange
contracts to hedge foreign currency transactions and foreign exchange options to
reduce its exposure to changes in foreign exchange rates. The amount of any gain
or loss on derivative financial instruments was immaterial in 1998, 1997, and
1996. There are no contracts or options outstanding at December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
must be adopted by January 1, 2000, and will require the Company to recognize
all derivative instruments as either assets or liabilities on the balance sheet
and measure those instruments at fair value. Gains and losses on foreign
currency transactions and forward exchange contracts, to the extent they have
been effective as hedges, would continue to be recognized as they are now.
Adoption of SFAS No. 133 is not expected to have a material impact on the
Company's operating results or financial position.
Cash and cash equivalents: The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Inventories: Inventories are valued at the lower of cost or market value.
Cost of domestic inventories, except for those of the Coatings segment, are
determined using the last-in, first-out ("LIFO") method. Cost of foreign
subsidiaries and the domestic Coatings segment inventories are determined using
the first-in, first-out ("FIFO") method.
Property, plant, and equipment: Property, plant, and equipment are recorded
at cost. 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; and machinery and equipment, 3 to 15 years.
Expenditures for renewals and betterments which increase the estimated
useful life or capacity of the assets are capitalized; expenditures for repairs
and maintenance are expensed when incurred.
Intangible assets: Intangible assets consist of goodwill and other
intangibles 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, 1998 and 1997, accumulated amortization
amounted to $5,217 and $4,398, respectively.
Asset impairment: The Company periodically evaluates the carrying value of
its property, plant, and equipment and goodwill when events and circumstances
warrant such a review. Property, plant, and equipment and goodwill is considered
impaired when the anticipated undiscounted future cash flows from a logical
grouping of assets is less than the carrying value. In that event, the Company
recognizes a loss equal to the amount by which the carrying value exceeds the
fair market value of assets (less estimated costs to dispose, for assets to be
disposed of). See Note 2.
Revenue recognition: Sales are recorded primarily when products are shipped
to customers. License fees and royalties offset by miscellaneous expenses are
recorded when earned.
Research and development costs: Research and development costs are expensed
as incurred. Company sponsored research and development expenses during 1998,
1997, and 1996 were $9,550, $9,508, and $11,181, respectively.
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 the 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.
Exhibit 13 Page 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
contamination in the future.
Comprehensive income: In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income. The Company has presented the components of
comprehensive income in its Statement of Shareholders' Equity. The adoption of
SFAS No. 130 did not affect results of operations, financial position, or cash
flows. The accumulated currency translation adjustments and minimum pension
liability included in accumulated other comprehensive income were $1,580 and
$(998) at December 31, 1998, respectively, and $(208) and $(666) at December 31,
1997, respectively.
Segment information: In 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see Note 11).
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.
Reclassifications: Certain reclassifications of prior years' data have been
made to improve comparability.
Note 2 - Repositioning, Integration, and Asset Impairment Charges
In the fourth quarter of 1998, the Company announced and implemented a
repositioning and integration plan to better align its organizational structure
with market demands, improve operational performance and reduce costs, and
recorded a pre-tax charge of $5,261 ($2,882 after-tax and minority interest, or
$0.33 per share in connection therewith). The repositioning and integration
charge included workforce reductions (approximately 70 employees) in the
Company's U.S., South American and European operations and integration costs
associated with the closure of a leased facility as a result of the Company's
recent acquisition in Brazil (see Note 12).
The components of the 1998 pre-tax repositioning and integration charge
included severance and other benefit costs of $3,990 and early pension and
postemployment benefits of $1,271. During 1998, $965 of severance benefits was
paid to affected employees. The remaining termination benefits liability at
December 31, 1998 of $3,025 will be paid out during 1999. The liabilities for
early pension and postemployment benefits are included in the Company's pension
and postretirement benefits obligations (see Note 7).
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. In connection with
these plans, the Company recorded pre-tax charges of $24,455 ($16,912 after-tax,
or $1.96 per share) comprised of repositioning and asset impairment charges of
$19,230 and an impairment charge of $5,225 ($3,445 after-tax) related to an
equity investment.
