================================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------FORM 10-K
----------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,
20022003or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 0-7154
-----------------QUAKER CHEMICAL CORPORATION
(Exact(Exact name of Registrant as specified in its charter)
A Pennsylvania Corporation No. 23-0993790 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization)
A Pennsylvania Corporation No. 23-0993790 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
One Quaker Park, 901 Hector Street,
Conshohocken, Pennsylvania
19428 (Address(Address of principal executive offices) (Zip(Zip Code) Registrant'sRegistrant’s telephone number, including area code (610) 832-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange on Title of each class which registered ------------------- ------------------------ Common Stock, New York Stock Exchange $1.00 par value Stock Purchase New York Stock Exchange Rights
Title of each class
Name of each Exchange on which registered
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
-----------------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]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'sRegistrant’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.[_]¨Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2 of the Act)12b-2) Yes[X]x No[_]¨State aggregate market value of
voting and non-votingcommonequitystock 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 June28, 2002): $210,589,726. State the aggregate market value of the voting and non-voting common equity 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 14,30, 2003):$172,665,525.$219,520,465.Indicate the number of shares outstanding of each of the
Registrant'sRegistrant’s classes of common stock as of the latest practicable date:9,352,0049,623,150 shares of Common Stock, $1.00 Par Value, as ofMarch 14, 2003.February 29, 2004.DOCUMENTS INCORPORATED BY REFERENCE
Portions of the
Registrant'sRegistrant’s definitive Proxy Statement dated March 31,20032004 in connection with the Annual Meeting of Shareholders to be held on May14, 20035, 2004 are incorporated into Part III.================================================================================PART I
As used in this Report, the terms
"Quaker"“Quaker,” the “Company,” “we” andthe "Company"“our” refer to Quaker Chemical Corporation, its subsidiaries, and associated companies, unless the context otherwise requires.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'sservices (“CMS”). 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 thecoldhot 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 and concrete products; (ix) construction products such as flexible sealants and protective coatings for various applications; and (x) programs to provide chemical management services. Individual product lines representing more than 10% of consolidated revenues for any of the past three years are as follows:
2002 2001 2000 ---- ---- ----Rolling lubricants.............. 21.5% 22.9% 25.3% Machining and grinding compounds 14.8% 15.2% 14.8% Hydraulic fluids................ 12.7% 12.4% 11.6% Corrosion preventitives......... 10.4% 10.5% 10.7%
2003 2002 2001 Rolling lubricants
23.2 % 21.5 % 22.9 % Machining and grinding compounds
14.3 % 14.8 % 15.2 % Chemical management services
10.9 % 4.8 % 5.4 % Hydraulic fluids
10.7 % 12.7 % 12.4 % Corrosion preventives
9.1 % 10.4 % 10.5 % A substantial portion of
Quaker'sQuaker’s sales worldwide are made directly through its own employees and its CMS programs with the balance being handled through distributors and agents. Quaker employees visit the plants of customers regularly and, through training and experience, identify production needs which can be resolved or alleviated either by adaptingQuaker'sQuaker’s existing products or by applying new formulations developed inQuaker'sQuaker’s laboratories. Generally, separate manufacturing facilities of a single customer are served by different personnel. Sales are generally recorded when products are shipped to customers and services earned. For products shipped on consignment, revenue is recorded upon usage by the customer. As part of theCompany'sCompany’s chemical management services, certain third partyproducts are transferredproduct sales to customers are managed by the Company. Where the Company acts as a principal, revenues are recognized on a gross reporting basis atno gross profit and, accordingly, these transactions have no effect onthe selling price negotiated with the customers. Where the Company acts as an agent, such revenue is recorded using netsales.reporting as service revenues, at the amount of the administrative fee earned by the Company for ordering the goods. Third party products transferred underthesearrangements resulting in net reporting totaled $26.6 million, $28.3 million, and $20.7 million for 2003, 2002, and$19.7 million for 2002,2001,and 2000,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.
1
Competition
The chemical specialty industry
is composed ofcomprises a number of companies of similar size as well as companies larger and smaller than Quaker. Quaker cannot readily determine its precise position in every industry it serves. Based on information available to Quaker, however, it is estimated that Quaker holds a leading and significant global position (among a group in excess of 25 other suppliers) in the market for process fluids to produce sheet steel 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 for1individual 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
2002, Quaker's2003, Quaker’s five largest customers (each composed of multiple subsidiaries or divisions with semi-autonomous purchasing authority) accounted for approximately18%24% of its consolidated net sales with the largest of these customers accounting for approximately7%9% of consolidated net sales. A significant portion ofQuaker'sQuaker’s revenues are realized from the sale of process fluids and services 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 onQuaker'sQuaker’s business.Raw Materials
Quaker uses over 500 raw materials, including mineral oils and derivatives, animal fats and
fatderivatives, vegetable oils and derivatives, ethylene derivatives, solvents, surface active agents, chlorinated paraffinic compounds, and a wide variety of other organic and inorganic compounds. In2002,2003, onlyonethree rawmaterialmaterials (mineraloil)oil and derivatives, animal fats and derivatives, and vegetable oils and derivatives) accounted for as much as 10% of the total cost ofQuaker'sQuaker’s raw material purchases. The price of mineral oil is directly affected by the price of crude oil. Accordingly, significant fluctuations in the price of crude oil can have a material effect upon theCompany'sCompany’s business. Many of the raw materials used by Quaker are"commodity"“commodity” chemicals, and, therefore,Quaker'sQuaker’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'sQuaker’s proprietary formulae and the application of its skills and experience to meet customer needs.Quaker'sQuaker’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'sDevelopment—LaboratoriesQuaker’s research and development laboratories are directed primarily toward applied research and development since the nature of
Quaker'sQuaker’s businessrequires continuingrequire continual 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 2003, 2002, and 2001and 2000were $10.1 million, $9.1 million, and $8.9 million,and $8.5 million,respectively.2
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'sQuaker’s subsidiaries and associated companies also have laboratory facilities. Although not as complete as the Conshohocken or Uithoorn laboratories, these facilities are generally sufficient for the requirements of the customers being served. If problems are encountered which cannot be resolved by local laboratories, such problems may be referred to the laboratory staff in Conshohocken or Uithoorn.2Regulatory 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
2002,2003, capital expenditures directed solely or primarily to regulatory compliance amounted to approximately $0.5 million compared to $0.5 million and $1.3 million in 2002 and$2.8 million in2001,and 2000,respectively. In2003,2004, the Company expects to incur approximately$1.4$1.6 million for capital expenditures directed primarily to regulatory compliance. Incorporated by reference is the information contained in Note 14 of Notes to Consolidated Financial Statements included in Item 8 of this Report.Number of Employees
On December 31,
2002, Quaker's2003, Quaker’s consolidated companies had1,0381,141 full-time employees of whom462497 were employed by the parent company and its U.S. subsidiaries and576644 were employed by its non-U.S. subsidiaries. Associated companies of Quaker (in which it owns 50% or less) employed144148 people on December 31,2002.2003.Product Classification
The
Company'sCompany’s reportable segments are as follows:(1) Metalworking process
chemicals--productschemicals—products used as lubricants for various heavy industrial and manufacturing applications.(2)
Coatings--temporaryCoatings—temporary and permanent coatings for metal and concrete products and chemical milling maskants.(3) Other chemical
products--primarily chemicals used in the manufacturing of paper in 2000 (pulp and paper division sold May 2000) as well asproducts—other various chemical products.Incorporated by reference is the information contained in Note 11 of Notes to Consolidated Financial Statements included in Item 8 of this Report.
Non-U.S. Activities
Since significant revenues and earnings are generated by non-U.S. operations,
Quaker'sQuaker’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.ReferenceIncorporated by reference ismade to disclosurethe information contained in Item 7A of this Report and in Note 11 of Notes to Consolidated Financial Statements included in Item 8 of this Report.Quaker
Chemical Corporationon the InternetFinancial results, news and other information about Quaker
Chemical Corporationcan be accessed from theCompany'sCompany’s Web site athttp://www.quakerchem.com.www.quakerchem.com. This site includes important information on products and services, financial reports, news releases, and career opportunities. TheCompany'sCompany’s periodic and current reports, including exhibits and supplemental schedules filed therewith, and amendments to those reports, filed with the Securities and Exchange Commission("SEC"(“SEC”) are available onthisthe Company’s Web site, free of charge, as soon as reasonably practicable after they are electronically filed or furnished to the SEC.3
Factors that May Affect Our Future Results
(Cautionary(Cautionary Statements
Underunder the Private Securities Litigation Reform Act of 1995)Certain information included in this Report and other materials filed or to be filed by Quaker with the
Securities and Exchange CommissionSEC (as well as information included in oral statements or other written3statements made or to be made by us) containscontain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including:.statements relating to our business strategy;.our current and future results and plans; and.statements that include the words"may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "plan"“may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions.Such statements include information relating to current and future business activities, operational matters, capital spending, and financing sources. From time to time, oral or written forward-looking statements are also included in
Quaker'sQuaker’s periodic reports on Forms 10-Q and 8-K, press releases and other materials released to the public.Any or all of the forward-looking statements in this
report,Report, inQuaker'sQuaker’s Annual Report to Shareholders for20022003, and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Report will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in
Quaker'sQuaker’s subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.TheThese forward-looking statements are subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. A major risk is that the Company’s demand is largely derived from the demand for its customers’ products, which subjects the Company to uncertainties related to downturns in a customer’s business and unanticipated customer production shutdowns. Other major risks and uncertaintiesthat could impact the Company's future operations and resultsinclude, 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,the current conflict in Iraq, and future security alertsand 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. These risks, uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results. Other factors beyond those discussed below could also adversely affect us. Therefore, we caution you not to place undue reliance on our forward-looking statements. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.Item 2. Properties.
Quaker'sQuaker’s corporate headquarters and a laboratory facility are located in Conshohocken, Pennsylvania.
Quaker'sQuaker’s other principal facilities are located in Detroit, Michigan; Middletown, Ohio; Placentia, California; Uithoorn, The Netherlands; Santa Perpetua de Mogoda, Spain; Rio de Janeiro, Brazil; Tradate, Italy; and Wuxi, China. All the properties except Placentia, California are used by the metalworking segment and Placentia, California is used by the coatings segment. 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"“Venture”), and the Placentiasite,and Tradate sites, whichisare leased, all of these principal facilities are owned by Quaker and as of December 31,20022003 were mortgage free. Quaker also leases sales, laboratory, manufacturing, and warehouse facilities in other locations.4
In January 2001, the Company contributed its Conshohocken, Pennsylvania property and buildings (the
"Site"“Site”) toa real estate joint venture (the "Venture")the Venture in exchange for a 50%ownershipinterest in the Venture. The Venture did not assume any debt or other obligations of the Company. The Venture renovated certain of the existing buildings at the Site, as well as built new office space (the"Project"“Project”). In December 2000, the Company entered into an agreement with the Venture to lease approximately 38% of theSite'sSite’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 less favorable than the terms it would have obtained from an unaffiliated third party. As of December 31,2002,2003, approximately87%93% of theSite'sSite’s office space was under lease and the Site (including improvements thereon) was subject toencumberancesencumbrances securing indebtedness of the Venture in the amount of$27.3$26.9 million.4The company has not guaranteed, nor is it obligated to pay, any principal, interest or penalties on the indebtedness of the Venture, even in the event of default by the Venture. During the fourth quarter of 2002, the Company completed the sale of its Woodchester, England manufacturing facility. As of December 31, 2001, Quaker closed this 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'sQuaker’s Villeneuve, France site is currently for sale. Quaker ceased manufacturing operations at
itsthis facilityin Villeneuve, France,effective March 31, 2002. Production was consolidated into its facilities in Uithoorn, The Netherlands and Santa Perpetua de Mogoda, Spain. Sales, warehousing, and laboratory activities will continue at the Villeneuve site pending its sale.Quaker'sQuaker’s aforementioned principal facilities (excluding Conshohocken) consist of various manufacturing, administrative, warehouse, and laboratory buildings. Substantially all of the buildings (including Conshohocken) 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'sQuaker’s present operations. The Company has a program to identify needed capital improvementswhich isthat are 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'sQuaker’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
thisreference is the information concerning pending asbestos-related litigation against an inactive subsidiary and amounts accrued associated with certain environmental investigatory andnoncapitalnon-capital remediation costs in Note 14 of Notes to Consolidated Financial Statements which appears in Item 8 of this Report. The Company is party to other litigation which management currently believes will not have a material adverse effect on theCompany'sCompany’s results of operations, cash flow, or financial condition.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.
5
Item 4(a). Executive Officers of the Registrant.
Set forth below are the executive officers of the Company. Each of the executive officers
wereother than Rex Curtis is elected annually to a one-year term. Mr. Curtis was elected to his position on January 1, 2004.
Name, Age, and Present
Position with the Company
Business Experience During Past Five
Position with the Company
Years and Period Served as an Officer- ------------------------- -------------------------------------Ronald J. Naples, 57..................... Mr. Naples was elected Chairman of the Board in May 1997 and58
Chairman of the Board andChief Executive Officer in October 1995. He also served as
Chief Executive Officer, and DirectorPresident of the Company from October 1995 until March 1998.Mr. Naples has been a Director of the Companyserved in his current position since1988.1997.Joseph W. Bauer, 60...................... Mr. Bauer was elected61
President and Chief Operating Officerof President and Chief Operating Officer the Company in March 1998. Previously,Mr. Bauer was employed by M. A. Hanna and was President of M. A. Hanna Color Division from 1996 tohas served in his current position since 1998.5
Name, Age, and Present Business Experience During Past Five Position with the Company Years and Period Served as an Officer - ------------------------- -------------------------------------Michael F. Barry, 44.......................45
Chief Financial Officer and Treasurer and
Vice President, Global Industry Leader,
Industrial Metalworking and CoatingsMr. Barry was elected Vice President Chief Financial Officerand Global Industry Leader, Industrial Metalworking and Coatings in January 2004. Mr. Barry currently serves in this position as well as the Company’s Vice President, Chief Financial OfficerTreasurer of the Company in November 1998. Previously, Mr.and Treasurer,Barry was employed by Lyondell (formerly ARCO Chemical) wherea position which he has heldthe position of Business Director for its Urethanes business throughout the Americas from 1997 tosince 1998.D. Jeffry Benoliel, 44.....................45
Vice President, Secretary
and General CounselMr. Benoliel was elected Vice President and General Counsel in Vice President, Secretary andJanuary 2001. He was electedan officerCorporate Secretary of the Company in MayGeneral Counsel1998,at which time he assumed the office of Corporate Secretaryin 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.JoseJosé Luiz Bregolato, 57....................58
Vice President and Managing
Director—South AmericaMr. Bregolato was elected tohas served in his current positioninsince 1993.Vice President and Managing Director--South AmericaIan F. Clark, 58........................... Mr. Clark was elected an officer of the Company in March 1999.59
Vice President and Global Industry
Leader—Metalworking/
Chemical Management ServicesMr. Clark has announced his decision to retire, effective March 31, 2004. He assumed his current position in January 2001. Previously,From March 1999 to December 2002, heLeader--Metalworking/was Vice President and Global IndustryLeader--Steel/Leader—Steel/FluidChemical Management Services Power from March 1999 to December 2000.Power. Prior to joining the Company in March 1999, he was employed by Ciba Specialty Chemicals Corporation where he was Vice 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, 47.........................Rex Curtis, 45
Vice President and Global Industry
Leader—Automotive MetalworkingMr. GeierCurtis was elected to his current position in January 2004. From June 2001 through December 2003, he was the Company’s Director—Global Business Segment Manager—Automotive Metalworking. Mr. Curtis joined the Company in November1997.1999 as the North American Sales Manager—Automotive Metalworking and remained in such position through May 2001. Prior to joining the Company he was President—Vulcan Oil Company from 1992 to November 1999.Stephen D. Holland, 56
VicePresident--HumanPresident—Human ResourcesMr. Holland was elected to his current position in May 2003. Prior to joining the Company in May 2003, he was Vice President—Human Resources for the Aerospace Group of Teleflex Inc. from 1993 to September 2002. 6
Name, Age, and Present
Position with the Company
Business Experience During Past Five
Years and Period Served as an OfficerMark Harris, 48............................49
Vice President and Global Industry
Leader—Steel/Fluid PowerMr. Harris was elected to his current position in January 2001. Vice President and Global IndustryFrom 1996 until he assumed his current position, Mr. Harris wasLeader--Steel/Fluid PowerRegional Industry Manager for theCompany'sCompany’s Steel/Fluid Power business in Europe, the Middle East, and Africa.Daniel S. Ma, 62........................... Mr. Ma was elected to his current position in 1993. Vice President and Managing Director--Asia/PacificWilbert Platzer, 41........................42
Vice President—Worldwide OperationsMr. Platzer was elected to his current position in January 2001. Vice President--WorldwideFrom March 1996 to June 1999, he was Managing Director ofOperationsQuaker Chemical B.V., theCompany'sCompany’s Dutch affiliate, and, from July 1999 until he assumed his current position, he was Director ofOperations--Europe.Operations—Europe.Irving H. Tyler, 44........................45
Vice President—Information Services
and Chief Information OfficerMr. Tyler was elected Vice President--Information Services and Vice President--Information Services Chief Information Officer of the Companyto his current position in January 2001.and Chief Information Officer Previously,From July 1999 through December 2000, he was theCompany'sCompany’s Director of Information Services and Chief Information Officerfrom July 1999 to January 2001,and was the Company’s European Controller from August 1997 toJulyJune 1999.Mark A. Featherstone, 41...................42
Global ControllerMr. Featherstone joined the Company in May 2001 as Global Global ControllerController. 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 2000.67
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities. The
Company'sCompany’s common stock is listed on the New York Stock Exchange("NYSE"(“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 reportedbyon the NYSE composite table (amounts rounded to the nearest penny), and the quarterly dividends declaredas indicated:and paid:
Range of Quotations --------------------------- Dividends 2002 2001 Declared ------------- ------------- ---------- High Low High Low 2002 2001 ------ ------ ------ ------ ---- -----First quarter. $25.50 $19.84 $19.00 $16.12 $.21 $.205 Second quarter 24.90 20.51 20.99 17.17 .21 .205 Third quarter. 25.00 18.32 21.75 16.96 .21 .205 Fourth quarter 23.68 18.22 22.30 18.00 .21 .205
Price Range Dividends
Declared
Dividends
Paid
2003 2002 High Low High Low 2003 2002 2003 2002 First quarter
$ 23.46 $ 18.07 $ 25.50 $ 19.84 $ .21 $ .21 $ .21 $ .205 Second quarter
26.38 20.31 24.90 20.51 .21 .21 .21 .21 Third quarter
28.50 22.29 25.00 18.32 .21 .21 .21 .21 Fourth quarter
30.75 23.44 23.68 18.22 .21 .21 .21 .21 As of January
17, 200316, 2004 there were872799 shareholders of record of theCompany'sCompany’s common stock, its only outstanding class of equity securities.Reference is made to the
"Equityinformation appearing under the caption “Equity CompensationPlan Information" incorporated by referencePlans” in Item 12 of this Report, which is incorporated herein by this reference.Item 6. Selected Financial Data.
Item 6. Selected Financial Data. The following table sets forth selected financial information for the
Company:Company and its consolidated subsidiaries:
2003 2002 2001(1) 2000(2) 1999(3) (Dollars in thousands, except per share amounts) Summary of Operations:
Net sales
$ 340,192 $ 274,521 $ 251,074 $ 267,570 $ 265,671 Income before taxes, equity income and minority interest
24,118 24,318 14,430 26,486 27,151 Net income
14,833 14,297 7,665 17,163 15,651 Per share:
Net income-basic
$ 1.58 $ 1.56 $ .85 $ 1.94 $ 1.76 Net income-diluted
1.52 1.51 .84 1.93 1.74 Dividends declared
.84 .84 .82 .80 .77 Dividends paid
.84 .835 .82 .79 .765 Financial Position:
Working capital
$ 37,719 $ 37,529 $ 47,424 $ 52,981 $ 51,584 Total assets
287,347 213,858 179,666 188,239 182,213 Long-term debt
15,827 16,590 19,380 22,295 25,122 Shareholders’ equity
112,352 88,055 80,899 84,907 81,199
2002 2001/(1) / 2000/(2)/ 1999/(3)/ 1998/(4)/ -------- -------- -------- -------- -------- (Dollars in thousands except per share amounts)SummaryThe results of Operations: Net sales....................................... $274,521 $251,074 $267,570 $265,671 $264,453 Income before taxes, equity incomeoperations 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; andminority interest...................................... 24,318 14,430 26,486 27,151 16,797 Net income...................................... 14,297 7,665 17,163 15,651 10,650 Per share: Net income-basic............................ $ 1.56 $ .85 $ 1.94 $ 1.76 $ 1.21 Net income-diluted.......................... 1.51 .84 1.93 1.74 1.20 Dividends................................... .84 .82 .80 .77 .74 Financial Position: Working capital................................. $ 37,529 $ 47,424 $ 52,981 $ 51,584 $ 45,636 Total assets.................................... 213,858 179,666 188,239 182,213 191,403 Long-term debt.................................. 16,590 19,380 22,295 25,122 25,344 Shareholders' equity............................ 88,055 80,899 84,907 81,199 83,735organizational structure charges of $184 after-tax.- -------- (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 organizational structure charges of $184 after-tax. (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. (3) The results of operations for 1999 include a net restructuring credit of $188 after-tax. (4) The results of operations for 1998 include net restructuring and integration charges of $2,882 after-tax and minority interest. 7
(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.
