EXHIBIT 13
PORTIONS OF THE ANNUAL REPORT INCORPORATED BY REFERENCE
FINANCIAL REVIEW
- -------------------------------------------------------
QUAKER CHEMICAL CORPORATION 1993 ANNUAL REPORT
Consolidated Statement
of Operations ..................... 14
Consolidated Statement
of Cash Flows ....................... 15
Consolidated Balance Sheet .......... 16
Notes to Consolidated
Financial Statements ................ 18
Report of Independent
Accountants ......................... 26
Supplemental Financial
Information ......................... 27
Management's Discussion and
Analysis of Financial Condition and
Results of Operations ............... 30
Corporate Information ............... 32
13
Exhibit 13 Page
1
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
- -------------------------------------------------------------------------------
1993 1992(a) 1991(a)
- -------------------------------------------------------------------------------
Net sales............................ $195,004,000 $212,491,000 $191,051,000
Other income, net (Note 1)........... 1,421,000 904,000 1,237,000
------------ ------------ ------------
196,425,000 213,395,000 192,288,000
------------ ------------ ------------
Costs and expenses (Notes 1, 4
and 6):
Cost of goods sold................ 112,369,000 119,176,000 109,261,000
Selling, administrative and
general expenses............... 74,242,000 76,528,000 67,828,000
Repositioning charges (Note 2).... 11,900,000
------------ ------------ ------------
198,511,000 195,704,000 177,089,000
------------ ------------ ------------
Income (loss) from operations........ (2,086,000) 17,691,000 15,199,000
Interest expense..................... (1,467,000) (1,541,000) (1,756,000)
Interest income...................... 1,376,000 1,997,000 1,949,000
------------ ------------ ------------
Income (loss) before taxes........... (2,177,000) 18,147,000 15,392,000
Taxes on income (Note 5)............. 234,000 6,947,000 6,098,000
------------ ------------ ------------
(2,411,000) 11,200,000 9,294,000
Equity in net income of
associated companies (Note 1)..... 1,001,000 1,328,000 1,898,000
Minority interest in net income of
subsidiary........................ (348,000) (430,000) (402,000)
------------ ------------ ------------
Income (loss) before cumulative
effect of change in accounting
principle......................... (1,758,000) 12,098,000 10,790,000
Cumulative effect of change in
accounting for postretirement
benefits (Note 6)................. (5,675,000)
------------- ------------ ------------
Net income (loss)................. $ (1,758,000) $ 12,098,000 $ 5,115,000
============ ============ ============
Per share data (Note 1):
Income (loss) per share before
cumulative effect of change
in accounting principle........ $(.19) $1.33 $1.20
Cumulative effect of change in
accounting for postretirement
benefits (Note 6).............. (.63)
Net income (loss)................. (.19) 1.33 .57
Dividends......................... .60-1/2 .57 .53
- -------------------------------------------------------------------------------
(a) Restated for comparative purposes.
14
Exhibit 13 Page
2
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
1993 1992 1993
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $ (1,758,000) $ 12,098,000 $ 5,115,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation........................................ 6,545,000 6,427,000 5,188,000
Amortization........................................ 1,021,000 1,385,000 1,554,000
Equity in net income of associated companies........ (1,001,000) (1,328,000) (1,898,000)
Minority interest in earnings of subsidiary......... 348,000 430,000 402,000
Deferred taxes...................................... (491,000) 76,000 494,000
Cumulative effect of change in accounting principle. 5,675,000
Deferred compensation and other
postretirement benefits........................... 254,000 427,000 212,000
Repositioning charges, net.......................... 9,700,000
Other............................................... (181,000) 98,000 512,000
Change in current assets and liabilities
Accounts receivable............................... 1,490,000 82,000 939,000
Inventories....................................... 444,000 1,352,000 1,369,000
Prepaid expenses (including taxes) and other
current assets.................................. (3,331,000) 621,000 (3,129,000)
Accounts payable and accrued liabilities............ 4,018,000 3,047,000 (6,378,000)
Estimated taxes on income........................... (261,000) (983,000) 177,000
------------ ------------ -----------
Net cash provided by operating activities... 16,797,000 23,732,000 10,232,000
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Short-term investments.............................. (854,000) 4,097,000 4,999,000
Dividends from associated companies................. 785,000 314,000 860,000
Purchase of property, plant and equipment........... (8,960,000) (7,226,000) (8,420,000)
Companies acquired excluding cash................... (11,271,000) (8,270,000)
Purchase of patent, production technology and
other related assets.............................. (854,000) (4,400,000) (2,500,000)
Proceeds from sale of patent, production technology
and other related assets.......................... 6,500,000
Proceeds from the sale of assets.................... 746,000 1,254,000
Other............................................... (332,000) (508,000) 17,000
------------ ------------ -----------
Net cash used in investing activities........ (14,240,000) (14,739,000) (5,044,000)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term debt incurred............................ 2,740,000 1,487,000 2,629,000
Long-term debt and capital lease incurred........... 1,102,000 15,727,000
Repayment of short-term debt........................ (2,434,000) (15,164,000)
Repayment of long-term debt and capital lease....... (2,997,000) (2,104,000) (234,000)
Dividends paid...................................... (5,525,000) (5,096,000) (4,768,000)
Treasury stock issued............................... 971,000 2,451,000 1,297,000
Other............................................... (17,000) (126,000) (151,000)
------------ ------------ -----------
Net cash used in financing activities........ (6,160,000) (2,825,000) (1,227,000)
------------ ------------ -----------
Effect of exchange rate changes on cash............. (1,477,000) (2,828,000) (977,000)
------------ ------------ -----------
Net (decrease) increase in cash
and cash equivalents.............................. (5,080,000) 3,340,000 2,984,000
Cash and cash equivalents at beginning of year........ 24,373,000 21,033,000 18,049,000
------------ ------------ -----------
Cash and cash equivalents at end of year.............. $ 19,293,000 $ 24,373,000 $21,033,000
============ ============ ===========
Supplemental cash flow information
Cash paid for income taxes and interest was as follows:
Income taxes........................................ $ 5,535,000 $ 6,775,000 $ 9,068,000
Interest............................................ 1,448,000 1,207,000 1,988,000
In conjunction with an acquisition in 1993, the company assumed $1,295,000
in debt of which $646,000 was current.
