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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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, 2002
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
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QUAKER CHEMICAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-0993790
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Quaker Park, 901 Hector Street, Conshohocken, Pennsylvania 19428 - 0809
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-832-4000
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Not Applicable
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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 July 31, 2002 9,311,598
QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheet at June 30, 2002 and December 31,
2001
Condensed Consolidated Statement of Income for the Three and Six
Months ended June 30, 2002 and 2001
Condensed Consolidated Statement of Cash Flows for the Six Months
ended June 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
* * * * * * * * * *
Quaker Chemical Corporation
Condensed Consolidated Balance Sheet
Unaudited
(dollars in thousands)
June 30, December 31,
2002 2001 *
---- ------
ASSETS
Current assets
Cash and cash equivalents $ 18,316 $ 20,549
Accounts receivable, net 55,828 44,787
Inventories
Raw materials and supplies 10,868 9,673
Work-in-process and finished goods 9,749 9,112
Prepaid expenses and other current assets 12,594 8,809
--------- ---------
Total current assets 107,355 92,930
--------- ---------
Property, plant and equipment, at cost 111,036 97,367
Less accumulated depreciation 63,921 59,123
--------- ---------
Total property, plant and equipment 47,115 38,244
Goodwill 22,097 14,960
Other intangible assets 6,337 1,442
Investments in associated companies 9,390 9,839
Deferred income taxes 8,837 9,085
Other assets 13,705 13,166
--------- ---------
$ 214,836 $ 179,666
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt $ 24,905 $ 2,858
Accounts and other payables 26,229 20,196
Accrued compensation 7,973 8,109
Other current liabilities 15,449 14,343
--------- ---------
Total current liabilities 74,556 45,506
Long-term debt 19,459 19,380
Deferred income taxes 1,152 1,233
Other noncurrent liabilities 25,632 24,212
--------- ---------
Total liabilities 120,799 90,331
--------- ---------
Minority interest in equity of subsidiaries 8,041 8,436
--------- ---------
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 576 357
Retained earnings 105,664 103,953
Unearned compensation (1,419) (1,597)
Accumulated other comprehensive (loss) (23,632) (24,075)
--------- ---------
90,853 88,302
Treasury stock, shares held at cost;
2002-356,898, 2001-526,865 (4,857) (7,403)
--------- ---------
Total shareholders' equity 85,996 80,899
--------- ---------
$ 214,836 $ 179,666
========= =========
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
Unaudited
(dollars in thousands, except per share data)
Three Months ended June 30, Six Months ended June 30,
----------------------------- ------------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Net sales $ 69,457 $ 65,073 $ 129,384 $ 129,288
Cost of goods sold 40,495 37,988 76,065 76,381
----------- ----------- ----------- -----------
Gross margin 28,962 27,085 53,319 52,907
Selling, general and administrative expenses 23,279 20,126 43,303 39,849
----------- ----------- ----------- -----------
Operating income 5,683 6,959 10,016 13,058
Other (expense) income, net (28) 379 252 1,159
Interest expense (407) (499) (826) (991)
Interest income 295 206 548 477
----------- ----------- ----------- -----------
Income before taxes 5,543 7,045 9,990 13,703
Taxes on income 1,774 2,184 3,197 4,248
----------- ----------- ----------- -----------
3,769 4,861 6,793 9,455
Equity in net income of associated
companies 201 216 184 496
Minority interest in net income of
subsidiaries (734) (963) (1,383) (1,824)
----------- ----------- ----------- -----------
Net income $ 3,236 $ 4,114 $ 5,594 $ 8,127
=========== =========== =========== ===========
Per share data:
Net income - basic $ 0.35 $ 0.45 $ 0.61 $ 0.90
Net income - diluted $ 0.35 $ 0.45 $ 0.60 $ 0.90
Dividends declared $ 0.21 $ 0.205 $ 0.42 $ 0.41
Based on weighted average number of shares outstanding:
Basic 9,249,925 9,064,679 9,202,378 8,983,623
Diluted 9,308,678 9,124,642 9,262,025 9,044,729
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Quaker Chemical Corporation
Condensed Consolidated Statement of Cash Flows
For the Six Months ended June 30,
Unaudited
(dollars in thousands)
2002 2001
---- ----
Cash flows from operating activities
Net income $ 5,594 $ 8,127
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 2,327 2,376
Amortization 325 730
Equity in net income of associated companies (184) (496)
Minority interest in earnings of subsidiaries 1,383 1,824
Deferred compensation and other postretirement benefits (329) 915
Other, net (1,938) 2,511
Increase (decrease) in cash from changes in current assets and current
liabilities:
Accounts receivable, net (4,532) (3,073)
Inventories (798) 1,644
Prepaid expenses and other current assets (1,080) (1,509)
Accounts payable and accrued liabilities 4,571 (4,858)