(3) The results of operations for 1999 include a net restructuring credit of $188 after-tax. 8
Item 7.
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.Executive Summary
Quaker Chemical Corporation is a worldwide developer, producer, and marketer of chemical specialty products and a provider of chemical management services for various heavy industrial and manufacturing
applications around the globe, with significant sales to the steel and automotive industries. Our strategies and initiatives flow from three business imperatives: (1) sell customer solutions—value—not just fluids, (2) operate as a globally integrated whole and (3) harness the power of our global knowledge and learning. Success factors critical to the Company’s business include successfully differentiating ourselves from our competition, operating efficiently as a globally integrated whole, and increasing market share, customer penetration and profitability through internally developed programs and strategic acquisitions.
The Company operates in mature businesses, which are driven by demand for consumer durables and are therefore subject to the vulnerabilities of a cyclical economy. 2003 proved a difficult operating environment as it relates to demand. The Company experienced softness in sheet steel demand in the U.S. and Europe, two regions critical to our financial results. The Company’s leading share position in those regions makes it a target for competition as our customers may see a need to establish second source suppliers. Also in 2003, the Company did see increased competitive activity in its European market resulting in a net loss of business and slight decrease in market share. Despite this difficult environment, the Company’s Asian and South American regions saw strong growth. As we enter 2004, the competitive pressures and the challenges they present remain, but we still expect growth in our steel business primarily out of the Asian and South American markets.
In 2003, the Company experienced significant revenue growth in its chemical management services (CMS) with the award of new CMS contracts in the North America automotive market. The profitability of this new business is dependent on the Company’s ability to identify and implement cost reduction programs and to achieve product conversions. During 2004, the Company expects to achieve increased profitability from this business as cost reductions and product conversions are achieved.
The Company continually looks for acquisitions that are a tight fit in terms of products, strategic customers or complementary technology and therefore help to build market share or increase customer penetration. In the past two years the Company has made five such acquisitions adding approximately $14.0 million of incremental revenues in 2003. Although modest in size, these acquisitions have helped solidify the Company’s core business through increased product breadth and customer penetration and have and are expected to continue to contribute to revenues and earnings.
A significant amount of the revenue growth in 2003 can be attributed to CMS, acquisitions, and foreign exchange. CMS and the acquisitions have different margin characteristics and did not contribute significantly to earnings. In addition, the Company in 2003 experienced significantly higher raw material costs and administrative expenses. This resulted in only a small increase in earnings year over year. As the Company exited 2003, the pricing in its key raw material markets, specifically crude oil-based, animal fat and vegetable oil derivatives, were at four-year highs. The Company does not believe this trend will reverse in the short term, and there is a risk of even higher raw material prices in 2004, particularly, crude oil. In addition, the Company experienced increases in administrative costs in 2003 related to pension, insurance, its global enterprise resource planning system (“ERP”) implementation and compliance with new governance regulations under the Sarbanes-Oxley Act. The Company again expects to see higher costs in 2004 for these items, in particular costs related to Sarbanes-Oxley compliance.
Despite these trends, the Company grew both revenue and net income and remained committed to its long-term strategic actions. The Company completed three tight-fit acquisitions in 2003 and advanced customer penetration through major new CMS contracts, all of which are expected to contribute to future growth. The Company continues to invest in its ERP to further its initiative of operating as a globally integrated whole. The Company’s balance sheet remains strong, and the Company extended its dividend record to 31 consecutive years of increases.
9
Critical Accounting Policies and Estimates
Quaker'sQuaker’s discussion and analysis of its financial condition and results of operations are based upon
Quaker'sQuaker’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 describe the more significant judgments and estimates used in the preparation of its consolidated financial statements:
1. Accounts receivable and inventory reserves and
exposures--Quakerexposures—Quaker establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition ofQuaker'sQuaker’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. 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. Further, a significant portion ofQuaker'sQuaker’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, 2001, and early 2002,Through 2003, Quaker recorded additional provisions for doubtful accounts primarily related to bankruptcies in the U.S. steel industry. When a bankruptcy occurs, Quaker must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process. These matters may increase theCompany'sCompany’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 therealizabilityrealization of recorded accounts receivable or returned inventory.2. Environmental and litigation
reserves--Accrualsreserves—Accruals for environmental and litigation 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. An inactive subsidiary of the Company is involved in asbestos litigation. If the Company everconcludedconcludes that itwasis probable itwouldwill be liable for any of the obligations of such subsidiary, then itwouldwill record the associated liabilities if they can be reasonably estimated. The Company will reassess this situation periodically in accordance withStatement of Financial Accounting Standards ("SFAS")SFAS No. 5,"Accounting“Accounting for Contingencies."” See Note 14 of Notes to Consolidated Financial Statements which appears in Item 8 of this Report.810
3. Realizability of equity
investments--Quakerinvestments—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 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 aninvestment'sinvestment’s current carrying value. These factors may result in an impairment charge in the future.4. Tax exposures and valuation
allowances--Quakerallowances—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 valuation allowances when necessary 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. U.S. income taxes have not been provided on the undistributed earnings of non-U.S. subsidiaries since it is theCompany'sCompany’s intention to continue to reinvest these earnings in those subsidiaries for working capital and expansion needs. U.S. and foreign income taxes that would be payable if such earnings were distributed may be lower than the amount computed at the U.S. statutory rate due to the availability of tax credits.5. Restructuring
liabilities--Restructuringliabilities—Restructuring charges may consist of charges for employee severance, rationalization of manufacturing facilities and other items. In 2001, Quakerhasrecorded restructuring and other exit costs, including involuntary termination of certain employees, in accordance with the Financial Accounting StandardsBoard's ("FASB"Board’s (“FASB”) Emerging Issues Task Force Issue No. 94-3,"Liability“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. In July 2002, the FASB issued SFAS No. 146,"Accounting“Accounting for Costs Associated with Exit or Disposal Activities,"” which nullified EITF Issue No. 94-3. The Companyis required to adoptadopted the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The principal difference between SFAS No. 146 and EITF 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for exit costs is recognized at the date of an entity’s commitment to an exit plan.6. Goodwill and other intangible
assets--Goodwillassets—Goodwill and other intangible assets are evaluated in accordance with SFAS No. 142,"Goodwill“Goodwill and Other Intangible Assets."” Intangible assets, which do not have indefinite lives, are recorded at fair value and amortized over a straight-line basis based on third party valuations of the assets. Goodwill and intangible assets, which have indefinite lives, are no longer amortized and are required to be assessed at least annually for impairment. The Company compares theassets'assets’ fair value to its carrying value primarily based on future discounted cash flows in order to determine if an impairment charge is warranted. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning. The actual cash flows could differ frommanagement's11
management’s estimates due to changes in business conditions, operating performance, and economic conditions. The Company completed its annual impairment assessment as of the end of the third quarter
20022003 and no impairment charge was warranted.97. Postretirement
benefits--Thebenefits—The Company provides certain pension and other postretirement benefits to employees and retirees. Independent actuaries, in accordance with accounting principles generally accepted in theU.S.,United States, perform the required valuations to determine benefit expense and, if necessary, non-cash charges to equity for additional minimum pension liabilities. Critical assumptions used in the actuarial valuation include the weighted average discount rate, rates of increase in compensation levels and expected long-term rates of return on assets. If different assumptions were used, additional pension expense or charges to equitymaymight be required. For2002,2003, the Company incurred such a non-cash charge to equity of$4.3$2.2 million. TheCompany'sCompany’s pension plan year-end is November 30, which serves as the measurement date.As a result, the Company used a weighted average discount rate of 6.875%. Had the Company decreased its weighted average discount rate to 6.75%, the additional minimum pension liability would have increased approximately $0.6 million and pension expense would not have materially changed for 2002. Commencing in 2003, the Company lowered its long-term rate of return on plan assets from 9.25% to 8.75%.Recently Issued Accounting Standards
In
June 2001,January 2003, theFASB 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. Management has assessed the impact of the new standard and determined there is no material impact to the financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13 and Technical Corrections." For most companies, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Extraordinary treatment will be required for certain extinguishments as provided inFinancial AccountingPrinciplesStandards Board("APB"(“FASB”)Opinion No. 30. The statement also amended SFAS No. 13 for certain sales-leaseback and sublease accounting. The Company adopted this standard on January 1, 2003. Management has assessed the impact of the new standard and determined there is no material impact to the financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullified EITF Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure." This standard amends the transition and disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 148, the Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense has been recognized for stock options since all options granted had an exercise price equal to the market value of the underlying stock on the grant date. The Company currently does not intend to transition to the use of a fair value method for accounting for stock-based compensation. See also Note 1 to Notes to the Consolidated Financial Statements. In November 2002, the FASB, issued FASB Interpretation No.45 (FIN 45)46 (“FIN 46”),"Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34". FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of the Interpretation are effective for financial statements issued after December 15, 2002. The provisions for initial recognition and measurements are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Management has assessed the impact of the new standard and determined there to be no material impact to the financial statements. 10In January 2003, the FASB issued FIN No. 46, "Consolidation“Consolidation of Certain Variable InterestEntities" (VIEs)Entities, (“VIEs”), which is an interpretation of Accounting Research Bulletin(ARB)(“ARB”) No. 51,"Consolidated“Consolidated Financial Statements."” FINNo.46 addresses the application of ARB No. 51 to VIEs, and generally would require that assets, liabilities and results of theactivityactivities of a VIE be consolidated into the financial statements of the enterprise that is considered the primary beneficiary. FINNo.46, as revised by FIN 46 (revised December 2003), is effective for public entities that have interests in VIEs commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application for all other types of entities is required in financial statements for periods ending after March 15, 2004. The Company has determined that its real estate joint venture is a VIE and that the Company is not the primary beneficiary. See also Note 3 of Notes to Consolidated Financial Statements.In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or mezzanine equity, by now requiring those same instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim
periodsperiod beginning after June 15, 2003. On November 7, 2003, the FASB issued FASB Staff Position (“FSP”) FAS 150-3, which delayed the effective date for certain provisions of SFAS 150 indefinitely. For the effective provisions of the standard, management has assessed the impact and determined there toVIEsbe no material impact to the financial statements. For the deferred provisions, the Company does not expect the pending adoption to have a material impact on the financial statements.In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which provides guidance on how to determine when an arrangement that involves multiple revenue-generating activities or deliverables should be divided into separate units of accounting for revenue recognition purposes. It further states, that if this division is required, the arrangement consideration should be allocated among the separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods that begin after June 15, 2003. The adoption of EITF 00-21 did not have a material effect on the Company’s financial position, results of operations or cash flows.
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,” which
an enterprise holdssupersedes SAB 101, “Revenue Recognition in Financial Statements,” and updates portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting guidance. The Company had previously adopted the12
necessary changes incorporated into SAB 104, which did not have a
variable interestmaterial effect on the Company’s financial position, results of operations or cash flows.In December 2003, the FASB revised Statement No. 132 (“SFAS 132”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised standard mandates additional disclosures for pensions and other postretirement benefit plans and is designed to improve disclosure transparency within financial statements and requires certain disclosures to be made on a quarterly basis (collectively, the “Amended Disclosures”). Compliance with the Amended Disclosures is effective for fiscal periods beginning after December 15, 2003, and has been incorporated into Note 7 of the Notes to Consolidated Financial Statements. Interim period disclosures will be required to be made by the Company commencing in the first quarter of 2004.
On January 12, 2004 the FASB issued FSP No. FAS 106-1, which permits a sponsor of a postretirement health care plan that
it acquired before February 1, 2003.provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). On December 8, 2003, President Bush signed the Act into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a Federal subsidy to companies which sponsor retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted under FSP No. 106-1, the Company did not reflect the effects of this Act in its consolidated financial statements and accompanying notes. Specific authoritative guidance on the accounting for the Federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. The Company is currentlyinassessing theprocessimpact ofreviewingtheprovisions of FIN No. 46, particularly in relation to the Company's real estate joint venture to determine if the joint venture must be consolidated effective July 1, 2003. However, all disclosures required by FIN 46 are included in the accompanying Note 3 to Notes to the Consolidated Financial Statements. FIN 46 is effective immediately for any variable interests acquired subsequent to January 31, 2003. The Company has not acquired any variable interests subsequent to January 31, 2003.Act.Liquidity and Capital Resources
Quaker'sQuaker’s cash and cash equivalents
decreasedincreased to $21.9 million at December 31, 2003 from $13.9 million at December 31,2002 from $20.5 million at December 31, 2001.2002. Thedecrease resultedincrease is primarily from$24.4$8.4 million provided by operating activities and $22.0 million provided by financing activities, offset in part by$30.3 million and $1.3$24.4 million used in investingand financing activities, respectively. Quaker has also reduced working capital levels from $47.4 million to $37.5 million as of December 31, 2001 and 2002 respectively. As part of the Company's chemical management services' growth strategy, the Company has a number of proposals outstanding. If the Company is successful in the bid process, this could have a material impact to the Company's working capital requirements.activities.Net cash flow provided by operating activities
amountedwas $8.4 million in 2003 compared to $24.4 million in2002 compared with $22.6 million in 2001. The increase2002. This decrease primarily resulted froman increase in net income and pension liabilities over 2001 offset byincreasedseverance payments in 2002.working capital needs associated with the Company’s recently awarded CMS contracts, effective May 1, 2003.Net cash used in investing activities
increasedwas $24.4 million in 2003 compared to $30.3 million in2002 from $8.0 million in 2001. This increase is primarily related to $21.3 million cash paid for the Company's 2002 acquisitions.2002. Dividends and distributions from associated companieswas lowerincreased $3.6 million in2002 as a result of lower net income2003, and were driven by priority distributions received fromour Japanesethe Company’s real estate joint venture. The Company paid $16.0 million for 2003 acquisitions versus $21.3 million for 2002 acquisitions. Proceeds from the disposition of assetswaswere significantly higher in 2002, reflective of the sale ofourthe Company’s U.K. manufacturing facility which was completed in the fourth quarter of 2002.Cash used for capital expenditures was $2.8 million higher in 2002 as compared to 2001.Expenditures for property, plant, and equipment
wereincreased to $12.6 million in 2003 from $10.8 million in2002 compared to $8.0 million in 2001.2002. Capital expenditures in2002, primarily2003 included $4.1 million for the renovation of the Company’s U.S. laboratory facility and $3.1 million for the Company’s global ERP implementation. The remaining capital expenditures related to upgrades of manufacturing capabilities at various locations, with $0.5 millionrelated tospent for environmental and regulatory compliance in2002 versus $1.3 million in 2001, approximately $4.5 million in 2002 forboth 2003 and 2002. For 2004, theCompany's global transaction system, as well as $2.4 million in 2002 related to the Company's new corporate offices. TheCompany expectsthese initiatives to continue in 2003 with the Company'scapital expendituresprojectedto be approximately$15$10.0 millionin 2003.as most of the lab renovation is complete and the Company expects limited capital being spent towards our global ERP implementation.In January 2001, the Company contributed its Conshohocken, Pennsylvania property and buildings (the
"Site"“Site”) to a real estate joint venture (the"Venture"“Venture”) in exchange for a 50%ownershipinterest in the Venture. The Venture did not assume any debt or other obligations of the Company. The Venturecredited 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. At December 31, 2002, the Company's investment balance was approximately $4.0 million. The Venturerenovated certain of the existing buildings at the Site, as well as built new officespace (the "Project").space. In December 2000, the Company entered into an agreement with the Venture to lease approximately 38% of theSite'sSite’s available office space for a13
15-year period commencing February 2002, with multiple renewal options.
TheDuring 2003, the Companybelievesreceived priority cash distributions, which reduced theterms of this lease are no less favorable than the terms it would have obtained from an unaffiliated third party.Company’s investment balance to $0. As of December 31,2002,2003, approximately87%93% of theSite'sSite’s office space was underlease. The Venture funded the Project with a $21.0 million construction loan (the "Venture"), of which approximately $11.8 million was outstanding as of December 31, 2001. The Venture Loan was secured in part by 11a mortgage on the Sitelease andcertain guarantees executed by certain Venture partners other than the Company. In December 2002, $27.3 million of permanent financing, at a 5.95% interest rate secured bythe Site (includingthe related improvements),improvements thereon) wasobtained (the "Financing"), which was usedsubject topay offencumbrances securing indebtedness of the VentureLoanin2002. In March 2003,theCompany received approximately $1.8 millionamount ofproceeds as a priority return, and expects to receive an estimated additional $2.2 million during 2003. After receiving the aforementioned priority distributions and if cash flows permit, the Company will be eligible to receive additional priority distributions of up to $2.3 million from the Venture. In connection with the Financing, the guarantees from the Venture partners with respect to the Venture Loan expired.$26.9 million. The Company has not guaranteed nor is it obligated to pay any principal, interest or penalties on theVenture Loan orindebtedness of theFinancing,Venture, even in the event of default by the Venture. At December 31,2002,2003, the Venture had property with a net book value of$27.8$27.2 million, total assets of$35.6$29.0 million, and total liabilities of$27.5 million, including $27.3 million due under the Financing.$27.2 million.Net cash flows
used inprovided by financing activities were $22.0 million in 2003 versus a $1.3 million use of cash in2002 compared with $9.6 million in 2001.2002. Thenet change was primarily due to a netincrease in cash provided by financing activities was as a result of increased short-term borrowings in order to fund current year acquisitions and working capital needs primarily associated with the Company’s new CMS contracts.The Company increased its principal credit facilities from $15.0 million committed and $10.0 million uncommitted at the end of
$9.0March 2003 to its current position of $30.0 millionincurred primarily to finance the Company's 2002 acquisitions. In addition, 2002 includes repayments of long-term debt of $2.9 million which was offset by $3.0 million of proceeds primarily related to shares issued upon exercise of stock options. In April 2002, the Company entered into acommitted and $20.0 millioncommitted revolvinguncommitted. The Company had approximately $39.8 million and $8.9 million outstanding on these creditfacility with a bank, which expires in April 2003. In March 2003, the Company reached agreement with this bank to extend the term of this facility by an additional year, with the available credit to be reduced to $15.0 million. At the Company's option, the interest rate for borrowings under this facility may be based on the lender's cost of funds plus a margin, LIBOR plus a margin, or on the lender's prime rate. There were no outstanding borrowings under this facilityfacilities as of December 31,2002. Further, in April2003 and 2002,the Company entered into a $10.0 million uncommitted demand credit facility. A total of $8.9 million in borrowings under this facility was outstanding as of December 31, 2002 at an average borrowing rate of approximately 2.4%.respectively. The provisions of the agreements require that the Company maintain certain financial ratios and covenants, all of which the Company was in compliance with as of December 31, 2003 and 2002. Under its most restrictive covenants the Company can borrow an additional$69.0$38.1 million as of December 31,2002.2003. The Company believes that it is capable of renewing its current credit facilities, on an annual basis, or obtaining additional borrowing capacity on competitive terms. Following are the details of the company’s individual facilities.In April 2002, the Company entered into a $20.0 million committed credit facility, with a bank, with an expiration date of April 2003. In March 2003, the Company replaced its $20.0 million committed credit facility with another facility with the same lender of $15.0 million, which expires in December 2004. At the Company’s option, the interest rate for borrowings under the agreement may be based on the lender’s cost of funds plus a margin, LIBOR plus a margin, or on the prime rate. Further, in April 2002, the Company entered into a $10.0 million uncommitted demand credit facility with the same lender under similar terms. A total of $19.8 million in borrowings under these facilities was outstanding at December 31, 2003, at an average borrowing rate of approximately 2.1%.
In June 2003, the Company entered into a $10.0 million committed credit facility with another bank, which expires in June 2004. At the Company’s option, the interest rate for borrowings under the agreement may be based on the euro dollar rate plus a margin or the prime rate plus a margin. In July 2003, an amendment increased this committed credit facility to $15.0 million. A total of $15.0 million in borrowings was outstanding at December 31, 2003, at an average borrowing rate of approximately 1.5%.
In June 2003, the Company also entered into a $10.0 million uncommitted demand credit facility with another bank. At the Company’s option, the interest rate for borrowings under this agreement may be based on the prime rate or the LIBOR rate plus a margin. A total of $5.0 million in borrowings was outstanding at December 31, 2003, at an average borrowing rate of approximately 2.2%.
