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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-7154
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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 (I.R.S. Employer
of incorporation or organization) Identification No.)
Elm and Lee Streets, Conshohocken, Pennsylvania 19428
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 832-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each Exchange on which 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. [_]
State 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 8, 2002):
$206,450,054.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of the latest practicable date: 9,164,385 shares of
Common Stock, $1.00 Par Value, as of March 8, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement dated March 28, 2002
in connection with the Annual Meeting of Shareholders to be held on May 8, 2002
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, further
downturns in our customers' businesses, significant increases in raw material
costs, worldwide economic and political conditions, foreign currency
fluctuations, and future terrorist attacks such as those that occurred on
September 11, 2001. Furthermore, the Company is subject to the same business
cycles as those experienced by steel, automobile, aircraft, appliance, 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.
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. Generally,
separate manufacturing facilities of a single customer are served by different
sales personnel. Sales are recorded when products are shipped to customers and
services earned. As part of the Company's chemical management services, certain
third party products are transferred to customers at no gross profit and
accordingly, these transactions have no effect on net sales. Third party
products transferred under these arrangements totaled $20.7 million, $19.7
million, and $16.3 million for 2001, 2000, and 1999, respectively. License fees
and royalties are recorded when earned and are included in other income.
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.
1
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 customers. Competition in the industry is
based primarily on the ability to provide products that 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 2001, Quaker's five largest customers (each composed of multiple
subsidiaries or divisions with semi-autonomous purchasing authority) accounted
for approximately 15% of its consolidated net sales with the largest of these
customers accounting for approximately 5% of consolidated net sales. 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. Furthermore, steel
customers typically have limited manufacturing locations as compared to
metalworking customers and generally use higher volumes of products at a single
location. Accordingly, the loss or closure of a steel mill of a significant
customer can have a material adverse effect on Quaker's business.
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
2001, only one raw material (mineral oil) 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 that 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. Research and development expenses during 2001, 2000,
and 1999 were $8.9 million, $8.5 million, and $8.5 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 that 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
2
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 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 2001, capital expenditures
directed solely or primarily to regulatory compliance amounted to approximately
$1.3 million compared to $2.8 million and $1.7 million in 2000 and 1999,
respectively. In 2002, the Company expects to incur approximately $1.0 million
for capital expenditures directed primarily to regulatory compliance.
Number of Employees
On December 31, 2001, Quaker's consolidated companies had 955 full-time
employees of whom 376 were employed by the parent company and its U.S.
subsidiaries and 579 were employed by its non-U.S. subsidiaries. Associated
companies of Quaker (in which it owns 50% or less) employed 156 people on
December 31, 2001.
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 in 2000 and 1999 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. Reference is made to disclosure contained in Note 11 of Notes to
Consolidated Financial Statements included in Item 8 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; Uithoorn, The Netherlands; 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 "Venture"), all of these principal facilities are owned by Quaker
and as of December 31, 2001 were mortgage free. Quaker also leases small sales,
laboratory, and warehouse facilities in other locations.
In January 2001, the Company contributed its Conshohocken, Pennsylvania
property and buildings (the "Site") to the Venture in exchange for a 50%
ownership in the Venture. The Venture did not assume any debt or other
obligations of the Company. The Venture is renovating certain of the existing
buildings at the Site, as well
3
as building new office space (the "Project"). In December 2000, the Company
entered into an agreement with the Venture to lease approximately 40% of the
Site's available office space for a 15-year period commencing February 2002,
with multiple renewal options. The Company believes the terms of this lease are
no worse than the terms it would have obtained from an unaffiliated third
party. As of February 28, 2002, approximately half of the Site's remaining
office space was under lease to unaffiliated third parties.
The Venture is funding the Project with a $21.0 million construction loan
from The Bank of New York, of which approximately $11.8 million was outstanding
as of December 31, 2001. The loan is secured in part by a mortgage on the Site
and guarantees of completion and payment of interest and operating expenses
executed by certain Venture partners other than the Company.
Quaker's Woodchester, England and Villeneuve, France sites are currently for
sale. As of December 31, 2001, Quaker closed its Woodchester, England facility
and transferred production to its facilities in Uithoorn, The Netherlands and
Santa Perpetua de Mogoda, Spain. The administrative, warehousing, and
laboratory activities previously conducted at the Woodchester site were
transferred to a sales distribution office located in Stonehouse, England. In
addition, Quaker is ceasing manufacturing operations at its facility in
Villeneuve, France, effective March 31, 2002. Production will be consolidated
into its facilities in Uithoorn, The Netherlands and Santa Perpetua de Mogoda,
Spain. Sales, warehousing, and laboratory activities will continue pending the
sale of the Villeneuve site.
Quaker's aforementioned principal facilities (excluding Conshohocken)
consist of various manufacturing, administrative, warehouse, 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 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-consolidated, 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.
4
Item 4(a). Executive Officers of the Registrant.
Set forth below are the executive officers of the Company. Each of the
executive officers, other than Mark Featherstone, was elected to a one year
term. Mr. Featherstone assumed his officer position when he joined the Company.
Name, Age, and Present Business Experience During Past Five
Position with the Company Years and Period Served as an Officer
- ------------------------- -------------------------------------
Ronald J. Naples, 56....................... Mr. Naples was elected Chairman of the Board in May 1997 and
Chairman of the Board and Chief Executive Officer in October 1995. He also served as
Chief Executive Officer, and Director President of the Company from October 1995 until March 1998. Mr.
Naples has been a Director of the Company since 1988.
Joseph W. Bauer, 59........................ Mr. Bauer was elected President and Chief Operating Officer of the
President and Chief Operating Officer 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, 43....................... Mr. Barry was elected Vice President, Chief Financial Officer and
Vice President, Chief Financial Officer Treasurer of the Company in November 1998. Previously, Mr. Barry
and Treasurer 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, 43..................... Mr. Benoliel was elected Vice President and General Counsel in
Vice President, Secretary January 2001. He was elected an officer of the Company in May
and General Counsel 1998, at which time he assumed the office of Corporate Secretary in
addition to being Director, Corporate Legal Affairs, a position he
held since May 1996. Mr. Benoliel is the son of Peter A. Benoliel, a
Director of the Company.
Jose Luiz Bregolato, 56.................... Mr. Bregolato was elected to his current position in 1993.
Vice President and Managing
Director--South America
Ian F. Clark, 57........................... Mr. Clark was elected an officer of the Company in March 1999. He
Vice President and Global Industry assumed his current position in January 2001. Previously, he was
Leader--Metalworking/ Vice President and Global Industry Leader--Steel/Fluid Power from
Chemical Management Services 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, 46......................... Mr. Geier was elected to his current position in November 1997.
