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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from to
Commission file number 0-7154
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QUAKER CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
A Pennsylvania Corporation No. 23-0993790
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Elm and Lee Streets, Conshohocken, 19428
Pennsylvania (Zip Code)
(Address of principal executive
offices)
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Registrant's telephone number, including area code (610) 832-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on which
Title of each class registered
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Common Stock, $1.00 par value New York Stock Exchange
Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant. (The aggregate market value is computed by reference to the
last reported sale on the New York Stock Exchange on March 9, 2001):
$145,038,814.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of the latest practicable date: 8,929,576 shares of
Common Stock, $1.00 Par Value, as of March 9, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement dated March 30, 2001
in connection with the Annual Meeting of Shareholders to be held on May 9, 2001
are incorporated into Part III.
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PART I
As used in this Report, the terms "Quaker" and the "Company" refer to Quaker
Chemical Corporation, its subsidiaries, and associated companies, unless the
context otherwise requires.
Statements contained in this Annual Report on Form 10-K 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, and durable goods
manufacturers.
Item 1. Business.
General Description
Quaker develops, produces, and markets a broad range of formulated chemical
specialty products for various heavy industrial and manufacturing applications
and, in addition, offers and markets chemical management services. Quaker's
principal products and services include: (i) rolling lubricants (used by
manufacturers of steel in the hot and cold rolling of steel and by
manufacturers of aluminum in the cold rolling of aluminum); (ii) corrosion
preventives (used by steel and metalworking customers to protect metal during
manufacture, storage, and shipment); (iii) metal finishing compounds (used to
prepare metal surfaces for special treatments such as galvanizing and tin
plating and to prepare metal for further processing); (iv) machining and
grinding compounds (used by metalworking customers in cutting, shaping, and
grinding metal parts which require special treatment to enable them to tolerate
the manufacturing process); (v) forming compounds (used to facilitate the
drawing and extrusion of metal products); (vi) hydraulic fluids (used by steel,
metalworking, and other customers to operate hydraulically activated
equipment); (vii) technology for the removal of hydrogen sulfide in various
industrial applications; (viii) chemical milling maskants for the aerospace
industry and temporary and permanent coatings for metal products; (ix)
construction products such as flexible sealants and protective coatings for
various applications; and (x) programs to provide chemical management services.
On May 31, 2000, Quaker completed the sale of its U.S. pulp and paper
business which developed, produced and marketed paper production products used
as defoamers, release agents, softeners, debonders and dispersants. For
additional information see Note 12 of Notes to Consolidated Financial
Statements, which appears in Item 8 of this report.
A substantial portion of Quaker's sales worldwide are made directly through
its own sales force with the balance being handled through distributors and
agents. Quaker sales persons visit the plants of customers regularly and,
through training and experience, identify production needs which can be
resolved or alleviated either by adapting Quaker's existing products or by
applying new formulations developed in Quaker's laboratories. In 2000, certain
products were also sold in Canada and Korea by licensees under long-term
royalty agreements. Generally, separate manufacturing facilities of a single
customer are served by different sales personnel.
The business of the Company and its operating results are subject to certain
risks, of which the principal ones are referred to in the following
subsections.
Competition
The chemical specialty industry is composed of a number of companies of
similar size as well as companies larger and smaller than Quaker. Quaker cannot
readily determine its precise position in every industry it serves. Based on
information available to Quaker, however, it is estimated that Quaker holds a
significant position (among a group in excess of 25 other suppliers) in the
market for process fluids used in the production of hot and cold rolling of
steel. Many competitors are in fewer and more specialized product
classifications or provide different levels of technical services in terms of
specific formulations for individual
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customers. Competition in the industry is based primarily on the ability to
provide products which meet the needs of the customer and render technical
services and laboratory assistance to customers and, to a lesser extent, on
price.
Major Customers and Markets
During 2000, Quaker's five largest customers (each composed of multiple
subsidiaries or divisions with semi-autonomous purchasing authority) accounted
for approximately 13.0% of its consolidated net sales with the largest of these
customers accounting for 4.0% of consolidated net sales. Furthermore, a
significant portion of Quaker's revenues are realized from the sale of process
fluids to manufacturers of steel, automobiles, appliances, and durable goods,
and, therefore, Quaker is subject to the same business cycles as those
experienced by these manufacturers and their customers.
Raw Materials
Quaker uses over 500 raw materials, including mineral oils, fats and fat
derivatives, ethylene derivatives, solvents, surface active agents, chlorinated
paraffinic compounds, and a wide variety of organic and inorganic compounds. In
2000, only one raw material accounted for as much as 10% of the total cost of
Quaker's raw material purchases. Many of the raw materials used by Quaker are
"commodity" chemicals, and, therefore, Quaker's earnings can be affected by
market changes in raw material prices. Quaker has multiple sources of supply
for most materials, and management believes that the failure of any single
supplier would not have a material adverse effect upon its business. Reference
is made to disclosure contained in Item 7A of this Report.
Patents and Trademarks
Quaker has a limited number of patents and patent applications, including
patents issued, applied for, or acquired in the United States and in various
foreign countries, some of which may prove to be material to its business.
Principal reliance is placed upon Quaker's proprietary formulae and the
application of its skills and experience to meet customer needs. Quaker's
products are identified by trademarks which are registered throughout its
marketing area. Quaker makes little use of advertising but relies heavily upon
its reputation in the markets which it serves.
Research and Development--Laboratories
Quaker's research and development laboratories are directed primarily toward
applied research and development since the nature of Quaker's business requires
continuing modification and improvement of formulations to provide chemical
specialties to satisfy customer requirements. Research and development costs
are expensed as incurred. Company-sponsored research and development expenses
during 2000, 1999, and 1998 were $8.5 million, $8.5 million, and $9.6 million,
respectively.
Quaker maintains quality control laboratory facilities in each of its
manufacturing locations. In addition, Quaker maintains in Conshohocken,
Pennsylvania, and Uithoorn, The Netherlands, laboratory facilities which are
devoted primarily to applied research and development.
Most of Quaker's subsidiaries and associated companies also have laboratory
facilities. Although not as complete as the Conshohocken or Uithoorn
laboratories, these facilities are generally sufficient for the requirements of
the customers being served. If problems are encountered which cannot be
resolved by local laboratories, such problems may be referred to the laboratory
staff in Conshohocken or Uithoorn.
Regulatory Matters
In order to facilitate compliance with applicable federal, state, and local
statutes and regulations relating to occupational health and safety and
protection of the environment, the Company has an ongoing program of site
assessment for the purpose of identifying capital expenditures or other actions
that may be necessary to comply
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with such requirements. The program includes periodic inspections of each
facility by Quaker and/or independent environmental experts, as well as
ongoing inspections by on-site personnel. Such inspections are addressed to
operational matters, record keeping, reporting requirements, and capital
improvements. In 2000, capital expenditures directed solely or primarily to
regulatory compliance amounted to approximately $2.8 million compared to $1.7
million and $1.1 million in 1999 and 1998, respectively.
Number of Employees
On December 31, 2000, Quaker's consolidated companies had 943 full-time
employees of whom 379 were employed by the parent company and its U.S.
subsidiaries and 564 were employed by its non-U.S. subsidiaries. Associated
companies of Quaker (in which it owns 50% or less) employed 205 people on
December 31, 2000.
Product Classification
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 as well as other various chemical products.
Non-U.S. Activities
Since significant revenues and earnings are generated by non-U.S.
operations, Quaker's financial results are affected by currency fluctuations,
particularly between the U.S. dollar, the E.U. euro, the Brazilian real, and
other foreign currencies, and the impact of those currency fluctuations on the
underlying economies. Reference is made to disclosure contained in Item 7A of
this Report.
Item 2. Properties.
Quaker's corporate headquarters and a laboratory facility are located in
Conshohocken, Pennsylvania. Quaker's other principal facilities are located in
Detroit, Michigan; Woodchester, England; Uithoorn, The Netherlands;
Villeneuve, France; Santa Perpetua de Mogoda, Spain; Rio de Janeiro, Brazil;
and Wuxi, China. With the exception of the Conshohocken site, which is owned
by a real estate joint venture of which Quaker is a 50% partner (the "Real
Estate Venture"), all of these principal facilities are owned by Quaker. On
December 31, 2000, all of the aforementioned principal facilities, including
the Conshohocken site, were mortgage free. Quaker also leases small sales,
laboratory and warehouse facilities in other locations. Financing for the
laboratory facility in Conshohocken, was arranged through the use of
industrial revenue and development bonds with an outstanding balance at
December 31, 2000 of $5.0 million. In January 2001, Quaker contributed the
entire Conshohocken site to the Real Estate Venture. The Real Estate Venture
was organized to renovate certain of the existing buildings at the site as
well as to build new office space, a portion of which will be leased to Quaker
(new office space and renovated laboratory facilities), 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 on March 16, 2001 of approximately $2.7
million.
Quaker's aforementioned principal facilities (excluding Conshohocken)
consist of various manufacturing, administrative, warehouse, and laboratory
buildings. Manufacturing and warehouse facilities located in Conshohocken,
Pennsylvania, were closed in 1996 leaving just the administrative and
laboratory buildings. Substantially all of the buildings are of fire-resistant
construction and are equipped with sprinkler systems. All facilities are
primarily of masonry and/or steel construction and are adequate and suitable
for Quaker's present operations. The Company has a program to identify needed
capital improvements which is implemented as management considers necessary or
desirable. Most locations have various numbers of raw material storage
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tanks ranging from 7 to 66 each with a capacity ranging from 1,000 to 82,000
gallons and processing or manufacturing vessels ranging in capacity from 15 to
16,000 gallons.
Each of Quaker's 50% or less owned non-U.S. associated companies owns or
leases a plant and/or sales facilities in various locations.
Item 3. Legal Proceedings.
