QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
Note 1Significant Accounting Policies
Principles of consolidation:
All majority-owned
subsidiaries are included in the Companys 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. The Companys 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.
In January 2003, the Financial Accounting
Standards Board (FASB), issued FASB Interpretation No. 46 (FIN 46), Consolidation of Certain Variable Interest Entities, (VIEs), which is an interpretation of Accounting Research Bulletin
(ARB) No. 51, Consolidated Financial Statements. FIN 46, as revised by FIN 46 (revised December 2003), addresses the application of ARB No. 51 to VIEs, and generally would require that assets, liabilities and
results of the activities of a VIE be consolidated into the financial statements of the enterprise that is considered the primary beneficiary. The consolidated financial statements include the accounts of the Company and all of its subsidiaries in
which a controlling interest is maintained and would include any VIEs if the Company was the primary beneficiary pursuant to the provisions of FIN 46 (revised December 2003). The Company determined that its real estate joint venture, which was
always accounted for under the equity method, was a VIE but that the Company was not the primary beneficiary. In February 2005, the Venture sold its real estate assets, which resulted in $4,187 of proceeds to the Company after payment of the
partnership obligations. The proceeds included, a gain of $2,989 related to the sale by the Venture of its real estate holdings as well as $1,198 of preferred distributions. These proceeds are included in other income. See also Note 5 of Notes to
Consolidated 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 equity and will be included in income only upon sale or liquidation of the underlying investment. All non-U.S. subsidiaries use their 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. Inventories are valued using the first-in, first-out (FIFO) method. See also Note 7 of Notes to Consolidated Financial Statements.
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.
33
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Capitalized software:
The Company applies the Accounting Standards
Executive Committee Statement of Position (SOP) 98-1, 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 the Companys global transaction system, approximately $1,685 and $3,817 of net costs were capitalized at December 31, 2007 and 2006, 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 and Other Intangible Assets. The 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. 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 17 of Notes to Consolidated Financial Statements.
Revenue recognition:
The Company recognizes revenue in accordance with the terms of the underlying agreements, when title
and risk of loss have been transferred, collectibility is reasonably assured, and pricing is fixed or determinable. This generally occurs for product sales when products are shipped to customers or, for consignment arrangements, upon usage by the
customer and when services are performed. License fees and royalties are recognized in accordance with agreed-upon terms, when performance obligations are satisfied, the amount is fixed or determinable, and collectibility is reasonably assured, and
are included in other income. 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 $52,702, $62,777 and $38,840 for 2007, 2006 and 2005, respectively.
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 2007, 2006 and 2005 were $14,608, $12,989 and $14,148, 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 funds in money market securities and financial instruments having maturities typically within 90 days. The Company has not experienced losses from the aforementioned investments. See also Note 6 of Notes to Consolidated Financial
Statements.
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.
34
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 Equity. The components of accumulated other comprehensive loss at December 31, 2007 include: accumulated foreign currency translation adjustments of $13,264, minimum pension liability of
$(18,399), unrealized holding gains on available-for-sale securities of $226, and the fair value of derivative instruments of $(716). The components of accumulated other comprehensive loss at December 31, 2006 include: accumulated foreign
currency translation adjustments of $1,848, minimum pension liability of $(21,300), unrealized holding gains on available-for-sale securities of $308 and the fair value of derivative instruments of $85.
Income taxes and uncertain tax positions:
The provision for income taxes is determined using the asset and liability
approach of accounting for income 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 the Companys 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. The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48) on January 1, 2007. FIN 48 applies to all income tax positions taken on previously filed tax returns or expected to be
taken on a future tax return. FIN 48 prescribes a benefit recognition model with a two-step approach, a more-likely-than-not recognition criterion, and a measurement attribute that measures the position as the largest amount of tax benefit that is
greater than 50% likely of being realized upon effective settlement. FIN 48 also requires that the amount of interest expense and income to be recognized related to uncertain tax positions be computed by applying the applicable statutory rate of
interest to the difference between the tax position recognized in accordance with FIN 48, including timing differences, and the amount previously taken or expected to be taken in a tax return. The Companys continuing practice is to recognize
interest and/or penalties related to income tax matters in income tax expense.
Derivatives:
The Company uses
derivative financial instruments primarily for purposes of hedging exposures to fluctuations in interest rates. The Company does not enter into derivative contracts for trading or speculative purposes. In accordance with SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, as amended and interpreted, all derivatives are recognized on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the effective portion of any hedge is
reported in Accumulated Other Comprehensive Income (Loss) until it is cleared to earnings during the same period in which the hedged item affects earnings. The Company uses no derivative instruments designated as fair value hedges.
The Company has entered into seven interest rate swaps in order to fix a portion of its variable rate debt. The swaps had a combined notional value of
$35,000 and $25,000 and a fair value of $(1,102) and $85 at December 31, 2007 and December 31, 2006, respectively. The counterparties to the swaps are major financial institutions.
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 this standard on
its consolidated financial statements.
35
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB 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 comparison 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 application of SFAS No. 159 is elective and the Company has chosen not to measure any additional financial instruments or any other items at fair value. The
Company is currently assessing the impact of this standard on its consolidated financial statements.
In September 2007, EITF Issue 06-11
Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11) was issued. EITF 06-11 should be applied prospectively to the income tax benefits that result from dividends on equity-classified employee
share-based payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those years. The Company is currently assessing the impact of this standard on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (FAS 141(R)) and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements, as amendment of ARB No. 51 (FAS 160). FAS 141(R) will significantly change how business acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. Some of the changes, such as the accounting for contingent consideration, will introduce more volatility into earnings. FAS 160 will change the accounting and reporting for minority interests, which will
be recharacterized as noncontrolling interests and classified as a component of equity. FAS 141(R) will be applied prospectively. FAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests.
All other requirements of FAS 160 shall be applied prospectively. FAS 141(R) and FAS 160 are effective for fiscal years beginning on or after December 15, 2008. The Company is currently assessing the impact of these standards on its financial
statements.
Accounting estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingencies at the date of the financial statements and the reported amounts of net
sales and expenses during the reporting period. Actual results could differ from such estimates.
Reclassifications:
Certain reclassifications of prior years data have been made to improve comparability.
Note 2Out-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 in 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-month period 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, 2006 or 2007 and, therefore, has not restated any prior period amounts.
36
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Note 3Restructuring and Related Activities
In the first quarter of 2005, Quakers management approved a restructuring plan (2005
1
st
Quarter Program). Included in the first quarter 2005 restructuring charge were provisions for severance for 16 employees totaling $1,408. At
December 31, 2005, all severance payments were completed. The Company reversed $96 of unused restructuring charges related to this program, which completed all actions contemplated by the 2005 1
st
Quarter Program.
In the fourth quarter of 2005, Quakers management approved a restructuring plan (2005 4
th
Quarter Program) with the goal of
significantly reducing operating costs in the U.S. and Europe. The restructuring plan included involuntary terminations, a freeze of the Companys U.S. pension plan, a voluntary early retirement window to certain U.S. employees, with enhanced
pension and other postretirement benefits. Included in the restructuring charges were provisions for severance (voluntary and involuntary) of 55 employees. Restructuring and related charges of $9,344 were recognized in the fourth quarter of 2005.
The charge comprised $4,024 related to severance for involuntary terminations, $1,017 related to one-time payments for voluntary early retirement, $2,668 related to the U.S. pension plan freeze, and $1,635 for the enhanced pension and other
postretirement benefits related to voluntary early retirement participants. The Company completed the initiatives contemplated under this program during 2006. The charges related to the U.S. pension plan freeze and the enhanced pension and other
postretirement benefits were included as part of the accrued pension and other postretirement balances. See also Note 11 of Notes to Consolidated Financial Statements.
Note 4Uncertain Tax Positions
In June 2006, the Financial Accounting Standards Board issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes the recognition threshold and measurement attributes for financial
statement recognition and measurement of tax positions taken or expected to be taken on a tax return. FIN 48 requires the determination of whether the benefits of tax positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to be more likely than not sustained upon audit, a company recognizes the largest amount of benefit that is greater than 50% likely of being realized upon ultimate
settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained upon audit, a company does not recognize any portion of the benefit in the financial statements.
FIN 48 also provides guidance on de-recognition, classification, penalties and interest, accounting in interim periods, disclosure, and transition. FIN
48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48, effective January 1, 2007.
As a result of the implementation of FIN 48, the Company recognized a $5,503 increase in 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. The Company had accrued $592 for penalties and $728 for interest at January 1,
2007.