Vice President--Human Resources 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, 47............................ Mr. Harris was elected to his current position in January 2001. From
Vice President and Global Industry 1996 until he assumed his current position, Mr. Harris was Regional
Leader--Steel/Fluid Power Industry Manager for the Company's Steel/Fluid Power business in
Europe, the Middle East, and Africa.
Daniel S. Ma, 61........................... Mr. Ma was elected to his current position in 1993.
Vice President and Managing
Director--Asia/Pacific
5
Name, Age, and Present Business Experience During Past Five
Position With the Company Years and Period Served as an Officer
- ------------------------- -------------------------------------
Wilbert Platzer, 40..................... Mr. Platzer was elected to his current position in January 2001. From
Vice President--Worldwide March 1996 to June 1999, he was Managing Director of Quaker
Operations 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, 43..................... Mr. Tyler was elected Vice President--Information Services and
Vice President--Information Services Chief Information Officer of the Company in January 2001.
and Chief Information Officer 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 to January 1997.
Mark A. Featherstone, 40................ Mr. Featherstone joined the Company in May 2001 as Global
Global Controller Controller. Previously, he was Senior Vice President-Finance and
Controller at Internet Partnership Group from April 2000 to March
2001, and Director of Financial Policies and Projects at Coty Inc.
from May 1996 to March 2000.
6
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 (amounts rounded to the nearest
penny), and the quarterly dividends declared as indicated:
Range of Quotations
--------------------------- Dividends
2001 2000 Declared
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High Low High Low 2001 2000
------ ------ ------ ------ ----- -----
First quarter................ $19.00 $16.12 $17.00 $13.38 $.205 $.195
Second quarter............... 20.99 17.17 17.44 15.06 .205 .195
Third quarter................ 21.75 16.96 17.38 15.81 .205 .205
Fourth quarter............... 22.30 18.00 19.25 15.88 .205 .205
As of January 18, 2002 there were 810 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:
2001/(1)/ 2000/(2)/ 1999/(3)/ 1998/(4)/ 1997/(5)/
-------- -------- -------- -------- --------
(Dollars in thousands except per share amounts)
Summary of Operations:
Net sales.................... $251,074 $267,570 $265,671 $264,453 $248,220
Income before taxes.......... 14,430 26,486 27,151 16,797 19,735
Net income................... 7,665 17,163 15,651 10,650 12,611
Per share:...................
Net income basic....... $.85 $1.94 $1.76 $1.21 $1.45
Net income diluted..... .84 1.93 1.74 1.20 1.45
Dividends.............. .82 .80 .77 .74 .71
Financial Position:
Working capital............ $ 47,424 $ 52,981 $ 51,584 $ 45,636 $ 48,098
Total assets............... 178,823 188,239 182,213 191,403 172,463
Long-term debt............. 19,380 22,295 25,122 25,344 25,203
Shareholders' equity....... 80,899 84,907 81,199 83,735 74,976
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(1) The results of operations for 2001 include restructuring charges of $4,039
after-tax; an additional provision for doubtful accounts related to the
poor financial condition of certain customers of $1,380 after-tax; an
environmental charge of $345 after-tax; and nonrecurring organizational
structure charges of $184 after-tax. Excluding these items, net income for
2001 was $13,613.
(2) The results of operations for 2000 include an additional provision for
doubtful accounts related to the poor financial condition of certain
customers of $1,154 after-tax; a net gain on exit of businesses of $1,016
after-tax; and an environmental charge of $1,035 after-tax. Excluding these
items, net income for 2000 was $18,336.
(3) The results of operations for 1999 include a net restructuring credit of
$188 after-tax. Excluding this credit, net income for 1999 was $15,462.
(4) The results of operations for 1998 include net restructuring and
integration charges of $2,882 after-tax and minority interest. Excluding
these charges, net income for 1998 was $13,532.
(5) 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.
7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Critical Accounting Policies and Estimates
Quaker's discussion and analysis of its financial condition and results of
operations are based upon Quaker's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
Quaker to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, Quaker evaluates its
estimates, including those related to customer sales incentives, product
returns, bad debts, inventories, property, plant, and equipment, investments,
intangible assets, income taxes, financing operations, restructuring, accrued
incentive compensation plans, pensions and other postretirement benefits, and
contingencies and litigation. Quaker bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Quaker believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
1. Accounts receivable and inventory reserves and exposures--Quaker
establishes allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments. If the
financial condition of Quaker's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may
be required. Downturns in the overall economic climate may also tend to
exacerbate specific customer financial issues. A significant portion of
Quaker's revenues is derived from sales to customers in the U.S. steel
industry, where a number of bankruptcies occurred during recent years. In
2000 and 2001, Quaker recorded additional provisions for doubtful accounts
primarily related to bankruptcies in the U.S. steel industry, including the
December 2001 decision by LTV Corporation, a major customer, to cease
operations. When a bankruptcy occurs, Quaker must judge the amount of
proceeds, if any, that may ultimately be received through the bankruptcy or
liquidation process. As part of its terms of trade, Quaker may custom
manufacture products for certain large customers and/or may ship product on
a consignment basis. These practices may increase the Company's exposure
should a bankruptcy occur, and may require writedown or disposal of certain
inventory due to its estimated obsolescence or limited marketability.
Customer returns of products or disputes may also result in similar issues
related to the realizability of recorded accounts receivable or returned
inventory.
2. Environmental and litigation reserves--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 extend the life, increase the capacity or improve the safety or
efficiency of the property from the date acquired or constructed, and/or
mitigate or prevent contamination in the future. Estimates for accruals for
environmental matters are based on a variety of potential technical
solutions, governmental regulations and other factors, and are subject to a
large range of potential costs for remediation and other actions. A
considerable amount of judgment is required in determining the most likely
estimate within the range, and the factors determining this judgment may
vary over time. Similarly, reserves for litigation and similar matters are
based on a range of potential outcomes and require considerable judgment in
determining the most probable outcome. If no amount within the range is
considered more probable than any other amount, the Company accrues the
lowest amount in the range in accordance with generally accepted accounting
principles.
3. Realizability of equity investments--Quaker holds equity investments
in various domestic and foreign companies, whereby it has the ability to
influence, but not control, the operations of the entity and its future
results. Quaker records an investment impairment charge when it believes an
investment has
8
experienced a decline in value that is other than temporary. Future adverse
changes in market conditions, poor operating results of underlying
investments, or devaluation of foreign currencies could result in losses or
an inability to recover the carrying value of the investments that may not
be reflected in an investment's current carrying value. These factors may
result in an impairment charge in the future.