The Company is a party to proceedings, cases, and requests for information
from, and negotiations with, various claimants and federal and state agencies
relating to various matters including environmental matters. Incorporated
herein by this reference is the information concerning pending asbestos-related
cases against a non-operating subsidiary and amounts accrued associated with
certain environmental investigatory and noncapital remediation costs in Note 13
of Notes to Consolidated Financial Statements which appears in Item 8 of this
Report.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the last
quarter of the period covered by this Report.
Item 4(a). Executive Officers of the Registrant.
Set forth below are the executive officers of the Company, each elected for
a one-year term:
Name, Age, and Present Business Experience During Past Five
Position With the Company Years and Period Served as an Officer
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Ronald J. Naples, 55.................... Mr. Naples was elected Chairman of
Chairman of the Board and the Board in May 1997 and Chief
Chief Executive Officer, and Director Executive Officer in October 1995. He
also served as President of the
Company from October 1995 until March
1998. Mr. Naples was elected a
Director of the Company in 1988.
Joseph W. Bauer, 58..................... Mr. Bauer was elected President and
President and Chief Operating Officer Chief Operating Officer of the
Company in March 1998. Previously,
Mr. Bauer was employed by M. A. Hanna
and was President of M. A. Hanna
Color Division from 1996 to 1998.
Michael F. Barry, 42.................... Mr. Barry was elected Vice President,
Vice President, Chief Financial Officer Chief Financial Officer and Treasurer
and Treasurer of the Company in November 1998.
Previously, Mr. Barry was employed by
Lyondell (formerly ARCO Chemical)
where he held the position of
Business Director for its Urethanes
business throughout the Americas from
1997 to 1998 and where he also held a
variety of financial and business
positions from 1988 to 1997.
D. Jeffry Benoliel, 42.................. Mr. Benoliel was elected Vice
Vice President, Secretary President and General Counsel in
and General Counsel January 2001. He was elected an
officer of the Company in May 1998,
at which time he assumed the office
of Corporate Secretary in addition to
being Director, Corporate Legal
Affairs, a position he has held since
May 1996. From 1995 to 1996, he was
Manager, Corporate Legal Affairs. Mr.
Benoliel is the son of Peter A.
Benoliel, a Director of the Company.
Jose Luiz Bregolato, 55 ................ Mr. Bregolato was elected to his
Vice President and Managing Director-- current position in 1993.
South America
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Name, Age, and Present Business Experience During Past Five
Position With the Company Years and Period Served as an Officer
------------------------- -------------------------------------
Ian F. Clark, 56..................... Mr. Clark was elected an officer of the
Vice President and Global Industry Company in March 1999. He assumed his
Leader--Metalworking current position in January 2001.
and Chemical Management Services Previously, he was Vice President and
Global Industry Leader--Steel/Fluid
Power from March 1999 to December 2000.
Prior to joining the Company, he was
employed by Ciba Specialty Chemicals
Corporation where he was President-Sales
and Marketing, U.S. Pigments Division
from 1990 to 1998 and, in addition, was
General Manager for one of its global
pigment segments from 1996 to 1998.
James A. Geier, 45................... Mr. Geier was elected to his current
Vice President--Human Resources position in November 1997. Previously,
Mr. Geier held a variety of human
resources positions at Rhone-Poulenc
Rorer Pharmaceuticals, Inc. for a period
of more than five years.
Mark Harris, 46...................... Mr. Harris was elected to his current
Vice President and Global Industry position in January 2001. From 1996
Leader--Steel/Fluid Power until he assumed his current position,
Mr. Harris was Regional Industry Manager
for the Company's Steel/Fluid Power
business in Europe, the Middle East, and
Africa.
Daniel S. Ma, 60..................... Mr. Ma was elected to his current
Vice President and Managing position in 1993.
Director-- Asia/Pacific
Marcus C. J. Meijer, 53.............. Mr. Meijer was elected an officer of the
Senior Vice President Company in 1990. From July 1999 to
December 2000, he was the Company's
Senior Vice President and Global
Industry Leader--Metalworking/CMS, and
from 1990 to July 1999 he was Vice
President--Europe.
Wilbert Platzer, 39.................. Mr. Platzer was elected to his current
Vice President--Worldwide Operations position in January 2001. From March
1996 to June 1999, he was Managing
Director of Quaker Chemical B.V., the
Company's Dutch affiliate, and from July
1999 until he assumed his current
position he was Director of Operations--
Europe.
Irving H. Tyler, 42 ................. Mr. Tyler was elected Vice President--
Vice President--Information Services Information Services and Chief
and Chief Information Officer Information Officer of the Company in
January 2001. Previously, he was the
Company's Director of Information
Services and Chief Information Officer
from July 1999 to January 2001; European
Controller from August 1997 to July
1999; Director of Operations and
Information Services from January 1997
to August 1997; Director of Finance,
North American Operations from January
1995 through January 1997.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock is listed on the New York Stock Exchange ("NYSE")
under the trading symbol KWR. The following table sets forth, for the calendar
quarters during the past two years, the range of high and low sales prices for
the common stock as reported by the NYSE, and the quarterly dividends declared
as indicated:
Range of Quotations
-------------------------------- Dividends
2000 1999 Declared
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High Low High Low 2000 1999
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First quarter .............$17 $13 3/8 $18 $13 1/2 $.19 1/2 $.19
Second quarter............. 17 7/16 15 1/16 18 3/8 13 11/16 .19 1/2 .19
Third quarter.............. 17 3/8 15 13/16 17 5/16 15 13/16 .20 1/2 .19 1/2
Fourth quarter............. 19 1/4 15 7/8 17 1/16 13 7/8 .20 1/2 .19 1/2
As of January 17, 2001 there were 868 shareholders of record of the
Company's common stock, its only outstanding class of equity securities.
Item 6. Selected Financial Data.
The following table sets forth selected financial information for the
Company:
2000(/1/) 1999(/2/) 1998(/3/) 1997(/4/) 1996(/5/)
--------- --------- --------- --------- ---------
(Dollars in thousands except per share amounts)
Summary of Operations:
Net sales.................... $267,570 $265,671 $264,453 $248,220 $247,100
Income (loss) before taxes... 26,486 27,151 16,797 19,735 (3,997)
Net income (loss)............ 17,163 15,651 10,650 12,611 (7,599)
Per share:
Net income (loss)-basic.... 1.94 1.76 1.21 1.45 (.88)
Net income (loss)-diluted.. 1.93 1.74 1.20 1.45 (.88)
Dividends.................. .80 .77 .74 .71 .69
Financial Position:
Working capital.............. 52,981 51,584 45,636 48,098 22,518
Total assets................. 188,161 182,213 191,403 172,463 165,608
Long-term debt............... 22,295 25,122 25,344 25,203 5,182
Shareholders' equity......... 84,907 81,199 83,735 74,976 73,566
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(1) The results of operations for 2000 include a net gain on exit of businesses
of $1,016 after-tax and a litigation charge of $1,035 after-tax. Excluding
these items, net income for 2000 was $17,182.
(2) The results of operations for 1999 include a net repositioning credit of
$188 after-tax. Excluding this credit, net income for 1999 was $15,462.
(3) The results of operations for 1998 include net repositioning and
integration charges of $2,882, after-tax and minority interest. Excluding
these charges, net income for 1998 was $13,532.
(4) The results of operations for 1997 include a gain on the sale of the
European pulp and paper business, $1,703 after-tax and a litigation charge
of $2,000, $1,320 after-tax. Excluding these items, net income was $12,228.
(5) The results of operations for 1996 include special charges, $16,912 after-
tax. Excluding these charges, net income for 1996 was $9,313.
6
Item 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 $21.4 million in
2000 compared to $14.2 million in 1999. The increase principally resulted from
increased net income, in addition to a decrease in the change in accounts
receivable in 2000 versus 1999 and repositioning benefit payments of $2.1
million made in 1999.
Net cash used in investing activities decreased to $4.0 million in 2000 from
$6.4 million in 1999. The decrease is primarily related to $5.2 million of
proceeds received from the sale of the U.S. pulp and paper business, in
addition to $1.0 million of proceeds related to the disposition of assets,
partially offset by a $3.5 million contingent purchase payment related to the
1998 Brazilian acquisition.
Expenditures for property, plant, and equipment totaling $6.1 million in
2000 were consistent with 1999 levels and included upgrades of manufacturing
capabilities at various locations, with $2.8 million for environmental and
regulatory compliance in 2000 versus $1.7 million in 1999. Capital expenditures
for 2001 are expected to be approximately $13.0 million and include various
upgrades to manufacturing capabilities in the U.S. and Europe and an estimated
$2.0 million for environmental and regulatory compliance. A significant amount
of the 2001 increase is related to capital expenditures of approximately $3.0
million for a global transaction system implementation. In January 2001, the
Company contributed the entire Conshohocken site to a real estate joint venture
of which the Company is a 50% partner. 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 which will be leased to the Company, with the
balance to be leased to unaffiliated third parties. The Company believes that
funds generated internally should be sufficient to finance payments for capital
expenditures.
Net cash flows used in financing activities were $8.8 million in 2000,
compared with $7.4 million used in financing activities in 1999. The net change
was primarily due to approximately $2.0 million paid to purchase shares of
stock under the Company's stock repurchase program during 2000.
The Company has available $18.0 million in a line of credit and believes
that additional bank borrowings could be negotiated at competitive rates, based
on its debt-to-equity ratio and current levels of operating performance. The
Company believes that in 2001, it is capable of supporting its operating
requirements, payment of dividends to shareholders, possible acquisition
opportunities, and possible resolution of contingencies (see Note 13 of Notes
to Consolidated Financial Statements) through internally generated funds
supplemented with debt as needed.
Operations
Comparison of 2000 with 1999
As discussed in Note 1 of the Notes to Consolidated Financial Statements,
reclassifications which had no effect on net income have been made to
previously reported sales and cost of sales data for all periods presented to
include freight costs incurred and billed to customers in accordance with
Emerging Issues Task Force No. 00-10, "Accounting for Shipping and Handling
Fees and Costs."
