============================================================================== 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 September 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 November 10, 1997 8,712,695 ==============================================================================
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 September 30, 1997 and December 31, 1996 Consolidated Statement of Operations for the nine months ended September 30, 1997 and 1996 Consolidated Statement of Operations for the three months ended September 30, 1997 and 1996 Consolidated Statement of Cash Flows for the nine months ended September 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) September 30, December 31, 1997 1996 (Unaudited) * Assets Current assets Cash and cash equivalents $ 9,854 $ 8,525 Accounts receivable 47,153 45,564 Inventories Raw materials and supplies 9,398 9,094 Work in process and finished goods 11,641 11,947 Deferred income taxes 4,404 4,840 Prepaid expenses and other current assets 7,548 6,582 -------- -------- Total current assets 89,998 86,552 -------- -------- Investments in and advances to associated companies 4,679 3,941 -------- -------- Property, plant and equipment, at cost Land 5,904 6,586 Buildings and improvements 31,349 32,680 Machinery and equipment 57,657 58,220 Construction in progress 1,439 1,476 -------- -------- 96,349 98,962 Less accumulated depreciation 55,405 55,002 -------- -------- Total property, plant and equipment 40,944 43,960 -------- -------- Goodwill, net 14,585 16,222 Deferred income taxes 9,504 9,278 Other noncurrent assets 4,486 5,655 -------- -------- Total noncurrent assets 28,575 31,155 -------- -------- $164,196 $165,608 ======== ======== * Condensed from audited financial statements. - 3 -
Quaker Chemical Corporation Consolidated Balance Sheet (dollars in thousands) September 30, December 31, 1997 1996 (Unaudited) * Liabilities Current liabilities Short-term borrowings, current portion of long-term debt, notes payable and capital leases $ 14,071 $ 17,404 Accounts payable 22,077 23,386 Dividends payable 1,560 1,508 Accrued liabilities 21,137 19,843 Estimated taxes on income 3,505 1,893 -------- -------- Total current liabilities 62,350 64,034 -------- -------- Long-term debt, notes payable and capital leases 5,205 5,182 Deferred income taxes 3,230 3,222 Accrued postretirement benefits 8,979 8,898 Other noncurrent liabilities 5,447 6,255 -------- -------- Total noncurrent liabilities 22,861 23,557 -------- -------- Total liabilities 85,211 87,591 -------- -------- Minority interest in equity of subsidiaries 3,583 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 869 634 Retained earnings 80,252 74,317 Unearned compensation (892) (459) Foreign currency translation adjustments 615 6,475 -------- -------- 90,508 90,631 Treasury stock, shares held at cost; 1997 - 953,516; 1996 - 1,044,452 (15,106) (16,377) -------- -------- Total shareholders' equity 75,402 74,254 -------- -------- $164,196 $165,608 ======== ======== * Condensed from audited financial statements - 4 -
Quaker Chemical Corporation Consolidated Statement of Operations Nine Months Ended September 30, Unaudited (dollars in thousands except per share data) 1997 1996 Net sales $177,542 $179,802 -------- -------- Costs and expenses Cost of goods sold 99,519 103,862 Selling, administrative and general expenses 64,908 64,264 Repositioning charges 13,100 Gain on sale of European pulp and paper business 2,621 - -------- -------- 161,806 181,226 -------- -------- Income (loss) from operations 15,736 (1,424) Other income, net 1,414 1,154 Interest expense (1,168) (1,476) Interest income 200 275 -------- -------- Income (loss) before taxes 16,182 (1,471) Taxes on income 6,342 197 -------- -------- 9,840 (1,668) Equity in net income of associated companies 941 287 Minority interest in net income of subsidiaries (238) (176) -------- -------- Net income (loss) $ 10,543 $ (1,557) ======== ======== Per share data: Net income (loss) $1.22 ($0.18) Dividends declared $0.53 $0.515 Based on weighted average number of shares outstanding 8,661,836 8,588,918 - 5 -