As of December 31, 2007, the Companys cumulative liability for gross unrecognized tax benefits was $10,861. The Company
had accrued $809 for penalties and $1,211 for interest at December 31, 2007. The
37
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Company continues to recognize interest and penalties associated with uncertain tax positions as a component of Taxes on Income in its Consolidated Statement
of Income. The Company has recognized $160 for penalties and $443 for interest on its Consolidated Statement of Income for the twelve-month period ended December 31, 2007.
The Company estimates that during the year ended December 31, 2008 it will reduce its cumulative liability for gross unrecognized tax benefits by
approximately $600 to $700 due to the expiration of the statute of limitations with regard to certain tax positions. This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability for
unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits with regard to new tax positions for the year ended December 31, 2008.
The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign tax jurisdictions. Tax
years that remain subject to examination by major tax jurisdictions include the United Kingdom from 2001, Brazil from 2002, the Netherlands and Spain from 2003, Italy, India and the United States from 2004, China from 2005, and various domestic
state tax jurisdictions from 1993.
In 2007, the Internal Revenue Service commenced a routine examination of the Companys U.S.
corporate income tax returns for the tax years ended December 31, 2005 and December 31, 2006. Based on the outcome of this examination, the Company may recognize changes to its unrecognized tax benefit.
In addition, the Company is currently under audit by French taxing authorities for tax years 2000 through 2004. As of December 31, 2007, the French
tax authorities have proposed certain adjustments to the Companys transfer pricing transactions. Management is currently evaluating the proposed adjustments. While the outcome of such adjustments would cause the Company to recognize changes to
its unrecognized benefits, the Company does not anticipate that the adjustments would result in a material change to its financial position.
|
|
|
|
|
|
|
|
|
|
|
Tabular Reconciliation
December 31, 2007
|
|
Unrecognized tax benefits at January 1, 2007
|
|
$
|
|
|
|
$
|
8,902
|
|
Increase unrecognized tax benefits taken in prior periods
|
|
|
367
|
|
|
|
|
|
(Decrease) unrecognized tax benefits taken in prior periods
|
|
|
(510
|
)
|
|
|
|
|
Increaseforeign exchange rates
|
|
|
880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737
|
|
Increase unrecognized tax benefits taken in current period
|
|
|
1,333
|
|
|
|
|
|
(Decrease) unrecognized tax benefits taken in current period
|
|
|
|
|
|
|
|
|
Increaseforeign exchange rates
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,428
|
|
Increase unrecognized tax benefits due to settlements
|
|
|
|
|
|
|
|
|
(Decrease) unrecognized tax benefits due to settlements
|
|
|
|
|
|
|
|
|
Increase (Decrease)foreign exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in unrecognized tax benefits due to lapse of statute of limitations
|
|
|
(206
|
)
|
|
|
|
|
Increase (Decrease)foreign exchange rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at December 31, 2007
|
|
|
|
|
|
$
|
10,861
|
|
|
|
|
|
|
|
|
|
|
38
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Note 5Investments in Associated Companies
Investments in associated (less than majority-owned) companies are accounted for under the equity method. Summarized financial information of the
associated companies, in the aggregate, is as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Current assets
|
|
$
|
28,130
|
|
$
|
24,129
|
Noncurrent assets
|
|
|
5,351
|
|
|
5,400
|
Current liabilities
|
|
|
11,320
|
|
|
13,062
|
Noncurrent liabilities
|
|
|
247
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Net sales
|
|
$
|
51,248
|
|
$
|
46,062
|
|
$
|
44,507
|
Gross margin
|
|
|
18,660
|
|
|
17,662
|
|
|
17,677
|
Operating income
|
|
|
3,735
|
|
|
3,920
|
|
|
3,430
|
Net income
|
|
|
1,658
|
|
|
1,574
|
|
|
1,202
|
In January 2001, the Company contributed its Conshohocken, Pennsylvania property and buildings
(the Site) into a real estate joint venture (the Venture) in exchange for a 50% interest in the Venture. The Venture did not assume any debt or other obligations of the Company and the Company did not guarantee nor was it
obligated to pay any principal, interest or penalties on any of the Ventures indebtedness. The Venture renovated certain of the existing buildings at the Site, as well as built new office space. In December 2000, the Company entered into an
agreement with the Venture to lease approximately 38% of the Sites available office space for a 15-year period commencing February 2002, with multiple renewal options. The Company believes the terms of this lease were no less favorable than
the terms it would have obtained from an unaffiliated third party. In February 2005, the Venture sold its real estate assets to an unrelated third party, which resulted in $4,187 of proceeds to the Company after payment of the Ventures
obligations. The proceeds include a gain of $2,989 related to the sale by the Venture of its real estate holdings as well as $1,198 of preferred distributions. These proceeds are included in other income.
Note 6 Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in
existing accounts receivable. Reserves for customers filing for bankruptcy protection are generally established at 75-100% of the amount owed at the filing date, dependent on the Companys evaluation of likely proceeds from the bankruptcy
process. Large and/or financially distressed customers are generally reserved for on a specific review basis while a general reserve is established for other customers based on historical experience. The Company performs a formal review of its
allowance for doubtful accounts quarterly. Account balances are charged off against the allowance when the Company feels it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to
its customers. During 2007, the Companys five largest customers accounted for approximately 29% of its consolidated net sales with the largest customer (Arcelor-Mittal Group) accounting for approximately 10% of consolidated net sales.
39
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
At December 31, 2007 and 2006, the Company had gross trade accounts receivable totaling $121,207
and $110,525 with trade accounts receivable greater than 90 days past due of $5,178 and $5,565, respectively. Following are the changes in the allowance for doubtful accounts during the years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Period
|
|
Charged
to Costs
and
Expenses
|
|
Write-Offs
Charged to
Allowance
|
|
|
Effect of
Exchange
Rate
Changes
|
|
|
Balance
at End
of Period
|
ALLOWANCE FOR DOUBTFUL ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
3,185
|
|
$
|
41
|
|
$
|
(413
|
)
|
|
$
|
259
|
|
|
$
|
3,072
|
Year ended December 31, 2006
|
|
$
|
4,066
|
|
$
|
|
|
$
|
(961
|
)
|
|
$
|
80
|
|
|
$
|
3,185
|
Year ended December 31, 2005
|
|
$
|
6,773
|
|
$
|
1,216
|
|
$
|
(3,828
|
)
|
|
$
|
(95
|
)
|
|
$
|
4,066
|
Note 7Inventories
Total inventories comprise:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Raw materials and supplies
|
|
$
|
24,447
|
|
$
|
21,589
|
Work in process and finished goods
|
|
|
36,291
|
|
|
30,395
|
|
|
|
|
|
|
|
|
|
$
|
60,738
|
|
$
|
51,984
|
|
|
|
|
|
|
|
Note 8Property, Plant and Equipment
Property, plant and equipment comprise:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Land
|
|
$
|
6,630
|
|
|
$
|
5,768
|
|
Building and improvements
|
|
|
50,530
|
|
|
|
40,446
|
|
Machinery and equipment
|
|
|
116,325
|
|
|
|
104,427
|
|
Construction in progress
|
|
|
2,393
|
|
|
|
8,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,878
|
|
|
|
158,934
|
|
Less accumulated depreciation
|
|
|
(113,591
|
)
|
|
|
(98,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
62,287
|
|
|
$
|
60,927
|
|
|
|
|
|
|
|
|
|
|
40
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
The Company leases certain equipment under capital leases in Europe and the U.S., including its
manufacturing facility in Tradate, Italy. Gross property, plant, and equipment includes $3,736 and $3,398 of capital leases with $947 and $672 of accumulated depreciation at December 31, 2007 and 2006, respectively. The following is a schedule
by years of future minimum lease payments:
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2008
|
|
$
|
431
|
|
2009
|
|
$
|
369
|
|
2010
|
|
$
|
558
|
|
2011
|
|
$
|
17
|
|
2012
|
|
$
|
|
|
2013 and beyond
|
|
$
|
|
|
|
|
|
|
|
Total net minimum lease payments
|
|
|
1,375
|
|
Less amount representing interest
|
|
|
(174
|
)
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
1,201
|
|
|
|
|
|
|
Note 9Asset Retirement Obligations
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS
No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company adopted the standard as of January 1, 2003 and there was no material
impact to the financial statements. In March 2005, the FASB issued its FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143. The interpretation
clarifies that the term conditional asset retirement obligation (CARO) as used in SFAS No.143, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. A liability is recorded when there is enough information regarding the timing of the CARO to perform a probability weighted discounted cash flow analysis.
