Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 1 Out of Period Adjustments
During the third quarter of 2007, the Company identified errors of a cumulative $993 overstatement of its consolidated income tax expense for the years 2004, 2005 and 2006. These errors were related to the deferred
tax accounting for the Companys foreign pension plans and intangible assets regarding one of the Companys 2002 acquisitions. The Company corrected these errors during the third quarter 2007, which had the effect of reducing tax expense
by $993, and increasing net income by $993 for the three and nine months ended September 30, 2007. The Company does not believe this adjustment is material to the consolidated financial statements for the years ended December 31, 2004,
2005 or 2006, or to our projected results for the current year, and as a result, has not restated any prior period amounts. As the Companys assessment was based on projected full year 2007 results, the Company will update its assessment at
year-end based upon actual 2007 results.
Note 2 Condensed Financial Information
The condensed consolidated financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles in the
United States for interim financial reporting and the United States Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments, except
as described in note 1 above) which are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods. The results for the three and nine months ended September 30, 2007 are not
necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Companys Annual Report filed on Form 10-K for the year ended December 31, 2006.
As part of the Companys chemical management services, certain third-party product sales to customers are managed by the Company. Where the Company acts as a
principal, revenues are recognized on a gross reporting basis at the selling price negotiated with 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 under arrangements resulting in net reporting totaled $40,233 and $44,408 for the nine months ended September 30, 2007 and 2006, respectively.
Note 3 Recently Issued Accounting Standards
In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 157
on its consolidated financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of
assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159 on its consolidated financial position and results of operations.
Note 4 Uncertain Income Tax Positions
The
Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007. As a result of the implementation, the Company recognized a $5,503 increase to reserves for uncertain tax positions.
This increase was accounted for as an adjustment to the beginning balance of retained earnings on the Balance Sheet. Including the cumulative effect increase, at the beginning of 2007, the Company had approximately $8,902 of total gross unrecognized
tax benefits. Of this amount, $5,479 (net of the Federal benefit of state taxes and other offsetting taxes) represents the amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in any future periods. At
September 30, 2007, the Company had $10,159 of total gross unrecognized tax benefits.
The Company and its subsidiaries are subject to U.S. Federal
income tax, as well as income tax of multiple state and foreign jurisdictions. The Company has concluded all U.S. Federal income tax matters for years through 2002. Substantially, all material state and local tax matters have been concluded for
years through 1992. With few exceptions, the Company is no longer subject to non-U.S. income tax examinations by foreign taxing authorities for years before 2000.
6
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
The Company is currently under audit by French taxing authorities for 2000 through 2004 tax years. As of
December 31, 2006, the French taxing authorities have proposed certain significant adjustments to the Companys transfer pricing and intercompany charges. Management is currently evaluating those proposed adjustments to determine if it
agrees, but the Company does not anticipate the adjustments would result in a material change to its financial position.
In addition, the Company is
currently under a routine Federal audit in the U.S. for the year 2005.
The Companys continuing practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. The Company had $728 accrued for interest and $592 accrued for penalties at January 1, 2007. As of September 30, 2007, the Company had $1,077 accrued for interest and $768 accrued for
penalties.
Note 5 Stock-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment,
(SFAS 123R). SFAS 123R requires the recognition of the
fair value of stock compensation in net income. The Company elected the modified prospective method in adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. In
addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in net income in the periods after the date of adoption using the same valuation method (e.g. Black-Scholes) and assumptions determined under the
original provisions of SFAS 123,
Accounting for Stock-Based Compensation,
as disclosed in the Companys previous filings.
Prior
to January 1, 2006, the Company accounted for employee stock option grants using the intrinsic method in accordance with Accounting Principles Board (APB) Opinion No. 25
Accounting for Stock Issued to Employees
. As
such, no compensation cost was recognized for employee stock options that had exercise prices equal to the fair market value of our common stock at the date of granting the option. The Company also complied with the pro forma disclosure requirements
of SFAS No. 123
Accounting for Stock Based Compensation
, and SFAS No. 148
Accounting for StockBased CompensationTransition and Disclosure
.