The Company believes that in
2003,2004, it is capable offundingsupporting its operating requirements including pension plan contributions, payments of dividends to shareholders, possible acquisition opportunities, and possible resolution of contingencies, through internally generated funds supplemented with debt as needed. In addition, in2003,2004, the Company expects tomeetmake minimum cash contributions to itscash contribution minimum to itsU.S. defined benefit plans of approximately $1.5 million.14
The following table summarizes the
Company'sCompany’s contractual obligations at December 31,2002,2003, and the effect such obligations are expected to have on its liquidity and cash flow in futureperiods:periods (amounts in millions):
Payments due by period (Dollars in thousands) ---------------------------------------------------- 2008 and Contractual Obligations Total 2003 2004 2005 2006 2007 beyond ----------------------- ------- ------- ------ ------ ------ ------ --------Long-term debt.................... $19,447 $ 2,857 $2,857 $2,857 $2,857 $2,857 $ 5,162 Short-term debt................... 9,348 9,348 -- -- -- -- -- Non-cancelable operating leases... 27,639 4,327 3,657 2,802 2,450 2,350 12,053 ------- ------- ------ ------ ------ ------ ------- Total contractual cash obligations $56,434 $16,532 $6,514 $5,659 $5,307 $5,207 $17,215 ======= ======= ====== ====== ====== ====== =======
Payments due by period Contractual Obligations
Total 2004 2005 2006 2007 2008 2009 and
beyondLong-term debt
$ 18.844 $ 3.017 $ 3.212 $ 3.208 $ 3.184 $ 0.324 $ 5.899 Short-term debt
39.975 39.975 — — — — — Non-cancelable operating leases
26.180 4.560 3.798 2.894 2.640 2.417 9.871 Total contractual cash obligations
$ 84.999 $ 47.552 $ 7.010 $ 6.102 $ 5.824 $ 2.741 $ 15.770 Operations
Comparison of 2003 with 2002
Consolidated net sales increased by 24% to $340.2 million in 2003 from $274.5 million in 2002. The impact from foreign exchange rate translation increased sales by approximately $18.2 million, or 7%. The Company’s 2003 acquisitions and the timing of the 2002 acquisitions increased net sales by $14.0 million, or 5%, and the Company’s recently awarded chemical management services (“CMS”) contracts, which were effective May 1, 2003, increased net sales by approximately $27.0 million or 10%. The remaining 2% increase in net sales was due primarily to double-digit growth in the Asia/Pacific and South American regions partially offset by a decline in business in the U.S. and Europe. The decline in business in the U.S. and Europe was substantially caused by softness in sheet steel demand. In addition, in late 2003, the Company experienced some increased competition as a result of the Company’s strong market share coupled with its customers’ interest in establishing second source suppliers.
Gross profit (net sales less cost of goods sold) as a percentage of sales declined from 40.6% in 2002 to 35.7% in 2003. The Company’s new CMS contracts result in a different relationship between margins and revenue than has applied in the past for the Company’s traditional product business. At the majority of current CMS sites, the Company effectively acts as an agent and records revenue and costs from third party sales on a net sales or “pass-through” basis. The new CMS contracts have a different structure that results in the Company recognizing in reported revenue the gross revenue received from the CMS site customer, and in cost of goods sold the third party product purchases, which substantially offset each other since the Company currently has very little of its own product converted at these sites. The negative impact to gross margin related to the new CMS contracts was approximately 3 percentage points. The remaining decline in gross margin as a percentage of sales is primarily due to increased raw material costs and product mix. At the end of 2003, the Company experienced a four-year high in the pricing in the market for its key raw material markets, specifically crude oil-based, animal fat and vegetable oil derivatives. The Company estimates the raw material price increases negatively impacted gross profit by approximately $2.5 million in 2003.
Selling, general and administrative costs (“SG&A”) as reported for 2003 were $97.2 million compared to $87.6 million in 2002. Approximately three quarters of the $9.6 million increase is due to foreign exchange rate translation and the Company’s acquisition activity, which impacted SG&A by approximately $4.6 million and $2.4 million, respectively. The remaining increase in SG&A was due to higher costs including pension, insurance, and the Company’s continued rollout of its global ERP system, offset in part by reduced incentive compensation expense. In 2004, the Company expects to again see higher expenses related to these administrative areas as well as increases related to Sarbanes-Oxley Act compliance and the restoration of performance-based incentive compensation.
Also included in the 2003 results is a $0.1 million net restructuring charge. 2003 severance program costs of approximately $0.3 million were partially offset by the release of $0.2 million of unused restructuring accruals related to the Company’s 2001 restructuring program.
15
The Company’s effective tax rate was 31% in 2003 versus 32% in 2002. The reduction in the effective tax rate is reflective of the Company’s favorable settlement of several outstanding tax audits and appeal issues. The effective tax rate is dependent on many internal and external factors and is assessed by the Company on a regular basis. Currently, the Company anticipates its effective tax rate for 2004 will remain in the 30% to 32% range.
Equity in net income of associated companies for 2003 was $0.9 million higher than 2002. This increase primarily reflects a priority distribution received from the Company’s real estate joint venture as well as improved performance from this venture compared to 2002.
The $0.5 million increase in minority interest expense is primarily due to full-year consolidation of the Company’s South African joint venture. Effective July 1, 2002, the Company acquired a controlling interest of Quaker Chemical South Africa (Pty.) Ltd. (South Africa).
Comparison of 2002 with 2001
Consolidated net sales increased to $274.5 million in 2002 from $251.1 million in 2001. The 9% increase was the net result of a 6% increase in volume and a 5% improvement in price/mix, offset by a 2% negative
12impact from foreign currency translation. The 6% increase in volume was primarily due to the inclusion of revenues from the acquisitions of United Lubricants Corporation and Epmar Corporation, as well as the purchase of a controlling interest in the Company'sCompany’s South African joint venture, which was included in theCompany'sCompany’s consolidated results effective July 1, 2002. At constant exchange rates and excluding revenue from acquisitions, consolidated net sales increased 3%.Gross profit as a percentage of sales was 40.6% in 2002 compared with 40.2% in 2001. This increase in gross margin percentage was attributable to higher volumes and lower raw material prices with some product mix changes.
While raw material price decreases and product mix changes have resulted in improved margins to date, the Company expects the 2003 gross margin to be relatively flat or slightly down. The Company is beginning to see upward pressure on raw material prices particularly in the first half of 2003. This pressure is expected to be somewhat offset by mix improvement and continued cost savings initiatives. However, the duration of higher crude oil prices currently being experienced may negatively impact raw material pricing for a longer period of time.Selling, general and administrative costs
(SG&A)(“SG&A”) as reported for 2002 were $87.6 million compared to $80.5 million in 2001. Upon the January 1, 2002 adoption ofSFASStatement of Financial Accounting Standards (“SFAS”) No. 142,"Goodwill“Goodwill and Other Intangible Assets,"” the Company no longer amortizes goodwill. SG&A for 2001 included $1.0 million of goodwill amortization. Other significant costs in 2001 included: $2.0 million of additional provisions for doubtful accounts primarily attributable to U.S. steel customers that filed for bankruptcy protection under Chapter 11 and $0.3 million of organizational structure costs. The overall increase in 2002 SG&A was primarily related to theCompany's current yearCompany’s 2002 acquisitions, which added approximately $4.9 million of expense, as well as higher administrative costs such as insurance, pension, incentive compensation, and expenses related to theCompany'sCompany’s new globaltransaction system. In 2003, the Company expects higher costs for pension and insurance as well as for our global transaction system.ERP implementation.Operating income as reported was $24.0 million in 2002 compared to $14.2 million in 2001. In addition to the significant costs noted in 2001 SG&A, operating income for 2001 also included a restructuring charge of $5.9 million as well as an additional environmental provision of $0.5 million. The restructuring charge of $5.9 million related to plans to close and sell
ourthe Company’s manufacturing facilities in the U.K. and France, reduce administrative functions, as well as costs related to abandoned acquisitions. The overallincrease inincreased operating income in 2002 was primarily attributable to the 2001 significant costs noted above, as well as higher gross margin from the noted volume increases.The
Company'sCompany’s effective tax rate was 32% in 2002 versus 31% in 2001. The effective tax rate is dependent on many internal and external factors and is assessed by the Company on a regular basis.Currently the Company anticipates its effective tax rate for 2003 will be 33%.The Company had previously been assessed additional taxes based on an audit of certain subsidiaries for prior years, whichhashad been resolved with no material impact to theCompany'sCompany’s consolidated financial statements.Equity in net income of associated companies for 2002 was approximately $0.3 million lower than 2001. This decrease was primarily attributable to the July 2002 purchase of a controlling interest in the
Company'sCompany’s South African joint venture, as well as losses from the start-up of theCompany'sCompany’s real estate joint venture.16
Minority interest in net income of subsidiaries for 2002 was approximately $0.4 million lower than 2001. This decrease was substantially the result of lower U.S. dollar net income from the
Company'sCompany’s joint venture in Brazil partially offset by an improved performance of theCompany'sCompany’s China joint venture and the purchase of a controlling interest in our South African joint venture.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 13unfavorably impacted the sales comparison by 1%. The shortfall for the year was mainly attributable to 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. 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. SG&A costs as reported for 2001 were $80.5 million compared to $86.9 million in 2000. Both 2001 and 2000 SG&A included certain significant costs. These costs included additional provisions for doubtful accounts primarily attributable to U.S. steel customers that filed for bankruptcy protection under Chapter 11 of $2.0 million and $1.7 million in 2001 and 2000, respectively. SG&A for 2001 also included $0.3 million of organizational structure costs. The overall decline in SG&A is primarily due to continued cost containment efforts as well as foreign exchange impacts. Operating income as reported was $14.2 million in 2001 compared to $25.1 million reported in 2000. In addition to the significant costs noted in SG&A, operating income for 2001 also included the following significant costs: a restructuring charge of $5.9 million, as well as an additional environmental provision of $0.5 million. The restructuring charge of $5.9 million, related to plans to close and sell our manufacturing facilities in the U.K. and France, reduce administrative functions, as well as costs related to abandoned acquisitions. Operating income for 2000 also included a gain of $1.5 million relating to the sale of our U.S. pulp and paper business offset by an additional environmental provision of $1.5 million. The overall decline in operating income was the result of the aforementioned significant costs as well as lower gross profit margin related to the overall sales decline in 2001. 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.Restructuring and Related Activities
In 2001,
Quaker'sQuaker’s management approved restructuring plans to realign the organization and reduce operatingcosts. Quaker'scosts (2001 program). Quaker’s restructuring plansincludeincluded the decision to close and sell 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 restructuring charges are provisions for severance of 53 employees. Restructuring and related charges of $5.854 million were recognized in 2001. The charge comprisedof $2.644$2.807 million related to employee separations,$2.613$2.450 million related to facility rationalization charges, and $0.597 million related to abandoned acquisitions. Employee separation benefits varied depending on local regulations within certain foreign countries and included severance and other benefits. As of December 31,2002,2003, Quaker had completed5051 of the planned 53 employee separations under the 2001plan.program. During the fourth quarter of 2002, the Company completed the sale of its U.K. manufacturingfacility. Quakerfacility, which closedthis facilityat the end14of 2001. In 2003, the Company reversed $0.2 million of unused restructuring accruals related to the 2001 program. In 2003, Quaker’s management approved restructuring plans to further realign the organization (2003 program). Included in the 2003 restructuring charge are provisions for severance for 9 employees totaling $0.273 million.
Quaker expects to substantially complete the initiatives contemplated under the restructuring plans, including the sale of its former manufacturing facility in France,
by the end of 2003.during 2004.Accrued restructuring balances, included in other current liabilities
as of December 31, 2002and assigned to the Metalworking segment, are asfollows:follows (amounts in millions):
(Dollars in thousands) ----------------------------------------------------------------------- Balance Currency Balance December 31, Translation December 31, 2001 Payments and Other 2002 ------------ -------- ----------- ------------Employee separations.... $2,534 $(1,374) $114 $1,274 Facility rationalization 1,439 (752) 182 869 ------ ------- ---- ------ Total................ $3,973 $(2,126) $296 $2,143 ====== ======= ==== ======
Employee
Separations
Facility
Rationalization
Abandoned
Acquisitions
Total 2001 Program:
Restructuring charges
$ 2.807 $ 2.450 $ 0.597 $ 5.854 Asset impairment
— (1.015 ) — (1.015 ) Payments
(0.111 ) (0.171 ) (0.597 ) (0.879 ) Currency translation and other
0.001 0.012 — 0.013 December 31, 2001 ending balance
2.697 1.276 — 3.973 Payments
(1.374 ) (0.752 ) — (2.126 ) Currency translation and other
0.114 0.182 — 0.296 December 31, 2002 ending balance
1.437 0.706 — 2.143 Restructuring reversals
(0.156 ) (0.060 ) — (0.216 ) Payments
(0.832 ) (0.204 ) — (1.036 ) Currency translation and other
0.001 0.083 — 0.084 December 31, 2003 ending balance
0.450 0.525 — 0.975 2003 Program:
Restructuring charges
0.273 — — 0.273 Payments
(0.047 ) — — (0.047 ) Currency translation and other
0.002 — — 0.002 December 31, 2003 ending balance
0.228 — — 0.228 Total restructuring December 31, 2003 ending balance
$ 0.678 $ 0.525 $ — $ 1.203 17
Environmental Clean-up Activities
The Company is involved in environmental clean-up activities in connection with an existing plant
location. Duringlocation and former waste disposal sites. In April of 1992, thesecond quarter of 2000, it was discovered during an internal environmental audit thatCompany identified certain soil and groundwater contamination at AC Products, Inc.(ACP)(“ACP”), a wholly ownedsubsidiary, 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,subsidiary. Voluntarily in coordination with the Santa Ana California Regional Water Quality Board, ACP isinvolved in certain soil and groundwater remediation activities identified in prior years. In connection with these activities,remediating theCompany recorded pre-tax charges totaling $0.5 million and $1.5 million in 2001 and 2000, respectively.contamination. The Company believes that the remaining potential-known liabilities associated with these mattersrangeranges from approximately$1.2$0.9 million to$1.9$1.5 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. See Note 14 of Notes to Consolidated Financial Statements which appears in Item 8 of this Report.��
General
The Company generally does not 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 55% to 56% of the consolidated net annual
sales (seesales. See Note 11 of the Notes to Consolidated FinancialStatements).Statements which appears in item 8 of this report.Factors that May Affect Our Future Results
(Cautionary(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)
Certain information included in this Report and other materials filed or to be filed by Quaker with the
Securities and Exchange CommissionSEC (as well as information included in oral statements or other written statements made or to be made by us)containscontain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including:.statements relating to our business strategy;.our current and future results and plans; and.statements that include the words"may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "plan"“may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions.15Such statements include information relating to current and future business activities, operational matters, capital spending, and financing sources. From time to time, oral or written forward-looking statements are also included in
Quaker'sQuaker’s periodic reports on Forms 10-Q and 8-K, press releases and other materials released to the public.Any or all of the forward-looking statements in this report, in
Quaker'sQuaker’s Annual Report to Shareholders for20022003 and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Report will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in
Quaker'sQuaker’s subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.TheThese forward-looking statements are18
subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. A major risk is that the Company’s demand is largely derived from the demand for its customers’ products, which subjects the Company to uncertainties related to downturns in a customer’s business and unanticipated customer production shutdowns. Other major
risks and uncertainties
that could impact the Company's future operations and resultsinclude, 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,the current conflict in Iraq, and future security alertsand 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. These risks, uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results. Other factors beyond those discussed below could also adversely affect us. Therefore, we caution you not to place undue reliance on our forward-looking statements. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.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'sQuaker’s exposure to market rate risk for changes in interest rates relates primarily to its short and long-term debt. Most ofQuaker'sQuaker’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 an adverse effect on Quaker, depending on the extent ofQuaker'sQuaker’s short-term borrowings. As of December 31,2002,2003, Quaker had$9.3approximately $40.0 million in short-term borrowings.Foreign Exchange
Risk.Risk. A significant portion ofQuaker'sQuaker’s revenues and earnings is generated by its foreign operations. These foreign operations also hold a significant portion ofQuaker'sQuaker’s assets and liabilities. All such operations use the local currency as their functional currency. Accordingly,Quaker'sQuaker’s financial results are affected by risks typical of global business such as currency fluctuations, particularly between the U.S. dollar, the Brazilian real, and the E.U. euro. As exchange rates vary,Quaker'sQuaker’s results can be materially affected.InThe Company generally does not 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
Quaker has used, on a limited basis, forward exchange contractsthree years, sales by non-U.S. subsidiaries accounted for approximately 55% tohedge foreign currency transactions and56% of the consolidated net annual sales. See Note 11 of the Notes to Consolidated Financial Statements which appears in item 8 of this report.In addition, the Company often sources inventory among its worldwide operations. This practice can give rise to foreign exchange
optionsrisk resulting from the varying cost of inventory toreduce exposure to changes in foreign exchange rates.the receiving location as well as from the revaluation of intercompany balances. Theamount of any gain or loss on these derivative financial instruments was immaterial. Quaker was not in 2002 and is not currently a party to any derivative financial instruments. Therefore, adoption of SFAS No. 133, as amended by SFAS No. 138, did not have a material impact on Quaker's operating results or financial position as of December 31, 2002.Company mitigates this risk through local sourcing efforts.Commodity Price
Risk.Risk. Many of the raw materials used by Quaker are commodity chemicals, and, therefore,Quaker'sQuaker’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 certain16limited 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.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 ofQuaker'sQuaker’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 ofQuaker'sQuaker’s revenues is derived from sales to customers in the U.S. steel industry, where a19
number of bankruptcies occurred during recent years.
In 2000, 2001, and early 2002,Through 2003, Quaker recorded additional provisions for doubtful accounts primarily related to bankruptcies in the U.S. steel industry. When a bankruptcy occurs, Quaker must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process. In addition, 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 theCompany'sCompany’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.20
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----Financial Statements:
22 23 24 25 Consolidated Statement of
Shareholders' Equity. 22Shareholders’ Equity26 Notes to Consolidated Financial
Statements..... 23Statements27 1721
REPORT OF INDEPENDENT
ACCOUNTANTSAUDITORSTo 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 17 and listed in the index appearing under Item15(a)(1) on page44,53, present fairly, in all material respects, the financial position of Quaker Chemical Corporation and its subsidiaries at December 31,20022003 and2001,2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31,2002,2003, 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 15(a)(2) on page4453 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 theCompany'sCompany’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.As discussed in Note 13 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards
("SFAS"(“SFAS”) No. 142,"Goodwill“Goodwill and Other Intangible Assets." /s/”/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 18, 2003 18February 27, 2004
22
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, ---------------------------- 2002 2001 2000 -------- -------- -------- (Dollars in thousands except per share amounts)Net sales............................................... $274,521 $251,074 $267,570 -------- -------- -------- Costs and expenses: Cost of goods sold................................... 162,944 150,045 155,530 Selling, general, and administrative expenses........ 87,604 80,484 86,865 Net gain on exit of businesses.......................... -- -- (1,473) Environmental charge.................................... -- 500 1,500 Restructuring charges................................... -- 5,854 -- -------- -------- -------- 250,548 236,883 242,422 -------- -------- -------- Operating income........................................ 23,973 14,191 25,148 Other income, net....................................... 1,135 1,089 2,434 Interest expense........................................ (1,774) (1,880) (2,030) Interest income......................................... 984 1,030 934 -------- -------- -------- Income before taxes, equity income and minority interest 24,318 14,430 26,486 Taxes on income......................................... 7,782 4,473 8,211 -------- -------- -------- 16,536 9,957 18,275 Equity in net income of associated companies............ 295 613 1,424 Minority interest in net income of subsidiaries......... (2,534) (2,905) (2,536) -------- -------- -------- Net income.............................................. $ 14,297 $ 7,665 $ 17,163 ======== ======== ======== Per share data: Net income--basic.................................... $ 1.56 $ .85 $ 1.94 Net income--diluted.................................. $ 1.51 $ .84 $ 1.93 Dividends............................................ $ .84 $ .82 $ .80 Weighted average shares outstanding: Basic................................................ 9,172 9,054 8,831 Diluted.............................................. 9,474 9,114 8,896
Year Ended December 31, 2003 2002 2001 (Dollars in thousand, except
per share amounts)Net sales
$ 340,192 $ 274,521 $ 251,074 Costs and expenses:
Cost of goods sold
218,818 162,944 150,045 Selling, general, and administrative expenses
97,202 87,604 80,484 Environmental charge
— — 500 Restructuring charges, net
57 — 5,854 316,077 250,548 236,883 Operating income
24,115 23,973 14,191 Other income, net
764 1,135 1,089 Interest expense
(1,576 ) (1,774 ) (1,880 ) Interest income
815 984 1,030 Income before taxes, equity income and minority interest
24,118 24,318 14,430 Taxes on income
7,488 7,782 4,473 16,630 16,536 9,957 Equity in net income of associated companies
1,244 295 613 Minority interest in net income of subsidiaries
(3,041 ) (2,534 ) (2,905 ) Net income
$ 14,833 $ 14,297 $ 7,665 Per share data:
Net income—basic
$ 1.58 $ 1.56 $ .85 Net income—diluted
$ 1.52 $ 1.51 $ .84 Weighted average shares outstanding:
Basic
9,381 9,172 9,054 Diluted
9,761 9,474 9,114 See notes to consolidated financial statements.