4. Tax exposures and valuation allowances--Quaker records expenses and
liabilities for taxes based on estimates of amounts that will be ultimately
determined to be deductible in tax returns filed in various jurisdictions.
The filed tax returns are subject to audit, often several years subsequent
to the date of the financial statements. Disputes or disagreements may arise
during audits over the timing or validity of certain items or deductions,
which may not be resolved for extended periods of time. Quaker establishes
reserves for potential tax audit and other exposures as transactions occur
and reviews these reserves on a regular basis; however, actual exposures and
audit adjustments may vary from these estimates. Quaker also records a
valuation allowance to reduce its deferred tax assets to the amount that is
more likely than not to be realized. While Quaker has considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event Quaker were to
determine that it would be able to realize its deferred tax assets in the
future in excess of its net recorded amount, an adjustment to the deferred
tax asset would increase income in the period such determination was made.
Likewise, should Quaker determine that it would not be able to realize all
or part of its net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such
determination was made.
5. Restructuring reserves--Restructuring charges may consist of charges
for employee severance, rationalization of manufacturing facilities and
other items. Quaker records restructuring and other exit costs, including
involuntary termination of certain employees, in accordance with the
Financial Accounting Standards Board's ("FASB") Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." Certain of these items, particularly those
involving impairment charges for assets to be sold or closed, require
significant estimates and assumptions in terms of estimated sale proceeds,
date of sale, transaction costs and other matters, and these estimates can
change based on market conditions and other factors.
6. Goodwill and other intangible assets--Intangible assets consist of
goodwill and other intangible assets arising from acquisitions which are
being amortized on a straight-line basis. The realizability and period of
benefit of goodwill is evaluated periodically to assess recoverability and,
if necessary, impairment or adjustment of the period benefited would be
recognized. Quaker is required to adopt Statement of Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, effective January 1,
2002. Under SFAS No. 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed at least annually for
impairment.
Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. In addition, companies are required to review goodwill and
intangible assets reported in connection with prior acquisitions, possibly
disaggregate and report separately previously identified intangible assets, and
possibly reclassify certain intangible assets into goodwill. SFAS No. 142
establishes new guidelines for accounting for goodwill and other intangible
assets. Goodwill associated with acquisitions consummated after June 30, 2001
is not amortized. The Company recognized no such goodwill. Additionally, upon
adoption, existing goodwill is no longer amortized, but instead will be
assessed for impairment on at least an annual basis. The Company implemented
the remaining provisions of SFAS No. 142 on January 1, 2002. The Company does
not expect to recognize an impairment charge in 2002 in accordance with SFAS
No. 142. The non-amortization provisions of SFAS No. 142 for goodwill and
intangibles is currently expected to result in an increase in operating income
ranging from approximately $0.5 million to $1.0 million in 2002.
9
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. This statement is effective for fiscal years beginning after
June 15, 2002. The Company is currently assessing the impact of this new
standard.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets." The provisions of this statement provide a single
accounting model for impairment of long-lived assets. This statement is
effective for fiscal years beginning after December 15, 2001. The Company
adopted this standard on January 1, 2002. Management has assessed the impact of
the new standard and determined there to be no material impact to the financial
statements.
Liquidity and Capital Resources
Quaker's cash and cash equivalents increased to $20.5 million at December
31, 2001 from $16.6 million at December 31, 2000. The increase resulted
primarily from $22.6 million provided by operating activities, offset by $8.0
million and $9.6 million used in investing and financing activities,
respectively.
Net cash flow provided by operating activities amounted to $22.6 million in
2001 compared to $21.4 million in 2000. The increase primarily resulted from an
increase in the change in working capital accounts including accounts
receivable, inventory, and accounts payable and accrued liabilities in 2001
versus 2000, offset by a decrease in operating income, excluding special items,
as well as restructuring benefit payments of $1.1 million made in 2001. See
"Operations--Comparison of 2001 with 2000" for discussion of operations and
special items.
Net cash used in investing activities increased to $8.0 million in 2001 from
$2.8 million in 2000. The increase is primarily related to the year 2000, which
includes $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. In addition, 2001 included
$1.4 million related to the Company's acquisition from its Canadian licensee,
H.L. Blachford, Ltd., of rights to market to, sell to, and service all Canadian
integrated steel makers and certain accounts in the Canadian metalworking
market. Cash used for capital expenditures was $1.9 million higher in 2001
compared to 2000.
Expenditures for property, plant, and equipment were $8.0 million in 2001
compared to $6.1 million in 2000. Capital expenditures included upgrades of
manufacturing capabilities at various locations, with $1.3 million for
environmental and regulatory compliance in 2001 versus $2.8 million in 2000, in
addition to $3.6 million in 2001 for a global transaction system. Capital
expenditures for 2002 are expected to be approximately $17.0 million and
include various upgrades to manufacturing capabilities in the U.S. and Europe,
and an estimated $1.0 million for environmental and regulatory compliance.
Approximately $10.0 million of the 2002 capital expenditures are related to the
global transaction system implementation and leasehold improvements in the
Company's new office space (see below). The Company believes that available
cash, internally generated cash, and financing arrangements should be
sufficient to fund future capital expenditures.
In January 2001, the Company contributed its Conshohocken, Pennsylvania
property and buildings (the "Site"), to a real estate joint venture (the
"Venture") in exchange for a 50% ownership in the Venture. The Venture did not
assume any debt or other obligations of the Company. The Venture credited the
Company's capital account with the estimated fair value of the Site, which
amount was in excess of the book value of the contribution. The Company
recorded its investment in the Venture at book value, which totaled $4.7
million.
The Venture is renovating certain of the existing buildings at the Site, as
well as building new office space (the "Project"). In December 2000, the
Company entered into an agreement with the Venture to lease approximately 40%
of the Site's available office space for a 15-year period commencing February
2002 with multiple renewal options. The Company believes the terms of this
lease are no worse than the terms it would
10
have obtained from an unaffiliated third party. As of February 28, 2002,
approximately half of the Site's remaining office space was under lease to
unaffiliated third parties.
The Venture is funding the Project with a $21.0 million construction loan
from The Bank of New York (the "Venture Loan"), of which approximately $11.8
million was outstanding as of December 31, 2001. The Venture Loan is secured in
part by a mortgage on the Site and guarantees of completion and payment of
interest and operating expenses executed by certain Venture partners other than
the Company.