Quaker Chemical Corporation Consolidated Statement of Operations Three Months Ended September 30, Unaudited (dollars in thousands except per share data) 1997 1996 Net sales $ 58,687 $ 61,813 -------- -------- Costs and expenses Cost of goods sold 32,362 35,672 Selling, administrative and general expenses 21,260 21,760 Repositioning charges 13,100 -------- -------- 53,622 70,532 -------- -------- Income (loss) from operations 5,065 (8,719) Other income, net 432 334 Interest expense (374) (468) Interest income 95 79 -------- -------- Income (loss) before taxes 5,218 (8,774) Taxes on income 2,081 (2,724) -------- -------- 3137 (6,050) Equity in net income of associated companies 321 185 Minority interest in net income of subsidiaries (139) (16) -------- -------- Net income (loss) $ 3,319 $ (5,881) ======== ======== Per share data: Net income (loss) $0.38 ($0.68) Dividends declared $0.18 $0.34 Based on weighted average number of shares outstanding 8,704,525 8,558,223 - 6- Quaker Chemical Corporation Consolidated Statement of Cash Flows For the Nine Months Ended September 30, <TABLE> <CAPITON> Unaudited (dollars in thousands) 1997 1996 <S> <C> <C> Cash flows from operating activities Net income $10,543 $(1,557) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,630 4,632 Amortization 1,435 1,633 Equity in net income of associated companies (941) (287) Minority interest in earnings of subsidiaries 210 176 Deferred income taxes 33 (2,672) Deferred compensation and other postretirement benefits 592 583 Repositioning charges, net 12,600 Net change in repositioning liability (2,767) (764) Gain on sale of European pulp and paper business (2,621) - Other, net 428 (263) Increase (decrease) in cash from changes in current assets and liabilities net of acquisitions and divestitures: Accounts receivable (4,547) (5,415) Inventories (577) 1,153 Prepaid expenses and other current assets (3,904) 1,454 Accounts payable and accrued liabilities 4,519 7,199 Estimated taxes on income 2,758 2,893 ------- ------- Net cash provided by operating activities 8,791 21,365 ------- ------- Cash flows from investing activities Dividends from associated companies 603 1,158 Investments in property, plant, equipment and other assets (3,753) (4,076) Investments in and advances to associated companies (318) (1,073) Proceeds from the sale of assets - 683 Preceeds from sale of European pulp and paper business 3,053 - Other, net (146) - ------- ------- Net cash used in investing activities (561) (3,308) ------- ------- Cash flows from financing activities Net increase in short-term borrowings and notes payable 821 1,032 Repayment of long-term debt, notes payable and capital leases (4,090) (4,091) Dividends paid (4,608) (4,427) Treasury stock issued 1,506 323 Treasury stock acquired - (1,587) ------- ------- Net cash used in financing activities (6,371) (8,750) ------- ------- Effect of exchange rate changes on cash (530) (818) ------- ------- Net increase in cash and cash equivalents 1,329 8,489 Cash and cash equivalents at beginning of period 8,525 7,230 ------- ------- Cash and cash equivalents at end of period $ 9,854 $15,719 ======= ======= Supplemental cash flow information Cash paid for income taxes and interest was as follows: Income taxes $5,802 $ 5,125 Interest 1,265 1,645 </TABLE> - 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 $8.8 million in the first nine months of 1997 compared to $21.3 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) increased $4.7 million from December 31, 1996 primarily as a result of decreased short-term borrowings, proceeds received from the sale of the European pulp and paper business and improved operating performance. The current ratio at September 30, 1997 was 1.4 to 1, unchanged from December 31, 1996. Operations Comparison of Nine Months 1997 with Nine Months 1996 Through nine months, consolidated net sales decreased by 1% as compared to the same period of 1996. The decrease in sales was the net result of a 1% increase due to pricing initiatives and product sales mix and a 4% increase in volume offset by a 6% decrease due to foreign currency translation rates. Operating income was $15.7 million as compared to a loss of ($1.6) million in 1996 The loss in 1996 was due to a pretax repositioning charge of $13.1 million (approximately $8.6 million after tax) taken in the third quarter of 1996. Excluding the repositioning charge, 1997 