UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K

 


 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20032006

or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-7154001-12019

 


QUAKER CHEMICAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

A Pennsylvania Corporation No. 23-0993790
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

One Quaker Park, 901 Hector Street,


Conshohocken, Pennsylvania

 19428
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area codecode: (610) 832-4000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class


 

Name of each Exchange on which registered


Common Stock, $1.00 par value

 New York Stock Exchange

Stock Purchase Rights

 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 


Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨Accelerated filer  xNon-accelerated filer  ¨

Indicate by check mark whether the Registrant is an accelerated filera shell company (as defined in Exchange Act Rule 12b-2)12b-2 of the Act).    Yes¨    No  x    No  ¨

State aggregate market value of common stock held by non-affiliates of the Registrant. (The aggregate market value is computed by reference to the last reported sale on the New York Stock Exchange on June 30, 2003)2006): $219,520,465.

$184,494,293.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date: 9,623,15010,020,588 shares of Common Stock, $1.00 Par Value, as of February 29, 2004.

28, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement dated March 31, 2004 in connection withrelating to the Annual Meeting of Shareholders to be held on May 5, 20049, 2007 are incorporated by reference into Part III.

 



PART I

As used in this Report, the terms “Quaker,” the “Company,” “we” and “our” refer to Quaker Chemical Corporation, its subsidiaries, and associated companies, unless the context otherwise requires.

 

Item 1.    Business.

Item 1.Business.

General Description

Quaker develops, produces, and markets a broad range of formulated chemical specialty products for various heavy industrial and manufacturing applications and, in addition, offers and markets chemical management services (“CMS”). Quaker’s principal products and services include: (i) rolling lubricants (used by manufacturers of steel in the hot and cold rolling of steel and by manufacturers of aluminum in the hot rolling of aluminum); (ii) corrosion preventives (used by steel and metalworking customers to protect metal during manufacture, storage, and shipment); (iii) metal finishing compounds (used to prepare metal surfaces for special treatments such as galvanizing and tin plating and to prepare metal for further processing); (iv) machining and grinding compounds (used by metalworking customers in cutting, shaping, and grinding metal parts which require special treatment to enable them to tolerate the manufacturing process)process, achieve closer tolerance and improve tool life); (v) forming compounds (used to facilitate the drawing and extrusion of metal products); (vi) hydraulic fluids (used by steel, metalworking, and other customers to operate hydraulically activated equipment); (vii) technology for the removal of hydrogen sulfide in various industrial applications; (viii) chemical milling maskants for the aerospace industry and temporary and permanent coatings for metal and concrete products; (ix) construction products such as flexible sealants and protective coatings for various applications; and (x) programs to provide chemical management services. Individual product lines representing more than 10% of consolidated revenues for any of the past three years are as follows:

 

   2003

  2002

  2001

 

Rolling lubricants

  23.2% 21.5% 22.9%

Machining and grinding compounds

  14.3% 14.8% 15.2%

Chemical management services

  10.9% 4.8% 5.4%

Hydraulic fluids

  10.7% 12.7% 12.4%

Corrosion preventives

  9.1% 10.4% 10.5%

   2006  2005  2004 

Rolling lubricants

  21.0% 21.3% 22.3%

Machining and grinding compounds

  16.6% 16.4% 15.0%

Chemical management services

  10.3% 11.7% 13.6%

Hydraulic fluids

  10.8% 10.4% 10.1%

Corrosion preventives

  10.6% 9.5% 9.8%

A substantial portion of Quaker’s sales worldwide are made directly through its own employees and its CMS programs with the balance being handled through distributorsvalue-added resellers and agents. Quaker employees visit the plants of customers regularly and, through training and experience, identify production needs which can be resolved or alleviated either by adapting Quaker’s existing products or by applying new formulations developed in Quaker’s laboratories. Quaker makes little use of advertising but relies heavily upon its reputation in the markets which it serves. Generally, separate manufacturing facilities of a single customer are served by different personnel. Sales are generally recorded when products are shipped to customers and services earned. For products shipped on consignment, revenue is recorded upon usage by the customer. As part of the Company’s chemical management services, certain third partythird-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 the 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 $26.6$62.8 million, $28.3$38.8 million, and $20.7$35.2 million for 2003, 2002,2006, 2005 and 2001,2004, respectively. 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 recordedrecognized in accordance with agreed-upon terms, when earnedperformance obligations are satisfied, the amount is fixed or determinable, and collectibility is reasonably assured, and are included in other income.

The business of the Company and its operating results are subject to certain risks, of which the principal ones are referred to in the following subsections.

1


Competition

The chemical specialty industry comprises a number of companies of similar size as well as companies larger and smaller than Quaker. Quaker cannot readily determine its precise position in every industry it serves. Based on information available to Quaker, however, it is estimated that Quaker holds a leading and significant global position (among a group in excess of 25 other suppliers) in the market for process fluids to produce sheet steel usedsteel. It is also believed that Quaker holds significant global positions in the productionmarkets for process fluids in portions of hotthe automotive and cold rolling of steel.industrial markets. Many competitors are in fewer and more specialized product classifications or provide different levels of technical services in terms of specific formulations for individual customers. Competition in the industry is based primarily on the ability to provide products that meet the needs of the customer and render technical services and laboratory assistance to customers and, to a lesser extent, on price.

Major Customers and Markets

During 2003,In 2006, Quaker’s five largest customers (each composed of multiple subsidiaries or divisions with semi-autonomous purchasing authority) accounted for approximately 24%23% of its consolidated net sales with the largest of these customerscustomer (General Motors) accounting for approximately 9%6% of consolidated net sales. A significant portion of Quaker’s revenues are realized from the sale of process fluids and services to manufacturers of steel, automobiles, appliances, and durable goods, and, therefore, Quaker is subject to the same business cycles as those experienced by these manufacturers and their customers. Furthermore, steel customers typically have limited manufacturing locations as compared to metalworking customers and generally use higher volumes of products at a single location. Accordingly, the loss or closure of a steel mill of a significant customer can have a material adverse effect on Quaker’s business.

Raw Materials

Quaker uses over 5001,000 raw materials, including mineral oils and derivatives, animal fats and derivatives, vegetable oils and derivatives, ethylene derivatives, solvents, surface active agents, chlorinated paraffinic compounds, and a wide variety of other organic and inorganic compounds. In 2003,2006, only three raw materialsmaterial groups (mineral oil and derivatives, animal fats and derivatives, and vegetable oils and derivatives) each accounted for as much as 10% of the total cost of Quaker’s raw material purchases. The price of mineral oil is directlycan be affected by the price of crude oil.oil and refining capacity. Accordingly, significant fluctuations in the price of crude oil can have a material effect upon the Company’s business. Many of the raw materials used by Quaker are “commodity” chemicals, and, therefore, Quaker’s earnings can be affected by market changes in raw material prices. Quaker has multiple sources of supply for most materials, and management believes that the failure of any single supplier would not have a material adverse effect upon its business. Reference is made to the disclosure contained in Item 7A of this Report.

Patents and Trademarks

Quaker has a limited number of patents and patent applications, including patents issued, applied for, or acquired in the United States and in various foreign countries, some of which may prove to be material to its business. Principal reliance is placed upon Quaker’s proprietary formulae and the application of its skills and experience to meet customer needs. Quaker’s products are identified by trademarks that are registered throughout its marketing area. Quaker makes little use of advertising but relies heavily upon its reputation in the markets which it serves.

Research and Development—Laboratories

Quaker’s research and development laboratories are directed primarily toward applied research and development since the nature of Quaker’s business requirerequires continual modification and improvement of formulations to provide chemical specialties to satisfy customer requirements. Research and development costs are expensed as incurred. Research and development expenses during 2003, 2002,2006, 2005 and 20012004 were $10.1$13.0 million, $9.1$14.2 million and $8.9$13.8 million, respectively.

2


Quaker maintains quality control laboratory facilities in each of its manufacturing locations. In addition, Quaker maintains in Conshohocken, Pennsylvania, Placentia, California and Uithoorn, The Netherlands, laboratory facilities that are devoted primarily to applied research and development.

Most of Quaker’s subsidiaries and associated companies also have laboratory facilities. Although not as complete as the Conshohocken or Uithoorn laboratories, these facilities are generally sufficient for the requirements of the customers being served. If problems are encountered which cannot be resolved by local laboratories, such problems may be referred to the laboratory staff in Conshohocken or Uithoorn.

Regulatory Matters

In order to facilitate compliance with applicable Federal, state, and local statutes and regulations relating to occupational health and safety and protection of the environment, the Company has an ongoing program of site assessment for the purpose of identifying capital expenditures or other actions that may be necessary to comply with such requirements. The program includes periodic inspections of each facility by Quaker and/or independent environmental experts, as well as ongoing inspections and training by on-site personnel. Such inspections are addressed to operational matters, record keeping, reporting requirements, and capital improvements. In 2003,2006, capital expenditures directed solely or primarily to regulatory compliance amounted to approximately $0.5$0.8 million compared to $0.5$0.7 million and $1.3$1.1 million in 20022005 and 2001,2004, respectively. In 2004,2007, the Company expects to incur approximately $1.6$1.2 million for capital expenditures directed primarily to regulatory compliance. Incorporated by reference is the information regarding AC Products, Inc. contained in Note 1418 of Notes to Consolidated Financial Statements included in Item 8 of this Report.

Number of Employees

On December 31, 2003,2006, Quaker’s consolidated companies had 1,1411,287 full-time employees of whom 497540 were employed by the parent company and its U.S. subsidiaries and 644747 were employed by its non-U.S. subsidiaries. Associated companies of Quaker (in which it owns 50% or less) employed 148159 people on December 31, 2003.

2006.

Product Classification

The Company’s reportable segments are as follows:

(1) Metalworking process chemicalsproducts used as lubricantsindustrial process fluids for various heavy industrial and manufacturing applications.

(2) Coatings—temporary and permanent coatings for metal and concrete products and chemical milling maskants.

(3) Other chemical products—other various chemical products.

Incorporated by reference is the segment information contained in Note 1113 of Notes to Consolidated Financial Statements included in Item 8 of this Report.

Non-U.S. Activities

Since significant revenues and earnings are generated by non-U.S. operations, Quaker’s financial results are affected by currency fluctuations, particularly between the U.S. dollar, the E.U. euro, the Brazilian real, and other foreign currencies,the Chinese renminbi and the impact of those currency fluctuations on the underlying economies. Incorporated by reference is the foreign exchange risk information contained in Item 7A of this Report and the geographic information in Note 1113 of Notes to Consolidated Financial Statements included in Item 8 of this Report.

Quaker on the Internet

Financial results, news and other information about Quaker can be accessed from the Company’s Web site athttp://www.quakerchem.com.www.quakerchem.com. This site includes important information on products and services, financial reports, news releases, and career opportunities. The Company’s periodic and current reports, including exhibits and supplemental schedules filed therewith, and amendments to those reports, filed with the Securities and Exchange Commission (“SEC”) are available on the Company’s Web site, free of charge, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Information that can be accessed through the Company’s Web site is not incorporated by reference in this Report and accordingly you should not consider that information part of this Report.

3


Factors that May Affect Our Future Results

(Cautionary Statements under the Private Securities Litigation Reform Act of 1995)

Certain information included in this Report and other materials filed or to be filed by Quaker with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including:

 

statements relating to our business strategy;

 

our current and future results and plans; and

 

statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions.

Such statements include information relating to current and future business activities, operational matters, capital spending, and financing sources. From time to time, oral or written forward-looking statements are also included in Quaker’s periodic reports on Forms 10-Q and 8-K, press releases, and other materials released to the public.

Any or all of the forward-looking statements in this Report, in Quaker’s Annual Report to Shareholders for 2003,2006, and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Report will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in Quaker’s subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. These forward-looking statements are subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. A major risk is that the Company’s demand is largely derived from the demand for its customers’ products, which subjects the Company to uncertainties related to downturns in a customer’s business and unanticipated customer production shutdowns. Other major risks and uncertainties include, but are not limited to, significant increases in raw material costs, worldwide economic and political conditions, foreign currency fluctuations, and terrorist attacks such as those that occurred on September 11, 2001.2001, each of which is discussed in greater detail in Item 1A of this Report. Furthermore, the Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, appliance, and durable goods manufacturers. These risks, uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results. Other factors

beyond those discussed belowin this Report could also adversely affect us. Therefore, we caution you not to place undue reliance on our forward-looking statements. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

 

Item 1A.Risk Factors

Item 2.    Properties.Changes to the industries and markets that Quaker serves could have a material adverse effect on the Company’s liquidity, financial position and results of operations.

The chemical specialty industry comprises a number of companies of similar size as well as companies larger and smaller than Quaker. It is estimated that Quaker holds a leading global position in the markets for process fluids to produce sheet steel and in portions of the automotive and industrial markets. The industry is highly competitive, and a number of companies with significant financial resources and/or customer relationships compete with us to provide similar products and services. Our competitors may be positioned to offer more favorable pricing and service terms, resulting in reduced profitability and loss of market share for us. Historically, competition in the industry has been based primarily on the ability to provide products that meet the needs of the customer and render technical services and laboratory assistance to the customer and, to a lesser extent, on price. Success factors critical to the Company’s business include successfully differentiating the Company’s offering from its competition, operating efficiently and profitably as a globally integrated whole, and increasing market share and customer penetration through internally developed business programs and strategic acquisitions.

The business environment in which the Company operates remains challenging. The Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, appliance, and durable goods manufacturers. A major risk is that the Company’s demand is largely derived from the demand for its customers’ products, which subjects the Company to uncertainties related to downturns in our customers’ business and unanticipated customer production shutdowns or curtailments. Customer production within the steel and automotive industries has been recently slowing especially in the U.S., South American and European markets. This is further impacted by the loss of market share of certain of the Company’s automotive customers in these markets. In addition, consolidation in the steel industry is concentrating sales among certain of the Company’s key customers. The Company has limited ability to adjust its cost level contemporaneously with changes in sales and gross margins. Thus, a significant downturn in sales or gross margins due to weak end-user markets, loss of a significant customer, and/or rising raw material costs could have a material adverse effect on the Company’s liquidity, financial position and results of operations.

Our business depends on attracting and retaining qualified management personnel.

The unanticipated departure of any key member of our management team could have an adverse effect on our business. Given the relative size of the Company and the breadth of its global operations, there are a limited number of qualified management personnel to assume the responsibilities of management level employees should there be management turnover. In addition, because of the specialized and technical nature of our business, our future performance is dependent on the continued service of, and our ability to attract and retain qualified management, commercial and technical personnel. Competition for such personnel is intense, and we may be unable to continue to attract or retain such personnel.

Inability to obtain sufficient price increases or contract concessions to offset increases in the costs of raw material could have a material adverse effect on the Company’s liquidity, financial position and results of operations. Price increases implemented could result in the loss of sales.

Quaker uses over 1,000 raw materials, including mineral oils and derivatives, animal fats and derivatives, vegetable oils and derivatives, ethylene derivatives, solvents, surface active agents, chlorinated paraffinic compounds, and a wide variety of other organic and inorganic compounds. In 2006, three raw material groups (mineral oil and derivatives, animal fats and derivatives, and vegetable oils and derivatives) each accounted for

as much as 10% of the total cost of Quaker’s raw material purchases. The price of mineral oil can be affected by the price of crude oil and refining capacity. In addition, many of the raw materials used by Quaker are “commodity” chemicals. Accordingly, Quaker’s earnings can be affected by market changes in raw material prices.

Over the past three years, Quaker has experienced significant increases in its raw material costs, particularly crude-oil derivatives. For example, the price of crude oil averaged $66 per barrel in 2006 versus $57 in 2005 and $42 in 2004. In addition, refining capacity has also been constrained by various factors, which further contributed to higher raw material costs and negatively impacted margins. In response, the Company has aggressively pursued price increases to offset the increased raw material costs. Although the Company has been successful in recovering a substantial amount of the raw material cost increases, it has experienced competitive as well as contractual constraints limiting pricing actions. In addition, as a result of the Company’s pricing actions, customers may become more likely to consider competitor’s products, some of which may be available at a lower cost. Significant loss of customers could result in a material adverse effect on the Company’s results of operations.

Bankruptcy of a significant customer could have a material adverse effect on our liquidity, financial position and results of operations.

During 2006, our five largest customers (each composed of multiple subsidiaries or divisions with semi-autonomous purchasing authority) together accounted for approximately 23% of our consolidated net sales with the largest customer (General Motors) accounting for approximately 6% of consolidated net sales.

A significant portion of Quaker’s revenues is derived from sales to customers in the U.S. steel industry, where a number of bankruptcies occurred during recent years. In addition, certain large industrial customers have also experienced financial difficulty. As part of the bankruptcy process, the Company’s pre-petition receivables may not be realized, customer manufacturing sites may be closed or contracts voided. The bankruptcy of a major customer could have a material adverse effect on the Company’s liquidity, financial position and results of operations. Steel customers typically have limited manufacturing locations as compared to metalworking customers and generally use higher volumes of products at a single location. The loss or closure of a steel mill or other major customer site of a significant customer could have a material adverse effect on Quaker’s business.

Failure to comply with any material provisions of our credit facility could have a material adverse effect on our liquidity, financial position and results of operations.

The Company maintains a $100.0 million unsecured credit facility (the “Credit Facility”) with a group of lenders, which can be increased to $125.0 million at the Company’s request if lenders agree to increase their commitments and the Company satisfies certain conditions. The Credit Facility, which matures on September 30, 2010, provides the availability of revolving credit borrowings. In general, the borrowings under the Credit Facility bear interest at either a base rate or LIBOR rate plus a margin based on the Company’s consolidated leverage ratio.

The Credit Facility contains limitations on capital expenditures, investments, acquisitions and liens, as well as default provisions customary for facilities of its type. While these covenants and restrictions are not currently considered to be overly restrictive, they could become more difficult to comply with as our business or financial conditions change. In addition, deterioration in the Company’s results of operations or financial position could significantly increase borrowing costs.

Quaker is exposed to market rate risk for changes in interest rates, due to the variable interest rate applied to the Company’s borrowings under its credit facilities. Accordingly, if interest rates rise significantly, the cost of debt to Quaker will increase, perhaps significantly, depending on the extent of Quaker’s borrowings under the Credit Facility. At December 31, 2006, the Company had $79.2 million outstanding under its credit facilities. 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 $25.0 million at December 31, 2006. In February 2007, the Company completed a refinancing of its existing industrial development bonds to fix the interest rate of an additional $5.0 million of debt.

Failure to generate taxable income could have a material adverse effect on our financial position and results of operations.

At the end of 2006, the Company had net U.S. deferred tax assets totaling $15.5 million, excluding deferred tax assets relating to additional minimum pension liabilities. In addition, the Company has $5.1 million in operating loss carryforwards primarily related to certain of its foreign operations. The Company records valuation allowances when necessary to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. However, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would be a non-cash charge to income in the period such determination was made, which could have a material adverse effect on the Company’s financial statements. The Company continues to closely monitor this situation as it relates to its net deferred tax assets and the assessment of valuation allowances. The Company is implementing actions that could positively impact taxable income.

Environmental laws and regulations and pending legal proceedings may materially and adversely affect the Company’s liquidity, financial position and results of operations.

The Company is a party to proceedings, cases, and requests for information from, and negotiations with, various claimants and Federal and state agencies relating to various matters, including environmental matters. An adverse result in any such matters may materially and adversely affect the Company’s liquidity, financial position and results of operations. Incorporated herein by reference is the information concerning pending asbestos-related litigation against an inactive subsidiary and amounts accrued associated with certain environmental investigatory and non-capital remediation costs in Note 18 of Notes to Consolidated Financial Statements which appears in Item 8 of this Report.

Ability to rapidly develop, manufacture and gain market acceptance of new and enhanced products required to maintain or expand our business.

We believe that our continued success depends on our ability to continuously develop and manufacture new products and product enhancements on a timely and cost-effective basis, in response to customers’ demands for higher performance process chemicals, coatings and other chemical products. Our competitors may develop new products or enhancements to their products that offer performance, features and lower prices that may render our products less competitive or obsolete and, as a consequence, we may lose business and/or significant market share. The development and commercialization of new products requires significant expenditures over an extended period of time, and some products that we seek to develop may never become profitable. In addition, we may not be able to develop and introduce products incorporating new technologies in a timely manner that will satisfy our customers’ future needs or achieve market acceptance.

The scope of our international operations subjects the Company to risks, including risks from changes in trade regulations, currency fluctuations, and political and economic instability.

Since significant revenues and earnings are generated by non-U.S. operations, Quaker’s financial results are affected by currency fluctuations, particularly between the U.S. dollar, the E.U. euro, the Brazilian real, and the Chinese renminbi and the impact of those currency fluctuations on the underlying economies. During the past three years, sales by non-U.S. subsidiaries accounted for approximately 53% to 56% of the annual consolidated net sales. All of these operations use the local currency as their functional currency. The Company generally does not use financial instruments that expose it to significant risk involving foreign currency transactions; however,

the size of non-U.S. activities has a significant impact on reported operating results and attendant net assets. Therefore, as exchange rates vary, Quaker’s results can be materially affected. Incorporated by reference is the foreign exchange risk information contained in Item 7A of this Report and the geographic information in Note 13 of Notes to Consolidated Financial Statements included in Item 8 of this Report.

Additional risks associated with the Company’s international operations include but are not limited to the following:

Changes in economic conditions from country to country,

Changes in a country’s political condition,

Trade protection measures,

Licensing and other legal requirements,

Local tax issues,

Longer payment cycles in certain foreign markets,

Restrictions on the repatriation of our assets, including cash,

Significant foreign and United States taxes on repatriated cash,

The difficulties of staffing and managing dispersed international operations,

Less protective foreign intellectual property laws, and

Legal systems which may be less developed and predictable than those in the United States.

Terrorist attacks, or other acts of violence or war may affect the markets in which we operate and our profitability.

Terrorist attacks may negatively affect our operations. There can be no assurance that there will not be further terrorist attacks against the United States or United States businesses. Terrorist attacks or armed conflicts may directly impact our physical facilities or those of our suppliers or customers. Additional terrorist attacks may disrupt the global insurance and reinsurance industries with the result that we may not be able to obtain insurance at historical terms and levels for all of our facilities. Furthermore, additional attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect the sales of our products. The consequences of terrorist attacks or armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business.

Item 1B.Unresolved Staff Comments.

None.

Item 2.Properties.

Quaker’s corporate headquarters and a laboratory facility are located in Conshohocken, Pennsylvania. Quaker’s other principal facilities are located in Detroit, Michigan; Middletown, Ohio; Placentia, California; Santa Fe Springs, California; Uithoorn, The Netherlands; Santa Perpetua de Mogoda, Spain; Rio de Janeiro, Brazil; Tradate, Italy; and Wuxi, China.Qingpu, China, which commenced operations in January 2007. All of the properties except Placentia, California and Santa Fe Springs, California are used by the metalworking segment andsegment. The Placentia, California isand Santa Fe Springs, California properties are used by the coatings segment. With the exception of the Conshohocken, site, which is owned by a real estate joint venture of which Quaker is a 50% partner (the “Venture”), and the Placentia, Santa Fe Springs and Tradate sites, which are leased, all of these principal facilities are owned by Quaker and as of December 31, 20032006 were mortgage free. Quaker also leases sales, laboratory, manufacturing, and warehouse facilities in other locations.

4


In January 2001, the Company contributed its Conshohocken, Pennsylvania property and buildings (the “Site”) to the Venture in exchange for a 50% interest in the Venture. The Venture did not assume any debt or other obligations of the Company. The Venture renovated certain of the existing buildings at the Site, as well as built new office space (the “Project”). In December 2000, the Company entered into an agreement with the Venture to lease approximately 38% of the Site’s available office space for a 15-year period commencing February 2002, with multiple renewal options. The Company believes the terms of this lease are no less favorable than the terms it would have obtained from an unaffiliated third party. As of December 31, 2003, approximately 93% of the Site’s office space was under lease and the Site (including improvements thereon) was subject to encumbrances securing indebtedness of the Venture in the amount of $26.9 million. The company has not guaranteed, nor is it obligated to pay, any principal, interest or penalties on the indebtedness of the Venture, even in the event of default by the Venture.