- ----------------------------------------------------------------------------------------------------
15
Exhibit 13 Page
3
CONSOLIDATED BALANCE SHEET
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
ASSETS 1993 1992
- -------------------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents (Note 1)........................................ $ 19,293,000 $ 24,373,000
Short-term investments, at cost which approximates market................. 1,000,000 135,000
Accounts receivable, less allowances for doubtful accounts of $1,244,000..
in 1993 and $834,000 in 1992............................................ 37,108,000 37,525,000
Inventories (Notes 1 and 4)
Work in process and finished goods...................................... 9,278,000 9,205,000
Raw materials and supplies.............................................. 8,269,000 8,531,000
Deferred taxes (Note 5)................................................... 2,857,000 445,000
Prepaid expenses and other current assets................................. 6,582,000 5,353,000
------------ ------------
Total current assets.................................................... 84,387,000 85,567,000
------------ ------------
Investments in associated companies, at equity (Notes 1 and 3)............... 6,224,000 6,001,000
------------ ------------
Property, plant and equipment, at cost (Notes 1 and 3)
Land...................................................................... 6,440,000 6,042,000
Buildings and improvements................................................ 35,590,000 32,873,000
Machinery and equipment................................................... 63,066,000 57,306,000
Construction in progress.................................................. 1,980,000 1,477,000
------------ ------------
107,076,000 97,698,000
Less accumulated depreciation............................................. 50,525,000 45,519,000
------------ ------------
56,551,000 52,179,000
------------ ------------
Excess of cost over net assets of acquired companies, net (Note 1)........... 14,472,000 9,529,000
Deferred taxes (Note 5)...................................................... 4,788,000 4,358,000
Other noncurrent assets (Note 1)............................................. 4,563,000 8,979,000
------------ ------------
23,823,000 22,866,000
------------ ------------
$170,985,000 $166,613,000
============ ============
- -------------------------------------------------------------------------------------------------------------
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Exhibit 13 Page
4
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1993 1992
- ------------------------------------------------------------------------------------------------------
Current liabilities
Short-term borrowings and current portions of long-term
debt and capital leases (Note 7).................................. $ 4,953,000 $ 2,893,000
Accounts payable.................................................... 18,117,000 13,954,000
Dividends payable................................................... 1,432,000 1,379,000
Accrued liabilities
Compensation...................................................... 5,251,000 5,051,000
Other (Note 2).................................................... 12,476,000 4,130,000
Estimated taxes on income (Note 5).................................. 413,000 719,000
------------ ------------
Total current liabilities......................................... 42,642,000 28,126,000
------------ ------------
Long-term debt and capital leases (Note 7)............................. 16,095,000 18,604,000
Deferred taxes on income (Note 5)...................................... 3,043,000 3,302,000
Deferred foreign investment incentive benefits......................... 942,000 1,105,000
Accrued postretirement benefits (Note 6)............................... 8,968,000 8,898,000
Other noncurrent liabilities (Note 2).................................. 5,898,000 3,216,000
------------ ------------
Total noncurrent liabilities...................................... 34,946,000 35,125,000
------------ ------------
77,588,000 63,251,000
------------ ------------
Commitments and contingencies (Notes 1 and 11).........................
Minority interest in equity of subsidiary (Note 1)..................... 2,014,000 1,720,000
------------ ------------
Shareholders' equity (Note 8)
Common stock, $1 par value; authorized 30,000,000 shares;
issued (including treasury shares) 9,664,009 shares............... 9,664,000 9,664,000
Capital in excess of par value...................................... 529,000 301,000
Retained earnings................................................... 83,498,000 90,834,000
Equity adjustment from foreign currency translation................. 3,577,000 7,471,000
------------ ------------
97,268,000 108,270,000
Treasury stock, shares held at cost; 1993-421,842, 1992-475,838..... 5,885,000 6,628,000
------------ ------------
91,383,000 101,642,000
------------ ------------
$170,985,000 $166,613,000
============ ============
- -------------------------------------------------------------------------------------------------------------
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Exhibit 13 Page
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All majority owned subsidiaries are included in the consolidated financial
statements, with appropriate elimination of intercompany balances and
transactions. The consolidated balance sheet includes total assets of
$79,651,000 in 1993 and $75,402,000 in 1992 and total liabilities of
$19,221,000 in 1993 and $14,377,000 in 1992 of international subsidiaries.
The consolidated statement of operations includes net income of international
subsidiaries of $3,729,000 in 1993, $9,391,000 in 1992 and $7,812,000 in 1991.
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 international subsidiaries and associated
companies, except for Mexico and Venezuela prior to 1992, are translated into
U.S. dollars at the respective rates of exchange prevailing at the end of the
year. Income accounts are translated at average exchange rates prevailing
during the year. Translation adjustments resulting from this process, except
for Mexico and Venezuela prior to 1992, 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) method.
Inventories of subsidiaries are valued primarily at first-in, first-out cost,
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, remaining
life of the lease. At December 31, 1993 and 1992, respectively, $1,301,000
and $727,000 of leased equipment and accumulated depreciation thereon in the
amount $520,000 in 1993 and $214,000 in 1992 are included in the property,
plant and equipment accounts.
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 income.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES AND OTHER NONCURRENT
ASSETS
Excess of cost over net assets of acquired companies and other noncurrent
assets consist primarily of intangibles arising from acquisitions. They 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, 1993 and 1992,
accumulated amortization of the excess of cost over net assets of acquired
companies amounted to $1,621,000 and $1,215,000, 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 cost of pension and postretirement benefits
other than pensions.
REVENUE RECOGNITION
Sales are recorded primarily when products are shipped to customers.