The Companys CAROs consist primarily of asbestos contained in certain manufacturing facilities and decommissioning costs related to its aboveground
storage tanks. In the fourth quarter of 2005, due to a change in facts and circumstances at one of its manufacturing facilities, the Company determined enough information regarding the timing of cash flows was available to record a liability for
$250. During 2007 and 2006, the Company accrued interest on this liability, which is included in other non-current liabilities, of $15 and $15, respectively.
41
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Note 10Taxes on Income
Taxes on income consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,577
|
|
|
$
|
|
|
|
$
|
(443
|
)
|
State
|
|
|
20
|
|
|
|
21
|
|
|
|
20
|
|
Foreign
|
|
|
5,425
|
|
|
|
5,799
|
|
|
|
8,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,022
|
|
|
|
5,820
|
|
|
|
7,812
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(951
|
)
|
|
|
792
|
|
|
|
(3,194
|
)
|
Foreign
|
|
|
597
|
|
|
|
(388
|
)
|
|
|
(1,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,668
|
|
|
$
|
6,224
|
|
|
$
|
3,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of earnings (losses) before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
Domestic
|
|
$
|
(1,259
|
)
|
|
$
|
395
|
|
$
|
(12,249
|
)
|
Foreign
|
|
|
23,994
|
|
|
|
18,045
|
|
|
18,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,735
|
|
|
$
|
18,440
|
|
$
|
6,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic earnings (losses) before income taxes do not include foreign earnings that are included
in U.S. taxable income. During the fourth quarter of 2005, the Company elected to repatriate substantial accumulated foreign earnings and implemented other tax planning strategies, which enabled the Company to utilize all domestic operating loss
carryforwards, and improved its global capital structure. This repatriation was the primary reason for the increase in the Companys effective tax rate in 2005 and resulted in a net $1,000 charge to tax expense.
42
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Total deferred tax assets and liabilities are composed of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Current
|
|
Non-current
|
|
|
Current
|
|
Non-current
|
|
Retirement benefits
|
|
$
|
582
|
|
$
|
7,771
|
|
|
$
|
609
|
|
$
|
10,918
|
|
Allowance for doubtful accounts
|
|
|
403
|
|
|
|
|
|
|
628
|
|
|
|
|
Insurance and litigation reserves
|
|
|
539
|
|
|
700
|
|
|
|
826
|
|
|
|
|
Postretirement benefits
|
|
|
|
|
|
2,467
|
|
|
|
|
|
|
2,634
|
|
Supplemental retirement benefits
|
|
|
|
|
|
1,692
|
|
|
|
|
|
|
1,460
|
|
Performance incentives
|
|
|
1,830
|
|
|
1,301
|
|
|
|
1,884
|
|
|
1,204
|
|
Equity-based compensation
|
|
|
132
|
|
|
591
|
|
|
|
|
|
|
332
|
|
Alternative minimum tax carryforward
|
|
|
|
|
|
2,092
|
|
|
|
|
|
|
2,092
|
|
Vacation pay
|
|
|
452
|
|
|
|
|
|
|
432
|
|
|
|
|
Insurance settlement
|
|
|
|
|
|
6,524
|
|
|
|
|
|
|
5,176
|
|
Operating loss carryforward
|
|
|
|
|
|
4,908
|
|
|
|
|
|
|
5,098
|
|
Foreign tax credit
|
|
|
|
|
|
3,237
|
|
|
|
|
|
|
2,161
|
|
Deferred compensation
|
|
|
|
|
|
429
|
|
|
|
|
|
|
352
|
|
Uncertain tax positions
|
|
|
104
|
|
|
2,406
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
300
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,042
|
|
|
34,418
|
|
|
|
4,379
|
|
|
31,472
|
|
Valuation allowance
|
|
|
|
|
|
(4,161
|
)
|
|
|
|
|
|
(2,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets, net
|
|
$
|
4,042
|
|
$
|
30,257
|
|
|
$
|
4,379
|
|
$
|
28,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
$
|
2,056
|
|
|
|
|
|
$
|
1,275
|
|
Europe pension and other
|
|
|
|
|
|
5,527
|
|
|
|
|
|
|
4,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
|
|
$
|
7,583
|
|
|
|
|
|
$
|
5,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Income tax provision at the Federal statutory tax rate
|
|
$
|
7,957
|
|
|
$
|
6,454
|
|
|
$
|
2,315
|
|
State income tax provisions, net
|
|
|
13
|
|
|
|
13
|
|
|
|
13
|
|
Non-deductible entertainment and business meal expense
|
|
|
213
|
|
|
|
136
|
|
|
|
151
|
|
Differences in tax rates on foreign earnings and remittances
|
|
|
(169
|
)
|
|
|
59
|
|
|
|
3,777
|
|
Uncertain tax positions
|
|
|
458
|
|
|
|
|
|
|
|
|
|
Out-of-period adjustment
|
|
|
(993
|
)
|
|
|
|
|
|
|
|
|
Foreign tax refunds
|
|
|
(665
|
)
|
|
|
(425
|
)
|
|
|
|
|
Excess FTC utilization
|
|
|
|
|
|
|
|
|
|
|
(2,429
|
)
|
Settlement of tax contingencies
|
|
|
|
|
|
|
|
|
|
|
(446
|
)
|
Miscellaneous items, net
|
|
|
(146
|
)
|
|
|
(13
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income
|
|
$
|
6,668
|
|
|
$
|
6,224
|
|
|
$
|
3,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the Company domestically had a net deferred tax asset of $16,773
inclusive of alternative minimum tax (AMT) credits of $2,092. Additionally, the Company has foreign tax credit carryovers of $3,237 which have the following expiration dates: $100 in 2012, $763 in 2013, $535 in 2014, $762 in 2016
43
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
and $1,077 in 2017. A full valuation allowance has been taken against these foreign tax credits. Finally, the Company has foreign tax loss carryforwards of
$14,206 of which $676 expires in 2011; the remaining foreign tax losses have no expiration dates. A partial valuation allowance has been established with respect to the tax benefit of these losses for $924.
U.S. income taxes have not been provided on the undistributed earnings of non-U.S. subsidiaries because it is the Companys intention to continue to
reinvest these earnings in those subsidiaries to support growth initiatives. 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. The amount of such undistributed earnings at December 31, 2007 was approximately $57,000. Any income tax liability which might result from ultimate remittance of these earnings is expected to be substantially offset
by foreign tax credits.
Note 11Pension and Other Postretirement Benefits
The Company maintains various noncontributory retirement plans, the largest of which is in the U.S., covering substantially all of its employees in the
U.S. and certain other countries. The plans of the Companys subsidiaries in The Netherlands and in the United Kingdom are subject to the provisions of SFAS No. 87, Employers Accounting for Pensions. The plans of the
remaining non-U.S. subsidiaries are, for the most part, either fully insured or integrated with the local governments plans and are not subject to the provisions of SFAS No. 87. The Companys U.S. pension plan year ends on
November 30, which serves as the measurement date. The measurement date for the Companys other postretirement benefits is December 31.
As part of the Companys 2005 fourth quarter restructuring program, the Company implemented a freeze of its U.S. pension plan for non-union employees and offered a voluntary early retirement window with enhanced
pension and other postretirement benefits. The freeze of the Companys U.S. pension plan resulted in a plan curtailment charge of $2,668. The pension and other postretirement benefits enhancements resulted in special termination benefits
charges of $1,205 and $430, respectively. See also Note 3 of Notes to Consolidated Financial Statements.
In September 2006, the FASB
issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158). SFAS No. 158 requires that employers recognize on a prospective basis the funded status of their
defined benefit pension and other postretirement plans on their consolidated balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period
but are not recognized as components of net periodic benefit cost. SFAS No. 158 also requires additional disclosures in the Notes to Consolidated Financial Statements, which have been incorporated below.