During the fourth quarter of 2002, the Company completed the sale of its Woodchester, England manufacturing facility. As of December 31, 2001, Quaker closed this facility and transferred production to its facilities in Uithoorn, The Netherlands and Santa Perpetua de Mogoda, Spain. The administrative, warehousing, and laboratory activities previously conducted at the Woodchester site were transferred to a sales distribution office located in Stonehouse, England.

Quaker’s Villeneuve, France site is currently for sale. Quaker ceased manufacturing operations at this facility effective March 31, 2002. Production was consolidated into its facilities in Uithoorn, The Netherlands and Santa Perpetua de Mogoda, Spain. Sales, warehousing, and laboratory activities will continue at the Villeneuve site pending its sale.

Quaker’s aforementioned principal facilities (excluding Conshohocken) consist of various manufacturing, administrative, warehouse, and laboratory buildings. Substantially all of the buildings (including Conshohocken) are of fire-resistant construction and are equipped with sprinkler systems. All facilities are primarily of masonry and/or steel construction and are adequate and suitable for Quaker’s present operations. The Company has a program to identify needed capital improvements that are implemented as management considers necessary or desirable. Most locations have various numbers of raw material storage tanks ranging from 7 to 66 at each location with a capacity ranging from 1,000 to 82,000 gallons and processing or manufacturing vessels ranging in capacity from 15 to 16,000 gallons.

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 Venture’s 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 Site’s available office space for a 15-year period commencing February 2002, with multiple renewal options. The Company believes the terms of this lease 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 $4.2 million of proceeds to the Company after payment of the Venture’s obligations.

In 2005, the Company completed the sale of its Villeneuve, France site. Quaker had ceased manufacturing operations at this facility in March 2002. Production was consolidated into its facilities in Uithoorn, The Netherlands and Santa Perpetua de Mogoda, Spain. In November 2006, the Company’s former Chinese joint venture partner purchased the Wuxi joint venture’s manufacturing facility, with production scheduled to be transferred to the Company’s Qingpu, China facility during 2007.

Each of Quaker’s 50% or less owned non-U.S. associated companies owns or leases a plant and/or sales facilities in various locations.

 

Item 3.    Legal Proceedings.

Item 3.Legal Proceedings.

The Company is a party to proceedings, cases, and requests for information from, and negotiations with, various claimants and Federal and state agencies relating to various matters, including environmental matters. Incorporated herein by reference is the information concerning pending asbestos-related litigation against an inactive subsidiary and amounts accrued associated with certain environmental investigatory and non-capital remediation costs in Note 1418 of Notes to Consolidated Financial Statements, which appears in Item 8 of this Report. The Company is a party to other litigation which management currently believes will not have a material adverse effect on the Company’s results of operations, cash flow, or financial condition.

 

Item 4.    Submission of Matters to a Vote of Security Holders.

Item 4.Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the last quarter of the period covered by this Report.

5


Item 4(a).    Executive Officers of the Registrant.

Item 4(a).Executive Officers of the Registrant.

Set forth below are the executive officers of the Company. Each of the executive officers other than Rex Curtis is elected annually to a one-year term. Mr. Curtis was elected to his position on January 1, 2004.

 

Name, Age, and Present

Position with the Company


  

Business Experience During Past Five

Years and Period Served as an Officer


Ronald J. Naples, 58
61

Chairman of the Board and

Chief Executive Officer, and Director

  Mr. Naples has served in his current position since 1997.
Joseph W. Bauer, 61

Neal E. Murphy, 49

Vice President, Chief Financial Officer

and Chief Operating OfficerTreasurer

  Mr. BauerMurphy was elected Vice President in July 2004 and was elected Chief Financial Officer and Treasurer in August 2004. Prior to joining the Company, he was Senior Vice President and Chief Financial Officer of International Specialty Products from February 2002 to July 2004.

Michael F. Barry, 48

Senior Vice President and Managing

Director—North America

Mr. Barry assumed his current position in January 2006. He was Senior Vice President and Global Industry Leader—Metalworking and Coatings from July 2005 through December 2005. He was Vice President and Global Industry Leader—Industrial Metalworking and Coatings from January 2004 through June 2005 and Vice President and Chief Financial Officer from 1998 to August 2004.

D. Jeffry Benoliel, 48

Vice President, Secretary

and General Counsel

Mr. Benoliel has served in his current position since 1998.2001.
Michael F. Barry, 45
Chief Financial Officer and Treasurer and
Vice President, Global Industry Leader,
Industrial Metalworking and Coatings
Mr. Barry was elected Vice President and Global Industry Leader, Industrial Metalworking and Coatings in January 2004. Mr. Barry currently serves in this position as well as the Company’s Vice President, Chief Financial Officer and Treasurer, a position which he has held since 1998.
D. Jeffry Benoliel, 45
Vice President, Secretary
and General Counsel
Mr. Benoliel was elected Vice President and General Counsel in January 2001. He was elected Corporate Secretary of the Company in May 1998, in addition to being Director, Corporate Legal Affairs, a position he held since May 1996. Mr. Benoliel is the son of Peter A. Benoliel, a Director of the Company.

José Luiz Bregolato, 58
61

Vice President and Managing

Director—South America

  Mr. Bregolato has served in his current position since 1993.
Ian F. Clark, 59

Mark A. Featherstone, 45

Vice President and Global Industry
Leader—Metalworking/
Chemical Management ServicesController

  Mr. ClarkFeatherstone was elected Vice President in March 2005, and has announced his decision to retire, effective March 31, 2004. Heheld the position of Global Controller since May 2001.

Mark Harris, 52

Senior Vice President—Global Strategy and

Marketing

Mr. Harris assumed his current position in January 2001. From March 1999 to2006. He was Senior Vice President and Global Industry Leader—Steel from July 2005 through December 2002, he2005. He was Vice President and Global Industry Leader—Steel/Fluid Power. Prior to joining the Company in March 1999, he was employed by Ciba Specialty Chemicals Corporation where he was Vice President-Sales and Marketing, U.S. Pigments DivisionSteel from 1990 to 1998 and, in addition, was General Manager for one of its global pigment segments from 1996 to 1998.January 2001 through June 2005.
Rex Curtis, 45

Jan F. Nieman, 46

Vice President and Global Industry
Leader—Automotive MetalworkingManaging

Director—Asia/Pacific

  Mr. CurtisNieman was elected to his currentVice President in February 2005, and has held the position in January 2004. From June 2001 through December 2003, heof Managing Director, Asia/Pacific since August 2003. He was the Company’s Director—also Global Business Segment Manager—Automotive Metalworking. Mr. Curtis joined the Company in November 1999 as the North American Sales Manager—Automotive Metalworking and remained in such position through May 2001. Prior to joining the Company he was President—Vulcan Oil Company from 1992 to November 1999.
Stephen D. Holland, 56
Vice President—Human Resources
Mr. Holland was elected to his current position in May 2003. Prior to joining the Company in May 2003, he was Vice President—Human Resources for the Aerospace Group of Teleflex Inc. from 1993 to September 2002.

6


Name, Age, and Present

Position with the Company


Business Experience During Past Five
Years and Period Served as an Officer


Mark Harris, 49
Vice President and Global Industry
Leader—Steel/Fluid Power
Mr. Harris was elected to his current position in January 2001. From 1996 until he assumed his current position, Mr. Harris was Regional IndustryUnit Manager for the Company’s Steel/Fluid Power business in Europe, the Middle East, and Africa.
Wilbert Platzer, 42
Vice President—Worldwide Operations
Mr. Platzer was elected to his current position in January 2001. From March 1996 to June 1999, he was Managing Director ofValue Added Resellers—Metalworking, Quaker Chemical B.V., the Company’s Dutch affiliate, and, from July 1999 until he assumed his current position, he was Director of Operations—Europe.October 2000 to August 2003.
Irving H. Tyler,

Wilbert Platzer, 45

Vice President—Information Services
President and Chief Information OfficerManaging

Director—Europe

  Mr. Tyler was elected toPlatzer assumed his current position in January 2001. From2006. He was Vice President – Global Industrial Metalworking from July 19992005 through December 2000, he2005. He was the Company’s Director of Information Services and Chief Information Officer and was the Company’s European ControllerVice President—Worldwide Operations from August 1997 toJanuary 2001 through June 1999.
Mark A. Featherstone, 42
Global Controller
Mr. Featherstone joined the Company in May 2001 as Global Controller. Previously, he was Senior Vice President-Finance and Controller at Internet Partnership Group from April 2000 to March 2001, and Director of Financial Policies and Projects at Coty Inc. from May 1996 to March 2000.2005.

7


PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.

The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) under the trading symbol KWR. The following table sets forth, for the calendar quarters during the past two most recent fiscal years, the range of high and low sales prices for the common stock as reported on the NYSE composite tabletape (amounts rounded to the nearest penny), and the quarterly dividends declared and paid:

 

   Price Range

  

Dividends

Declared


  

Dividends

Paid


   2003

  2002

    
   High

  Low

  High

  Low

  2003

  2002

  2003

  2002

First quarter

  $23.46  $18.07  $25.50  $19.84  $.21  $.21  $.21  $  .205

Second quarter

   26.38   20.31   24.90   20.51   .21   .21   .21   .21

Third quarter

   28.50   22.29   25.00   18.32   .21   .21   .21   .21

Fourth quarter

   30.75   23.44   23.68   18.22   .21   .21   .21   .21

   Price Range  Dividends
Declared
  Dividends
Paid
   2006  2005    
   High  Low  High  Low  2006  2005  2006  2005

First quarter

  $21.75  $18.90  $25.07  $20.03  $0.215  $0.215  $0.215  $0.215

Second quarter

   21.94   16.70   22.00   17.30   0.215   0.215   0.215   0.215

Third quarter

   20.29   18.04   19.11   16.57   0.215   0.215   0.215   0.215

Fourth quarter

   22.49   18.25   19.34   15.80   0.215   0.215   0.215   0.215

As of January 16, 200417, 2007, there were 799918 shareholders of record of the Company’s common stock, its only outstanding class of equity securities.

ReferenceEvery holder of Quaker common stock is madeentitled to one vote or ten votes for each share held of record on any record date depending on how long each share has been held. As of January 17, 2007, 9,948,053 shares of Quaker common stock were issued and outstanding. Based on the information available to the information appearing underCompany, on January 17, 2007, the caption “Equity Compensation Plans”holders of 1,054,298 shares of Quaker common stock would have been entitled to cast ten votes for each share, or approximately 54% of the total votes that would have been entitled to be cast as of that record date and the holders of 8,893,755 shares of Quaker common stock would have been entitled to cast one vote for each share, or approximately 46% of the total votes that would have been entitled to be cast as of that date. The number of shares that are indicated as entitled to one vote includes those shares presumed to be entitled to only one vote. Because the holders of these shares may rebut this presumption, the total number of votes entitled to be cast as of January 17, 2007 could be more than 19,436,735.

The following graph compares the cumulative total return (assuming reinvestment of dividends) from December 31, 2001 to December 31, 2006 for (i) Quaker’s common stock, (ii) the S&P SmallCap 600 Stock Index (the “SmallCap Index”) and (iii) the S&P Chemicals (Specialty) Index-SmallCap (the “Chemicals Index”). The graph assumes the investment of $100 on December 31, 2001 in Item 12each of this Report, which is incorporated herein by this reference.Quaker’s common stock, the stocks comprising the SmallCap Index, and the stocks comprising the Chemicals Index.

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

Item 6.Selected Financial Data.

The following table sets forth selected financial information for the Company and its consolidated subsidiaries:

 

  2003

  2002

  2001(1)

  2000(2)

  1999(3)

  2006  2005(1)  2004  2003  2002
  (Dollars in thousands, except per share amounts)  (In thousands, except per share amounts)

Summary of Operations:

                         

Net sales

  $340,192  $274,521  $251,074  $267,570  $265,671  $460,451  $424,033  $400,695  $340,192  $274,521

Income before taxes, equity income and minority interest

   24,118   24,318   14,430   26,486   27,151   18,440   6,615   17,457   24,118   24,318

Net income

   14,833   14,297   7,665   17,163   15,651   11,667   1,688   8,974   14,833   14,297

Per share:

                         

Net income-basic

  $1.58  $1.56  $.85  $1.94  $1.76  $1.19  $0.17  $0.93  $1.58  $1.56

Net income-diluted

   1.52   1.51   .84   1.93   1.74  $1.18  $0.17  $0.90  $1.52  $1.51

Dividends declared

   .84   .84   .82   .80   .77   0.86   0.86   0.86   0.84   0.84

Dividends paid

   .84   .835   .82   .79   .765   0.86   0.86   0.855   0.84   0.835

Financial Position:

                         

Working capital

  $37,719  $37,529  $47,424  $52,981  $51,584  $96,062  $79,105  $45,569  $37,137  $37,529

Total assets

   287,347   213,858   179,666   188,239   182,213   357,382   331,995   324,893   289,467   213,858

Long-term debt

   15,827   16,590   19,380   22,295   25,122   85,237   67,410   14,848   15,827   16,590

Shareholders’ equity

   112,352   88,055   80,899   84,907   81,199   110,831   105,907   122,587   112,352   88,055

Following amounts in thousands

(1)The results of operationsoperation for 2001 include restructuring charges of $4,039 after-tax; an additional provision for doubtful accounts related to the poor financial condition of certain customers of $1,380 after-tax; an environmental charge of $345 after-tax; and organizational structure charges of $184 after-tax.
(2)The results of operations for 2000 include an additional provision for doubtful accounts related to the poor financial condition of certain customers of $1,154 after-tax; a net gain on exit of businesses of $1,016 after-tax; and an environmental charge of $1,035 after-tax.
(3)The results of operations for 19992005 include a net pre-tax charge for restructuring creditand related activities of $188 after-tax.$10,320, proceeds from the sale of real estate by the Company’s real estate joint venture of $4,187, and a $1,000 tax charge associated with the repatriation of accumulated earnings of its foreign subsidiaries.

8


Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Executive Summary

Quaker Chemical Corporation is a worldwide developer, producer, and marketer of chemical specialty products and a provider of chemical management services (“CMS”) for various heavy industrial and manufacturing

applications around the globe, with significant sales to the steel and automotive industries. Our strategies and initiatives flow from three business imperatives: (1) sell customer solutions—value—not just fluids, (2) operate as a globally integrated whole and (3) harnessThe improved 2006 results largely reflect the powercontinued execution of our global knowledge and learning. Success factors critical to the Company’s actions taken throughout 2005 in response to its challenging business include successfully differentiating ourselves from our competition, operating efficiently as a globally integrated whole, and increasing market share, customer penetration and profitability through internally developed programs and strategic acquisitions.

environment.

The Company operates in mature businesses, which are driven by demand for consumer durables and are therefore subject to the vulnerabilities of a cyclical economy. 2003 proved a difficult operating environment as it relates to demand. The Company experienced softness in sheet steel demand in the U.S. and Europe, two regions critical to our financial results. The Company’s leading share position in those regions makes it a target for competition as our customers may see a need to establish second source suppliers. Also in 2003, the Company did see increased competitive activity in its European market resulting in a net loss of business and slight decrease in market share. Despite this difficult environment, the Company’s Asian and South American regions saw strong growth. As we enter 2004, the competitive pressures and the challenges they present remain, but we still expect growth in our steel business primarily out of the Asian and South American markets.

In 2003, the Company experienced significant revenue growth in its chemical management services (CMS)2006 was primarily due to increased selling prices, as well as higher volume in China. Higher selling prices, combined with improved CMS profitability, offset higher raw material and third-party finished product costs, resulting in significantly higher gross margin dollars with only a slight improvement in gross margin as a percentage of sales as compared to 2005. Raw material costs, primarily crude oil derivatives, continued to increase during 2006 compared to the awardprior year, mitigating pricing actions intended to improve gross margins as a percentage of new CMS contractssales. While oil prices have recently declined from a peak early in the North America automotive market.third quarter of 2006, to date, the oil price reductions have not yet resulted in any significant reduction in raw material prices. Selling, general and administrative expenses for 2006 increased $4.6 million compared to 2005. Cost savings from restructuring efforts completed in 2005 enabled increased spending in higher growth areas, higher variable compensation and higher professional fees.

Earnings per diluted share of $1.18 represent a considerable improvement over the $0.17 for 2005. The profitabilityprincipal factors impacting 2006 earnings included a 9% growth in revenues and improved performance from CMS. The Company’s 2005 earnings included a $10.3 million pre-tax charge for restructuring and related activities and a $1.0 million tax charge attributable to the repatriation of this new business is dependent onaccumulated earnings of its foreign subsidiaries, which were offset in part by $4.2 million of pre-tax income from the sale of property by the Company’s abilityreal estate joint venture and lower minority interest primarily as a result of the Company’s first quarter 2005 acquisition of the remaining 40% interest in its Brazilian affiliate. The Company’s 2005 restructuring efforts are positively impacting the bottom line as resources have been shifted to identifyhigher growth areas like China, CMS and implement cost reduction programscoatings. However, any improvements in gross margin as a percentage of sales will depend upon a sustained period of stable or declining raw material costs. The Company remains focused on pursing revenue opportunities, managing its raw material and to achieve product conversions. During 2004,other costs and pursuing pricing initiatives. Most recently, in the fourth quarter of 2006 the Company expects to achieve increased profitability from thisacquired the remaining minority interest in its China affiliate.

Notwithstanding the improved performance, the business as cost reductions and product conversions are achieved.

The Company continually looks for acquisitions that are a tight fitenvironment in terms of products, strategic customers or complementary technology and therefore help to build market share or increase customer penetration. In the past two yearswhich the Company has made five such acquisitions adding approximately $14.0 million of incremental revenuesoperates remains challenging. While demand in 2003. Although modest in size, these acquisitions have helped solidify the Company’s core business through increased product breadth and customer penetration and have and areChina is expected to continue to contributeremain strong, volume in other markets was limited by customer end-market issues, including higher inventory levels in the U.S. steel industry and reduced vehicle sales experienced by some automotive customers, with indications that these conditions would continue for the foreseeable future. Raw material and third party product costs continue to revenues and earnings.

A significant amount ofremain higher as compared to the revenue growth in 2003 can be attributed to CMS, acquisitions, and foreign exchange. CMS and the acquisitions have different margin characteristics and did not contribute significantly to earnings.prior year. In addition,certain instances, the Company in 2003 experienced significantlyfaces competitive or contractual constraints limiting pricing actions to recover these higher raw material costs and administrative expenses. This resulted in only a small increase in earnings year over year. As the Company exited 2003, the pricing in its key raw material markets, specifically crude oil-based, animal fat and vegetable oil derivatives, were at four-year highs. The Company does not believe this trend will reverse in the short term, and there is a risk of even higher raw material prices in 2004, particularly, crude oil. In addition, the Company experienced increases in administrative costs in 2003 related to pension, insurance, its global enterprise resource planning system (“ERP”) implementation and compliance with new governance regulations under the Sarbanes-Oxley Act. The Company again expects to see higher costs in 2004 for these items, in particular costs related to Sarbanes-Oxley compliance.costs.

Despite these trends, the Company grew both revenue and net income and remained committed to its long-term strategic actions. The Company completed three tight-fit acquisitions in 2003 and advanced customer penetration through major new CMS contracts, all of which are expected to contribute to future growth. The Company continues to invest in its ERP to further its initiative of operating as a globally integrated whole. The Company’s balance sheet remains strong, and the Company extended its dividend record to 31 consecutive years of increases.

9


Critical Accounting Policies and Estimates

Quaker’s discussion and analysis of its financial condition and results of operations are based upon Quaker’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Quaker to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, Quaker evaluates its estimates, including those related to customer sales incentives, product returns, bad debts, inventories, property, plant, and equipment, investments, intangible assets, income taxes, financing operations, restructuring, accrued incentive compensation plans, pensions and other postretirement benefits, and contingencies and litigation. Quaker bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the

circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Quaker believes the following critical accounting policies describe the more significant judgments and estimates used in the preparation of its consolidated financial statements:

1. Accounts receivable and inventory reserves and exposures—Quaker establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Quaker’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Downturns in the overall economic climate may also tend to exacerbate specific customer financial issues. As part of its terms of trade, Quaker may custom manufacture products for certain large customers and/or may ship product on a consignment basis. Further, a significant portion of Quaker’s revenues is derived from sales to customers in the U.S. steel industry, where a number of bankruptcies have occurred during recent years. Through 2003, Quaker recorded additional provisions for doubtful accounts primarily related to bankruptcies in the U.S. steel industry.In recent years, certain large industrial customers have also experienced financial difficulty. When a bankruptcy occurs, Quaker must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process. These matters may increase the Company’s exposure should a bankruptcy occur, and may require writedown or disposal of certain inventory due to its estimated obsolescence or limited marketability. Customer returnsReserves for customers filing for bankruptcy protection are generally established at 75-100% of products the amount outstanding at the filing date, dependent on the Company’s evaluation of likely proceeds from the bankruptcy process. Large and/or disputes may also resultfinancially 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’s consolidated allowance for doubtful accounts was $3.2 million and $4.1 million at December 31, 2006 and 2005, respectively. Further, the Company recorded provisions for doubtful accounts of $0.0 million, $1.2 million and $0.5 million in similar issues related2006, 2005 and 2004 respectively. An increase of 10% to the realization of recorded accounts receivable or returned inventory.

provisions would have decreased the Company’s pre-tax earnings by $0.0 million, $0.12 million and $0.05 million in 2006, 2005 and 2004, respectively.

2. Environmental and litigation reserves—Accruals for environmental and litigation matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties and are not discounted. Environmental costs and remediation costs are capitalized if the costs extend the life, increase the capacity or improve the safety or efficiency of the property from the date acquired or constructed, and/or mitigate or prevent contamination in the future. Estimates for accruals for environmental matters are based on a variety of potential technical solutions, governmental regulations and other factors, and are subject to a large range of potential costs for remediation and other actions. A considerable amount of judgment is required in determining the most likely estimate within the range, and the factors determining this judgment may vary over time. Similarly, reserves for litigation and similar matters are based on a range of potential outcomes and require considerable judgment in determining the most probable outcome. If no amount within the range is considered more probable than any other amount, the Company accrues the lowest amount in the range in accordance with generally accepted accounting principles. An inactive subsidiary of the Company is involved in asbestos litigation. If the Company ever concludes that it is probable it will be liable for any of the obligations of such subsidiary, then it will record the associated liabilities if they can be reasonably estimated. The Company will reassess this situation periodically in accordance with SFAS No. 5, “Accounting for Contingencies.” See Note 1418 of Notes to Consolidated Financial Statements which appears in Item 8 of this Report.

10


3. Realizability of equity investments—Quaker holds equity investments in various domestic and foreign companies, whereby it has the ability to influence, but not control, the operations of the entity and its future results. Quaker records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions, poor operating results of underlying investments, or devaluation of foreign currencies could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value.

These factors may result in an impairment charge in the future.

The carrying amount of the Company’s equity investments at December 31, 2006 was $7.0 million and was comprised of three investments totaling $3.6 million, $2.3 million and $1.1 million, respectively.

