SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________________
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from
____________to____________
Commission file number 0-7154
------
QUAKER CHEMICAL CORPORATION
------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-0993790
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Elm and Lee Streets, Conshohocken, Pennsylvania 19428 - 0809
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-832-4000
------------
Not Applicable
------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Number of Shares of Common Stock
Outstanding on April 30, 2001 9,057,072
QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
---------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet at March 31, 2001 (unaudited) and
December 31, 2000
Condensed Consolidated Statement of Income for the Three Months ended
March 31, 2001 and 2000 (unaudited)
Condensed Consolidated Statement of Cash Flows for the Three Months
ended March 31, 2001 and 2000 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
* * * * * * * * * *
Quaker Chemical Corporation
Condensed Consolidated Balance Sheet
(dollars in thousands)
March 31,
2001 December 31,
(Unaudited) 2000 *
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 17,004 $ 16,552
Accounts receivable 53,184 54,401
Inventories
Raw materials and supplies 10,274 11,872
Work-in-process and finished goods 10,551 10,844
Prepaid expenses and other current assets 8,263 9,512
------------- ------------
Total current assets 99,276 103,181
------------- ------------
Property, plant and equipment, at cost 92,635 108,034
Less accumulated depreciation 55,642 65,575
------------- ------------
Total property, plant and equipment 36,993 42,459
Intangible assets 15,992 17,370
Investments in associated companies 10,806 5,925
Other assets 19,923 19,226
------------- ------------
$ 182,990 $ 188,161
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 6,914 $ 2,914
Accounts and other payables 22,102 23,573
Accrued compensation 4,839 11,854
Other current liabilities 11,979 11,859
------------- ------------
Total current liabilities 45,834 50,200
Long-term debt 22,244 22,295
Other noncurrent liabilities 22,891 22,382
------------- ------------
Total liabilities 90,969 94,877
------------- ------------
Minority interest in equity of subsidiaries 8,609 8,377
------------- ------------
Shareholders' Equity
Common stock $1 par value; authorized
30,000,000 shares; issued (including
treasury shares) 9,664,009 shares 9,664 9,664
Capital in excess of par value 476 746
Retained earnings 105,935 103,760
Accumulated other comprehensive (loss) (21,845) (16,714)
------------- ------------
94,230 97,456
Treasury stock, shares held at cost;
2001-715,789, 2000-812,646 (10,818) (12,549)
------------- ------------
Total shareholders' equity 83,412 84,907
------------- ------------
$ 182,990 $ 188,161
============= ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
* Condensed from audited financial statements.
Quaker Chemical Corporation
Condensed Consolidated Statement of Income
For the Three Months Ended March 31,
Unaudited
(dollars in thousands, except per share data)
First Quarter
------------ ------------
2001 2000
----------- -----------
Net sales $ 64,215 $ 66,994
Cost of goods sold 38,393 39,106
----------- -----------
Gross Margin 25,822 27,888
Selling, general and administrative 19,723 21,636
----------- -----------
Operating income 6,099 6,252
Other income, net 780 729
Interest expense, net (221) (290)
----------- -----------
Income before taxes 6,658 6,691
Taxes on income 2,064 2,074
----------- -----------
4,594 4,617
Equity in net income of associated
companies 280 267
Minority interest in net income of
subsidiaries (861) (513)
----------- -----------
Net income $ 4,013 $ 4,371
=========== ===========
Per share data:
Net income - basic and diluted $0.45 $0.49
Dividends declared $0.205 $0.195
Based on weighted average number of
shares outstanding:
Basic 8,901,667 8,862,735
Diluted 8,963,929 8,928,394
The accompanying notes are an integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Condensed Consolidated Statement of Cash Flows
For the Three Months ended March 31,
Unaudited
(dollars in thousands)
2001 2000
-------------- --------------