Note 3 - Investments in Associated Companies
Summarized financial information of the associated companies (less than
majority-owned), in the aggregate, is as follows:
December 31,
-----------------------------
1998 1997 1996
- --------------------------------------------------------
Current assets........... $24,220 $21,922 $20,848
Noncurrent assets........ 6,084 4,484 5,263
Current liabilities...... 13,772 11,994 12,647
Noncurrent liabilities... 3,761 3,395 2,763
Year Ended December 31,
-----------------------------
1998 1997 1996
- --------------------------------------------------------
Net sales................ $50,542 $54,262 $53,481
Gross margin............. 18,893 19,683 18,070
Operating income......... 5,963 6,089 3,412
Net income............... 2,367 2,662 1,252
Note 4 - Inventories
Total inventories are comprised of:
December 31,
--------------------
1998 1997
- --------------------------------------------------------
Raw materials and supplies......... $12,616 $10,316
Work in process and finished goods. 11,901 11,365
------- -------
$24,517 $21,681
======= =======
Inventories valued under the LIFO method amounted to $6,621 and $6,988 at
December 31, 1998 and 1997, respectively. The estimated replacement costs for
these inventories using the FIFO method were approximately $6,867 and $7,148,
respectively.
Exhibit 13 Page 24
Note 5 - Property, Plant, and Equipment
Property, plant, and equipment is comprised of:
December 31,
---------------------
1998 1997
- --------------------------------------------------------
Land ............................. $ 5,858 $ 5,751
Building and improvements......... 37,711 31,523
Machinery and equipment........... 65,818 58,532
Construction in progress ........ 2,576 1,213
-------- -------
111,963 97,019
Less accumulated depreciation..... 62,341 56,365
-------- -------
$ 49,622 $40,654
======== =======
Note 6 - Taxes on Income
Taxes on income consist of the following:
Year Ended December 31,
1998 1997 1996
- --------------------------------------------------------
Current
Federal............... $ 1,294 $ 557 $(3,838)
State................. 145 155 193
Foreign............... 5,425 6,640 4,359
------- ----- -------
6,864 7,352 714
Deferred
Federal............... (1,016) (1,294) (488)
Foreign............... 871 1,835 240
------- ----- -------
Total.................... $ 6,719 $ 7,893 $ 466
======= ======= =======
Total deferred tax assets and liabilities are comprised of the following at
December 31:
1998 1997
------------------------ ------------------------
Non- Non-
Current current Current current
- --------------------------------------------------------------------------------
Retirement benefits....... $ 35 $ 251
Allowance for doubtful
accounts................. 307 369
FRS impairment............ $ 2,192 $ 2,162
Insurance and litigation
reserves................. 1,372 1,175
Postretirement benefits... 3,027 3,038
Supplemental retirement
benefits................. 733 682
Performance incentives.... 1,314 431 797 663
Alternative minimum
tax carryforward......... 968 968
Repositioning charges..... 1,800 2,873 868 3,498
Operating loss
carryforward............. 3,844 3,146
Other..................... 570 348
Valuation allowance...... (3,844) (3,146)
------ ------- ------ -------
Total deferred tax assets. $4,828 $10,794 $3,460 $11,359
====== ======= ====== =======
Depreciation.............. $ 2,773 $2,732
Sale of European pulp
and paper business...... 916 916
Other..................... 207 104
------- -------
Total deferred tax
liabilities.............. $ 3,896 $ 3,752
======= =======
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:
1998 1997 1996
- --------------------------------------------------------------------------------
Income tax (benefit)
provision at the Federal
statutory tax rate.................. $5,833 $6,710 $(1,359)
State income tax
provisions, net..................... 96 102 54
Non-deductible
entertainment and
business meal expense............... 206 214 200
Foreign taxes on earnings
at rates different from the
Federal statutory rate.............. 197 833 1,280
Miscellaneous items, net.............. 387 34 291
------ ------ -------
Taxes on income....................... $6,719 $7,893 $ 466
====== ====== =======
At December 31, 1998, the Company has net operating loss carryforwards of
$11,813, of which $946 expire between 1999 and 2003. There is no time limit for
the remaining net operating loss carryforwards of $10,867. Due to the
uncertainty of the realization of these deferred tax assets, the Company has
established a valuation allowance against these carryforward benefits.