4. Tax exposures and valuation allowances—Quaker records expenses and liabilities for taxes based on estimates of amounts that will be ultimately determined to be deductible in tax returns filed in various jurisdictions. The filed tax returns are subject to audit, often several years subsequent to the date of the financial statements. Disputes or disagreements may arise during audits over the timing or validity of certain items or deductions, which may not be resolved for extended periods of time. Quaker establishes reserves for potential tax audit and other exposures as transactions occur and reviews these reserves on a regular basis; however, actual exposures and audit adjustments may vary from these estimates. Quaker also records valuation allowances when necessary to reduce its deferred tax assets to the amount that is more likely than not to be realized. While Quaker has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event Quaker were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should Quaker determine that it would not be able to realize all or part of its net deferred tax assetassets in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.made which could have a material adverse impact on the Company’s financial statements. U.S. income taxes have not been provided on the undistributed earnings of non-U.S. subsidiaries since it is the Company’s intention to continue to reinvest these earnings in those subsidiaries for working capital needs and expansion needs.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 foreign tax credits.

5. Restructuring liabilities—Restructuring charges may consist of charges for employee severance, rationalization of manufacturing facilities and other items. In 2001, Quaker recorded restructuring and other exit costs, including involuntary termination of certain employees, in accordance with the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Certain of these items, particularly those involving impairment charges for assets to be sold or closed, require significant estimates and assumptions in terms of estimated sale proceeds, date of sale, transaction costs and other matters, and these estimates can change based on market conditions and other factors. In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which nullified EITF Issue No. 94-3. The Company adopted the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The principal difference between SFAS No. 146 and EITF 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for exit costs is recognized at the date of an entity’s commitment to an exit plan.

6. Goodwill and other intangible assets—Goodwill and other intangible assets are evaluated in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Intangible assets, which do not have indefinite lives, are recorded at fair value and amortized over a straight-line basis based on third party valuations of the assets. Goodwill and intangible assets, which have indefinite lives, are no longer amortized and are required to be assessed at least annually for impairment. The Company compares the assets’ fair value to itstheir carrying value primarily based on future discounted cash flows in order to determine if an impairment charge is warranted. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning. The actual cash flows could differ from

11


management’s estimates due to changes in business conditions, operating performance, and economic conditions. The Company completed its annual impairment assessment as of the end of the third quarter 20032006, and no impairment charge was warranted. The Company’s consolidated goodwill and indefinite-lived intangible assets at December 31, 2006 and 2005 were $39.3 million and $36.0 million, respectively. The

Company’s assumption of weighted average cost of capital and estimated future net operating profit after tax (NOPAT) are particularly important in determining whether an impairment charge has been incurred. The Company currently uses a weighted average cost of capital of 12% and, at September 30, 2006, this assumption would have had to increase by more than 2.5 percentage points before any of the Company’s reporting units would fail step one of the SFAS No. 142 impairment analysis. Further, at September 30, 2006, the Company’s estimate of future NOPAT would have had to decrease by more than 17% before any of the Company’s reporting units would be considered potentially impaired.

7. Postretirement benefits—The Company provides certain pension and other postretirement benefits to employees and retirees. Independent actuaries, in accordance with accounting principles generally accepted in the United States, perform the required valuations to determine benefit expense and, if necessary, non-cash charges to equity for additional minimum pension liabilities. Critical assumptions used in the actuarial valuation include the weighted average discount rate, rates of increase in compensation levels, and expected long-term rates of return on assets. If different assumptions were used, additional pension expense or charges to equity might be required. For 2003,2006, the Company incurred such a non-cash charge to equity of $2.2 million.$9.3 million, in connection with the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit and Other Postretirement Plans.” The Company’s pension plan year-end is November 30, which serves as the measurement date. The following table highlights the potential impact on the Company’s pre-tax earnings due to changes in assumptions with respect to the Company’s pension plans, based on assets and liabilities at December 31, 2006:

 

    1/2 Percentage Point
Increase
   1/2 Percentage Point
Decrease
   Foreign  Domestic  Total  Foreign  Domestic  Total
   (Dollars in millions)

Discount rate

  $(0.6) $(0.1) $(0.7) $0.4  $0.1  $0.5

Expected rate of return on plan assets

  $(0.2) $(0.2) $(0.4) $0.2  $0.2  $0.4

Recently Issued Accounting Standards

In January 2003,June 2006, the Financial Accounting Standards Board (“FASB”),FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Certain Variable Interest Entities, (“VIEs”), which is48, “Accounting for Uncertainty in Income Taxes, an interpretation of Accounting Research BulletinFASB Statement No. 109” (“ARB”) No. 51, “Consolidated Financial Statements.” FIN 46 addresses48”). FIN 48 clarifies the application of ARB No. 51accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to VIEs, and generally would require that assets, liabilities and results of the activities of a VIE be consolidated intomeet before being recognized in the financial statements of the enterprise that is considered the primary beneficiary.statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 46, as revised by FIN 46 (revised December 2003),48 is effective for public entities that have interests in VIEs commonly referred to as special-purpose entities for periods endingfiscal years beginning after December 15, 2003. Application for all other types2006. The cumulative effects, if any, of entities is required in financial statements for periods ending after March 15, 2004. The Company has determined that its real estate joint venture is a VIE and that the Company is not the primary beneficiary. See also Note 3applying FIN 48 will be recorded as an adjustment to retained earnings as of Notes to Consolidated Financial Statements.

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or mezzanine equity, by now requiring those same instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003,of adoption. The Company is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition and is not yet in a position to determine such effects.

In September 2006, the FASB issued FASB Staff Position (“FSP”) FAS 150-3, which delayedAUG AIR-1 “Accounting for Planned Major Maintenance Activities” (FSP AUG AIR-1). FSP AUG AIR-1 amends the effective dateguidance on the accounting for certain provisions of SFAS 150 indefinitely. Forplanned major maintenance activities; specifically, it precludes the effective provisionsuse of the standard, management has assessed the impact and determined there to be no material impact to the financial statements. For the deferred provisions, the Company does not expect the pending adoption to have a material impact on the financial statements.

In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which provides guidance on how to determine when an arrangement that involves multiple revenue-generating activities or deliverables should be divided into separate units of accounting for revenue recognition purposes. It further states, that if this division is required, the arrangement consideration should be allocated among the separate units of accounting. The guidancepreviously acceptable “accrue in the consensusadvance” method. FSP AUG AIR-1 is effective for revenue arrangements entered into in fiscal periods that beginyears beginning after JuneDecember 15, 2003.2006. The adoption of EITF 00-21FSP AUG AIR-1 did not have a material effect on the Company’sour consolidated financial position or results of operations or cash flows.

operations.

In December 2003,September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,” which supersedes108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 101, “Revenue Recognition108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in Financial Statements,” and updates portionsSAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The adoption of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting guidance. The Company had previously adopted the

12


necessary changes incorporated into SAB 104, which108 did not have a material effect on the Company’sour consolidated financial position or results of operations or cash flows.

operations.

In December 2003,September 2006, the FASB revised Statementissued SFAS No. 132 (“157, “Fair Value Measurements” (SFAS No. 157). SFAS 132”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised standard mandates additional disclosuresNo. 157 establishes a common definition for pensions and other postretirement benefit plans and is designed to improve disclosure transparency within financial statements and requires certain disclosuresfair value to be made onapplied to US GAAP guidance requiring use of fair

value, establishes a quarterly basis (collectively, the “Amended Disclosures”). Compliance with the Amended Disclosuresframework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal periodsyears beginning after DecemberNovember 15, 2003, and has been incorporated into Note 7 of the Notes to Consolidated Financial Statements. Interim period disclosures will be required to be made by the Company commencing in the first quarter of 2004.

On January 12, 2004 the FASB issued FSP No. FAS 106-1, which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). On December 8, 2003, President Bush signed the Act into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a Federal subsidy to companies which sponsor retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted under FSP No. 106-1, the Company did not reflect the effects of this Act in its consolidated financial statements and accompanying notes. Specific authoritative guidance on the accounting for the Federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information.2007. The Company is currently assessing the impact of the Act.

SFAS No. 157 on its consolidated financial position and results of operations.

Liquidity and Capital Resources

Quaker’s cash and cash equivalents increased to $21.9remained at $16.1 million at December 31, 2003 from $13.92006 and 2005. Operating and financing activities provided $8.2 million at December 31, 2002. The increase is primarily from $8.4and $4.2 million, respectively, which were offset by $13.5 million of net cash used in investing activities.

Net cash flows provided by operating activities were $8.2 million in 2006 versus $11.6 million in 2005. The Company’s higher net income was more than offset by the change in working capital accounts, increased net pension plan contributions and $22.0 million providedhigher restructuring payments in 2006, as a result of the actions taken in the fourth quarter of 2005. The change in working capital accounts was largely driven by financing activities, offsethigher incentive compensation accruals in part by $24.4 million used2006 on higher earnings and the timing of accounts payable in investing activities.

the U.S. and Europe in the prior year.

Net cash flow provided by operating activities was $8.4 million in 2003 compared to $24.4 million in 2002. This decrease primarily resulted from increased working capital needs associated with the Company’s recently awarded CMS contracts, effective May 1, 2003.

Net cashflows used in investing activities was $24.4were $13.5 million in 20032006 compared to $30.3$8.8 million in 2002. Dividends2005. The primary factors affecting the change in cash flows were higher capital expenditures in 2006 for expansion, primarily in Asia/Pacific, and distributionslower payments related to acquisitions, and lower proceeds from associated companies increased $3.6the disposition of assets. In March 2005, the Company acquired the remaining 40% interest in its Brazilian joint venture for $6.7 million. In accordance with the purchase agreement, the Company made the first of four $1.0 million contingent annual payments in the first quarter of 2006. In addition, in the fourth quarter of 2006, the Company paid $0.6 million in 2003, and were drivenconnection with the acquisition of the remaining minority interest in its China joint venture. See also Note 14 of Notes to Consolidated Financial Statements. In the first quarter of 2005, the Company recorded a gain of $3.0 million in connection with the sale of real estate assets by priority distributions received from the Company’s real estate joint venture. Theventure, discussed below. In 2005, the Company paid $16.0received $1.9 million for 2003 acquisitions versus $21.3 million for 2002 acquisitions. Proceedsof cash proceeds from the disposition of assets were significantly higher in 2002, reflective of the sale of the Company’s U.K. manufacturing facility which was completed in the fourth quarter of 2002.

Expenditures for property, plant, and equipment increased to $12.6 million in 2003 from $10.8 million in 2002. Capital expenditures in 2003 included $4.1 million for the renovation of the Company’s U.S. laboratory facility and $3.1 million for the Company’s global ERP implementation. The remaining capital expenditures related to upgrades of manufacturing capabilities at various locations, with $0.5 million spent for environmental and regulatory compliance in both 2003 and 2002. For 2004, the Company expects capital expenditures to be approximately $10.0 million as most of the lab renovation is complete and the Company expects limited capital being spent towards our global ERP implementation.

its Villeneuve, France site.

In January 2001, the Company contributed its Conshohocken, Pennsylvania property and buildings (the “Site”) tointo 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.Company and the Company did not guarantee nor was it obligated to pay any principal, interest or penalties on any of the Venture’s 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 Site’s available office space for a

13


15-year period commencing February 2002, with multiple renewal options. During 2003,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 $4.2 million of proceeds to the Company received priority cash distributions, which reduced the Company’s investment balance to $0. As of December 31, 2003, approximately 93%after payment of the Site’s office space was under leaseVenture’s obligations. The proceeds include a gain of $3.0 million related to the sale by the Venture of its real estate holdings as well as $1.2 million of preferred distributions.

In December 2005, an inactive subsidiary of the Company reached a settlement agreement and release with one of its insurance carriers for $15.0 million. The proceeds of the settlement are restricted and can only be used to pay claims and costs of defense associated with this subsidiary’s asbestos litigation. In accordance with the agreement, the subsidiary received $7.5 million cash in December 2005 and the Site (including improvements thereon) was subjectremaining $7.5 million in December of 2006, which were deposited into an interest bearing account, which earned approximately $0.3 million in 2006, offset by $0.5 million of payments in 2006. The restrictions regarding the use of proceeds lapse after a period of 15 years. Due to encumbrances securing indebtednessthe restricted nature of the Ventureproceeds, a corresponding deferred credit was established in “Other non-current liabilities” for an equal and offsetting amount, and will remain until the amountrestrictions lapse or the funds are exhausted via payments of $26.9 million. The Company has not guaranteed nor is it obligatedclaims and costs of defense. See Notes 16, 17 and 18 of Notes to pay any principal, interest or penalties on the indebtedness of the Venture, even in the event of default by the Venture. At December 31, 2003, the Venture had property with a net book value of $27.2 million, total assets of $29.0 million, and total liabilities of $27.2 million.

Consolidated Financial Statements.

Net cash flows provided by financing activities were $22.0$4.2 million in 2003 versus2006 compared to a $1.3$14.9 million use of cash in 2002.2005. The increase in cash providedchange was caused primarily by financing activities was as a result of increased short-termnet borrowings in order2006 compared to net repayments in 2005. The borrowings in 2006 were used to fund current year acquisitions andthe Company’s working capital needs, primarily associated withconstruction of a new manufacturing

and research facility in China, and the fourth quarter 2006 acquisition of the remaining interest in the Company’s China affiliate. The fourth quarter 2005 restructuring actions were funded during 2006. In addition, lower distributions were paid to the minority shareholders in 2006 due to the acquisition of minority shareholders’ interests. The prior year distributions to minority shareholders were driven in large part by a distribution made prior to the Company’s acquisition of the remaining 40% interest in its Brazilian joint venture described above.

In September 2005, the Company prepaid its senior unsecured notes due in 2007. The total amount of principal prepaid was $8.6 million. In October 2005, the Company entered into a new CMS contracts.

syndicated multi-currency credit agreement that provides for financing in the United States and The Netherlands. This facility enabled the Company to consolidate the majority of its short-term debt into a longer-term facility. The new facility terminates on September 30, 2010. The new facility allows for revolving credit borrowings in a principal amount of up to $100.0 million, which can be increased its principal credit facilities from $15.0to $125.0 million committed and $10.0 million uncommitted at the end of March 2003Company’s request if lenders agree to its current position of $30.0 million committedincrease their commitments and $20.0 million uncommitted. Thethe Company had approximately $39.8 million and $8.9 million outstandingsatisfies certain conditions. In general, borrowings under the credit facility bear interest at either a base rate or LIBOR rate plus a margin based on these credit facilities as of December 31, 2003 and 2002, respectively.the Company’s consolidated leverage ratio. The provisions of the agreementsagreement require that the Company maintain certain financial ratios and covenants, all of which the Company was in compliance with as of December 31, 20032006 and 2002.2005. Under its most restrictive covenants, the Company can borrowcould have borrowed an additional $38.1$18.8 million as of December 31, 2003. The Company believes that it is capable of renewing its current credit facilities, on an annual basis, or obtaining additional borrowing capacity on competitive terms. Following are the details of the company’s individual facilities.

In April 2002, the Company entered into a $20.0 million committed credit facility, with a bank, with an expiration date of April 2003. In March 2003, the Company replaced its $20.0 million committed credit facility with another facility with the same lender of $15.0 million, which expires in December 2004. At the Company’s option, the interest rate for borrowings under the agreement may be based on the lender’s cost of funds plus a margin, LIBOR plus a margin, or on the prime rate. Further, in April 2002, the Company entered into a $10.0 million uncommitted demand credit facility with the same lender under similar terms. A total of $19.8 million in borrowings under these facilities was outstanding at December 31, 2003,2006. At December 31, 2006 and 2005, the Company had approximately $79.2 million and $63.8 million outstanding on these credit lines at ana weighted average borrowing rate of approximately 2.1%.

5.69% and 4.42%, 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 $25.0 million at December 31, 2006. In June 2003,February 2007, the Company entered intocompleted a $10.0 million committed credit facility with another bank, which expires in June 2004. At the Company’s option,refinancing of its existing industrial development bonds to fix the interest rate for borrowings under the agreement may be based on the euro dollar rate plus a margin or the prime rate plus a margin. In July 2003,of an amendment increased this committed credit facility to $15.0 million. A totaladditional $5.0 million of $15.0 million in borrowingsdebt.

The Company’s net debt-to-total capital ratio was outstanding40% at December 31, 2003, at an average borrowing rate of approximately 1.5%.

In June 2003, the Company also entered into a $10.0 million uncommitted demand credit facility with another bank. At the Company’s option, the interest rate for borrowings under this agreement may be based on the prime rate or the LIBOR rate plus a margin. A total of $5.0 million in borrowings was outstanding2006, compared to 35% at December 31, 2003, at an average borrowing rate2005. In connection with the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” the Company recorded a non-cash charge to “Shareholders’ equity” of $9.3 million, which negatively impacted the Company’s net debt-to-total capital ratio by approximately 2.2%.

two percentage points. The Company believes that in 2004,2007 it is capable of supporting its operating requirements including pension plan contributions, payments of dividends to shareholders, possible acquisition and business opportunities, capital expenditures and possible resolution of contingencies, through internally generated funds supplemented with debt as needed. In addition, in 2004, the Company expects to make minimum cash contributions to its U.S. defined benefit plans of approximately $1.5 million.

14


The following table summarizes the Company’s contractual obligations at December 31, 2003,2006, and the effect such obligations are expected to have on its liquidity and cash flow in future periods (amountsperiods. Pension and other postretirement plan contributions beyond 2007 are not determinable since the amount of any contribution is heavily dependent on the future economic environment and investment returns on pension trust assets. The timing of payments related to other long-term liabilities, which consist primarily of deferred compensation agreements, cannot be readily determined due to their uncertainty. Interest obligations on the Company’s short and long-term debt are excluded as the majority of the Company’s debt is subject to variable interest rates. (Amounts in millions):

 

  Payments due by period

 Payments due by period

Contractual Obligations


  Total

  2004

  2005

  2006

  2007

  2008

  2009 and
beyond


 Total 2007 2008 2009 2010 2011 2012 and
beyond

Short-term debt

 $3.261 $3.261 $—   $—   $—   $—   $—  

Long-term debt

  $18.844  $3.017  $3.212  $3.208  $3.184  $0.324  $5.899  85.501  1.369  1.405  0.942  76.785  —    5.000

Short-term debt

   39.975   39.975   —     —     —     —     —  

Capital lease obligations

  1.717  0.446  0.407  0.338  0.508  0.018  —  

Non-cancelable operating leases

   26.180   4.560   3.798   2.894   2.640   2.417   9.871  20.012  4.073  3.623  2.667  1.991  1.733  5.925

Purchase obligations

  3.503  3.070  0.433  —    —    —    —  

Pension and other postretirement plan contributions

  7.983  7.983  —    —    —    —    —  

Other long-term liabilities (primarily deferred compensation agreements)

  8.553  —    —    —    —    —    8.553
  

  

  

  

  

  

  

              

Total contractual cash obligations

  $84.999  $47.552  $7.010  $6.102  $5.824  $2.741  $15.770 $130.530 $20.202 $5.868 $3.947 $79.284 $1.751 $19.478
  

  

  

  

  

  

  

              

Operations

Comparison of 2003 with 2002CMS Discussion

Consolidated net sales increased by 24%During 2003, the Company expanded its approach to $340.2 million in 2003 from $274.5 million in 2002. The impact from foreign exchange rate translation increased sales by approximately $18.2 million, or 7%. The Company’s 2003 acquisitions and the timing of the 2002 acquisitions increased net sales by $14.0 million, or 5%, and the Company’s recently awardedits chemical management services (“CMS”)(CMS) channel consistent with the Company’s strategic imperative to sell customer solutions—value—not just fluids. Prior to this change, the Company effectively acted as an agent whereby it purchased chemicals from other companies and resold the product to the customer at little or no margin and earned a set management fee for providing this service. Therefore, the profit earned on the management fee was relatively secure as the entire cost of the products was passed on to the customer. The approach taken in 2003 was dramatically different. The Company began entering into new contracts under which it receives a set management fee and the costs that relate to those management fees were effective May 1,and are largely dependent on how well the Company controls product costs and achieves product conversions from other third-party suppliers to its own products. This approach came with new risks and opportunities, as the profit earned from the management fee is subject to movements in product costs as well as the Company’s own performance. The Company believes this expanded approach is a way for Quaker to become an integral part of our customers’ operational efforts to improve manufacturing costs and to demonstrate value that the Company would not be able to demonstrate as purely a product provider.

Under this alternative pricing structure, the Company was awarded a series of multi-year CMS contracts primarily at General Motors Powertrain, DaimlerChrysler and Ford manufacturing sites in 2003, increased net sales by approximately $27.0 million or 10%. The remaining 2% increase2004, 2005 and 2006. This business was an important step in net sales was due primarily to double-digit growthbuilding the Company’s share and leadership position in the Asia/Pacificautomotive process fluids market and South American regions partially offset by a decline in business in the U.S. and Europe. The decline in business in the U.S. and Europe was substantially caused by softness in sheet steel demand. In addition, in late 2003,has positioned the Company experienced some increased competition aswell for penetration of CMS opportunities in other metalworking manufacturing sites. This alternative approach had a result ofdramatic impact on the Company’s strong market share coupled with its customers’ interest in establishing second source suppliers.

Gross profit (net sales less cost of goods sold) as a percentage of sales declined from 40.6% in 2002 to 35.7% in 2003. The Company’s newrevenue and margins. Under the traditional CMS contracts result in a different relationship between margins and revenue than has applied in the past for the Company’s traditional product business. At the majority of current CMS sites,approach, where the Company effectively acts as an agent, and records revenuerevenues and costs from third partythese sales are reported on a net sales or “pass-through” basis. The new CMS contracts haveAs discussed above, the alternative structure is different in that the Company’s revenue received from the customer is a different structure that resultsfee for products and services provided to the customer, which are indirectly related to the actual costs incurred. As a result, the Company recognizes in the Company recognizingalternative structure in reported revenuerevenues the gross revenue received from the CMS site customer, and in cost of goods sold, the third partythird-party product purchases, which substantially offset each other sinceuntil the Company currentlyachieves significant product conversions. As some contracts have been renewed or renegotiated, some of the contracts reverted to a “pass through” basis. Currently, the Company has very littlea mix of its owncontracts with both the traditional product converted at these sites.pass through structure and fixed priced contracts covering all services and products. The negative impactCompany’s offerings will continue to gross margin relatedinclude both approaches to CMS depending on customer requirements and business circumstances.

Comparison of 2006 with 2005

Net sales for 2006 were $460.5 million, up 8.6% from $424.0 million for 2005. The increase in net sales was attributable to higher sales prices and volume growth. Volume growth was mainly attributable to market share growth and increased demand in the new CMS contracts was approximately 3 percentage points. The remaining declineU.S. and China offset by softening demand in gross marginEurope. Selling price increases were broadly implemented across all regions and market segments to offset significantly higher raw material costs.

Gross profit (net sales less cost of goods sold) as a percentage of sales is primarily duewas 31.0% for 2006, as compared to increased30.6% for 2005. Higher selling prices and a stronger performance from the Company’s CMS channel helped maintain margins notwithstanding continued increases in raw material costs and product mix. At the end of 2003, the Company experienced a four-year high in the pricing in the market for its key raw material markets, specificallyprices, particularly crude oil-based, animal fat and vegetable oil derivatives. The Company estimates the raw material price increases negatively impacted gross profit by approximately $2.5 million in 2003.

Selling, general and administrative costsexpenses (“SG&A”) as reported for 2003 were $97.22006 increased $4.6 million compared to $87.6 million2005. Cost savings from restructuring efforts completed in 2002. Approximately three quarters of the $9.6 million increase is2005 enabled increased spending in higher growth areas, higher variable compensation, and higher professional fees. In addition, due to foreign exchange rate translation anda legislative change, effective January 1, 2006, the Company’s acquisition activity, which impacted SG&A by approximately $4.6Company recorded a pension gain in the first quarter of 2006 of $0.9 million and $2.4 million, respectively. The remaining increase in SG&A was duerelating to higher costs including pension, insurance, and the Company’s continued rolloutone of its global ERP system, offset in part by reduced incentive compensation expense. European pension plans. SG&A as a percentage of sales decreased from 27.4% to 26.3%.