Change in restructuring liabilities (1,167) (244)
-------- --------
Net cash provided by operating activities 4,172 7,947
-------- --------
Cash flows from investing activities
Investments in property, plant and equipment (5,060) (3,148)
Payments related to acquisitions (21,576) (1,450)
Other, net 298 1,111
-------- --------
Net cash (used in) investing activities (26,338) (3,487)
-------- --------
Cash flows from financing activities
Net increase in short-term borrowings 22,009 2,548
Dividends paid (3,802) (3,672)
Treasury stock issued 2,404 2,427
Distributions to minority shareholders (1,335) (1,119)
Other, net 85 (36)
-------- --------
Net cash provided by financing activities 19,361 148
-------- --------
Effect of exchange rate changes on cash 572 (2,217)
-------- --------
Net (decrease) increase in cash and cash equivalents (2,233) 2,391
Cash and cash equivalents at beginning of period 20,549 16,552
-------- --------
Cash and cash equivalents at end of period $ 18,316 $ 18,943
======== ========
Noncash investing activities:
Contribution of property, plant & equipment to real estate joint venture $ - $ 4,350
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
2002 presentation. In the opinion of management, the financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which
are necessary for a fair statement of the financial position, results of
operations and cash flows for the interim periods. The results for the three and
six months ended June 30, 2002 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, 2001.
As part of the Company's chemical management services, certain third party
products are transferred to customers at no gross profit and accordingly, these
transactions are not recorded in net sales or expense. Third party products
transferred under these arrangements totaled $14,187 and $10,099 for the six
months ended June 30, 2002 and 2001, respectively.
Note 2 - Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No 143 addresses
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs. This statement
is effective for fiscal years beginning after June 15, 2002. The Company is
currently assessing the impact of this new standard.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets." The provisions of this statement provide a single accounting
model for impairment of long-lived assets. The statement is effective for fiscal
years beginning after December 15, 2001. The Company adopted this standard on
January 1, 2002. Management has assessed the impact of the new standard and
determined there to be no material impact to the financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 62, Amendment of FASB Statement No. 13 and Technical Corrections." For
most companies, SFAS No. 145 will require gains and losses on extinguishments of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in APB
Opinion No. 30. The statement also amended SFAS No. 13 for certain
sales-leaseback and sublease accounting. The Company is required to adopt the
provisions of SFAS No. 145 effective January 1, 2003. The Company is currently
evaluating the impact of adoption of this statement.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", and nullifies EITF Issue No. 94-3. SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereas EITF No 94-3 had
recognized the liability at the commitment date to an exit plan. The Company is
required to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. The Company is currently
evaluating the impact of adoption of this statement.
Note 3 --Earnings Per Share
The following table summarizes earnings per share (EPS) calculations for the
three months ended June 30, 2002 and 2001:
2002 2001
---- ----
Numerator for basic EPS and diluted EPS--
net income ............................................ $ 3,236 $ 4,114
------- -------
Denominator for basic EPS--weighted
average shares ........................................ 9,250 9,065
Effect of dilutive securities, primarily
employee stock options ................................ 59 60
------- -------
Denominator for diluted EPS--weighted
average shares and assumed
conversions. .......................................... 9,309 9,125
======= =======
Basic EPS ............................................... $ .35 $ .45
Diluted EPS ............................................. $ .35 $ .45
The following table summarizes earnings per share (EPS) calculations for the six
months ended June 30, 2002 and 2001:
2002 2001
---- ----
Numerator for basic EPS and diluted EPS--
net income ......................................... $ 5,594 $ 8,127
------- -------
Denominator for basic EPS--weighted
average shares ..................................... 9,202 8,984
Effect of dilutive securities, primarily
employee stock options ............................. 60 61
------- -------
Denominator for diluted EPS--weighted
average shares and assumed
conversions......................................... 9,262 9,045
======= =======
Basic EPS ............................................. $ .61 $ .90
Diluted EPS ........................................... $ .60 $ .90
Note 4 - 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 and concrete products
and chemical milling maskants.