The Company has not guaranteed, nor is it obligated to pay any principal,
interest or penalties on the Venture Loan, even in the event of default by the
Venture. At December 31, 2001, the Venture had property with a book value of
$19.0 million, total assets of $19.8 million, and total liabilities of $14.5
million. The Venture expects to complete the Project in mid-2002, and expects
to refinance the Venture Loan, which matures in July 2002 subject to extension
under certain conditions, on acceptable terms. The Company can offer no
assurances that the refinancing will be successful. If cash flows permit, the
Company will be eligible to receive priority distributions from the Venture.
Net cash flows used in financing activities were $9.6 million in 2001
compared with $10.0 million in 2000. 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, partially offset by increased dividends
in 2001. In addition, 2001 includes repayments of long-term debt of $2.9
million which was offset by $2.9 million of proceeds primarily related to
shares issued upon exercise of stock options.
As of December 31, 2001, the Company had available an $18.0 million
unsecured demand line of credit. The Company 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
is in compliance with all covenants or other requirements set forth in its
credit agreements. The Company believes that, in 2002, 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.
The following table summarizes the Company's contractual obligations at
December 31, 2001, and the effect such obligations are expected to have on its
liquidity and cash flow in future periods:
Payments due by period (Dollars in thousands)
---------------------------------------------------
2007 and
Contractual Obligations Total 2002 2003 2004 2005 2006 beyond
----------------------- ------- ------ ------ ------ ------ ------ --------
Long-term debt.................... $22,238 $2,858 $2,857 $2,857 $2,857 $2,857 $ 7,952
Capital lease obligations......... -- -- -- -- -- -- --
Non-cancelable operating leases... 25,512 3,851 3,233 2,326 1,637 1,562 12,903
Unconditional purchase obligations -- -- -- -- -- -- --
Other long-term obligations....... -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ -------
Total contractual cash obligations $47,750 $6,709 $6,090 $5,183 $4,494 $4,419 $20,855
======= ====== ====== ====== ====== ====== =======
Operations
Comparison of 2001 with 2000
Consolidated net sales decreased from $267.6 million in 2000 to $251.1
million in 2001. The 6% decline was the net result of a 4% decrease in volume
and a 3% improvement in price/mix, offset by a 4% 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 1%. The shortfall for the
year was mainly attributable to
11
metalworking process chemicals sales declines in the U.S., Europe, and
Asia/Pacific regions, primarily due to weak demand from the steel industry, as
indicated by bankruptcy filings of two of the Company's major U.S. customers.
Brazil sales increased in this segment on a local currency basis, but declined
as well due to the weakening of the Brazilian real against the U.S. dollar.
These declines were partially offset by higher coatings segment revenues
despite weakening aircraft production in the fourth quarter of 2001. Sales from
the Company's new joint venture ("Q2 Technologies") also helped offset the
sales decline with its strong performance in sales of its sulfur removal
technology to industrial customers.
Operating income as reported was $14.2 million in 2001 compared to $25.1
million reported in 2000. Excluding special items, operating income decreased
to $22.8 million in 2001 from $26.8 million in 2000. The decline was primarily
due to a lower gross profit margin related to the overall sales decline in
2001. Gross profit as a percentage of sales also declined (40.2% for 2001
compared to 41.9% for 2000) primarily as a result of lower sales volumes and
higher raw material costs in addition to product mix changes. Excluding special
items, operating income as a percentage of sales was 9.1% in 2001 compared to
10.0% in the prior year.
Overall selling, general, and administrative costs as reported for 2001 were
$80.5 million compared to $86.9 million in 2000. Both 2001 and 2000 include
costs related to special items. Special items include an additional reserve for
doubtful accounts primarily related to U.S. steel customers that filed for
bankruptcy protection under Chapter 11 and totaled $2.0 million and $1.7
million in 2001 and 2000, respectively, and $0.3 million related to
organizational structure costs in 2001. The restructuring and environmental
charges discussed below (see "Restructuring and Related Activities" and
"Environmental Clean-up Activities") are also considered special items.
Excluding special items and adjusting for the U.S. pulp and paper sale in 2000,
overall SG&A costs declined 6% compared to 2000. The decline in SG&A is
primarily due to continued cost containment efforts as well as foreign exchange
impacts.
Other income variance primarily reflects lower license fee revenue in 2001
in addition to gains on fixed asset disposals in 2000 versus losses in 2001.
Net interest expense was lower in 2001 reflecting increased interest income and
lower overall short-term borrowings in addition to lower interest rates in
2001. Equity income was lower in 2001 compared to 2000, reflecting lower income
from the Company's joint ventures in Mexico, Japan, and Venezuela, as well as
losses incurred by the Venture. Minority interest was higher in 2001, primarily
due to higher net income from joint ventures in Brazil and Q2 Technologies.
The Company's effective tax rate was 31% in both 2001 and 2000. The Company
has been assessed approximately $2.0 million of additional taxes based on an
audit of certain subsidiaries for prior years. The Company has initiated an
appeal process related to this assessment and currently believes its reserves
are adequate. The Company is currently reviewing the effective rate for 2002,
which is dependent on many internal and external factors, including but not
limited to the profitability of the Company's foreign operations and favorable
determination relative to the above-referenced audits, but expects the
effective tax rate to be 32%.
Comparison of 2000 with 1999
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.
Operating income as reported was $25.1 million in 2000 compared to $27.3
million reported in 1999. Operating income decreased to $25.1 million in 2000
from $27.0 million (excluding the impacts of the restructuring and integration
credit adjustments) in 1999. The decline was primarily due to a lower gross
profit
12
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 that 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.
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.
Restructuring and Related Activities
In the third and fourth quarters of 2001, Quaker's management approved
restructuring plans to realign its organization and reduce operating costs.
Quaker's restructuring plans include the closure and sale of its manufacturing
facilities in the U.K. and France. In addition, Quaker consolidated certain
functions within its global business units and reduced administrative
functions, as well as expensed costs related to abandoned acquisitions.
Included in the third and fourth quarter restructuring charges are provisions
for severance for 16 and 37 employees, respectively.
Restructuring and related charges of $2.958 million and $2.896 million were
expensed during the third and fourth quarters of 2001, respectively. The third
quarter charge comprised $0.520 million related to employee separations, $2.038
million related to facility rationalization charges, and $0.400 million related
to abandoned acquisitions. The fourth quarter charge comprised $2.124 million
related to employee separations, $0.575 million related to facility
rationalization charges, and $0.197 million related to abandoned acquisitions.