In 2004,the first quarter of 2005, the Company expects to again see higher expensesincurred a net pre-tax charge of $1.2 million related to these administrative areas as well as increases related to Sarbanes-Oxley Act compliance anda reduction in its workforce. During the restorationfourth quarter of performance-based incentive compensation.

Also included2005, the Company furthered this restructuring effort with the goal of significantly reducing operating costs in the 2003 results isU.S. and Europe. The fourth quarter program included involuntary terminations, a $0.1 million net restructuring charge. 2003 severance program costs of approximately $0.3 million were partially offset by the release of $0.2 million of unused restructuring accruals related to the Company’s 2001 restructuring program.

15


The Company’s effective tax rate was 31% in 2003 versus 32% in 2002. The reduction in the effective tax rate is reflectivefreeze of the Company’s favorable settlementU.S. pension plan, and a voluntary early retirement offering to eligible U.S. employees. These actions resulted in a net pre-tax charge of several outstanding tax audits and appeal issues. $9.1 million.

The effective tax ratedecrease in other income is dependent on many internal and external factors and is assessed by the Company on a regular basis. Currently, the Company anticipates its effective tax rate for 2004 will remain in the 30%largely due to 32% range.

Equity in net income$4.2 million of associated companies for 2003 was $0.9 million higher than 2002. This increase primarily reflects a priority distribution received frompre-tax gain relating to the Company’s real estate joint venture as well as improved performance from this venturerecorded in 2005. The remainder of the decrease was the result of foreign exchange losses in 2006 compared to 2002.

gains in 2005. The increase in net interest expense is attributable to higher average borrowings and higher interest rates.

The $0.5effective tax rate was 33.8% for 2006 compared to 50.4% in 2005, with the decrease primarily due to the tax charge taken in 2005 associated with the repatriation of accumulated foreign earnings.

At the end of 2006, the Company had net U.S. deferred tax assets totaling $15.5 million, increaseexcluding deferred tax assets relating to additional minimum pension liabilities. The Company records valuation allowances when necessary to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. However, in the event the Company were to determine that it would not be able to realize all or part of its U.S. net deferred tax assets in the future, an adjustment to the deferred tax asset would be a non-cash charge to income in the period such determination were made, which could have a material adverse impact on the Company’s financial statements. The continued upward pressure in the prices for the Company’s crude-oil based raw materials has negatively impacted U.S. profitability. The Company continues to closely monitor this situation as it relates to its net deferred tax assets and the assessment of valuation allowances. The Company is continuing to evaluate alternatives that could positively impact taxable income.

The decrease in minority interest expense for the year is primarily due to full-year consolidationthe acquisition of the remaining 40% interest in the Company’s Brazilian affiliate in March of 2005, the fourth quarter 2006 acquisition of the remaining interest in the Company’s China affiliate, and lower financial performance from most of the Company’s minority affiliates.

Segment Reviews—Comparison of 2006 with 2005

Metalworking Process Chemicals:

Metalworking Process Chemicals consist of industrial process fluids for various heavy industrial and manufacturing applications and represented approximately 92% of the Company’s net sales in 2006. Net sales for this segment were up $32.0 million, or 8%, compared to 2005. Foreign currency translation positively impacted net sales by approximately 1%, driven by the Brazilian real to U.S. dollar exchange rate. The average Brazilian real to U.S. dollar rate was 0.46 in 2006 compared to 0.41 in 2005. Net sales were positively impacted by 4% growth in North America, 5% growth in Europe, 20% growth in Asia/Pacific and 2% growth in South AfricanAmerica, all on a constant currency basis. The growth in net sales was attributable to both higher sales and volume growth. The majority of the volume growth came from increased demand in China, while price increases implemented across all regions helped to restore margins despite higher raw material costs. The $12.6 million increase in this segment’s operating income compared to 2005 is largely reflective of the Company’s pricing actions, improved performance from the Company’s U.S. CMS channel, and savings generated from the Company’s 2005 restructuring actions.

Coatings:

The Company’s Coatings segment, which represented approximately 7% of the Company’s net sales for 2006, contains products that provide temporary and permanent coatings for metal and concrete products and chemical milling maskants. Net sales for this segment were up $6.2 million, or 23% in 2006, compared with the

prior year. The increase in net sales was the result of increased demand for both coatings and chemical milling maskants to the aerospace industry. This segment’s operating income increased $1.2 million, consistent with the noted volume increases.

Other Chemical Products:

Other Chemical Products, which represented approximately 1% of the Company’s net sales for 2006, consists of sulfur removal products for industrial gas streams sold by the Company’s Q2 Technologies joint venture. Effective July 1, 2002,Net sales for 2006 decreased $1.8 million, or 47%, due to a variety of market conditions, including reduced demand in the Company acquiredhydrocarbon and wastewater markets. This segment’s operating income decreased $0.4 million, as a controlling interestresult of Quaker Chemical South Africa (Pty.) Ltd. (South Africa).

the noted volume decreases.

Comparison of 20022005 with 20012004

ConsolidatedNet sales for 2005 increased to $424.0 million, up 6% from $400.7 million for 2004. Approximately 4% of the increase was attributable to higher sales prices, while foreign exchange rate translation favorably impacted net sales increased to $274.5 millionby approximately 2%. Volume increases in 2002 from $251.1 million in 2001. The 9% increase was the net result of a 6% increase in volume and a 5% improvement in price/mix,Asia/Pacific were partially offset by a 2% negative impact from foreign currency translation. The 6% increasesofter demand in volume was primarily due to the inclusion of revenues from the acquisitions of United Lubricants CorporationNorth America and Epmar Corporation, as well as the purchase of a controlling interest in the Company’s South African joint venture, which was included in the Company’s consolidated results effective July 1, 2002. At constant exchange rates and excluding revenue from acquisitions, consolidated net sales increased 3%.

Europe.

Gross profit as a percentage of sales was 40.6%declined from 32.7% in 2002 compared2004 to 30.6% in 2005. Higher prices for the Company’s raw materials, particularly crude oil derivatives, and higher third-party product purchase costs with 40.2% in 2001. This increaserespect to the Company’s CMS contracts, exceeded the pace at which price increases could be implemented through the year. Unfavorable product and regional mix also contributed to the decline in gross margin percentage was attributable to higher volumes and lower raw material prices with some product mix changes.

profit percentage.

Selling, general and administrative costsexpenses (“SG&A”) for 2005 increased $2.8 million or approximately 3% from 2004. Foreign exchange rate translation accounted for approximately half of the increase with the remainder attributable to inflation, investments in growth initiatives, and higher pension costs offset by other cost reduction efforts. SG&A as reported for 2002 were $87.6 million compareda percentage of sales decreased from 28.3% to $80.5 million in 2001. Upon27.4%.

In the January 1, 2002 adoptionfirst quarter of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,”2005, the Company no longer amortizes goodwill. SG&A for 2001 included $1.0 million of goodwill amortization. Other significant costs in 2001 included: $2.0 million of additional provisions for doubtful accounts primarily attributable to U.S. steel customers that filed for bankruptcy protection under Chapter 11 and $0.3 million of organizational structure costs. The overall increase in 2002 SG&A was primarily related to the Company’s 2002 acquisitions, which added approximately $4.9 million of expense, as well as higher administrative costs such as insurance, pension, incentive compensation, and expenses related to the Company’s new global ERP implementation.

Operating income as reported was $24.0 million in 2002 compared to $14.2 million in 2001. In addition to the significant costs noted in 2001 SG&A, operating income for 2001 also includedincurred a restructuringnet pre-tax charge of $5.9 million as well as an additional environmental provision of $0.5 million. The restructuring charge of $5.9$1.2 million related to plans to closea reduction in its workforce. During the fourth quarter of 2005, the Company furthered this restructuring effort with the goal of significantly reducing operating costs in the U.S. and sellEurope. The fourth quarter program included involuntary terminations, a freeze of the Company’s manufacturing facilitiesU.S. pension plan, and a voluntary early retirement offering to eligible U.S. employees. These actions resulted in the U.K. and France, reduce administrative functions, as well as costs related to abandoned acquisitions. a net pre-tax charge of $9.1 million.

The overall increased operatingincrease in other income in 2002for 2005 was primarily attributablelargely due to the 2001 significant costs noted above, as well as higher gross margin$4.2 million of proceeds received from the noted volume increases.

The Company’s effective tax rate was 32% in 2002 versus 31% in 2001. The effective tax rate is dependent on many internal and external factors and is assessedsale by the Company on a regular basis. The Company had previously been assessed additional taxes based on an audit of certain subsidiaries for prior years, which had been resolved with no material impact to the Company’s consolidated financial statements.

Equity in net income of associated companies for 2002 was approximately $0.3 million lower than 2001. This decrease was primarily attributable to the July 2002 purchase of a controlling interest in the Company’s South African joint venture, as well as losses from the start-up of the Company’s real estate joint venture.venture of its holdings. The proceeds included a $3.0 million gain relating to the sale by the venture of its real estate holdings, as well as $1.2 million of preferred return distributions. Preferred distributions in 2004 totaled $0.9 million. Foreign exchange gains in 2005 also contributed to the increase in other income. The increase in net interest expense in 2005 was due to higher average borrowings and higher interest rates on the Company’s debt.

The effective tax rate was 50.4% versus 31.5% in 2004. The increase was primarily due to the Company’s election, in the fourth quarter of 2005, to repatriate substantial accumulated foreign earnings primarily to improve its global capital structure, which resulted in a $1.0 million charge in tax expense.

16


MinorityThe $1.7 million decrease in minority interest in 2005 was primarily due to the Company’s first quarter 2005 acquisition of the remaining 40% interest in its Brazilian affiliate.

Segment Reviews—Comparison of 2005 with 2004

Metalworking Process Chemicals:

Metalworking Process Chemicals consists of industrial process fluids for various heavy industrial and manufacturing applications and represented approximately 93% of the Company’s net incomesales in 2005. Net sales were up $23.0 million, or 6%, compared with 2004. Favorable currency translation represented approximately 2 percentage

points of subsidiaries for 2002 was approximately $0.4 million lower than 2001. This decrease was substantially the result of lowergrowth in this segment, driven by the Brazilian real to U.S. dollar exchange rate. The average Brazilian real to U.S. dollar rate was 0.41 in 2005 compared to 0.34 in 2004. The remaining net income from the Company’s joint venturesales increase of 4% was due to 35% growth in BrazilAsia/Pacific, 7.2% growth in South America, 1% growth in North America, partially offset by an improved performancedecreases in our European net sales, which were down 3%, all on a constant currency basis. The growth in net sales is primarily attributable to the pricing actions taken by the Company throughout 2004 and 2005 to help in offsetting the escalation in raw material costs. Volume increases in Asia/Pacific were offset by volume declines in the Company’s North American and European regions. The $6.4 million decrease in this segment’s operating income compared to 2004 is largely reflective of the pace at which raw material costs have escalated beyond the Company’s China joint venturepricing actions. This segment’s operating income was also impacted by higher selling costs compared to the prior year.

Coatings:

The Company’s Coatings segment, which represented approximately 6% of Company’s net sales for 2005, contains products that provide temporary and permanent coatings for metal and concrete products and chemical milling maskants. Net sales for this segment were up $2.0 million, or 8%, in 2005, compared with the purchaseprior year, primarily due to higher chemical milling maskant sales to the aerospace industry. Operating income decreased by $0.1 million in 2005 compared to 2004 due to higher raw material and selling costs.

Other Chemical Products:

Other Chemical Products, which represented approximately 1% of a controlling interestnet sales in our South African2005, consists of sulfur removal products for industrial gas streams sold by the Company’s Q2 Technologies joint venture.

Net sales for 2005 decreased $1.7 million or 31% due to a variety of market conditions, including special one-time sales to this segment’s largest customer in 2004 affecting the yearly net sales comparison. This segment’s operating income decreased by $0.4 million, consistent with the noted volume decreases and higher raw material costs.

Restructuring and Related Activities

In 2001, Quaker’s management approved restructuring plans to realign the organization, primarily in Europe, and reduce operating costs (2001 program)Program). Quaker’s restructuring plans included the decision to close and sell manufacturing facilities in the U.K. and France. In addition, Quaker consolidated certain functions within its global business units and reduced administrative functions, as well as expensed costs related to abandoned acquisitions. Included in the restructuring charges arewere provisions for severance of 53 employees. Restructuring and related charges of $5.854 million were recognized in 2001. The charge comprised $2.807 million related to employee separations, $2.450 million related to facility rationalization charges, and $0.597 million related to abandoned acquisitions. Employee separation benefits varied depending on local regulations within certain foreign countries and includedIn January of 2005, the last severance and other benefits. As of December 31, 2003, Quaker had completed 51 of the planned 53 employee separationspayment under the 2001 program was made and the Company reversed $0.117 million of unused restructuring accruals related to this program. During the fourth quarter of 2002,In 2005, the Company completed the sale of its U.K. manufacturing facility,Villeneuve, France site for $1.907 million, which closed atcompleted all actions contemplated by the end of 2001. In 2003, the2001 Program. The Company reversed $0.2$0.159 million of unused restructuring accruals related to this program in the 2001 program.

fourth quarter of 2005.

In 2003, Quaker’s management approved a restructuring plans to further realign the organizationplan (2003 program)Program). Included in the 2003 restructuring charge arewere provisions for severance for 9 employees totaling $0.273 million. As of March 31, 2005, all severance payments were completed and the Company reversed $0.059 million of unused restructuring accruals related to this program, which completed all actions contemplated by the 2003 Program.

In 2004, Quaker’s management approved a restructuring plan by announcing the consolidation of its administrative facilities in Hong Kong with its Shanghai headquarters (2004 Program). Included in the 2004 restructuring charge were severance provisions for 5 employees totaling $0.119 million and an asset impairment related to the Company’s previous plans to implement its global ERP system at this location totaling $0.331 million. As of March 31, 2005, all severance payments were completed, which completed all actions contemplated by the 2004 Program.

Quaker expectsIn the first quarter of 2005, Quaker’s management approved a restructuring plan (2005 1st Quarter Program). Included in the first quarter 2005 restructuring charge were provisions for severance for 16 employees totaling $1.408 million. At December 31, 2005, all severance payments were completed. The Company reversed $0.096 million of unused restructuring charges related to substantially completethis program, which completed all actions contemplated by the 2005 1st Quarter Program.

In the fourth quarter of 2005, Quaker’s management approved a restructuring plan (2005 4th 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 Company’s U.S. pension plan, and 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 million were recognized in the fourth quarter of 2005. The charge comprised $4.024 million related to severance for involuntary terminations, $1.017 million related to one-time payments for voluntary early retirement, $2.668 million related to the U.S. pension plan freeze, and $1.635 million for the enhanced pension and other postretirement benefits related to voluntary early retirement participants. The charges related to the U.S. pension plan freeze and the enhanced pension and postretirement benefits are not included in the following table, and are included as part of the accrued pension and other post retirement balances. See also Note 9 of Notes to Consolidated Financial Statements which appears in Item 8 of this Report. The Company completed the initiatives contemplated under the restructuring plans, including the sale of its former manufacturing facility in France,this program during 2004.2006.

 

Accrued restructuring balances, included in other current liabilities and assigned to the Metalworking segment, are as follows (amounts in millions):

   

Employee

Separations


  

Facility

Rationalization


  

Abandoned

Acquisitions


  Total

 

2001 Program:

                 

Restructuring charges

  $2.807  $2.450  $0.597  $5.854 

Asset impairment

   —     (1.015)  —     (1.015)

Payments

   (0.111)  (0.171)  (0.597)  (0.879)

Currency translation and other

   0.001   0.012   —     0.013 
   


 


 


 


December 31, 2001 ending balance

   2.697   1.276   —     3.973 

Payments

   (1.374)  (0.752)  —     (2.126)

Currency translation and other

   0.114   0.182   —     0.296 
   


 


 


 


December 31, 2002 ending balance

   1.437   0.706   —     2.143 

Restructuring reversals

   (0.156)  (0.060)  —     (0.216)

Payments

   (0.832)  (0.204)  —     (1.036)

Currency translation and other

   0.001   0.083   —     0.084 
   


 


 


 


December 31, 2003 ending balance

   0.450   0.525   —     0.975 
   


 


 


 


2003 Program:

                 

Restructuring charges

   0.273   —     —     0.273 

Payments

   (0.047)  —     —     (0.047)

Currency translation and other

   0.002   —     —     0.002 
   


 


 


 


December 31, 2003 ending balance

   0.228   —     —     0.228 
   


 


 


 


Total restructuring December 31, 2003 ending balance

  $0.678  $0.525  $—    $1.203 
   


 


 


 


17


    Employee
Separations
 

2005 4th Quarter Program:

  

Restructuring charges

  $5.041 

Payments

   (1.006)

Currency translation and other

   (0.002)
     

December 31, 2005 ending balance

   4.033 
     

Payments

   (4.033)
     

December 31, 2006 ending balance

  $0 
     

Environmental Clean-up Activities

The Company is involved in environmental clean-up activities in connection with an existing plant location and former waste disposal sites. In April of 1992, the Company identified certain soil and groundwater contamination at AC Products, Inc. (“ACP”), a wholly owned subsidiary. Voluntarily in coordination with the Santa Ana California Regional Water Quality Board, ACP is remediating the contamination. The Company believes that the remaining potential-known liabilities associated with these matters rangesrange from approximately $0.9$1.5 million to $1.5$1.9 million, for which the Company has sufficient reserves. Notwithstanding the foregoing, the Company cannot be certain that liabilities in the form of remediation expenses, fines, penalties, and damages will not be incurred in excess of the amount reserved. See Note 1418 of Notes to Consolidated Financial Statements which appears in Item 8 of this Report.

��

General

The Company generally does not use financial instruments that expose it to significant risk involving foreign currency transactions; however, the size of non-U.S. activities has a significant impact on reported operating results and the attendant net assets. During the past three years, sales by non-U.S. subsidiaries accounted for approximately 55%53% to 56% of the consolidated net annual sales. See Note 1113 of the Notes to Consolidated Financial Statements which appears in itemItem 8 of this report.

Report.

Factors that May Affect Our Future Results

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

Certain information included in this Report and other materials filed or to be filed by Quaker with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as

amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including:

 

statements relating to our business strategy;

 

our current and future results and plans; and

 

statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions.

Such statements include information relating to current and future business activities, operational matters, capital spending, and financing sources. From time to time, oral or written forward-looking statements are also included in Quaker’s periodic reports on Forms 10-Q and 8-K, press releases and other materials released to the public.

Any or all of the forward-looking statements in this report, in Quaker’s Annual Report to Shareholders for 20032006 and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Report will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in Quaker’s subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. These forward-looking statements are

18


subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. A major risk is that the Company’s demand is largely derived from the demand for its customers’ products, which subjects the Company to uncertainties related to downturns in a customer’s business and unanticipated customer production shutdowns. Other major

risks and uncertainties include, but are not limited to, significant increases in raw material costs, worldwide economic and political conditions, foreign currency fluctuations, and terrorist attacks such as those that occurred on September 11, 2001.2001, each of which is discussed in greater detail in Item 1A of this Report. Furthermore, the Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, appliance, and durable goods manufacturers. These risks, uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results. Other factors beyond those discussed belowin this Report could also adversely affect us. Therefore, we caution you not to place undue reliance on our forward-looking statements. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

 

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

Quaker is exposed to the impact of interest rates, foreign currency fluctuations, changes in commodity prices, and credit risk.

Interest Rate Risk.    Quaker’s exposure to market rate risk for changes in interest rates relates primarily to its short and long-term debt. Most of Quaker’s long-term debt has a fixed interest rate, while its short-term debt is negotiated at market rates which can be either fixed or variable.rates. Accordingly, if interest rates rise significantly, the cost of short-term debt to Quaker will increase. This can have an adverse effect on Quaker, depending on the extent of Quaker’s short-term borrowings. As of December 31, 2003,2006, Quaker had approximately $40.0$79.2 million in short-term borrowings.borrowings under its credit facilities at a weighted average borrowing rate of approximately 5.69%. The Company uses derivative financial instruments primarily for the purposes of hedging exposures to fluctuations in interest rates. The Company does not enter into derivative contracts for trading or speculative purposes. In 2006

and 2005, the Company entered into five interest rate swaps in order to fix a portion of its variable rate debt. The swaps had a combined notional value of $25.0 million and $15.0 million and a fair value of $0.1 and $(0.1) million at December 31, 2006 and December 31, 2005, respectively. The counterparties to the swaps are major financial institutions. See the information included under the caption “Derivatives” in Note 1 of Notes to Consolidated Financial Statements which appears in Item 8 of this Report and is incorporated herein by reference. In February 2007, the Company completed a refinancing of its existing industrial development bonds to fix the interest rate of an additional $5.0 million of debt.

Foreign Exchange Risk.    A significant portion of Quaker’s revenues and earnings is generated by its foreign operations. These foreign operations also hold a significant portion of Quaker’s assets and liabilities. All such operations use the local currency as their functional currency. Accordingly, Quaker’s financial results are affected by risks typical of global business such as currency fluctuations, particularly between the U.S. dollar, the Brazilian real, the Chinese renminbi and the E.U. euro. As exchange rates vary, Quaker’s results can be materially affected.

The Company generally does not use financial instruments that expose it to significant risk involving foreign currency transactions; however, the size of non-U.S. activities has a significant impact on reported operating results and the attendant net assets. During the past three years, sales by non-U.S. subsidiaries accounted for approximately 55%53% to 56% of the consolidated net annual sales. See Note 11 of the Notes to Consolidated Financial Statements which appears in item 8 of this report.

In addition, the Company often sources inventory among its worldwide operations. This practice can give rise to foreign exchange risk resulting from the varying cost of inventory to the receiving location as well as from the revaluation of intercompany balances. The Company mitigates this risk through local sourcing efforts.

Commodity Price Risk.    Many of the raw materials used by Quaker are commodity chemicals, and, therefore, Quaker’s earnings can be materially adversely affected by market changes in raw material prices. In certain cases, Quaker has entered into fixed-price purchase contracts having a term of up to one year. These contracts provide for protection to Quaker if the price for the contracted raw materials rises, however, in certain limited circumstances, Quaker will not realize the benefit if such prices decline.

Credit Risk.    Quaker establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Quaker’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Downturns in the overall economic climate may also tend to exacerbate specific customer financial issues. A significant portion of Quaker’s revenues is derived from sales to customers in the U.S. steel industry, where a

19


number of bankruptcies occurred during recent years. Through 2003, Quaker recorded additional provisions for doubtful accounts primarily related to bankruptcies in the U.S. steel industry.In recent years, certain large industrial customers have also experienced financial difficulty. When a bankruptcy occurs, Quaker must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process. In addition, as part of its terms of trade, Quaker may custom manufacture products for certain large customers and/or may ship product on a consignment basis. These practices may increase the Company’s exposure should a bankruptcy occur, and may require writedown or disposal of certain inventory due to its estimated obsolescence or limited marketability. Customer returns of products or disputes may also result in similar issues related to the realizability of recorded accounts receivable or returned inventory.

20


Item 8.    Financial Statements and Supplementary Data.