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, 1998 was
approximately $85,000. Any income tax liability which might result from ultimate
remittance of these earnings is expected to be substantially offset by foreign
tax credits.
Note 7 - Pension and Other Postretirement Benefits
The Company maintains various noncontributory retirement plans, the largest
of which is in the U.S., covering substantially all of its employees in the U.S.
and certain other countries. The plans of the Company's subsidiaries in the
Netherlands and in the United Kingdom are subject to the provision of SFAS No.
87, "Employers' Accounting for Pensions." 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.
Exhibit 13 Page 25
The following table shows the components of pension costs for the periods
indicated:
1998 1997 1996
- -------------------------------------------------------
Service cost............... $ 1,608 $ 1,425 $ 1,305
Interest cost.............. 3,613 3,376 3,347
Expected return
on plan assets........... (4,416) (4,124) (3,858)
Other amortization, net.... (387) (454) (373)
------- ------- -------
Net pension cost of plans
subject to SFAS No. 87... 418 223 421
Early pension benefits
(Note 2)................. 965
------- ------- -------
Net pension cost of plans
subject to SFAS No. 87 1,383 223 421
Pension costs of plans not
subject to SFAS No. 87 243 179 274
------- ------- -------
Net pension costs.......... $ 1,626 $ 402 $ 695
======= ======= =======
The U.S. defined benefit pension plan is the largest plan. The significant
assumptions for the U.S. plan were as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Discount rate for projected benefit obligation 6.75% 7.25% 7.375%
Assumed long-term rate 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 which are consistent with (but not
identical to) those of the U.S. plan.
The Company has postretirement benefit plans that provide medical and life
insurance benefits for certain retired employees of the Company. Both the
medical and life insurance plans are currently unfunded.
The following table shows the components of postretirement costs for the periods
indicated:
1998 1997 1996
- --------------------------------------------------------------------------------
Service cost............................ $ 100 $ 72 $ 77
Interest cost........................... 622 642 571
------ ---- ----
Net periodic postretirement benefit cost 722 714 648
Special income item..................... 306
------ ---- ----
Net periodic postretirement benefit cost $1,028 $714 $648
====== ==== ====
The following table shows the Company plans' funded status reconciled with
amounts reported in the consolidated balance sheet, as of December 31:
Other
postretirement
Pension benefits benefits
----------------------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation
at beginning of year........... $50,727 $50,196 $ 9,114 $ 8,974
Service cost..................... 1,608 1,425 100 72
Interest cost.................... 3,613 3,377 622 642
Amendments....................... 3,717 306
Translation difference........... 955 (1,764)
Actuarial loss................... 5,709 481 158 155
Benefits paid.................... (2,811) (3,012) (725) (729)
Other............................ (47) 24
------- ------- ------- -------
Benefit obligation
at end of year................. 63,471 50,727 9,575 9,114
Change in plan assets
Fair value of plan assets
at beginning of year........... 53,041 51,336
Actual return on plan assets.... 5,348 5,100
Employer contribution............ 1,709 1,544 725 729
Plan participants' contributions. 58 44
Translation difference........... 967 (1,971)
Benefits paid.................... (2,811) (3,012) (725) (729)
------- ------- ------- -------
Fair value of plan assets
at end of year.................. 58,312 53,041
Funded status.................... (5,159) 2,314 (9,575) (9,114)
Unrecognized transition asset.... (2,279) (2,625)
Unrecognized gain/(loss)......... 1,503 (5,300) (291) (450)
Unrecognized prior service cost.. 3,918 3,073
------- ------- ------- -------
Net amount recognized............ $(2,017) $(2,538) $(9,866) $(9,564)
------- ------- ======= =======
Amounts recognized in the
statement of financial
position consist of:
Prepaid benefit cost.......... 3,400 1,823
Accrued benefit obligation.... (6,415) (5,027)
Accumulated other
comprehensive income........ 998 666
------- -------
Net amount recognized............ $(2,017) $(2,538)
======= =======
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $9,589, $8,446, and $2,874, respectively, as of
December 31, 1998 and $4,309, $4,183, and $0 respectively, as of December 31,
1997.