Employee separation benefits under each plan varied depending on local
regulations within certain foreign countries and included severance and other
benefits. As of December 31, 2001, Quaker had completed 25 of the planned 53
employee separations under the 2001 plans. Quaker expects to substantially
complete the initiatives contemplated under the restructuring plans by
September 30, 2002. Upon conclusion of its restructuring and other cost savings
initiatives, Quaker expects to achieve annualized savings of approximately $4.0
million in cost of sales and operating expenses. These estimated cost savings
were calculated based upon expected cost reductions primarily related to
employee separations as well as lower operating and depreciation expense
resulting from factory rationalizations. However, Quaker cannot give any
assurance whether the entire estimated cost savings will be realized.
13
Components of accrued restructuring costs and amounts charged against the
2001 plans as of December 31, 2001 were as follows:
2001
(Dollars in thousands)
- --------------------------------------- ------------------------ -------- ----------- -----------------
Currency
Restructuring Asset Translation December 31, 2001
Charges Impairment Payments and Other Ending Balance
------------- ---------- -------- ----------- -----------------
Employee Separations................... $2,644 $ -- $(111) $ 1 $2,534
Facility Rationalization............... 2,613 (1,015) (171) 12 1,439
Abandoned Acquisitions................. 597 -- (597) -- --
------ ------- ----- --- ------
Total............................... $5,854 $(1,015) $(879) $13 $3,973
====== ======= ===== === ======
In the fourth quarter of 1998, the Company announced and implemented a
restructuring and integration plan to better align its organizational structure
with market demands, improve operational performance, and reduce costs. The
components of the 1998 pre-tax restructuring 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 restructuring 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).
Environmental Clean-up Activities
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. In connection with these activities, the Company recorded pre-tax
charges totaling $0.5 million and $1.5 million in 2001 and 2000, respectively.
The Company believes that the potential-known liabilities associated with these
matters range from approximately $1.4 million to $2.3 million, for which the
Company has sufficient reserves. Notwithstanding the foregoing, the Company
cannot be certain that liabilities in the form of remediation expenses, fines,
penalties, and damages will not be incurred in excess of the amount reserved.
General
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 54% to 56% of the consolidated net
annual sales (see Note 11 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 were issued, and legacy currencies were
withdrawn from circulation. The
14
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 euro conversion did not have a material adverse impact
on the Company's financial condition or results of operations.
Forward-Looking and Cautionary Statements
Except for historical information and discussions, statements contained in
this 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, changes in commodity prices, and credit risk.
Interest Rate Risk. Quaker's exposure to market rate risk for changes in
interest rates relates primarily to its short and long-term debt. Most of
Quaker's long-term debt has a fixed interest rate, while its short-term debt is
negotiated at market rates which can be either fixed or variable. 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, 2001, Quaker
had $1,000 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, 2001.
Commodity Price Risk. Many of the raw materials used by Quaker are
commodity chemicals, and, therefore, Quaker's earnings can be materially
adversely affected by market changes in raw material prices. In certain cases,
Quaker has entered into fixed-price purchase contracts having a term of up to
one year. These contracts provide for protection to Quaker if the price for the
contracted raw materials rises, however, in certain limited circumstances,
Quaker will not realize the benefit if such prices decline. Quaker has not
been, nor is it currently a party to, any derivative financial instrument
relative to commodities.
Credit Risk. Quaker establishes allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. If the financial condition of Quaker's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Downturns in the overall economic climate may also
tend to exacerbate specific customer financial issues. A significant portion of
Quaker's revenues is derived from sales to customers in the U.S. steel
industry, where a number of bankruptcies occurred during recent years. In 2000
and 2001, Quaker recorded additional provisions
15
for doubtful accounts primarily related to bankruptcies in the U.S. steel
industry. When a bankruptcy occurs, Quaker must judge the amount of proceeds,
if any, that may ultimately be received through the bankruptcy or liquidation
process. As part of its terms of trade, Quaker may custom manufacture products
for certain large customers and/or may ship product on a consignment basis.
These practices may increase the Company's exposure should a bankruptcy occur,
and may require writedown or disposal of certain inventory due to its estimated
obsolescence or limited marketability. Customer returns of products or disputes
may also result in similar issues related to the realizability of recorded
accounts receivable or returned inventory.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Financial Statements:
Report of Independent Accountants................................. 17
Consolidated Statement of Operations.............................. 18
Consolidated Balance Sheet........................................ 19
Consolidated Statement of Cash Flows.............................. 20
Consolidated Statement of Shareholders' Equity.................... 21
Notes to Consolidated Financial Statements........................ 22
16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Quaker Chemical Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 on page 16 and listed in the index appearing under Item
14(a)(1) on page 39, present fairly, in all material respects, the financial
position of Quaker Chemical Corporation and its subsidiaries at December 31,
2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 39 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule 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, Pennsylvania
March 13, 2002
17
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands except
per share amounts)
Net sales.................................................. $251,074 $267,570 $265,671
-------- -------- --------
Costs and expenses:
Cost of goods sold...................................... 150,045 155,530 150,028
Selling, general, and administrative expenses........... 80,484 86,865 88,676
Net gain on exit of businesses............................. -- (1,473) --
Environmental charge....................................... 500 1,500 --
Restructuring charges (credit)............................. 5,854 -- (314)
-------- -------- --------
236,883 242,422 238,390
-------- -------- --------
Operating income........................................... 14,191 25,148 27,281
Other income, net.......................................... 1,089 2,434 1,862
Interest expense........................................... (1,880) (2,030) (2,486)
Interest income............................................ 1,030 934 494
-------- -------- --------
Income before taxes........................................ 14,430 26,486 27,151
Taxes on income............................................ 4,473 8,211 10,860
-------- -------- --------
9,957 18,275 16,291
Equity in net income of associated companies............... 613 1,424 957
Minority interest in net income of subsidiaries............ (2,905) (2,536) (1,597)
-------- -------- --------
Net income................................................. $ 7,665 $ 17,163 $ 15,651
======== ======== ========
Per share data:
Net income--basic....................................... $ .85 $ 1.94 $ 1.76
Net income--diluted..................................... $ .84 $ 1.93 $ 1.74
Dividends............................................... $ .82 $ .80 $ .77
Weighted average shares outstanding:
Basic................................................... 9,054 8,831 8,914
Diluted................................................. 9,114 8,896 8,975
See notes to consolidated financial statements.