1923
CONSOLIDATED BALANCE SHEET
December 31, -------------------- 2002 2001 -------- -------- (Dollars in thousands except per share amounts)ASSETS Current assets Cash and cash equivalents................................................... $ 13,857 $ 20,549 Accounts receivable, net.................................................... 53,353 44,787 Inventories, net............................................................ 23,636 18,785 Deferred income taxes....................................................... 5,874 4,031 Prepaid expenses and other current assets................................... 6,953 4,778 -------- -------- Total current assets.................................................... 103,673 92,930 Property, plant, and equipment, net............................................ 48,512 38,244 Goodwill....................................................................... 21,927 14,960 Other intangible assets, net................................................... 5,852 1,442 Investments in associated companies............................................ 9,060 9,839 Deferred income taxes.......................................................... 10,609 9,085 Other assets................................................................... 14,225 13,166 -------- -------- Total assets............................................................ $213,858 $179,666 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long-term debt................. $ 12,205 $ 2,858 Accounts payable............................................................ 27,461 18,323 Dividends payable........................................................... 1,962 1,873 Accrued compensation........................................................ 10,254 8,109 Other current liabilities................................................... 14,262 14,343 -------- -------- Total current liabilities............................................... 66,144 45,506 Long-term debt................................................................. 16,590 19,380 Deferred income taxes.......................................................... 1,518 1,233 Accrued pension and postretirement benefits.................................... 28,723 19,239 Other non-current liabilities.................................................. 5,166 4,973 -------- -------- Total liabilities....................................................... 118,141 90,331 -------- -------- Minority interest in equity of subsidiaries.................................... 7,662 8,436 -------- -------- 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.............................................. 626 357 Retained earnings........................................................... 110,448 103,953 Unearned compensation....................................................... (1,245) (1,597) Accumulated other comprehensive loss........................................ (27,078) (24,075) -------- -------- 92,415 88,302 Treasury stock, shares held at cost; 2002-342,109, 2001-526,865............. (4,360) (7,403) -------- -------- Total shareholders' equity.............................................. 88,055 80,899 -------- -------- Total liabilities and shareholders' equity........................... $213,858 $179,666 ======== ========
December 31, 2003 2002 (Dollars in thousands,
except par value and
share amounts)ASSETS
Current assets
Cash and cash equivalents
$ 21,915 $ 13,857 Accounts receivable, net
78,121 53,353 Inventories, net
32,211 23,636 Deferred income taxes
4,550 5,874 Prepaid expenses and other current assets
6,727 6,953 Total current assets
143,524 103,673 Property, plant, and equipment, net
62,391 48,512 Goodwill
33,301 21,927 Other intangible assets, net
9,616 5,852 Investments in associated companies
6,005 9,060 Deferred income taxes
12,846 10,609 Other assets
19,664 14,225 Total assets
$ 287,347 $ 213,858 LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt
42,992 12,205 Accounts payable
39,240 27,461 Dividends payable
2,019 1,962 Accrued compensation
6,816 10,254 Other current liabilities
14,738 14,262 Total current liabilities
105,805 66,144 Long-term debt
15,827 16,590 Deferred income taxes
2,688 1,518 Accrued pension and postretirement benefits
34,165 28,723 Other non-current liabilities
6,802 5,166 Total liabilities
165,287 118,141 Minority interest in equity of subsidiaries
9,708 7,662 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
2,181 626 Retained earnings
117,308 110,448 Unearned compensation
(621 ) (1,245 ) Accumulated other comprehensive loss
(15,406 ) (27,078 ) 113,126 92,415 Treasury stock, shares held at cost; 2003-54,178, 2002-324,109
(774 ) (4,360 ) Total shareholders’ equity
112,352 88,055 Total liabilities and shareholders’ equity
$ 287,347 $ 213,858 See notes to consolidated financial statements.
2024
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, -------------------------- 2002 2001 2000 -------- ------- ------- (Dollars in thousands)Cash flows from operating activities Net income................................................................................... $ 14,297 $ 7,665 $17,163 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................................................. 5,432 4,913 5,404 Amortization.............................................................................. 805 1,467 1,408 Equity in net income of associated companies.............................................. (295) (613) (1,424) Minority interest in earnings of subsidiaries............................................. 2,534 2,905 2,536 Deferred income taxes..................................................................... 328 (627) (1,821) Deferred compensation and other postretirement benefits................................... 35 201 1,218 Net gain on exit of businesses............................................................ -- -- (1,473) Environmental charge...................................................................... -- 500 1,500 Restructuring charge...................................................................... -- 5,854 -- Pension and other, net.................................................................... 1,524 (695) 596 Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions and divestitures: Accounts receivable, net.................................................................. (657) 7,573 (2,187) Inventories............................................................................... (3,101) 2,762 (650) Prepaid expenses and other current assets................................................. (194) 39 (1,596) Accounts payable and accrued liabilities.................................................. 7,107 (6,603) (1,805) Change in restructuring liabilities....................................................... (2,156) (1,123) (328) Estimated taxes on income................................................................. (1,261) (1,614) 2,852 -------- ------- ------- Net cash provided by operating activities.............................................. 24,398 22,604 21,393 -------- ------- ------- Cash flows from investing activities Capital expenditures......................................................................... (10,837) (8,036) (6,126) Dividends from associated companies.......................................................... 515 1,208 625 Investments in and advances to associated companies.......................................... -- 95 -- Payments related to acquisitions............................................................. (21,285) (1,718) (3,500) Proceeds from sale of business............................................................... -- -- 5,200 Proceeds from disposition of assets.......................................................... 1,682 259 1,006 Other, net................................................................................... (326) 165 (11) -------- ------- ------- Net cash used in investing activities.................................................. (30,251) (8,027) (2,806) -------- ------- ------- Cash flows from financing activities............................................................. Dividends paid............................................................................... (7,714) (7,410) (6,989) Net increase (decrease) in short-term borrowings............................................. 9,026 (56) (290) Repayment of long-term debt.................................................................. (2,853) (2,891) (28) Treasury stock issued........................................................................ 2,951 2,902 810 Treasury stock repurchased................................................................... -- -- (1,961) Distributions to minority shareholders....................................................... (2,673) (2,335) (1,533) Other, net................................................................................... -- 234 -- -------- ------- ------- Net cash used in financing activities.................................................. (1,263) (9,556) (9,991) -------- ------- ------- Effect of exchange rate changes on cash...................................................... 424 (1,024) (721) Net (decrease) increase in cash and cash equivalents...................................... (6,692) 3,997 7,875 Cash and cash equivalents at beginning of year............................................ 20,549 16,552 8,677 -------- ------- ------- Cash and cash equivalents at end of year.................................................. $ 13,857 $20,549 $16,552 ======== ======= ======= Supplemental cash flow disclosures Cash paid during the year for: Income taxes................................................................................. $ 7,787 $ 7,550 $ 6,935 Interest..................................................................................... 1,897 1,876 2,020 Noncash investing activities: Contribution of property, plant, and equipment to real estate joint venture.................. $ -- $ 4,358 $ --
Year Ended December 31, 2003 2002 2001 (Dollars in thousands) Cash flows from operating activities
Net income
$ 14,833 $ 14,297 $ 7,665 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
6,677 5,432 4,913 Amortization
960 805 1,467 Equity in net income of associated companies
(844 ) (295 ) (613 ) Minority interest in earnings of subsidiaries
3,041 2,534 2,905 Deferred income taxes
1,389 328 (627 ) Deferred compensation and other, net
(418 ) 107 288 Environmental charge
— — 500 Restructuring charges, net
57 — 5,854 Pension and other postretirement benefits
428 1,452 (782 ) Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions:
Accounts receivable
(14,604 ) (657 ) 7,573 Inventories
(4,692 ) (3,101 ) 2,762 Prepaid expenses and other current assets
(648 ) (194 ) 39 Accounts payable and accrued liabilities
478 7,107 (6,603 ) Change in restructuring liabilities
(1,083 ) (2,156 ) (1,123 ) Estimated taxes on income
2,803 (1,261 ) (1,614 ) Net cash provided by operating activities
8,377 24,398 22,604 Cash flows from investing activities
Capital expenditures
(12,608 ) (10,837 ) (8,036 ) Dividends and distributions from associated companies
4,080 515 1,208 Investments in and advances to associated companies
— — 95 Payments related to acquisitions
(15,983 ) (21,285 ) (1,718 ) Proceeds from disposition of assets
232 1,682 259 Other, net
(87 ) (326 ) 165 Net cash (used in) investing activities
(24,366 ) (30,251 ) (8,027 ) Cash flows from financing activities
Dividends paid
(7,916 ) (7,714 ) (7,410 ) Net increase (decrease) in short-term borrowings
30,581 9,026 (56 ) Repayment of long-term debt
(2,570 ) (2,853 ) (2,891 ) Treasury stock issued
4,328 2,951 2,902 Distributions to minority shareholders
(2,391 ) (2,673 ) (2,335 ) Other, net
— — 234 Net cash provided by (used in) financing activities
22,032 (1,263 ) (9,556 ) Effect of exchange rate changes on cash
2,015 424 (1,024 ) Net increase (decrease) in cash and cash equivalents
8,058 (6,692 ) 3,997 Cash and cash equivalents at beginning of year
13,857 20,549 16,552 Cash and cash equivalents at end of year
$ 21,915 $ 13,857 $ 20,549 Supplemental cash flow disclosures
Cash paid during the year for:
Income taxes
$ 3,633 $ 7,787 $ 7,550 Interest
1,680 1,897 1,876 Noncash investing activities:
Contribution of property, plant, and equipment to real estate joint venture
$ — $ — $ 4,358 See notes to consolidated financial statements.
2125
CONSOLIDATED STATEMENT OF
SHAREHOLDERS'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, 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 ($.82 per share).. -- -- (7,472) -- -- -- (7,472) Shares issued upon exercise of options................ -- (375) -- -- -- 3,106 2,731 Shares issued for employee stock purchase plan....... -- 8 -- -- -- 244 252 Restricted stock............ -- (22) -- (1,597) -- 1,796 177 ------ ----- -------- ------- -------- -------- ------- Balance at December 31, 2001... 9,664 357 103,953 (1,597) (24,075) (7,403) 80,899 ------- Net income.................. -- -- 14,297 -- -- 14,297 Currency translation adjustments............... -- -- -- -- 1,478 -- 1,478 Minimum pension liability... -- -- -- -- (4,322) -- (4,322) Unrealized (loss) on available-for-sale securities................ -- -- -- -- (159) -- (159) ------- Comprehensive income...... -- -- -- -- -- -- 11,294 ------- Dividends ($.84 per share).. -- -- (7,802) -- -- -- (7,802) Shares issued upon exercise of options................ -- 250 -- -- -- 2,548 2,798 Shares issued for employee stock purchase plan....... -- 80 -- -- -- 144 224 Shares issued for long-term incentive awards.......... -- (61) -- -- -- 351 290 Restricted stock............ -- -- -- 352 -- -- 352 ------ ----- -------- ------- -------- -------- ------- Balance at December 31, 2002 $9,664 $ 626 $110,448 $(1,245) $(27,078) $ (4,360) $88,055 ====== ===== ======== ======= ======== ======== =======
Common
stockCapital in
excess of
par valueRetained
earningsUnearned
compensationAccumulated
other
comprehensive
income (loss)Treasury
stockTotal (Dollars in thousands, except per share amounts) 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 grant of $1,774, amortization of unearned compensation of $177
— (22 ) — (1,597 ) — 1,796 177 Balance at December 31, 2001
9,664 357 103,953 (1,597 ) (24,075 ) (7,403 ) 80,899 Net income
— — 14,297 — — 14,297 Currency translation adjustments
— — — — 1,478 — 1,478 Minimum pension liability
— — — — (4,322 ) — (4,322 ) Unrealized (loss) on available-for-sale securities
— — — — (159 ) — (159 ) Comprehensive income
— — — — — — 11,294 Dividends ($.84 per share)
— — (7,802 ) — — — (7,802 ) Shares issued upon exercise of options
— 250 — — — 2,548 2,798 Shares issued for employee stock purchase plan
— 80 — — — 144 224 Shares issued for long-term incentive awards
(61 ) — — — 351 290 Amortization of unearned compensation
— — — 352 — — 352 Balance at December 31, 2002
9,664 626 110,448 (1,245 ) (27,078 ) (4,360 ) 88,055 Net income
— — 14,833 — — — 14,833 Currency translation adjustments
— — — — 13,441 — 13,441 Minimum pension liability
— — — — (2,159 ) — (2,159 ) Unrealized gain on available-for-sale securities
— — — — 390 — 390 Comprehensive income
— — — — — — 26,505 Dividends ($.84 per share)
— — (7,973 ) — — — (7,973 ) Shares issued upon exercise of options
1,351 — — — 3,287 4,638 Shares issued for employee stock purchase plan
— 138 — — — 180 318 Shares issued for long-term incentive awards
— 66 — — — 119 185 Amortization of unearned compensation
— — — 624 — — 624 Balance at December 31, 2003
$ 9,664 $ 2,181 $ 117,308 $ (621 ) $ (15,406 ) $ (774 ) $ 112,352 See notes to consolidated financial statements.
2226
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars(Dollars in thousands except per share amounts)
Note
1--Significant1—Significant Accounting PoliciesPrinciples of consolidation: All majority-owned subsidiaries are included in the
Company'sCompany’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. TheCompany'sCompany’s share of net income or losses of investments is included in the consolidated statement of income. The Company periodically reviews these investments for impairments and, if necessary, would adjust these investments to their fair value when a decline in market value is deemed to be other than temporary.Effective July 1, 2002, the Company acquired a controlling interest of Quaker Chemical South Africa (Pty.) Ltd. (South Africa), a previously 50% owned joint venture. As a result, South Africa, previously reported using the equity method, is now a fully consolidated 51% owned subsidiary. The effect of this change was not material to the financial statements.
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'shareholders’ equity and will be included in income only upon sale or liquidation of the underlying investment. All non-U.S. subsidiaries use its local currency as its functional currency.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. The majority of domestic inventories are valued using the last-in, first-out
("LIFO"(“LIFO”) method. Cost of non-U.S. subsidiaries and certain domestic inventories are determined using the first-in, first-out("FIFO"(“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 periodically evaluated whenever changes in circumstances or current events indicate the carrying amount of such assets may not be recoverable. An estimate of undiscounted cash flows produced by the asset, or the appropriate group of assets, is compared with the carrying value to determine whether an impairment exists. 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. Upon sale or other dispositions of long-lived assets, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposals is recorded to income. 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.
Capitalized Software: The Company applies the Accounting Standards Executive Committee Statement of Position (SOP) 98-1,
"Accounting“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use."” This SOP requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. In connection with the implementation of theCompany'sCompany’s global transaction27
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
system, approximately
$8,378$10,203 and$3,572$8,378 of costs were capitalized at December 31,20022003 and2001,2002, respectively. These costs are amortized over a period of five years once the assets are placed into service.Goodwill and Other Intangible Assets: On January 1, 2002, the Company adopted SFAS No. 142,
"Goodwill“Goodwill and Other Intangible Assets."” The new standard requires that goodwill and indefinite-lived intangible assets no longer be amortized. In addition, goodwill and indefinite-lived intangible assets are tested for impairment at least annually. These tests will be performed more frequently if there are triggering events.23QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)Impairment losses after initial adoption will be recorded as part of income from continuing operations. Definite-lived intangible assets are amortized over their estimated useful lives, generally for periods ranging from 5 to 20 years. The Company continually evaluates the reasonableness of the useful lives of these assets. See also Note 13 oftheNotes to Consolidated Financial Statements.Revenue recognition: Sales are generally recorded when products are shipped to customers and services earned. For products shipped on consignment, revenue is recorded upon usage by the customer. As part of the
Company'sCompany’s chemical management services, certain third partyproductsproduct sales to customers aretransferred to customers.managed by the Company. Where the Company acts as a principal, revenues are recognized on a gross reporting basis at the selling price negotiated withclients.customers. Where the Company acts as an agent, such revenue is recorded using net reporting as service revenues, at the amount of the administrative fee earned by the Company for ordering the goods. Third party products transferred underthesearrangements resulting in net reporting totaled $26,617, $28,344, andrecorded net totaled $28,344,$20,654, for 2003, 2002, and$19,733, for 2002,2001,and 2000,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 are included in selling, general and administrative expenses, and during 2003, 2002, and 2001 were $10,050, $9,072, and
2000 were $9,072,$8,851,and $8,496,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 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,
20022003 and2001,2002, the allowance for doubtful accounts was$6,118$6,763 and$5,155,$6,118, respectively. Historically, the Company has experienced some losses related to the poor financial condition of certain customers.Prior to 2000, such losses were not material.In 2003, 2002,2001,and2000,2001, the Company provided allowances of $991, $1,365,$2,472,and$1,971,$2,472, 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.
28
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
Comprehensive income (loss): The Company presents comprehensive income (loss) in its Statement of
Shareholders'Shareholders’ Equity. The components of accumulated other comprehensive loss at December 31, 2003 include: accumulated foreign currency translation adjustments of $6,610, minimum pension liability of $8,756, and unrealized holding losses on available-for-sale securities of $40. The components of accumulated other comprehensive loss at December 31, 2002 include: accumulated foreign currency translation adjustments of $20,051 and minimum pension liability of $6,597 and unrealized holding losses on available-for-sale securities of $430.The components of accumulated other comprehensive loss at December 31, 2001 include: accumulated foreign currency translation adjustments of $21,529 and minimum pension liability of $2,275 and unrealized holding losses on available-for-sale securities of $271. 24QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)Income Taxes: The provision for income taxes is determined using the asset and liability approach of accounting for income
taxes.taxes.Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of theCompany'sCompany’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.Stock-based compensation: In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS)(“SFAS”) No. 148,"Accounting“Accounting for Stock-BasedCompensation--TransitionCompensation—Transition and Disclosure."” This standard amends the transition and disclosure requirements of SFAS No. 123,"Accounting“Accounting for Stock-Based Compensation."” As permitted by SFAS No. 148, the Companyaccountscontinues to account for stock option grants in accordance with Accounting Principles Board Opinion No. 25,"Accounting“Accounting for Stock Issued to Employees."” Accordingly, no compensation expense has been recognized for stock options since all options granted had an exercise price equal to the market value of the underlying stock on the grant date.The Company currently does not intend to transition to the use of a fair value method for accounting for stock-based compensation.The following tables illustrate the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No.
123 as well as the assumptions used in the calculation.
Year Ended December 31, ------------------------- 2002 2001 2000 ------- ------ ------- (Dollars in thousands, except per share amounts)Net income--as reported................................................. $14,297 $7,665 $17,163 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax................ 537 429 269 ------- ------ ------- Pro forma net income.................................................... $13,760 $7,236 $16,894 ======= ====== ======= Earnings per share: Basic--as reported................................................... $ 1.56 $ 0.85 $ 1.94 Basic--pro forma..................................................... $ 1.50 $ 0.80 $ 1.91 Diluted--as reported................................................. $ 1.51 $ 0.84 $ 1.93 Diluted--pro forma................................................... $ 1.45 $ 0.79 $ 1.90The fair value123. See also Note 9 ofeach option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:Notes to Consolidated Financial Statements.
2002 2001 2000 ---- ---- ----Dividend yield......... 3.9% 3.9% 3.9% Expected volatility.... 23.9% 21.9% 20.4% Risk-free interest rate 3.00% 3.38% 5.12% Expected life (years).. 5 7 7
Year Ended December 31, 2003 2002 2001 Net income—as reported
$ 14,833 $ 14,297 $ 7,665 Add: Stock-based employee compensation expense included in net income, net of related tax effects
485 495 203 Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax
(996 ) (981 ) (584 ) Pro forma net income
$ 14,322 $ 13,811 $ 7,284 Earnings per share:
Basic—as reported
$ 1.58 $ 1.56 $ 0.85 Basic—pro forma
$ 1.53 $ 1.51 $ 0.80 Diluted—as reported
$ 1.52 $ 1.51 $ 0.84 Diluted—pro forma
$ 1.47 $ 1.46 $ 0.80 Recently issued accounting standards: In
June 2001,January 2003, theFASB 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. Management has assessed the impact of the new standard and determined there is no material impact to the financial statements. 25QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts) In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13 and Technical Corrections." For most companies, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. The statement also amended SFAS No. 13 for certain sales-leaseback and sublease accounting. The Company adopted this standard on January 1, 2003. Management has assessed the impact of the new standard and determined there is no material impact to the financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullified EITF Issue No. 94-3. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No. 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. In November 2002, the FASBFinancial Accounting Standards Board (“FASB”), issued FASB Interpretation No.45 (FIN 45)46 (“FIN 46”),"Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34". FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of the Interpretation are effective for financial statements issued after December 15, 2002. However, the provisions for initial recognition and measurements are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Management has assessed the impact of the new standard and determined there to be no material impact to the financial statements. In January 2003, the FASB issued FIN 46, "Consolidation“Consolidation of Certain Variable InterestEntities" (VIEs)Entities, (“VIEs”), which is an interpretation of Accounting Research Bulletin(ARB)(“ARB”) No. 51,"Consolidated“Consolidated Financial29
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
Statements.
"” FIN 46 addresses the application of ARB No. 51 to VIEs, and generally would require that assets, liabilities and results of theactivityactivities of a VIE be consolidated into the financial statements of the enterprise that is considered the primary beneficiary. FIN 46, as revised by FIN 46 (revised December 2003), is effective for public entities that have interests in VIEs commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application for all other types of entities is required in financial statements for periods ending after March 15, 2004. The Company has determined that its real estate joint venture is a VIE and that the Company is not the primary beneficiary. See also Note 3 of Notes to Consolidated Financial Statements.In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or mezzanine equity, by now requiring those same instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim
periodsperiod beginning after June 15, 2003. On November 7, 2003, the FASB issued FASB Staff Position (“FSP”) FAS 150-3, which delayed the effective date for certain provisions of SFAS 150 indefinitely. For the effective provisions of the standard, management has assessed the impact and determined there toVIEsbe no material impact to the financial statements. For the deferred provisions, the Company does not expect the pending adoption to have a material impact on the financial statements.In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which provides guidance on how to determine when an arrangement that involves multiple revenue-generating activities or deliverables should be divided into separate units of accounting for revenue recognition purposes. It further states, that if this division is required, the arrangement consideration should be allocated among the separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods that begin after June 15, 2003. The adoption of EITF 00-21 did not have a material effect on the Company’s financial position, results of operations or cash flows.