Consolidated net sales for 2000 increased $1.9 million over 1999. The sales
growth was the net result of a 5% increase in volume and a 3% improvement in
price/mix, offset by a 5% negative impact from foreign currency translation.
Also, the sale of the U.S. pulp and paper business in May 2000 unfavorably
impacted the sales comparison by 2%. The improvement for the year was mainly
attributable to metalworking process chemicals sales growth in Brazil and the
Asia/Pacific region primarily due to strong demand from the steel industry,
offset by reductions in the European region due to foreign currency translation
and lower coatings segment revenues. Coatings segment revenues declined as a
result of lower aircraft production.
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Operating income decreased to $25.1 million in 2000 from $27.0 million
(excluding the impacts of the repositioning and integration credit adjustments)
in 1999. The decline was primarily due to a lower gross profit margin as a
percentage of sales (41.9% for 2000 compared to 43.5% for 1999). This decrease
is mainly a result of higher raw material costs.
Selling, general, and administrative costs in 2000 decreased approximately
$1.8 million or 2% from 1999, reflecting the Company's continued cost
containment programs and a positive foreign exchange impact. This decrease was
offset by a $1.7 million additional reserve for doubtful accounts related to
two U.S. steel customers which filed for bankruptcy protection under Chapter
11.
Minority interest was significantly higher in 2000, primarily due to higher
net income from joint ventures in Brazil and China. Net interest expense was
lower in 2000 reflecting increased interest income and lower overall short-term
borrowings. Other income variance reflects lower license revenue and gains on
fixed asset disposals.
The Company's effective tax rate in 2000 was 31% compared with 40% in 1999.
The decrease in effective tax rate is primarily due to the implementation of
several global tax planning initiatives, the most significant of which is
related to the Company's net operating loss carryforward position in Brazil.
The impact of the tax planning initiatives in Brazil is being magnified as
these operations become more profitable. The Company is currently reviewing the
effective rate for 2001, which is dependent on many internal and external
factors, including but not limited to the profitability of the Company's
foreign operations.
During 2000, the Company performed a comprehensive review of the strategic
position of certain individual business units and related assets, and decided
to exit certain businesses. Accordingly, the Company recorded valuation
reserves for certain assets of $0.9 million and a pre-tax gain on the sale of
its U.S. pulp and paper business of $2.4 million.
Comparison of 1999 with 1998
Consolidated net sales for 1999 increased $1.2 million over 1998 results,
primarily due to increased metalworking process chemicals revenues in Brazil
and Asia/Pacific, offset by reductions in the European region due to foreign
currency translation and lower coatings segment revenues. Declines in the
coatings segment were related to lower aircraft production.
Operating income increased to $27.0 million from $22.5 million (excluding
impacts of the repositioning and integration charge adjustments). The
improvement was primarily due to lower raw material costs, lower global
manufacturing costs, and a more favorable sales mix due to increased sales of
advantaged products.
In 1998, the Company initiated a repositioning and integration plan to
better align its organizational structure with market demands, to improve
operational performance, and to reduce costs. In the fourth quarter of 1998,
the Company took a pre-tax charge of $5.3 million in connection with this
program. At the end of 1999, the Company had substantially implemented these
initiatives and reversed approximately $314,000 of the original charge. This is
reported as a separate line item in the Consolidated Statement of Operations
(see Note 2 of Notes to Consolidated Financial Statements).
Selling, general, and administrative costs in 1999 were flat compared with
1998, reflecting realized cost savings from the repositioning and integration
program, offset primarily by increased costs in Brazil related to a midyear
1998 acquisition, as well as other business initiatives and projects such as
Year 2000 projects.
8
The increase in other income of $0.7 million represents increased license
revenue and lower foreign exchange losses in Europe in 1999 versus the prior
year. Increased interest expense of $0.3 million over the prior year was
related to higher short-term borrowings in the early part of 1999. Minority
interest was $1.2 million higher in 1999 compared with the prior year due to
higher net income earned in the Brazilian joint venture.
The Company's effective tax rate of 40% is consistent with prior years.
General
The Company is involved in environmental clean-up activities and litigation
in connection with an existing plant location and former waste-disposal sites
(see Note 13 of Notes to Consolidated Financial Statements). During the second
quarter of 2000, it was discovered during an internal environmental audit that
AC Products, Inc. (ACP), a wholly owned subsidiary, had failed to properly
report its air emissions. In response, an internal investigation of all
environmental, health, and safety matters at ACP was conducted. ACP voluntarily
disclosed these matters to regulators and took steps to correct all
environmental, health, and safety issues discovered. In addition, ACP is
involved in certain soil and groundwater remediation activities identified in
prior years. The Company believes that the potential uninsured known
liabilities associated with these matters approximate $1.5 million, for which
the Company has sufficient reserves. Notwithstanding the foregoing, the Company
cannot be certain that liabilities in the form of fines, penalties, and damages
will not be incurred in excess of the amount reserved.
The Company does not currently use financial instruments that expose it to
significant risk involving foreign currency transactions; however, the size of
non-U.S. activities has a significant impact on reported operating results and
the attendant net assets. During the past three years, sales by non-U.S.
subsidiaries accounted for approximately 53% to 56% of the consolidated net
annual sales (see Note 11 of Notes to Consolidated Financial Statements).
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
Company recorded a pre-tax charge of $5.3 million ($2.9 million after-tax and
minority interest, or $0.33 per share) in connection therewith. The
repositioning and integration charge included workforce reductions
(approximately 70 employees) in the Company's U.S., South American and European
operations and integration costs associated with the closure of a leased
facility as a result of the Company's 1998 acquisition in Brazil (see Note 2 of
Notes to Consolidated Financial Statements).
The components of the 1998 pre-tax repositioning and integration charge
included severance and other benefit costs of $4.0 million and early pension
and postemployment benefits of $1.3 million. At the end of 1999, the Company
had substantially implemented these initiatives and reversed approximately
$314,000 of the original charge. The remaining repositioning and integration
liability at December 31, 2000 of $244,000 was paid in January 2001 (see Note 2
of Notes to Consolidated Financial Statements). The liabilities for early
pension and postemployment benefits are included in the Company's pension and
postretirement benefits obligations (see Note 7 of Notes to Consolidated
Financial Statements).
Euro
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 is 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 conversion. The Company anticipates that the
euro conversion will not have a material adverse impact on its financial
condition or results of operations.
9
Accounting for Derivative Instruments and Hedging Activities
In June 1998 and June 2000, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." These statements establish accounting and reporting
standards requiring that every derivative instrument be recorded on the balance
sheet as either an asset or a liability measured at fair value. SFAS Nos. 133
and 138 also require that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133, as amended by SFAS No. 138, is effective for fiscal years beginning
after June 15, 2000. Quaker is not currently a party to any derivative
financial instruments. Therefore, adoption of these new standards will not have
a material impact on the Company's operating results or financial position.
Forward-Looking and Cautionary Statements
Except for historical information and discussions, statements contained in
this Annual Report 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 7A. Quantitative and Qualitative Disclosures About Market Risk.
Quaker is exposed to the impact of 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. 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 December 31, 2000, Quaker
had $27,000 in short-term borrowings.
Foreign Exchange Risk. A significant portion of Quaker's revenues and
earnings is generated by its foreign operations. All such operations 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, and there are no
contracts or options outstanding at December 31, 2000.
Commodity Price Risk. Many of the raw materials used by Quaker are commodity
chemicals, and, therefore, Quaker 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.
10
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Financial Statements:
Report of Independent Accountants........................................ 12
Consolidated Statement of Operations..................................... 13
Consolidated Balance Sheet............................................... 14
Consolidated Statement of Cash Flows..................................... 15
Consolidated Statement of Shareholders' Equity........................... 16
Notes to Consolidated Financial Statements............................... 17
11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Quaker Chemical Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders'
equity present fairly, in all material respects, the financial position of
Quaker Chemical Corporation and its subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, PA
March 9, 2001
12
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands
except per share amounts)
Net sales........................................ $267,570 $265,671 $264,453
-------- -------- --------
Costs and expenses:
Cost of goods sold.............................. 155,530 150,028 153,760
Selling, general, and administrative expenses... 86,865 88,676 88,162
Net gain on exit of businesses................... (1,473) -- --
Litigation charge................................ 1,500 -- --
Repositioning and integration (credit) charges... -- (314) 5,261
-------- -------- --------
242,422 238,390 247,183
-------- -------- --------
Operating income................................. 25,148 27,281 17,270
Other income, net................................ 2,434 1,862 1,116
Interest expense................................. (2,030) (2,486) (2,151)
Interest income.................................. 934 494 562
-------- -------- --------
Income before taxes.............................. 26,486 27,151 16,797
Taxes on income.................................. 8,211 10,860 6,719
-------- -------- --------
18,275 16,291 10,078
Equity in net income of associated companies..... 1,424 957 961
Minority interest in net income of subsidiaries.. (2,536) (1,597) (389)
-------- -------- --------
Net income....................................... $ 17,163 $ 15,651 $ 10,650
======== ======== ========
Per share data:
Net income--basic............................... $1.94 $1.76 $1.21
Net income--diluted............................. $1.93 $1.74 $1.20
Dividends....................................... $ .80 $ .77 $ .74
See notes to consolidated financial statements.