44
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
The following table shows the Company plans funded status reconciled with amounts reported in
the consolidated balance sheet as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Total
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Total
|
|
|
Domestic
|
|
|
Domestic
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
46,639
|
|
|
$
|
65,958
|
|
|
$
|
112,597
|
|
|
$
|
44,464
|
|
|
$
|
66,207
|
|
|
$
|
110,671
|
|
|
$
|
10,283
|
|
|
$
|
10,902
|
|
Service cost
|
|
|
1,913
|
|
|
|
660
|
|
|
|
2,573
|
|
|
|
2,025
|
|
|
|
586
|
|
|
|
2,611
|
|
|
|
25
|
|
|
|
15
|
|
Interest cost
|
|
|
2,295
|
|
|
|
3,629
|
|
|
|
5,924
|
|
|
|
1,920
|
|
|
|
3,575
|
|
|
|
5,495
|
|
|
|
522
|
|
|
|
551
|
|
Employee contributions
|
|
|
138
|
|
|
|
|
|
|
|
138
|
|
|
|
111
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
Amendments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(111
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
Curtailment (gain)/loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,748
|
)
|
|
|
|
|
|
|
(2,748
|
)
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(1,296
|
)
|
|
|
(4,422
|
)
|
|
|
(5,718
|
)
|
|
|
(1,132
|
)
|
|
|
(5,756
|
)
|
|
|
(6,888
|
)
|
|
|
(1,207
|
)
|
|
|
(1,153
|
)
|
Plan expenses and premiums paid
|
|
|
(370
|
)
|
|
|
(80
|
)
|
|
|
(450
|
)
|
|
|
(285
|
)
|
|
|
(80
|
)
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
Actuarial (gain)/loss
|
|
|
(4,917
|
)
|
|
|
456
|
|
|
|
(4,461
|
)
|
|
|
(2,875
|
)
|
|
|
1,537
|
|
|
|
(1,338
|
)
|
|
|
(443
|
)
|
|
|
(32
|
)
|
Translation difference
|
|
|
4,151
|
|
|
|
|
|
|
|
4,151
|
|
|
|
5,159
|
|
|
|
|
|
|
|
5,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
48,553
|
|
|
$
|
66,201
|
|
|
$
|
114,754
|
|
|
$
|
46,639
|
|
|
$
|
65,958
|
|
|
$
|
112,597
|
|
|
$
|
9,180
|
|
|
$
|
10,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
41,160
|
|
|
$
|
40,861
|
|
|
|
82,021
|
|
|
$
|
34,514
|
|
|
$
|
37,873
|
|
|
$
|
72,387
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
1,174
|
|
|
|
3,435
|
|
|
|
4,609
|
|
|
|
1,187
|
|
|
|
3,838
|
|
|
|
5,025
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
1,359
|
|
|
|
5,947
|
|
|
|
7,306
|
|
|
|
2,553
|
|
|
|
4,906
|
|
|
|
7,459
|
|
|
|
1,207
|
|
|
|
1,153
|
|
Employee contributions
|
|
|
138
|
|
|
|
|
|
|
|
138
|
|
|
|
111
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(1,296
|
)
|
|
|
(4,422
|
)
|
|
|
(5,718
|
)
|
|
|
(1,132
|
)
|
|
|
(5,756
|
)
|
|
|
(6,888
|
)
|
|
|
(1,207
|
)
|
|
|
(1,153
|
)
|
Plan expenses and premiums paid
|
|
|
(370
|
)
|
|
|
(80
|
)
|
|
|
(450
|
)
|
|
|
(285
|
)
|
|
|
|
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
Translation difference
|
|
|
4,038
|
|
|
|
|
|
|
|
4,038
|
|
|
|
4,212
|
|
|
|
|
|
|
|
4,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
46,203
|
|
|
$
|
45,741
|
|
|
$
|
91,944
|
|
|
$
|
41,160
|
|
|
$
|
40,861
|
|
|
$
|
82,021
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(2,350
|
)
|
|
$
|
(20,460
|
)
|
|
$
|
(22,810
|
)
|
|
$
|
(5,479
|
)
|
|
$
|
(25,097
|
)
|
|
$
|
(30,576
|
)
|
|
$
|
(9,180
|
)
|
|
$
|
(10,283
|
)
|
Adjustments for contributions in December
|
|
|
|
|
|
|
1,250
|
|
|
|
1,250
|
|
|
|
|
|
|
|
1,119
|
|
|
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(2,350
|
)
|
|
$
|
(19,210
|
)
|
|
$
|
(21,560
|
)
|
|
$
|
(5,479
|
)
|
|
$
|
(23,978
|
)
|
|
$
|
(29,457
|
)
|
|
$
|
(9,180
|
)
|
|
$
|
(10,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current asset/Prepaid benefit cost
|
|
$
|
1,685
|
|
|
$
|
|
|
|
$
|
1,685
|
|
|
$
|
430
|
|
|
$
|
|
|
|
$
|
430
|
|
|
$
|
|
|
|
$
|
|
|
Current liabilities
|
|
|
(231
|
)
|
|
|
(495
|
)
|
|
|
(726
|
)
|
|
|
(145
|
)
|
|
|
(495
|
)
|
|
|
(640
|
)
|
|
|
(1,000
|
)
|
|
|
(1,100
|
)
|
Non-current liabilities
|
|
|
(3,804
|
)
|
|
|
(18,715
|
)
|
|
|
(22,519
|
)
|
|
|
(5,764
|
)
|
|
|
(23,483
|
)
|
|
|
(29,247
|
)
|
|
|
(8,180
|
)
|
|
|
(9,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(2,350
|
)
|
|
$
|
(19,210
|
)
|
|
$
|
(21,560
|
)
|
|
$
|
(5,479
|
)
|
|
$
|
(23,978
|
)
|
|
$
|
(29,457
|
)
|
|
$
|
(9,180
|
)
|
|
$
|
(10,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts not yet reflected in net periodic benefit costs and included in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition asset (obligation)
|
|
$
|
401
|
|
|
$
|
|
|
|
$
|
401
|
|
|
$
|
538
|
|
|
$
|
|
|
|
$
|
538
|
|
|
$
|
|
|
|
$
|
|
|
Prior service credit (cost)
|
|
|
(244
|
)
|
|
|
(106
|
)
|
|
|
(350
|
)
|
|
|
(252
|
)
|
|
|
(119
|
)
|
|
|
(371
|
)
|
|
|
93
|
|
|
|
159
|
|
Accumulated gain (loss)
|
|
|
(7,565
|
)
|
|
|
(18,070
|
)
|
|
|
(25,635
|
)
|
|
|
(11,602
|
)
|
|
|
(18,435
|
)
|
|
|
(30,037
|
)
|
|
|
(1,802
|
)
|
|
|
(2,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (AOCI)
|
|
|
(7,408
|
)
|
|
|
(18,176
|
)
|
|
|
(25,584
|
)
|
|
|
(11,316
|
)
|
|
|
(18,554
|
)
|
|
|
(29,870
|
)
|
|
|
(1,709
|
)
|
|
|
(2,169
|
)
|
Cumulative employer contributions in excess of net period benefit cost
|
|
|
5,058
|
|
|
|
(1,034
|
)
|
|
|
4,024
|
|
|
|
5,837
|
|
|
|
(5,424
|
)
|
|
|
413
|
|
|
|
(7,471
|
)
|
|
|
(8,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(2,350
|
)
|
|
$
|
(19,210
|
)
|
|
$
|
(21,560
|
)
|
|
$
|
(5,479
|
)
|
|
$
|
(23,978
|
)
|
|
$
|
(29,457
|
)
|
|
$
|
(9,180
|
)
|
|
$
|
(10,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit pension plans was $108,324 ($65,722
Domestic, $42,602 Foreign) and $105,210 ($64,560 Domestic, $40,650 Foreign) at December 31, 2007 and 2006, respectively.