18
QUAKER CHEMICAL CORPORATION
CONSOLIDATED BALANCE SHEET
December 31,
----------------------
2001 2000
---------- ----------
(Dollars in thousands
except per share
amounts)
ASSETS
Current assets
Cash and cash equivalents................................................... $ 20,549 $ 16,552
Accounts receivable, net.................................................... 44,787 54,401
Inventories, net............................................................ 18,785 22,716
Deferred income taxes....................................................... 4,031 4,977
Prepaid expenses and other current assets................................... 3,935 4,535
---------- ----------
Total current assets.................................................... 92,087 103,181
Property, plant, and equipment, net............................................ 38,244 42,459
Goodwill and other intangible assets, net...................................... 16,402 18,014
Investments in associated companies............................................ 9,839 5,925
Deferred income taxes.......................................................... 9,085 9,992
Other assets................................................................... 13,166 8,668
---------- ----------
Total assets............................................................ $ 178,823 $ 188,239
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt................. $ 2,858 $ 2,914
Accounts payable............................................................ 18,323 21,762
Dividends payable........................................................... 1,873 1,811
Accrued compensation........................................................ 8,109 11,854
Other current liabilities................................................... 13,500 11,859
---------- ----------
Total current liabilities............................................... 44,663 50,200
Long-term debt................................................................. 19,380 22,295
Deferred income taxes.......................................................... 1,233 3,711
Accrued postretirement benefits................................................ 9,837 9,823
Other liabilities.............................................................. 14,375 8,926
---------- ----------
Total liabilities....................................................... 89,488 94,955
---------- ----------
Minority interest in equity of subsidiaries.................................... 8,436 8,377
---------- ----------
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.............................................. 357 746
Retained earnings........................................................... 103,953 103,760
Unearned compensation....................................................... (1,597) --
Accumulated other comprehensive loss........................................ (24,075) (16,714)
---------- ----------
88,302 97,456
Treasury stock, shares held at cost; 2001-526,865, 2000-812,646............. (7,403) (12,549)
---------- ----------
Total shareholders' equity.............................................. 80,899 84,907
---------- ----------
Total liabilities and shareholders' equity........................... $ 178,823 $ 188,239
========== ==========
See notes to consolidated financial statements.
19
QUAKER CHEMICAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
-------------------------
2001 2000 1999
------- ------- -------
(Dollars in thousands)
Cash flows from operating activities
Net income................................................................................... $ 7,665 $17,163 $15,651
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.............................................................................. 4,913 5,404 5,682
Amortization.............................................................................. 1,467 1,408 1,274
Equity in net income of associated companies.............................................. (613) (1,424) (957)
Minority interest in earnings of subsidiaries............................................. 2,905 2,536 1,597
Deferred income taxes..................................................................... (627) (1,821) 1,031
Deferred compensation and other postretirement benefits................................... 201 1,218 326
Net gain on exit of businesses............................................................ -- (1,473) --
Environmental charge...................................................................... 500 1,500 --
Restructuring charges (credit)............................................................ 5,854 -- (314)
Other, net................................................................................ (695) 596 926
Increase (decrease) in cash from changes in current assets and current liabilities, net of
acquisitions and divestitures:
Accounts receivable, net.................................................................. 7,573 (2,187) (6,132)
Inventories............................................................................... 2,762 (650) (644)
Prepaid expenses and other current assets................................................. 39 (1,596) (400)
Accounts payable and accrued liabilities.................................................. (6,603) (1,805) (1,313)
Change in restructuring liabilities....................................................... (1,123) (328) (2,139)
Estimated taxes on income................................................................. (1,614) 2,852 (361)
------- ------- -------
Net cash provided by operating activities.............................................. 22,604 21,393 14,227
------- ------- -------
Cash flows from investing activities
Capital expenditures......................................................................... (8,036) (6,126) (5,726)
Dividends from associated companies.......................................................... 1,208 625 615
Investments in and advances to associated companies.......................................... 95 -- (28)
Payments related to acquisitions............................................................. (1,718) (3,500) --
Proceeds from sale of business............................................................... -- 5,200 --
Proceeds from disposition of assets.......................................................... 259 1,006 88
Other, net................................................................................... 165 (11) (1,160)
------- ------- -------
Net cash used in investing activities.................................................. (8,027) (2,806) (6,211)
------- ------- -------
Cash flows from financing activities
Dividends paid............................................................................... (7,410) (6,989) (6,817)
Net (decrease) in short-term borrowings and current portion of long-term debt................ (56) (290) (689)
Repayment of long-term debt.................................................................. (2,891) (28) (409)
Treasury stock issued........................................................................ 2,902 810 557
Treasury stock repurchased................................................................... -- (1,961) --
Distributions to minority shareholders....................................................... (2,335) (1,533) (142)
Other, net................................................................................... 234 -- --
------- ------- -------
Net cash used in financing activities.................................................. (9,556) (9,991) (7,500)
------- ------- -------
Effect of exchange rate changes on cash...................................................... (1,024) (721) (2,052)
Net increase (decrease) in cash and cash equivalents...................................... 3,997 7,875 (1,536)
Cash and cash equivalents at beginning of year............................................ 16,552 8,677 10,213
------- ------- -------
Cash and cash equivalents at end of year.................................................. $20,549 $16,552 $ 8,677
======= ======= =======
Supplemental cash flow disclosures
Cash paid during the year for:
Income taxes................................................................................. $ 7,550 $ 6,935 $10,310
Interest..................................................................................... 1,876 2,020 2,494
Noncash investing activities:
Contribution of property, plant, and equipment to real estate joint venture.................. $ 4,358 -- --
See notes to consolidated financial statements.
20
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, 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
--------
Net income...................... -- -- 7,665 -- -- -- 7,665
Currency translation
adjustments................... -- -- -- -- (5,566) -- (5,566)
Minimum pension liability....... -- -- -- -- (1,524) -- (1,524)
Unrealized (loss) on available-
for-sale securities........... -- -- -- -- (271) -- (271)
--------
Comprehensive income.......... -- -- -- -- -- -- 304
--------
Dividends ($.82 per share)...... -- -- (7,472) -- -- -- (7,472)
Shares issued upon exercise of
options....................... -- (375) -- -- -- 3,106 2,731
Shares issued for employee
stock purchase plan........... -- 8 -- -- -- 244 252
Restricted stock................ -- (22) -- (1,597) -- 1,796 177
------ ----- -------- ------- -------- -------- --------
Balance at December 31, 2001 $9,664 $ 357 $103,953 $(1,597) $(24,075) $ (7,403) $ 80,899
====== ===== ======== ======= ======== ======== ========
See notes to consolidated financial statements.
21
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, 2001 and 2000, accumulated
amortization amounted to $9,195 and $8,016, respectively.