In December 2003, the SEC issued SAB 104, “Revenue Recognition,” which
an enterprise holdssupersedes SAB 101, “Revenue Recognition in Financial Statements,” and updates portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting guidance. The Company had previously adopted the necessary changes incorporated into SAB 104, which did not have avariable interestmaterial effect on the Company’s financial position, results of operations or cash flows.In December 2003, the FASB revised Statement No. 132 (“SFAS 132”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised standard mandates additional disclosures for pensions and other postretirement benefit plans and is designed to improve disclosure transparency within financial statements and requires certain disclosures to be made on a quarterly basis (collectively, the “Amended Disclosures”). Compliance with the Amended Disclosures is effective for fiscal periods beginning after December 15, 2003, and have been incorporated into Note 7 of Notes to Consolidated Financial Statements. Interim period disclosures will be required to be made by the Company commencing in the first quarter of 2004.
On January 12, 2004 the FASB issued FSP No. FAS 106-1, which permits a sponsor of a postretirement health care plan that
it acquired before February 1, 2003.provides a prescription drug benefit to make a one-time election to defer accounting for the30
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). On December 8, 2003, President Bush signed the Act into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a Federal subsidy to companies which sponsor retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted under FSP No. 106-1, the Company did not reflect the effects of this Act in its consolidated financial statements and accompanying notes. Specific authoritative guidance on the accounting for the Federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. The Company is currently
inassessing theprocessimpact ofreviewingtheprovisions of FIN 46, particularly in relation to the Company's real estate joint venture to determine if the joint venture must be consolidated effective July 1, 2003. However, all disclosures required by FIN 46 are included in the accompanying Note 3 to the Consolidated Financial Statements. FIN 46 is effective immediately for any variable interests acquired subsequent to January 31, 2003. The Company has not acquired any variable interests subsequent to January 31, 2003.Act.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'years’ data have been made to improve comparability.Note
2--Restructuring2—Restructuring and Related ActivitiesIn 2001,
Quaker'sQuaker’s management approved restructuring plans to realign the organization and reduce operatingcosts. Quaker'scosts (2001 program). Quaker’s restructuring plansincludeincluded the decision to close and sell manufacturing facilities in the26QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)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 restructuring charges are provisions for severance of 53 employees. Restructuring and related charges of $5,854 were recognized in 2001. The charge comprisedof $2,644$2,807 related to employee separations,$2,613$2,450 related to facility rationalization charges, and $597 related to abandoned acquisitions. Employee separation benefits varied depending on local regulations within certain foreign countries and included severance and other benefits. As of December 31,2002,2003, Quaker had completed5051 of the planned 53 employee separations under the 2001plan.program. During the fourth quarter of 2002, the Company completed the sale of its U.K. manufacturingfacility. Quakerfacility, which closedthis facilityat the end of 2001. In 2003, the Company reversed $216 of unused restructuring accruals related to the 2001 program.In 2003, Quaker’s management approved restructuring plans to further realign the organization (2003 program). Included in the 2003 restructuring charge are provisions for severance for 9 employees totaling $273.
Quaker expects to substantially complete the initiatives contemplated under the restructuring plans, including the sale of its former manufacturing facility in France
by the end of 2003.during 2004.31
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
Accrued restructuring balances, included in other current liabilities
as of December 31, 2002and assigned to the Metalworking segment, are as follows:
Balance Currency Balance December 31, translation December 31, 2001 Payments and other 2002 ------------ -------- ----------- ------------Employee separations.... $2,534 $(1,374) $114 $1,274 Facility rationalization 1,439 (752) 182 869 ------ ------- ---- ------ Total................ $3,973 $(2,126) $296 $2,143 ====== ======= ==== ======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.
Employee
Separations
Facility
Rationalization
Abandoned
Acquisitions
Total 2001 Program:
Restructuring charges
$ 2,807 $ 2,450 $ 597 $ 5,854 Asset impairment
— (1,015 ) — (1,015 ) Payments
(111 ) (171 ) (597 ) (879 ) Currency translation and other
1 12 — 13 December 31, 2001 ending balance
2,697 1,276 — 3,973 Payments
(1,374 ) (752 ) — (2,126 ) Currency translation and other
114 182 — 296 December 31, 2002 ending balance
1,437 706 — 2,143 Restructuring reversals
(156 ) (60 ) — (216 ) Payments
(832 ) (204 ) — (1,036 ) Currency translation and other
1 83 — 84 December 31, 2003 ending balance
450 525 — 975 2003 Program:
Restructuring charges
273 — — 273 Payments
(47 ) — — (47 ) Currency translation and other
2 — — 2 December 31, 2003 ending balance
228 — — 228 Total restructuring December 31, 2003 ending balance
$ 678 $ 525 $ — $ 1,203 Note
3--Investments3—Investments in Associated CompaniesInvestments 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, --------------- 2002 2001 ------- -------Current assets........ $26,868 $19,350 Noncurrent assets..... 33,337 24,416 Current liabilities... 10,003 11,863 Noncurrent liabilities 28,185 12,57027
December 31, 2003 2002 Current assets
$ 22,632 $ 26,868 Noncurrent assets
32,176 33,337 Current liabilities
12,139 10,003 Noncurrent liabilities
27,373 28,185
Year Ended December 31, 2003 2002 2001 Net sales
$ 41,034 $ 39,612 $ 43,138 Gross margin
19,566 17,958 19,093 Operating income
4,370 4,691 4,263 Net income
1,253 1,161 1,527 32
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)(Dollars(Dollars in thousands except per share amounts)
Year Ended December 31, ----------------------- 2002 2001 2000 ------- ------- -------Net sales....... $39,612 $43,138 $57,460 Gross margin.... 17,958 19,093 21,227 Operating income 4,691 4,263 5,226 Net income...... 1,161 1,527 2,004In January 2001, the Company contributed its Conshohocken, Pennsylvania property and buildings (the
"Site"“Site”) to a real estate joint venture (the"Venture"“Venture”) in exchange for a 50%ownershipinterest in the Venture. The Venture did not assume any debt or other obligations of the Company. The Venturecredited 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. At December 31, 2002, the Company's investment balance was approximately $4,000. The Venturerenovated certain of the existing buildings at the Site, as well as built new officespace (the "Project").space. In December 2000, the Company entered into an agreement with the Venture to lease approximately 38% of theSite'sSite’s available office space for a 15-year period commencing February 2002, with multiple renewal options.TheDuring 2003, the Companybelievesreceived priority cash distributions, which reduced theterms of this lease are no less favorable than the terms it would have obtained from an unaffiliated third party.Company’s investment balance to $0. As of December 31,2002,2003, approximately87%93% of theSite'sSite’s office space was underlease. The Venture funded the Project with a $21,000 construction loan (the "Venture"), of which approximately $11,766 was outstanding as of December 31, 2001. The Venture Loan was secured in part by a mortgage on the Sitelease andcertain guarantees executed by certain Venture partners other than the Company. In December 2002, $27,250 of permanent financing, at a 5.95% interest rate secured bythe Site (includingthe related improvements),improvements thereon) wasobtained (the "Financing"), which was usedsubject topay offencumbrances securing indebtedness of the VentureLoanin2002. In March 2003,theCompany received approximately $1,800amount ofproceeds as a priority return, and expects to receive an estimated additional $2,200 during 2003. After receiving the aforementioned priority distributions and if cash flows permit, the Company will be eligible to receive additional priority distributions up to $2,300 from the Venture. In connection with the Financing, the guarantees from the Venture partners with respect to the Venture Loan expired.$26,861. The Company has not guaranteed nor is it obligated to pay any principal, interest or penalties on theVenture Loan orindebtedness of theFinancing,Venture, even in the event of default by the Venture. At December 31,2002,2003, the Venture had property with a net book value of$27,844,$27,151, total assets of$35,589,$28,954, and total liabilities of$27,517, including $27,250 due under the Financing.$27,178.Note
4--Inventories4—InventoriesTotal inventories comprise:
December 31, --------------- 2002 2001 ------- -------Raw materials and supplies........ $11,342 $ 9,673 Work in process and finished goods 12,294 9,112 ------- ------- $23,636 $18,785 ======= =======28QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)
December 31, 2003 2002 Raw materials and supplies
$ 14,691 $ 11,342 Work in process and finished goods
17,520 12,294 $ 32,211 $ 23,636 Inventories valued under the LIFO method amounted to
$5,715$5,635 and$5,636$5,715 at December 31,20022003 and2001,2002, respectively. The estimated replacement costs for these inventories using the FIFO method were approximately $5,263 and $5,350,and $5,196,respectively.Note
5--Property,5—Property, Plant, and EquipmentProperty, plant, and equipment comprise:
December 31, ---------------- 2002 2001 -------- -------Land......................... $ 5,044 $ 4,328 Building and improvements.... 28,214 25,132 Machinery and equipment...... 75,551 61,881 Construction in progress..... 4,398 6,026 -------- ------- 113,207 97,367 Less accumulated depreciation 64,695 59,123 -------- ------- $ 48,512 $38,244 ======== =======
December 31, 2003 2002 Land
$ 6,830 $ 5,044 Building and improvements
34,480 28,214 Machinery and equipment
86,732 75,551 Construction in progress
8,406 4,398 136,448 113,207 Less accumulated depreciation
74,057 64,695 $ 62,391 $ 48,512 33
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
Note
6--Taxes6—Taxes on IncomeTaxes on income consist of the following:
Year Ended December 31, ------------------------ 2002 2001 2000 ------ ------- -------Current: Federal. $ 533 $(1,066) $ 2,411 State... 7 5 145 Foreign. 6,914 6,161 7,476 ------ ------- ------- 7,454 5,100 10,032 Deferred: Federal. (904) 226 (1,337) Foreign. 1,232 (853) (484) ------ ------- ------- Total...... $7,782 $ 4,473 $ 8,211 ====== ======= =======
Year Ended December 31, 2003 2002 2001 Current:
Federal
$ (360 ) $ 533 $ (1,066 ) State
7 7 5 Foreign
6,452 6,914 6,161 6,099 7,454 5,100 Deferred:
Federal
1,613 (904 ) 226 Foreign
(224 ) 1,232 (853 ) Total
$ 7,488 $ 7,782 $ 4,473 The components of earnings before income taxes were as follows:
2002 2001 2000 ------- ------- -------Domestic $(1,401) $(7,935) $(1,448) Foreign. 25,719 22,365 27,934 ------- ------- ------- Total... $24,318 $14,430 $26,486 ======= ======= =======29QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)
2003 2002 2001 Domestic
$ (1,483 ) $ (1,401 ) $ (7,935 ) Foreign
25,601 25,719 22,365 Total
$ 24,118 $ 24,318 $ 14,430 Total deferred tax assets and liabilities are composed of the following at December 31:
2002 2001 --------------- -------------- Non- Non- Current current Current current ------- ------- ------- -------Retirement benefits.................. $ 600 $ 3,409 $ 179 $ -- Allowance for doubtful accounts...... 1,469 -- 706 -- FRS impairment....................... -- -- -- 1,836 Insurance and litigation reserves.... 751 -- 666 -- Postretirement benefits.............. -- 3,127 -- 3,111 Supplemental retirement benefits..... -- 1,058 -- 900 Performance incentives............... 2,349 1,277 306 2,256 Alternative minimum tax carryforward. -- 1,444 -- -- Restructuring charges................ 705 -- 2,174 -- Vacation pay......................... -- 268 -- 261 Goodwill............................. -- 26 -- 564 Operating loss carryforward.......... -- 897 -- 903 Other................................ -- -- -- 157 ------ ------- ------ ------ 5,874 11,506 4,031 9,988 Valuation allowance.................. -- (897) -- (903) ------ ------- ------ ------ Total deferred income tax assets--net $5,874 $10,609 $4,031 $9,085 ====== ======= ====== ====== Depreciation......................... $ 1,257 $1,161 Other................................ 261 72 ------- ------ Total deferred income tax liabilities $ 1,518 $1,233 ======= ======
2003 2002 Current Non-current Current Non-current Retirement benefits
$ 814 $ 4,540 $ 600 $ 3,409 Allowance for doubtful accounts
1,490 — 1,469 — Insurance and litigation reserves
600 — 751 — Postretirement benefits
— 2,987 — 3,127 Supplemental retirement benefits
— 1,146 — 1,058 Performance incentives
949 1,270 2,349 1,277 Alternative minimum tax carryforward
— 2,092 — 1,444 Restructuring charges
406 — 705 — Vacation pay
291 — — 268 Goodwill
— — — 26 Operating loss carryforward
— 1,153 — 897 Other
— 197 — — 4,550 13,385 5,874 11,506 Valuation allowance
— (539 ) — (897 ) Total deferred income tax assets—net
$ 4,550 $ 12,846 $ 5,874 $ 10,609 Depreciation
$ 2,464 $ 1,257 Other
224 261 Total deferred income tax liabilities
$ 2,688 $ 1,518 34
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:
2002 2001 2000 ------- ------ -------Income tax provision at the Federal statutory tax rate...................... $ 8,511 $4,906 $ 9,005 State income tax provisions, net............................................ 5 3 96 Non-deductible entertainment and business meal expense...................... 160 159 173 Foreign taxes on earnings at rates different from the Federal statutory rate (1,126) (321) (1,239) Miscellaneous items, net.................................................... 232 (274) 176 ------- ------ ------- Taxes on income............................................................. $ 7,782 $4,473 $ 8,211 ======= ====== =======
2003 2002 2001 Income tax provision at the Federal statutory tax rate
$ 8,441 $ 8,511 $ 4,906 State income tax provisions, net
5 5 3 Non-deductible entertainment and business meal expense
179 160 159 Foreign taxes on earnings at rates different from the Federal statutory rate
(1,504 ) (1,126 ) (321 ) Miscellaneous items, net
367 232 (274 ) Taxes on income
$ 7,488 $ 7,782 $ 4,473 At December 31,
2002,2003, the Companyhashad foreign net operating loss carryforwards of$2,530,$3,320, of which$1,242$1,735 expire between20032004 and2008.2007. There is no time limit for the remaining net operating loss carryforwards of$1,288.$1,585. 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'sCompany’s intention to continue to reinvest these earnings in those subsidiaries for working capital and expansion needs. U.S. and foreign income taxes that would be payable if such earnings were distributed may be30QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)lower than the amount computed at the U.S. statutory rate due to the availability of tax credits. The amount of such undistributed earnings at December 31,20022003 was approximately$133,000.$121,000. 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--Pension7—Pension and Other Postretirement BenefitsThe 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'sCompany’s subsidiaries in the Netherlands and in the United Kingdom are subject to theprovisionprovisions of SFAS No. 87,"Employers'“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 localgovernments'governments’ plans and are not subject to the provisions of SFAS No. 87.In 2003 the Company adopted SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This statement retains the disclosure requirement contained in the original standard and requires additional disclosures about the assets, obligations, cash flows and net periodic cost of defined benefit postretirement plans. As permitted by the Statement, disclosures regarding the plan asset information for non-U.S. pension plans and estimated future benefit payments for both pension and other postretirement benefit plans worldwide will be delayed until 2004.
35
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
The following table shows the components of pension costs for the periods indicated:
2002 2001 2000 ------- ------- -------Service cost..................................... $ 2,369 $ 2,172 $ 2,442 Interest cost.................................... 4,652 4,359 4,169 Expected return on plan assets................... (4,304) (4,569) (4,583) Other amortization, net.......................... 558 284 97 Pension curtailment (Note 2)..................... -- 42 -- ------- ------- ------- Net pension cost of plans subject to SFAS No. 87. 3,275 2,288 2,125 Pension costs of plans not subject to SFAS No. 87 62 46 69 ------- ------- ------- Net pension costs................................ $ 3,337 $ 2,334 $ 2,194 ======= ======= =======
2003 2002 2001 Service cost
$ 3,159 $ 2,369 $ 2,172 Interest cost
4,954 4,652 4,359 Expected return on plan assets
(4,134 ) (4,304 ) (4,569 ) Other amortization, net
885 558 284 Pension curtailment
— — 42 Net pension cost of plans subject to SFAS No. 87
4,864 3,275 2,288 Pension costs of plans not subject to SFAS No. 87
69 62 46 Net pension costs
$ 4,933 $ 3,337 $ 2,334 The
Company'sCompany’s pension plan year end is November 30, which serves as the measurement date. Theassumed long-term rate of return on plan assetsmeasurement date for the Company’s other postretirement benefits is December21, 2002, 2001, and 2000 was 9.25%. Effective January 1, 2003, the Company lowered its assumed long-term rate of return on plan assets to 8.75%. 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.31.The Company has postretirement benefit plans that provide medical and life insurance benefits for certain of its retired employees. Both the medical and life insurance plans are currently unfunded.
The following table shows the components of postretirement costs for the periods indicated:
2002 2001 2000 ---- ---- ----Service cost............................ $112 $ 95 $105 Interest cost........................... 715 696 714 ---- ---- ---- Net periodic postretirement benefit cost $827 $791 $819 ==== ==== ====
2003 2002 2001 Service cost
$ 39 $ 112 $ 95 Interest cost and other
626 715 696 Net periodic postretirement benefit cost
$ 665 $ 827 $ 791 The weighted-average assumptions used to determine net periodic benefit cost (U.S. plans) for years ended December 31,
were as follows:
Pension Benefits Other Benefits 2003 2002 2003 2002 Discount rate
6.875 % 7.25 % 6.875 % 7.25 % Expected return on plan assets
8.75 % 9.25 % N/A N/A Assumed long-term rate of compensation increases
4.5 % 4.75 % N/A N/A 36
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)(Dollars(Dollars in thousands except per share amounts)
The following table shows the Company
plans'plans’ funded status reconciled with amounts reported in the consolidated balance sheet as of December 31:
Other postretirement Pension benefits benefits ------------------ ----------------- 2002 2001 2002 2001 -------- -------- -------- -------Change in benefit obligation Benefit obligation at beginning of year............ $ 69,915 $ 65,824 $ 9,815 $ 9,841 Service cost....................................... 2,306 2,113 112 95 Interest cost...................................... 4,652 4,359 715 696 Amendments......................................... 104 -- -- -- Translation difference............................. 3,558 (940) -- -- Actuarial (gain) loss.............................. 2,169 2,491 960 (41) Benefits paid...................................... (3,917) (3,971) (1,058) (776) Other.............................................. 32 39 -- -- -------- -------- -------- ------- Benefit obligation at end of year.................. $ 78,819 $ 69,915 $ 10,544 $ 9,815 ======== ======== ======== ======= Change in plan assets Fair value of plan assets at beginning of year..... $ 53,553 $ 58,006 -- -- Actual return on plan assets....................... (1,446) (2,108) -- -- Employer contribution.............................. 1,535 2,301 1,058 777 Plan participants' contributions................... 51 59 -- -- Translation difference............................. 3,044 (877) -- -- Benefits paid...................................... (3,838) (3,828) (1,058) (777) -------- -------- -------- ------- Fair value of plan assets at end of year........... 52,899 53,553 -- -- Funded status...................................... (25,920) (16,362) (10,544) (9,815) Unrecognized transition asset...................... (882) (848) -- -- Unrecognized gain (loss)........................... 19,501 10,930 937 (22) Unrecognized prior service cost.................... 3,780 3,946 -- -- -------- -------- -------- ------- Net amount recognized.............................. $ (3,521) $ (2,334) $ (9,607) $(9,837) ======== ======== ======== ======= Amounts recognized in the balance sheet consist of: Prepaid benefit cost............................ $ 4,381 $ 3,737 Accrued benefit obligation...................... (21,686) (12,088) Intangible asset................................ 3,777 3,742 Accumulated other comprehensive income.......... 10,007 2,275 -------- -------- Net amount recognized.............................. $ (3,521) $ (2,334) ======== ========
Pension Benefits Other
Postretirement
Benefits
2003 2002 2003 2002 Change in benefit obligation
Benefit obligation at beginning of year
$ 78,819 $ 69,915 $ 10,544 $ 9,815 Service cost
3,081 2,306 39 112 Interest cost
4,954 4,652 678 715 Amendments
78 104 (598 ) — Translation difference
5,057 3,558 — — Actuarial loss
3,279 2,169 1,199 960 Benefits paid
(4,088 ) (3,917 ) (1,076 ) (1,058 ) Other
(4 ) 32 — — Benefit obligation at end of year
$ 91,176 $ 78,819 $ 10,786 $ 10,544 Change in plan assets
Fair value of plan assets at beginning of year
$ 52,899 $ 53,553 — — Actual return on plan assets
4,358 (1,446 ) — — Employer contribution
3,865 1,535 1,076 1,058 Plan participants’ contributions
77 51 — — Translation difference
4,421 3,044 — — Benefits paid
(3,903 ) (3,838 ) (1,076 ) (1,058 ) Fair value of plan assets at end of year
61,717 52,899 — — Funded status
(29,459 ) (25,920 ) (10,786 ) (10,544 ) Unrecognized transition asset
(919 ) (882 ) — — Unrecognized gain
23,284 19,501 2,105 937 Unrecognized prior service cost
3,593 3,780 (514 ) — Net amount recognized
$ (3,501 ) $ (3,521 ) $ (9,195 ) $ (9,607 ) Amounts recognized in the balance sheet consist of:
Prepaid benefit cost
$ 5,980 $ 4,381 Accrued benefit obligation
(27,438 ) (21,686 ) Intangible asset
4,661 3,777 Accumulated other comprehensive income
13,296 10,007 Net amount recognized
$ (3,501 ) $ (3,521 ) The
U.S. definedweighted-average assumptions used to determine the benefitpension plan is the largest plan. The significant assumptions for the U.S. planobligations (U.S. plans) at December 31, were as follows:
2002 2001 2000 ----- ---- ----Discount rate for projected benefit obligation.. 6.875% 7.25% 7.5% Assumed long-term rate of compensation increases 4.5% 4.75% 5.5%32
Pension Benefits Other Benefits 2003 2002 2003 2002 Discount rate for projected benefit obligation
6.0 % 6.875 % 6.0 % 6.875 % Assumed long-term rate of compensation increases
3.625 % 4.5 % N/A N/A 37
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)(Dollars(Dollars in thousands except per share amounts)
All other pension plans used assumptions in determining the actuarial present value of the projected benefit obligations which are generally consistent with (but not identical to) those of the U.S. plan.