(3) Other chemical products - 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 six
months ending June 30:
Metalworking Other
Process Chemical
Chemicals Coatings Products Total
----------------------------------------------------
2002
Net sales $117,902 $ 9,383 $ 2,099 $129,384
Operating income 25,194 2,397 582 28,173
2001
Net sales $118,611 $ 8,760 $ 1,917 $129,288
Operating income 26,474 2,427 752 29,653
Operating income comprises revenue less related costs and expenses.
Non-operating items 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 six months ended June 30 is as follows:
2002 2001
---- ----
Total operating income for
reportable segments $ 28,173 $ 29,653
Non-operating expenses (17,832) (15,865)
Amortization (325) (730)
Interest expense (826) (991)
Interest income 548 477
Other income, net 252 1,159
-------- --------
Consolidated income before taxes $ 9,990 $ 13,703
======== ========
Note 5 - Comprehensive Income
The following table summarizes comprehensive income for the three months ended
June 30:
2002 2001
------- --------
Net income $ 3,236 $ 4,114
Foreign currency translation adjustments 2,746 (2,092)
------- -------
Comprehensive income $ 5,982 $ 2,022
======= =======
The following table summarizes comprehensive income for the six months ended
June 30:
2002 2001
------- -------
Net income $ 5,594 $ 8,127
Foreign currency translation adjustments 443 (7,223)
------- -------
Comprehensive income $ 6,037 $ 904
======= =======
Note 6 - Restructuring and Nonrecurring Expenses
In the third and fourth quarters of 2001, Quaker's management approved
restructuring plans to realign its organization and reduce operating costs.
Quaker's restructuring plans include the closure and sale of its manufacturing
facilities in the U.K. and France. In addition, Quaker consolidated certain
functions within its global business units and reduced administrative functions,
as well as expensed costs related to abandoned acquisitions. Included in the
third and fourth quarter restructuring charges are provisions for the severance
of 16 and 37 employees, respectively.
Restructuring and related charges of $2,958 and $2,896 were expensed during the
third and fourth quarters of 2001, respectively. The third quarter charge
comprised $520 related to employee separations, $2,038 related to facility
rationalization charges and $400 related to abandoned acquisitions. The fourth
quarter charge comprised $2,124 related to employee separations, $575 related to
facility rationalization charges and $197 related to abandoned acquisitions.
Employee separation benefits under each plan varied depending on local
regulations within certain foreign countries and included severance and other
benefits. As of June 30, 2002, Quaker had completed 48 of the planned 53
employee separations under the 2001 plans. Quaker expects to substantially
complete the initiatives contemplated under the restructuring plans, including
the disposition of the manufacturing facilities, by early to mid 2003.
Accrued restructuring balances as of June 30, 2002 are as follows:
- --------------------------------------------------------------------------------
Balance Currency Balance
December translation June
31, 2001 Payments and other 30,2002
-------- -------- --------- -------
- --------------------------------------------------------------------------------
Employee separations $ 2,534 $ (752) $ 55 $ 1,837
- --------------------------------------------------------------------------------
Facility rationalization 1,439 (415) 77 1,101
------- ------- ----- -------
- --------------------------------------------------------------------------------
Total $ 3,973 $(1,167) $ 132 $ 2,938
======= ======== ===== =======
- --------------------------------------------------------------------------------
Note 7 - Business Acquisitions
On March 1, 2002, the Company acquired certain assets and liabilities of United
Lubricants Corporation ("ULC"), a North American manufacturer and distributor of
specialty lubricant products and chemical management services, for approximately
$13,676. The acquisition of ULC strategically strengthens the Company's global
leadership supply position to the steel industry.