Other income, principally license fees offset by miscellaneous expenses, is
recorded when earned. License fees recorded by the company from its
nonconsolidated international associates amounted to $1,178,000, $1,135,000
and $1,313,000 in 1993, 1992 and 1991, respectively. Fees received from
independent licensees are immaterial.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Company
sponsored research and development expenses during 1993, 1992 and 1991 were
$11,037,000, $11,134,000, and $10,000,000, 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 and of
short-term investments and trade receivables. The company invests temporary
and excess cash in money market securities and instruments in U.S. and foreign
commercial banks having maturities typically within 90 days. The company has
not experienced losses from the aforementioned investments.
The company sells its principal products to most of 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.
18
Exhibit 13 Page
6
NOTE 2--REPOSITIONING CHARGES
During 1993, the company implemented a broad scope program of changes
focused on reducing the company's operating costs to compete more effectively
in today's environment. This program includes consolidation and closure of
certain of the company's facilities, selected workforce reductions, and
planned divestitures of nonstrategic business operations. The consolidated
statement of operations for 1993 includes charges before income taxes of
$11,900,000 ($7,854,000 after tax, or $.85 per share) relating to this
program. Of the total, $5,200,000 relates to the cost of the workforce
reductions. The remaining $6,700,000 is to provide for the closure of a
manufacturing facility in Pomona, California, consolidation of European
manufacturing operations, and the divestiture of nonstrategic business
operations. As of December 31, 1993, $7,600,000 and $2,100,000 remained in
accrued liabilities and other noncurrent liabilities, respectively. Of the
$7,600,000, approximately $3,700,000 represents anticipated cash outlays in
1994.
NOTE 3--ASSOCIATED COMPANIES
Summarized financial information of the associated companies (less than
majority owned), in the aggregate, for 1993, 1992 and 1991 is as follows:
(Dollars in thousands)
----------------------------------------
1993 1992(a) 1991(a)
----------------------------------------
Current assets................ $22,515 $21,841 $30,173
Noncurrent assets............. 2,643 2,238 5,897
Current liabilities........... 12,888 11,432 13,115
Noncurrent liabilities........ 950 768 1,948
Net sales..................... $52,028 $44,244 $61,471
Operating income (b).......... 5,654 5,689 7,866
Income before taxes........... 4,287 5,183 6,966
Net income.................... 2,165 2,676 3,999
(a) Restated for comparative purposes.
(b) Net sales, less costs and expenses.
Operations of Alpine Labs are included since its formation on November 1,
1990 to February 12, 1992 when it became a wholly-owned subsidiary. Quaker
Chemical, S.A. is excluded from the summary after January 1, 1992 when it
became a wholly-owned subsidiary (see Note 10).
NOTE 4--INVENTORIES
Inventories valued under the LIFO method amounted to $4,879,000 and
$4,858,000 at December 31, 1993 and 1992, respectively. The estimated
replacement costs for these inventories using the first-in, first-out method
were approximately $6,115,000 and $6,080,000, respectively.
19
Exhibit 13 Page
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 5--TAXES ON INCOME
Taxes on income included in the consolidated statement of operations
consist of the following:
- --------------------------------------------------------------------------------------------------------
Federal Foreign State Total
- --------------------------------------------------------------------------------------------------------
1993
CURRENTLY PAYABLE (RECOVERABLE)....... $ (598,000) $4,123,000 $144,000 $3,669,000
TAX EFFECT OF TEMPORARY DIFFERENCES
CURRENT............................ (2,310,000) (634,000) (2,944,000)
NONCURRENT......................... (478,000) (13,000) (491,000)
----------- ---------- -------- ----------
$(3,386,000) $3,476,000 $144,000 $ 234,000
=========== ========== ======== ==========
1992
Currently payable..................... $ 451,000 $6,213,000 $208,000 $6,872,000
Tax effect of temporary differences
Current............................ (1,000) (1,000)
Noncurrent......................... 453,000 (377,000) 76,000
----------- ---------- -------- ----------
$ 903,000 $5,836,000 $208,000 $6,947,000
=========== ========== ======== ==========
1991
Currently payable .................... $ 59,000 $5,257,000 $238,000 $5,554,000
Tax effect of temporary differences
Current............................ 416,000 (31,000) 385,000
Noncurrent......................... 180,000 (59,000) 38,000 159,000
----------- ---------- -------- ----------
$ 655,000 $5,198,000 $245,000 $6,098,000
=========== ========== ======== ==========
Total deferred tax assets and liabilities are comprised of the following
at December 31:
---------------------------------------------------------------
1993 1992
---------------------------------------------------------------
CURRENT DEFERRED Current Deferred
---------------------------------------------------------------
Retirement benefits.................. $ 212,000 $326,000
Postretirement benefits.............. $3,049,000 $3,025,000
Supplemental retirement benefits..... 530,000 483,000
Repositioning charges................ 2,252,000 726,000
Long-term performance incentives..... 189,000
Other................................ 393,000 483,000 119,000 661,000
----------- ---------- -------- ----------
Total deferred tax assets............ $2,857,000 $4,788,000 $445,000 $4,358,000
=========== ========== ======== ==========
Depreciation......................... $2,844,000 $2,839,000
Other................................ 199,000 463,000
---------- ----------
Total deferred tax liabilities....... $3,043,000 $3,302,000
========== ==========
The following is a reconciliation of income taxes at the Federal statutory
rate with income taxes recorded by the company:
-------------------------------------------------
1993 1992 1991
-------------------------------------------------
Income tax provision (benefit) at the
Federal statutory tax rate....................... $(740,000) $6,170,000 $5,233,000
State income tax provisions, net.................... 98,000 137,000 162,000
Foreign taxes on earnings at rates different than
the Federal statutory rate....................... 723,000 368,000 469,000
Miscellaneous items, net............................ 153,000 272,000 234,000
--------- ---------- ----------
Taxes on income..................................... $ 234,000 $6,947,000 $6,098,000
========= ========== ==========
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Exhibit 13 Page
8
United States income taxes have not been provided on the undistributed
earnings of international subsidiaries since it is the company's intention to
continue to reinvest these earnings abroad for working capital and expansion
needs. The amount of such undistributed earnings at December 31, 1993 was
approximately $47,000,000. Any income tax liability which might result from
ultimate remittance of these earnings is expected to be substantially offset
by foreign tax credits. Effective January 1, 1991, the company adopted the
provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109)
"Accounting for Income Taxes." The cumulative effect of adoption of SFAS 109
was not material.