Exhibit 13 Page 26
The discount rate used in determining the accumulated postretirement
benefit obligation was 6.75% and 7.25% in 1998 and 1997, respectively.
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 7.8% in 1998, gradually decreasing to 5.5%
over 9 years. A 1% increase in the health care cost trend rate would increase
total service and interest cost for 1998 by $34 and the accumulated
postretirement benefit obligation as of December 31, 1998 by $547. A 1% decrease
in the health care cost trend rate would decrease total service and interest
cost for 1998 by $30 and the accumulated postretirement benefit obligation as of
December 31, 1998 by $480.
The Company maintains a plan under which supplemental retirement benefits
are provided to certain officers. 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 $411, $291, and $262 in 1998, 1997, and
1996, respectively, representing the annual accrued benefits under this plan.
Profit sharing plan: The Company also maintains a qualified profit sharing
plan covering substantially all domestic employees other than those who are
compensated on a commission basis. Contributions were $310, $295, and $405 for
1998, 1997, and 1996, respectively.
Note 8 - Long-term Debt
Long-term debt consisted of the following:
December 31,
---------------------------
1998 1997
- -----------------------------------------------------------------------
6.98% Senior unsecured notes due 2007..... $20,000 $20,000
Industrial development authority
monthly floating rate (3.5% at
December 31, 1998) demand
bonds maturing 2014...................... 5,000 5,000
Other debt obligations.................... 686 203
------- -------
25,686 25,203
Less current portion...................... 342
------- -------
$25,344 $25,203
======= =======
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 on long-term debt are due as follows:
$342 in 1999, $0 in 2000, and $2,857 in 2001, 2002, and 2003.
At December 31, 1998, the Company had outstanding short-term borrowings
with banks under lines of credit in the aggregate of $1,078. There were no
outstanding short-term borrowings at December 31, 1997.
The Company 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 the time. There were no
outstanding borrowings under this line of credit at December 31, 1998 or 1997.
At December 31, 1998 and 1997, the values at which the financial
instruments are recorded are not materially different from their fair market
value.
Note 9 - Shareholders' Equity
Holders of record of the Company's common stock for a period of 36
consecutive calendar months or less are entitled to 1 vote per share of common
stock. Holders of record of the Company's common stock for a period greater than
36 consecutive calendar months are entitled to 10 votes per share of common
stock.
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, 27,538 shares, 26,490
shares, and 31,193 shares were issued from treasury in 1998, 1997, and 1996,
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, 1998, 105,035 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
Exhibit 13 Page 27
has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-based Compensation." Accordingly, no compensation expense has been
recognized for the stock option plans. Had compensation cost been determined
based on the fair value at grant date for awards in 1998, 1997, and 1996
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1998 1997 1996
- --------------------------------------------------------------------------------
Net income (loss)- as reported......... $10,650 $12,611 $(7,599)
Net income (loss)- pro forma........... 10,304 12,567 (8,139)
Net income (loss) per share-
as reported (diluted)................ $1.20 $1.45 $(.88)
Net income (loss) per share-
pro forma (diluted).................. 1.16 1.45 (.95)
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:
1998 1997 1996
- --------------------------------------------------------
Dividend yield............. 3.9% 3.9% 3.9%
Expected volatility........ 22.7% 24.5% 22.5%
Risk-free interest rate.... 5.09% 5.65% 6.35%
Expected life (years)...... 9 8 8
The table below summarizes transactions in the plan during 1998, 1997, and
1996.