The Company recognized approximately $863 of share-based compensation expense and $302 of related tax benefits in our unaudited condensed consolidated statement of
operations for the nine months ended September 30, 2007. The compensation expense was comprised of $304 related to stock options, $437 related to nonvested stock awards, $30 related to the Companys Employee Stock Purchase Plan, and $92
related to the Companys Director Stock Ownership Plan.
Approximately $73 of the amount of compensation cost recognized in 2006 for stock option
awards reflects amortization relating to the remaining unvested portion of stock option awards granted prior to January 1, 2006. The estimated fair value of the options granted during prior years was calculated using a Black-Scholes model. The
Black-Scholes model incorporates assumptions to value stock-based awards. The Company will continue to use the Black-Scholes option pricing model to value share-based awards. The estimated fair value of the Companys share-based awards is
amortized on a straight-line basis over the vesting period of the awards. The risk-free rate of interest for periods within the contractual life of the option is based on U.S. Government Securities Treasury Constant Maturities over the contractual
term of the equity instrument. Expected volatility is based on the historical volatility of the Companys stock. The Company uses historical data on exercise timing to determine the expected life assumption. The assumptions used for stock
option grants made in the first quarter of 2005 include the following: dividend yield of 3.4%, expected volatility of 22.6%, risk-free interest rate of 3.9%, an expected life of 5 years, and a forfeiture rate of 8% over the remaining life of these
options.
Based on our historical experience, we have assumed a forfeiture rate of 13% on the nonvested stock. Under the true-up provisions of SFAS 123R,
we will record additional expense if the actual forfeiture rate is lower than we estimated, and we will record a recovery of prior expense if the actual forfeiture is higher than we estimated.
The adoption of SFAS 123R had an impact of $66 and $156 due to the accrual of compensation expense on the unvested stock options for the three and nine months ended
September 30, 2006.
The Company has a long-term incentive program (LTIP) 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 become 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. Beginning in 1999, the LTIP program provided for common stock awards, the value of which was generally determined based on Company performance over a
two to five-year period. Common stock awards issued in 2006 and 2007 under the LTIP program are subject only to time vesting over a two to five-year period. In addition, as part of the Companys Global Annual Incentive Plan (GAIP),
nonvested shares may be issued to key employees.
7
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Stock option activity under all plans is as follows:
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price per
Share
|
|
Weighted Average
Remaining
Contractual
Term (years)
|
Balance at December 31, 2006
|
|
1,092,420
|
|
|
20.69
|
|
|
Options granted
|
|
166,065
|
|
|
23.13
|
|
|
Options exercised
|
|
(166,935
|
)
|
|
18.52
|
|
|
Options forfeited
|
|
(29,956
|
)
|
|
23.16
|
|
|
Options expired
|
|
(11,519
|
)
|
|
24.16
|
|
|
Balance at September 30, 2007
|
|
1,050,075
|
|
|
21.31
|
|
3.3
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007
|
|
824,935
|
|
|
21.10
|
|
2.5
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during 2007 was approximately $676. Intrinsic value is calculated
as the difference between the current market price of the underlying security and the strike price of a related option. As of September 30, 2007, the total intrinsic value of options outstanding was approximately $2,699, and the total intrinsic
value of exercisable options was approximately $2,377.
A summary of the Companys outstanding stock options at September 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
at 9/30/2007
|
|
Weighted
Average
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
at
9/30/2007
|
|
Weighted
Average
Exercise
Price
|
$13.30 - $15.96
|
|
1,000
|
|
1.5
|
|
$
|
14.13
|
|
1,000
|
|
$
|
14.13
|
15.97 - 18.62
|
|
142,400
|
|
0.4
|
|
|
17.56
|
|
142,400
|
|
|
17.56
|
18.63 - 21.28
|
|
437,875
|
|
2.8
|
|
|
20.10
|
|
363,475
|
|
|
20.12
|
21.29 - 23.94
|
|
320,000
|
|
5.2
|
|
|
22.45
|
|
169,260
|
|
|
21.85
|
23.95 - 26.60
|
|
148,800
|
|
3.1
|
|
|
26.06
|
|
148,800
|
|
|
26.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,050,075
|
|
3.3
|
|
|
21.31
|
|
824,935
|
|
|
21.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007, unrecognized compensation expense related to options granted during 2006 was $253,
and for options granted during 2007 was $577.