Item 8.Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

   Page

Financial Statements:

  

Report of Independent AuditorsRegistered Public Accounting Firm

  2228

Consolidated Statement of Income

  2330

Consolidated Balance Sheet

  2431

Consolidated Statement of Cash Flows

  2532

Consolidated Statement of Shareholders’ Equity

  2633

Notes to Consolidated Financial Statements

  2734

21


REPORT OF INDEPENDENT AUDITORSReport of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

of Quaker Chemical CorporationCorporation:

We have completed integrated audits of Quaker Chemical Corporation’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a) (1) on page 53, present fairly, in all material respects, the financial position of Quaker Chemical Corporation and its subsidiaries at December 31, 20032006 and 2002,2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003,2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a) (2) on page 53 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; ourmanagement. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditingthe standards generally accepted inof the United States of America, whichPublic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 139 and Note 11 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statementchanged the manner in which it accounts for defined benefit pension and other postretirement plans effective December 31, 2006 and the manner in which it accounts for share-based compensation in 2006.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in “Management’s Report on Internal Control over Financial Reporting,” appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of FinancialDecember 31, 2006 based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Standards (“SFAS”) No. 142, “GoodwillOversight Board (United States). Those standards require that we plan and Other Intangible Assets.”perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting

includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/    PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Philadelphia, PennsylvaniaPA

February 27, 2004

22March 9, 2007


QUAKER CHEMICAL CORPORATION

CONSOLIDATED STATEMENT OF INCOME

 

   Year Ended December 31,

 
   2003

  2002

  2001

 
   (Dollars in thousand, except
per share amounts)
 

Net sales

  $340,192  $274,521  $251,074 
   


 


 


Costs and expenses:

             

Cost of goods sold

   218,818   162,944   150,045 

Selling, general, and administrative expenses

   97,202   87,604   80,484 

Environmental charge

   —     —     500 

Restructuring charges, net

   57   —     5,854 
   


 


 


    316,077   250,548   236,883 
   


 


 


Operating income

   24,115   23,973   14,191 

Other income, net

   764   1,135   1,089 

Interest expense

   (1,576)  (1,774)  (1,880)

Interest income

   815   984   1,030 
   


 


 


Income before taxes, equity income and minority interest

   24,118   24,318   14,430 

Taxes on income

   7,488   7,782   4,473 
   


 


 


    16,630   16,536   9,957 

Equity in net income of associated companies

   1,244   295   613 

Minority interest in net income of subsidiaries

   (3,041)  (2,534)  (2,905)
   


 


 


Net income

  $14,833  $14,297  $7,665 
   


 


 


Per share data:

             

Net income—basic

  $1.58  $1.56  $.85 

Net income—diluted

  $1.52  $1.51  $.84 

Weighted average shares outstanding:

             

Basic

   9,381   9,172   9,054 

Diluted

   9,761   9,474   9,114 

   Year Ended December 31, 
   2006  2005  2004 
   

(In thousands, except

per share amounts)

 

Net sales

  $460,451  $424,033  $400,695 
             

Costs and expenses:

    

Cost of goods sold

   317,850   294,219   269,818 

Selling, general, and administrative expenses

   120,969   116,340   113,536 

Restructuring and related activities, net

   —     10,320   450 
             
   438,819   420,879   383,804 
             

Operating income

   21,632   3,154   16,891 

Other income, net

   1,259   6,120   1,818 

Interest expense

   (5,520)  (3,681)  (2,363)

Interest income

   1,069   1,022   1,111 
             

Income before taxes, equity income and minority interest

   18,440   6,615   17,457 

Taxes on income

   6,224   3,336   5,499 
             
   12,216   3,279   11,958 

Equity in net income of associated companies

   773   618   890 

Minority interest in net income of subsidiaries

   (1,322)  (2,209)  (3,874)
             

Net income

  $11,667  $1,688  $8,974 
             

Per share data:

    

Net income—basic

  $1.19  $0.17  $0.93 

Net income—diluted

  $1.18  $0.17  $0.90 

Weighted average shares outstanding:

    

Basic

   9,779   9,679   9,606 

Diluted

   9,854   9,816   9,969 

 

See notes to consolidated financial statements.

23


QUAKER CHEMICAL CORPORATION

CONSOLIDATED BALANCE SHEET

 

   December 31,

 
   2003

  2002

 
   (Dollars in thousands,
except par value and
share amounts)
 

ASSETS

         

Current assets

         

Cash and cash equivalents

  $21,915  $13,857 

Accounts receivable, net

   78,121   53,353 

Inventories, net

   32,211   23,636 

Deferred income taxes

   4,550   5,874 

Prepaid expenses and other current assets

   6,727   6,953 
   


 


Total current assets

   143,524   103,673 

Property, plant, and equipment, net

   62,391   48,512 

Goodwill

   33,301   21,927 

Other intangible assets, net

   9,616   5,852 

Investments in associated companies

   6,005   9,060 

Deferred income taxes

   12,846   10,609 

Other assets

   19,664   14,225 
   


 


Total assets

  $287,347  $213,858 
   


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

         

Current liabilities

         

Short-term borrowings and current portion of long-term debt

   42,992   12,205 

Accounts payable

   39,240   27,461 

Dividends payable

   2,019   1,962 

Accrued compensation

   6,816   10,254 

Other current liabilities

   14,738   14,262 
   


 


Total current liabilities

   105,805   66,144 

Long-term debt

   15,827   16,590 

Deferred income taxes

   2,688   1,518 

Accrued pension and postretirement benefits

   34,165   28,723 

Other non-current liabilities

   6,802   5,166 
   


 


Total liabilities

   165,287   118,141 
   


 


Minority interest in equity of subsidiaries

   9,708   7,662 
   


 


Commitments and contingencies

   —     —   

Shareholders’ equity

         

Common stock, $1 par value; authorized 30,000,000 shares; issued (including treasury shares) 9,664,009 shares

   9,664   9,664 

Capital in excess of par value

   2,181   626 

Retained earnings

   117,308   110,448 

Unearned compensation

   (621)  (1,245)

Accumulated other comprehensive loss

   (15,406)  (27,078)
   


 


    113,126   92,415 

Treasury stock, shares held at cost; 2003-54,178, 2002-324,109

   (774)  (4,360)
   


 


Total shareholders’ equity

   112,352   88,055 
   


 


Total liabilities and shareholders’ equity

  $287,347  $213,858 
   


 


   December 31, 
   2006   2005 
   (In thousands, except
par value and
share amounts)
 

ASSETS

    

Current assets

    

Cash and cash equivalents

  $16,062   $16,121 

Accounts receivable, net

   107,340    93,943 

Inventories

   51,984    45,818 

Deferred income taxes

   4,379    4,439 

Prepaid expenses and other current assets

   6,476    5,672 
          

Total current assets

   186,241    165,993 

Property, plant and equipment, net

   60,927    56,897 

Goodwill

   38,740    35,418 

Other intangible assets, net

   8,330    8,703 

Investments in associated companies

   7,044    6,624 

Deferred income taxes

   28,573    24,385 

Other assets

   27,527    33,975 
          

Total assets

  $357,382   $331,995 
          

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities

    

Short-term borrowings and current portion of long-term debt

  $4,950   $5,094 

Accounts payable

   54,212    50,832 

Dividends payable

   2,133    2,091 

Accrued compensation

   15,225    9,818 

Other current liabilities

   13,659    19,053 
          

Total current liabilities

   90,179    86,888 

Long-term debt

   85,237    67,410 

Deferred income taxes

   5,317    4,608 

Accrued pension and postretirement benefits

   38,430    38,210 

Other non-current liabilities

   23,353    22,363 
          

Total liabilities

   242,516    219,479 
          

Minority interest in equity of subsidiaries

   4,035    6,609 
          

Commitments and contingencies

   —      —   

Shareholders’ equity

    

Common stock, $1 par value; authorized 30,000,000 shares;
Issued: 2006-9,925,976, 2005-9,726,385 shares

   9,926    9,726 

Capital in excess of par value

   5,466    3,574 

Retained earnings

   114,498    111,317 

Accumulated other comprehensive loss

   (19,059)   (18,710)
          

Total shareholders’ equity

   110,831    105,907 
          

Total liabilities and shareholders’ equity

  $357,382   $331,995 
          

See notes to consolidated financial statements.

24


QUAKER CHEMICAL CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

 

  Year Ended December 31,

 
  2003

  2002

  2001

 
  (Dollars in thousands) 

Cash flows from operating activities

            

Net income

 $14,833  $14,297  $7,665 

Adjustments to reconcile net income to net cash provided by operating activities:

            

Depreciation

  6,677   5,432   4,913 

Amortization

  960   805   1,467 

Equity in net income of associated companies

  (844)  (295)  (613)

Minority interest in earnings of subsidiaries

  3,041   2,534   2,905 

Deferred income taxes

  1,389   328   (627)

Deferred compensation and other, net

  (418)  107   288 

Environmental charge

  —     —     500 

Restructuring charges, net

  57   —     5,854 

Pension and other postretirement benefits

  428   1,452   (782)

Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions:

            

Accounts receivable

  (14,604)  (657)  7,573 

Inventories

  (4,692)  (3,101)  2,762 

Prepaid expenses and other current assets

  (648)  (194)  39 

Accounts payable and accrued liabilities

  478   7,107   (6,603)

Change in restructuring liabilities

  (1,083)  (2,156)  (1,123)

Estimated taxes on income

  2,803   (1,261)  (1,614)
  


 


 


Net cash provided by operating activities

  8,377   24,398   22,604 
  


 


 


Cash flows from investing activities

            

Capital expenditures

  (12,608)  (10,837)  (8,036)

Dividends and distributions from associated companies

  4,080   515   1,208 

Investments in and advances to associated companies

  —     —     95 

Payments related to acquisitions

  (15,983)  (21,285)  (1,718)

Proceeds from disposition of assets

  232   1,682   259 

Other, net

  (87)  (326)  165 
  


 


 


Net cash (used in) investing activities

  (24,366)  (30,251)  (8,027)
  


 


 


Cash flows from financing activities

            

Dividends paid

  (7,916)  (7,714)  (7,410)

Net increase (decrease) in short-term borrowings

  30,581   9,026   (56)

Repayment of long-term debt

  (2,570)  (2,853)  (2,891)

Treasury stock issued

  4,328   2,951   2,902 

Distributions to minority shareholders

  (2,391)  (2,673)  (2,335)

Other, net

  —     —     234 
  


 


 


Net cash provided by (used in) financing activities

  22,032   (1,263)  (9,556)
  


 


 


Effect of exchange rate changes on cash

  2,015   424   (1,024)

Net increase (decrease) in cash and cash equivalents

  8,058   (6,692)  3,997 

Cash and cash equivalents at beginning of year

  13,857   20,549   16,552 
  


 


 


Cash and cash equivalents at end of year

 $21,915  $13,857  $20,549 
  


 


 


Supplemental cash flow disclosures

            

Cash paid during the year for:

            

Income taxes

 $3,633  $7,787  $7,550 

Interest

  1,680   1,897   1,876 

Noncash investing activities:

            

Contribution of property, plant, and equipment to real estate joint venture

 $—    $—    $4,358 

   Year Ended December 31, 
   2006  2005  2004 
   (In thousands) 

Cash flows from operating activities

    

Net income

  $11,667  $1,688  $8,974 

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

   10,136   9,163   8,610 

Amortization

   1,427   1,368   1,157 

Equity in net income of associated companies, net of dividends

   (348)  (384)  (602)

Minority interest in earnings of subsidiaries

   1,322   2,209   3,874 

Deferred income tax

   404   (4,476)  (1,872)

Deferred compensation and other, net

   (507)  (747)  (442)

Stock based compensation

   857   771   452 

Restructuring and related activities

   —     6,018   450 

Gain on sale of partnership assets

   —     (2,989)  —   

(Gain) Loss on disposal of property, plant and equipment

   34   —     (509)

Insurance settlement realized

   (544)  —     —   

Pension and other postretirement benefits

   (4,247)  (439)  (172)

Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions:

    

Accounts receivable

   (8,947)  (9,600)  (6,254)

Inventories

   (4,146)  (5,821)  (7,559)

Prepaid expenses and other current assets

   (140)  161   (388)

Accounts payable and accrued liabilities

   5,440   15,726   129 

Change in restructuring liabilities

   (4,033)  (2,798)  (558)

Estimated taxes on income

   (192)  1,722   (1,596)
             

Net cash provided by operating activities

   8,183   11,572   3,694 
             

Cash flows from investing activities

    

Capital expenditures

   (12,379)  (6,989)  (8,643)

Payments related to acquisitions

   (1,684)  (6,700)  —   

Proceeds from partnership disposition of assets

   —     2,989   —   

Proceeds from disposition of assets

   64   1,918   1,880 

Insurance settlement received and interest earned

   7,836   7,508   —   

Change in restricted cash, net

   (7,292)  (7,508)  —   

Other, net

   —     —     (75)
             

Net cash used in investing activities

   (13,455)  (8,782)  (6,838)
             

Cash flows from financing activities

    

Proceeds from short-term debt

   1,897   —     —   

Net (decrease) increase in short-term borrowings

   (3,384)  (52,703)  17,683 

Proceeds from long-term debt

   15,283   59,525   2,564 

Repayment of long-term debt

   (940)  (9,566)  (3,679)

Dividends paid

   (8,444)  (8,340)  (8,241)

Stock options exercised, other

   1,235   387   960 

Distributions to minority shareholders

   (1,490)  (4,198)  (1,956)
             

Net cash provided by (used in) financing activities

   4,157   (14,895)  7,331 
             

Effect of exchange rate changes on cash

   1,056   (852)  2,976 

Net (decrease) increase in cash and cash equivalents

   (59)  (12,957)  7,163 

Cash and cash equivalents at beginning of the period

   16,121   29,078   21,915 
             

Cash and cash equivalents at end of the period

  $16,062  $16,121  $29,078 
             

Supplemental cash flow disclosures

    

Cash paid during the year for:

    

Income taxes

  $6,315  $5,584  $4,809 

Interest

   4,944   3,354   2,201 

Non-cash activities:

    

Restricted insurance receivable (See also Note 16 of Notes to Consolidated Financial Statements)

  $7,500  $7,500  $—   

See notes to consolidated financial statements.

25


QUAKER CHEMICAL CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

  Common
stock


 Capital in
excess of
par value


  Retained
earnings


  Unearned
compensation


  Accumulated
other
comprehensive
income (loss)


  Treasury
stock


  Total

 
  (Dollars in thousands, except per share amounts) 

Balance at December 31, 2000

 $9,664 $746  $103,760  $    —    $(16,714) $(12,549) $84,907 
                         


Net income

  —    —     7,665   —     —     —     7,665 

Currency translation adjustments

  —    —     —     —     (5,566)  —     (5,566)

Minimum pension liability

  —    —     —     —     (1,524)  —     (1,524)

Unrealized (loss) on available-for-sale securities

  —    —     —     —     (271)  —     (271)
                         


Comprehensive income

  —    —     —     —     —     —     304 
                         


Dividends ($.82 per share)

  —    —     (7,472)  —     —     —     (7,472)

Shares issued upon exercise of options

  —    (375)  —     —     —     3,106   2,731 

Shares issued for employee stock purchase plan

  —    8   —     —     —     244   252 

Restricted stock grant of $1,774, amortization of unearned compensation of $177

  —    (22)  —     (1,597)  —     1,796   177 
  

 


 


 


 


 


 


Balance at December 31, 2001

  9,664  357   103,953   (1,597)  (24,075)  (7,403)  80,899 
                         


Net income

  —    —     14,297   —     —         14,297 

Currency translation adjustments

  —    —     —     —     1,478   —     1,478 

Minimum pension liability

  —    —     —     —     (4,322)  —     (4,322)

Unrealized (loss) on available-for-sale securities

  —    —     —     —     (159)  —     (159)
                         


Comprehensive income

  —    —     —     —     —     —     11,294 
                         


Dividends ($.84 per share)

  —    —     (7,802)  —     —     —     (7,802)

Shares issued upon exercise of options

  —    250   —     —     —     2,548   2,798 

Shares issued for employee stock purchase plan

  —    80   —     —     —     144   224 

Shares issued for long-term incentive awards

     (61)  —     —     —     351   290 

Amortization of unearned compensation

  —    —     —     352   —     —     352 
  

 


 


 


 


 


 


Balance at December 31, 2002

  9,664  626   110,448   (1,245)  (27,078)  (4,360)  88,055 
                         


Net income

  —    —     14,833   —     —     —     14,833 

Currency translation adjustments

  —    —     —     —     13,441   —     13,441 

Minimum pension liability

  —    —     —     —     (2,159)  —     (2,159)

Unrealized gain on available-for-sale securities

  —    —     —     —     390   —     390 
                         


Comprehensive income

  —    —     —     —     —     —     26,505 
                         


Dividends ($.84 per share)

  —    —     (7,973)  —     —     —     (7,973)

Shares issued upon exercise of options

     1,351   —     —     —     3,287   4,638 

Shares issued for employee stock purchase plan

  —    138   —     —     —     180   318 

Shares issued for long-term incentive awards

  —    66   —     —     —     119   185 

Amortization of unearned compensation

  —    —     —     624   —     —     624 
  

 


 


 


 


 


 


Balance at December 31, 2003

 $9,664 $2,181  $117,308  $(621) $(15,406) $(774) $112,352 
  

 


 


 


 


 


 


  Common
stock
 Capital in
excess of
par value
 Retained
earnings
  Unearned
compensation
  Accumulated
other
comprehensive
income (loss)
  Treasury
stock
  Total 
  (In thousands, except per share amounts) 

Balance at December 31, 2003

 $9,664 $2,181 $117,308  $(621) $(15,406) $(774) $112,352 
          

Net income

  —    —    8,974   —     —     —     8,974 

Currency translation adjustments

  —    —    —     —     8,959   —     8,959 

Minimum pension liability

  —    —    —     —     (1,052)  —     (1,052)

Unrealized gain on
available-for-sale securities

  —    —    —     —     159   —     159 
          

Comprehensive income

  —    —    —     —     —     —     17,040 
          

Dividends ($0.86 per share)

  —    —    (8,301)  —     —     —     (8,301)

Shares issued upon exercise of options

  4  301  —     —     —     536   841 

Shares issued for employee stock purchase plan

  1  40  —     —     —     162   203 

Equity-based compensation plans

  —    110  —     —     —     76   186 

Amortization of unearned compensation

  —    —    —     266   —     —     266 
                          

Balance at December 31, 2004

  9,669  2,632  117,981   (355)  (7,340)  —     122,587 
          

Net income

  —    —    1,688   —     —     —     1,688 

Currency translation adjustments

  —    —    —     — ��   (7,897)  —     (7,897)

Minimum pension liability

  —    —    —     —     (3,449)  —     (3,449)

Current period changes in fair value of derivatives

  —    —    —     —     (71)  —     (71)

Unrealized gain on
available-for-sale securities

  —    —    —     —     47   —     47 
          

Comprehensive income

  —    —    —     —     —     —     (9,682)
          

Dividends ($0.86 per share)

  —    —    (8,352)  —     —     —     (8,352)

Shares issued upon exercise of options

  33  273  —     —     —     —     306 

Shares issued for employee stock purchase plan

  17  260  —     —     —     —     277 

Equity-based compensation plans

  7  409  —     —     —     —     416 

Amortization of unearned compensation

  —    —    —     355   —     —     355 
                          

Balance at December 31, 2005

  9,726  3,574  111,317   —     (18,710)  —     105,907 

Net income

  —    —    11,667   —     —     —     11,667 

Currency translation adjustments

  —    —    —     —     7,396   —     7,396 

Minimum pension liability

  —    —    —     —     1,250   —     1,250 

Current period changes in fair value of derivatives

  —    —    —     —     155   —     155 

Unrealized gain on
available-for-sale securities

  —    —    —     —     143   —     143 
          

Comprehensive income

  —    —    —     —     —     —     20,611 
          

Adjustment to initially apply FASB Statement No. 158

  —    —    —     —     (9,293)  —     (9,293)

Dividends ($0.86 per share)

  —    —    (8,486)  —     —     —     (8,486)

Shares issued upon exercise of options

  104  942  —     —     —     —     1,046 

Shares issued for employee stock purchase plan

  11  178  —     —     —     —     189 

Equity-based compensation plans

  85  772  —     —     —     —     857 
                          

Balance at December 31, 2006

 $9,926 $5,466 $114,498  $—    $(19,059) $—    $110,831 
                          

See notes to consolidated financial statements.

26


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share amounts)

Note 1—Significant Accounting Policies

Principles of consolidation:    All majority-owned subsidiaries are included in the Company’s consolidated financial statements, with appropriate elimination of intercompany balances and transactions. Investments in associated (less than majority-owned) companies are accounted for under the equity method. The Company’s share of net income or losses of investments is included in the consolidated statement of income. The Company periodically reviews these investments for impairments and, if necessary, would adjust these investments to their fair value when a decline in market value is deemed to be other than temporary.

Effective July 1, 2002,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 acquiredand 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 Quaker Chemical South Africa (Pty.) Ltd. (South Africa), a previously 50% ownedFIN 46 (revised December 2003). The Company determined that its real estate joint venture. As a result, South Africa, previously reported usingventure, which was always accounted for under the equity method, is nowwas a fully consolidated 51% owned subsidiary. The effect of this changeVIE but that the Company was not materialthe primary beneficiary. In February 2005, the Venture sold its real estate assets, which resulted in $4,187 of proceeds to the financial statements.

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 3 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 itstheir local currency as its functional currency.

Cash and cash equivalents:    The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Inventories:    Inventories are valued at the lower of cost or market value. The majority of domestic inventoriesInventories are valued using the last-in, first-out (“LIFO”) method. Cost of non-U.S. subsidiaries and certain domestic inventories are determined using the first-in, first-out (“FIFO”) method. See also Note 5 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.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

Capitalized Software:    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 Company’s global transaction

27


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

system, approximately $10,203$3,817 and $8,378$6,406 of net costs were capitalized at December 31, 20032006 and 2002,2005, respectively. These costs are amortized over a period of five years once the assets are placed into service.

Goodwill and Other Intangible Assets:    other intangible assets:On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” The new standard requires that goodwill and indefinite-lived intangible assets no longer be amortized. In addition, goodwill and indefinite-lived intangible assets are tested for impairment at least annually. These tests will be performed more frequently if there are triggering events. Impairment losses after initial adoption will be recorded as part of income from continuing operations. Definite-lived intangible assets are amortized over their estimated useful lives, generally for periods ranging from 5 to 20 years. The Company continually evaluates the reasonableness of the useful lives of these assets. See also Note 1315 of Notes to Consolidated Financial Statements.

Revenue recognition:Sales are    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 recordedoccurs for product sales when products are shipped to customers and services earned. For products shipped onor, for consignment revenue is recordedarrangements, upon usage by the customer.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 Company’s chemical management services, certain third partythird-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 partyThird-party products transferred under arrangements resulting in net reporting totaled $26,617, $28,344,$62,777, $38,840 and $20,654,$35,215 for 2003, 2002,2006, 2005 and 2001,2004, respectively. License fees and royalties are recorded when earned and are included in other income.

Research and development costs:    Research and development costs are expensed as incurred. Research and development expenses are included in selling, general and administrative expenses, and during 2003, 2002,2006, 2005 and 20012004 were $10,050, $9,072,$12,989, $14,148, and $8,851,$13,808, 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 cashfunds in money market securities and financial instruments having maturities typically within 90 days. The Company has not experienced losses from the aforementioned investments.

The Company sells its principal products See also Note 4 of Notes to major steel, automotive, and related companies around the world. The Company maintains allowances for potential credit losses. As of December 31, 2003 and 2002, the allowance for doubtful accounts was $6,763 and $6,118, respectively. Historically, the Company has experienced some losses related to the poor financial condition of certain customers. In 2003, 2002, and 2001, the Company provided allowances of $991, $1,365, and $2,472, respectively, primarily related to U.S. steel customers that filed for bankruptcy under Chapter 11.

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.

28


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

Comprehensive income (loss):    The Company presents comprehensive income (loss) in its Statement of Shareholders’ Equity. The components of accumulated other comprehensive loss at December 31, 20032006 include: accumulated foreign currency translation adjustments of $6,610,$1,848, minimum pension liability of $8,756, and $(21,300),

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

unrealized holding lossesgains on available-for-sale securities of $40.$308, and the fair value of derivative instruments of $85. The components of accumulated other comprehensive loss at December 31, 20022005 include: accumulated foreign currency translation adjustments of $20,051$(5,548) and minimum pension liability of $6,597 and$(13,257), unrealized holding lossesgains on available-for-sale securities of $430.