1998 1997 1996
------------------------- -------------------- -----------
Weighted Weighted
Average Average
Number Exercise Number Exercise Number
of Shares Price of Shares Price of Shares
- -----------------------------------------------------------------------------------------------
Options outstanding at January 1, 921,999 $17.03 1,008,129 $16.83 894,854
Options granted 155,400 17.19 62,530 18.24 290,070
Options exercised (97,994) 12.89 (32,768) 14.71 (48,678)
Options expired (36,142) 21.02 (115,892) 15.82 (128,117)
------- --------- ---------
Options outstanding at December 31, 943,263 17.34 921,999 17.03 1,008,129
------- --------- ---------
Options exercisable at December 31, 760,352 $17.47 712,154 $17.30 689,934
------- ------ --------- ------ ---------
The following table summarizes information about stock options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
- ----------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Number Con- Average Number Average
Range of Outstanding tractual Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Life Price at 12/31/98 Prices
- ------------------------------------------------------ ------------------------
$12.10-$14.52 137,886 7 $13.46 123,380 $13.46
14.53- 16.94 251,109 8 15.72 136,704 15.02
16.95- 19.36 415,045 6 18.19 361,045 18.18
19.37- 21.78 69,223 3 20.77 69,223 20.77
21.79- 24.20 70,000 6 22.36 70,000 22.36
------- - -------
943,263 6 $17.34 760,352 $17.47
======= = ====== ======= ======
Options were exercised for cash, resulting in the issuance of 97,994 shares
in 1998 and 32,768 shares in 1997. Options to purchase 120,829 shares were
available at December 31, 1998 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 $870, $1,350, and $600 in 1998, 1997, and 1996,
respectively.
Shareholders of record on February 20, 1990 received 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.
Exhibit 13 Page 28
In the event that 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
("CEO") of which 5,000 shares were paid to him immediately and 15,000 shares
were delivered to him on October 2, 1996, October 2, 1997, and October 2, 1998.
The unearned compensation has been charged to selling, administrative, and
general expenses ("SA&G") over the three-year vesting period and was $197 in
1998 and $263 in 1997 and 1996.
In 1997, the Company granted an additional stock bonus of 35,000 shares of
the Company's common stock to its CEO. The shares were registered in his name
and were delivered over a two-year period based on the attainment of certain
profit-before-tax financial performance criteria. In 1998, 16,975 shares were
earned, and in 1997, 17,500 shares were earned, and $315 and $331 was charged to
SA&G in 1998 and 1997, respectively.
Additionally, the CEO earned a bonus of 50,000 shares of the Company's
common stock during 1997 based on the increase in the Company's earnings per
share. Approximately $900 was charged to SA&G during 1997.
Note 10 - Earnings Per Share
The following table summarizes earnings per share (EPS) calculations for
the years ended December 31, 1998, 1997, and 1996:
December 31,
-----------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Numerator for basic EPS
and diluted EPS -
net income (loss)........... $10,650 $12,611 $(7,599)
======= ======= =======
Denominator for basic EPS -
weighted average shares..... 8,789 8,673 8,587
Effect of dilutive securities:
Primarily employee
stock options............ 71 34 52
------- ------- -------
Denominator for diluted EPS -
weighted average shares and
assumed conversions 8,860 8,707 8,639
======= ======= =======
Basic EPS..................... $1.21 $1.45 $(.88)
Diluted EPS................... 1.20 1.45 (.88)
The following number of stock options are not included in dilutive earnings
per share since in each case the exercise price is greater than the market
price: 190, 226, and 587, in 1998, 1997, and 1996, respectively.
Note 11 - Business Segments
The Company's reportable segments are as follows:
(1) Metalworking process chemicals-produces products used as lubricants for
various heavy industrial and manufacturing applications.
(2) Coatings-produces temporary and permanent coatings for metal products and
chemical milling maskants.
(3) Other chemical products-primarily includes chemicals used in the
manufacturing of paper as well as other various chemical products.
Segment data includes direct segment costs as well as general operating
costs, including depreciation, allocated to each segment based on net sales.
Exhibit 13 Page 29
The table below presents information about the reported segments for the
years ending December 31:
Metalworking Other
Process Chemical
Chemicals Coatings Products Total
- --------------------------------------------------------------------------------
1998
Net sales........... $225,433 $19,434 $12,233 $257,100
Operating income.... 30,377 4,896 (843) 34,430
Depreciation........ 4,805 84 261 5,150
1997
Net sales........... $211,457 $15,662 $14,415 $241,534
Operating income.... 27,322 3,545 528 31,395
Depreciation........ 4,630 80 316 5,026
1996
Net sales........... $211,099 $10,846 $18,306 $240,251
Operating income.... 24,655 2,088 988 27,731
Depreciation........ 5,652 78 490 6,220
Operating income comprises revenue less related costs and expenses.