NOTE 6--EMPLOYEE BENEFITS
PENSION PLANS
The company maintains various noncontributory retirement plans covering
substantially all of the employees of the parent company and its domestic
subsidiaries. The benefits for these plans are based primarily on years of
service and employees' pay near retirement.
The plans of international subsidiaries are, for the most part, either
fully insured or integrated with the local governments' plans and are not
subject to the provisions of the Statement of Financial Accounting Standards
No. 87 (SFAS 87), "Employers' Accounting for Pensions."
The pension costs for all plans include the following components:
-----------------------------------------------
1993 1992 1991
-----------------------------------------------
Service cost--benefits earned during the period.... $ 809,000 $ 834,000 $ 791,000
Interest cost on projected benefit obligation...... 2,335,000 2,251,000 2,158,000
Return on plan assets
--actual........................................ (2,820,000) (3,690,000) (4,551,000)
--deferred gain................................. 98,000 1,254,000 2,426,000
Other amortization--net............................ (110,000) (103,000) (111,000)
----------- ----------- -----------
Net pension costs of plans subject to SFAS 87...... 312,000 546,000 713,000
Pension costs of plans not subject to SFAS 87...... 904,000 872,000 828,000
----------- ----------- -----------
Total pension costs................................ $ 1,216,000 $ 1,418,000 $ 1,541,000
=========== =========== ===========
The following table summarizes the funded status of the company's defined
benefit pension plans and the related amounts recognized in the company's
consolidated balance sheets as of December 31:
---------------------------------
1993 1992
---------------------------------
Actuarial present value of:
Vested benefit obligation..................................... $29,542,000 $26,705,000
=========== ===========
Accumulated benefit obligation................................ $29,729,000 $26,831,000
=========== ===========
Projected benefit obligation..................................... $32,543,000 $30,025,000
Plan assets at market value...................................... 30,677,000 29,143,000
----------- -----------
Plan assets less than projected benefit obligation............... (1,866,000) (882,000)
Unrecognized cumulative net (gain) loss.......................... 222,000 (933,000)
Unrecognized prior service cost related to adjustment of
retirees' benefits and benefit update......................... 1,963,000 2,105,000
Unrecognized net gain at date of initial application of SFAS 87.. (2,425,000) (2,669,000)
----------- -----------
Accrued pension costs............................................ $(2,106,000) $(2,379,000)
=========== ===========
The significant assumptions for the plans were as follows:
---------------------------------------
1993 1992 1991
---------------------------------------
Discount rate for projected benefit obligation........... 7.5% 8.0% 8.25%
Assumed long-term rates of compensation increases........ 5.5% 6.0% 6.5%
Long-term rate of return on plan assets.................. 9.5% 9.5% 9.5%
21
Exhibit 13 Page
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
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. No
contributions were made in 1993. Contributions for 1992 and 1991 were
$310,000 and $520,000, respectively.
OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Effective January 1, 1991, the company adopted the provisions of Statement
of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting
for Postretirement Benefits Other Than Pensions," for its U.S. postretirement
benefit plans. The plans 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 for 1993, 1992 and
1991 are as follows:
--------------------------------
1993 1992 1991
--------------------------------
Service cost--benefits attributed to
service during the period............... $ 79,000 $ 96,000 $ 92,000
Interest cost on accumulated benefit
obligation.............................. 650,000 664,000 683,000
-------- -------- --------
Postretirement benefit cost................ $729,000 $760,000 $775,000
======== ======== ========
The funded status of the plan at December 31, 1993 and 1992 is as follows:
------------------------
1993 1992
------------------------
Retirees............................................ $7,218,000 $6,824,000
Fully eligible active participants.................. 88,000 100,000
Other participants.................................. 1,712,000 1,952,000
---------- ----------
Total accumulated postretirement benefit obligation. 9,018,000 8,876,000
Unrecognized actuarial gain (loss).................. (50,000) 22,000
---------- ----------
Net unfunded post-retirement benefit
liability........................................ $8,968,000 $8,898,000
========== ==========
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.5%.
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 8.9% in 1993--gradually decreasing to
5.5% over 13 years. A 1% increase in the health care cost trend rate would
increase aggregate service cost for 1993 by $46,000 and the accumulated
postretirement benefit obligation as of December 31, 1993 by $656,000.
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 post-retirement benefits. Included in total pension
costs are charges of $270,000 in 1993, $330,000 in 1992 and $252,000 in 1991,
representing the annual accrued benefits under this plan.
Effective January 1, 1993, the company adopted the provisions of Statement
of Financial Accounting Standards No. 112 (SFAS 112), "Employer's Accounting
for Postemployment Benefits." The cumulative effect of adoption of SFAS 112
was not material.
NOTE 7--DEBT AND LEASE OBLIGATIONS
Long-term debt at December 31, consisted of the following:
---------------------------
1993 1992
---------------------------
Industrial development authority monthly
floating rate (2.6% at December 31, 1993)
demand bonds maturing 2014.................... $ 5,000,000 $ 5,000,000
6.64% note payable due July 8, 1997.............. 13,333,000 15,000,000
Capital lease obligations........................ 789,000 526,000
Other notes payable due 1994 to 1998, interest
ranges from 3.7% to 10.8% 758,000
----------- -----------
19,880,000 20,526,000
Less current portion............................. 3,785,000 1,922,000
----------- -----------
$16,095,000 $18,604,000
=========== ===========
In 1992, the company entered into an intermediate-term private placement
of $15,000,000 of 6.64% notes payable requiring semiannual principal payments
of $1,667,000 beginning July 8, 1993 and continuing through 1997. The
long-term financing agreements require, among other things, the maintenance of
working capital and net worth ratios. The company is in compliance with these
requirements.