Cash flows from operating activities
Net income $ 4,013 $ 4,371
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,162 1,295
Amortization 362 285
Equity in net income of associated companies (280) (267)
Minority interest in earnings of subsidiaries 861 513
Deferred compensation and other postretirement benefits 638 350
Other, net 2,073 872
Increase (decrease) in cash from changes in current assets and
current liabilities:
Accounts receivable, net (734) (899)
Inventories 1,068 741
Prepaid expenses and other current assets (1,320) (1,283)
Accounts payable and accrued liabilities (6,370) (455)
Change in repositioning liabilities (244) (30)
-------------- --------------
Net cash provided by operating activities 1,229 5,493
-------------- --------------
Cash flows from investing activities
Investments in property, plant and equipment (1,419) (1,198)
Payments related to acquisitons (1,450) -
Other, net (190) -
-------------- --------------
Net cash used in investing activities (3,059) (1,198)
-------------- --------------
Cash flows from financing activities
Net increase in short-term borrowings 4,000 612
Dividends paid (1,816) (1,741)
Treasury stock repurchased - (1,961)
Treasury stock issued 1,461 139
Other, net (38) 9
-------------- --------------
Net cash provided by (used in) financing activities 3,607 (2,942)
-------------- --------------
Effect of exchange rate changes on cash (1,325) (651)
-------------- --------------
Net increase in cash and cash equivalents 452 702
Cash and cash equivalents at beginning of period 16,552 8,677
-------------- --------------
Cash and cash equivalents at end of period $ 17,004 $ 9,379
============== ==============
Noncash investing activities:
Contribution of property, plant & equipment to real estate
joint venture $ 4,239 $ -
The accompanying notes are an integral part of these condensed consolidated financial statements.
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands)
(Unaudited)
NOTE 1 - CONDENSED FINANCIAL INFORMATION
The condensed consolidated financial statements included herein are unaudited
and have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and Securities and Exchange
Commission regulations. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Certain prior year amounts have been reclassified to conform to
the 2001 presentation. In the opinion of management, the financial statements
reflect all adjustments (of a normal and recurring nature) which are necessary
to present fairly the financial position, results of operations and cash flows
for the interim periods. The results for the three months ended March 31, 2001
are not necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Annual Report
filed on Form 10-K for the year ended December 31, 2000.
NOTE 2 - WEIGHTED AVERAGE SHARES OUTSTANDING
Three Months Ended
March 31
--------------------------------------
Basic Diluted
------------------ ----------------
2001 8,901,667 8,963,929
2000 8,862,735 8,928,394
The difference between basic and diluted weighted average shares outstanding
results from the assumption that dilutive stock options outstanding were
exercised.
NOTE 3 - BUSINESS SEGMENTS
The Company's reportable segments are as follows:
(1) Metalworking process chemicals - products used as lubricants for various
heavy industrial and manufacturing applications.
(2) Coatings - temporary and permanent coatings for metal products and chemical
milling maskants.
(3) Other chemical products - primarily chemicals used in the manufacturing of
paper in 2000, 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.
The table below presents information about the reported segments for the three
months ending March 31:
Metalworking Other
Process Chemical
Chemicals Coatings Products Total
-----------------------------------------------------------------------------
2001
Net sales $59,093 $4,071 $1,051 $64,215
Operating income 12,337 1,087 328 13,752
2000
Net sales $60,215 $3,999 $2,780 $66,994
Operating income (loss) 14,076 1,031 (25) 15,082
Operating income comprises revenue less related costs and expenses. Non-
operating expenses primarily consist of general corporate expenses identified as
not being a cost of operation, interest expense, interest income, and license
fees from non-consolidated associates.
