============================================================================== 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 June 30, 1997 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 August 5, 1997 8,705,793 ==============================================================================
PART I. FINANCIAL INFORMATION QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES CONDENSED FINANCIAL INFORMATION The following condensed financial statements are filed as part of this quarterly report on Form 10-Q: Consolidated Balance Sheet at June 30, 1997 and December 31, 1996 Consolidated Statement of Income for the six months ended June 30, 1997 and 1996 Consolidated Statement of Income for the three months ended June 30, 1997 and 1996 Consolidated Statement of Cash Flows for the six months ended June 30, 1997 and 1996. * * * * * * * * * * NOTE TO CONDENSED FINANCIAL INFORMATION The attached condensed financial information has been prepared in accordance with instructions for Form 10-Q and, therefore, does not include all financial note information which might be necessary for a fair presentation in accordance with generally accepted accounting principles. Such condensed financial information is unaudited, but in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments and accruals, necessary for a fair presentation of results for the periods indicated. The net income reported for the periods should not necessarily be regarded as indicative of net income on an annualized basis (see accompanying Management's Discussion and Analysis-Other Significant Items); however, significant variations from the results for the same period of the previous year, if any, have been disclosed in the accompanying Management's Discussion and Analysis. Certain reclassifications of prior years' data have been made to improve comparability. - 2 -
Quaker Chemical Corporation Consolidated Balance Sheet (dollars in thousands) June 30, December 31, 1997 1996 (Unaudited) * Assets Current assets Cash and cash equivalents $ 7,402 $ 8,525 Accounts receivable 46,369 45,564 Inventories Raw materials and supplies 8,506 9,094 Work in process and finished goods 11,407 11,947 Deferred income taxes 4,457 4,840 Prepaid expenses and other current assets 12,671 6,582 -------- -------- Total current assets 90,812 86,552 -------- -------- Investments in and advances to associated companies 4,897 3,941 -------- -------- Property, plant and equipment, at cost Land 6,203 6,586 Buildings and improvements 31,500 32,680 Machinery and equipment 56,164 58,220 Construction in progress 2,190 1,476 -------- -------- 96,057 98,962 Less accumulated depreciation 54,513 55,002 -------- -------- Total property, plant and equipment 41,544 43,960 Goodwill, net 14,781 16,222 Deferred income taxes 9,550 9,278 Other noncurrent assets 5,236 5,655 -------- -------- Total noncurrent assets 29,567 31,155 -------- -------- $166,820 $165,608 * Condensed from audited financial statements. - 3 -
Quaker Chemical Corporation Consolidated Balance Sheet (dollars in thousands) June 30, December 31, 1997 1996 (Unaudited) * Liabilities Current liabilities Short-term borrowings, current portion of long-term debt, notes payable and capital leases $ 20,584 $ 17,404 Accounts payable 21,614 23,386 Dividends payable 1,520 1,508 Accrued liabilities 21,478 19,843 Estimated taxes on income 3,087 1,893 -------- -------- Total current liabilities 68,283 64,034 -------- -------- Long-term debt, notes payable and capital leases 5,052 5,182 Deferred income taxes 3,250 3,222 Accrued postretirement benefits 8,961 8,898 Other noncurrent liabilities 5,558 6,255 -------- -------- Total noncurrent liabilities 22,821 23,557 -------- -------- Total liabilities 91,104 87,591 -------- -------- Minority interest in equity of subsidiaries 3,671 3,763 -------- -------- 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 696 634 Retained earnings 78,502 74,317 Unearned compensation (329) (459) Foreign currency translation adjustments (546) 6,475 -------- -------- 87,987 90,631 Treasury stock, shares held at cost; 1997 - 973,054 1996 - 1,044,452 (15,942) (16,377) -------- -------- Total shareholders' equity 72,045 74,254 -------- -------- $166,820 $165,608 * Condensed from audited financial statements - 4 -
Quaker Chemical Corporation Consolidated Statement of Income Six Months Ended June 30, Unaudited (dollars in thousands except per share data) 1997 1996 Net sales $118,855 $117,989 -------- -------- Costs and expenses Cost of goods sold 67,157 68,190 Selling, administrative and general expenses 43,648 42,504 -------- -------- 110,805 110,694 -------- -------- Gain on sale of European pulp and paper business 2,621 - -------- -------- Income from operations 10,671 7,295 Other income, net 982 820 Interest expense (794) (1,008) Interest income 105 196 -------- -------- Income before taxes 10,964 7,303 Taxes on income 4,261 2,921 -------- -------- 6,703 4,382 Equity in net income of associated companies 620 102 Minority interest in net income of subsidiaries (99) (160) -------- -------- Net income $ 7,224 $ 4,324 ======== ======== Per share data: Net income $0.84 $0.50 Dividends declared $0.35 $0.17 Based on weighted average number of shares outstanding 8,636,599 8,666,161 - 5 -