13
QUAKER CHEMICAL CORPORATION
CONSOLIDATED BALANCE SHEET
December 31,
--------------------------
2000 1999
------------ ------------
(Dollars in thousands
except per share amounts)
ASSETS
Current assets
Cash and cash equivalents........................ $ 16,552 $ 8,677
Accounts receivable.............................. 54,401 55,132
Inventories...................................... 22,716 23,357
Deferred income taxes............................ 4,977 4,843
Prepaid expenses and other current assets........ 4,535 4,232
------------ ------------
Total current assets........................... 103,181 96,241
Property, plant, and equipment, net................ 42,459 44,752
Intangible assets.................................. 17,370 15,994
Investments in associated companies................ 5,925 5,773
Deferred income taxes.............................. 9,914 9,688
Other assets....................................... 9,312 9,765
------------ ------------
Total assets................................... $188,161 $182,213
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current portion of
long-term debt.................................. $ 2,914 $ 431
Accounts payable................................. 21,762 22,350
Dividends payable................................ 1,811 1,742
Accrued compensation............................. 11,854 8,749
Other current liabilities........................ 11,859 11,385
------------ ------------
Total current liabilities...................... 50,200 44,657
Long-term debt..................................... 22,295 25,122
Deferred income taxes.............................. 3,633 3,949
Accrued postretirement benefits.................... 9,823 9,798
Other liabilities.................................. 8,926 9,370
------------ ------------
Total liabilities.............................. 94,877 92,896
------------ ------------
Minority interest in equity of subsidiaries........ 8,377 8,118
------------ ------------
Commitments and contingencies......................
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................... 746 832
Retained earnings................................ 103,760 93,655
Accumulated other comprehensive loss............. (16,714) (11,378)
------------ ------------
97,456 92,773
Treasury stock, shares held at cost;
2000-812,646, 1999-729,986...................... (12,549) (11,574)
------------ ------------
Total shareholders' equity..................... 84,907 81,199
------------ ------------
Total liabilities and shareholders' equity... $188,161 $182,213
============ ============
See notes to consolidated financial statements.
14
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
--------------------------
2000 1999 1998
------- ------- --------
(Dollars in thousands)
Cash flows from operating activities
Net income........................................ $17,163 $15,651 $ 10,650
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................... 5,404 5,682 5,290
Amortization.................................... 1,408 1,274 1,821
Equity in net income of associated companies.... (1,424) (957) (961)
Minority interest in earnings of subsidiaries... 2,536 1,597 389
Deferred income taxes........................... (1,821) 1,031 (145)
Deferred compensation and other postretirement
benefits....................................... 1,218 326 1,396
Net gain on exit of businesses.................. (1,473) -- --
Litigation charge............................... 1,500 -- --
Repositioning and integration (credit) charges.. -- (314) 5,261
Other, net...................................... 596 926 --
Increase (decrease) in cash from changes in
current assets and current liabilities, net of
acquisitions and divestitures:
Accounts receivable, net........................ (2,187) (6,132) (2,684)
Inventories..................................... (650) (644) (1,149)
Prepaid expenses and other current assets....... (1,596) (400) (1,879)
Accounts payable and accrued liabilities........ (1,805) (1,313) (851)
Change in repositioning liabilities............. (328) (2,139) (1,882)
Estimated taxes on income....................... 2,852 (361) (2,675)
------- ------- --------
Net cash provided by operating activities..... 21,393 14,227 12,581
------- ------- --------
Cash flows from investing activities
Capital expenditures.............................. (6,126) (5,726) (8,099)
Dividends from associated companies............... 625 615 1,096
Investments in and advances to associated
companies........................................ -- (28) (621)
Payments related to acquisitions.................. (3,500) -- (9,350)
Proceeds from sale of business.................... 5,200 -- --
Proceeds from disposition of assets............... 1,006 88 70
Other, net........................................ (1,249) (1,302) 63
------- ------- --------
Net cash used in investing activities......... (4,044) (6,353) (16,841)
------- ------- --------
Cash flows from financing activities
Dividends paid.................................... (6,989) (6,817) (6,526)
Net (decrease) increase in short-term
borrowings....................................... (290) (689) 1,078
Long-term borrowings.............................. -- -- 483
Repayment of long-term debt....................... (28) (409) --
Treasury stock issued............................. 810 557 1,588
Treasury stock repurchased........................ (1,961) -- --
Other, net........................................ (295) -- --
------- ------- --------
Net cash used in financing activities......... (8,753) (7,358) (3,377)
------- ------- --------
Effect of exchange rate changes on cash........... (721) (2,052) (566)
Net increase (decrease) in cash and cash
equivalents.................................... 7,875 (1,536) (8,203)
Cash and cash equivalents at beginning of year.. 8,677 10,213 18,416
------- ------- --------
Cash and cash equivalents at end of year........ $16,552 $ 8,677 $ 10,213
======= ======= ========
Supplemental cash flow disclosures
Cash paid during the year for:
Income taxes.................................... $ 6,935 $10,310 $ 5,059
Interest........................................ 2,020 2,494 1,945
See notes to consolidated financial statements.
15
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated
Capital in other
Common excess of Retained Unearned comprehensive Treasury
stock par value earnings compensation income (loss) stock Total
------ ---------- -------- ------------ ------------- -------- --------
(Dollars in thousands except per share amounts)
Balance at December 31, 1997.. $9,664 $ 928 $ 80,749 $(528) $ (874) $(14,963) $ 74,976
--------
Net income.................. -- -- 10,650 -- -- -- 10,650
Currency translation
adjustments................ -- -- -- -- 1,788 -- 1,788
Minimum pension liability... -- -- -- -- (332) -- (332)
--------
Comprehensive income........ -- -- -- -- -- -- 12,106
--------
Dividends ($.74 per share).. -- -- (6,526) -- -- -- (6,526)
Shares issued upon exercise
of options................. -- (339) -- -- -- 1,574 1,235
Shares issued for employee
stock purchase plan........ -- 90 -- -- -- 395 485
Restricted stock............ -- 231 -- 528 -- 700 1,459
------ ----- -------- ----- -------- -------- --------
Balance at December 31, 1998.. 9,664 910 84,873 -- 582 (12,294) 83,735
--------
Net income.................. -- -- 15,651 -- -- -- 15,651
Currency translation
adjustments................ -- -- -- -- (11,997) -- (11,997)
Minimum pension liability... -- -- -- -- 37 -- 37
--------
Comprehensive income........ -- -- -- -- -- -- 3,691
--------
Dividends ($.77 per share).. -- -- (6,869) -- -- -- (6,869)
Shares issued upon exercise
of options................. -- (3) -- -- -- 167 164
Shares issued for employee
stock purchase plan........ -- (75) -- -- -- 553 478
------ ----- -------- ----- -------- -------- --------
Balance at December 31, 1999.. 9,664 832 93,655 -- (11,378) (11,574) 81,199
--------
Net income.................. -- -- 17,163 -- -- -- 17,163
Currency translation
adjustments................ -- -- -- -- (5,546) -- (5,546)
Minimum pension liability... -- -- -- -- 210 -- 210
--------
Comprehensive income........ -- -- -- -- -- -- 11,827
--------
Dividends ($.80 per share).. -- -- (7,058) -- -- -- (7,058)
Shares acquired under
repurchase program......... -- -- -- -- -- (1,961) (1,961)
Shares issued upon exercise
of options................. -- (54) -- -- -- 613 559
Shares issued for employee
stock purchase plan........ -- (32) -- -- -- 373 341
------ ----- -------- ----- -------- -------- --------
Balance at December 31, 2000.. $9,664 $ 746 $103,760 -- $(16,714) $(12,549) $ 84,907
====== ===== ======== ===== ======== ======== ========
See notes to consolidated financial statements.
16
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
Note 1--Significant Accounting Policies
Principles of consolidation: All majority-owned subsidiaries are included in
the Company's consolidated financial statements, with appropriate elimination
of intercompany balances and transactions. Investments in associated (less than
majority-owned) companies are accounted for under the equity method.
Translation of foreign currency: Assets and liabilities of non-U.S.
subsidiaries and associated companies are translated into U.S. dollars at the
respective rates of exchange prevailing at the end of the year. Income and
expense accounts are translated at average exchange rates prevailing during the
year. Translation adjustments resulting from this process are recorded directly
in shareholders' equity and will be included in income only upon sale or
liquidation of the underlying investment.
Cash and cash equivalents: The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Inventories: Inventories are valued at the lower of cost or market value.
Cost of domestic inventories, except for those of the coatings segment, are
determined using the last-in, first-out ("LIFO") method. Cost of non-U.S.
subsidiaries and the domestic coatings segment inventories are determined using
the first-in, first-out ("FIFO") method.
Long-lived assets: Property, plant, and equipment are stated at cost.
Depreciation is computed using the straight-line method on an individual asset
basis over the following estimated useful lives: buildings and improvements, 10
to 45 years; and machinery and equipment, 3 to 15 years. The carrying value of
long-lived assets is evaluated whenever changes in circumstances indicate the
carrying amount of such assets may not be recoverable. If necessary, the
Company recognizes an impairment loss for the difference between the carrying
amount of the assets and their estimated fair value. Fair value is based on
current and anticipated future undiscounted cash flows. Expenditures for
renewals and betterments which increase the estimated useful life or capacity
of the assets are capitalized; expenditures for repairs and maintenance are
expensed when incurred.
Intangible assets: Intangible assets consist of goodwill and other
intangibles arising from acquisitions which are being amortized on a straight-
line basis over various periods not exceeding 40 years. The realizability and
period of benefit of goodwill is evaluated periodically to assess
recoverability and, if warranted, impairment or adjustment of the period
benefited would be recognized. At December 31, 2000 and 1999, accumulated
amortization amounted to $6,032 and $5,532, respectively.
Revenue recognition: Sales are recorded when products are shipped to
customers and services earned. License fees and royalties are recorded when
earned.
Research and development costs: Research and development costs are expensed
as incurred. Company sponsored research and development expenses during 2000,
1999, and 1998 were $8,496, $8,524, and $9,550, respectively.
Concentration of credit risk: Financial instruments, which potentially
subject the Company to a concentration of credit risk, principally consist of
cash equivalents, short-term investments, and trade receivables. The Company
invests temporary and excess cash in money market securities and financial
17
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
instruments having maturities typically within 90 days. The Company has not
experienced losses from the aforementioned investments.