45
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Information for pension plans with accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Foreign
|
|
Domestic
|
|
Total
|
|
Foreign
|
|
Domestic
|
|
Total
|
Projected benefit obligation
|
|
$
|
11,944
|
|
$
|
66,201
|
|
$
|
78,145
|
|
$
|
13,142
|
|
$
|
65,958
|
|
$
|
79,100
|
Accumulated benefit obligation
|
|
|
10,500
|
|
|
65,722
|
|
|
76,222
|
|
|
10,556
|
|
|
64,560
|
|
|
75,116
|
Fair value of plan assets
|
|
|
7,909
|
|
|
45,742
|
|
|
53,651
|
|
|
7,233
|
|
|
40,861
|
|
|
48,094
|
Information for pension plans with a projected benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Foreign
|
|
Domestic
|
|
Total
|
|
Foreign
|
|
Domestic
|
|
Total
|
Projected benefit obligation
|
|
$
|
11,944
|
|
$
|
66,201
|
|
$
|
78,145
|
|
$
|
13,142
|
|
$
|
65,958
|
|
$
|
79,100
|
Fair value of plan assets
|
|
|
7,909
|
|
|
45,742
|
|
|
53,651
|
|
|
7,233
|
|
|
40,861
|
|
|
48,094
|
Components of net periodic benefit costpension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Total
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Total
|
|
Service cost
|
|
$
|
1,913
|
|
|
$
|
660
|
|
|
$
|
2,573
|
|
|
$
|
2,025
|
|
|
$
|
586
|
|
|
$
|
2,611
|
|
Interest cost
|
|
|
2,295
|
|
|
|
3,629
|
|
|
|
5,924
|
|
|
|
1,920
|
|
|
|
3,575
|
|
|
|
5,495
|
|
Expected return on plan assets
|
|
|
(1,802
|
)
|
|
|
(3,556
|
)
|
|
|
(5,358
|
)
|
|
|
(1,596
|
)
|
|
|
(3,222
|
)
|
|
|
(4,818
|
)
|
Pension plan curtailment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(983
|
)
|
|
|
|
|
|
|
(983
|
)
|
Other, amortization, net
|
|
|
365
|
|
|
|
955
|
|
|
|
1,320
|
|
|
|
679
|
|
|
|
831
|
|
|
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,771
|
|
|
$
|
1,688
|
|
|
$
|
4,459
|
|
|
$
|
2,045
|
|
|
$
|
1,770
|
|
|
$
|
3,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Total
|
|
Service cost
|
|
$
|
2,025
|
|
|
$
|
1,735
|
|
|
$
|
3,760
|
|
Interest cost
|
|
|
1,898
|
|
|
|
3,394
|
|
|
|
5,292
|
|
Expected return on plan assets
|
|
|
(1,529
|
)
|
|
|
(2,888
|
)
|
|
|
(4,417
|
)
|
Pension plan curtailment
|
|
|
|
|
|
|
2,668
|
|
|
|
2,668
|
|
Special termination benefits
|
|
|
|
|
|
|
1,205
|
|
|
|
1,205
|
|
Other, amortization, net
|
|
|
656
|
|
|
|
855
|
|
|
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,050
|
|
|
$
|
6,969
|
|
|
$
|
10,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Other changes recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Foreign
|
|
|
Domestic
|
|
|
Total
|
|
|
Foreign
|
|
Domestic
|
|
Total
|
Net (gain) loss arising during period
|
|
$
|
(4,289
|
)
|
|
$
|
578
|
|
|
$
|
(3,711
|
)
|
|
$
|
|
|
$
|
|
|
$
|
|
Recognition of amortizations in net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition (obligation) asset
|
|
|
185
|
|
|
|
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
Prior service (cost) credit
|
|
|
(32
|
)
|
|
|
(13
|
)
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
Actuarial gain (loss)
|
|
|
(518
|
)
|
|
|
(943
|
)
|
|
|
(1,461
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on amounts included in AOCI
|
|
|
746
|
|
|
|
|
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
|
(3,908
|
)
|
|
|
(378
|
)
|
|
|
(4,286
|
)
|
|
|
9,312
|
|
|
318
|
|
|
9,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
$
|
(1,137
|
)
|
|
$
|
1,310
|
|
|
$
|
173
|
|
|
$
|
11,357
|
|
$
|
2,088
|
|
$
|
13,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit costother postretirement plan:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Service cost
|
|
$
|
25
|
|
$
|
15
|
|
$
|
20
|
Interest cost and other
|
|
|
539
|
|
|
570
|
|
|
616
|
Special termination benefits
|
|
|
|
|
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
564
|
|
$
|
585
|
|
$
|
1,066
|
|
|
|
|
|
|
|
|
|
|
Other changes recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
Net (gain) loss arising during period
|
|
$
|
(444
|
)
|
|
$
|
|
Recognition of amortizations in net periodic benefit cost
|
|
|
|
|
|
|
|
Prior service (cost) credit
|
|
|
67
|
|
|
|
|
Actuarial gain (loss)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
|
(461
|
)
|
|
|
2,169
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
$
|
103
|
|
|
$
|
2,754
|
|
|
|
|
|
|
|
|
Estimated amounts that will be amortized from accumulated other comprehensive loss over the
next fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Other
Postretirement
Benefits
|
|
|
|
Foreign
|
|
|
Domestic
|
|
Total
|
|
|
Transition obligation (asset)
|
|
$
|
(198
|
)
|
|
$
|
|
|
$
|
(198
|
)
|
|
$
|
|
|
Actuarial (gain) loss
|
|
|
194
|
|
|
|
804
|
|
|
998
|
|
|
|
70
|
|
Prior service cost (credit)
|
|
|
34
|
|
|
|
11
|
|
|
45
|
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30
|
|
|
$
|
815
|
|
$
|
845
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Weighted-average assumptions used to determine benefit obligations at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.75
|
%
|
|
5.50
|
%
|
|
5.75
|
%
|
|
5.50
|
%
|
Rate of compensation increase
|
|
3.375
|
%
|
|
3.375
|
%
|
|
N/A
|
|
|
N/A
|
|
Foreign Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.55
|
%
|
|
4.81
|
%
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
|
3.95
|
%
|
|
3.19
|
%
|
|
N/A
|
|
|
N/A
|
|
Weighted-average assumptions used to determine net periodic benefit costs for years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
5.500
|
%
|
|
5.500
|
%
|
|
5.500
|
%
|
|
5.50
|
%
|
Expected long-term return on plan assets
|
|
8.500
|
%
|
|
8.500
|
%
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
|
3.375
|
%
|
|
3.375
|
%
|
|
N/A
|
|
|
N/A
|
|
Foreign Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.81
|
%
|
|
4.35
|
%
|
|
N/A
|
|
|
N/A
|
|
Expected long-term return on plan assets
|
|
4.19
|
%
|
|
4.17
|
%
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
|
3.19
|
%
|
|
3.10
|
%
|
|
N/A
|
|
|
N/A
|
|
The long-term rates of return on assets were selected from within the reasonable range of rates
determined by (a) historical real returns for the asset classes covered by the investment policy and (b) projections of inflation over the long-term period during which benefits are payable to plan participants.
Assumed health care cost trend rates at December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Health care cost trend rate for next year
|
|
8.75
|
%
|
|
9.5
|
%
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
|
|
5.0
|
%
|
|
5.0
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
2014
|
|
|
2014
|
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
1% point
Increase
|
|
1% point
Decrease
|
|
Effect on total service and interest cost
|
|
$
|
23
|
|
$
|
(20
|
)
|
Effect on postretirement benefit obligations
|
|
|
430
|
|
|
(390
|
)
|
48
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Plan Assets
The Companys pension plan target asset allocation and the weighted-average asset allocations at December 31, 2007 and 2006 by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at December 31,
|
|
|
|
Target
|
|
|
2007
|
|
|
2006
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
61
|
%
|
|
60
|
%
|
|
62
|
%
|
Debt securities
|
|
32
|
%
|
|
14
|
%
|
|
12
|
%
|
Other
|
|
7
|
%
|
|
26
|
%
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
Foreign Plans
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
14
|
%
|
|
15
|
%
|
|
11
|
%
|
Debt securities
|
|
86
|
%
|
|
85
|
%
|
|
89
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, Other consisted principally of hedge funds
(approximately 5% of plan assets) and cash and cash equivalents (approximately 21% of plan assets). Based upon prevailing interest rates available for money market funds, a temporary addendum to the investment policy was approved in May 2006. This
addendum allowed for a greater range of the mix between debt securities and cash and cash equivalents around the stated long-term target allocation percentages presented in the above table. The Company was in compliance with all approved ranges of
asset allocations.
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 Companys investment responsibilities for the exclusive benefit of plan participants and 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 Companys pension investment professionals have discretion to manage the assets within established asset allocation ranges
approved by senior management of the Company.
The total value of plan assets for the Companys pension plans is $91,944 and $82,021
as of December 31, 2007 and 2006, respectively. U.S. pension assets include Company common stock in the amounts of $220 (less than 1% of total U.S. plan assets), and $221 (less than 1% of total U.S. plan assets) at December 31, 2007 and
2006, respectively.
Cash Flows
Contributions
The Company expects to make minimum cash contributions of $6,669 to its pension plans ($3,595 Domestic,
$3,074 Foreign) and $1,000 to its other postretirement benefit plan in 2008.
49
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other
Postretirement
Benefits
|
|
|
Foreign
|
|
Domestic
|
|
Total
|
|
2008
|
|
$
|
1,370
|
|
$
|
4,165
|
|
$
|
5,535
|
|
$
|
1,000
|
2009
|
|
|
1,547
|
|
|
4,059
|
|
|
5,606
|
|
|
950
|
2010
|
|
|
1,616
|
|
|
4,377
|
|
|
5,993
|
|
|
960
|
2011
|
|
|
1,785
|
|
|
5,050
|
|
|
6,835
|
|
|
930
|
2012
|
|
|
1,846
|
|
|
5,129
|
|
|
6,975
|
|
|
910
|
2013 and beyond
|
|
|
10,503
|
|
|
26,996
|
|
|
37,499
|
|
|
3,930
|
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 $1,297, $1,076 and $725 in 2007, 2006 and 2005, respectively, representing
the annual accrued benefits under this plan.