The following table shows the fair value of assets and liabilities recorded for
the acquisition, subject to post-closing adjustments:
Receivables $ 4,513
Inventories 868
Property, plant and equipment 4,166
Goodwill 4,930
Intangible assets 2,300
Other assets 74
-------
16,851
-------
Accounts payable 2,148
Accrued expenses and other current liabilities 261
Other noncurrent liabilities 766
-------
3,175
-------
Cash paid for acquisition $13,676
=======
The $4,930 of goodwill was assigned to the Metalworking process chemicals
segment, and the entire amount is expected to be deductible for income tax
purposes.
The $2,300 of intangible assets comprised $1,400 of branded customer lists, $700
of formulations, and $200 of trademarks. These intangibles are being amortized
over a five-year period.
The results of operations of ULC are included in the consolidated statement of
income beginning March 1, 2002. Pro-forma results of operations have not been
provided because the effects are not material.
On April 22, 2002, the Company acquired one hundred percent of the outstanding
stock of Epmar Corporation ("Epmar"), a North American manufacturer of polymeric
coatings, sealants, adhesives, and various other compounds, for approximately
$7,500 and the assumption of $400 of debt. The acquisition of Epmar provides
technological capability that is directly related to the Company's coatings
business.
The following table shows the fair value of assets and liabilities recorded for
the acquisition, subject to post-closing adjustments:
Receivables $ 848
Inventories 422
Property, plant and equipment 967
Goodwill 3,218
Intangible assets 2,920
Other assets 39
-------
8,414
-------
Accounts payable 406
Accrued expenses and other current liabilities 108
Other noncurrent liabilities 400
-------
914
-------
Cash paid for acquisition $ 7,500
=======
The $3,218 of goodwill was assigned to the Coatings segment, and the entire
amount is expected to be deductible for income tax purposes.
The $2,920 of intangible assets comprised: $1,600 of customer lists to be
amortized over twenty years, $720 of product line technology to be amortized
over ten years, and $600 of trademarks which have indefinite lives and will not
be amortized.
The results of operations of Epmar are included in the consolidated statement of
income beginning April 22, 2002. Pro-forma results of operations have not been
provided because the effects are not material.
Note 8 - Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 established new guidelines for accounting for goodwill and
other intangible assets. Upon adoption, goodwill is no longer amortized, but
instead assessed for impairment at least on an annual basis. Accordingly, on
January 1, 2002, the Company ceased amortizing its goodwill. The Company
completed impairment assessment of its goodwill and did not incur an impairment
charge related to the adoption of SFAS No. 142.
The following is a reconciliation of previously reported financial information
to pro-forma amounts exclusive of goodwill amortization for the three months
ended June 30, 2001:
Net income $4,114
Goodwill amortization expense, net of tax 176
------
Pro-forma net income $4,290
======
Earnings per share, basic and diluted $0.45
Goodwill amortization expense, net of tax 0.02
-----
Pro-forma earnings per share, basic and diluted $0.47
=====
The following is a reconciliation of previously reported financial information
to pro-forma amounts exclusive of goodwill amortization for the six months ended
June 30, 2001:
Net income $8,127
Goodwill amortization expense, net of tax 357
------
Pro-forma net income $8,484
======
Earnings per share, basic and diluted $0.90
Goodwill amortization expense, net of tax 0.04
-----
Pro-forma earnings per share, basic and diluted $0.94
=====
The changes in carrying amount of goodwill for the six months ended June 30,
2002 are as follows:
Metalworking
process chemicals Coatings Total
----------------------------------------
Balance as of
January 1, 2002 $11,081 $3,879 $14,960
Goodwill additions 5,025 3,218 8,243
Currency translation
adjustments (1,106) -- (1,106)
------- ------ -------
Balance as of
June 30, 2002 $15,000 $7,097 $22,097
======= ====== =======
Goodwill additions are subject to post-closing adjustments.