During the next five years, payments on long-term debt are due as follows:
$3,785,000 in 1994; $3,748,000 in 1995; $3,514,000 in 1996; $3,392,000 in
1997; and $441,000 in 1998.
At December 31, 1993, a non-U.S. subsidiary of the company had an
outstanding note payable to a bank in the amount of $1,168,000 maturing in
March 1994. The interest rate on the note was 10.1%. The parent company also
has available a $10,000,000 unsecured line of credit. Any borrowings under
this line of credit will be at the bank's best rate of interest in effect at
the time. There were no borrowings against the line of credit during 1993 and
1992.
At December 31, 1993 and 1992, the value at which the financial
instruments are recorded approximated their fair market value.
22
Exhibit 13 Page
10
NOTE 8--SHAREHOLDERS' EQUITY
An analysis of the changes in consolidated shareholders' equity is as
follows:
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
Equity
adjustment
from
Capital in foreign
Common excess of Retained currency Treasury
Stock par value earnings translation stock Total
- ----------------------------------------------------------------------------------------------------------------
BALANCE, DEC. 31, 1990................. $9,655 $ 0 $83,674 $15,859 $(10,075) $ 99,113
Net income--1991.................... 5,115 5,115
Dividends--$.53 per share........... (4,768) (4,768)
Shares issued upon exercise
of options....................... 3 (215) (77) 852 563
Shares issued for employee stock
purchase plan.................... 221 442 663
Translation adjustment.............. (1,791) (1,791)
Other............................... 6 (6) 3 3
------ ----- ------- ------- -------- --------
BALANCE, DEC. 31, 1991................. 9,664 0 83,944 14,068 (8,778) 98,898
Net income--1992.................... 12,098 12,098
Dividends--$.57 per share........... (5,208) (5,208)
Shares issued upon exercise
of options....................... (389) 1,185 796
Shares issued for employee stock
purchase plan.................... 302 471 773
Shares issued for pension plan...... 348 416 764
Translation adjustment.............. (6,597) (6,597)
Other............................... 40 78 118
------ ----- ------- ------- -------- --------
BALANCE, DEC. 31, 1992................. 9,664 301 90,834 7,471 (6,628) 101,642
Net loss--1993...................... (1,758) (1,758)
Dividends--$.60-1/2 per share....... (5,578) (5,578)
Shares issued upon exercise
of options....................... (27) 109 82
Shares issued for employee
stock purchase plan.............. 196 528 724
Translation adjustment.............. (3,894) (3,894)
Other............................... 59 106 165
------ ----- ------- ------- -------- --------
BALANCE, DEC. 31, 1993................. $9,664 $ 529 $83,498 $ 3,577 $ (5,885) $ 91,383
====== ===== ======= ======= ======== ========
The 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. None of the
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, 38,399 shares and 35,277
shares were issued from the treasury in 1993 and 1992, respectively. In 1991,
33,568 shares were issued from the treasury, and 2,413 shares were purchased
in the open market. The number of shares that may be purchased by an employee
in any one year is limited by factors dependent upon the market value of the
stock and the employee's base salary. At December 31, 1993,
23
Exhibit 13 Page
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
246,925 shares may be issued under the plan.
The company has a long-term performance 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. 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 the grant.
The table below summarizes transactions in the plan during 1993, 1992 and
1991.
- ------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
NUMBER OF OPTION PRICE Number of Option price Number of Option price
SHARES PER SHARE shares per share shares per share
- ------------------------------------------------------------------------------------------------------------------
Options outstanding at January 1,... 445,776 $11.00-$19.75 571,535 $11.00-$19.53 465,601 $11.00-$15.91
Options granted..................... 206,444 $21.00-$24.20 2,598 $17.75-$19.75 220,000 $17.75-$19.53
Options exercised................... (13,686) $12.50-$19.75 (128,357) $11.00-$17.75 (114,066) $11.00-$14.50
------- ------- -------
Options outstanding at December 31,. 638,534 $11.00-$24.20 445,776 $11.00-$19.75 571,535 $11.00-$19.53
======= ============= ======= =======
Options exercisable at December 31,. 432,090 $11.00-$19.75 445,228 $11.00-$19.75 351,535 $11.00-$15.91
======= ======= =======
Options were exercised for cash and the surrender of 5,739, 41,770 and
46,402 previously outstanding shares in 1993, 1992 and 1991, respectively,
resulting in the net issuance of 7,947 shares in 1993, 86,587 shares in 1992
and 67,664 shares in 1991. Options to purchase 793,556 shares were available
at December 31, 1993 for future grant.
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 nil in 1993 and 1991 and a credit of
$292,000 in 1992.
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 $72 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 persons 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 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.
24
Exhibit 13 Page
12
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
United States and international operations which are summarized for 1993, 1992
and 1991 as follows:
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
European Consolidated
United Economic ---------------------------
States Community Other 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers:
1993................................ $110,067 $74,090 $10,847 $195,004
-------- ------- ------- ========
1992................................ 118,831 83,276 10,384 $212,491
-------- ------- ------- ========
1991................................ 114,988 65,888 10,175 $191,051
-------- ------- ------- ========
Operating profit:
1993................................ 5,164 10,745 652 $ 16,561
-------- ------- -------
1992................................ 7,196 16,025 1,368 $ 24,589
-------- ------- -------
1991................................ 6,754 13,262 1,419 $ 21,435
-------- ------- -------
Repositioning charges..................... (11,900)
Nonoperating expenses..................... (6,838) (6,442) (6,043)
Minority interests and equity in net
income of associated companies......... 653 898 1,496
-------- -------- --------
Income (loss) before taxes and cumulative
effect of change in accounting
principle.............................. (1,524) 19,045 16,888
Taxes on income........................... 234 6,947 6,098
Cumulative effect of change in
accounting principle................... (5,675)
-------- -------- --------
Net income (loss)................... $ (1,758) $ 12,098 $ 5,115
======== ======== ========
Identifiable assets:
1993................................ 70,889 55,427 6,988 $133,304
-------- ------- -------
1992................................ 82,727 56,372 4,994 $144,093
-------- ------- -------
1991................................ 75,793 49,547 5,041 $130,381
-------- ------- -------
Investments in associated companies....... 6,224 6,001 9,835
Nonoperating assets....................... 31,457 16,519 18,905
-------- -------- --------
Total assets........................ $170,985 $166,613 $159,121
======== ======== ========
Transfers between geographic areas are not material. Operating profit is
comprised of revenue less related costs and expenses, excluding dividends and
license fees paid to the parent company. 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
1993, 1992, and 1991. A substantial portion of consolidated sales on a global
basis are made to the steel production market (see Classification of Products
by Markets Served on page 27 of this report), and as a result, accounts
receivable generally reflect a similar distribution of receivables from
customers in these markets.