During the first quarter of 2007, the Company granted 166,065 stock options under the Companys LTIP
plan that are subject only to time vesting over a three-year period. The options were valued using the Black-Scholes model with the following assumptions: dividend yield of 4.4%, expected volatility of 27.0%, risk-free interest rate of 4.7%, an
expected term of 6 years, and a forfeiture rate of 3% over the remaining life of the options. Approximately $140 of expense was recorded on these options during 2007. The fair value of these awards is amortized on a straight-line basis over the
vesting period of the awards.
Under the Companys LTIP plan, 49,550 shares of nonvested stock were outstanding at December 31, 2006. In the
first quarter of 2007, 38,240 shares of nonvested stock were granted at a weighted average grant date fair value of $23.13. None of these awards were vested, 15,680 shares were forfeited and 72,110 shares were outstanding as of September 30,
2007. The fair value of the nonvested stock is based on the trading price of the Companys common stock on the date of grant. The Company adjusts the grant date fair value for expected forfeitures based on historical experience for similar
awards. As of September 30, 2007, unrecognized compensation expense related to these awards was $953, to be recognized over a weighted average remaining period of 2.2 years.
Under the Companys GAIP plan, 42,500 shares of nonvested stock were granted during the second quarter of 2005 at a weighted average grant date fair value of $20.12 per share. At December 31, 2006, 40,250
shares were outstanding. Through September 30, 2007, 12,750 shares vested and were issued, no shares were forfeited and 27,500 shares were outstanding. As of September 30, 2007, unrecognized compensation expense related to these awards was
$168, to be recognized over a weighted average remaining period of 1.6 years.
8
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Employee Stock Purchase Plan
In 2000, the Board adopted an Employee Stock Purchase Plan (ESPP) whereby employees may purchase Company stock through a payroll deduction plan. Purchases are made from the plan and credited to each
participants account at the end of each month, the Investment Date. The purchase price of the stock is 85% of the fair market value on the Investment Date. The plan is compensatory and the 15% discount is expensed on the Investment
Date. All employees, including officers, are eligible to participate in this plan. A participant may withdraw all uninvested payment balances credited to a participants account at any time by giving written notice to the Committee. An employee
whose stock ownership of the Company exceeds five percent of the outstanding common stock is not eligible to participate in this plan.
2003 Director
Stock Ownership Plan
In March 2003, our Board of Directors approved a stock ownership plan for each member of our Board to encourage the Directors to
increase their investment in the Company. The Plan was effective on the date it was approved and remains in effect for a term of ten years or until it is earlier terminated by the Board. The maximum number of shares of Common Stock which may be
issued under the Plan is 75,000, subject to certain conditions that the Committee may elect to adjust the number of shares. As of September 30, 2007, the Committee has not made any elections to adjust the shares under this plan. Each Director
is eligible to receive an annual retainer for services rendered as a member of the Board of Directors. Currently, each Director who owns less than 7,500 shares of Company Common Stock is required to receive 75% of the annual retainer in Common Stock
and 25% of the annual retainer in cash. Effective as of the 2007 Annual Meeting, each Director who owns 7,500 or more shares of Company Common Stock received 20% of the annual retainer in Common Stock and 80% of the annual retainer in cash with the
option to receive Common Stock in lieu of the cash portion of the retainer. Effective as of the 2007 Annual Meeting, the annual retainer is $28. The number of shares issued in payment of the fees is calculated based on an amount equal to the average
of the closing prices per share of Common Stock as reported on the composite tape of the New York Stock Exchange for the two trading days immediately preceding the retainer payment date. The retainer payment date is June 1. For the three and
nine months ended September 30, 2007, the Company recorded approximately $31 and $92 of compensation expense, respectively. For the three and nine months ended September 30, 2006, the Company recorded approximately $32 and $94,
respectively.