Nonoperating expenses primarily consist of general corporate expenses identified
as not being a cost of operation, interest expense, interest income, and license
fees from nonconsolidated associates.
A reconciliation of total segment operating income to total consolidated
income (loss) before taxes, for the years ended December 31, 1998, 1997, and
1996 is as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Total operating income for
reportable segments........... $34,430 $31,395 $27,731
Repositioning charges........... (5,261) (19,230)
Nonoperating charges............ (9,938) (10,630) (6,599)
Asset impairment charges
on equity investment.......... (3,445)
Depreciation and
amortization.................. (1,961) (2,238) (2,488)
Litigation charge............... (2,000)
Interest expense................ (2,151) (1,547) (1,906)
Interest income................. 562 329 432
Other income.................... 1,116 1,805 1,508
Gain on sale of European
pulp and paper business....... 2,621
------- ------- --------
Consolidated income (loss)
before taxes.................. $16,797 $19,735 $ (3,997)
======= ======= ========
The following is sales and long-lived asset information by geographic area
as of and for the years ended December 31:
1998 1997 1996
- ----------------------------------------------------------
Net sales
United States............ $119,624 $110,942 $104,135
Europe................... 93,097 94,898 101,676
Asia/Pacific............. 25,750 22,416 24,188
South America............ 18,629 13,278 10,252
-------- -------- --------
Consolidated............. $257,100 $241,534 $240,251
======== ======== ========
1998 1997 1996
- ----------------------------------------------------------
Long-lived assets
United States............ $28,417 $26,400 $26,834
Europe................... 30,341 26,828 29,618
Asia/Pacific............. 5,606 5,225 5,810
South America............ 18,677 6,794 7,516
------- ------- -------
Consolidated............. $83,041 $65,247 $69,778
======= ======= =======
Note 12 - Business Acquisitions and Divestitures
In 1998 and 1997, 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 the excess of cost over net
assets of acquired companies. 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, individually or in
the aggregate, were not material.
On June 25, 1998, the Company completed the formation of a majority-owned
joint venture in Brazil and small businesses in Italy and Venezuela for
approximately $9,350 of which goodwill comprises $5,500 and is being amortized
over 20 years. In addition to the initial contribution, certain earn out
provisions may require additional investments.
On August 7, 1997, the Company entered into an agreement with Asianol
Lubricants Ltd. for the creation of a joint venture in India. The Company owns
55% of the joint venture and made a cash investment of $153 during 1997.
On July 1, 1997, the Company completed the sale of its European pulp and
paper business for approximately $3,500 in cash.
Note 13 - Commitments and Contingencies
In 1996, Petrolite Corporation ("Petrolite"), filed a demand of arbitration
and a statement in support thereof with the American Arbitration Association in
St. Louis, Missouri. Petrolite asserted claims for negligent misrepresentation
and breach of contract arising out of a Technology Purchase Agreement (the
"Agreement") between Petrolite and the Company pursuant to which the Company
sold various assets, including certain patent rights, to Petrolite for a
purchase price of approximately $8,500 plus an obligation to pay royalties.
During 1998, the Company paid Petrolite an undisclosed amount not exceeding the
amount accrued in 1997, to resolve all disputes between them and terminate the
arbitration proceedings.
Exhibit 13 Page 30
A wholly owned non-operating 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 all
potential uninsured liabilities related to claims of which it is aware.
Effective October 31, 1997, the subsidiary's insurance carriers agreed to be
responsible for all damages and costs (including attorneys' fees) arising out of
all existing and future asbestos claims. At December 31, 1998 and 1997, the
subsidiary accrued approximately $50 to provide for anticipated damages and
costs incurred prior to October 31, 1997.
The Company has accrued for certain environmental investigatory and
noncapital remediation costs consistent with the policy set forth in Note 1. The
Company identified certain soil and groundwater contamination at AC Products,
Inc. ("ACP"), a wholly owned subsidiary. In coordination with the Santa Ana
California Regional Water Quality Board, ACP is remediating the contamination.
The Company believes that the potential uninsured liability associated with the
completion of the remediation effort ranges from $700 to $2,300, for which the
Company has accrued approximately $1,400.