Quaker Chemical Corporation Consolidated Statement of Income Three Months Ended June 30, Unaudited (dollars in thousands except per share data) 1997 1996 Net sales $60,312 $59,786 ------- ------- Costs and expenses Cost of goods sold 33,981 34,235 Selling, administrative and general expenses 22,153 21,419 ------- ------- 56,134 55,654 ------- ------- Gain on sale of European pulp and paper business 2,621 - ------- ------- Income from operations 6,799 4,132 Other income, net 630 536 Interest expense (369) (508) Interest income 45 104 ------- ------- Income before taxes 7,105 4,264 Taxes on income 2,717 1,705 ------- ------- 4,388 2,559 Equity in net income of associated companies 333 145 Minority interest in net income of subsidiaries (64) (56) ------- ------- Net income $ 4,657 $ 2,648 ======= ======= Per share data: Net income $0.54 $0.31 Dividends declared $0.175 * Based on weighted average number of shares outstanding 8,650,975 8,665,575 * Dividends for the second quarter of 1996 were declared and paid in July 1996 at a rate of $0.17 per share. - 6-
Quaker Chemical Corporation Consolidated Statement of Cash Flows For the Six Months Ended June 30, Unaudited (dollars in thousands) 1997 1996 Cash flows from operating activities Net income $ 7,224 $ 4,324 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,230 3,151 Amortization 1,000 1,080 Equity in net income of associated companies (620) (102) Minority interest in earnings of subsidiaries 85 160 Deferred income taxes (318) 103 Deferred compensation and other postretirement benefits 401 668 Net change in repositioning liability (3,195) (618) Gain on sale of European pulp and paper business (2,621) Other, net (638) 393 Increase (decrease) in cash from changes in current assets and liabilities net of acquisitions and divestitures: Accounts receivable (3,396) (4,170) Inventories 217 2,060 Prepaid expenses and other current assets (2,492) 1,317 Accounts payable and accrued liabilities 3,694 725 Estimated taxes on income 1,361 3,065 ------- ------- Net cash provided by operating activities 2,932 12,156 ------- ------- Cash flows from investing activities Dividends from associated companies 30 1,078 Investments in property, plant, equipment and other assets (2,274) (2,937) Investments in and advances to associated companies (228) (720) Proceeds from the sale of assets - 683 Other, net (146) - ------- ------- Net cash used in investing activities (2,618) (1,896) ------- ------- Cash flows from financing activities Net increase in short-term borrowings and notes payable 5,538 (1,034) Repayment of long-term debt, notes payable and capital leases (2,451) (2,408) Dividends paid (3,039) (1,474) Treasury stock issued 497 209 Treasury stock acquired - (1,587) ------- ------- Net cash provided by financing activities 545 (6,294) ------- ------- Effect of exchange rate changes on cash (1,982) (758) ------- ------- Net increase in cash and cash equivalents (1,123) 3,208 Cash and cash equivalents at beginning of period 8,525 7,230 ------- ------- Cash and cash equivalents at end of period $ 7,402 $10,438 ======= ======= Supplemental cash flow information Cash paid for income taxes and interest was as follows: Income taxes $ 291 $ 2,050 Interest 862 1,087 - 7-
Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Net cash flow provided by operating activities amounted to $2.9 million in the first half of 1997 compared to $12.2 million in the same period of 1996. The decrease was principally due to the timing of a tax refund in 1996, the timing of payments related to the 1996 repositioning program and other operating working capital changes. 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) decreased $4.3 million from December 31, 1996 primarily as a result of increased short-term borrowings associated with the replacement of maturing long-term debt and seasonal cash needs. The current ratio at June 30, 1997 was 1.3 to 1 as compared to 1.4 to 1 at December 31, 1996, down slightly due to increased short-term borrowings. Operations Comparison of Six Months 1997 with Six Months 1996 Consolidated net sales for the first half of 1997 increased by 1% over the first half of 1996. The increase in sales was the net result of a 2% increase due to pricing initiatives and product sales mix, a 5% increase in volume, and a 6% decrease due to foreign currency translation rates. Operating income improved 46% to $10.7 million as compared to $7.3 million in the same period of 1996. The 46% improvement was mainly attributable to a one-time gain of $2.6 million from the sale of the European pulp and paper business, better European results, which benefited from strong demand from European steel customers and improved pricing, improved results of the Company's South American operations, increased demand by aircraft producers for chemical specialty products supplied by the Company's AC Products subsidiary and benefits associated with the 1996 repositioning of operations. The Company's gross profit margin as a percentage of sales increased 1% mainly due to the benefits associated with the consolidation of manufacturing operations in the United States, a generally improved sales mix in the United States and Europe, stable raw material costs and pricing initiatives implemented over the past year, primarily in Europe. Selling, administrative and general expenses as a percentage of sales increased 1% over 1996 due mainly to investment spending to support strategic initiatives. Net interest costs decreased slightly due to reduced financing costs associated with lower overall debt levels. Other income increased due to higher license fee income and gains from foreign exchange transactions. The increase in equity in net income from associated companies was primarily due to reduced losses incurred by the Company's Fluid Recycling Services joint venture. Earnings per share of $.84 were 68% higher than the prior year despite a negative foreign currency translation impact of approximately $.05 per share due to the strengthening of the dollar, primarily against the Dutch guilder. - 8 -