25
Exhibit 13 Page
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
NOTE 10--BUSINESS ACQUISITIONS AND DIVESTITURES
In 1994, the company entered into an agreement for the creation of a joint
venture which is expected to enhance the Total Fluid Management (TFM) service
capabilities of the company. An initial cash investment of approximately
$3,000,000 has been made with additional investments expected based on the
growth of the venture.
Effective May 14, 1993, the company acquired for $10,693,000 in cash 100%
of the common stock of Raffineries de l'Ile de France (RIF), a metalworking
chemical specialty business in France. The results of the operations of RIF
are included in the consolidated financial statements from that date. The
effect on the consolidated statements has not been material.
As part of a plan to exit from the petroleum production chemicals market,
effective February 12, 1992, the company acquired for approximately $4,450,000
in cash the remaining 57.5% interest in Alpine Labs, making it wholly owned by
the company. The results of operations, which have not been material, are
included in the consolidated financial statements from that date. Pursuant to
the plan noted above, effective July 27, 1993, the company completed the sale
of its petroleum production chemical operations' assets, the principal
component of which was the SULFA-SCRUB(R) patents and technology, to the
Petrolite Corporation for $6,500,000 in cash, $2,000,000 due within three
years and future royalty payments. In addition, the agreement of sale
provides that the Petrolite Corporation grant back to the company a license to
sell products incorporating the technology in certain markets not serviced by
the Petrolite Corporation. The effect of the sale on the consolidated
statements was not material.
Effective January 1, 1992, the company acquired for $8,600,000 in cash 50%
of the common stock of Quaker Chemical, S.A. in Spain making it a wholly-owned
subsidiary. The results of operations of Quaker Chemical, S.A. are included
in the consolidated financial statements from that date. The effect on the
consolidated statements has not been material.
NOTE 11--COMMITMENTS AND CONTINGENCIES
A wholly-owned subsidiary of the company is a co-defendant in claims filed
by multiple claimants alleging injury due to exposure to asbestos. The
company has reached a settlement with a group of these claimants and has
petitioned the courts for a declaratory judgement against one of its insurance
carriers for certain coverage which is in dispute. The company believes that
the potential uninsured liability associated with this action is approximately
$1,200,000.
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 and of cash flows present
fairly, in all material respects, the financial position of Quaker Chemical
Corporation (the "Company") and its subsidiaries at December 31, 1993 and
1992, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, 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.
As discussed in Notes 5 and 6, the Company changed its methods of
accounting for income taxes and postretirement benefits other than pensions in
1991.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 18, 1994
26
Exhibit 13 Page
14
SUPPLEMENTAL FINANCIAL INFORMATION, YEAR ENDED DECEMBER 31
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)
- -------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------
Steel production...... $ 89,255 46% $ 94,483 44% $ 78,357 41% $ 88,447 44% $ 78,230 43%
Metalworking.......... 57,826 30 58,719 28 51,106 27 49,916 25 40,298 22
Paper production...... 12,169 6 15,042 7 16,760 9 22,016 11 21,546 12
Other................. 35,754 18 44,247 21 44,828 23 41,095 20 41,586 23
-------- ---- -------- ---- --------- ---- -------- ---- -------- ----
$195,004 100% $212,491 100% $191,051 100% $201,474 100% $181,660 100%
======== ==== ======== ==== ========= ==== ======== ==== ======== ====
Information on Quaker's markets appear on the inside front cover of this
report.
QUARTERLY RESULTS (UNAUDITED)
(Dollars in thousands, except per share figures)
- -------------------------------------------------------------------------------
First Second Third Fourth
- -------------------------------------------------------------------------------
1993
NET SALES.......................... $48,361 $51,343 $48,441 $46,859 (5)
OPERATING INCOME (LOSS) (1 AND 6).. 3,214 (1,268) 739 (6,192) (5)
NET INCOME (LOSS).................. 2,724 (449) 730 (4,763)
NET INCOME (LOSS) PER SHARE (3).... $.30 $(.05) $.08 $(.52)
1992
Net sales.......................... $54,850 $55,853 $54,057 $47,731 (5)
Operating income (1 and 2)......... 5,279 4,769 4,592 2,147 (5)
Net income......................... 3,710 3,322 3,204 1,862
Net income per share (3)........... $.41 $.37 $.35 $.20
1991 (4)
Net sales.......................... $46,977 $49,459 $48,759 $45,856
Operating income (1 and 2)......... 3,872 4,532 3,694 1,864
Income before cumulative effect of.
change in accounting principle.. 3,256 3,162 2,705 1,667
Cumulative effect of change in
accounting for postretirement
benefits......................... (5,675) -- -- --
Net income (loss).................. (2,419) 3,162 2,705 1,667
Income per share before cumulative
effect of change in accounting
principle....................... $ .36 $.35 $.30 $.19
Cumulative per share effect of
change in accounting for
postretirement benefits......... (.63) -- -- --
Net income (loss) per share (3).... $(.27) $.35 $.30 $.19
(1) Net sales, less costs and expenses.
(2) Restated for comparative purposes.