Note 6 Earnings Per Share
The
following table summarizes earnings per share (EPS) calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Numerator for basic EPS and diluted EPS net income
|
|
$
|
3,160
|
|
$
|
3,139
|
|
$
|
10,848
|
|
$
|
8,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPSweighted average shares
|
|
|
10,016,801
|
|
|
9,792,187
|
|
|
9,969,739
|
|
|
9,762,019
|
Effect of dilutive securities, primarily employee stock options
|
|
|
118,108
|
|
|
62,438
|
|
|
126,206
|
|
|
71,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPSweighted average shares and assumed conversions
|
|
|
10,134,909
|
|
|
9,854,625
|
|
|
10,095,945
|
|
|
9,833,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.32
|
|
$
|
0.32
|
|
$
|
1.09
|
|
$
|
0.89
|
Diluted EPS
|
|
$
|
0.31
|
|
$
|
0.32
|
|
$
|
1.07
|
|
$
|
0.88
|
The following number of stock options are not included in the earnings per share since in each case the exercise
price is greater than the market price: 299,540 and 787,520 for the three and nine months ended September 30, 2007 and 2006, respectively.
9
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 7 Business Segments
The Companys reportable segments are as follows:
(1) Metalworking process chemicals industrial process fluids
for various heavy industrial and manufacturing applications.
(2) Coatings temporary and permanent coatings for metal and concrete products and
chemical milling maskants.
(3) Other chemical products other various chemical products.
Segment data includes direct segment costs as well as general operating costs.
The table below presents information about the reported segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Metalworking Process Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
129,944
|
|
|
$
|
107,416
|
|
|
$
|
373,090
|
|
|
$
|
318,282
|
|
Operating income
|
|
|
18,772
|
|
|
|
15,894
|
|
|
|
56,020
|
|
|
|
45,452
|
|
Coatings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
10,043
|
|
|
|
8,668
|
|
|
|
28,200
|
|
|
|
24,940
|
|
Operating income
|
|
|
2,193
|
|
|
|
2,093
|
|
|
|
6,360
|
|
|
|
6,285
|
|
Other Chemical Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
728
|
|
|
|
341
|
|
|
|
1,914
|
|
|
|
1,702
|
|
Operating income
|
|
|
22
|
|
|
|
(3
|
)
|
|
|
107
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
140,715
|
|
|
|
116,425
|
|
|
|
403,204
|
|
|
|
344,924
|
|
Operating income
|
|
|
20,987
|
|
|
|
17,984
|
|
|
|
62,487
|
|
|
|
51,887
|
|
Non-operating expenses
|
|
|
(14,132
|
)
|
|
|
(12,344
|
)
|
|
|
(41,191
|
)
|
|
|
(34,140
|
)
|
Environmental charges
|
|
|
(3,300
|
)
|
|
|
|
|
|
|
(3,300
|
)
|
|
|
|
|
Amortization
|
|
|
(289
|
)
|
|
|
(350
|
)
|
|
|
(900
|
)
|
|
|
(1,058
|
)
|
Interest expense
|
|
|
(1,714
|
)
|
|
|
(1,432
|
)
|
|
|
(4,929
|
)
|
|
|
(4,040
|
)
|
Interest income
|
|
|
344
|
|
|
|
214
|
|
|
|
708
|
|
|
|
605
|
|
Other income, net
|
|
|
382
|
|
|
|
539
|
|
|
|
1,618
|
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before taxes
|
|
$
|
2,278
|
|
|
$
|
4,611
|
|
|
$
|
14,493
|
|
|
$
|
14,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income comprises revenue less related costs and expenses. Non-operating items primarily consist of
general corporate expenses identified as not being a cost of operation, interest expense, interest income, and license fees from non-consolidated associates.