The Company sells its principal products to major steel, automotive, and
related companies around the world. The Company maintains allowances for
potential credit losses. The allowance for doubtful accounts was $2,960 in 2000
and $1,133 in 1999. Historically, the Company has experienced some losses
related to bankruptcy proceedings of major steel companies in the U.S. Prior to
2000, such losses have not been material. In 2000, the Company recorded an
allowance of $1,672 related to two U.S. steel customers which filed for
bankruptcy protection under Chapter 11.
Environmental liabilities and expenditures: Accruals for environmental
matters are recorded when it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated. Accrued liabilities
are exclusive of claims against third parties and are not discounted.
Environmental costs and remediation costs are capitalized if the costs increase
the value of the property from the date acquired or constructed and/or mitigate
or prevent contamination in the future.
Comprehensive income: The Company presents the components of comprehensive
income in its Statement of Shareholders' Equity. The accumulated currency
translation adjustments and minimum pension liability included in accumulated
other comprehensive loss were $15,963 and $751 at December 31, 2000,
respectively, and $10,417 and $961 at December 31, 1999, respectively. The
change in currency translation adjustment during 2000 is due to currency
fluctuations, primarily between the U.S. dollar, the Brazilian real and the
E.U. euro. The change in currency translation adjustment in 1999 is mainly
related to the Brazilian acquisition (see Note 12).
Recently Issued Accounting Standards: In June 1998 and June 2000, the
Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
These statements establish accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either an asset
or liability measured at fair value. SFAS Nos. 133 and 138 also require that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended by
SFAS No. 138, is effective for fiscal years beginning after June 15, 2000. The
adoption of these new standards is not expected to have a material impact on
the Company's operating results or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial
Statements", which clarifies certain existing accounting principles for the
timing of revenue recognition and its classification in the financial
statements. The implementation of SAB 101 in the fourth quarter of 2000 did not
have a material effect on the Company's financial statements.
In July 2000, the Emerging Issues Task Force (EITF) of the FASB issued EITF
No. 00-10, "Accounting for Shipping and Handling Fees and Costs", which
addresses the income statement classification of shipping and handling fees and
costs. As a result of implementing EITF No. 00-10, the Company now classifies
as revenues certain freight charges billed to customers and has restated prior
years' revenues and cost of sales in accordance with this guidance.
Implementation of EITF No. 00-10 had no impact on earnings.
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, and disclosure of contingencies at the date of the financial
statements and the reported amounts of net sales and expenses during the
reporting period. Actual results could differ from such estimates.
18
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Reclassifications: Certain reclassifications of prior years' data have been
made to improve comparability and to comply with EITF No. 00-10.
Note 2--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, and
recorded a pre-tax charge of $5,261 ($2,882 after-tax and minority interest, or
$0.33 per share). The repositioning and integration charge included workforce
reductions (approximately 70 employees) in the Company's U.S., South American
and European operations and integration costs associated with the closure of a
leased facility as a result of the Company's acquisition in Brazil (see Note
12).
The components of the 1998 pre-tax repositioning and integration charge
included severance and other benefit costs of $3,990 and early pension and
other postretirement benefits of $1,271. At the end of 1999, the Company had
substantially implemented these initiatives and reversed approximately $314 of
the original charge. The remaining severance and other benefit costs liability
balance at December 31, 2000 of $244 was paid in January 2001. The liabilities
for early pension and other postretirement benefits are included in the
Company's pension and postretirement benefits obligations (see Note 7).
The components of pre-tax charges incurred in 1998, as well as balances
remaining at December 31, 2000, were as follows:
1998 repositioning and integration charges for severance, other
employee benefits and integration costs.............................. $3,990
Benefit payments in 1998.............................................. (965)
Benefit payments in 1999.............................................. (2,139)
1999 adjustment....................................................... (314)
Benefit payments in 2000.............................................. (328)
------
Remaining liability at December 31, 2000.............................. $ 244
======
Note 3--Investments in Associated Companies
Summarized financial information of the associated companies (less than
majority-owned), in the aggregate, is as follows:
December 31,
---------------
2000 1999
------- -------
Current assets................................................. $26,999 $28,983
Noncurrent assets.............................................. 5,391 6,648
Current liabilities............................................ 13,763 16,091
Noncurrent liabilities......................................... 4,776 4,676
Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
Net sales............................................... $57,460 $54,224 $50,542
Gross margin............................................ 21,227 20,377 18,893
Operating income........................................ 5,226 5,821 5,963
Net income.............................................. 2,004 2,196 2,367
19
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Note 4--Inventories
Total inventories comprise:
December 31,
---------------
2000 1999
------- -------
Raw materials and supplies..................................... $11,872 $12,140
Work in process and finished goods............................. 10,844 11,217
------- -------
$22,716 $23,357
======= =======
Inventories valued under the LIFO method amounted to $6,497 and $6,380 at
December 31, 2000 and 1999, respectively. The estimated replacement costs for
these inventories using the FIFO method were approximately $6,287 and $5,929,
respectively.
Note 5--Property, Plant, and Equipment
Property, plant, and equipment comprise:
December 31,
---------------
2000 1999
------- -------
Land........................................................... $ 5,670 $ 5,437
Building and improvements...................................... 33,881 34,696
Machinery and equipment........................................ 65,844 65,542
Construction in progress....................................... 2,639 3,249
------- -------
108,034 108,924
Less accumulated depreciation.................................. 65,575 64,172
------- -------
$42,459 $44,752
======= =======
Note 6--Taxes on Income
Taxes on income consist of the following:
Year Ended December 31,
-------------------------
2000 1999 1998
------- -------- -------
Current:
Federal............................................ $ 2,411 $ 3,528 $ 1,294
State.............................................. 145 85 145
Foreign............................................ 7,476 6,216 5,425
------- -------- -------
10,032 9,829 6,864
Deferred:
Federal............................................ (1,337) 522 (1,016)
Foreign............................................ (484) 509 871
------- -------- -------
Total................................................ $ 8,211 $ 10,860 $ 6,719
======= ======== =======
20
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Total deferred tax assets and liabilities are composed of the following at
December 31:
2000 1999
--------------- ---------------
Non- Non-
Current current Current current
------- ------- ------- -------
Retirement benefits........................... $ 13 $ -- $ 155 $ --
Allowance for doubtful accounts............... 560 -- 180 --
FRS impairment................................ -- 1,836 -- 1,836
Insurance and litigation reserves............. 670 -- 1,523 --
Postretirement benefits....................... -- 3,102 -- 3,082
Supplemental retirement benefits.............. -- 802 -- 772
Performance incentives........................ 2,637 722 1,790 102
Alternative minimum tax carryforward.......... -- 396 -- 743
Repositioning charges......................... 1,097 2,873 1,195 2,873
Operating loss carryforward................... -- 1,222 -- 1,618
Other......................................... -- 183 -- 280
Valuation allowance........................... -- (1,222) -- (1,618)
------ ------- ------ -------
Total deferred tax assets..................... $4,977 $ 9,914 $4,843 $ 9,688
====== ======= ====== =======
Depreciation.................................. $ 3,467 $ 2,944
Sale of business.............................. -- 916
Other......................................... 166 89
------- -------
Total deferred tax liabilities................ $ 3,633 $ 3,949
======= =======
The following is a reconciliation of income taxes at the Federal statutory
rate with income taxes recorded by the Company for the years ended December 31:
2000 1999 1998
------ ------- ------
Income tax provision at the Federal statutory tax rate........................ $9,005 $ 9,231 $5,833
State income tax provisions, net.............................................. 96 56 96
Non-deductible entertainment and business meal expense........................ 173 195 206
Foreign taxes on earnings at rates different from the Federal statutory rate.. (1,239) 1,321 197
Miscellaneous items, net...................................................... 176 57 387
------ ------- ------
Taxes on income............................................................... $8,211 $10,860 $6,719
====== ======= ======
At December 31, 2000, the Company has foreign net operating loss
carryforwards of $3,864, of which $207 expire between 2001 and 2002. There is
no time limit for the remaining net operating loss carryforwards of $3,657. Due
to the uncertainty of the realization of these deferred tax assets, the Company
has established a valuation allowance against these carryforward benefits.
U.S. income taxes have not been provided on the undistributed earnings of
non-U.S. subsidiaries since it is the Company's intention to continue to
reinvest these earnings in those subsidiaries for working capital and expansion
needs. The amount of such undistributed earnings at December 31, 2000 was
approximately $107,000. Any income tax liability which might result from
ultimate remittance of these earnings is expected to be substantially offset by
foreign tax credits.
21
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Note 7--Pension and Other Postretirement Benefits
The Company maintains various noncontributory retirement plans, the largest
of which is in the U.S., covering substantially all of its employees in the
U.S. and certain other countries. The plans of the Company's subsidiaries in
the Netherlands and in the United Kingdom are subject to the provision of SFAS
No. 87, "Employers' Accounting for Pensions." The plans of the remaining non-
U.S. subsidiaries are, for the most part, either fully insured or integrated
with the local governments' plans and are not subject to the provisions of SFAS
No. 87.
The following table shows the components of pension costs for the periods
indicated:
2000 1999 1998
------ ------ ------
Service cost............................................ $2,442 $2,136 $1,608
Interest cost........................................... 4,169 3,962 3,613
Expected return on plan assets.......................... (4,583) (4,614) (4,416)
Other amortization, net................................. 97 (46) (387)
Early pension benefits (Note 2)......................... -- -- 965
------ ------ ------
Net pension cost of plans subject to SFAS No. 87........ 2,125 1,438 1,383
Pension costs of plans not subject to SFAS No. 87....... 69 67 243
------ ------ ------
Net pension costs....................................... $2,194 $1,505 $1,626
====== ====== ======
The U.S. defined benefit pension plan is the largest plan. The significant
assumptions for the U.S. plan were as follows:
2000 1999 1998
----- ----- -----
Discount rate for projected benefit obligation................ 7.5% 7.5% 6.75%
Assumed long-term rate of compensation increases.............. 5.5% 5.5% 5.5%
Long-term rate of return on plan assets....................... 9.25% 9.25% 9.25%
All other pension plans used assumptions in determining the actuarial
present value of the projected benefit obligations which are consistent with
(but not identical to) those of the U.S. plan.