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 $205 and $475 was accrued at December 31, 1998 and 1997,
respectively, to provide for such anticipated future environmental assessments
and remediation costs.
The Company is 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.
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, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Quaker
Chemical Corporation and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, 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.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 10, 1999
Exhibit 13 Page 31
ELEVEN-YEAR FINANCIAL SUMMARY
(Dollars in thousands except per share data and number of employees)
1998(1) 1997(2) 1996(3) 1995 1994(4)
- --------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales ............................................ $ 257,100 $ 241,534 $ 240,251 $ 227,038 $ 194,676
Income (loss) before taxes and cumulative effect
of change in accounting principle .................. 17,369 20,504 (7,133) 11,575 15,318
Cumulative effect of change in accounting
for postretirement benefits ........................
Net income (loss) .................................... 10,650 12,611 (7,599) 6,688 9,402
Per share(6)
Income (loss) before cumulative effect
of change in accounting principle .............. 1.21 1.45 (.88) .76 1.03
Cumulative effect of change in accounting
for postretirement benefits ....................
Net income (loss) basic, excluding special charges 1.54 1.41 1.08 .76 .99
Net income (loss) ................................. 1.21 1.45 (.88) .76 1.03
Dividends ......................................... .74 .71 .69 .68 .63 1/2
Financial Position
Current assets ....................................... 96,068 95,857 86,552 87,375 83,400
Current liabilities .................................. 50,432 47,759 64,034 60,868 42,754
Working capital ...................................... 45,636 48,098 22,518 26,507 40,646
Property, plant, and equipment, net .................. 49,622 40,654 43,960 56,309 51,694
Total assets ......................................... 189,903 172,463 165,608 185,408 170,172
Long-term debt ....................................... 25,344 25,203 5,182 9,300 12,207
Shareholders' equity ................................. 83,735 74,976 73,566 93,215 93,677
Other Data
Current ratio ........................................ 1.9/1 2.0/1 1.4/1 1.4/1 2.0/1
Capital expenditures ................................. 8,099 5,580 6,923 9,833 9,255
Net income (loss) as a percentage of net sales(7) .... 4.1% 5.2% (3.2)% 2.9% 4.8
Return on average shareholders' equity(7) ............ 13.4% 17.0% (9.1)% 7.2% 10.2
Shareholders' equity per share at end of year(6) ..... 9.41 8.60 8.53 10.76 10.62
Common stock per share price range(6):
High .............................................. 21 19 13/16 17 1/4 19 19 1/2
Low ............................................... 13 15 11 3/4 11 14 3/4
Number of shares outstanding at end of year(6) ....... 8,894 8,720 8,620 8,664 8,819
Number of employees at end of year:
Consolidated subsidiaries ......................... 923 871 835 870 743
Associated companies .............................. 266 250 232 235 212
ELEVEN-YEAR FINANCIAL SUMMARY (Continued)
(Dollars in thousands except per share data and number of employees)
1993(5) 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales ............................................ $ 195,004 $ 212,491 $ 191,051 $ 201,474 $ 181,660 $ 166,662
Income (loss) before taxes and cumulative effect
of change in accounting principle .................. (1,524) 19,045 16,888 22,580 19,647 18,939
Cumulative effect of change in accounting
for postretirement benefits ........................ (5,675)
Net income (loss) .................................... (1,758) 12,098 5,115 14,106 12,840 11,731
Per share(6)
Income (loss) before cumulative effect
of change in accounting principle .............. (.19) 1.33 1.20 1.51 1.35 1.21
Cumulative effect of change in accounting
for postretirement benefits .................... (.63)
Net income (loss) basic, excluding special charges .66 1.33 .57 1.51 1.35 1.21
Net income (loss) ................................. (.19) 1.33 .57 1.51 1.35 1.21
Dividends ......................................... .60 1/2 .57 .53 .47 .41 .37
Financial Position
Current assets ....................................... 84,387 85,567 82,725 84,833 75,427 69,326
Current liabilities .................................. 42,642 28,126 36,592 40,342 27,848 26,924