A reconciliation of total segment operating income to total consolidated income
before taxes, for the three months ended March 31 is as follows:
2001 2000
------- -------
Total operating income for
reportable segments $13,752 $15,082
Non-operating expenses (6,129) (7,250)
Depreciation and amortization (1,524) (1,580)
Interest expense (492) (478)
Interest income 271 188
Other income, net 780 729
------- -------
Consolidated income before taxes $ 6,658 $ 6,691
======= =======
NOTE 4 - COMPREHENSIVE INCOME
The following table summarizes comprehensive (loss) income for the three months
ended March 31:
2001 2000
--------- ---------
Net income $ 4,013 $ 4,371
Foreign currency translation adjustments (5,131) (2,372)
-------- --------
Comprehensive (loss) income $(1,118) $ 1,999
======== ========
NOTE 5 - REPOSITIONING AND INTEGRATION 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 components of the 1998 pre-tax repositioning and integration charge
included severance and other benefit costs, and early pension and other
postretirement benefits. The liabilities for early pension and other
postretirement benefits are included in the Company's pension and postretirement
benefits obligations.
The repositioning accrual had a balance of $244 at December 31, 2000. That
liability was paid in the first quarter of 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
Net cash flows provided by operating activities were $1.2 million in the
first three months of 2001 compared to cash flows provided by operating
activities of $5.5 million in the same period of 2000. The decrease was
primarily due to the timing of payments related to certain year-end 2000 accrued
expenses, as well as a decrease in the change in accounts payable.
Net cash flows used in investing activities increased to $3.1 million in
the first three months of 2001 compared to cash flows used in investing
activities of $1.2 million in the same period of 2000. This increase was
primarily related to the acquisition from the Company's Canadian licensee of
rights to market to, sell to, and service certain Canadian customers.
Expenditures for property, plant, and equipment totaling $1.4 million in
the first quarter of 2001 were consistent with the first quarter of 2000. In
January 2001, the Company contributed the entire Conshohocken site, the location
of its corporate headquarters, to a real estate joint venture of which the
Company is a 50% partner. The contribution totaling approximately $4.2 million
was recorded as an Investment in associated companies on the Company's Condensed
Consolidated Balance Sheet. This noncash transaction did not impact earnings
and was excluded from the Condensed Consolidated Statement of Cash Flows. The
joint venture was organized to renovate certain of the existing buildings at the
site as well as to build new office space. A portion of the space will be leased
to the Company, with the balance to be leased to unaffiliated third parties.
Renovation is being funded by a construction loan secured in part by a mortgage
on the Conshohocken site, which loan had an outstanding balance at March 31,
2001 of approximately $2.8 million.
Net cash flows provided by financing activities were $3.6 million for the
first three months of 2001 compared with net cash flows used in financing
activities of $2.9 million for the same period of the prior year. The net change
was primarily due to $4.0 million in short-term borrowings and approximately
$1.4 million of proceeds from shares issued upon exercise of stock options in
2001, compared to approximately $2.0 million paid to purchase shares of stock
under the Company's stock repurchase program in 2000.
OPERATIONS
- ----------
COMPARISON OF FIRST QUARTER 2001 WITH FIRST QUARTER 2000
- --------------------------------------------------------
Consolidated net sales for the first quarter of 2001 were $64.2 million, a
four percent decrease compared to the first quarter of 2000. The sales
comparison was negatively impacted by a decline in U.S sales due to a softening
U.S. economy, as well as unfavorable foreign currency translations and the sale
of the U.S. pulp and paper business in May 2000. Without the impacts of the
stronger dollar and excluding the net sales of the U.S. pulp and paper business
during the relevant period, consolidated net sales would have increased three
percent, with strong growth in all regions, except the U.S.
Cost of sales increased as a percentage of sales from 58 percent in 2000 to
60 percent in 2001 primarily as a result of increases in raw material and
freight costs, product mix changes, and lower sales which resulted in higher
manufacturing costs as a percentage of sales.
Overall selling, general and administrative expenses were approximately
nine percent lower in the first quarter of 2001 compared to the same period in
2000. This was primarily due to continued cost containment efforts, the sale of
the U.S. pulp and paper business in 2000, as well as positive foreign exchange
impacts.
Other income primarily reflects foreign exchange gains in Europe, partially
offset by lower license revenue. Net interest expense is more favorable in 2001
compared to the prior year due to higher interest income. Minority interest was
significantly higher in the first quarter of 2001 compared with the same period
last year, primarily due to higher net income from the joint ventures in Brazil
and Australia.