Defined Contribution Plan
The Company has a 401(k) plan with an employer match covering substantially all domestic employees. Effective January 1, 2006, the plan added a
nonelective contribution on behalf of participants who have completed one year of service equal to 3% of the eligible participants compensation. Total Company contributions were $1,634, $1,402 and $625 for 2007, 2006 and 2005, respectively.
Note 12Debt
Debt consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Industrial development authority monthly 5.10% fixed rate demand bonds maturing 2018
|
|
$
|
5,000
|
|
|
$
|
5,000
|
|
Credit facilities (5.8% weighted average borrowing rate at December 31, 2007)
|
|
|
73,848
|
|
|
|
79,212
|
|
Other debt obligations (including capital leases)
|
|
|
3,927
|
|
|
|
5,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,775
|
|
|
|
90,187
|
|
Short-term debt
|
|
|
(2,533
|
)
|
|
|
(3,261
|
)
|
Current portion of long-term debt
|
|
|
(1,755
|
)
|
|
|
(1,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,487
|
|
|
$
|
85,237
|
|
|
|
|
|
|
|
|
|
|
The long-term financing agreements require the maintenance of certain financial covenants with
which the Company is in compliance. During the next five years, payments on the Companys debt, including capital lease maturities, are due as follows: $4,288 in 2008, $1,467 in 2009, $537 in 2010, $21 in 2011, $71,462 in 2012 and $5,000 beyond
2012.
50
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
On August 13, 2007, Quaker and certain of its wholly owned subsidiaries entered into a second
amendment to the 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 increased 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. In general, borrowings under the credit facility bear interest at either a base rate or LIBOR rate plus a margin based on the Companys consolidated leverage
ratio. In February 2007, the Company completed a refinancing of its existing industrial development bonds to fix the interest rate on an additional $5,000 of debt.
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, 2007 and 2006. Under its most
restrictive covenants, the Company could have borrowed an additional $67,583 at December 31, 2007. At December 31, 2007 and 2006, the Company had approximately $73,848 and $79,212 outstanding on these credit lines at a weighted average
borrowing rate of 5.8% and 5.69%, respectively. 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 at December 31, 2007.
At December 31, 2007 and 2006, the amounts at which the Companys debt are recorded
are not materially different from their fair market value.
Note 13Shareholders Equity and Stock-Based Compensation
The Company has 30,000,000 shares of common stock authorized, with a par value of $1, and 10,147,239 shares issued as of December 31, 2007.
Holders of record of the Companys 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 the Companys common stock for a period greater than 36 consecutive calendar months are entitled to 10 votes per share of common stock.
The Company is authorized to issue 10,000,000 shares of preferred stock, $1 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.
On March 6, 2000, the Companys Board of Directors approved a new Rights Plan and declared a dividend of one new right (the
Rights) for each outstanding share of common stock to shareholders of record on March 20, 2000.
The Rights become
exercisable if a person or group acquires or announces a tender offer which would result in such persons acquisition of 20% or more of the Companys common stock.
Each Right, when exercisable, entitles the registered holder to purchase one one-hundredth of a share of a newly authorized Series B preferred stock at
an exercise price of sixty-five dollars per share subject to certain anti-dilution adjustments. In addition, if a person or group acquires 20% or more of the outstanding shares of the Companys common stock, without first obtaining Board of
Directors approval, as required by the terms of the Rights Agreement, each Right will then entitle its holder (other than such person or members of any such group) to purchase, at the Rights then current exercise price, a number of one
one-hundredth shares of Series B preferred stock having a total market value of twice the Rights exercise price.
51
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
In addition, at any time after a person acquires 20% of the outstanding shares of common stock and
prior to the acquisition by such person of 50% or more of the outstanding shares of common stock, the Company may exchange the Rights (other than the Rights which have become null and void), in whole or in part, at an exchange ratio of one share of
common stock or equivalent share of preferred stock, per Right.
The Board of Directors can redeem the Rights for $.01 per Right at any
time prior to the acquisition by a person or group of beneficial ownership of 20% or more of the Companys 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.
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
.
SFAS 123R requires the Company to present pro forma information for the comparative periods prior to the adoption as if the Company had accounted for all
employee stock options under the fair value method of the original SFAS 123. The following table illustrates the effect on net income and net income per common share if the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation in the prior-year period:
|
|
|
|
|
|
|
December 31,
2005
|
|
Net Incomeas reported
|
|
$
|
1,688
|
|
Add: Stock-based employee compensation expense included in net income, net of related tax effects
|
|
|
347
|
|
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of
tax
|
|
|
(832
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
1,203
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basicas reported
|
|
$
|
0.17
|
|
Basicpro forma
|
|
$
|
0.12
|
|
Dilutedas reported
|
|
$
|
0.17
|
|
Dilutedpro forma
|
|
$
|
0.12
|
|
52
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
The Company recognized approximately $1,550 of sharebased compensation expense and $543 of
related tax benefits in our consolidated statement of income for the year ended December 31, 2007. The compensation expense was comprised of $408 related to stock options, $980 related to nonvested stock awards, $41 related to the
Companys Employee Stock Purchase Plan, and $121 related to the Companys Director Stock Ownership Plan. The Company recognized approximately $857 of share-based compensation expense and $300 of related tax benefits in our consolidated
statement of income for the year ended December 31, 2006. The compensation expense was comprised of $224 related to stock options, $474 related to nonvested stock awards, $34 related to the Companys Employee Stock Purchase Plan, and $125
related to the Companys Director Stock Ownership Plan.
Approximately $91 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 stock-based awards. The estimated fair value of the Companys
stock-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 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 $91 due to the accrual of compensation expense on the unvested stock options for the year ended
December 31, 2006.
No compensation expense related to stock option grants had been recorded in the condensed consolidated statement
of income for 2005, as all of the options granted had an exercise price equal to the market value of the underlying stock on the date of grant. Accordingly, results for prior periods have not been restated.
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 derived from Company performance over a three-year period. In the fourth
quarter of 2007, the Company recorded equity-based compensation expense of $378 as it became probable that the performance condition regarding the Companys 2005 grant would be achieved. Common stock awards issued in 2006 and 2007 under the
LTIP program are subject only to time vesting over a three to five-year period. In addition, as part of the Companys Global Annual Incentive Plan (GAIP), nonvested shares may be issued to key employees, which generally vest over a
two to five-year period.
53
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Stock option activity under all plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
per Share
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
per Share
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
Options outstanding at January 1,
|
|
1,092,420
|
|
|
20.69
|
|
|
|
1,183,485
|
|
|
19.88
|
|
|
Options granted
|
|
166,065
|
|
|
23.13
|
|
|
|
120,600
|
|
|
19.98
|
|
|
Options exercised
|
|
(183,335
|
)
|
|
18.46
|
|
|
|
(175,750
|
)
|
|
14.57
|
|
|
Options forfeited
|
|
(29,956
|
)
|
|
23.16
|
|
|
|
(2,375
|
)
|
|
23.08
|
|
|
Options expired
|
|
(12,019
|
)
|
|
24.04
|
|
|
|
(33,540
|
)
|
|
21.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31,
|
|
1,033,175
|
|
|
21.36
|
|
3.1
|
|
1,092,420
|
|
|
20.69
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31,
|
|
808,035
|
|
|
21.16
|
|
2.3
|
|
948,010
|
|
|
20.65
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
per Share
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
Options outstanding at January 1,
|
|
1,237,425
|
|
|
19.49
|
|
|
Options granted
|
|
158,360
|
|
|
21.97
|
|
|
Options exercised
|
|
(156,775
|
)
|
|
17.97
|
|
|
Options forfeited
|
|
(2,500
|
)
|
|
23.22
|
|
|
Options expired
|
|
(53,025
|
)
|
|
22.38
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31,
|
|
1,183,485
|
|
|
19.88
|
|
3.3
|
|
|
|
|
|
|
|
|
Options exercisable at December 31,
|
|
1,066,274
|
|
|
19.55
|
|
3.2
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during 2007 was approximately $735. 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 December 31, 2007, the total intrinsic value of options outstanding was approximately $1,411, and the
total intrinsic value of exercisable options was approximately $1,263.