The accumulated benefit obligation for all pension plans is $82,539 and $70,638 at December 31, 2003 and 2002, respectively.
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $67,886, $63,189 and $36,651, respectively, as of December 31, 2003 and $60,913, $55,761, and $34,204, respectively, as of December 31, 2002.
Pension Benefits 2003 2002 Increase in minimum liability included in other comprehensive income, net
$ 2,159 $ 4,322 Plan Assets
The Company’s U.S. pension plan strategic target asset allocation and the weighted-average asset allocations at December 31, 2003, and 2002, by asset category were as follows:
Plan Assets at December 31, Target 2003 2002 Asset Category
Equity securities
56 % 60 % 58 % Debt securities
32 26 40 Other
12 14 2 Total
100 % 100 % 100 % The long-term rate of return on assets in the U.S. was selected from within the reasonable range of rates determined by (a) historical real returns for the asset classes covered by the investment policy, and
$55,284, $50,601,(b) projections of inflation over the long-term period during which benefits are payable to plan participants.The general principles guiding investment of U.S. pension assets are those embodied in the Employee Retirement Income Security Act of 1974 (ERISA). These principles include discharging the Company’s investment responsibilities for the exclusive benefit of plan participants and
$38,602, respectively,in accordance with the “prudent expert” standard and other ERISA rules and regulations. The Company establishes strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. The interaction between plan assets and benefit obligations is periodically studied to assist in establishing such strategic asset allocation targets. The Company’s pension investment professionals have discretion to manage the assets within established asset allocation ranges approved by senior management of the Company. The Company’s U.S. pension assets are invested in U.S. and non-U.S. markets.The total value of plan assets for U.S. pension plans is $32,399 and $31,106 as of December 31,
2001.2003 and 2002, respectively. U.S. pension assets include Company common stock in the amounts of $262 (1% of total plan assets), and $231(1% of total plan assets) at December 31, 2003 and 2002, respectively. “Other” consists principally of hedge funds and cash and cash equivalents.38
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
Contributions
The
discount rate used in determining the accumulatedCompany expects to make minimum cash contributions $1,483 to its U.S. pension plan and $1,061 to its other postretirement benefitobligation was 6.875%plan in2002 and 7.25% in 2001. In valuing costs and liabilities, different2004.Assumed health care cost trend rates
December 31, 2003 2002 Health care cost trend rate assumed for next year
11.5 % 8.5 % Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
5.0 % 5.0 % Year that the rate reaches ultimate trend rate
2013 2010 Assumed health care cost trend rates
were usedhave a significant effect on the amounts reported forretirees under and over age 65. The averagethe health care plans. A one-percentage-point change in assumedrate for medical benefits for all retirees was 8.5% in 2002, gradually decreasing to 5% over eight years. A 1% increase in thehealth care cost trendraterates wouldincrease total service and interest cost for 2002 by $34 andhave theaccumulated postretirement benefit obligation as of December 31, 2002 by $531. A 1% decrease in the health care cost trend rate would decrease total service and interest cost for 2002 by $31 and the accumulated postretirement benefit obligation as of December 31, 2002 by $476.following effects:
1% Point
Increase1% Point
DecreaseEffect on total of service and interest cost
$ 33 $ (34 ) Effect on postretirement benefit obligations
$ 585 $ (531 ) The Company maintains a plan under which supplemental retirement benefits are provided to certain officers. Benefits payable under the plan are based on a combination of years of service and existing postretirement benefits. Included in total pension costs are charges of $626, $780, and $681 in 2003, 2002, and
$575 in 2002,2001,and 2000,respectively, representing the annual accrued benefits under this plan.Profit sharing
plan:planThe Company had maintained a qualified profit sharing plan covering substantially all domestic employees other than those who are compensated on a commission basis.
Contributions were $617 for 2000.In January 2001, this plan was replaced by an enhanced employer match on theCompany'sCompany’s 401(k) plan. TheCompany'sCompany’s 401(k) matching contributions were $546, $484, and $530 for 2003, 2002, and 2001, respectively.Note
8--Debt8—DebtDebt consisted of the following:
December 31, ---------------- 2002 2001 ------- -------6.98% Senior unsecured notes due 2007............................................. $14,286 $17,143 Industrial development authority monthly floating rate (1.4% at December 31, 2002) demand bonds maturing 2014...................................................... 5,000 5,000 Other debt obligations, primarily an uncommitted demand credit facility........... 9,509 95 ------- ------- 28,795 22,238 Short-term debt................................................................... (9,348) (1) Current portion of long-term debt................................................. (2,857) (2,857) ------- ------- $16,590 $19,380 ======= =======
December 31, 2003 2002 6.98% senior unsecured notes due 2007
$ 11,429 $ 14,286 Industrial development authority monthly floating rate (1.13% at December 31, 2003) demand bonds maturing 2014
5,000 5,000 Other debt obligations, primarily credit facilities
42,390 9,509 58,819 28,795 Short-term debt
(39,975 ) (9,348 ) Current portion of long-term debt
(3,017 ) (2,857 ) $ 15,827 $ 16,590 39
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
The long-term financing agreements require the maintenance of certain financial covenants with which the Company is in compliance.
During the next
fivefour years, payments on long-term debt are due as follows:$2,857$3,017 in2003,2004, $3,212 in 2005, $3,208 in 2006, and2007. 33QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars$3,184 inthousands except per share amounts)2007.At December 31,
20022003 and2001,2002, the Company had outstanding short-term borrowings with banks under lines of credit in the aggregate of $39,975 and $9,300, respectively.The Company increased its principal credit facilities from $15,000 committed and
$1, respectively. In April 2002,$10,000 uncommitted at theCompany entered into a $20.0 million committed revolving credit facility, with a bank, which expires in April 2003. Inend of March 2003theto its current position of $30,000 committed and $20,000 uncommitted. The Companyreached agreement with this bank to extend the term of this facility by an additional year, with the availablehad approximately $39,800 and $8,900 outstanding on these creditto be reduced to $15.0 million. At the Company's option, the interest rate for borrowings under the agreement may be based on the lender's cost of funds plus a margin, LIBOR plus a margin, or on the lender's prime rate. There were no outstanding borrowings under this facilityfacilities as of December 31,2002. Further, in April2003 and 2002,the Company entered into a $10.0 million uncommitted demand credit facility with the same lender under similar terms. A total of $8.9 million in borrowings under this facility was outstanding at December 31, 2002 at a weighted average borrowing rate of approximately 2.4%.respectively. The provisions of the agreements require that the Company maintain certain financial ratios and covenants, all of which the Company was in compliance with as of December 31, 2003 and 2002. Under its most restrictive covenants the Company can borrow an additional$69.0 million$38,053 as of December 31,2002. These2003. The Company believes that it is capable of renewing its current credit facilities, on an annual basis, or obtaining additional borrowing capacity on competitive terms. Following are the details of the Company’s individual facilities.In April 2002, the Company entered into a $20,000 committed credit facility with a bank, with an expiration date of April 2003. In March 2003, the Company replaced
an uncommittedits $20,000 committed credit facility with another facility with the same lender of $15,000, which expires in December 2004. At theamount of $18.0 million, which was terminated in July 2002. There were no outstandingCompany’s option, the interest rate for borrowings underthatthe agreement may be based on the lender’s cost of funds plus a margin, LIBOR plus a margin, or on the prime rate. Further, in April 2002, the Company entered into a $10,000 uncommitted demand credit facilityaswith the same lender under similar terms. A total of $19,800 in borrowings under these facilities was outstanding at December 31,2001.2003 at an average borrowing rate of approximately 2.1%.In June 2003, the Company entered into a $10,000 committed credit facility with another bank, which expires in June 2004. At the Company’s option, the interest rate for borrowings under the agreement may be based on the eurodollar rate plus a margin or the prime rate plus a margin. In July 2003, an amendment increased this committed credit facility to $15,000. A total of $15,000 in borrowings was outstanding at December 31, 2003 at an average borrowing rate of approximately 1.5%.
In June 2003, the Company also entered into a $10,000 uncommitted demand credit facility with another bank. At the Company’s option, the interest rate for borrowings under this agreement may be based on the prime rate or the LIBOR rate plus a margin. A total of $5,000 in borrowings was outstanding at December 31, 2003 at an average borrowing rate of approximately 2.2%.
As of December 31,
2002,2003, the Company maintained a $5,135 stand-by letter of credit which guarantees payment of the industrial development authority bonds. This letter of credit is renewed annually.At December 31,
20022003 and2001,2002, the amounts at which theCompany'sCompany’s short-term debt and its industrial development demand bonds are recorded are not materially different from their fair market value. The estimated fair value of theCompany'sCompany’s fixed rate long-term debt, based on quoted market prices for similar issues of the same remaining maturities, was $12,355 and $15,623 at December 31,2002.2003 and 2002, respectively.Note 9—Shareholders’ Equity
The
estimated fairCompany has 30,000,000 shares of common stock authorized, with a par value ofthe Company's long-term debt at December 31, 2001 was not materially different from its carrying value. Note 9--Shareholders' Equity$1, and 9,664 shares issued (including treasury).40
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
Holders of record of the
Company'sCompany’s common stock for a period of less than 36 consecutive calendar months or less are entitled to 1 vote per share of common stock. Holders of record of theCompany'sCompany’s common stock for a period greater than 36 consecutive calendar months are entitled to 10 votes per share of common stock.Treasury stock is held for use by the various Company plans
whichthat require the issuance of theCompany'sCompany’s common stock.The Company is authorized to issue 10,000,000 shares of preferred stock, $1.00 par value, subject to approval by the Board of Directors. The Board of Directors may designate one or more series of preferred stock and the number of shares, rights, preferences, and limitations of each series. No preferred stock has been issued.
Under provisions of a stock purchase plan, which permits employees to purchase shares of stock at 85% of the market value, 13,358 shares, 10,224 shares,
13,463 shares,and20,85713,463 shares were issued from treasury in 2003, 2002,2001,and2000,2001, respectively. The number of shares that may be purchased by an employee in any year is limited by factors dependent upon the market value of the stock and theemployee'semployee’s base salary. At December 31,2002, 476,3132003, 462,955 shares are available for purchase.The Company has a long-term incentive program for key employees which provides for the granting of options to purchase stock at prices not less than market value on the date of the grant. Most options are
34QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)exercisable between one and three years after the date of the grant for a period of time determined by the Company not to exceed seven years from the date of grant for options issued in 1999 or later and ten years for options issued in prior years.The table below summarizes transactions in the plan during 2003, 2002,
2001,and2000:2001:
2002 2001 2000 ------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- --------Options outstanding at January 1,.. 1,053,984 $16.80 1,140,447 $16.60 1,082,947 $16.93 Options granted.................... 245,500 20.21 214,700 17.83 140,700 14.69 Options exercised.................. (173,987) 16.38 (166,215) 15.73 (25,350) 16.27 Options expired.................... (250) 14.44 (134,948) 18.18 (57,850) 18.19 --------- --------- --------- Options outstanding at December 31, 1,125,247 17.61 1,053,984 16.80 1,140,447 16.60 ========= ========= ========= Options exercisable at December 31, 735,834 16.82 748,208 16.76 906,306 17.01 ========= ========= =========
2003 2002 2001 Number of
SharesWeighted
Average
Exercise
PriceNumber of
SharesWeighted
Average
Exercise
PriceNumber of
SharesWeighted
Average
Exercise
PriceOptions outstanding at January 1,
1,125,247 $ 17.61 1,053,984 $ 16.80 1,140,447 $ 16.60 Options granted
273,800 20.36 245,500 20.21 214,700 17.83 Options exercised
(244,697 ) 16.58 (173,987 ) 16.38 (166,215 ) 15.73 Options expired
(25,550 ) 21.42 (250 ) 14.44 (134,948 ) 18.18 Options outstanding at December 31,
1,128,800 18.42 1,125,247 17.61 1,053,984 16.80 Options exercisable at December 31,
672,625 17.32 735,834 16.82 748,208 16.76 The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2003 2002 2001 Dividend yield
3.9 % 3.9 % 3.9 % Expected volatility
23.9 % 23.9 % 21.9 % Risk-free interest rate
3.00 % 3.00 % 3.38 % Expected life (years)
5 5 7 41
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
The following table summarizes information about stock options outstanding at December 31,
2002:2003:
Options Outstanding Options Exercisable - -------------------------------------------------------------- -------------------------- Number Weighted Weighted Number Weighted Range of Outstanding at Average Average Exercisable Average Exercise Prices 12/31/02 Contractual Life Exercise Price at 12/31/02 Exercise Price - --------------- -------------- ---------------- -------------- ----------- --------------$12.10--$14.52 169,700 4 $13.88 166,675 $13.87 14.53-- 16.94 217,600 4 15.35 192,062 15.43 16.95-- 19.36 421,447 4 17.98 306,597 18.02 19.37-- 21.78 236,500 6 20.09 500 19.85 21.79-- 24.20 80,000 3 22.45 70,000 22.36 --------- ------- 1,125,247 4 17.61 735,834 16.82 ========= =======
Options Outstanding
Options Exercisable Range of
Exercise PricesNumber
Outstanding at
12/31/03Weighted
Average
Contractual LifeWeighted
Average
Exercise Price
Number
Exercisable at
12/31/03Weighted
Average
Exercise Price
$12.10—$14.52 132,350 2 $13.80 132,350 $13.80 14.53— 16.94 117,950 3 15.31 117,950 15.31 16.95— 19.36 328,850 3 17.92 270,775 17.92 19.37— 21.78 489,650 6 20.24 101,550 20.09 21.79— 24.20 60,000 2 22.60 50,000 22.50 1,128,800 4 18.42 672,625 17.32 Options were exercised for cash, resulting in the issuance from treasury of 244,697 shares in 2003 and 173,987 shares in
2002 and 166,215 shares in 2001.2002. Options to purchase752,500478,700 shares were available at December 31,20022003 for future grants.The program also provides for cash awards and commencing in 1999, common stock awards, the value of which is determined based on operating results over a three-year period for awards issued starting in 1999, and over a four-year period in prior years. The effect on operations of the change in the estimated value of incentive units during the year was $(45), $689, and $25 in 2003, 2002, and
$921 in 2002,2001,and 2000,respectively.Shareholders of record on February 20, 1990 received two stock purchase rights for each three shares of common stock outstanding. These rights expired on February 20, 2000. On March 6, 2000, the Company’s Board of Directors approved a new Rights Plan and declared a dividend of one new right (the
"Rights"“Rights”) for each outstanding share of common stock to shareholders of record on March 20, 2000.The Rights become exercisable if a person or group acquires or announces a tender offer which would result in such
person'sperson’s acquisition of 20% or more of theCompany'sCompany’s common stock.Each Right, when exercisable, entitles the registered holder to purchase one one-hundredth of a share of a newly authorized Series B preferred stock at an exercise price of sixty-five dollars per share subject to certain
35QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)anti-dilution adjustments. In addition, if a person or group acquires 20% or more of the outstanding shares of theCompany'sCompany’s common stock, without first obtaining Board ofDirectors'Directors’ approval, as required by the terms of the Rights Agreement, each Right will then entitle its holder (other than such person or members of any such group) to purchase, at theRight'sRight’s then current exercise price, a number of one one-hundredth shares of Series B preferred stock having a total market value of twice theRight'sRight’s exercise price.In addition, at any time after a person acquires 20% of the outstanding shares of common stock and prior to the acquisition by such person of 50% or more of the outstanding shares of common stock, the Company may exchange the Rights (other than the Rights which have become null and void), in whole or in part, at an exchange ratio of one share of common stock or equivalent share of preferred stock, per Right.
The Board of Directors can redeem the Rights for $.01 per Right at any time prior to the acquisition by a person or group of beneficial ownership of 20% or more of the
Company'sCompany’s common stock. Until a Right is exercised, the holder thereof will have no rights as a shareholder of the Company, including without limitation, the right to vote or to receive dividends. Unless earlier redeemed or exchanged, the Rights will expire on March 20, 2010.42
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
Restricted stock bonus: As part of the
Company'sCompany’s 2001 Global Annual Incentive Plan("(“AnnualPlan"Plan”), approved by shareholders on May 9, 2001, a restricted stock bonus of 100,000 shares of theCompany'sCompany’s stock was granted to an executive of the Company. The shares were issued in April 2001, in accordance with the terms of the Annual Plan, and registered in theexecutive'sexecutive’s name. The shares will vest over afour-yearfive-year period, with the first installment vesting at the end of 2001 on achieving certain performance targets and thethreefour remaining installments vesting annually in January thereafter, subject to theexecutive'sexecutive’s continued employment by the Company. In 2003, 35,000 shares were earned and $624 was charged to selling general, and administrative expenses (“SG&A”). In 2002, 20,000 shares were earned and $352 waschargedcharge toselling, general, and administrative expenses ("SG&A").&A. In 2001, 10,000 shares were earned and $177 was charged to SG&A. The compensation amount related to the remaining shareshavehas been recorded as unearned compensation and will be charged to SG&A when earned.Note
10--Earnings10—Earnings Per ShareThe following table summarizes earnings per share
("EPS"(“EPS”) calculations for the years ended December 31, 2003, 2002,2001,and2000:2001:
December 31, ---------------------- 2002 2001 2000 ------- ------ -------Numerator for basic EPS and diluted EPS--net income.......................... $14,297 $7,665 $17,163 ------- ------ ------- Denominator for basic EPS--weighted average shares........................... 9,172 9,054 8,831 Effect of dilutive securities, primarily employee stock options.............. 302 60 65 ------- ------ ------- Denominator for diluted EPS--weighted average shares and assumed conversions. 9,474 9,114 8,896 ======= ====== ======= Basic EPS.................................................................... $ 1.56 $ .85 $ 1.94 Diluted EPS.................................................................. $ 1.51 $ .84 $ 1.93
December 31, 2003 2002 2001 Numerator for basic EPS and diluted EPS—net income
$ 14,833 $ 14,297 $ 7,665 Denominator for basic EPS—weighted average shares
9,381 9,172 9,054 Effect of dilutive securities, primarily employee stock options
380 302 60 Denominator for diluted EPS—weighted average shares and
assumed conversions.
9,761 9,474 9,114 Basic EPS
$ 1.58 $ 1.56 $ .85 Diluted EPS
$ 1.52 $ 1.51 $ .84 The following number of stock options are not included in dilutive earnings per share since in each case the exercise price is greater than the market price: 0, 0, and 79, in 2003, 2002, and
190, in 2002,2001,and 2000,respectively.36QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)Note
11--Business11—Business SegmentsThe
Company'sCompany’s reportable segments are as follows:(1) Metalworking process
chemicals--productschemicals—products used as lubricants for various heavy industrial and manufacturing applications.(2)
Coatings--temporaryCoatings—temporary and permanent coatings for metal and concrete products and chemical milling maskants.(3) Other chemical
products--primarily chemicals used in the manufacturing of paper in 2000, as well asproducts—other various chemical products.Segment data includes direct segment costs as well as general operating costs, including depreciation, allocated to each segment based on net sales. Inter-segment transactions are immaterial.
43
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
The table below presents information about the reported segments for the years ended December 31:
Metalworking Other Process Chemical Chemicals Coatings Products Total ------------ -------- -------- --------2002 Net sales............... $249,469 $20,554 $4,498 $274,521 Operating income........ 52,446 5,391 1,188 59,025 Depreciation............ 4,800 395 87 5,282 2001 Net sales............... $228,527 $18,464 $4,083 $251,074 Operating income........ 47,580 5,161 1,211 53,952 Depreciation............ 4,580 155 82 4,817 2000 Net sales............... $245,279 $17,560 $4,731 $267,570 Operating income (loss). 55,743 4,216 (580) 59,379 Depreciation............ 5,122 122 125 5,369
Metalworking
Process
ChemicalsCoatings Other
Chemical
ProductsTotal 2003
Net sales
$ 313,299 $ 22,732 $ 4,161 $ 340,192 Operating income
53,939 6,019 724 60,682 Depreciation
5,807 421 77 6,305 2002
Net sales
$ 249,469 $ 20,554 $ 4,498 $ 274,521 Operating income
52,446 5,391 1,188 59,025 Depreciation
4,800 395 87 5,282 2001
Net sales
$ 228,527 $ 18,464 $ 4,083 $ 251,074 Operating income
47,580 5,161 1,211 53,952 Depreciation
4,580 155 82 4,817 Operating income comprises revenue less related costs and expenses. Nonoperating expenses primarily consist of general corporate expenses identified as not being a cost of operation, interest expense, interest income, and license fees from nonconsolidated associates.