(3) Based on weighted average number of shares outstanding.
(4) Restated first, second and third quarters to reflect adoption of SFAS
106 effective January 1, 1991 (see Note 6 to the Consolidated Financial
Statements).
(5) See Operations section of Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages 30 and 31 of
this report.
(6) The second and fourth quarters include repositioning charges of $3,500
and $8,400, respectively.
27
Exhibit 13 Page
15
SUPPLEMENTAL FINANCIAL INFORMATION, continued
STOCK MARKET AND RELATED SECURITY HOLDER MATTERS
During the past two years, the common stock of the company has been traded
in the Nasdaq National Market at the price ranges indicated below, and the
following quarterly dividends per share have been declared as indicated:
- -------------------------------------------------------------------------------
Range of NASDAQ System
Quotations Dividends
1993 1992 Declared
HIGH LOW High Low 1993 1992
- -------------------------------------------------------------------------------
First quarter......... $24-5/8 $20-3/4 $22-1/4 $18-3/4 $.15 $.14
Second quarter........ 23 17-3/4 26 21 .15 .14
Third quarter......... 20 16-1/2 24-3/4 19-1/2 .15 .14
Fourth quarter........ 18-1/2 14-1/4 23-1/2 19-3/4 .15-1/2 .15
As of January 15, 1994, there were 1,044 shareholders of record of the
company's common stock, $1 par value, its only outstanding class of equity
securities.
- -------------------------------------------------------------------------------
COPIES OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1993 AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE PROVIDED WITHOUT
CHARGE ON REQUEST TO QUAKER CHEMICAL CORPORATION, ATTENTION KARL H. SPAETH,
VICE PRESIDENT AND CORPORATE SECRETARY, CONSHOHOCKEN, PA 19428.
- -------------------------------------------------------------------------------
28
Exhibit 13 Page
16
SELECTED FINANCIAL INFORMATION
(Numbers in thousands, except per share figures and number of employees)
- --------------------------------------------------------------------------------------------------------
1993(1) 1992 1991 1990 1989 1984
- --------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net sales........................ $195,004 $212,491 $191,051 $201,474 $181,660 $115,813
Income (loss) before taxes
and cumulative effect of
change in accounting
principle...................... (1,524) 19,045 16,888 22,580 19,647 12,355
Cumulative effect of change
in accounting for
postretirement benefits........ (5,675)
Net income (loss)................ (1,758) 12,098 5,115 14,106 12,840 7,289
Per share (2)
Income (loss) before cumulative
effect of change in
accounting principle......... (.19) 1.33 1.20 1.51 1.35 .70
Cumulative effect of change in
accounting for postretirement
benefits..................... (.63)
Net income (loss).............. (.19) 1.33 .57 1.51 1.35 .70
Dividends...................... .60-1/2 .57 .53 .47 .41 .23
FINANCIAL POSITION
Current assets................... 84,387 85,567 82,725 84,833 75,427 45,588
Current liabilities.............. 42,642 28,126 36,592 40,342 27,848 14,352
Working capital.................. 41,745 57,441 46,133 44,491 47,579 31,236
Property, plant and equipment,
net............................ 56,551 52,179 48,661 46,315 36,539 18,567
Total assets..................... 170,985 166,613 159,121 152,408 131,430 78,616
Long-term debt and capital
leases........................ 16,095 18,604 5,219 5,453 5,665 9,565
Shareholders' equity............. 91,383 101,642 98,898 99,113 90,440 49,104
OTHER DATA
Current ratio.................... 2.0/1 3.0/1 2.3/1 2.1/1 2.7/1 3.2/1
Capital expenditures (3)......... 8,960 7,226 8,420 12,663 7,553 3,547
Net income (loss) as a % of
net sales (6).................. (0.9)% 5.7% 5.6% 7.0% 7.1% 6.3%
Return on average shareholders'
equity (6)..................... (1.8)% 12.1% 10.9% 14.9% 14.8% 15.2%
Shareholders' equity per share
at end of year (4)............. 9.89 11.06 10.95 11.11 9.55 4.73
Common stock price range (5):
High......................... 24-5/8 26 22-1/4 19-1/4 15-5/8 9-1/2
Low.......................... 14-1/4 18-3/4 15 12 12-1/2 6-3/4
Number of shares outstanding at
end of year (4)................ 9,242 9,188 9,028 8,921 9,473 10,386
Number of employees at end of
year........................... 1,006 972 1,027 1,080 983 904
(1) The results of operations for 1993 include net repositioning charges of
$7,854 ($0.85 per share). Excluding these charges, net income for 1993
was $6,096 ($0.66 per share).
(2) Based on the weighted average shares outstanding, giving retroactive
effect to a three-for-two split in 1990 and a two-for-one split in 1985.
(3) Capital expenditures prior to 1986 are stated net of dispositions.
(4) Based on the shares outstanding at year end, giving retroactive effect to
a three-for-two split in 1990 and a two-for-one split in 1985.
(5) Restated to give retroactive effect to a three-for-two split in 1990 and a
two-for-one split in 1985.
(6) Calculated for 1991 using $10,790 which is the net income before the
cumulative effect of change in accounting principle.
29
Exhibit 13 Page
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
In spite of lower operating results experienced in 1993, the company
remains strong in its ability to generate adequate cash to meet the needs of
current operations and to fund programs for future growth and expansion.
Major sources and uses of cash during 1993 included: a cash receipt of $6.5
million related to the sale of certain of the company's petroleum production
chemical operations assets, the principal component of which was the
SULFA-SCRUB(R) patents and technology, effectively completing the company's
planned exit from the petroleum production chemicals market; the purchase of
Raffineries de l'Ile de France (RIF), a metalworking chemical specialty
business in France, for $10.7 million; and $9.0 million in expenditures for
additions to property, plant and equipment. These items, along with lower
regular operating activities, were the principal reasons for the decrease of
$6.3 million in the company's net cash position (cash and cash equivalents
plus short-term investments less short-term borrowings and current portion of
long-term debt and capital leases) to $15.3 million. Also, the current ratio
declined to 2.0/1 in 1993 from 3.0/1 in 1992 primarily as a result of the
aforementioned net uses of cash and an increase in current liabilities of
approximately $7.6 million related to the company's 1993 repositioning charges
(see Note 2 on page 19). Cash outlays associated with the repositioning
charges, which will be funded internally, are anticipated to be approximately
$3.7 million in 1994 and $2.1 million in the years thereafter.