A summary of the Companys outstanding stock options at
December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise
Prices
|
|
Number
Outstanding at
12/31/2007
|
|
Weighted
Average
Contractual Life
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable at
12/31/2007
|
|
Weighted
Average
Exercise Price
|
$13.30$15.96
|
|
1,000
|
|
1.25
|
|
14.13
|
|
1,000
|
|
14.13
|
15.97 18.62
|
|
127,600
|
|
0.20
|
|
17.55
|
|
127,600
|
|
17.55
|
18.63 21.28
|
|
437,075
|
|
2.56
|
|
20.10
|
|
362,675
|
|
20.12
|
21.29 23.94
|
|
318,700
|
|
4.94
|
|
22.46
|
|
167,960
|
|
21.85
|
23.95 26.60
|
|
148,800
|
|
2.88
|
|
26.06
|
|
148,800
|
|
26.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033,175
|
|
3.10
|
|
21.36
|
|
808,035
|
|
21.16
|
|
|
|
|
|
|
|
|
|
|
|
54
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
As of December 31, 2007, unrecognized compensation expense related to options granted in 2006
was $208 and for options granted during 2007 was $517.
During the second quarter of 2006, the Company granted 120,600 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 4.1%, expected volatility of 27.1%, risk free
interest rate of 5.0%, an expected term of 6 years, and a forfeiture rate of 3% over the remaining life of the options. Approximately $209 and $133 of expense was recorded on these options during 2007 and 2006, respectively. The fair value of these
awards is amortized on a straight-line basis over the awards vesting period.
During the first quarter of 2007, the Company granted 166,065
stock options under the Companys LTIP plan 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 $199 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 vested, 15,680 shares were forfeited and 72,110 shares
were outstanding as of December 31, 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 December 31, 2007, unrecognized compensation expense related to these awards was $836, to be recognized over a weighted average remaining period of 1.9 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 December 31, 2007, 12,750 shares vested and were issued, no shares were forfeited and 27,500 shares were outstanding. As of December 31, 2007,
unrecognized compensation expense related to these awards was $126 to be recognized over a weighted average remaining period of 1.6 years.
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
55
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
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 December 31, 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. Currently, 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. The Company recorded approximately $121, $125 and $116 of expense in 2007, 2006 and 2005, respectively.
Restricted Stock Bonus
As part of the Companys
2001 Global Annual Incentive Plan (GAIP), approved by shareholders on May 9, 2001, a restricted stock bonus of 100,000 shares of the Companys stock was granted to an executive of the Company. The shares were issued in April
2001, in accordance with the terms of the GAIP, and registered in the executives name. The shares vested over a five-year period, with the first installment vesting at the end of 2001 on achieving certain performance targets and the four
remaining installments vesting annually in January thereafter, subject to the executives continued employment by the Company. In 2005, 20,000 shares were earned and $355 was charged to selling, general, and administrative expenses,
respectively.
Note 14Earnings Per Share
The following table summarizes earnings per share (EPS) calculations for the years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Numerator for basic EPS and diluted EPSnet income
|
|
$
|
15,471
|
|
$
|
11,667
|
|
$
|
1,688
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPSweighted average shares
|
|
|
9,986,347
|
|
|
9,778,745
|
|
|
9,679,013
|
Effect of dilutive securities, primarily employee stock options
|
|
|
120,571
|
|
|
75,355
|
|
|
136,572
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPSweighted average shares and assumed conversions
|
|
|
10,106,918
|
|
|
9,854,100
|
|
|
9,815,585
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
1.55
|
|
$
|
1.19
|
|
$
|
0.17
|
Diluted EPS
|
|
$
|
1.53
|
|
$
|
1.18
|
|
$
|
0.17
|
56
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
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: 413,753, 787,020 and 769,670 in 2007, 2006 and 2005, respectively.
Note 15Business
Segments
The Companys reportable segments are as follows:
(1) Metalworking process chemicalsindustrial process fluids for various heavy industrial and manufacturing applications.
(2) Coatingstemporary and permanent coatings for metal and concrete products and chemical milling maskants.
(3) Other chemical productsother 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.
The table below presents information about the reported segments for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metalworking
Process
Chemicals
|
|
Coatings
|
|
Other
Chemical
Products
|
|
Total
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
506,033
|
|
$
|
36,646
|
|
$
|
2,918
|
|
$
|
545,597
|
Operating income
|
|
|
74,285
|
|
|
8,305
|
|
|
102
|
|
|
82,692
|
Depreciation
|
|
|
9,747
|
|
|
706
|
|
|
56
|
|
|
10,509
|
Segment assets
|
|
|
377,770
|
|
|
20,012
|
|
|
1,267
|
|
|
399,049
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
425,777
|
|
$
|
32,684
|
|
$
|
1,990
|
|
$
|
460,451
|
Operating income
|
|
|
61,944
|
|
|
7,818
|
|
|
71
|
|
|
69,833
|
Depreciation
|
|
|
8,458
|
|
|
649
|
|
|
40
|
|
|
9,147
|
Segment assets
|
|
|
337,329
|
|
|
19,055
|
|
|
998
|
|
|
357,382
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
393,762
|
|
$
|
26,486
|
|
$
|
3,785
|
|
$
|
424,033
|
Operating income
|
|
|
49,357
|
|
|
6,574
|
|
|
470
|
|
|
56,401
|
Depreciation
|
|
|
7,346
|
|
|
494
|
|
|
71
|
|
|
7,911
|
Segment Assets
|
|
|
312,776
|
|
|
18,196
|
|
|
1,023
|
|
|
331,995
|
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 non-consolidated affiliates.
57
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
A reconciliation of total segment operating income to total consolidated income before taxes for the
years ended December 31, 2007, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Total operating income for reportable segments
|
|
$
|
82,692
|
|
|
$
|
69,833
|
|
|
$
|
56,401
|
|
Restructuring and related charges, net
|
|
|
|
|
|
|
|
|
|
|
(10,320
|
)
|
Environmental charges
|
|
|
(3,300
|
)
|
|
|
|
|
|
|
|
|
Non-operating charges
|
|
|
(51,811
|
)
|
|
|
(45,785
|
)
|
|
|
(40,307
|
)
|
Depreciation of corporate assets and amortization
|
|
|
(2,374
|
)
|
|
|
(2,416
|
)
|
|
|
(2,620
|
)
|
Interest expense
|
|
|
(6,426
|
)
|
|
|
(5,520
|
)
|
|
|
(3,681
|
)
|
Interest income
|
|
|
1,376
|
|
|
|
1,069
|
|
|
|
1,022
|
|
Other income, net
|
|
|
2,578
|
|
|
|
1,259
|
|
|
|
6,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before taxes
|
|
$
|
22,735
|
|
|
$
|
18,440
|
|
|
$
|
6,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and long-lived asset information is by geographic area as of and for the years ended
December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Net sales
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
232,550
|
|
$
|
202,979
|
|
$
|
190,735
|
Europe
|
|
|
168,982
|
|
|
141,444
|
|
|
130,080
|
Asia/Pacific
|
|
|
82,059
|
|
|
63,600
|
|
|
53,763
|
South America
|
|
|
58,538
|
|
|
49,281
|
|
|
43,939
|
South Africa
|
|
|
3,468
|
|
|
3,147
|
|
|
5,516
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
545,597
|
|
$
|
460,451
|
|
$
|
424,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
80,170
|
|
$
|
79,206
|
|
$
|
80,555
|
Europe
|
|
|
40,701
|
|
|
36,455
|
|
|
41,553
|
Asia/Pacific
|
|
|
13,687
|
|
|
10,203
|
|
|
5,283
|
South America
|
|
|
20,694
|
|
|
16,671
|
|
|
14,181
|
South Africa
|
|
|
39
|
|
|
33
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
155,291
|
|
$
|
142,568
|
|
$
|
141,617
|
|
|
|
|
|
|
|
|
|
|
Note 16Business Acquisitions and Divestitures
In May 2007, the Companys Q2 Technologies, (Q2T) joint venture acquired the oil and gas field chemical 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 were recorded to be
amortized over five years.
In the fourth quarter of 2006, the Company acquired the remaining interest in its Chinese joint venture. In
accordance with the purchase agreement, payments for the acquisition occur as follows: $614 within five business days of closing, $825 one year from the closing date, $825 two years from the closing date, and $889 three years from the closing date.
The Company recorded the present value of the remaining payments as debt.
58
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
The Company made the first payment in the fourth quarter of 2006; the second payment in the fourth quarter of 2007. In addition, the Company allocated $797
to intangible assets, comprising customer lists to be amortized over ten years and a non-compete agreement to be amortized over two years. The Company also recorded $230 of goodwill, which was assigned to the metalworking process chemicals segment.