$166, and the fair value of derivative instruments of $(71).

Income Taxes:taxes:    The provision for income taxes is determined using the asset and liability approach of accounting for income taxes.taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Stock-based compensation: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 December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 148,accordance with SFAS 133, “Accounting for Stock-Based Compensation—TransitionDerivative Instruments and Disclosure.Hedging Activities,This standard amendsas amended and interpreted, all derivatives are recognized on the transitionbalance 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.

In 2006 and disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 148,2005, the Company continuesentered into five interest rate swaps in order to account for stock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized for stock options since all options grantedfix a portion of its variable rate debt. The swaps had an exercise price equala combined notional value of $25,000 and $15,000 and a fair value of $85 and $(71) at December 31, 2006 and December 31, 2005, respectively. The counterparties to the market value of the underlying stock on the grant date.

The following tables illustrate the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123. See also Note 9 of Notes to Consolidated Financial Statements.

   Year Ended December 31,

 
   2003

  2002

  2001

 

Net income—as reported

  $14,833  $14,297  $7,665 

Add: Stock-based employee compensation expense included in net income, net of related tax effects

   485   495   203 

Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax

   (996)  (981)  (584)
   


 


 


Pro forma net income

  $14,322  $13,811  $7,284 
   


 


 


Earnings per share:

             

Basic—as reported

  $1.58  $1.56  $0.85 

Basic—pro forma

  $1.53  $1.51  $0.80 

Diluted—as reported

  $1.52  $1.51  $0.84 

Diluted—pro forma

  $1.47  $1.46  $0.80 

swaps are major financial institutions.

Recently issued accounting standards:

In January 2003,June 2006, the Financial Accounting Standards Board (“FASB”),FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Certain Variable Interest Entities, (“VIEs”), which is48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effects, if any, of applying FIN 48 will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition and is not yet in a position to determine such effects.

In September 2006, the FASB issued FASB Staff Position (“FSP”) AUG AIR-1 “Accounting for Planned Major Maintenance Activities” (FSP AUG AIR-1). FSP AUG AIR-1 amends the guidance on the accounting for planned major maintenance activities; specifically, it precludes the use of the previously acceptable “accrue in advance” method. FSP AUG AIR-1 is effective for fiscal years beginning after December 15, 2006. The adoption of FSP AUG AIR-1 did not have a material effect on our consolidated financial position or results of operations.

In September 2006, the SEC staff issued Staff Accounting Research Bulletin (“ARB”SAB”) No. 51, “Consolidated108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial

29 Statements” (SAB 108). SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

Statements.” FIN 46 addresses the application of ARB No. 51financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied 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. FIN 46, as revised by FIN 46 (revised December 2003), is effective for public entities that have interests in VIEs commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application for all other types of entities is required inannual financial statements for periodsfiscal years ending after MarchNovember 15, 2004. The Company has determined that its real estate joint venture is a VIE and that the Company is not the primary beneficiary. See also Note 3 of Notes to Consolidated Financial Statements.

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, could be classified as equity or mezzanine equity, by now requiring those same instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, the FASB issued FASB Staff Position (“FSP”) FAS 150-3, which delayed the effective date for certain provisions of SFAS 150 indefinitely. For the effective provisions of the standard, management has assessed the impact and determined there to be no material impact to the financial statements. For the deferred provisions, the Company does not expect the pending adoption to have a material impact on the financial statements.

In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a consensus of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which provides guidance on how to determine when an arrangement that involves multiple revenue-generating activities or deliverables should be divided into separate units of accounting for revenue recognition purposes. It further states, that if this division is required, the arrangement consideration should be allocated among the separate units of accounting. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods that begin after June 15, 2003.2006. The adoption of EITF 00-21SAB 108 did not have a material effect on the Company’sour consolidated financial position or results of operations or cash flows.

operations.

In December 2003, the SEC issued SAB 104, “Revenue Recognition,” which supersedes SAB 101, “Revenue Recognition in Financial Statements,” and updates portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting guidance. The Company had previously adopted the necessary changes incorporated into SAB 104, which did not have a material effect on the Company’s financial position, results of operations or cash flows.

In December 2003,September 2006, the FASB revised Statementissued SFAS No. 132 (“157, “Fair Value Measurements” (SFAS No. 157). SFAS 132”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised standard mandates additional disclosuresNo. 157 establishes a common definition for pensions and other postretirement benefit plans and is designed to improve disclosure transparency within financial statements and requires certain disclosuresfair value to be made onapplied to US GAAP guidance requiring use of fair value, establishes a quarterly basis (collectively, the “Amended Disclosures”). Compliance with the Amended Disclosuresframework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal periodsyears beginning after DecemberNovember 15, 2003, and have been incorporated into Note 7 of Notes to Consolidated Financial Statements. Interim period disclosures will be required to be made by the Company commencing in the first quarter of 2004.

On January 12, 2004 the FASB issued FSP No. FAS 106-1, which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the

30


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). On December 8, 2003, President Bush signed the Act into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a Federal subsidy to companies which sponsor retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted under FSP No. 106-1, the Company did not reflect the effects of this Act in its consolidated financial statements and accompanying notes. Specific authoritative guidance on the accounting for the Federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information.2007. The Company is currently assessing the impact of the Act.

SFAS No. 157 on its consolidated financial position and results of operations.

Accounting estimates:    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingencies at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from such estimates.

Reclassifications:    Certain reclassifications of prior years’ data have been made to improve comparability.

Note 2—Restructuring and Related Activities

In 2001, Quaker’s management approved restructuring plans to realign the organization, primarily in Europe, and reduce operating costs (2001 program)Program). Quaker’s restructuring plans included the decision to close and sell manufacturing facilities in the U.K. and France. In addition, Quaker consolidated certain functions within its global business units and reduced administrative functions, as well as expensed costs related to abandoned acquisitions. Included in the restructuring charges arewere provisions for severance of 53 employees. Restructuring and related charges of $5,854 were recognized in 2001. The charge comprised $2,807 related to employee separations, $2,450 related to facility rationalization charges, and $597 related to abandoned acquisitions. Employee separation benefits varied depending on local regulations within certain foreign countries and includedIn January of 2005, the last severance and other benefits. As of December 31, 2003, Quaker had completed 51 of the planned 53 employee separationspayment under the 2001 program was made and the Company reversed $117 of unused restructuring accruals related to this program. During the fourth quarter of 2002,In 2005, the Company completed the sale of its U.K. manufacturing facility,Villeneuve, France site for $1,907, which closed atcompleted all actions contemplated by the end of 2001. In 2003, the2001 Program. The Company reversed $216$159 of unused restructuring accruals related to this program in the 2001 program.

fourth quarter of 2005.

In 2003, Quaker’s management approved a restructuring plans to further realign the organizationplan (2003 program)Program). Included in the 2003 restructuring charge arewere provisions for severance for 9 employees totaling $273. As of March 31, 2005, all severance payments were completed and the Company reversed $59 of unused restructuring accruals related to this program, which completed all actions contemplated by the 2003 Program.

Quaker expects to substantially completeIn 2004, Quaker’s management approved a restructuring plan by announcing the initiatives contemplated under the restructuring plans, including the saleconsolidation of its former manufacturing facilityadministrative facilities in France during 2004.Hong Kong with its Shanghai headquarters (2004 Program). Included in the 2004 restructuring charge were severance provisions for 5 employees totaling $119 and an asset impairment related to the Company’s previous plans to implement its global ERP system at this location totaling $331. As of March 31, 2005, all severance payments were completed, which completed all actions contemplated by the 2004 Program.

In the first quarter of 2005, Quaker’s management approved a restructuring plan (2005 1st 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 1st Quarter Program.

31In the fourth quarter of 2005, Quaker’s management approved a restructuring plan (2005 4th Quarter Program) with the goal of significantly reducing operating costs in the U.S. and Europe. The restructuring plan


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

included involuntary terminations, a freeze of the Company’s 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 are not included in the following table, and are included as part of the accrued pension and other postretirement balances. See also Note 9 of Notes to Consolidated Financial Statements.

Accrued restructuring balances, included in other current liabilities and assigned to the Metalworking segment, are as follows:

 

   

Employee

Separations


  

Facility

Rationalization


  

Abandoned

Acquisitions


  Total

 

2001 Program:

                 

Restructuring charges

  $2,807  $2,450  $597  $5,854 

Asset impairment

   —     (1,015)  —     (1,015)

Payments

   (111)  (171)  (597)  (879)

Currency translation and other

   1   12   —     13 
   


 


 


 


December 31, 2001 ending balance

   2,697   1,276   —     3,973 

Payments

   (1,374)  (752)  —     (2,126)

Currency translation and other

   114   182   —     296 
   


 


 


 


December 31, 2002 ending balance

   1,437   706   —     2,143 

Restructuring reversals

   (156)  (60)  —     (216)

Payments

   (832)  (204)  —     (1,036)

Currency translation and other

   1   83   —     84 
   


 


 


 


December 31, 2003 ending balance

   450   525   —     975 
   


 


 


 


2003 Program:

                 

Restructuring charges

   273   —     —     273 

Payments

   (47)  —     —     (47)

Currency translation and other

   2   —     —     2 
   


 


 


 


December 31, 2003 ending balance

   228   —     —     228 
   


 


 


 


Total restructuring December 31, 2003 ending balance

  $678  $525  $—    $1,203 
   


 


 


 


   Employee
Separations
 

2005 4th Quarter Program:

  

Restructuring charges

   5,041 

Payments

   (1,006)

Currency translation and other

   (2)
     

December 31, 2005 ending balance

   4,033 
     

Payments

   (4,033)
     

December 31, 2006 ending balance

  $0 
     

Note 3—Investments 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,

  December 31,
  2003

  2002

  2006  2005

Current assets

  $22,632  $26,868  $24,129  $22,063

Noncurrent assets

   32,176   33,337   5,400   4,844

Current liabilities

   12,139   10,003   13,062   11,153

Noncurrent liabilities

   27,373   28,185   233   291

 

   Year Ended December 31,

   2003

  2002

  2001

Net sales

  $41,034  $39,612  $43,138

Gross margin

   19,566   17,958   19,093

Operating income

   4,370   4,691   4,263

Net income

   1,253   1,161   1,527

32


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

   Year Ended December 31,
   2006  2005  2004

Net sales

  $46,062  $44,507  $48,104

Gross margin

   17,662   17,677   22,216

Operating income

   3,920   3,430   5,440

Net income

   1,574   1,202   2,194

In January 2001, the Company contributed its Conshohocken, Pennsylvania property and buildings (the “Site”) tointo a real estate joint venture (the “Venture”) in exchange for a 50% interest in the Venture. The Venture

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

did not assume any debt or other obligations of the Company.Company and the Company did not guarantee nor was it obligated to pay any principal, interest or penalties on any of the Venture’s 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 Site’s available office space for a 15-year period commencing February 2002, with multiple renewal options. During 2003,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 received priority cash distributions, which reduced the Company’s investment balance to $0. As of December 31, 2003, approximately 93%after payment of the Site’s office space was under lease andVenture’s obligations. The proceeds include a gain of $2,989 related to the Site (including improvements thereon) was subject to encumbrances securing indebtedness ofsale by the Venture of its real estate holdings as well as $1,198 of preferred distributions. These proceeds are included in other income.

Note 4—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 our best estimate of the amount of $26,861. The Company has not guaranteed nor is it obligated to pay any principal, interest or penaltiesprobable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience by industry and regional economic data. Reserves for customers filing for bankruptcy protection are generally established at 75-100% of the amount owed at the filing date, dependent on the indebtednessCompany’s evaluation of likely proceeds from the Venture, even inbankruptcy 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. We perform a formal review of our allowance for doubtful accounts quarterly. Account balances are charged off against the eventallowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance-sheet credit exposure related to our customers. During 2006, the Company’s five largest customers accounted for approximately 23% of default byits consolidated net sales with the Venture. largest customer (General Motors) accounting for approximately 6% of consolidated net sales.

At December 31, 2003,2006 and 2005, the VentureCompany had propertygross trade accounts receivable totaling $110,525 and $98,009 with a net book valuetrade accounts receivable greater than 90 days past due of $27,151, total assets of $28,954,$5,565 and total liabilities of $27,178.$11,725, respectively. Following are the changes in the allowance for doubtful accounts during the years ended December 31, 2006, 2005 and 2004.

 

   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, 2006

  $4,066  $—    $(961) $80  $3,185

Year ended December 31, 2005

  $6,773  $1,216  $(3,828) $(95) $4,066

Year ended December 31, 2004

  $6,763  $500  $(512) $22  $6,773

Note 4—5—Inventories

Total inventories comprise:

 

  December 31,

  December 31,
  2003

  2002

  2006  2005

Raw materials and supplies

  $14,691  $11,342  $21,589  $20,016

Work in process and finished goods

   17,520   12,294   30,395   25,802
  

  

      
  $32,211  $23,636  $51,984  $45,818
  

  

      

Inventories valued under the LIFO method amounted to $5,635 and $5,715 at December 31, 2003 and 2002, respectively. The estimated replacement costs for these inventories using the FIFO method were approximately $5,263 and $5,350, respectively.

Note 5—Property, Plant, and Equipment

Property, plant, and equipment comprise:

   December 31,

   2003

  2002

Land

  $6,830  $5,044

Building and improvements

   34,480   28,214

Machinery and equipment

   86,732   75,551

Construction in progress

   8,406   4,398
   

  

    136,448   113,207

Less accumulated depreciation

   74,057   64,695
   

  

   $62,391  $48,512
   

  

33


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

Note 6—Property, Plant and Equipment

Property, plant and equipment comprise:

   December 31, 
   2006  2005 

Land

  $5,768  $5,391 

Building and improvements

   40,446   38,110 

Machinery and equipment

   104,427   94,223 

Construction in progress

   8,293   3,179 
         
   158,934   140,903 

Less accumulated depreciation

   (98,007)  (84,006)
         
  $60,927  $56,897 
         

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 $3,398 and $2,659 of capital leases with $672 and $345 of accumulated depreciation at December 31, 2006 and 2005, respectively. The following is a schedule by years of future minimum lease payments:

For the year ended December 31,

    

2007

  $446 

2008

  $407 

2009

  $338 

2010

  $508 

2011

  $18 

2012 and beyond

  $—   
     

Total net minimum lease payments

   1,717 

Less amount representing interest

   (292)
     

Present value of net minimum lease payments

  $1,425 
     

Note 7—Asset Retirement Obligations

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. 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 (“FIN 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 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 Company’s CARO’s consist primarily of asbestos contained in certain manufacturing facilities and decommissioning costs related to its above-ground 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

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

regarding the timing of cash flows was available to record a liability for $250. During 2006, the Company accrued interest on this liability, which is included in other non-current liabilities, of $15.

Note 8—Taxes on Income

Taxes on income consist of the following:

 

   Year Ended December 31,

 
   2003

  2002

  2001

 

Current:

             

Federal

  $(360) $533  $(1,066)

State

   7   7   5 

Foreign

   6,452   6,914   6,161 
   


 


 


    6,099   7,454   5,100 

Deferred:

             

Federal

   1,613   (904)  226 

Foreign

   (224)  1,232   (853)
   


 


 


Total

  $7,488  $7,782  $4,473 
   


 


 


   Year Ended December 31, 
   2006  2005  2004 

Current:

    

Federal

  $—    $(443) $—   

State

   21   20   —   

Foreign

   5,799   8,235   7,371 
             
   5,820   7,812   7,371 

Deferred:

    

Federal

   792   (3,194)  (1,881)

Foreign

   (388)  (1,282)  9 
             

Total

  $6,224  $3,336  $5,499 
             

The components of earnings before income taxes were as follows:

 

  2003

 2002

 2001

   2006  2005 2004 

Domestic

  $(1,483) $(1,401) $(7,935)  $395  $(12,249) $(7,242)

Foreign

   25,601   25,719   22,365    18,045   18,864   24,699 
  


 


 


          

Total

  $24,118  $24,318  $14,430   $18,440  $6,615  $17,457 
  


 


 


          

Domestic earnings 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 Company’s effective tax rate in 2005 and resulted in a net $1,000 charge to tax expense.

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:

 

   2003

  2002

 
   Current

  Non-current

  Current

  Non-current

 

Retirement benefits

  $814  $4,540  $600  $3,409 

Allowance for doubtful accounts

   1,490   —     1,469   —   

Insurance and litigation reserves

   600   —     751   —   

Postretirement benefits

   —     2,987   —     3,127 

Supplemental retirement benefits

   —     1,146   —     1,058 

Performance incentives

   949   1,270   2,349   1,277 

Alternative minimum tax carryforward

   —     2,092   —     1,444 

Restructuring charges

   406   —     705   —   

Vacation pay

   291   —     —     268 

Goodwill

   —     —     —     26 

Operating loss carryforward

   —     1,153   —     897 

Other

   —     197   —     —   
   

  


 

  


    4,550   13,385   5,874   11,506 

Valuation allowance

   —     (539)  —     (897)
   

  


 

  


Total deferred income tax assets—net

  $4,550  $12,846  $5,874  $10,609 
   

  


 

  


Depreciation

      $2,464      $1,257 

Other

       224       261 
       


     


Total deferred income tax liabilities

      $2,688      $1,518 
       


     


34


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

   2006  2005 
   Current  Non-current  Current  Non-current 

Retirement benefits

  $609  $10,918  $1,116  $7,948 

Allowance for doubtful accounts

   628   —     690   —   

Insurance and litigation reserves

   826   —     800   —   

Postretirement benefits

   —     2,634   —     2,744 

Supplemental retirement benefits

   —     1,460   —     1,347 

Performance incentives

   1,884   1,204   474   1,150 

Equity-based compensation

   —     332   —     —   

Alternative minimum tax carryforward

   —     2,092   —     2,092 

Restructuring charges

   —     —     966   —   

Vacation pay

   432   —     393   —   

Insurance settlement

   —     5,176   —     5,253 

Operating loss carryforward

   —     5,098   —     3,527 

Foreign tax credit

   —     2,161   —     1,404 

Deferred compensation

   —     352   —     873 

Other

   —     45   —     48 
                 
   4,379   31,472   4,439   26,386 

Valuation allowance

   —     (2,899)  —     (2,001)
                 

Total deferred income tax assets, net

  $4,379  $28,573  $4,439  $24,385 
                 

Depreciation

    $1,275    $1,203 

Europe pension and other

     4,042     3,405 
             

Total deferred income tax liabilities

    $5,317    $4,608 
             

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:

 

   2003

  2002

  2001

 

Income tax provision at the Federal statutory tax rate

  $8,441  $8,511  $4,906 

State income tax provisions, net

   5   5   3 

Non-deductible entertainment and business meal expense

   179   160   159 

Foreign taxes on earnings at rates different from the Federal statutory rate

   (1,504)  (1,126)  (321)

Miscellaneous items, net

   367   232   (274)
   


 


 


Taxes on income

  $7,488  $7,782  $4,473 
   


 


 


   2006  2005  2004 

Income tax (benefit) provision at the Federal statutory tax rate

  $6,454  $2,315  $6,110 

State income tax provisions, net

   13   13   —   

Non-deductible entertainment and business meal expense

   136   151   176 

Differences in tax rates on foreign earnings and remittances

   (366)  3,777   (719)

Excess FTC utilization

   —     (2,429)  —   

Settlement of tax contingencies

   —     (446)  —   

Miscellaneous items, net

   (13)  (45)  (68)
             

Taxes on income

  $6,224  $3,336  $5,499 
             

At December 31, 2003,2006, the Company domestically had a net deferred tax asset of $15,515 inclusive of alternative minimum tax (AMT) credits of $2,092. Additionally, the Company has foreign net operatingtax credit carryovers of $2,161 which have the following expiration dates: $100 in 2012, $763 in 2013, $535 in 2014 and $763 in 2016. A full valuation allowance has been taken against these foreign tax credits. Finally, the Company has foreign tax loss carryforwards of $3,320,$13,591 of which $1,735 expire between 2004 and 2007. There is no time limit for$2,013 expires in 2011; the remaining net operating loss carryforwards of $1,585. Dueforeign tax losses have no expiration dates. A partial valuation allowance has been established with respect to the uncertainty of the realizationtax benefit of these deferred tax assets, the Company has established a valuation allowance against these carryforward benefits.losses for $738.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

U.S. income taxes have not been provided on the undistributed earnings of non-U.S. subsidiaries sincebecause it is the Company’s intention to continue to reinvest these earnings in those subsidiaries for working capital and expansion needs.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, 20032006 was approximately $121,000.$37,000. Any income tax liability which might result from ultimate remittance of these earnings is expected to be substantially offset by foreign tax credits.

Note 7—9—Pension and Other Postretirement Benefits

The Company maintains various noncontributory retirement plans, the largest of which is in the U.S., covering substantially all of its employees in the U.S. and certain other countries. The plans of the Company’s subsidiaries in theThe 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.

In 2003 the Company adopted SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This statement retains the disclosure requirement contained in the original standard and requires additional disclosures about the assets, obligations, cash flows and net periodic cost of defined benefit postretirement plans. As permitted by the Statement, disclosures regarding the plan asset information for non-U.S. pension plans and estimated future benefit payments for both pension and other postretirement benefit plans worldwide will be delayed until 2004.

35


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

The following table shows the components of pension costs for the periods indicated:

   2003

  2002

  2001

 

Service cost

  $3,159  $2,369  $2,172 

Interest cost

   4,954   4,652   4,359 

Expected return on plan assets

   (4,134)  (4,304)  (4,569)

Other amortization, net

   885   558   284 

Pension curtailment

   —     —     42 
   


 


 


Net pension cost of plans subject to SFAS No. 87

   4,864   3,275   2,288 

Pension costs of plans not subject to SFAS No. 87

   69   62   46 
   


 


 


Net pension costs

  $4,933  $3,337  $2,334 
   


 


 


The Company’s U.S. pension plan year end isends on November 30, which serves as the measurement date. The measurement date for the Company’s other postretirement benefits is December 31.

TheAs part of the Company’s 2005 fourth quarter restructuring program, the Company has postretirement benefit plans that provide medical and life insurance benefits for certainimplemented a freeze of its retired employees. BothU.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 medicalCompany’s U.S. pension plan resulted in a plan curtailment charge of $2,668. The pension and life insuranceother postretirement benefits enhancements resulted in special termination benefits charges of $1,205 and $430, respectively. See also Note 2 of Notes to Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post retirement 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 currently unfunded.

The following table shows thenot recognized as components of postretirement costs for the periods indicated:

   2003

  2002

  2001

Service cost

  $39  $112  $95

Interest cost and other

   626   715   696
   

  

  

Net periodic postretirement benefit cost

  $665  $827  $791
   

  

  

The weighted-average assumptions used to determine net periodic benefit cost (U.S. plans) for years endedcost. SFAS No. 158 also requires additional disclosures in the notes to financial statements, which have been incorporated below.