Working capital ...................................... 41,745 57,441 46,133 44,491 47,579 42,402
Property, plant, and equipment, net .................. 55,541 52,179 48,661 46,315 36,539 32,821
Total assets ......................................... 170,985 166,613 159,121 152,408 131,430 121,125
Long-term debt ....................................... 16,095 18,604 5,219 5,453 5,665 5,000
Shareholders' equity ................................. 91,383 101,642 98,898 99,113 90,440 82,884
Other Data
Current ratio ........................................ 2.0/1 3.0/1 2.3/1 2.1/1 2.7/1 2.6/1
Capital expenditures ................................. 8,960 7,226 8,420 12,663 7,553 5,295
Net income (loss) as a percentage of net sales(7) .... (0.9)% 5.7% 5.6% 7.0% 7.1% 7.0%
Return on average shareholders' equity(7) ............ (1.8)% 12.1% 10.9% 14.9% 14.8% 14.6%
Shareholders' equity per share at end of year(6) ..... 9.89 11.06 10.95 11.11 9.55 8.57
Common stock per share price range(6):
High .............................................. 24 5/8 26 22 1/4 19 1/4 15 5/8 16 1/8
Low ............................................... 14 1/4 18 3/4 15 12 12 1/2 11 3/8
Number of shares outstanding at end of year(6) ....... 9,242 9,188 9,028 8,921 9,473 9,669
Number of employees at end of year:
Consolidated subsidiaries ......................... 865 842 840 819 829 832
Associated companies .............................. 141 130 187 261 154 150
<FN>
(1) The results of operations for 1998 include net repositioning and integration
charges of $2,882, after-tax and minority interest, or $.33 per share.
Excluding these charges, net income for 1998 was $13,532, or $1.54 and $1.53
per basic and diluted share, respectively.
(2) The results of operations for 1997 include a gain on the sale of the
European pulp and paper business - $1,703 after-tax, or $.20 per share and a
litigation charge of $2,000 - $1,320 after-tax or $.16 per share. Excluding
these items, net income was $12,228, or $1.41 per share.
(3) 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.
(4) 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.
(5) 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.
(6) Restated to give retroactive effect to a three-for-two split in
1990.
(7) Calculated for 1991 using $10,790, which is the net income before the
cumulative effect of change in accounting principle
</FN>
Exhibit 13 Page 32-33
SUPPLEMENTAL FINANCIAL INFORMATION
Quarterly Results (unaudited)
(Dollars in thousands, except per share amounts)
First Second Third Fourth
- ------------------------------------------------------------------------------------------
1998
Net sales................................. $62,235 $65,355 $65,991 $63,519
Operating income(1)....................... 4,968 5,759 5,823 720
Net income(1) ............................ 2,894 3,470 3,555 731
Net income per share (basic).............. $.33 $.40 $.40 $.08
Net income per share (diluted)............ $.33 $.39 $.40 $.08
1997
Net sales................................. $58,543 $60,312 $58,687 $63,992
Operating income(2)....................... 3,872 6,799 5,065 5,412
Net income(3)............................. 2,567 4,657 3,319 2,068
Net income per share (basic and diluted).. $.30 $.54 $.38 $.23
<FN>
(1) The fourth quarter includes a $5,261 ($2,882 after-tax) repositioning and
integration charge.
(2) The second quarter includes a gain of $2,621 related to the sale of the
European pulp and paper business.
(3) The fourth quarter includes a $2,000 litigation charge.
</FN>
Stock Market and Related Security Holder Matters
The Company's common stock is listed on the New York Stock Exchange
("NYSE"). 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
reported by the NYSE, and the quarterly dividends declared as indicated.
Range of Quotations Dividends Declared
------------------------------------------- ------------------------
1998 1997 1998 1997
-------------------------------------------- ------------------------
High Low High Low
- -------------------------------------------------------------------------------------------------
First quarter..... $19 3/4 $16 1/2 $17 1/4 $15 $.18 $.17 1/2
Second quarter.... 21 17 11/16 17 3/8 15 1/2 .18 .17 1/2
Third quarter..... 19 3/4 15 7/16 18 3/4 15 3/4 .19 .18
Fourth quarter.... 18 7/16 13 19 13/16 17 .19 .18
As of January 15, 1999 there were 1,018 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, 1998 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.
Exhibit 13 Page 34