A reconciliation of total segment operating income to total consolidated income before taxes for the years ended December 31, 2003, 2002,
2001,and20002001 is as follows:
2002 2001 2000 -------- -------- --------Total operating income for reportable segments $ 59,025 $ 53,952 $ 59,379 Restructuring charges......................... -- (5,854) -- Nonoperating charges.......................... (34,097) (31,844) (32,761) Depreciation and amortization................. (955) (1,563) (1,443) Net gain on exit of businesses................ -- -- 1,473 Environmental charge.......................... -- (500) (1,500) Interest expense.............................. (1,774) (1,880) (2,030) Interest income............................... 984 1,030 934 Other income, net............................. 1,135 1,089 2,434 -------- -------- -------- Consolidated income before taxes.............. $ 24,318 $ 14,430 $ 26,486 ======== ======== ========37
2003 2002 2001 Total operating income for reportable segments
$ 60,682 $ 59,025 $ 53,952 Restructuring charges, net
(57 ) — (5,854 ) Nonoperating charges
(35,178 ) (34,097 ) (31,844 ) Depreciation and amortization
(1,332 ) (955 ) (1,563 ) Environmental charge
— — (500 ) Interest expense
(1,576 ) (1,774 ) (1,880 ) Interest income
815 984 1,030 Other income, net
764 1,135 1,089 Consolidated income before taxes
$ 24,118 $ 24,318 $ 14,430 44
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--STATEMENTS—(Continued)(Dollars(Dollars in thousands except per share amounts)
The following sales and long-lived asset information is by geographic area as of and for the years ended December 31:
2002 2001 2000 -------- -------- --------Net sales United States.... $124,831 $109,969 $117,106 Europe........... 96,920 88,370 92,151 Asia/Pacific..... 28,193 26,994 28,621 South America.... 21,974 25,741 29,692 South Africa..... 2,603 -- -- -------- -------- -------- Consolidated..... $274,521 $251,074 $267,570 ======== ======== ======== 2002 2001 2000 -------- -------- -------- Long-lived assets United States.... $ 57,732 $ 37,558 $ 32,467 Europe........... 29,479 23,340 23,011 Asia/Pacific..... 5,051 5,222 5,420 South America.... 7,300 11,531 14,168 South Africa..... 14 -- -- -------- -------- -------- Consolidated..... $ 99,576 $ 77,651 $ 75,066 ======== ======== ========
2003 2002 2001 Net sales
United States
$ 152,360 $ 124,831 $ 109,969 Europe
120,180 96,920 88,370 Asia/Pacific
33,711 28,193 26,994 South America
28,105 21,974 25,741 South Africa
5,836 2,603 — Consolidated
$ 340,192 $ 274,521 $ 251,074 2003 2002 2001 Long-lived assets
United States
$ 71,358 $ 57,732 $ 37,558 Europe
44,309 29,479 23,340 Asia/Pacific
6,332 5,051 5,222 South America
8,959 7,300 11,531 South Africa
19 14 — Consolidated
$ 130,977 $ 99,576 $ 77,651 Note
12--Business12—Business Acquisitions and DivestituresOn March 1, 2002,In October 2003, the Company acquired
certainthe assets of the steel andliabilities of United Lubricants Corporation ("ULC"), a North American manufacturer and distributor of specialty lubricant products and chemical management services,food-grade lubricants business from the Cincinnati-Vulcan Company forapproximately $14,038. The$8,841 cash. This acquisitionof ULC strategicallyfurther strengthensthe Company'sQuaker’s global leadership supply position to the steel industry. In connection with the acquisition, the Company allocated $2,260 to intangible assets comprising customer lists, product line technology, and non-compete agreements to be amortized over a period of 10 to 20 years. Thefollowing table shows the preliminary allocation of purchase price of assets and liabilitiesCompany also recordedfor the acquisition:
Receivables................................... $ 4,456 Inventories................................... 828 Property, plant, and equipment................ 4,105 Goodwill...................................... 5,487 Intangible assets............................. 2,350 Other assets.................................. 74 ------- 17,300 ------- Accounts payable.............................. 2,148 Accrued expenses and other current liabilities 265 Other current liabilities..................... 849 ------- 3,262 ------- Cash paid..................................... $14,038 =======38QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts) The $5,487$4,606 of goodwill, which was assigned to the Metalworkingprocess chemicals segment, and the entire amount is expected to be deductible for income tax purposes.Process Chemicals segment. The$2,350 of intangible assets comprised $1,400 of the branded customer lists, $700 of formulations, $200 of trademarks and $50 in noncompete agreements. These intangibles are being amortized over a five-year period. The results of operations of ULC are included in the consolidated statement of income beginning March 1, 2002. Proformapro forma results of operations have not been provided because the effectsarewere not material.In July 2003, the Company acquired all the outstanding stock of Eural S.r.l., a privately held company located in Tradate, Italy for $5,951 cash. Eural manufactures a variety of specialty metalworking fluids primarily for the Italian market. In connection with the acquisition, the Company allocated $1,831 to intangible assets comprising customer lists, formulations, trademarks and non-compete agreements to be amortized over a range of three to ten years. The Company also recorded $3,716 of goodwill, which was assigned to the Metalworking Process Chemicals segment. The pro forma results of operations have not been provided because the effects were not material.
In May 2003, the Company acquired a range of cleaners, wet temper fluids and other products from KS Chemie, located in Dusseldorf, Germany for $1,191 cash. This acquisition strategically strengthens the Company’s global leadership position as a process fluids supplier to the steel industry. In connection with the acquisition, the Company allocated $403 of intangible assets comprising product line technology and non-compete agreements to be amortized over a range of five to ten years. The Company also recorded $664 of goodwill, which was assigned to the Metalworking Process Chemicals segment. The pro forma results of operations have not been provided because the effects were not material.
45
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
On April 22, 2002, the Company acquired 100% of the outstanding stock of Epmar Corporation
("Epmar"(“Epmar”), a North American manufacturer of polymeric coatings, sealants, adhesives, and various other compounds forapproximately$7,611 cash and the assumption of $400 of debt. The acquisition of Epmar provides technological capability that is directly related to theCompany'sCompany’s coatings business.The following table showsIn connection with thepreliminary allocation of purchase price of assets and liabilities recorded foracquisition, theacquisition:
Receivables................................... $ 848 Inventories................................... 422 Property, plant, and equipment................ 938 Goodwill...................................... 3,390 Intangible assets............................. 2,920 Other assets.................................. 39 ------ 8,557 ------ Accounts payable.............................. 406 Accrued expenses and other current liabilities 140 Other current liabilities..................... 400 ------ 946 ------ Cash paid..................................... $7,611 ======The $3,390 of goodwill was assignedCompany allocated $2,920 tothe Coatings segment, and the entire amount is expected to be deductible for income tax purposes. The $2,920 ofintangible assetscomprised: $1,600 ofcomprising customer lists to be amortized over 20 years,$720 ofproduct line technology to be amortized over 10 years, and$600 oftrademarks which have indefinite lives and will not be amortized. TheresultsCompany also recorded $3,390 ofoperations of Epmar are included ingoodwill, which was assigned to theconsolidated statement of income beginning April 22, 2002. ProformaCoatings segment. The pro forma results of operations have not been provided because the effectsarewere not material.On March
30, 2001,1, 2002 the Company acquiredfrom its Canadian licensee, H. L. Blachford, Ltd.certain assets and liabilities of United Lubricants Corporation (“ULC”),rightsa North American manufacturer and distributor of specialty lubricant products and chemical management services, for $14,038 cash. The acquisition of ULC strategically strengthens the Company’s global leadership supply position tomarketthe steel industry. In connection with the acquisition the Company allocated $2,350 tosellintangible assets comprising customer lists, formulations, trademarks and non-compete agreements toand service all Canadian integrated steel makers and certain accounts inbe amortized over a five-year period. The Company also recorded $5,487 of goodwill, which was assigned to theCanadian metalworking market.Metalworking Process Chemicals segment. The pro forma results of operations have not been provided because the effects were not material.The following table shows the allocation of purchase price
totaling approximately $1,450, together with a five-year earn-out provisionoffive percent on net sales to certain accounts purchased, resulted in intangibleassetsof $1,364. 39QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts) On May 31, 2000, the Company completed the sale of its U.S. pulpandpaper businessliabilities recorded for$5,200. The Company recorded a pre-tax gain on the sale of $2,370. On June 25, 1998, the Company completed formation of a majority-owned joint venture in Brazil and small businesses in Italy and Venezuela for approximately $9,350, of which goodwill comprised $5,500. The agreement provided for an earn-out provision if certain performance targets were met. Those targets were met and $3,500 was paid in 2000, resulting in additional goodwill.these acquisitions:
December 31, 2003 2002 Receivables
$ 4,114 $ 5,304 Inventories
1,130 1,250 Other current assets
194 — Property, plant, and equipment
3,078 5,043 Goodwill
8,986 8,877 Intangible assets
4,494 5,270 Other assets
— 113 21,996 25,857 Current portion of long-term debt
143 — Accounts payable
3,084 2,554 Accrued expenses and other current liabilities
1,034 405 Other non-current liabilities
1,752 1,249 6,013 4,208 Cash paid
$ 15,983 $ 21,649 Note
13--Goodwill13—Goodwill and Other Intangible AssetsIn June 2001, the FASB issued SFAS No. 142,
"Goodwill“Goodwill and Other Intangible Assets."” SFAS No. 142 established new guidelines for accounting for goodwill and other intangible assets. Upon adoption, goodwill is no longer amortized, but instead assessed for impairment at least on an annual basis. Accordingly, on January 1, 2002, the Company ceased amortizing its goodwill. The Company completed the impairment assessment of its46
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
goodwill and did not incur an impairment charge related to the adoption of SFAS No. 142. Further, the Company completed its annual impairment assessment as of the end of the third quarter
2002of 2003 and no impairment charge was warranted.The following is a reconciliation of previously reported financial information to
proformapro-forma amounts exclusive of goodwill amortization for the twelve months ended December 31:
2001 2000 ------ -------Net income............................... $7,665 $17,163 Goodwill amortization expense, net of tax 693 696 ------ ------- Pro-forma net income..................... $8,358 17,859 ====== ======= Earnings per share: Basic................................. $ .85 $ 1.94 Diluted............................... .84 1.93 Goodwill Amortization Expense, net of tax Basic................................. $ .08 $ .08 Diluted............................... .08 .08 Pro-forma earnings per share Basic................................. $ .93 $ 2.02 Diluted............................... .92 2.01
2001 Net income
$ 7,665 Goodwill amortization expense, net of tax
693 Pro-forma net income
$ 8,358 Earnings per share:
Basic
$ .85 Diluted
.84 Goodwill Amortization Expense, net of tax
Basic
$ .08 Diluted
.08 Pro-forma earnings per share
Basic
$ .93 Diluted
.92 The changes in carrying amount of goodwill for the twelve months ended December 31,
20022003 are as follows:
Metalworking process chemicals Coatings Total ----------------- -------- -------Balance as of January 1, 2002... $11,081 $3,879 $14,960 Goodwill additions.............. 5,661 3,390 9,051 Currency translation adjustments (2,084) -- (2,084) ------- ------ ------- Balance as of December 31, 2002. $14,658 $7,269 $21,927 ======= ====== =======The goodwill additions in 2002 are preliminary and they are subject to post-closing adjustments. 40QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)
Metalworking
process chemicals
Coatings Total Balance as of December 31, 2001
$ 11,081 $ 3,879 $ 14,960 Goodwill additions
5,661 3,390 9,051 Currency translation adjustments
(2,084 ) — (2,084 ) Balance as of December 31, 2002
$ 14,658 $ 7,269 $ 21,927 Goodwill additions
9,135 — 9,135 Currency translation adjustments
2,239 — 2,239 Balance as of December 31, 2003
$ 26,032 $ 7,269 $ 33,301 Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of December 31,
2002,are as follows:
Gross carrying Accumulated Amount Amortization -------------- ------------Amortized intangible assets Customer lists and rights to sell.. $3,850 $ 393 Trademarks and patents............. 2,300 1,533 Formulations and product technology 1,420 165 Other.............................. 1,494 1,121 ------ ------ Total.............................. $9,064 $3,212 ====== ======
Gross carrying
Amount
Accumulated
Amortization
2003 2002 2003 2002 Amortized intangible assets
Customer lists and rights to sell
$ 6,181 $ 3,850 $ 865 $ 393 Trademarks and patents
1,786 1,700 1,584 1,533 Formulations and product technology
3,276 1,420 435 165 Other
1,959 1,494 1,302 1,121 Total
$ 13,202 $ 8,464 $ 4,186 $ 3,212 47
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
The Company recorded $960 and $805 of amortization expense in 2003 and 2002, respectively. Estimated annual aggregate amortization expense for the subsequent five years is as follows:
For the year ended December 31, 2003 $842 For the year ended December 31, 2004 $692 For the year ended December 31, 2005 $684 For the year ended December 31, 2006 $684 For the year ended December 31, 2007 $277
For the year ended December 31, 2004
$ 1,160 For the year ended December 31, 2005
$ 1,128 For the year ended December 31, 2006
$ 1,124 For the year ended December 31, 2007
$ 711 For the year ended December 31, 2008
$ 622 The Company has one indefinite-lived intangible asset of $600 for trademarks recorded in connection with the Company’s 2002 acquisition of Epmar.
Note
14--Commitments14—Commitments and ContingenciesThe Company is involved in environmental clean-up activities and litigation in connection with an existing plant location and former waste disposal
sites. Thesites operated by unaffiliated third parties. In April of 1992, the Company identified certain soil and groundwater contamination at AC Products, Inc.("ACP"(“ACP”), a wholly owned subsidiary.InVoluntarily in coordination with the Santa Ana California Regional Water Quality Board, ACP is remediating the contamination.During the second quarter of 2000, it was discovered during an internal environmental audit that ACP had failed to properly report its air emissions. In response, an internal investigation of all environmental, health, and safety matters at ACP was conducted. ACP has voluntarily disclosed these matters to regulators and has taken steps to correct all environmental, health, and safety issues discovered. In connection with these activities the Company recorded pre-tax charges totaling $500 and $1,500 in 2001 and 2000, respectively.The Company believes that the remaining potential-known liabilities associated with these mattersrangesrange from approximately$1,200$900 to$1,900,$1,500, for which the Company has sufficient reserves. Notwithstanding the foregoing, the Company cannot be certain that liabilities in the form of remediation expensesfines, penalties,and damages will not be incurred in excess of the amount reserved.Additionally, although there can be no assurance regarding the outcome of other environmental matters, the Company believes that it has made adequate accruals for costs associated with other environmental problems of which it is aware. Approximately
$199$188 and$260$199 was accrued at December 31,20022003 and December 31,2001,2002, respectively, to provide for such anticipated future environmental assessments and remediation costs.An inactive subsidiary of the Company that was acquired in 1978 sold certain products containing asbestos, primarily on an installed basis, and is among the defendants in numerous lawsuits alleging injury due to exposure to asbestos. The subsidiary discontinued operations in 1991 and has no remaining assets other than its existing insurance policies. To date, the overwhelming majority of these claims have been disposed of without payment and there have been no adverse judgements against the subsidiary. Based on
an initiala continued analysis of the existing and anticipated future claims against this subsidiary, it is currently projected that thesubsidiary'ssubsidiary’s total liability over the next 50 years for these claims is approximately$15 million$10,000 (excluding costs of defense). Although the Company has also been named as a defendant in certain of these cases, no claims have been actively pursued41QUAKER CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Dollars in thousands except per share amounts)against the Company and the Company has not contributed to the defense or settlement of any of these cases pursued against the subsidiary. These cases have been handled to date by thesubsidiary'ssubsidiary’s primary and excess insurers who agreed to pay all defense costs and be responsible for all damages assessed against the subsidiary arising out of existing and future asbestos claims up to the aggregate limits of the policies. A significant portion of this primary insurance coverage was provided by an insurer that is now insolvent, and the other primary insurers haverecentlyasserted that the aggregate limits of their policies have been exhausted. The subsidiary is challenging the applicability of these limits to the claims being brought against the subsidiary. The subsidiary has additional coverage under its excess policies. The Company believes, however, that if the coverage issues under the primary policies are resolved adversely to the subsidiary, thesubsidiary'ssubsidiary’s insurance coverage will likely be exhausted within the next three tofivefour years. As a result, liabilities in respect of claims not yet asserted may exceed coverage available to the subsidiary.48
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
If the
subsidiary'ssubsidiary’s insurance coverage were to be exhausted, claimants of the subsidiary may actively pursue claims against the Company because of theparent-subsidiaryparent subsidiary relationship. Although asbestos litigation is particularly difficult to predict, especially with respect to claims that are currently not being actively pursued against the Company, the Company does not believe that such claims would have merit or that the Company would be held to have liability for any unsatisfied obligations of the subsidiary as a result of such claims. After evaluating the nature of the claims filed against the subsidiary and the small number of such claims that have resulted in any payment, the potential availability of additional insurance coverage at the subsidiary level, the additional availability of theCompany'sCompany’s own insurance and theCompany'sCompany’s strong defenses to claims that it should be held responsible for thesubsidiary'ssubsidiary’s obligations because of theparent-subsidiaryparent subsidiary relationship, the Company believes that the inactivesubsidiary'ssubsidiary’s liabilities will not have a material impact on theCompany'sCompany’s financial condition, cash flows or results of operations.The Company is party to other litigation which management currently believes will not have a material adverse effect on the
Company'sCompany’s results of operations, cash flows or financial condition.The Company leases certain manufacturing and office facilities and equipment under non-cancelable operating leases with various terms from one to 25 years expiring in 2020. Rent expense for 2003, 2002, and 2001 was $4,771, $4,415, and
2000 was $4,415,$3,359,and $2,299,respectively. TheCompany'sCompany’s minimum rental commitments under non-cancelable operating leases at December 31,2002,2003, were approximately$4,327 in 2003, $3,657$4,560 in 2004,$2,802$3,798 in 2005,$2,450$2,894 in 2006,$2,350$2,640 in 2007, $2,417 in 2008, and$12,053$9,871 thereafter.Note
15--Quarterly15—Quarterly Results (unaudited)
First Second Third Fourth ------- ------- ------- -------2002 Net sales...................................... $59,927 $69,457 $73,268 $71,869 Gross profit................................... 24,357 28,962 29,399 28,859 Operating income............................... 4,333 5,683 6,702 7,255 Net income..................................... 2,358 3,236 4,289 4,414 Net income per share--basic.................... $ .26 $ .35 $ .47 $ .48 Net income per share--diluted.................. $ .26 $ .35 $ .45 $ .46 2001 Net sales...................................... $64,215 $65,073 $63,514 $58,272 Gross profit................................... 25,822 27,085 25,143 22,979 Operating income (loss)........................ 6,099 6,959 2,853 (1,720) Net income (loss).............................. 4,013 4,114 1,116 (1,578) Net income (loss) per share--basic and diluted. $ .45 $ .45 $ .12 $ (.17)42
First Second Third Fourth 2003
Net sales
$ 73,337 $ 83,453 $ 89,713 $ 93,689 Gross profit
28,366 28,947 30,785 33,276 Operating income
5,681 5,724 6,326 6,384 Net income
3,107 3,475 4,136 4,115 Net income per share—basic
$ .34 $ .37 $ .44 $ .43 Net income per share—diluted
$ .33 $ .36 $ .42 $ .41 2002
Net sales
$ 59,927 $ 69,457 $ 73,268 $ 71,869 Gross profit
24,357 28,962 29,399 28,859 Operating income
4,333 5,683 6,702 7,255 Net income
2,358 3,236 4,289 4,414 Net income per share—basic
$ .26 $ .35 $ .47 $ .48 Net income per share—diluted
$ .26 $ .35 $ .45 $ .46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART IIIItem
10. Directors and Executive Officers of the Registrant. Incorporated by reference is the information beginning immediately following the caption "Item 1--Election of Directors and Nominee Biographies" in the Registrant's definitive Proxy Statement to be filed with the SEC no later than 120 days after the close of its fiscal year ended December 31, 2002 (the "2003 Proxy Statement") to, but not including, the caption "Compensation of Directors," the information in the 2003 Proxy Statement beginning immediately following the caption "Board Committees and Meeting Attendance" to, but not including, the caption "Item 2--Approval of 2003 Director Stock Ownership Plan" and the information appearing in Item 4(a). Section 16(a) Beneficial Ownership Reporting Compliance. Based solely on the Company's review of certain reports filed with the SEC pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act"), as amended, and written representations of the Company's officers and directors, the Company believes that, with the exception of one late filing on Form 4 by Mr. Ian F. Clark and one late filing on Form 5 by Mr. James A. Geier each involving the late reporting of one transaction, all reports required to be filed pursuant to Section 16(a) of the 1934 Act with respect to transactions in the Company's Common Stock through December 31, 2002 were filed on a timely basis. Item 11. Executive Compensation. Incorporated by reference is the information beginning immediately following the caption "Compensation of Directors" to, but not including, the caption "Board Committees and Meeting Attendance" in the 2003 Proxy Statement, the information beginning immediately following the caption "Executive Compensation" to, but not including, the caption "Report of the Compensation/Management Development Committee on Executive Compensation" and the information immediately following the caption "Compensation Committee Interlocks and Insider Participation" to, but not including, the caption "Report to the Audit Committee" contained in the 2003 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference is the information beginning immediately following the caption "Stock Ownership of Certain Beneficial Owners and Management" to, but not including, the subcaption "Section 16(a) Beneficial Ownership Reporting Compliance" and the information under the caption "Item 2--Approval of 2003 Director Stock Ownership Plan" beginning immediately following the subcaption "Equity Compensation Plan Information" to, but not including the subcaption "Vote Required for Approval of the Plan" contained in the 2003 Proxy Statement. 43Controls and Procedures. Item 13. Certain Relationships and Related Transactions. No information is required to be provided in response to this Item 13. Item 14.9A.Evaluation of disclosure controls and procedures. The
Company'sCompany’s principal executive officer and principal financial officer have concluded that theCompany'sCompany’s disclosure controls and procedures (as defined in Exchange Act Rule13a-14(c)13a-15(e)), based on their evaluation of such controls and proceduresconducted within 90 days prior toas of thedate hereof,end of the49
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in thousands except per share amounts)
period covered by this Annual Report on Form 10-K, are effective to
ensurereasonably assure that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission.SEC.Changes in internal controls.