The following table shows the allocation of purchase price of assets and liabilities recorded at the acquisition date. The pro forma results of operations have not been provided because the effects were not material:
|
|
|
|
|
|
December 31, 2006
|
Current assets
|
|
$
|
3,114
|
Fixed assets
|
|
|
237
|
Intangibles
|
|
|
797
|
Goodwill
|
|
|
230
|
Other non current assets
|
|
|
34
|
|
|
|
|
Total assets
|
|
|
4,412
|
|
|
|
|
Current liabilities
|
|
|
1,538
|
Current portion of long-term debt
|
|
|
1,393
|
Long-term debt
|
|
|
1,481
|
|
|
|
|
Total liabilities
|
|
|
4,412
|
|
|
|
|
Cash Paid
|
|
$
|
|
|
|
|
|
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. In connection with the acquisition, the Company allocated $1,475 to intangible
assets, comprising customer lists of $600 to be amortized over 20 years and non-compete agreements of $875 to be amortized over five years. The Company also recorded $610 of goodwill, which was assigned to the metalworking process chemicals segment.
The first $1,000 payment was made in March 2006, and the second payment of $1,000 was made in February 2007. Both payments were recorded as goodwill and assigned to the metalworking process chemicals segment.
Note 17Goodwill and Other Intangible Assets
The Company completed its annual impairment assessment as of the end of the third quarter of 2007 and no impairment charge was warranted. The changes in carrying amount of goodwill for the years ended December 31, 2007 and 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Metalworking
Process
Chemicals
|
|
Coatings
|
|
Total
|
Balance as of December 31, 2005
|
|
$
|
28,149
|
|
$
|
7,269
|
|
$
|
35,418
|
|
|
|
|
|
|
|
|
|
|
Goodwill additions
|
|
|
1,535
|
|
|
|
|
|
1,535
|
Currency translation adjustments
|
|
|
1,787
|
|
|
|
|
|
1,787
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
$
|
31,471
|
|
$
|
7,269
|
|
$
|
38,740
|
|
|
|
|
|
|
|
|
|
|
Goodwill additions
|
|
|
1,016
|
|
|
|
|
|
1,016
|
Currency translation adjustments and other
|
|
|
3,221
|
|
|
812
|
|
|
4,033
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
35,708
|
|
$
|
8,081
|
|
$
|
43,789
|
|
|
|
|
|
|
|
|
|
|
59
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and rights to sell
|
|
$
|
8,391
|
|
$
|
7,682
|
|
$
|
3,340
|
|
$
|
2,812
|
Trademarks and patents
|
|
|
1,788
|
|
|
1,788
|
|
|
1,788
|
|
|
1,781
|
Formulations and product technology
|
|
|
3,278
|
|
|
3,278
|
|
|
1,931
|
|
|
1,645
|
Other
|
|
|
3,384
|
|
|
3,143
|
|
|
2,509
|
|
|
1,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,841
|
|
$
|
15,891
|
|
$
|
9,568
|
|
$
|
8,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded $1,197, $1,427 and $1,368 of amortization expense in 2007, 2006 and 2005,
respectively. Estimated annual aggregate amortization expense for the subsequent five years is as follows:
|
|
|
|
For the year ended December 31, 2008
|
|
$
|
1,143
|
For the year ended December 31, 2009
|
|
$
|
1,079
|
For the year ended December 31, 2010
|
|
$
|
879
|
For the year ended December 31, 2011
|
|
$
|
814
|
For the year ended December 31, 2012
|
|
$
|
716
|
The Company has one indefinite-lived intangible asset of $600 for trademarks.
Note 18Other Assets
Other assets comprise:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Restricted insurance settlement
|
|
$
|
18,651
|
|
$
|
14,800
|
Pension assets
|
|
|
1,684
|
|
|
430
|
Deferred compensation assets
|
|
|
5,214
|
|
|
5,489
|
Supplemental retirement income program
|
|
|
3,915
|
|
|
3,323
|
Uncertain tax positions
|
|
|
1,860
|
|
|
|
Other
|
|
|
2,695
|
|
|
3,485
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,019
|
|
$
|
27,527
|
|
|
|
|
|
|
|
In December 2005, an inactive subsidiary of the Company reached a settlement agreement and release
with one of its insurance carriers for $15,000. In accordance with the agreement, the subsidiary received $7,500 cash in December 2005 and the remaining $7,500 in December of 2006. In the first quarter of 2007, the subsidiary reached a settlement
agreement and release with another one of its insurance carriers for $20,000 payable in four annual installments of $5,000, the first of which was received in the second quarter of 2007. Under the latest settlement and release agreement, the
subsequent installments are contingent upon whether or not Federal asbestos litigation 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
60
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
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. The proceeds of the settlement and release agreements have been deposited into an interest bearing account which earned approximately $705 and $336 in
2007 and 2006, respectively, offset by $1,854 and $544 of payments in 2007 and 2006, respectively. Due to the restricted nature of the proceeds, a corresponding deferred credit was established in Other non-current liabilities for an
equal and offsetting amount, and will remain until the restrictions lapse or the funds are exhausted via payments of claims and costs of defense. See Notes 19 and 20 of Notes to Consolidated Financial Statements.
Note 19Other Non-Current Liabilities
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2006
|
Restricted insurance settlement
|
|
$
|
18,651
|
|
$
|
14,800
|
Uncertain tax positions
|
|
|
11,872
|
|
|
|
Environmental reserves
|
|
|
2,000
|
|
|
800
|
Fair value of interest rate swaps
|
|
|
1,102
|
|
|
|
Other (primarily deferred compensation agreements)
|
|
|
7,398
|
|
|
7,753
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,023
|
|
$
|
23,353
|
|
|
|
|
|
|
|
See also Notes 18 and 20 of Notes to Consolidated Financial Statements.
Note 20Commitments 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 $2,000 in two equal payments of $1,000 (the first payment paid October 31, 2007 and
the second payment paid on February 15, 2008). In addition to the $2,000 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 ACPs 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 $3,300
charge made up of $2,000 for the settlement of the litigation, plus an increase in its reserve for its soil and water remediation program of $1,300. As of December 31, 2007, the Company believes that the range of potential-known liabilities
associated with ACP contamination including the water and soil remediation program, is approximately $3,700 to $5,600, 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
61
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
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 well to be installed and 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. As mentioned above, a significantly higher maintenance expense was factored into the range if the system operates for the longer period. 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.
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 December 31, 2007 and
December 31, 2006, 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 the proceeds from insurance settlements received in late 2005, late 2006 and 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 $13,800 (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 has 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
62
QUAKER CHEMICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Dollars in
thousands except per share amounts)
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 18 and 19 of Notes to Consolidated Financial Statements.
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 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.
The Company leases certain manufacturing
and office facilities and equipment under non-cancelable operating leases with various terms from one to 15 years expiring in 2016. Rent expense for 2007, 2006 and 2005 was $4,239, $4,475 and $5,165, respectively. The Companys minimum rental
commitments under non-cancelable operating leases at December 31, 2007, were approximately $4,220 in 2008, $3,060 in 2009, $2,376 in 2010, $1,864 in 2011, $1,822 in 2012, and $5,846 thereafter.
Note 21Quarterly Results (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
(1)
|
|
Fourth
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
124,891
|
|
$
|
137,598
|
|
$
|
140,715
|
|
$
|
142,393
|
Gross profit
|
|
|
38,546
|
|
|
42,612
|
|
|
43,168
|
|
|
43,610
|
Operating income
|
|
|
6,627
|
|
|
7,203
|
|
|
3,266
|
|
|
8,111
|
Net income
|
|
|
3,537
|
|
|
4,151
|
|
|
3,160
|
|
|
4,623
|
Net income per sharebasic
|
|
$
|
0.36
|
|
$
|
0.42
|
|
$
|
0.32
|
|
$
|
0.46
|
Net income per sharediluted
|
|
$
|
0.35
|
|
$
|
0.41
|
|
$
|
0.31
|
|
$
|
0.46
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
109,816
|
|
$
|
118,683
|
|
$
|
116,425
|
|
$
|
115,527
|
Gross profit
|
|
|
32,485
|
|
|
36,065
|
|
|
36,775
|
|
|
37,276
|
Operating income
|
|
|
5,123
|
|
|
6,276
|
|
|
5,290
|
|
|
4,943
|
Net income
|
|
|
2,542
|
|
|
2,992
|
|
|
3,139
|
|
|
2,994
|
Net income per sharebasic
|
|
$
|
0.26
|
|
$
|
0.31
|
|
$
|
0.32
|
|
$
|
0.30
|
Net income per sharediluted
|
|
$
|
0.26
|
|
$
|
0.30
|
|
$
|
0.32
|
|
$
|
0.30
|
(1)
|
See Note 2 of Notes to Consolidated Financial Statements.
|
63