operating income was 16% higher than 1996. The improvement was mainly attributable to a one-time gain of $2.6 million from the sale of the European pulp and paper business, higher gross margins resulting from an improved sales mix, benefits associated with the 1996 repositioning of operations and lower overall selling, general and administrative expenses. The Company's gross profit margin as a percentage of sales increased 2% 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 planned 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 were $1.22 as compared to ($0.18) in 1996. Excluding the 1997 gain on the sale of the European pulp and paper business and the 1996 repositioning charge earnings per share increased 23% to $1.02 from $0.83. Excluding a negative foreign currency translation impact of approximately $.16 per share due to the strengthening of the dollar, primarily against the Dutch guilder earnings per share improved 42% over last year. - 8 -
Comparison of Third Quarter 1997 with Third Quarter 1996 Consolidated net sales for the third quarter of 1997 decreased 5% versus the third quarter of 1996. The decrease was the net result of a 1% increase in price and sales mix and a 1% volume increase offset by a 7% decrease from currency translation. Operating income, excluding the aforementioned third quarter 1996 repositioning charge of $13.1 million, increased 16%. The increase was due mainly to higher gross margins resulting from an improved sales mix, manufacturing consolidation savings and lower overall selling, general and administrative expenses. The reasons for changes in operating margin percentages, net interest costs, and equity in net income of associated companies in the third quarter 1997 versus the third quarter 1996 are basically the same as those previously mentioned for the comparative nine-month periods. Other income increased in the quarter mainly as a result of gains from foreign exchange transactions. Excluding the 1996 repositioning charge earnings per share for the three months ended September 30, 1997 and 1996 were $0.38 and $0.33, respectively. The represents a 15% increase over the prior year despite a negative foreign currency translation impact of approximately $0.06 (33% increase excluding the negative impact) per share due to the strengthening of the dollar, primarily against the Dutch guilder. Other Significant Items: In February 1997, the Financial Accounting Standards Board issued "Statement of Financial Accounting Standards (SFAS) No. 128 - Earnings Per Share." This Standard becomes effective for the Company in the fourth quarter of 1997 and requires two presentations of earnings per share, "basic" and "diluted". Had this standard been in effect for the third quarter of 1997, earnings per share on a pro forma basis would have been: Three Months Ended Nine Months Ended September 30, 1997 September 30, 1997 ------------------- ------------------ Basic (same as reported) $0.38 $1.22 Diluted $0.38 $1.21 "Diluted Earnings Per Share" is less than "Basic Earnings Per Share" , principally due to the assumed increase in the number of average shares outstanding resulting from outstanding options where the average market price of the company's stock was in excess of the related option prices. During 1997 the Financial Accounting Standards Board issued SFAS No. 130 - Reporting Comprehensive Income and SFAS No. 131 - Disclosures about Segments of an Enterprose and Related Information. 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. 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, 3, 4 and 5 are inapplicable and have been omitted. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 10(o)-Amendment to Employment Agreement by and between Registrant and Ronald J. Naples. Incorporated by reference to Exhibit 10(I) as filed by Registrant with Form 10-Q for the quarter ended September 30, 1995.* Exhibit 10(p)-Employment Agreement by and between Registrant and Joseph F. Virdone.* Exhibit 27-Financial Data Schedule - 10 -
(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: November 14, 1997 * A copy of Exhibit will be furnished upon request to: Quaker Chemical Corporation ATTENTION: Irene M. Kisleiko Assistant Corporate Secretary Elm and Lee Streets Conshohocken, PA 19428 - 11 -