The Company has postretirement benefit plans that provide medical and life
insurance benefits for certain retired employees of the Company. Both the
medical and life insurance plans are currently unfunded.
The following table shows the components of postretirement costs for the
periods indicated:
2000 1999 1998
---- ---- ------
Service cost.................................................. $105 $114 $ 100
Interest cost................................................. 714 669 622
---- ---- ------
Net periodic postretirement benefit cost...................... 819 783 722
Early postretirement benefits (Note 2)........................ -- -- 306
---- ---- ------
Net periodic postretirement benefit cost...................... $819 $783 $1,028
==== ==== ======
22
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The following table shows the Company plans' funded status reconciled with
amounts reported in the consolidated balance sheet as of December 31:
Other
Pension postretirement
benefits benefits
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
Change in benefit obligation
Benefit obligation at beginning of year... $64,712 $63,471 $ 9,607 $ 9,575
Service cost.............................. 2,382 2,083 105 114
Interest cost............................. 4,169 3,962 714 669
Amendments................................ 253 -- -- --
Translation difference.................... (1,365) (2,436) -- --
Actuarial (gain)/loss..................... (337) 1,230 209 100
Benefits paid............................. (4,031) (3,640) (794) (851)
Other..................................... 41 42 -- --
------- ------- ------- -------
Benefit obligation at end of year......... 65,824 64,712 9,841 9,607
Change in plan assets
Fair value of plan assets at beginning of
year..................................... 58,233 58,312 -- --
Actual return on plan assets.............. 3,032 3,950 -- --
Employer contribution..................... 1,571 1,728 794 851
Plan participants' contributions.......... 61 62 -- --
Translation difference.................... (1,114) (2,259) -- --
Benefits paid............................. (3,777) (3,560) (794) (851)
------- ------- ------- -------
Fair value of plan assets at end of year.. 58,006 58,233 -- --
Funded status............................. (7,818) (6,479) (9,841) (9,607)
Unrecognized transition asset............. (1,103) (1,608) -- --
Unrecognized gain/(loss).................. 2,882 2,481 18 (191)
Unrecognized prior service cost........... 3,660 3,658 -- --
------- ------- ------- -------
Net amount recognized..................... $(2,379) $(1,948) $(9,823) $(9,798)
======= ======= ======= =======
Amounts recognized in the balance sheet
consist of:
Prepaid benefit cost.................... $ 3,105 $ 3,467
Accrued benefit obligation.............. (6,311) (6,630)
Intangible asset........................ 76 254
Accumulated other comprehensive income.. 751 961
------- -------
Net amount recognized..................... $(2,379) $(1,948)
======= =======
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $7,075, $6,222, and $0, respectively, as of
December 31, 2000 and $9,912, $8,893, and $3,463, respectively, as of December
31, 1999.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% in 2000 and 1999.
In valuing costs and liabilities, different health care cost trend rates
were used for retirees under and over age 65. The average assumed rate for
medical benefits for all retirees was 8% in 2000, gradually decreasing to 5%
over nine years. A 1% increase in the health care cost trend rate would
increase total service and interest cost for 2000 by $37 and the accumulated
postretirement benefit obligation as of December 31, 2000 by $534.
23
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
A 1% decrease in the health care cost trend rate would decrease total service
and interest cost for 2000 by $34 and the accumulated postretirement benefit
obligation as of December 31, 2000 by $480.
The Company maintains a plan under which supplemental retirement benefits
are provided to certain officers. Benefits payable under the plan are based on
a combination of years of service and existing postretirement benefits.
Included in total pension costs are charges of $575, $511, and $411 in 2000,
1999, and 1998, respectively, representing the annual accrued benefits under
this plan.
Profit sharing plan: The Company also maintains a qualified profit sharing
plan covering substantially all domestic employees other than those who are
compensated on a commission basis. Contributions were $617, $1,251, and $310
for 2000, 1999, and 1998, respectively. In January 2001, this plan was replaced
by an enhanced employer match on the Company's 401(k) plan. Contributions
through this match are expected to approximate those of the profit sharing
plan.
Note 8--Debt
Debt consisted of the following:
December 31,
---------------
2000 1999
------- -------
6.98% Senior unsecured notes due 2007.......................... $20,000 $20,000
Industrial development authority monthly floating rate (4.6% at
December 31, 2000) demand bonds maturing 2014................. 5,000 5,000
Other debt obligations......................................... 209 553
------- -------
25,209 25,553
Less current portion........................................... 2,914 431
------- -------
$22,295 $25,122
======= =======
The long-term financing agreements require the maintenance of certain
financial covenants with which the Company is in compliance.
During the next five years, payments on long-term debt are due as follows:
$2,887 in 2001, $3,009 in 2002, and $2,857 in 2003, 2004, and 2005.
At December 31, 2000 and 1999, the Company had outstanding short-term
borrowings with banks under lines of credit in the aggregate of $27 and $331,
respectively.
The Company has available a $18,000 unsecured line of credit. Any borrowings
under this line of credit will be at the bank's most competitive rate of
interest in effect at the time. There were no outstanding borrowings under this
line of credit at December 31, 2000 or 1999.
At December 31, 2000 and 1999, the values at which the financial instruments
are recorded are not materially different from their fair market value.
Note 9--Shareholders' Equity
Holders of record of the Company's common stock for a period of 36
consecutive calendar months or less are entitled to 1 vote per share of common
stock. Holders of record of the Company's common stock for a period greater
than 36 consecutive calendar months are entitled to 10 votes per share of
common stock.
Treasury stock is held for use by the various Company plans which require
the issuance of the Company's common stock.
24
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The Company is authorized to issue 10,000,000 shares of preferred stock,
$1.00 par value, subject to approval by the Board of Directors. The Board of
Directors may designate one or more series of preferred stock and the number of
shares, rights, preferences, and limitations of each series. No preferred stock
has been issued.
Under provisions of a stock purchase plan which permits employees to
purchase shares of stock at 85% of the market value, 20,857 shares, 30,962
shares, and 27,538 shares were issued from treasury in 2000, 1999, and 1998,
respectively. The number of shares that may be purchased by an employee in any
year is limited by factors dependent upon the market value of the stock and the
employee's base salary. As of January 1, 2001, a new Employee Stock Purchase
Plan became effective under which employees may purchase stock under similar
terms as the prior plan. Under the new plan, which replaced the previous plan,
500,000 shares are available for purchase.
The Company has a long-term incentive program for key employees which
provides for the granting of options to purchase stock at prices not less than
market value on the date of the grant. Most options are exercisable between one
and three years after the date of the grant for a period of time determined by
the Company not to exceed seven years from the date of grant for options issued
in 1999 and ten years for options issued in prior years. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-
based Compensation." Accordingly, no compensation expense has been recognized
for the stock option plans. Had compensation cost been determined based on the
fair value at grant date for awards in 2000, 1999, and 1998 consistent with the
provisions of SFAS No. 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below:
2000 1999 1998
------- ------- -------
Net income--as reported................................ $17,163 $15,651 $10,650
Net income--pro forma.................................. 16,894 15,307 10,304
Net income per share--
as reported (diluted)................................. $ 1.93 $ 1.74 $ 1.20
Net income per share--
pro forma (diluted)................................... 1.90 1.71 1.16
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option - pricing model with the following weighted-
average assumptions:
2000 1999 1998
---- ---- ----
Dividend yield................................................ 3.9% 3.9% 3.9%
Expected volatility........................................... 20.4% 24.2% 22.7%
Risk-free interest rate....................................... 5.12% 6.45% 5.09%
Expected life (years)......................................... 7 8 9
25
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The table below summarizes transactions in the plan during 2000, 1999, and
1998.
2000 1999 1998
------------------- ------------------- -----------------
Weighted Weighted Weighted
Average Average Number Average
Number of Exercise Number of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- ------- --------
Options outstanding at
January 1,............. 1,082,947 $16.93 943,263 $17.34 921,999 $17.03
Options granted......... 140,700 14.69 157,600 14.37 155,400 17.19
Options exercised....... (25,350) 16.27 (2,516) 14.17 (97,994) 12.89
Options expired......... (57,850) 18.19 (15,400) 16.33 (36,142) 21.02
--------- --------- -------
Options outstanding at
December 31,........... 1,140,447 16.60 1,082,947 16.93 943,263 17.34
========= ========= =======
Options exercisable at
December 31,........... 906,306 17.01 826,347 17.35 760,352 17.47
========= ========= =======
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
- ------------------------------------------------------------ ---------------------------
Number Weighted Number Weighted
Range of Outstanding Weighted Average Average Exercisable Average
Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Prices
- --------------- ----------- ---------------- -------------- ----------- ---------------
$12.10 - $14.52 288,995 5 $13.95 207,895 $13.80
14.53 - 16.94 353,134 6 15.40 225,093 15.70
16.95 - 19.36 389,095 4 18.19 364,095 18.19
19.37 - 21.78 39,223 2 20.99 39,223 20.99
21.79 - 24.20 70,000 4 22.36 70,000 22.36
--------- -------
1,140,447 5 16.60 906,306 17.01
========= =======
Options were exercised for cash, resulting in the issuance of 25,350 shares
in 2000 and 2,516 shares in 1999. Options to purchase 731,800 shares were
available at December 31, 2000 for future grants.
The program also provides for cash awards and commencing in 1999, common
stock awards, the value of which is determined based on operating results over
a three-year period for awards issued in 1999, and over a four-year period in
prior years. The effect on operations of the change in the estimated value of
incentive units during the year was $921, $2,246, and $870 in 2000, 1999, and
1998, respectively.