Revenue recognition: Sales are recorded when products are shipped to
customers and services earned. As part of the Company's chemical management
services, certain third party products are transferred to customers at no gross
profit and, accordingly, these transactions have no effect on net sales. Third
party products transferred under these arrangements totaled $20,654, $19,733,
and $16,289 for 2001, 2000, and 1999, respectively. License fees and royalties
are recorded when earned and are included in other income.
Research and development costs: Research and development costs are expensed
as incurred. Research and development expenses during 2001, 2000, and 1999 were
$8,851, $8,496 and $8,524, 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
instruments having
22
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
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. As of December 31, 2001 and 2000, the allowance for
doubtful accounts was $5,155 and $2,960, respectively. Historically, the
Company has experienced some losses related to poor financial condition of
certain customers. Prior to 2000, such losses were not material. In 2001 and
2000, the Company recorded allowances of $2,000 and $1,672, respectively,
primarily related to U.S. steel customers that filed for bankruptcy 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. If no amount in the
range is considered more probable than any other amount, the Company records
the lowest amount in the range in accordance with generally accepted accounting
principles. Accrued liabilities are exclusive of claims against third parties
and are not discounted. Environmental costs and remediation costs are
capitalized if the costs extend the life, increase the capacity or improve
safety or efficiency of the property from the date acquired or constructed,
and/or mitigate or prevent contamination in the future.
Comprehensive income (loss): The Company presents comprehensive income
(loss) in its Statement of Shareholders' Equity. The components of accumulated
other comprehensive loss for 2001 include: accumulated foreign currency
translation adjustments of $21,529, minimum pension liability of $2,275, and
unrealized holding losses on available-for-sale securities of $271. The
components of accumulated other comprehensive loss for 2000 include:
accumulated foreign currency translation adjustments of $15,963 and minimum
pension liability of $751.
Recently issued accounting standards: In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. In addition, companies are required to review goodwill and
intangible assets reported in connection with prior acquisitions, possibly
disaggregate and report separately previously identified intangible assets, and
possibly reclassify certain intangible assets into goodwill. SFAS No. 142
establishes new guidelines for accounting for goodwill and other intangible
assets. Goodwill associated with acquisitions consummated after June 30, 2001
is not amortized. The Company has not recognized such goodwill. Additionally,
upon adoption, existing goodwill is no longer amortized, but instead will be
assessed for impairment on at least an annual basis. The Company implemented
the remaining provisions of SFAS No. 142 on January 1, 2002. The Company does
not expect to recognize an impairment charge in 2002 in accordance with SFAS
No. 142. The non-amortization provisions of SFAS No. 142 for goodwill and
intangibles is expected to result in an increase in operating income ranging
from approximately $500 to $1,000 in 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. This statement is effective for fiscal years beginning after
June 15, 2002. The Company is currently assessing the impact of this new
standard.
In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets." The provisions of this statement provide a single
accounting model for impairment of long-lived assets. The statement is
effective for fiscal years beginning after December 15, 2001. The Company
adopted this standard on
23
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
January 1, 2002. Management has assessed the impact of the new standard and
determined there to be no material impact to the financial statements.
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.
Reclassifications: Certain reclassifications of prior years' data have been
made to improve comparability.
Note 2--Restructuring and Related Activities
In the third and fourth quarters of 2001, the Company's management approved
restructuring plans to realign its organization and reduce operating costs. The
Company's restructuring plans include the closure and sale of its manufacturing
facilities in the U.K. and France. In addition, the Company consolidated
certain functions within its global business units and reduced administrative
functions, as well as expensed costs related to abandoned acquisitions.
Included in the third and fourth quarter restructuring charges are provisions
for the severance of 16 and 37 employees, respectively.
Restructuring and related charges of $2,958 and $2,896 were expensed during
the third and fourth quarters of 2001, respectively. The third quarter charge
comprised $520 related to employee separations, $2,038 related to facility
rationalization charges, and $400 related to abandoned acquisitions. The fourth
quarter charge comprised $2,124 related to employee separations, $575 related
to facility rationalization charges, and $197 related to abandoned
acquisitions. Employee separation benefits under each plan varied depending on
local regulations within certain foreign countries and included severance and
other benefits. As of December 31, 2001, the Company completed 25 of the
planned 53 employee separations under the 2001 plans. The Company expects to
substantially complete the initiatives contemplated under the restructuring
plans by September 30, 2002. Upon conclusion of its restructuring and other
cost savings initiatives, the Company expects to achieve annualized savings of
approximately $4,000 in cost of sales and operating expenses. These estimated
cost savings were calculated based upon expected cost reductions primarily
related to employee separations as well as lower operating and depreciation
expense resulting from factory rationalizations. However, the Company cannot
give any assurance whether the entire estimated cost savings will be realized.
Components of accrued restructuring costs and amounts charged against the
2001 plans as of December 31, 2001 were as follows:
2001
(Dollars in thousands)
Currency
Restructuring Asset Translation December 31, 2001
Charges Impairment Payments and Other Ending Balance
------------- ---------- -------- ----------- -----------------
Employee Separations.... $2,644 $ -- $(111) $ 1 $2,534
Facility Rationalization 2,613 (1,015) (171) 12 1,439
Abandoned Acquisitions.. 597 -- (597) -- --
------ ------- ----- --- ------
Total................ $5,854 $(1,015) $(879) $13 $3,973
====== ======= ===== === ======
24
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
In the fourth quarter of 1998, the Company announced and implemented a
restructuring and integration plan to better align its organizational structure
with market demands, improve operational performance, and reduce costs. The
components of the 1998 pre-tax restructuring and integration charge included
severance and other benefit costs of $4,000 and early pension and
postemployment benefits of $1,300. At the end of 1999, the Company had
substantially implemented these initiatives and reversed approximately $314 of
the original charge. The remaining restructuring and integration liability at
December 31, 2000 of $244 was paid in January 2001.
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).
Note 3--Investments in Associated Companies
Investments in associated (less than majority-owned) companies are accounted
for under the equity method. See Exhibit 21 in Part IV of this Form 10-K for a
listing of the associated companies and their relative ownership percentages.