Note 8 Comprehensive Income
The following table summarizes comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Net income
|
|
$
|
3,160
|
|
|
$
|
3,139
|
|
|
$
|
10,848
|
|
|
$
|
8,673
|
Change in fair value of derivatives
|
|
|
(595
|
)
|
|
|
(472
|
)
|
|
|
(366
|
)
|
|
|
131
|
Unrealized gain on available-for-sale securities
|
|
|
49
|
|
|
|
77
|
|
|
|
181
|
|
|
|
156
|
Minimum pension liability
|
|
|
(164
|
)
|
|
|
|
|
|
|
355
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
3,307
|
|
|
|
(408
|
)
|
|
|
7,447
|
|
|
|
4,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
5,757
|
|
|
$
|
2,336
|
|
|
$
|
18,465
|
|
|
$
|
13,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 9 Business Acquisitions and Divestitures
In March 2005, the Company acquired the remaining 40% interest in its Brazilian joint venture for $6,700. In addition, annual $1,000 payments for four years will be paid
subject to the former minority partners compliance with the terms of the purchase agreement. The second $1,000 payment was made in February 2007 and was recorded as goodwill assigned to the Metalworking Process Chemicals Segment.
In May 2007, the Companys Q2 Technologies (Q2T) joint venture acquired the hydrogen sulfide and natural gas field business of Frontier Research and
Chemicals Company, Inc., for $527 cash. The acquisition of this business is compatible with the products provided by Q2T and represents an attractive market addition. In connection with the acquisition, $394 of intangible assets was recorded to be
amortized over five years.
Note 10 Goodwill and Other Intangible Assets
The Company completed its annual impairment assessment as of the end of the third quarter 2007 and no impairment charge was warranted. The changes in carrying amount of goodwill for the nine months ended
September 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Metalworking
Process Chemicals
|
|
Coatings
|
|
Total
|
Balance as of December 31, 2006
|
|
$
|
31,471
|
|
$
|
7,269
|
|
$
|
38,740
|
Goodwill additions
|
|
|
1,016
|
|
|
|
|
|
1,016
|
Currency translation adjustments and other
|
|
|
2,499
|
|
|
812
|
|
|
3,311
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2007
|
|
$
|
34,986
|
|
$
|
8,081
|
|
$
|
43,067
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of September 30,
2007 and December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Customer lists and rights to sell
|
|
$
|
8,315
|
|
$
|
7,682
|
|
$
|
3,178
|
|
$
|
2,812
|
Trademarks and patents
|
|
|
1,788
|
|
|
1,788
|
|
|
1,788
|
|
|
1,781
|
Formulations and product technology
|
|
|
3,278
|
|
|
3,278
|
|
|
1,865
|
|
|
1,645
|
Other
|
|
|
3,339
|
|
|
3,143
|
|
|
2,392
|
|
|
1,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,720
|
|
$
|
15,891
|
|
$
|
9,223
|
|
$
|
8,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded $900 and $1,058 of amortization expense in the first nine months of 2007 and 2006,
respectively. Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows:
|
|
|
|
For the year ended December 31, 2007
|
|
$
|
1,185
|
For the year ended December 31, 2008
|
|
$
|
1,131
|
For the year ended December 31, 2009
|
|
$
|
1,068
|
For the year ended December 31, 2010
|
|
$
|
873
|
For the year ended December 31, 2011
|
|
$
|
810
|
For the year ended December 31, 2012
|
|
$
|
712
|
The Company has one indefinite-lived intangible asset of $600 for trademarks recorded in connection with the
Companys 2002 acquisition of Epmar.