Shareholders of record on February 20, 1990 received two stock purchase
rights for each three shares of common stock outstanding. These rights expired
on February 20, 2000. On March 6, 2000, the Board of Directors approved a new
Rights Plan and declared a dividend of one new right (the "Rights") for each
outstanding share of common stock to shareholders of record on March 20, 2000.
The Rights become exercisable if a person or group acquires or announces a
tender offer which would result in such person's acquisition of 20% or more of
the Company's common stock.
Each Right, when exercisable, entitles the registered holder to purchase one
one-hundredth of a share of a newly authorized Series B preferred stock at an
exercise price of sixty-five dollars per share subject to certain anti-dilution
adjustments. In addition, if a person or group acquires 20% or more of the
outstanding shares of the Company's common stock, without first obtaining Board
of Directors' approval, as required by the terms of the Rights Agreement, each
Right will then entitle its holder (other than such person or members of any
such group) to purchase, at the Right's then current exercise price, a number
of one one-hundredth shares of Series B preferred stock having a total market
value of twice the Right's exercise price.
26
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
In addition, at any time after a person acquires 20% of the outstanding
shares of common stock and prior to the acquisition by such person of 50% or
more of the outstanding shares of common stock, the Company may exchange the
Rights (other than the Rights which have become null and void), in whole or in
part, at an exchange ratio of one share of common stock or equivalent share of
preferred stock, per Right.
The Board of Directors can redeem the Rights for $.01 per Right at any time
prior to the acquisition by a person or group of beneficial ownership of 20% or
more of the Company's common stock. Until a Right is exercised, the holder
thereof will have no rights as a shareholder of the Company, including without
limitation, the right to vote or to receive dividends. Unless earlier redeemed
or exchanged, the Rights will expire on March 20, 2010.
Restricted stock bonus: In 1995 and 1997, the Company granted restricted
stock which was recognized as compensation over the period the shares were
earned or vested. In 1998 the Company recognized expense of $528 with respect
to this restricted stock.
Note 10--Earnings Per Share
The following table summarizes earnings per share (EPS) calculations for the
years ended December 31, 2000, 1999, and 1998:
December 31,
-----------------------
2000 1999 1998
------- ------- -------
Numerator for basic EPS and diluted EPS--net income... $17,163 $15,651 $10,650
------- ------- -------
Denominator for basic EPS--weighted average shares.... 8,831 8,914 8,789
Effect of dilutive securities, primarily employee
stock options........................................ 65 61 71
------- ------- -------
Denominator for diluted EPS--weighted average shares
and assumed conversions.............................. 8,896 8,975 8,860
------- ------- -------
Basic EPS............................................. $1.94 $1.76 $1.21
Diluted EPS........................................... 1.93 1.74 1.20
The following number of stock options are not included in dilutive earnings
per share since in each case the exercise price is greater than the market
price: 190, 192, and 190, in 2000, 1999, and 1998, respectively.
Note 11--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.
27
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
(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 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
years ended December 31:
Metalworking Other
Process Chemical
Chemicals Coatings Products Total
------------ -------- -------- --------
2000
Net sales........................... $244,055 $17,560 $ 5,955 $267,570
Operating income (loss)............. 56,921 4,216 (740) 60,397
Depreciation........................ 5,122 122 125 5,369
1999
Net sales........................... $243,007 $18,094 $ 4,570 $265,671
Operating income ................... 55,207 5,591 729 61,527
Depreciation........................ 5,090 116 281 5,487
1998
Net sales........................... $232,245 $19,521 $12,687 $264,453
Operating income ................... 48,332 6,150 507 54,989
Depreciation........................ 4,805 84 261 5,150
Operating income comprises revenue less related costs and expenses.
Nonoperating expenses primarily consist of general corporate expenses
identified as not being a cost of operation, interest expense, interest
income, and license fees from nonconsolidated associates.
A reconciliation of total segment operating income to total consolidated
income before taxes, for the years ended December 31, 2000, 1999, and 1998 is
as follows:
2000 1999 1998
-------- -------- --------
Total operating income for reportable segments... $ 60,397 $ 61,527 $ 54,989
Repositioning and integration credit (charges)... -- 314 (5,261)
Nonoperating charges............................. (33,779) (33,091) (30,497)
Depreciation and amortization.................... (1,443) (1,469) (1,961)
Net gain on exit of businesses................... 1,473 -- --
Litigation charge................................ (1,500) -- --
Interest expense................................. (2,030) (2,486) (2,151)
Interest income.................................. 934 494 562
Other income, net................................ 2,434 1,862 1,116
-------- -------- --------
Consolidated income before taxes................. $ 26,486 $ 27,151 $ 16,797
======== ======== ========
28
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The following sales and long-lived asset information is by geographic area
as of and for the years ended December 31:
2000 1999 1998
-------- -------- --------
Net sales
United States........................................ $117,106 $121,188 $123,472
Europe............................................... 92,151 92,687 96,267
Asia/Pacific......................................... 28,621 27,125 25,750
South America........................................ 29,692 24,671 18,964
-------- -------- --------
Consolidated......................................... $267,570 $265,671 $264,453
======== ======== ========
2000 1999 1998
-------- -------- --------
Long-lived assets
United States........................................ $ 32,467 $ 31,692 $ 29,917
Europe............................................... 23,011 26,235 30,341
Asia/Pacific......................................... 5,420 6,211 5,606
South America........................................ 14,168 12,146 18,677
-------- -------- --------
Consolidated......................................... $ 75,066 $ 76,284 $ 84,541
======== ======== ========
Note 12--Business Acquisitions and Divestitures
The Company completed the acquisition and divestiture set forth below. The
acquisition was accounted for as a purchase, and, accordingly, the purchase
price was allocated between fair value of identifiable net assets acquired and
the excess of cost over net assets of the acquired company. The consolidated
financial statements include operating results of the business acquired from
the date of acquisition. Pro forma results of operations have not been
presented for the acquisition or the divestiture because the effects of these
transactions, individually or in the aggregate, were not material.
On May 31, 2000, the Company completed the sale of its U.S. pulp and paper
business for $5,200. The Company recorded a pre-tax gain on the sale of $2,370.
On June 25, 1998, the Company completed formation of a majority-owned joint
venture in Brazil and small businesses in Italy and Venezuela for approximately
$9,350, of which goodwill comprises $5,500 and is being amortized over 20
years. The agreement provided for an earn-out provision if certain performance
targets were met. Those targets were met and $3,500 was paid in 2000, resulting
in additional goodwill that is being amortized over the remaining life of the
initial goodwill.
Note 13--Commitments and Contingencies
The Company is involved in environmental clean-up activities and litigation
in connection with an existing plant location and former waste disposal sites.
The Company identified certain soil and groundwater contamination at AC
Products, Inc. ("ACP"), a wholly owned subsidiary. In coordination with the
Santa Ana California Regional Water Quality Board, ACP is remediating the
contamination. During the second quarter of 2000, it was discovered during an
internal environmental audit that ACP had failed to properly report its air
emissions. In response, an internal investigation of all environmental, health,
and safety matters at ACP was conducted. ACP has voluntarily disclosed these
matters to regulators and has taken steps to correct all environmental, health,
and safety issues discovered. The Company believes that the potential uninsured
known
29
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
liabilities associated with these matters approximate $1.5 million, for which
the Company has sufficient reserves. Notwithstanding the foregoing, the Company
cannot be certain that liabilities in the form of fines, penalties, and damages
will not be incurred in excess of the amount reserved.
Additionally, although there can be no assurance regarding the outcome of
other environmental matters, the Company believes that it has made adequate
accruals for costs associated with other environmental problems of which it is
aware. Approximately $260 and $176 was accrued at December 31, 2000 and 1999,
respectively, to provide for such anticipated future environmental assessments
and remediation costs.
A wholly owned non-operating subsidiary of the Company is a co-defendant in
claims filed by multiple claimants alleging injury due to exposure to asbestos.
Although there can be no assurance regarding the outcome of existing claims
proceedings, the subsidiary believes that it has made adequate accruals for all
potential uninsured liabilities related to claims of which it is aware.
Effective October 31, 1997, the subsidiary's insurance carriers agreed to be
responsible for all damages and costs (including attorneys' fees) arising out
of all existing and future asbestos claims. At December 31, 2000, the
subsidiary had accrued approximately $50 to provide for anticipated damages and
costs incurred prior to October 31, 1997.
The Company is party to other litigation which management currently believes
will not have a material adverse effect on the Company's results of operations,
cash flows or financial condition.
30
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Note 14--Quarterly Results (unaudited)
First Second Third Fourth
------- ------- ------- -------
2000
Net sales..................................... $66,994 $69,355 $68,478 $62,743
Gross profit.................................. 27,888 29,228 28,129 26,795
Operating income.............................. 6,252 6,993 6,398 5,505
Net income.................................... 4,371 4,671 4,683 3,438
Net income per share (basic and diluted)...... $.49 $.53 $.53 $.39
1999
Net sales..................................... $62,439 $65,876 $69,667 $67,689
Gross profit.................................. 27,098 28,196 30,660 29,689
Operating income.............................. 4,975 6,401 7,939 7,966
Net income.................................... 2,998 3,803 4,264 4,586
Net income per share (basic and diluted)...... $.34 $.42 $.48 $.51
31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference is the information beginning immediately following
the caption "Election of Directors" to, but not including, the caption
"Executive Compensation" contained in the Registrant's definitive Proxy
Statement to be filed no later than 120 days after the close of its fiscal year
ended December 31, 2000 (the "2001 Proxy Statement") and the information
appearing in Item 4(a) on pages 4 and 5 of this Report.
Section 16(a) Beneficial Ownership Reporting Compliance.