The effective tax rate for 2001 is currently 31%, which is consistent with
the prior year.
OTHER SIGNIFICANT ITEMS
On March 30, 2001, the Company acquired from its Canadian licensee, H. L.
Blachford, Ltd., rights to market to, sell to, and service all Canadian
integrated steel makers and certain accounts in the Canadian metalworking
market. The purchase price totaling approximately $1.4 million, together with a
five-year earn-out provision of five percent on net sales to certain accounts
purchased, resulted in goodwill of $1.0 million, which is being amortized over
20 years.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency - the euro. The euro trades on currency
exchanges and may be used in business transactions. 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. 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 Form 10-Q 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
increases 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, aircraft, appliance or durable goods
manufacturers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Quaker is exposed to the impact of changes in interest rates, foreign
currency fluctuations, and changes in commodity prices.
Interest Rate Risk. Quaker's exposure to market rate risk for changes in
interest rates relates primarily to its short and long-term debt. Most of
Quaker's long-term debt has a fixed interest rate, while its short-term debt is
negotiated at market rates which can be either fixed or variable. Incorporated
by reference is the information in "Liquidity and Capital Resources" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 8 of the Notes to Consolidated Financial Statements on pages
7 and 24, respectively, of the Registrant's 2000 Annual Report filed on Form 10-
K. Accordingly, if interest rates rise significantly, the cost of short-term
debt to Quaker will increase. This can have a material adverse effect on Quaker
depending on the extent of Quaker's short-term borrowings. As of March 31,
2001, Quaker had $4.0 million in short-term borrowings.
Foreign Exchange Risk. A significant portion of Quaker's revenues and
earnings is generated by its foreign subsidiaries. Incorporated by reference is
the information concerning Quaker's non-U.S. activities appearing in Note 11 of
the Notes to Consolidated Financial Statements on pages 27 through 29 of the
Registrant's 2000 Annual Report filed on Form 10-K. All such subsidiaries use
the local currency as their functional currency. Accordingly, Quaker's
financial results are affected by risks typical of international business such
as currency fluctuations, particularly between the U.S. dollar, the Brazilian
real and the E.U. euro. As exchange rates vary, Quaker's results can be
materially adversely affected.
In the past, Quaker has used, on a limited basis, forward exchange
contracts to hedge foreign currency transactions and foreign exchange options to
reduce exposure to changes in foreign exchange rates. The amount of any gain or
loss on these derivative financial instruments was immaterial. During the
quarter ended March 31, 2001, Quaker was not a party to any derivative financial
instruments. Therefore, adoption of SFAS No. 133, as amended by SFAS No. 138,
did not have a material impact on Quaker's operating results or financial
position as of March 31, 2001. Incorporated by reference is the information
concerning Quaker's Significant Accounting Policies appearing in Note 1 of the
Notes to Consolidated Financial Statements on page 17 of the Registrant's 2000
Annual Report filed on Form 10-K.
Commodity Price Risk. Many of the raw materials used by Quaker are
commodity chemicals, and, therefore, Quaker's earnings can be materially
adversely affected by market changes in raw material prices. In certain cases,
Quaker has entered into fixed-price purchase contracts having a term of up to
one year. These contracts provide for protection to Quaker if the price for the
contracted raw materials rises, however, in certain limited circumstances,
Quaker will not realize the benefit if such prices decline. Quaker has not
been, nor is it currently a party to, any derivative financial instrument
relative to commodities.
PART II. OTHER INFORMATION
Items 1,2,3,4 and 5 of Part II are inapplicable and have been omitted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which
this report is filed.
* * * * * * * * *
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER CHEMICAL CORPORATION
---------------------------
(Registrant)
/s/ Michael F. Barry
-------------------------------
Michael F. Barry, officer duly
authorized to sign this report,
Vice President and Chief Financial Officer
Date: May 11, 2001
----------------