Gross carrying amounts and accumulated amortization for intangibles assets as of
June 30, 2002, are as follows:
Gross carrying Accumulated
Amount Amortization
-----------------------------
Amortized intangible assets
Customer lists and rights to sell $3,850 $ 179
Trademarks and patents 2,300 1,513
Formulations and product technology 1,420 53
Other 1,491 979
------ -----
Total $9,061 $2,724
====== ======
Estimated annual aggregate amortization expense for the current year and
subsequent five years is as follows:
For the year ended December 31, 2002 $692
For the year ended December 31, 2003 $825
For the year ended December 31, 2004 $688
For the year ended December 31, 2005 $686
For the year ended December 31, 2006 $686
For the year ended December 31, 2007 $320
Note 9 - Debt
In April 2002, the Company entered into a $20,000 committed credit
facility, with a bank, which expires in April 2003. At the Company's option, the
interest rate for borrowings under the agreement may be based on the lender's
cost of funds plus a margin, LIBOR plus a margin, or on the prime rate. The
provisions of the agreement require that the Company maintain certain financial
ratios and covenants, all of which the Company was in compliance with as of June
30, 2002. A total of $4,000 in borrowings was outstanding under this facility as
of June 30, 2002.
In April 2002, the Company entered into a $10,000 uncommitted credit
facility with the same lender under similar terms. No borrowings under this
facility were outstanding as of June 30, 2002.
These facilities replace an existing uncommitted facility in the amount of
$18,000, which was fully drawn as of June 2002. This facility was terminated in
July 2002, with all remaining balances outstanding scheduled to be repaid
through borrowings under the new facilities discussed above.
Note 10 - Subsequent Event
Effective July 1, 2002, the Company acquired a controlling interest of Quaker
Chemical South Africa (Pty.) Ltd (South Africa), a previously fifty-percent
owned joint venture. As a result, South Africa, previously reported using the
equity method, will become a fully consolidated subsidiary commencing in July
2002. The effect of this change is not expected to be material to the financial
statements.
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 $4.2 million in the
first six months of 2002 compared to $7.9 million in the same period of 2001.
The decrease was primarily due to lower net income in 2002 and increases in the
changes in accounts receivable, inventories, and prepaid expenses and other
current assets, offset by changes in accounts payable and accrued liabilities.
Net cash flows used in investing activities were $26.3 million in the first
six months of 2002 compared to $3.5 million in the same period of 2001. The
increase was primarily related to payments of $21.6 million in 2002 related to
the acquisitions of United Lubricants Corporation ("ULC") and Epmar Corporation
("Epmar"), compared to a payment of $1.4 million related to an acquisition in
2001.
Expenditures for property, plant, and equipment totaled $5.1 million in the
first six months of 2002 compared to $3.1 million in the same period of 2001.
The increase in spending was primarily the result of the project to implement a
global transaction system and the move into the new corporate headquarters.
Capital expenditures for 2002 are expected to be approximately $13.0 million,
which is down from the previous estimate of $17.0 million.
Net cash flows provided by financing activities were $19.4 million for the
first six months of 2002 compared with $0.1 million for the same period of the
prior year. The net change was primarily due to approximately $22.0 million of
short-term borrowings in 2002, primarily used to finance the ULC and Epmar
acquisitions, compared with $2.5 million of short-term borrowings in 2001.
In April 2002, the Company entered into a $20.0 million committed credit
facility, with a bank, which expires in April 2003. At the Company's option, the
interest rate for borrowings under the agreement may be based on the lender's
cost of funds plus a margin, LIBOR plus a margin, or on the prime rate. The
provisions of the agreement require that the Company maintain certain financial
ratios and covenants, all of which the Company was in compliance with as of June
30, 2002. A total of $4.0 million in borrowings was outstanding under this
facility as of June 30, 2002.
In April 2002, the Company entered into a $10.0 million uncommitted credit
facility with the same lender under similar terms. No borrowings under this
facility were outstanding as of June 30, 2002.
These facilities replace an existing uncommitted facility in the amount of
$18.0 million, which was fully drawn as of June 2002. This facility was
terminated in July 2002, with all remaining balances outstanding scheduled to be
repaid through borrowings under the new facilities discussed above.