There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies or material weaknesses, subsequent to the date of our most recent evaluation.As previously disclosed, the Company is in the process of implementing a globaltransactionERP system. The Company completed its initial implementation of this system in the Netherlands during the fourth quarter of 2002. In the second quarter of 2003, the Company implemented the ERP system at its Spanish subsidiary. During the fourth quarter of 2003, the Company implemented the system at its primary U.S. Operations. At the end of 2003, subsidiaries representing more than 50% of consolidated revenue are operational on the global ERP system. Additional subsidiaries are planned to be implemented during 2004 and 2005. The Company is taking the necessary steps to monitor and maintain the appropriate internal controls during this period of change.50
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference is the information beginning immediately following the caption “Item 1—Election of Directors and Nominee Biographies” in the Registrant’s definitive Proxy Statement to be filed with the SEC no later than 120 days after the close of its fiscal year ended December 31, 2003 (the “2004 Proxy Statement”) to, but not including, the caption “Compensation of Directors,” the information in the 2004 Proxy Statement beginning immediately following the caption “Board Committees and Meeting Attendance” to, but not including, the caption “Item 2—Ratification of Selection of Independent Auditors” and the information appearing in Item 4(a) of this Report.
Section 16(a) Beneficial Ownership Reporting Compliance.
Based solely on the Company’s review of certain reports filed with the SEC pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the “1934 Act”), as amended, and written representations of the Company’s officers and directors, the Company believes that, with the exception of one late filing on Form 4 by Mr. Ian F. Clark involving one transaction and one late filing on Form 4 by Mr. Robert P. Hauptfuhrer involving two transactions, all reports required to be filed pursuant to Section 16(a) of the 1934 Act with respect to transactions in the Company’s Common Stock through December 31, 2003 were filed on a timely basis.
The Company has a compliance program, the governing documents of which include a Code of Conduct (which is applicable to all of the company directors, executive officers and employees) and a Financial Code of Ethics for Senior Financial Officers (which is applicable to the Chief Executive Officer, Chief Financial Officer, Global Controller, Controllers of each of the company’s majority owned affiliates, Manager of Financial Reporting, and other individuals performing similar functions designated by the company’s Board of Directors). The Audit Committee oversees the administration of the program and is directly responsible for the disposition of all reported violations of the Financial Code of Ethics and complaints received regarding accounting, internal accounting controls, or audit matters. In addition, the Audit Committee approves any waivers to the Code of Conduct for directors and executive officers. The Code of Conduct, Financial Code of Ethics, Corporate Governance Guidelines and Audit, Compensation/Management Development and Governance Committee Charters have been posted on and are available free of charge from the Investors—Corporate Governance section of our website athttp://www.quakerchem.com or by written request addressed to Quaker Chemical Corporation, One Quaker Park, 901 Hector Street, Conshohocken, PA 19428 to the attention of Irene Kisleiko, Assistant Secretary.
The Board has affirmatively determined that three members of the Audit Committee, including its current Chairman, Robert P. Hauptfuhrer meet the criteria for a “financial expert” as defined by the SEC.
Item 11. Executive Compensation.
Incorporated by reference is the information beginning immediately following the caption “Compensation of Directors” to, but not including, the caption “Board Committees and Meeting Attendance” in the 2004 Proxy Statement, the information beginning immediately following the caption “Executive Compensation” to, but not including, the caption “Report of the Compensation/Management Development Committee on Executive Compensation” and the information immediately following the caption “Compensation Committee Interlocks and Insider Participation” to, but not including, the caption “Report of the Audit Committee” contained in the 2004 Proxy Statement.
51
Item 12. Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters.
Incorporated by reference is the information beginning immediately following the caption “Stock Ownership of Certain Beneficial Owners and Management” to, but not including, the subcaption “Section 16(a) Beneficial Ownership Reporting Compliance.”
The following table sets forth certain information relating to the Company’s equity compensation plans as of December 31, 2003. Each number of securities reflected in the table is a reference to shares of Quaker common stock.
Equity Compensation Plans
Equity Compensation Plan Information
Plan Category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rightsWeighted-average exercise
price of outstanding
options, warrants and
rightsNumber of securities remaining
available for future issuance
under equity
compensation plans(excluding securities reflected
in column (a))(a) (b) (c) Equity compensation plans approved by Security holders
1,128,800 $ 18.42 949,342 (1) Equity compensation plans not approved by security holders
— — — Total
1,128,800 $ 18.42 949,342
(1) As of December 31, 2003, 400,000 of these shares were available for issuance as restricted stock awards under the Company’s 2001 Global Annual Incentive Plan, 478,700 shares were available for issuance upon the exercise of stock options and/or as restricted stock awards under the Company’s 2001 Long-term Performance Incentive Plan, and the other 70,642 shares were available for issuance under the 2003 Director Stock Ownership Plan. Item 13. Certain Relationships and Related Transactions.
No information is required to be provided in response to this Item 13.
Item 14. PrincipalAccountant Fees and Services.
Incorporated by reference is the information beginning with the subcaption “Audit Fees” to, but not including the statement recommending a vote for ratification of the Company’s independent auditors contained in the 2004 Proxy Statement.
52
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)Exhibits and Financial Statement Schedules
1. Financial Statements and Supplementary Data.
Page ----Financial Statements:
Report of Independent
Accountants............. 18Auditors22 Consolidated Statement of
Income.............. 19Income23 Consolidated Balance
Sheet.................... 20Sheet24 Consolidated Statement of Cash
Flows.......... 21Flows25 Consolidated Statement of
Shareholders'Shareholders’ Equity2226 Notes to Consolidated Financial
Statements.... 232. Financial Statement Schedules
Statements 27 2. Financial Statement Schedules Schedule
II--ValuationII—Valuation and Qualifying Accounts for the years 2003, 2002,2001,and2000 51200159 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Financial statements of 50% or less owned companies have been omitted because none of the companies meets the criteria requiring inclusion of such statements.
443. Exhibits (numbered in accordance with Item 601 of Regulation S-K)
3(a) --—Amended and Restated Articles of Incorporation dated July 16, 1990. Incorporated by reference to Exhibit 3(a) as filed by Registrant with Form 10-K for the year 1996. 3(b) --—By-laws as amended through May 6, 1998. Incorporated by reference to Exhibit 3(b) as filed by Registrant with Form 10-K for the year 1998. 4 --—Shareholder Rights Plan dated March 6, 2000. Incorporated by reference to Form 8-K as filed by the Registrant on March 7, 2000. 10(a) --—Long-Term Performance Incentive Plan as approved May 5, 1993. Incorporated by reference to Exhibit 10(a) as filed by the Registrant with Form 10-K for the year 1993.* 10(i) --—Employment Agreement by and between the Registrant and Ronald J. Naples dated August 14, 1995. Incorporated by reference to Exhibit 10(i) as filed by Registrant with Form 10-Q for the quarter ended September 30, 1995.* 10(j) --—Amendment to the Stock Option Agreement dated October 2, 1995 by and between the Registrant and Ronald J. Naples. Incorporated by reference to Exhibit 10(j) as filed by Registrant with Form 10-Q for the quarter ended September 30, 1995.* 10(k) --—Employment Agreement by and between Registrant and JoseJosé Luiz Bregolato dated June 14, 1993. Incorporated by reference to Exhibit 10(k) as filed by Registrant with Form 10-K for the year 1995.*10(l) --—Employment Agreement by and between Registrant and Daniel S. Ma dated May 18, 1993. Incorporated by reference to Exhibit 10(l) as filed by Registrant with Form 10-K for the year 1995.* 53
10(o) --—Amendment No. 1 to Employment Agreement dated January 1, 1997 by and between Registrant and Ronald J. Naples. Incorporated by reference to Exhibit 10(o) as filed by Registrant with Form 10-K for the year 1997.* 10(p) --—Amendment No. 1 to 1995 Naples Restricted Stock Plan and Agreement dated January 21, 1998 by and between Registrant and Ronald J. Naples. Incorporated by reference to Exhibit 10(p) as filed by Registrant with Form 10-K for the year 1997.* 10(r) -- Employment Agreement by and between Registrant and James A. Geier dated November 5, 1997. Incorporated by reference to Exhibit 10(r) as filed by Registrant with Form 10-K for the year 1997.*10(s) --—Employment Agreement by and between Registrant and Joseph W. Bauer dated March 9, 1998. Incorporated by reference to Exhibit 10(s) as filed by Registrant with Form 10-K for the year 1997.* 10(t) --—Employment Agreement by and between Registrant and Ronald J. Naples dated March 11, 1999. Incorporated by reference to Exhibit 10(t) as filed by Registrant with Form 10-K for the year 1998.* 10(u) --—Employment Agreement by and between Registrant and Michael F. Barry dated November 30, 1998. Incorporated by reference to Exhibit 10(u) as filed by Registrant with Form 10-K for the year 1998.* 10(v) --—Employment Agreement by and between Registrant and Ian F. Clark dated March 15, 1999. Incorporated by reference to Exhibit 10(v) as filed by Registrant with Form 10-K for the year 1998.* 10(w) --—Change in Control Agreement by and between Registrant and Joseph W. Bauer dated February 1, 1999. Incorporated by reference to Exhibit 10(w) as filed by Registrant with Form 10-K for the year 1998.* 45
10(x) --—Change in Control Agreement by and between Registrant and Michael F. Barry dated November 30, 1998. Incorporated by reference to Exhibit 10(x) as filed by Registrant with Form 10-K for the year 1998.* 10(y) --—Change in Control Agreement by and between Registrant and JoseJosé Luiz Bregolato dated January 6, 1999. Incorporated by reference to Exhibit 10(y) as filed by Registrant with Form 10-K for the year 1998.*10(z) -- Change in Control Agreement by and between Registrant and James A. Geier dated January 15, 1999. Incorporated by reference to Exhibit 10(z) as filed by Registrant with Form 10-K for the year 1998.*10(aa) --—Change in Control Agreement by and between Registrant and Daniel S. Ma dated January 15, 1999. Incorporated by reference to Exhibit 10(aa) as filed by Registrant with Form 10-K for the year 1998.* 10(dd) --—1999 Long-Term Performance Incentive Plan as approved May 12, 1999, effective January 1, 1999. Incorporated by reference to Exhibit 10(dd) as filed by Registrant with Form 10-K for the year 1999.* 10(ff) --—Deferred Compensation Plan as adopted by the Registrant dated December 17, 1999, effective July 1, 1997. Incorporated by reference to Exhibit 10(ff) as filed by Registrant with Form 10-K for the year 1999.* 10(gg) --—Supplemental Retirement Income Program adopted by the Registrant on November 6, 1984, as amended November 8, 1989. Incorporated by reference to Exhibit 10(gg) as filed by Registrant with Form 10-K for the year 1999.* 10(hh) --—2001 Global Annual Incentive Plan as approved May 9, 2001, effective January 1, 2001. Incorporated by reference to Exhibit 10(hh) as filed by Registrant with Form 10-K for the year 2001.* 10(ii) --—2001 Long-Term Performance Incentive Plan as approved May 9, 2001, effective January 1, 2001. Incorporated by reference to Exhibit 10(ii) as filed by Registrant with Form 10-K for the year 2001.* 54
10(jj) --—Agreement of Lease between Quaker Park Associates, L.P. and Quaker Chemical Corporation dated December 19, 2000. Incorporated by reference to Exhibit 10(jj) as filed by Registrant with Form 10-K for the year 2001.* 10(kk) --—Asset Purchase Agreement between United Lubricants Corporation and ULC Acquisition Corp. dated January 23, 2002, as amended by Amendment to Purchase Asset Agreement dated February 28, 2002. Incorporated by reference to Exhibit 10(kk) as filed by Registrant with Form 10-K for the year 2001.* 10(mm) --—Credit Agreement between Registrant and ABN AMRO Bank N.V. in the amount of $20,000,000, dated April 12, 2002. Incorporated by reference to Exhibit 10(mm) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2002. 10(nn) --—Promissory Note in the amount of $10,000,000 in favor of ABN AMRO Bank N.V., dated April 15, 2002. Incorporated by reference to Exhibit 10(nn) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2002. 10(oo)
--—Stock Purchase Agreement between Epmar Corporation and Quaker Chemical Corporation dated April 22, 2002. Incorporated by reference to Exhibit 10(oo) as filed by the Registrant with Form 10-K for the year 2002. 10(pp) — First Amendment between Quaker Chemical Corporation and ABN Amro Bank N.V. dated March 25, 2003. Incorporated by reference to Exhibit 10(pp) as filed by the Registrant with Form 10-Q for the quarter ended March 31, 2003. 10(qq) — Credit Agreement between Registrant and PNC Bank, National Association in the amount of $10,000,000, dated June 19, 2003. Incorporated by reference to Exhibit 10(qq) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2003. 10(rr) — Commercial Note between Registrant and National City Bank, National Association in the amount of $10,000,000, dated June 19, 2003. Incorporated by reference to Exhibit 10(rr) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2003. 10(ss) — Employment Agreement by and between Registrant and Mark A. Harris, effective January 1, 2001. 10(tt) — Change in Control Agreement by and between Registrant and Mark A. Harris, effective January 1, 2001. 10(uu) — Employment Agreement by and between Registrant and L. Wilbert Platzer, effective January 1, 2001. 10(vv) — Change in Control Agreement by and between Registrant and L. Wilbert Platzer, effective January 1, 2001. 10(ww) — 2003 Director Stock Ownership Plan as approved May 14, 2003. 10(xx) — Employment Agreement by and between Registrant and Stephen D. Holland, effective May 18, 2003. 21 --—Subsidiaries and Affiliates of the Registrant 23 --—Consent of Independent Auditors 99.1 --Accountants31.1 — Certification of CEOChief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.31.2 — Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 32.1 — Certification of Ronald J. Naples pursuant to 18 U.S.C.U.S. C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.46
99.2 --1350.32.2 — Certification of CFOMichael F. Barry pursuant to 18U.S.C.U.S. C. Section1350,1350.
* This exhibit is a management contract or compensation plan or arrangement required to be filed as adopted pursuantan exhibit toSection 906 of the Sarbanes-Oxley Act of 2002.this Report.- -------- * This exhibit is a management contract or compensation plan or arrangement required to be filed as an exhibit to this Report.55
(b)Reports on Form
8-K. No reports8-K.1. On October 31, 2003 the Company furnished on Form 8-K
were filed by the Registrant during the last quarter of the period covered by this Report.its Third Quarter 2003 Press Release.(c)The exhibits required by Item 601 of Regulation S-K filed as part of this Report or incorporated herein by reference are listed in subparagraph (a)(3) of this Item
14. 4715. 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
QUAKER CHEMICAL CORPORATION Registrant By: /s/ RONALD J. NAPLES ----------------------------- Ronald J. Naples Chairman of the Board and Chief Executive Officer
QUAKER CHEMICAL CORPORATION
Registrant
By:
/S/ RONALD J. NAPLES
Ronald J. Naples
Chairman of the Board and Chief Executive Officer
Date: March
28, 200312, 2004Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Capacity Date ---------- -------- ---- /s/ RONALD J. NAPLES Principal Executive Officer March 28, 2003 - ----------------------------- and Director Ronald J. Naples
Signatures
Capacity
Date
/s/ RONALD J. NAPLES
Ronald J. Naples
Chairman of the Board and Chief Executive Officer
Principal Executive Officer and Director
March 10, 2004 /s/ MICHAEL F. BARRY
Michael F. Barry
Vice President, Chief Financial Officer and Treasurer
Principal Financial Officer
March 10, 2004 /s/ MARK A. FEATHERSTONE
Mark A. Featherstone
Global Controller
Principal Accounting Officer
March 10, 2004 Joseph B. Anderson, Jr.
Director
March , 2004 /s/ PATRICIA C. BARRON
Patricia C. Barron
Director
March 10, 2004 /s/ PETER A. BENOLIEL
Peter A. Benoliel
Director
March 10, 2004 Donald R. Caldwell
Director
March , 2004 /s/ ROBERT E. CHAPPELL
Robert E. Chappell
Director
March 10, 2004 /s/ WILLIAM R. COOK
William R. Cook
Director
March 10, 2004 /s/ EDWIN J. DELATTRE
Edwin J. Delattre
Director
March 10, 2004 57
Signatures
Capacity
Date
/s/ ROBERT P. HAUPTFUHRER
Robert P. Hauptfuhrer
Director
March 10, 2004 /s/ ROBERT H. ROCK
Robert H. Rock
Director
March 10, 2004 58
QUAKER CHEMICAL CORPORATION
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Balance at
Beginning
of PeriodCharged
to Costs
and
ExpensesWrite-Offs
Charged to
AllowanceEffect of
Exchange
Rate
ChangesBalance
at End
of Period(Dollars in thousands) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 2003
$ 6,118 $ 991 $ (435 ) $ 89 $ 6,763 Year ended December 31, 2002
$ 5,155 $ 1,365 $ (493 ) $ 91 $ 6,118 Year ended December 31, 2001
$ 2,960 $ 2,472 $ (218 ) $ (59 ) $ 5,155 59
EXHIBIT INDEX
Exhibit No. Description
10(ss) Employment Agreement by and between Registrant and Mark A. Harris, effective January 1, 2001. 10(tt) Change in Control Agreement by and between Registrant and Mark A. Harris, effective January 1, 2001. 10(uu) Employment Agreement by and between Registrant and L. Wilbert Platzer, effective January 1, 2001. 10(vv) Change in Control Agreement by and between Registrant and L. Wilbert Platzer, effective January 1, 2001. 10(ww) 2003 Director Stock Ownership Plan as approved by shareholders on May 14, 2003. 10(xx) Employment Agreement by and between Registrant and Stephen D. Holland, effective May 18, 2003. 21 Subsidiaries and Affiliates of the Registrant
23 Consent of Independent Accountants 31.1 Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 31.2 Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 32.1 Certification of
the Board and Chief Executive Officer /s/ MICHAEL F. BARRY Principal Financial Officer March 28, 2003 - ----------------------------- Michael F. Barry Vice President, Chief Financial Officer and Treasurer /s/ MARK A. FEATHERSTONE Principal Accounting Officer March 28, 2003 - ----------------------------- Mark A. Featherstone Global Controller /s/ JOSEPH B. ANDERSON, JR. Director March 28, 2003 - ----------------------------- Joseph B. Anderson, Jr. /s/ Director March , 2003 - ----------------------------- Patricia C. Barron /s/ PETER A. BENOLIEL Director March 28, 2003 - ----------------------------- Peter A. Benoliel /s/ DONALD R. CALDWELL Director March 28, 2003 - ----------------------------- Donald R. Caldwell /s/ ROBERT E. CHAPPELL Director March 28, 2003 - ----------------------------- Robert E. Chappell /s/ WILLIAM R. COOK Director March 28, 2003 - ----------------------------- William R. Cook /s/ EDWIN J. DELATTRE Director March 28, 2003 - ----------------------------- Edwin J. Delattre /s/ ROBERT P. HAUPTFUHRER Director March 28, 2003 - ----------------------------- Robert P. Hauptfuhrer /s/ ROBERT H. ROCK Director March 28, 2003 - ----------------------------- Robert H. Rock 48CERTIFICATION I, Ronald J. Naples, the Chief Executive Officer of Quaker Chemical Corporation, certify that: 1. I have reviewed this Annual Report on Form 10-K of Quaker Chemical Corporation; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-14 and 15(d)-14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 Signed: /s/ RONALD J. NAPLES ---------------------------------- Name:Ronald J. NaplesTitle: Chief Executive Officer Quaker Chemical Corporation49CERTIFICATION I, Michael F. Barry, the Chief Financial Officerpursuant to U.S.C. Section 135032.2 Certification of Quaker Chemical Corporation, certify that: 1. I have reviewed this Annual Report on Form 10-K of Quaker Chemical Corporation; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-14 and 15(d)-14) for the Registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 Signed: /s/ MICHAEL F. BARRY ---------------------------------- Name:Michael F. BarryTitle: Chief Financial Officer Quaker Chemical Corporation50QUAKER CHEMICAL CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Charged Effect of Balance atpursuant toCosts Write-Offs Exchange Balance Beginning and Charged to Rate at End of Period Expenses Allowance Changes of Period ---------- -------- ---------- --------- --------- (Dollars in thousands)ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended December 31, 2002... $5,155 $1,365 $(493) $ 91 $6,118 Year ended December 31, 2001... $2,960 $2,472 $(218) $(59) $5,155 Year ended December 31, 2000... $1,133 $1,971 $(106) $(38) $2,960U.S.C. Section 135051