The incremental effect of applying FASB Statement No. 158 on Individual Line Items in the Statement of Financial Position as of December 31, were2006, is as follows:

 

   Pension Benefits

  Other Benefits

 
   2003

  2002

  2003

  2002

 

Discount rate

  6.875% 7.25% 6.875% 7.25%

Expected return on plan assets

  8.75% 9.25% N/A  N/A 

Assumed long-term rate of compensation increases

  4.5% 4.75% N/A  N/A 

   Before
Application of
Statement 158
  Adjustments  After
Application of
Statement 158
 

Deferred Income Taxes

  $24,237  $4,336  $28,573 

Other Assets

   35,123   (7,596)  27,527 

Total Assets

   360,642   (3,260)  357,382 

Other Current Liabilities

   14,131   (472)  13,659 

Accrued pension and post retirement benefits

   31,925   6,505   38,430 

Total Liabilities

   236,483   6,033   242,516 

Accumulated other comprehensive loss

   (9,766)  (9,293)  (19,059)

Total shareholders’ equity

   120,124   (9,293)  110,831 

36


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
 
  Pension Benefits

 

Other

Postretirement

Benefits


  2006 2005 2006 2005 
  2003

 2002

 2003

 2002

  Foreign Domestic Total Foreign Domestic Total Domestic Domestic 

Change in benefit obligation

           

Benefit obligation at beginning of year

  $78,819  $69,915  $10,544  $9,815  $44,464  $66,207  $110,671  $44,709  $60,967  $105,676  $10,902  $10,671 

Service cost

   3,081   2,306   39   112   2,025   586   2,611   2,025   1,735   3,760   15   20 

Interest cost

   4,954   4,652   678   715   1,920   3,575   5,495   1,898   3,394   5,292   551   581 

Employee contributions

  111   —     111   102   —     102   —     —   

Amendments

   78   104   (598)  —     —     (111)  (111)  —     —     —     —     —   

Curtailment (gain)/loss

  (2,748)  —     (2,748)  —     (1,938)  (1,938)   —   

Special termination benefits

  —     —     —     —     1,205   1,205   —     430 

Benefits paid

  (1,132)  (5,756)  (6,888)  (717)  (3,831)  (4,548)  (1,153)  (1,159)

Plan expenses and premiums paid

  (285)  (80)  (365)  (463)  (80)  (543)  —     —   

Actuarial (gain)/loss

  (2,875)  1,537   (1,338)  2,646   4,755   7,401   (32)  359 

Translation difference

   5,057   3,558   —     —     5,159   —     5,159   (5,736)  —     (5,736)  —     —   

Actuarial loss

   3,279   2,169   1,199   960 

Benefits paid

   (4,088)  (3,917)  (1,076)  (1,058)

Other

   (4)  32   —     —   
  


 


 


 


                        

Benefit obligation at end of year

  $91,176  $78,819  $10,786  $10,544  $46,639  $65,958  $112,597  $44,464  $66,207  $110,671  $10,283  $10,902 
  


 


 


 


                        

Change in plan assets

           

Fair value of plan assets at beginning of year

  $52,899  $53,553   —     —    $34,514  $37,873  $72,387  $36,020  $33,188  $69,208   —     —   

Actual return on plan assets

   4,358   (1,446)  —     —     1,187   3,838   5,025   1,423   1,955   3,378   —     —   

Employer contribution

   3,865   1,535   1,076   1,058   2,553   4,906   7,459   2,751   6,561   9,312   1,153   1,159 

Plan participants’ contributions

   77   51   —     —   

Employee contributions

  111   —     111   102   —     102   —     —   

Benefits paid

  (1,132)  (5,756)  (6,888)  (717)  (3,831)  (4,548)  (1,153)  (1,159)

Plan expenses and premiums paid

  (285)  —     (285)  (463)  —     (463)  —     —   

Translation difference

   4,421   3,044   —     —     4,212   —     4,212   (4,602)  —     (4,602)  —     —   

Benefits paid

   (3,903)  (3,838)  (1,076)  (1,058)
  


 


 


 


                        

Fair value of plan assets at end of year

   61,717   52,899   —     —    $41,160  $40,861  $82,021  $34,514  $37,873  $72,387  $—    $—   
                        

Funded status

   (29,459)  (25,920)  (10,786)  (10,544) $(5,479) $(25,097) $(30,576) $(9,950) $(28,334) $(38,284) $(10,283) $(10,902)

Unrecognized transition asset

   (919)  (882)  —     —     —     —     —     (593)  —     (593)  —     —   

Unrecognized gain

   23,284   19,501   2,105   937 

Unrecognized (gain)/loss

  —     —     —     15,057   18,403   33,460   —     2,445 

Unrecognized prior service cost

   3,593   3,780   (514)  —     —     —     —     254   253   507   —     (226)

Adjustments for contributions in December

  —     1,119   1,119   —     1,036   1,036   —     —   
  


 


 


 


                        

Net amount recognized

  $(3,501) $(3,521) $(9,195) $(9,607) $(5,479) $(23,978) $(29,457) $4,768  $(8,642) $(3,874) $(10,283) $(8,683)
  


 


 


 


                        

Amounts recognized in the balance sheet consist of:

           

Prepaid benefit cost

  $5,980  $4,381  

Accrued benefit obligation

   (27,438)  (21,686) 

Non-current asset/Prepaid benefit cost

 $430   —    $430  $7,403   —    $7,403   —     —   

Current liabilities

  (145)  (495)  (640)  (674)  (519)  (1,193)  (1,100)  (1,124)

Non-current liabilities

  (5,764)  (23,483)  (29,247)  (4,039)  (26,612)  (30,651)  (9,183)  (7,559)

Intangible asset

   4,661   3,777    —     —     —     74   253   327   —     —   

Accumulated other comprehensive income

   13,296   10,007    —     —     —     2,004   18,236   20,240   —     —   
  


 


                         

Net amount recognized

  $(3,501) $(3,521)  $(5,479) $(23,978) $(29,457) $4,768  $(8,642) $(3,874) $(10,283) $(8,683)
  


 


                         

Amounts not yet reflected in net periodic benefit costs and included in accumulated other comprehensive income:

        

Transition asset (obligation)

 $538  $—    $538     $—    

Prior service credit (cost)

  (252)  (119)  (371)     159  

Accumulated gain (loss)

  (11,602)  (18,435)  (30,037)     (2,328) 
                

Accumulated other comprehensive income (AOCI)

  (11,316)  (18,554)  (29,870)     (2,169) 

Cumulative employer contributions in excess of net period benefit cost

  5,837   (5,424)  413      (8,114) 
                

Net amount recognized

 $(5,479) $(23,978) $(29,457)    $(10,283) 
                

The weighted-average assumptions used to determine the benefit obligations (U.S. plans) at December 31, were as follows:

   Pension Benefits

  Other Benefits

 
   2003

  2002

  2003

  2002

 

Discount rate for projected benefit obligation

  6.0% 6.875%   6.0% 6.875%

Assumed long-term rate of compensation increases

  3.625% 4.5% N/A  N/A 

37


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

All other pension plans used assumptions in determining the actuarial present value of the projected benefit obligations which are generally consistent with (but not identical to) those of the U.S. plan.

The accumulated benefit obligation for all defined benefit pension plans is $82,539was $105,210 ($64,560 Domestic, $40,650 Foreign) and $70,638$103,247 ($66,040 Domestic, $37,207 Foreign) at December 31, 20032006 and 2002,2005, respectively.

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assetsInformation for the pension plans with accumulated benefit obligationsobligation in excess of plan assets were $67,886, $63,189 and $36,651, respectively, as of December 31, 2003 and $60,913, $55,761, and $34,204, respectively, as of December 31, 2002.assets:

 

   Pension Benefits

   2003

  2002

Increase in minimum liability included in other comprehensive income, net

  $2,159  $4,322
   

  

   2006  2005
   Foreign  Domestic  Total  Foreign  Domestic  Total

Projected benefit obligation

  $13,142  $65,958  $79,100  $12,992  $66,207  $79,199

Accumulated benefit obligation

   10,556   64,560   75,116   10,508   66,040   76,548

Fair value of plan assets

   7,233   40,861   48,094   5,795   37,873   43,668

Information for pension plans with a projected benefit obligation in excess of plan assets:

 

   2006  2005
   Foreign  Domestic  Total  Foreign  Domestic  Total

Projected benefit obligation

  $13,142  $65,958  $79,100  $44,464  $66,207  $110,671

Fair value of plan assets

   7,233   40,861   48,094   34,514   37,873   72,387

Plan AssetsComponents of Net Periodic Benefit Cost—Pension Plans

   2006  2005 
   Foreign  Domestic  Total  Foreign  Domestic  Total 

Service cost

  $2,025  $586  $2,611  $2,025  $1,735  $3,760 

Interest cost

   1,920   3,575   5,495   1,898   3,394   5,292 

Expected return on plan assets

   (1,596)  (3,222)  (4,818)  (1,529)  (2,888)  (4,417)

Pension plan curtailment

   (983)  —     (983)  —     2,668   2,668 

Special termination benefits

   —     —     —     —     1,205   1,205 

Other, amortization, net

   679   831   1,510   656   855   1,511 
                         

Net periodic benefit cost

  $2,045  $1,770  $3,815  $3,050  $6,969  $10,019 
                         

Total recognized in other comprehensive income

   9,312   318   9,630    
                

Total recognized in net periodic benefit cost and other comprehensive income

  $11,357  $2,088  $13,445    
                

   2004 
   Foreign  Domestic  Total 

Service cost

  $1,825  $1,730  $3,555 

Interest cost

   1,806   3,383   5,189 

Expected return on plan assets

   (1,734)  (2,741)  (4,475)

Pension plan curtailment

   —     —     —   

Special termination benefits

   —     —     —   

Other, amortization, net

   376   898   1,274 
             

Net periodic benefit cost

  $2,273  $3,270  $5,543 
             

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

The Company’s U.S. pension plan strategic target asset allocation andComponents of Net Periodic Benefit Cost—Other Postretirement Plan

   2006  2005  2004

Service Cost

  $15  $20  $18

Interest cost and other

   570   616   637

Special termination benefits

   —     430   —  
            

Net periodic benefit cost

  $585  $1,066  $655
            

Total recognized in other comprehensive income

   2,169    
        

Total recognized in net periodic benefit cost and other comprehensive income

  $2,754    
        

Estimated amounts that will be amortized from accumulated other comprehensive income over the weighted-average asset allocationsnext fiscal year:

   Pension Plans  Other
Postretirement
Benefits
 
   Foreign  Domestic  Total  

Transition obligation (asset)

  $(178) $—    $(178) $—   

Actuarial (gain) loss

   501   785   1,286   110 

Prior service cost (credit)

   31   11   42   (70)
                 
  $354  $796  $1,150  $40 
                 

Additional Information

   Pension Benefits
   2006  2005
   Foreign  Domestic  Total  Foreign  Domestic  Total

Increase in minimum liability included in other comprehensive income

  $9,312  $318  $9,630  $(477) $5,816  $5,339

Weighted-average assumptions used to determine benefit obligations at December 31, 2003, and 2002, by asset category were as follows:31:

 

   Plan Assets at December 31,

 
   Target

  2003

  2002

 

Asset Category

          

Equity securities

  56% 60% 58%

Debt securities

  32  26  40 

Other

  12  14  2 
   

 

 

Total

  100% 100% 100%
   

 

 

   Pension Benefits   Other
Postretirement
Benefits
 
   2006   2005   2006   2005 

U.S. Plans:

        

Discount rate

  5.50%  5.50%  5.50%  5.50%

Rate of compensation increase

  3.375%  3.375%  N/A   N/A 

Foreign Plans:

        

Discount rate

  4.81%  4.35%  N/A   N/A 

Rate of compensation increase

  3.19%  3.10%  N/A   N/A 

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

Weighted-average assumptions used to determine net periodic benefit costs for years ended December 31:

   Pension Benefits  Other
Postretirement
Benefits
 
   2006  2005  2006  2005 

U.S. Plans:

     

Discount rate

  5.500% 5.750% 5.500% 5.750%

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

  4.35% 4.64% N/A  N/A 

Expected long-term return on plan assets

  4.17% 4.35% N/A  N/A 

Rate of compensation increase

  3.10% 3.10% N/A  N/A 

The long-term raterates of return on assets in the U.S. waswere 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:

   2006  2005 

Health care cost trend rate for next year

  9.5% 9.0%

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  2013 

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

  $27  $(24)

Effect on postretirement benefit obligations

   510   (460)

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

Plan Assets

The Company’s pension plan strategic target asset allocation and the weighted-average asset allocations at December 31, 2006 and 2005, by asset category were as follows:

   Plan Assets at December 31, 
   Target  2006  2005 

Asset Category

    

U.S. Plans

    

Equity securities

  61% 62% 58%

Debt securities

  32% 12% 25%

Other

  7% 26% 17%
          

Total

  100% 100% 100%
          

Foreign Plans

    

Equity securities

  11% 11% 11%

Debt securities

  89% 89% 89%
          

Total

  100% 100% 100%
          

At December 31, 2006 “Other” consists 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 Company’s 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 Company’s pension investment professionals have discretion to manage the assets within established asset allocation ranges approved by senior management of the Company. The Company’s U.S. pension assets are invested in U.S. and non-U.S. markets.

The total value of plan assets for U.S.the Company’s pension plans is $32,399$82,021 and $31,106$72,387 as of December 31, 20032006 and 2002,2005, respectively. U.S. pension assets include Company common stock in the amounts of $262 (1%$221 (less than 1% of total U.S. plan assets), and $231($179 (less than 1% of total U.S. plan assets) at December 31, 20032006 and 2002,2005, respectively. “Other” consists principally

Cash Flows

Contributions

The Company expects to make minimum cash contributions of hedge funds$6,883 to its pension plans ($5,495 Domestic, $1,388 Foreign) and cash and cash equivalents.

38$1,100 to its other postretirement benefit plan in 2007.


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

ContributionsEstimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

 

The Company expects to make minimum cash contributions $1,483 to its U.S. pension plan and $1,061 to its other postretirement benefit plan in 2004.

Assumed health care cost trend rates

   December 31,

 
   2003

  2002

 

Health care cost trend rate assumed for next year

  11.5% 8.5%

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

  5.0% 5.0%

Year that the rate reaches ultimate trend rate

  2013  2010 

Assumed health care cost trend rates 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 of service and interest cost

  $33  $(34)

Effect on postretirement benefit obligations

  $585  $(531)

   Pension Benefits  Other
Postretirement
Benefits
   Foreign  Domestic  Total  

2007

  1,063  4,094  5,157  1,100

2008

  1,192  4,078  5,270  1,040

2009

  1,342  3,976  5,318  1,000

2010

  1,374  4,328  5,702  1,000

2011

  1,589  5,006  6,595  960

2012 and beyond

  8,893  26,533  35,426  4,280

The Company maintains a plan under which supplemental retirement benefits are provided to certain officers. Benefits payable under the plan are based on a combination of years of service and existing postretirement benefits. Included in total pension costs are charges of $626, $780,$1,076, $725, and $681$827 in 2003, 2002,2006, 2005 and 2001,2004, respectively, representing the annual accrued benefits under this plan.

Profit sharing planDefined Contribution Plan

The Company had maintainedhas a qualified profit sharing401(k) plan with an employer match covering substantially all domestic employees other than thoseemployees. Effective January 1, 2006, the plan added a nonelective contribution on behalf of participants who are compensated on a commission basis. In January 2001, this plan was replaced by an enhanced employer match onhave completed one year of service equal to 3% of the Company’s 401(k) plan. The Company’s 401(k) matchingeligible participants’ compensation. Total Company contributions were $546, $484,$1,402, $625 and $530$575 for 2003, 2002,2006, 2005 and 2001,2004, respectively.

Note 8—10—Debt

Debt consisted of the following:

 

   December 31,

 
   2003

  2002

 

6.98% senior unsecured notes due 2007

  $11,429  $14,286 

Industrial development authority monthly floating rate (1.13% at December 31, 2003) demand bonds maturing 2014

   5,000   5,000 

Other debt obligations, primarily credit facilities

   42,390   9,509 
   


 


    58,819   28,795 

Short-term debt

   (39,975)  (9,348)

Current portion of long-term debt

   (3,017)  (2,857)
   


 


   $15,827  $16,590 
   


 


39


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

   December 31, 
   2006  2005 

Industrial development authority monthly floating rate (3.6% at December 31, 2006) demand bonds maturing 2014

  $5,000  $5,000 

Credit facilities (5.69% weighted average borrowing rate at December 31, 2006)

   79,212   63,766 

Other debt obligations (including capital leases)

   5,975   3,738 
         
   90,187   72,504 

Short-term debt

   (3,261)  (4,364)

Current portion of long-term debt

   (1,689)  (730)
         
  $85,237  $67,410 
         

The long-term financing agreements require the maintenance of certain financial covenants with which the Company is in compliance.

During the next fourfive years, payments on long-termthe Company’s debt, including capital lease maturities, are due as follows: $3,017$4,950 in 2004, $3,2122007, $1,724 in 2005, $3,2082008, $1,215 in 2006,2009, $77,271 in 2010, $27 in 2011 and $3,184$5,000 beyond 2011.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in 2007.thousands except per share amounts)

 

At December 31, 2003 and 2002,In 2005, the Company had outstanding short-term borrowings with banks under lines ofentered into a new syndicated multi-currency credit agreement that provides for financing in the aggregateUnited States and The Netherlands. This facility enabled the Company to consolidate the majority of $39,975 and $9,300, respectively.

its short-term debt into a longer-term facility. The Companynew facility terminates on September 30, 2010. The new facility allows for revolving credit borrowings in a principal amount of up to $100,000, which can be increased its principal credit facilities from $15,000 committed and $10,000 uncommittedto $125,000 at the end of March 2003Company’s request if lenders agree to its current position of $30,000 committedincrease their commitments and $20,000 uncommitted. Thethe Company had approximately $39,800 and $8,900 outstandingsatisfies certain conditions. In general, borrowings under the credit facility bear interest at either a base rate or LIBOR rate plus a margin based on these credit facilities as of December 31, 2003 and 2002, respectively. the Company’s consolidated leverage ratio.

The provisions of the agreementsagreement require that the Company maintain certain financial ratios and covenants, all of which the Company was in compliance with as of December 31, 20032006 and 2002.2005. Under its most restrictive covenants, the Company can borrowcould have borrowed an additional $38,053 as of December 31, 2003. The Company believes that it is capable of renewing its current credit facilities, on an annual basis, or obtaining additional borrowing capacity on competitive terms. Following are the details of the Company’s individual facilities.

In April 2002, the Company entered into a $20,000 committed credit facility with a bank, with an expiration date of April 2003. In March 2003, the Company replaced its $20,000 committed credit facility with another facility with the same lender of $15,000, which expires in December 2004. At the Company’s option, the interest rate for borrowings under the agreement may be based on the lender’s cost of funds plus a margin, LIBOR plus a margin, or on the prime rate. Further, in April 2002, the Company entered into a $10,000 uncommitted demand credit facility with the same lender under similar terms. A total of $19,800 in borrowings under these facilities was outstanding$18,796 at December 31, 20032006. At December 31, 2006 and 2005, the Company had approximately $79,212 and $63,766 outstanding on these credit lines at ana weighted average borrowing rate of approximately 2.1%.

5.69% and 4.42%, 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 $25,000 at December 31, 2006. In June 2003,February 2007, the Company entered intocompleted a $10,000 committed credit facility with another bank, which expires in June 2004. At the Company’s option,refinancing of its existing industrial development bonds to fix the interest rate for borrowings under the agreement may be based on the eurodollar rate plus a margin or the prime rate plus a margin. In July 2003,of an amendment increased this committed credit facility to $15,000. A totaladditional $5,000 of $15,000 in borrowings was outstanding at December 31, 2003 at an average borrowing rate of approximately 1.5%.

In June 2003, the Company also entered into a $10,000 uncommitted demand credit facility with another bank. At the Company’s option, the interest rate for borrowings under this agreement may be based on the prime rate or the LIBOR rate plus a margin. A total of $5,000 in borrowings was outstanding at December 31, 2003 at an average borrowing rate of approximately 2.2%.

debt.

As of December 31, 2003,2006, the Company maintained a $5,135 stand-by letter of credit which guarantees payment of the industrial development authority bonds. This letter of credit is renewed annually.

At December 31, 20032006 and 2002,2005, the amounts at which the Company’s short-term debt and its industrial development demand bonds are recorded are not materially different from their fair market value. The estimated fair value of the Company’s fixed rate long-term debt, based on quoted market prices for similar issues of the same remaining maturities, was $12,355 and $15,623 at December 31, 2003 and 2002, respectively.

Note 9—11—Shareholders’ Equity and Stock-Based Compensation

The Company has 30,000,000 shares of common stock authorized, with a par value of $1, and 9,6649,925,967 shares issued (including treasury).

40


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

issued.

Holders of record of the Company’s common stock for a period of less than 36 consecutive calendar months or less are entitled to 1 vote per share of common stock. Holders of record of the Company’s common stock for a period greater than 36 consecutive calendar months are entitled to 10 votes per share of common stock.

Treasury stock is held for use by the various Company plans that require the issuance of the Company’s common stock.

The Company is authorized to issue 10,000,000 shares of preferred stock, $1.00$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.

Under provisions of a stock purchase plan, which permits employees to purchase shares of stock at 85% of the market value, 13,358 shares, 10,224 shares, and 13,463 shares were issued from treasury in 2003, 2002, and 2001, respectively. The number of shares that may be purchased by an employee in any year is limited by factors dependent upon the market value of the stock and the employee’s base salary. At December 31, 2003, 462,955 shares are available for purchase.

The Company has a long-term incentive program for key employees which provides for the granting of options to purchase stock at prices not less than market value on the date of the grant. Most options are exercisable between one and three years after the date of the grant for a period of time determined by the Company not to exceed seven years from the date of grant for options issued in 1999 or later and ten years for options issued in prior years.

The table below summarizes transactions in the plan during 2003, 2002, and 2001:

   2003

  2002

  2001

   Number of
Shares


  Weighted
Average
Exercise
Price


  Number of
Shares


  Weighted
Average
Exercise
Price


  Number of
Shares


  Weighted
Average
Exercise
Price


Options outstanding at January 1,

  1,125,247  $17.61  1,053,984  $16.80  1,140,447  $16.60

Options granted

  273,800   20.36  245,500   20.21  214,700   17.83

Options exercised

  (244,697)  16.58  (173,987)  16.38  (166,215)  15.73

Options expired

  (25,550)  21.42  (250)  14.44  (134,948)  18.18
   

     

     

   

Options outstanding at December 31,

  1,128,800   18.42  1,125,247   17.61  1,053,984   16.80
   

     

     

   

Options exercisable at December 31,

  672,625   17.32  735,834   16.82  748,208   16.76
   

     

     

   

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

   2003

  2002

  2001

 

Dividend yield

  3.9% 3.9% 3.9%

Expected volatility

  23.9% 23.9% 21.9%

Risk-free interest rate

  3.00% 3.00% 3.38%

Expected life (years)

  5  5  7 

41


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

The following table summarizes information about stock options outstanding at December 31, 2003:

Options Outstanding


  Options Exercisable

Range of
Exercise Prices


  Number
Outstanding at
12/31/03


  

Weighted

Average
Contractual Life


  

Weighted

Average

Exercise Price


  

Number

Exercisable at
12/31/03


  

Weighted

Average

Exercise Price


$12.10—$14.52  132,350  2  $13.80  132,350  $13.80
14.53—  16.94  117,950  3    15.31  117,950    15.31
16.95—  19.36  328,850  3    17.92  270,775    17.92
19.37—  21.78  489,650  6    20.24  101,550    20.09
21.79—  24.20  60,000  2    22.60  50,000    22.50
   
        
   
   1,128,800  4    18.42  672,625    17.32
   
        
   

Options were exercised for cash, resulting in the issuance from treasury of 244,697 shares in 2003 and 173,987 shares in 2002. Options to purchase 478,700 shares were available at December 31, 2003 for future grants.

The program also provides for cash awards and commencing in 1999, common stock awards, the value of which is determined based on operating results over a three-year period for awards issued starting in 1999, and over a four-year period in prior years. The effect on operations of the change in the estimated value of incentive units during the year was $(45), $689, and $25 in 2003, 2002, and 2001, respectively.

Shareholders of record on February 20, 1990 received two stock purchase rights for each three shares of common stock outstanding. These rights expired on February 20, 2000. On March 6, 2000, the Company’s Board of Directors approved a new Rights Plan and declared a dividend of one new right (the “Rights”) for each outstanding share of common stock to shareholders of record on March 20, 2000.

The Rights become exercisable if a person or group acquires or announces a tender offer which would result in such person’s acquisition of 20% or more of the Company’s common stock.