The Company believes, that in 2002, it is capable of supporting its
operating requirements, payments of dividends to shareholders, possible
acquisition opportunities, and possible resolution of contingencies, through
internally generated funds supplemented with debt as needed.
Operations
Comparison of First Six Months 2002 with First Six Months 2001
Consolidated net sales for the first six months of 2002 were $129.4
million, essentially flat compared to the first six months of 2001. The sales
comparison was favorably impacted by the inclusion of revenues from ULC and
Epmar, partially offset by unfavorable foreign currency translations. At
constant exchange rates and excluding ULC and Epmar revenues, consolidated net
sales would have been down approximately three percent compared to 2001.
Cost of sales decreased as a percentage of sales from 59.1 percent in 2001
to 58.8 percent in 2002. The improvement was primarily a result of favorable raw
material costs.
Selling, general and administrative (SG&A) expenses of $43.3 million in the
first six months of 2002 were approximately nine percent higher than the $39.8
million reported in the first months of 2001. The increase was primarily the
result of SG&A expenses of ULC and Epmar, and higher pension, insurance, and
other administrative costs.
Other income variance primarily reflects foreign exchange losses in the
first six months of 2002 compared with foreign exchange gains in the first six
months of 2001, as well as lower license fee revenue in 2002 compared with 2001.
Net interest expense was favorable in the first six months of 2002 compared to
the prior year, despite increased borrowings to fund the ULC and Epmar
acquisitions, due to lower borrowing rates and the impact of principal payments
made on the Company's long-term debt. Equity income in the first six months of
2002 compared to the first six months of 2001 reflects lower income year over
year from the Company's joint venture in Mexico, as well as the start up of the
Company's real estate joint venture in Conshohocken, PA. Minority interest was
lower in the first six months of 2002 compared with the same period last year,
primarily due to lower net income from the Company's subsidiary in Brazil.
The effective tax rate for 2002 is currently 32%, compared to 31% in the
prior year. The effective tax rate is dependent on many internal and external
factors, and is assessed by the Company on a regular basis. The Company has been
assessed approximately $2 million of additional taxes based on an audit of
certain of its subsidiaries for prior years. The Company has initiated an appeal
process related to this assessment and currently believes its reserves are
adequate.
Comparison of Second Quarter 2002 with Second Quarter 2001
Consolidated net sales for the second quarter of 2002 were $69.5 million, a
seven percent increase compared to the second quarter of 2001. The sales
comparison was favorably impacted by the inclusion of revenues from ULC and
Epmar. The impact of foreign currency translations was not material to the
quarterly comparison, as the strengthening Euro was largely offset by the
weakening Brazilian Real and Argentine Peso. At constant exchange rates and
excluding ULC and Epmar revenues, consolidated net sales would have been down
approximately one percent compared to 2001.
Cost of sales as a percentage of sales was essentially flat.
Selling, general and administrative (SG&A) expenses in the second quarter
of 2002 were up $3.2 million from the second quarter of 2001. SG&A expenses of
ULC and Epmar accounted for approximately one half of the quarterly increase.
Higher pension, insurance, and other administrative costs were also factors.
Other income variance primarily reflects foreign exchange losses in the
second quarter of 2002 compared with foreign exchange gains in the second
quarter of 2001. Net interest expense was favorable in the second quarter of
2002 compared to the prior year, despite increased borrowings to fund the ULC
and Epmar acquisitions, due to lower borrowing rates and the impact of principal
payments made on the Company's long-term debt. Equity income in the second
quarter of 2002 was essentially flat compared to equity income in the second
quarter 2001. Minority interest was lower in the second quarter of 2002 compared
with the same period last year, primarily due to lower net income from the
Company's subsidiary in Brazil.
The effective tax rate for 2002 is currently 32%, compared to 31% in the
prior year.
Other Significant Items
On March 1, 2002, the Company acquired certain assets and liabilities of
United Lubricants Corporation for approximately $13.7 million, subject to
post-closing adjustments. The acquisition resulted in the recognition of
approximately $4.9 million of goodwill and $2.3 million of intangible assets.