Summarized financial information of the associated companies, in the
aggregate, is as follows:
December 31,
---------------
2001 2000
------- -------
Current assets................................... $19,350 $26,999
Noncurrent assets................................ 24,416 5,391
Current liabilities.............................. 11,863 13,763
Noncurrent liabilities........................... 12,570 4,776
Year Ended December 31,
-----------------------
2001 2000 1999
------- ------- -------
Net sales........................................ $43,138 $57,460 $54,224
Gross margin..................................... 19,093 21,227 20,377
Operating income................................. 4,263 5,226 5,821
Net income....................................... 1,527 2,004 2,196
In January 2001, the Company contributed its Conshohocken, Pennsylvania
property and buildings (the "Site") to a real estate joint venture (the
"Venture") in exchange for a 50% ownership in the Venture. The Venture did not
assume any debt or other obligations of the Company. The Venture credited the
Company's capital account with the estimated fair value of the Site, which
amount was in excess of the book value of the contribution. The Company
recorded its investment in the Venture at book value, which totaled $4,736.
The Venture is renovating certain of the existing buildings at the Site, as
well as building new office space (the "Project"). In December 2000, the
Company entered into an agreement with the Venture to lease approximately 40%
of the Site's available office space for a 15-year period commencing February
2002, with multiple renewal options. The Company believes the terms of this
lease are no worse than the terms it would have obtained from an unaffiliated
third party. As of February 28, 2002, approximately half of the Site's
remaining office space was under lease to unaffiliated third parties.
The Venture is funding the Project with a $21,000 construction loan from The
Bank of New York (the "Venture Loan"), of which approximately $11,766 was
outstanding as of December 31, 2001. The Venture Loan
25
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
is secured in part by a mortgage on the Site and guarantees of completion and
payment of interest and operating expenses executed by certain Venture partners
other than the Company.
The Company has not guaranteed, nor is it obligated to pay any principal,
interest or penalties on the Venture Loan, even in the event of default by the
Venture. At December 31, 2001, the Venture had property with a book value of
$19,003, total assets of $19,816 and total liabilities of $14,547. The Venture
expects to complete the Project in mid-2002, and expects to refinance the
Venture Loan, which matures in July 2002 subject to extension under certain
conditions, on acceptable terms. The Company can offer no assurances that the
refinancing will be successful. If cash flows permit, the Company will be
eligible to receive priority distributions from the Venture.
Note 4--Inventories
Total inventories comprise:
December 31,
---------------
2001 2000
------- -------
Raw materials and supplies....................... $ 9,673 $11,872
Work in process and finished goods............... 9,112 10,844
------- -------
$18,785 $22,716
======= =======
Inventories valued under the LIFO method amounted to $5,636 and $6,497 at
December 31, 2001 and 2000, respectively. The estimated replacement costs for
these inventories using the FIFO method were approximately $5,196 and $6,287,
respectively.
Note 5--Property, Plant, and Equipment
Property, plant, and equipment comprise:
December 31,
----------------
2001 2000
------- --------
Land............................................. $ 4,328 $ 5,670
Building and improvements........................ 25,132 33,881
Machinery and equipment.......................... 61,881 65,844
Construction in progress......................... 6,026 2,639
------- --------
97,367 108,034
Less accumulated depreciation.................... 59,123 65,575
------- --------
$38,244 $ 42,459
======= ========
26
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
Note 6--Taxes on Income
Taxes on income consist of the following:
Year Ended December 31,
-------------------------
2001 2000 1999
------- ------- -------
Current:...
Federal. $(1,066) $ 2,411 $ 3,528
State... 5 145 85
Foreign. 6,161 7,476 6,216
------- ------- -------
5,100 10,032 9,829
Deferred:..
Federal. 226 (1,337) 522
Foreign. (853) (484) 509
------- ------- -------
Total...... $ 4,473 $ 8,211 $10,860
======= ======= =======
Total deferred tax assets and liabilities are composed of the following at
December 31:
2001 2000
-------------- ---------------
Non- Non-
Current current Current current
------- ------- ------- -------
Retirement benefits.................. $ 179 $ -- $ 13 $ --
Allowance for doubtful accounts...... 706 -- 560 --
FRS impairment....................... -- 1,836 -- 1,836
Insurance and litigation reserves.... 666 -- 670 --
Postretirement benefits.............. -- 3,111 -- 3,102
Supplemental retirement benefits..... -- 900 -- 802
Performance incentives............... 306 2,256 2,637 722
Alternative minimum tax carryforward. -- -- -- 396
Restructuring charges................ 2,174 -- 1,097 2,873
Vacation pay......................... -- 261 -- 261
Goodwill............................. -- 564 -- --
Operating loss carryforward.......... -- 903 -- 1,222
Other................................ -- 157 -- --
------ ------ ------ -------
4,031 9,988 4,977 11,214
Valuation allowance.................. -- (903) -- (1,222)
------ ------ ------ -------
Total deferred income tax assets--net $4,031 $9,085 $4,977 $ 9,992
====== ====== ====== =======
Depreciation......................... $1,161 $ 3,467
Other................................ 72 244
------ -------
Total deferred income tax liabilities $1,233 $ 3,711
====== =======
27
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
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:
2001 2000 1999
------ ------- -------
Income tax provision at the Federal statutory tax rate...................... $4,906 $ 9,005 $ 9,231
State income tax provisions, net............................................ 3 96 56
Non-deductible entertainment and business meal expense...................... 159 173 195
Foreign taxes on earnings at rates different from the Federal statutory rate (321) (1,239) 1,321
Miscellaneous items, net.................................................... (274) 176 57
------ ------- -------
Taxes on income............................................................. $4,473 $ 8,211 $10,860
====== ======= =======
At December 31, 2001, the Company has foreign net operating loss
carryforwards of $2,670, of which $477 expire between 2002 and 2006. There is
no time limit for the remaining net operating loss carryforwards of $2,193. 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, 2001 was
approximately $109,000. Any income tax liability which might result from
ultimate remittance of these earnings is expected to be substantially offset by
foreign tax credits.
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:
2001 2000 1999
------- ------- -------
Service cost..................................... $ 2,172 $ 2,442 $ 2,136
Interest cost.................................... 4,359 4,169 3,962
Expected return on plan assets................... (4,569) (4,583) (4,614)
Other amortization, net.......................... 284 97 (46)
Pension curtailment (Note 2)..................... 42 -- --
------- ------- -------
Net pension cost of plans subject to SFAS No. 87. 2,288 2,125 1,438
Pension costs of plans not subject to SFAS No. 87 46 69 67
------- ------- -------
Net pension costs................................ $ 2,334 $ 2,194 $ 1,505
======= ======= =======
28
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands except per share amounts)
The U.S. defined benefit pension plan is the largest plan. The significant
assumptions for the U.S. plan were as follows:
2001 2000 1999
---- ---- ----
Discount rate for projected benefit obligation............. 7.25% 7.5% 7.5%
Assumed long-term rate of compensation increases........... 4.75% 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 medic