Comparison of Second Quarter 1997 with Second Quarter 1996 Consolidated net sales and operating income for the second quarter of 1997 increased 1% and 65%, respectively, versus the second quarter of 1996. The increase in sales was the net result of a 1% increase in price and sales mix, a 5% increase due to volume offset by a 5% decrease due to currency translation. The increase in operating income was due mainly to a one-time gain on the sale of the European pulp and paper business of $2.6 million. The reasons for changes in operating margin percentages, net interest costs, and equity in net income of associated companies in the second quarter 1997 versus the second quarter 1996 are basically the same as those previously mentioned for the comparative six-month periods. Other income increased in the quarter mainly as a result of gains from foreign exchange transactions. Other Significant Items: During 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 - Earnings Per Share, SFAS No. 130 - Reporting Comprehensive Income and SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information. SFAS No. 128 is effective in the fourth quarter of 1997 and SFAS No. 130 and SFAS No. 131 are effective in 1998. The Company is currently assessing the impact these new standards will have on its financial statements. SFAS No. 128 requires the presentation of two earnings per share - "basic" and "diluted". SFAS No. 130 requires that the components of comprehensive income be reported in the financial statements. SFAS No. 131 requires the disclosure of segment information utilizing the approach that the Company uses to manage its internal organization. Also, SFAS No. 131 requires the reporting of segment information on a condensed basis for interim periods beginning in 1999. - 9 -
PART II. OTHER INFORMATION Item 1. Legal Proceedings. On or about October 24, 1996, Petrolite Corporation and its subsidiary, Petrolite Holdings, Inc. (collectively, "Petrolite") filed a Demand for Arbitration with the American Arbitration Association and a Petition with the Circuit Court for the County of St. Louis, State of Missouri, against the Registrant and certain of its subsidiaries (collectively, the "Company"). The actions arise out of a Technology Purchase Agreement (the "Agreement") between Petrolite and the Company dated April 13, 1993, as amended, pursuant to which the Company sold various assets, including a patent (the "Patent"), to Petrolite for a purchase price of approximately $8.5 million plus an obligation to pay royalties. In a suit brought by Petrolite against Baker Hughes, Inc., et al. for infringement of the Patent, the United States District Court for the Western District of Oklahoma (No. CIV-94-311-M) affirmed by the United States Court of Appeals for the Federal Circuit (No. 95- 1447) declared all of the claims of the Patent invalid as a result of sales allegedly made by the Company more than one year prior to the filing of the Patent application. In its actions against the Company, Petrolite seeks damages in an unspecified amount, rescission of the Agreement, costs, and other relief. The Company believes that it has complete and meritorious defenses to the Petrolite actions and intends to vigorously defend the actions and deny liability and to pursue a claim against Petrolite for royalties. The bases for the Company's position include, but are not limited to, the Company specifically made no representations or warranties with respect to the validity of the Patent, all sales made by the Company prior to filing the Patent application were disclosed to Petrolite prior to closing under the Agreement and the findings made by the Court in Petrolite's suit with Baker Hughes, Inc. were the result of the failure of Petrolite's counsel to take certain required actions in the handling of the case. Items 2 and 3 are inapplicable and have been omitted. Item 4. Submission of Matters to a Vote of Security Holders The 1997 Annual Meeting of the Company's shareholders was held on May 7, 1997. At the Meeting, management's nominees, Lennox K. Black, Donald R. Caldwell, Robert E. Chappell and Robert P. Hauptfuhrer were elected to fill the four available positions as Class II Directors. Voting (expressed in number of votes) was as follows: Lennox K. Black, 32,331,205 votes for, - 10 -
43,952 votes against or withheld and no abstentions or broker non-votes; Donald R. Caldwell, 32,236,322 votes for, 138,825 votes against or withheld and no abstentions or broker non-votes; Robert E. Chappell, 32,233,332 votes for, 141,825 votes against or withheld and no abstentions or broker non-votes; and Robert P. Hautpfuhrer, 32,330,735 votes for, 44,422 votes against or withheld and no abstentions or broker non-votes. At the Meeting, shareholders ratified the appointment of Price Waterhouse LLP as the Company's independent auditors to examine and report on its financial statements for the year ending December 31, 1997 by a vote of 31,936,784 votes for, 125,736 votes against, and 312,637 abstentions or broker non-votes. Item 5 is inapplicable and has been omitted Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 3(b) The Registrant's By-Laws, as amended Exhibit 27-Financial Data Schedule (b) Reports on Form 8-K. No report on Form 8-K was 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/ Richard J. Fagan ------------------------------- Richard J. Fagan, officer duly authorized to sign this report, Controller, Treasurer and Chief Accounting Officer. Date: August 14, 1997 - 11 -