11
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 11 Pension and Other Postretirement Benefits
The components of net periodic benefit cost, for the three and nine months ended September 30, are as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
Pension Benefits
|
|
|
Other
Postretirement
Benefits
|
|
Pension Benefits
|
|
|
Other
Postretirement
Benefits
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
Service cost
|
|
$
|
631
|
|
|
$
|
725
|
|
|
$
|
5
|
|
$
|
8
|
|
$
|
1,861
|
|
|
$
|
1,947
|
|
|
$
|
15
|
|
$
|
23
|
Interest cost and other
|
|
|
1,472
|
|
|
|
638
|
|
|
|
135
|
|
|
155
|
|
|
4,379
|
|
|
|
4,111
|
|
|
|
405
|
|
|
465
|
Expected return on plan assets
|
|
|
(1,271
|
)
|
|
|
(281
|
)
|
|
|
|
|
|
|
|
|
(3,783
|
)
|
|
|
(3,600
|
)
|
|
|
|
|
|
|
Other amortization, net
|
|
|
324
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
970
|
|
|
|
1,131
|
|
|
|
|
|
|
|
FAS 88 (Gain)/loss due to curtailments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,156
|
|
|
$
|
1,506
|
|
|
$
|
140
|
|
$
|
163
|
|
$
|
3,427
|
|
|
$
|
2,647
|
|
|
$
|
420
|
|
$
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Contributions:
The Company previously disclosed in its financial statements for the year ended December 31, 2006, that it expected to make minimum cash contributions of $6,883 to its pension plans and $1,100 to its other postretirement benefit plan
in 2007. As of September 30, 2007, $5,640 and $825 of contributions have been made, respectively.
In accordance with local legislation, effective
January 1, 2006, one of the Companys European pension plans was partially curtailed to eliminate the supplemental early retirement payments for certain individuals. A curtailment gain of $942 was recognized in the first quarter of 2006.
Note 12 Commitments and Contingencies
In April
of 1992, the Company identified certain soil and groundwater contamination at AC Products, Inc. (ACP), a wholly owned subsidiary. In voluntary coordination with the Santa Ana California Regional Water Quality Board, ACP has been
remediating the contamination, the principal contaminant of which is perchloroethylene (PERC). On or about December 18, 2004, the Orange County Water District (OCWD) filed a civil complaint in Superior Court, in Orange
County, California against ACP and other parties potentially responsible for groundwater contamination. OCWD was seeking to recover compensatory and other damages related to the investigation and remediation of the contamination in the groundwater.
Effective October 17, 2007, ACP and OCWD settled all claims related to this litigation. Pursuant to the settlement agreement with OCWD, ACP agreed to pay $2.0 million in two equal payments of $1.0 million (the first payment being due
October 31, 2007 and the second payment being due February 15, 2008). In addition to the $2.0 million payment, ACP agreed to operate the two existing groundwater treatment systems associated with its extraction wells P-2 and P-3 so as to
hydraulically contain groundwater contamination emanating from ACP's site until such time as the concentrations of PERC are below the Federal maximum contaminant level for four consecutive quarterly sampling events. During the third quarter, the
Company recognized a $3.3 million charge made up of $2.0 million for the settlement of the litigation, plus an increase in its reserve for its soil and water remediation program by $1.3 million. The Company believes that the range of potential-known
liabilities associated with ACP contamination, including amounts owed to OCWD pursuant to the settlement and estimated future costs of the water and soil remediation program, is approximately $4.75 million to $6.6 million, for which the Company has
sufficient reserves.
The low and high ends of the range are based on the length of operation of the two extraction wells as determined by groundwater
modeling with planned higher maintenance costs in later years if a longer treatment period is required. Costs of operation include the operation and maintenance of the extraction wells, groundwater monitoring, one-time expenses to insure P-3 is
hydraulically containing the PERC plume and program management. The duration of the well operation was estimated based on historical trends in concentrations in the monitoring wells within the proximity of the applicable extraction wells. Also
factored into the model was the impact of water injected into the underground aquifer from a planned recharge basin adjacent to the ACP site as well as from an injection operated by OCWD as part of the groundwater treatment system for contaminants
which are the subject of the aforementioned litigation. Based on the modeling, it is estimated that P-2 will operate for three and half years to up to five years and P-3 will operate for six years to up to nine years. Operation and maintenance costs
were based on historical expenditures and estimated inflation. Also included in the reserve are anticipated expenditures to operate an on-site soil vapor extraction system and amounts owed in basin fees for extracted water.