Based solely on the Company's review of certain reports filed with the
Securities and Exchange Commission pursuant to Section 16(a) of the Securities
Exchange Act of 1934 (the "1934 Act"), as amended, and written representations
of the Company's officers and directors, the Company believes that all reports
required to be filed pursuant to Section 16(a) of the 1934 Act with respect to
transactions in the Company's Common Stock through December 31, 2000 were filed
on a timely basis.
Item 11. Executive Compensation.
Incorporated by reference is the information beginning immediately following
the caption "Executive Compensation" to, but not including, the caption
"Compensation/Management Development Committee Report on Executive
Compensation" contained in the Registrant's 2001 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference is the information beginning immediately following
the caption "Security Ownership of Certain Beneficial Owners and Management"
to, but not including, the subcaption "Section 16(a) Beneficial Ownership
Reporting Compliance" contained in the Registrant's 2001 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
No information is required to be provided in response to this Item 13.
32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits and Financial Statement Schedules
1.Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts for the years 2000, 1999 and
1998 ....................................................................page 37
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
Financial statements of 50% or less owned companies have been omitted
because none of the companies meets the criteria requiring inclusion of such
statements.
2.Exhibits (numbered in accordance with Item 601 of Regulation S-K)
3(a) -- Amended and Restated Articles of Incorporation dated July 16, 1990.
Incorporated by reference to Exhibit 3(a) as filed by Registrant with
Form 10-K for the year 1996.
3(b) -- By-Laws as amended through May 6, 1998. Incorporated by reference to
Exhibit 3(b) as filed by Registrant with Form 10-K for the year 1998.
4 -- Shareholder Rights Plan dated February 7, 1990. Incorporated by
reference to Form 8-K as filed by the Registrant on February 20,
1990.
4(a) -- Shareholder Rights Plan dated March 6, 2000. Incorporated by
reference to Form 8-K as filed by the Registrant on March 7, 2000.
10(a) -- Long-Term Performance Incentive Plan as approved May 5, 1993.
Incorporated by reference to Exhibit 10(a) as filed by the Registrant
with Form 10-K for the year 1993.*
10(h) -- Documents constituting employment contract by and between Quaker
Chemical Europe B.V. and M. C. J. Meijer dated January 1, 1991.
Incorporated by reference to Exhibit 10(h) as filed by Registrant
with Form 10-K for the year 1993.*
10(i) -- Employment Agreement by and between the Registrant and Ronald
J. Naples dated August 14, 1995. Incorporated by reference to Exhibit
10(i) as filed by Registrant with Form 10-Q for the quarter ended
September 30, 1995.*
10(j) -- Amendment to the Stock Option Agreement dated October 2, 1995 by and
between the Registrant and Ronald J. Naples. Incorporated by
reference to Exhibit 10(j) as filed by Registrant with Form 10-Q for
the quarter ended September 30, 1995.*
10(k) -- Employment Agreement by and between Registrant and Jose Luiz
Bregolato dated June 14, 1993. Incorporated by reference to Exhibit
10(k) as filed by Registrant with Form 10-K for the year 1995.*
10(l) -- Employment Agreement by and between Registrant and Daniel S. Ma dated
May 18, 1993. Incorporated by reference to Exhibit 10(l) as filed by
Registrant with Form 10-K for the year 1995.*
10(o) -- Amendment No. 1 to Employment Agreement dated January 1, 1997 by and
between Registrant and Ronald J. Naples. Incorporated by reference to
Exhibit 10(o) as filed by Registrant with Form 10-K for the year
1997.*
33
10(p) -- Amendment No. 1 to 1995 Naples Restricted Stock Plan and Agreement
dated January 21, 1998 by and between Registrant and Ronald J.
Naples. Incorporated by reference to Exhibit 10(p) as filed by
Registrant with Form 10-K for the year 1997.*
10(q) -- Employment Agreement by and between Registrant and Joseph F. Virdone
dated July 17, 1996. Incorporated by reference to Exhibit 10(q) as
filed by Registrant with Form 10-K for the year 1997.*
10(r) -- Employment Agreement by and between Registrant and James A. Geier
dated November 5, 1997. Incorporated by reference to Exhibit 10(r)
as filed by Registrant with Form 10-K for the year 1997.*
10(s) -- Employment Agreement by and between Registrant and Joseph W. Bauer
dated March 9, 1998. Incorporated by reference to Exhibit 10(s) as
filed by Registrant with Form 10-K for the year 1997.*
10(t) -- Employment Agreement by and between Registrant and Ronald J. Naples
dated March 11, 1999. Incorporated by reference to Exhibit 10(t) as
filed by Registrant with Form 10-K for the year 1998.*
10(u) -- Employment Agreement by and between Registrant and Michael F. Barry
dated November 30, 1998. Incorporated by reference to Exhibit 10(u)
as filed by Registrant with Form 10-K for the year 1998.*
10(v) -- Employment Agreement by and between Registrant and Ian F. Clark
dated March 15, 1999. Incorporated by reference to Exhibit 10(v) as
filed by Registrant with Form 10-K for the year 1998.*
10(w) -- Change in Control Agreement by and between Registrant and
Joseph W. Bauer dated February 1, 1999. Incorporated by reference to
Exhibit 10(w) as filed by Registrant with Form 10-K for the year
1998.*
10(x) -- Change in Control Agreement by and between Registrant and
Michael F. Barry dated November 30, 1998. Incorporated by reference
to Exhibit 10(x) as filed by Registrant with Form 10-K for the year
1998.*
10(y) -- Change in Control Agreement by and between Registrant and
Jose Luiz Bregolato dated January 6, 1999. Incorporated by reference
to Exhibit 10(y) as filed by Registrant with Form 10-K for the year
1998.*
10(z) -- Change in Control Agreement by and between Registrant and
James A. Geier dated January 15, 1999. Incorporated by reference to
Exhibit 10(z) as filed by Registrant with Form 10-K for the year
1998.*
10(aa) -- Change in Control Agreement by and between Registrant and Daniel S.
Ma dated January 15, 1999. Incorporated by reference to Exhibit
10(aa) as filed by Registrant with Form 10-K for the year 1998.*
10(bb) -- Change in Control Agreement by and between Registrant and
Joseph F. Virdone dated December 21, 1998. Incorporated by reference
to Exhibit 10(bb) as filed by Registrant with Form 10-K for the year
1998.*
10(cc) -- Change in Control Agreement by and between Registrant and Ian F.
Clark dated March 15, 1999. Incorporated by reference to Exhibit
10(cc) as filed by Registrant with Form 10-K for the year 1998.*
10(dd) -- 1999 Long-Term Performance Incentive Plan as approved May 12, 1999,
effective January 1, 1999. Incorporated by reference to Exhibit
10(dd) as filed by Registrant with Form 10-K for the year 1999.*
34
10(ee) -- Employment Agreement by and between Registrant and Marcus
C. J. Meijer dated September 28, 1999. Incorporated by reference to
Exhibit 10(ee) as Filed by Registrant with Form 10-K for the year
1999.*
10(ff) -- Deferred Compensation Plan as adopted by the Registrant dated
December 17, 1999, effective July 1, 1997. Incorporated by reference
to Exhibit 10(ff) as Filed by Registrant with Form 10-K for the year
1999.*
10(gg) -- Supplemental Retirement Income Program adopted by the Registrant on
November 6, 1984, as amended November 8, 1989. Incorporated by
reference to Exhibit 10(gg) as Filed by Registrant with Form 10-K
for the year 1999.*
21 -- Subsidiaries and Affiliates of the Registrant.
23 -- Consent of Independent Accountants.
* This exhibit is a management contract or compensation plan or arrangement
required to be filed as an exhibit to this Report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the last quarter
of the period covered by this Report.
(c) The exhibits required by Item 601 of Regulation S-K filed as part of
this Report or incorporated herein by reference are listed in subparagraph
(a)(2) of this Item 14.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ Ronald J. Naples
By: _________________________________
Ronald J. Naples
Chairman of the Board and Chief
Executive Officer
Date: March 21, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Capacity Date
---------- -------- ----
/s/ Ronald J. Naples Principal Executive Officer March 21, 2001
______________________________________ and Director
Ronald J. Naples
Chairman of the Board and Chief
Executive Officer
/s/ Michael F. Barry Principal Financial Officer March 21, 2001
______________________________________
Michael F. Barry
Vice President, Chief Financial
Officer, and Treasurer
/s/ Maureen N. Moyer Principal Accounting Officer March 21, 2001
______________________________________
Maureen N. Moyer
Global Controller
/s/ Joseph B. Anderson, Jr. Director March 21, 2001
______________________________________
Joseph B. Anderson, Jr.
/s/ Patricia C. Barron Director March 21, 2001
______________________________________
Patricia C. Barron
/s/ Peter A. Benoliel Director March 21, 2001
______________________________________
Peter A. Benoliel
/s/ Donald R. Caldwell Director March 21, 2001
______________________________________
Donald R. Caldwell
Director March 21, 2001
______________________________________
Robert E. Chappell
/s/ William R. Cook Director March 21, 2001
______________________________________
William R. Cook
Director March 21, 2001
______________________________________
Edwin J. Delattre
/s/ Robert P. Hauptfuhrer Director March 21, 2001
______________________________________
Robert P. Hauptfuhrer
/s/ Robert H. Rock Director March 21, 2001
______________________________________
Robert H. Rock
36
QUAKER CHEMICAL CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance Charged
at to Costs Write-Offs Effect of Balance
Beginning and Charged to Exchange Rate at End
of Period Expenses Allowance Changes of Period
--------- -------- ---------- ------------- ---------
(Dollars in thousands)
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Year ended December 31, 2000 $1,133 $1,971 $ (106) $ (38) $2,960
Year ended December 31, 1999 $2,004 $ 681 $(1,339) $(213) $1,133
Year ended December 31, 1998 $1,710 $ 355 $ (177) $ 116 $2,004
37
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
21 Subsidiaries and Affiliates of the Registrant
23 Consent of Independent Accountants
38