Pro-forma results of operations have not been presented because the effects were
not material.
On April 22, 2002, the Company acquired all of the outstanding stock of
Epmar Corporation for $7.5 million and the assumption of $0.4 million of debt.
The acquisition resulted in the recognition of approximately $3.2 million of
goodwill and $2.9 million of intangible assets. Pro-forma results of operations
have not been presented because the effects were not material.
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. In January 2002, new
euro-denominated bills and coins were issued, and legacy currencies were
withdrawn from circulation. The Company's operating subsidiaries affected by the
euro conversion executed plans to address the systems and business issues raised
by the euro currency. The euro conversion did not have a material adverse impact
on the Company's 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, further
downturns in our customers' businesses, significant increases in raw material
costs, worldwide economic and political conditions, foreign currency
fluctuations and future terrorist attacks such as those that occurred on
September 11, 2001. 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 interest rates, foreign currency
fluctuations, changes in commodity prices, and credit risk.
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
beginning on pages 10 and 31, respectively, of the Registrant's 2001 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 June 30, 2002, Quaker had $22.0 million of short-term
borrowings.
Foreign Exchange Risk. A significant portion of Quaker's revenues and
earnings is generated by its foreign subsidiaries. These foreign subsidiaries
also hold a significant portion of Quaker's assets and liabilities. Incorporated
by reference is the information concerning Quaker's non-U.S. activities
appearing in Note 11 of the Notes to Consolidated Financial Statements beginning
on page 35 of the Registrant's 2001 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 global 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. Quaker is not
currently 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 June 30, 2002.
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.
Credit Risk. Quaker establishes allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. If the financial condition of Quaker's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Downturns in the overall economic climate may also
tend to exacerbate specific customer financial issues. A significant portion of
Quaker's revenues is derived from sales to customers in the U.S. steel industry
where a number of bankruptcies occurred during recent years. In the first
quarter 2002, Quaker recorded additional provisions for doubtful accounts
primarily related to bankruptcies in the U.S. steel industry. When a bankruptcy
occurs, Quaker must judge the amount of proceeds, if any, that may ultimately be
received through the bankruptcy or liquidation process. As part of its terms of
trade, Quaker may custom manufacture products for certain large customers and/or
may ship product on a consignment basis. These practices may increase the
Company's exposure should a bankruptcy occur, and may require writedown or
disposal of certain inventory due to its estimated obsolescence or limited
marketability. Customer returns of products or disputes may also result in
similar issues related to the realizability of recorded accounts receivable or
returned inventory. Incorporated by reference is the information in "Critical
Accounting Policies and Estimates" and "Liquidity and Capital Resources" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning on pages 8 and 10 respectively, of the Registrant's 2001
Annual Report filed on Form 10-K.
PART II. OTHER INFORMATION
Items 1,2,3 and 5 of Part II are inapplicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of the Company's shareholders was held on May 8,
2002. At the Meeting, management's nominees, Peter A. Benoliel, Ronald J.
Naples, and Robert H. Rock were elected Class I Directors. Voting (expressed in
number of votes) was as follows: Peter A. Benoliel, 26,672,680 votes for,
101,268 votes against or withheld, and no abstentions or broker non-votes;
Ronald J. Naples, 25,856,670 votes for, 917,278 votes against or withheld, and
no abstentions or broker non-votes; and Robert H. Rock, 26,672,680 votes for,
101,268 votes against or withheld, and no abstentions or broker non-votes.
In addition, at the Meeting, the shareholders ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants to examine
and report on its financial statements for the year ending December 31, 2002 by
a vote of 26,689,061 for, 68,854 votes against, 16,033 abstentions, and no
broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits.
10(mm) - Credit Agreement between Registrant and ABN AMRO Bank N.V. in
the amount of $20,000,000, dated April 12, 2002.
10(nn) - Promissory Note in the amount of $10,000,000 in favor of ABN
AMRO Bank N.V., dated April 15, 2002.
99.1 - Certification of Ronald J. Naples
99.2 - Certification of Michael F. Barry
(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: August 14, 2002