Expenditures for property, plant and equipment in 1993 included the
purchase of new computer equipment and related software systems in the United
States, construction of a new office/laboratory in Australia, expenditures for
environmental and regulatory compliance in the amount of $1.0 million, and
upgrades of manufacturing capabilities at various locations. Capital
expenditures for 1994 are expected to be in the range of $9-$11 million and
include continued investment in major software systems in the United States,
various upgrades to manufacturing capabilities in the United States and
Europe, and expenditures, estimated at approximately $1.6 million, for
environmental and regulatory compliance. The company believes that funds
generated internally should be sufficient to finance the capital expenditure
program.
The parent company has available $10 million in a line of credit and,
based on its debt-equity ratio and current levels of operating performance,
believes that additional bank borrowings could be negotiated at competitive
rates, if required. The company is capable of supporting the anticipated
growth in operations during 1994, continued growth in dividends to
shareholders, stock repurchases and possible acquisition opportunities closely
aligned with key business strategies through internally generated funds
supplemented with debt as needed. In this regard, during 1994 the company
entered into an agreement for the creation of a joint venture (see Note 10 on
page 26) which required an initial cash investment of approximately $3.0
million with additional investments expected based on the growth of the
venture.
OPERATIONS
COMPARISON OF 1993 WITH 1992
Consolidated net sales for 1993 decreased $17.5 million (8%) while income
from operations before repositioning charges decreased $7.9 million (45%)
versus 1992. In 1993, the company recorded repositioning charges of $11.9
million ($7.9 million after tax, or $.85 per share) for the costs associated
with a broad scope program of changes, which includes consolidation and
closure of certain of the company's facilities, selected workforce reductions,
and planned divestitures of nonstrategic business operations. When the
overall program is completed in late 1994, the expected workforce reduction
versus mid-year 1993 levels will be approximately 8 to 10 percent. The
company expects to generate ongoing after-tax financial benefits from the
program of $1.4 million to $1.9 million ($.15-$.20 per share) starting in
1994.
The 1993 consolidated sales decrease was due to two main factors, a 4%
decline in volume and a 4% reduction associated with currency translation
(fluctuations in foreign currency exchange rates used to translate local
currency statements to dollars) as the U.S. dollar strengthened against most
major currencies during 1993. The decrease in volume for the year was
attributable primarily to a reduction in orders shipped to the
30
Exhibit 13 Page
18
People's Republic of China as that country worked down an earlier buildup
of inventory; the European recession's impact on customer production levels in
markets served by the company; and the adverse effect of lower production
rates in the aircraft and aerospace industry. Shipments to the People's
Republic of China are expected to resume in the second half of 1994 under a
more consistent order pattern. Other principal challenges still facing the
company are continued pricing pressures in key markets and increased customer
efficiencies in the usage of chemical products, particularly in North America.
While United States operating conditions signal stabilization or slight
improvement, the operations in Europe depend on that economy coming out of the
recession.
Operating margins, before the repositioning charges, declined in 1993,
when compared to 1992, due mainly to the negative leverage effect of fixed
costs on reduced sales volume. In 1993, the combination of lower operating
results, foreign taxes on earnings at rates different than the U.S. federal
tax rate, and the influence of non-deductible expenses, such as good-will
amortization, required a tax expense on a loss before taxes. The negative
influence of currency translation on net income in 1993 was $.8 million ($.09
per share). The decrease in equity in net income from associated companies
was primarily due to lower earnings from the company's Mexican affiliate.
COMPARISON OF 1992 WITH 1991
Consolidated net sales in the year 1992 increased $21.4 million (11%)
while income from operations increased $2.5 million (16%) over 1991. The
increase in sales was due to increases in volume 4%, price/mix 1%,
fluctuations in rates used to translate foreign currencies 2% (producing a
positive effect on net income of $.5 million) and the net effect of
acquisitions and divestitures 4%. The increase in volume for the year was
attributable primarily to orders shipped to the People's Republic of China and
increases in Quaker Construction Products and the European operations. The
net increase of 4% due to acquisitions and divestitures relates to the
inclusion of the subsidiary in Spain for the full year 1992, inclusion of
Alpine Labs for part of 1992, and divestiture of Overdale during 1991.
In the steel market, sales, after a very strong start in the first
quarter, softened in the United States market in the middle quarters and
decreased significantly in the fourth quarter. The metalworking market in
both the U.S. and Europe was stable until the fourth quarter when a
significant downturn in production in Europe and decreased orders driven by
cyclical consumption in the U.S. caused sales to drop. Therefore, the gross
profit in the fourth quarter fell well below the first three quarters. Sales
to the paper production market decreased mainly as a result of a deemphasis of
sales of one of the paper product lines.
Cost of goods sold as a percent of net sales decreased 1.1% in 1992, as
compared to 1991, mainly as a result of capitalizing on increased sales volume
and enhanced cost control. Raw material prices remained relatively stable
during 1992. Notwithstanding the increase in volume in 1992, selling,
administration and general expenses as a percent of sales generally remained
constant as compared to 1991. Programs for product and market development, as
well as quality enhancements, have contributed to this situation. The
decrease in equity in net income from associated companies is due to the
subsidiary in Spain being included in consolidated results (previously
reported as an associated company).
GENERAL
The company does not use financial instruments which expose it to
significant risk involving foreign currency transactions; however, the size of
international 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 40-44% of the dollar amount
of consolidated sales. In the same period, these subsidiaries accounted for
approximately 68-71% of consolidated operating profit (see Note 9 on page 25).
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.
31
Exhibit 13 Page
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