12
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
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 the proceeds from insurance settlements
received in late 2005 and early in the second quarter of 2007. To date, the overwhelming majority of these claims have been disposed of without payment and there have been no adverse judgments against the subsidiary. Based on a continued analysis of
the existing and anticipated future claims against this subsidiary, it is currently projected that the subsidiarys total liability over the next 50 years for these claims is approximately $12,700 (excluding costs of defense). Although the
Company has also been named as a defendant in certain of these cases, no claims have been actively pursued 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 were handled by the subsidiarys primary and excess insurers who had agreed in 1997 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 have asserted that the aggregate limits of their policies have been
exhausted. The subsidiary challenged the applicability of these limits to the claims being brought against the subsidiary. In response to this challenge, two of the three carriers entered into separate settlement and release agreements with the
subsidiary in late 2005 and in the first quarter of 2007 for $15,000 and $20,000, respectively. The payments under the latest settlement and release agreement are structured to be received over a four-year period with annual installments of $5,000,
the first of which was received early in the second quarter of 2007. The subsequent installments are contingent upon whether or not Federal asbestos legislation is adopted by the due date of each annual installment. If Federal asbestos legislation
is so enacted, and such legislation eliminates the carriers obligation to make the installment payment and requires the carrier to contribute into a trust or similar vehicle as a result of the policies issued to the subsidiary, then the
insurance carriers obligation to make the subsequent installments will be cancelled. The proceeds of both settlements are restricted and can only be used to pay claims and costs of defense associated with the subsidiarys asbestos
litigation. During the third quarter of 2007, the subsidiary and the remaining primary insurance carrier entered into a Claim Handling and Funding Agreement, under which the carrier will pay 27% of defense and indemnity costs incurred by or on
behalf of the subsidiary in connection with asbestos bodily injury claims for a minimum of five years beginning July 1, 2007. At the end of the term of the agreement, the subsidiary may choose to again pursue its claim against this insurer
regarding the application of the policy limits. The Company also believes that, if the coverage issues under the primary policies with the remaining carrier are resolved adversely to the subsidiary and all settlement proceeds were used, the
subsidiary may have limited additional coverage from a state guarantee fund established following the insolvency of one of the subsidiarys primary insurers. Nevertheless, liabilities in respect of claims may exceed the assets and coverage
available to the subsidiary. See also Notes 16 and 17 of Notes to Consolidated Financial Statements filed with the Companys Annual Report on Form 10-K for the year ended December 31, 2006.
If the subsidiarys assets and insurance coverage were to be exhausted, claimants of the subsidiary may actively pursue claims against the Company because of the
parent-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 the Companys own insurance and the Companys strong defenses to claims that it
should be held responsible for the subsidiarys obligations because of the parent-subsidiary relationship, the Company believes it is not probable that the Company will incur any material losses. All of the asbestos cases pursued against the
Company challenging the parent-subsidiary relationship are in the early stages of litigation. The Company has been successful in the past having claims naming it dismissed during initial proceedings. Since the Company may be in this early stage of
litigation for some time, it is not possible to estimate additional losses or range of loss, if any.
The Company believes, although there can be no
assurance regarding the outcome of other unrelated environmental matters, that it has made adequate accruals for costs associated with other environmental problems of which it is aware. Approximately $159 and $134 was accrued at September 30,
2007 and December 31, 2006, respectively, to provide for such anticipated future environmental assessments and remediation costs. The Company is party to other litigation which management currently believes will not have a material adverse
effect on the Companys results of operations, cash flows or financial condition.
13
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements(Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Note 13 Debt
On August 13, 2007, Quaker and its wholly owned subsidiaries entered into a second amendment to our syndicated multicurrency credit agreement with Bank of America, N.A., as administrative agent, swing line lender and letter of credit
issuer, and certain other financial institutions, as lenders. The amendment increases the maximum principal amount available for revolving credit borrowings from $100,000 to $125,000, which can be increased to $175,000 at the Companys option
if lenders agree to increase their commitments and the Company satisfies certain conditions. The amendment also extended the maturity date of the credit facility from 2010 to 2012. The Company was in compliance with all debt related covenants as of
September 30, 2007 and December 31, 2006.
The Company has entered into interest rate swaps in order to fix a portion of its variable rate debt
and mitigate the risks associated with higher interest rates. The combined notional value of the swaps was $35,000 and $25,000 as of September 30, 2007 and December 31, 2006, respectively.
14