Each Right, when exercisable, entitles the registered holder to purchase one one-hundredth of a share of a newly authorized Series B preferred stock at an exercise price of sixty-five dollars per share subject to certain

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

anti-dilution adjustments. In addition, if a person or group acquires 20% or more of the outstanding shares of the Company’s common stock, without first obtaining Board of Directors’ approval, as required by the terms of the Rights Agreement, each Right will then entitle its holder (other than such person or members of any such group) to purchase, at the Right’s then current exercise price, a number of one one-hundredth shares of Series B preferred stock having a total market value of twice the Right’s exercise price.

In addition, at any time after a person acquires 20% of the outstanding shares of common stock and prior to the acquisition by such person of 50% or more of the outstanding shares of common stock, the Company may exchange the Rights (other than the Rights which have become null and void), in whole or in part, at an exchange ratio of one share of common stock or equivalent share of preferred stock, per Right.

The Board of Directors can redeem the Rights for $.01 per Right at any time prior to the acquisition by a person or group of beneficial ownership of 20% or more of the Company’s common stock. Until a Right is exercised, the holder thereof will have no rights as a shareholder of the Company, including without limitation, the right to vote or to receive dividends. Unless earlier redeemed or exchanged, the Rights will expire on March 20, 2010.

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 Company’s previous filings.

42Prior 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 Stock–Based Compensation—Transition and Disclosure.”


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

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 (dollars in thousands, except per share data):

   Twelve Months Ended December 31, 
          2005                2004        

Net Income—as reported

  $1,688  $8,974 

Add: Stock-based employee compensation expense included in net income, net of related tax effects

   347   301 

Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax

   (832)  (887)
         

Pro forma net income

  $1,203  $8,388 
         

Earnings per share:

   

Basic—as reported

  $0.17  $0.93 

Basic—pro forma

  $0.12  $0.87 

Diluted—as reported

  $0.17  $0.90 

Diluted—pro forma

  $0.12  $0.84 

The Company recognized approximately $857 of share–based compensation expense and $300 of related tax benefits in our unaudited condensed consolidated statement of operations for the twelve months 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 Company’s Employee Stock Purchase Plan, and $125 related to the Company’s 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 share-based awards. The estimated fair value of the Company’s share-based awards is amortized on a straight–line basis over the awards’ vesting period. 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 Company’s 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 twelve months ended December 31, 2006.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

No compensation expense related to stock option grants had been recorded in the condensed consolidated statement of operations for 2005 and 2004, 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 determined based on Company performance over a two to five-year period. Common stock awards issued in 2006 under the LTIP program are subject only to time vesting over a two to five-year period. In addition, as part of the Company’s Global Annual Incentive Plan (“GAIP”), nonvested shares may be issued to key employees.

Stock option activity under all plans is as follows:

  2006 2005
  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,

 1,183,485  19.88  1,237,425  19.49 

Options granted

 120,600  19.98  158,360  21.97 

Options exercised

 (175,750) 14.57  (156,775) 17.97 

Options forfeited

 (2,375) 23.08  (2,500) 23.22 

Options expired

 (33,540) 21.77  (53,025) 22.38 
          

Options outstanding at December 31,

 1,092,420  20.69 3.2 1,183,485  19.88 3.3
          

Options exercisable at December 31,

 948,010  20.65 2.8 1,066,274  19.55 3.2
          

   2004
   Number of
Shares
  Weighted
Average
Exercise Price
per Share
  Weighted
Average
Remaining
Contractual
Term (years)

Options outstanding at January 1,

  1,128,800  18.42  

Options granted

  181,575  25.99  

Options exercised

  (46,050) 18.03  

Options forfeited

  (24,900) 21.19  

Options expired

  (2,000) 17.23  
       

Options outstanding at December 31,

  1,237,425  19.49  3.5
       

Options exercisable at December 31,

  876,825  18.00  2.7
       

The total intrinsic value of options exercised during 2006 was approximately $1,046. 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, 2006, the total intrinsic value of options outstanding was approximately $2,168, and the total intrinsic value of exercisable options was approximately $1,918.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

A summary of the Company’s outstanding stock options at December 31, 2006 is as follows:

Options Outstanding

  Options Exercisable

Range of
Exercise Prices

  Number
Outstanding at
12/31//2006
  Weighted
Average
Contractual Life
  Weighted
Average
Exercise Price
  Number
Exercisable at
12/31/2006
  Weighted
Average
Exercise Price

$13.30—$15.96

  45,900  0.12  $14.68  45,900  $14.68

  15.97—  18.62

  174,750  1.18   17.57  174,750   17.57

  18.63—  21.28

  513,625  3.35   20.10  393,025   20.14

  21.29—  23.94

  190,820  4.72   21.91  190,820   21.91

  23.95—  26.60

  167,325  3.96   25.99  143,515   26.01
            
  1,092,420  3.20   20.69  948,010   20.65
            

As of December 31, 2006, unrecognized compensation expense related to nonvested stock options awarded prior to the adoption of SFAS 123R was $0. As of December 31, 2006, unrecognized compensation expense related to options granted during 2006 was $431.

During the second quarter of 2006, the Company granted 120,600 stock options under the Company’s 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 $133 of expense was recorded on these options during 2006. The fair value of these awards is amortized on a straight-line basis over the awards vesting period.

Under the Company’s LTIP plan, 29,650 shares of nonvested stock were granted during the first quarter of 2006 at a weighted average grant date fair value of $19.99 per share. In the second quarter of 2006, an additional 19,900 shares of nonvested stock were granted at a weighted average grant date fair value of $17.01 per share. None of these awards were vested or were forfeited and were all outstanding as of December 31, 2006. The fair value of the nonvested stock is based on the trading price of the Company’s 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, 2006, unrecognized compensation expense related to these awards was $657, to be recognized over a weighted average remaining period of 1.8 years.

Under the Company’s 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. There were no new grants under this plan during 2006. None of these awards vested, 2,250 shares were forfeited, and 40,250 were outstanding as of December 31, 2006. As of December 31, 2006, unrecognized compensation expense related to these awards was $326, to be recognized over a weighted average remaining period of 1.9 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 participant’s 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 participant’s account at any time by giving written notice

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

to the Committee. An employee whose stock ownership of the Company exceeds five percent of the outstanding common stock is not eligible to participate in this plan.

2003 Director Stock Ownership Plan

In March 2003, our Board of Directors approved a stock ownership plan for each member of our Board to encourage the Directors to increase their investment in the Company. The Plan was effective on the date it was approved and remains in effect for a term of ten years or until it is earlier terminated by the Board. The maximum number of shares of Common Stock which may be issued under the Plan is 75,000, subject to certain conditions that the committee may elect to adjust the number of shares. As of December 31, 2006, 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. As of May 1, 2006, each Director who owned less than 7,500 shares of Company Common Stock was required to receive 75% of the annual retainer in Common Stock and 25% of the annual retainer in cash. Each Director who owned 7,500 or more shares of Company Common Stock receives 35% of the annual retainer in Common Stock and 65% of the annual retainer in cash with the option to receive Common Stock in lieu of the cash portion of the retainer. As of May 1, 2006, the annual retainer was $24. 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 by 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 $125, $116 and $137 of expense in 2006, 2005 and 2004, respectively.

Restricted stock bonus:    As part of the Company’s 2001 Global Annual Incentive Plan (“Annual Plan”GAIP”), approved by shareholders on May 9, 2001, a restricted stock bonus of 100,000 shares of the Company’s stock was granted to an executive of the Company. The shares were issued in April 2001, in accordance with the terms of the Annual Plan,GAIP, and registered in the executive’s name. The shares will vestvested 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 executive’s continued employment by the Company. In 2003, 35,0002005 and 2004, 20,000 and 15,000 shares were earned and $624$355 and $266 was charged to selling, general, and administrative expenses, (“SG&A”). In 2002, 20,000 shares were earned and $352 was charge to SG&A. In 2001, 10,000 shares were earned and $177 was charged to SG&A. The compensation amount related to the remaining shares has been recorded as unearned compensation and will be charged to SG&A when earned.respectively.

Note 10—12—Earnings Per Share

The following table summarizes earnings per share (“EPS”) calculations for the years ended December 31, 2003, 2002,2006, 2005 and 2001:2004:

 

  December 31,

  December 31,
  2003

  2002

  2001

  2006  2005  2004

Numerator for basic EPS and diluted EPS—net income

  $14,833  $14,297  $7,665  $11,667  $1,688  $8,974
  

  

  

         

Denominator for basic EPS—weighted average shares

   9,381   9,172   9,054   9,778,745   9,679,013   9,606,074

Effect of dilutive securities, primarily employee stock options

   380   302   60   75,355   136,572   362,970
  

  

  

         

Denominator for diluted EPS—weighted average shares and

         

assumed conversions.

   9,761   9,474   9,114

Denominator for diluted EPS—weighted average shares and assumed conversions

   9,854,100   9,815,585   9,969,044
  

  

  

         

Basic EPS

  $1.58  $1.56  $.85  $1.19  $0.17  $0.93

Diluted EPS

  $1.52  $1.51  $.84  $1.18  $0.17  $0.90

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: 0, 0,787,020, 769,670 and 79,176,725 in 2003, 2002,2006, 2005 and 2001,2004, respectively.

Note 11—13—Business Segments

The Company’s reportable segments are as follows:

(1) Metalworking process chemicals—products used as lubricantsindustrial process fluids for various heavy industrial and manufacturing applications.

(2) Coatings—temporary and permanent coatings for metal and concrete products and chemical milling maskants.

(3) Other chemical products—other various chemical products.

Segment data includes direct segment costs, as well as general operating costs, including depreciation, allocated to each segment based on net sales. Inter-segment transactions are immaterial.

43


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

The table below presents information about the reported segments for the years ended December 31:

 

   Metalworking
Process
Chemicals


  Coatings

  Other
Chemical
Products


  Total

2003

                

Net sales

  $313,299  $22,732  $4,161  $340,192

Operating income

   53,939   6,019   724   60,682

Depreciation

   5,807   421   77   6,305

2002

                

Net sales

  $249,469  $20,554  $4,498  $274,521

Operating income

   52,446   5,391   1,188   59,025

Depreciation

   4,800   395   87   5,282

2001

                

Net sales

  $228,527  $18,464  $4,083  $251,074

Operating income

   47,580   5,161   1,211   53,952

Depreciation

   4,580   155   82   4,817

   Metalworking
Process
Chemicals
  Coatings  Other
Chemical
Products
  Total

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

2004

        

Net sales

  $370,716  $24,529  $5,450  $400,695

Operating income

   55,723   6,633   914   63,270

Depreciation

   7,046   466   104   7,616

Segment Assets

   306,825   16,429   1,639   324,893

Operating income comprises revenue less related costs and expenses. Nonoperating expenses primarily consist of general corporate expenses identified as not being a cost of operation, interest expense, interest income, and license fees from nonconsolidated associates.

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, 2003, 2002,2006, 2005 and 20012004 is as follows:

 

   2003

  2002

  2001

 

Total operating income for reportable segments

  $60,682  $59,025  $53,952 

Restructuring charges, net

   (57)  —     (5,854)

Nonoperating charges

   (35,178)  (34,097)  (31,844)

Depreciation and amortization

   (1,332)  (955)  (1,563)

Environmental charge

   —     —     (500)

Interest expense

   (1,576)  (1,774)  (1,880)

Interest income

   815   984   1,030 

Other income, net

   764   1,135   1,089 
   


 


 


Consolidated income before taxes

  $24,118  $24,318  $14,430 
   


 


 


44


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

   2006  2005  2004 

Total operating income for reportable segments

  $69,833  $56,401  $63,270 

Restructuring and related charges, net

   —     (10,320)  (450)

Non-operating charges

   (45,785)  (40,307)  (43,778)

Depreciation of corporate assets and amortization

   (2,416)  (2,620)  (2,151)

Interest expense

   (5,520)  (3,681)  (2,363)

Interest income

   1,069   1,022   1,111 

Other income, net

   1,259   6,120   1,818 
             

Consolidated income before taxes

  $18,440  $6,615  $17,457 
             

The following sales and long-lived asset information is by geographic area as of and for the years ended December 31:

 

  2003

  2002

  2001

  2006  2005  2004

Net sales

               

United States

  $152,360  $124,831  $109,969

North America

  $202,979  $190,735  $189,179

Europe

   120,180   96,920   88,370   141,444   130,080   132,491

Asia/Pacific

   33,711   28,193   26,994   63,600   53,763   39,364

South America

   28,105   21,974   25,741   49,281   43,939   34,404

South Africa

   5,836   2,603   —     3,147   5,516   5,257
  

  

  

         

Consolidated

  $340,192  $274,521  $251,074  $460,451  $424,033  $400,695
  

  

  

         
  2003

  2002

  2001

  2006  2005  2004

Long-lived assets

               

United States

  $71,358  $57,732  $37,558

North America

  $79,206  $80,555  $69,753

Europe

   44,309   29,479   23,340   36,455   41,553   50,009

Asia/Pacific

   6,332   5,051   5,222   10,203   5,283   5,119

South America

   8,959   7,300   11,531   16,671   14,181   9,950

South Africa

   19   14   —     33   45   50
  

  

  

         

Consolidated

  $130,977  $99,576  $77,651  $142,568  $141,617  $134,881
  

  

  

         

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

Note 12—14—Business Acquisitions and Divestitures

In October 2003,the fourth quarter of 2006, the Company acquired the assetsremaining 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 made the first payment in the fourth quarter of 2006 and recorded the present value of the steelremaining payments as debt. In addition, the Company allocated $797 to intangible assets, comprising customer lists to be amortized over ten years and food-grade lubricants business from the Cincinnati-Vulcana non-compete agreement to be amortized over two years. The Company for $8,841 cash. This acquisition further strengthens Quaker’s global leadership supply positionalso recorded $230 of goodwill, which was assigned to the steel industry.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 $2,260$1,475 to intangible assets, comprising customer lists product line technology, and non-compete agreementsof $600 to be amortized over a period20 years and non-compete agreements of 10$875 to 20be amortized over five years. The Company also recorded $4,606$610 of goodwill, which was assigned to the Metalworking Process Chemicalsmetalworking process chemicals segment. The following table shows the allocation of purchase price of assets and liabilities recorded at the acquisition date. The first $1,000 payment was made in March 2006 and was recorded as goodwill and assigned to the metalworking process chemicals segment. The pro forma results of operations have not been provided because the effects were not material.material:

 

In July 2003, the Company acquired all the outstanding stock of Eural S.r.l., a privately held company located in Tradate, Italy for $5,951 cash. Eural manufactures a variety of specialty metalworking fluids primarily for the Italian market. In connection with the acquisition, the Company allocated $1,831 to intangible assets comprising customer lists, formulations, trademarks and non-compete agreements to be amortized over a range of three to ten years. The Company also recorded $3,716 of goodwill, which was assigned to the Metalworking Process Chemicals segment. The pro forma results of operations have not been provided because the effects were not material.
   December 31, 2005

Current assets

  $4,199

Fixed assets

   1,920

Intangibles

   1,475

Goodwill

   610

Other non-current assets

   604
    

Total Assets

   8,808
    

Liabilities

   2,108
    

Cash paid

  $6,700
    

In May 2003, the Company acquired a range of cleaners, wet temper fluids and other products from KS Chemie, located in Dusseldorf, Germany for $1,191 cash. This acquisition strategically strengthens the Company’s global leadership position as a process fluids supplier to the steel industry. In connection with the acquisition, the Company allocated $403 of intangible assets comprising product line technology and non-compete agreements to be amortized over a range of five to ten years. The Company also recorded $664 of goodwill, which was assigned to the Metalworking Process Chemicals segment. The pro forma results of operations have not been provided because the effects were not material.

45


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

 

On April 22, 2002, the Company acquired 100% of the outstanding stock of Epmar Corporation (“Epmar”), a North American manufacturer of polymeric coatings, sealants, adhesives, and various other compounds for $7,611 cash and the assumption of $400 of debt. The acquisition of Epmar provides technological capability that is directly related to the Company’s coatings business. In connection with the acquisition, the Company allocated $2,920 to intangible assets comprising customer lists to be amortized over 20 years, product line technology to be amortized over 10 years, and trademarks which have indefinite lives and will not be amortized. The Company also recorded $3,390 of goodwill, which was assigned to the Coatings segment. The pro forma results of operations have not been provided because the effects were not material.

On March 1, 2002 the Company acquired certain assets and liabilities of United Lubricants Corporation (“ULC”), a North American manufacturer and distributor of specialty lubricant products and chemical management services, for $14,038 cash. The acquisition of ULC strategically strengthens the Company’s global leadership supply position to the steel industry. In connection with the acquisition the Company allocated $2,350 to intangible assets comprising customer lists, formulations, trademarks and non-compete agreements to be amortized over a five-year period. The Company also recorded $5,487 of goodwill, which was assigned to the Metalworking Process Chemicals segment. The pro forma results of operations have not been provided because the effects were not material.

The following table shows the allocation of purchase price of assets and liabilities recorded for these acquisitions:

   December 31,

   2003

  2002

Receivables

  $4,114  $5,304

Inventories

   1,130   1,250

Other current assets

   194   —  

Property, plant, and equipment

   3,078   5,043

Goodwill

   8,986   8,877

Intangible assets

   4,494   5,270

Other assets

   —     113
   

  

    21,996   25,857
   

  

Current portion of long-term debt

   143   —  

Accounts payable

   3,084   2,554

Accrued expenses and other current liabilities

   1,034   405

Other non-current liabilities

   1,752   1,249
   

  

    6,013   4,208
   

  

Cash paid

  $15,983  $21,649
   

  

Note 13—15—Goodwill and Other Intangible Assets

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 established new guidelines for accounting for goodwill and other intangible assets. Upon adoption, goodwill is no longer amortized, but instead assessed for impairment at least on an annual basis. Accordingly, on January 1, 2002, the Company ceased amortizing its goodwill. The Company completed the impairment assessment of its

46


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

goodwill and did not incur an impairment charge related to the adoption of SFAS No. 142. Further, the Company completed its annual impairment assessment as of the end of the third quarter of 20032006 and no impairment charge was warranted.

The following is a reconciliation of previously reported financial information to pro-forma amounts exclusive of goodwill amortization for the twelve months ended December 31:

   2001

Net income

  $7,665

Goodwill amortization expense, net of tax

   693
   

Pro-forma net income

  $8,358
   

Earnings per share:

    

Basic

  $.85

Diluted

   .84

Goodwill Amortization Expense, net of tax

    

Basic

  $.08

Diluted

   .08

Pro-forma earnings per share

    

Basic

  $.93

Diluted

   .92

The changes in carrying amount of goodwill for the twelve months ended December 31, 20032006 and 2005 are as follows:

 

   

Metalworking

process chemicals


  Coatings

  Total

 

Balance as of December 31, 2001

  $11,081  $3,879  $14,960 

Goodwill additions

   5,661   3,390   9,051 

Currency translation adjustments

   (2,084)  —     (2,084)
   


 

  


Balance as of December 31, 2002

  $14,658  $7,269  $21,927 
   


 

  


Goodwill additions

   9,135   —     9,135 

Currency translation adjustments

   2,239   —     2,239 
   


 

  


Balance as of December 31, 2003

  $26,032  $7,269  $33,301 
   


 

  


   Metalworking
Process
Chemicals
  Coatings  Total 

Balance as of December 31, 2004

  $27,584  $7,269  $34,853 
             

Goodwill additions

   786   —     786 

Currency translation adjustments

   (221)  —     (221)
             

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 
             

Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of December 31 are as follows:

 

   

Gross carrying

Amount


  

Accumulated

Amortization


   2003

  2002

  2003

  2002

Amortized intangible assets

                

Customer lists and rights to sell

  $6,181  $3,850  $865  $393

Trademarks and patents

   1,786   1,700   1,584   1,533

Formulations and product technology

   3,276   1,420   435   165

Other

   1,959   1,494   1,302   1,121
   

  

  

  

Total

  $13,202  $8,464  $4,186  $3,212
   

  

  

  

47


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

   Gross Carrying
Amount
  Accumulated
Amortization
   2006  2005  2006  2005

Amortized intangible assets

        

Customer lists and rights to sell

  $7,682  $6,703  $2,812  $2,095

Trademarks and patents

   1,788   1,788   1,781   1,724

Formulations and product technology

   3,278   3,278   1,645   1,240

Other

   3,143   2,976   1,923   1,583
                

Total

  $15,891  $14,745  $8,161  $6,642
                

The Company recorded $960$1,427, $1,368 and $805$1,157 of amortization expense in 20032006, 2005 and 2002,2004, respectively. Estimated annual aggregate amortization expense for the subsequent five years is as follows:

 

For the year ended December 31, 2004

  $1,160

For the year ended December 31, 2005

  $1,128

For the year ended December 31, 2006

  $1,124

For the year ended December 31, 2007

  $711

For the year ended December 31, 2008

  $622

For the year ended December 31, 2007

  $1,120

For the year ended December 31, 2008

  $1,033

For the year ended December 31, 2009

  $970

For the year ended December 31, 2010

  $787

For the year ended December 31, 2011

  $727

The Company has one indefinite-lived intangible asset of $600 for trademarks recordedtrademarks.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in connection with the Company’s 2002 acquisition of Epmar.thousands except per share amounts)

 

Note 14—16—Other Assets

Other assets comprise:

   December 31,
   2006  2005

Restricted insurance settlement

  $14,800  $15,008

Pension assets

   430   7,730

Deferred compensation assets

   5,489   5,362

Supplemental retirement income program

   3,323   2,543

Other

   3,485   3,332
        

Total

  $27,527  $33,975
        

In December 2005, an inactive subsidiary of the Company reached a settlement agreement and release with one of its insurance carriers for $15,000. The proceeds of the settlement are restricted and can only be used to pay claims and costs of defense associated with this subsidiary’s asbestos litigation. In accordance with the agreement, the subsidiary received $7,500 cash in December 2005 and the remaining $7,500 in December of 2006. The funds earned $336 and $8 of interest in 2006 and 2005, respectively, which were offset by $544 of payments in 2006. The restrictions regarding the use of the proceeds lapse after a period of 15 years. 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 17 and 18 of Notes to Consolidated Financial Statements.

Note 17—Other Non-Current Liabilities

   December 31,
   2006  2005

Restricted insurance settlement

  $14,800  $15,008

Other (primarily deferred compensation agreements)

   8,553   7,355
        

Total

  $23,353  $22,363
        

See also Notes 16 and 18 of Notes to Consolidated Financial Statements.

Note 18—Commitments and Contingencies

The Company is involved in environmental clean-up activities and litigation in connection with an existing plant location and former waste disposal sites operated by unaffiliated third parties. In April of 1992, the Company identified certain soil and groundwater contamination at AC Products, Inc. (“ACP”), a wholly owned subsidiary. Voluntarily in coordination with the Santa Ana California Regional Water Quality Board, ACP is remediating the contamination. The Company believes that the remaining potential-known liabilities associated with these matters range from approximately $900$1,500 to $1,500,$1,900, for which the Company has sufficient reserves. Notwithstanding the foregoing, the Company cannot be certain that liabilities in the form of remediation expenses and damages will not be incurred in excess of the amount reserved.

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

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

groundwater contamination containing tetrachloroethylene and other compounds, including perchloroethylene (“PCE”). OCWD is seeking to recover compensatory and other damages related to the investigation and remediation of the contamination in the groundwater. ACP seeks to defend this case vigorously on a number of bases including, most significantly, that it voluntarily investigated and remediated some or all of the PCE that appears to have originated at this facility. In cases such as these, parties often are allocated a percentage of responsibility for damages awarded or agreed upon. At this point in the case, it is not possible to provide an estimate of the percentage of liability, if any, that ACP ultimately may bear. Accordingly, it is not possible at this time to estimate the amount, if any, that ACP ultimately may be required to pay in settlement or to satisfy any adverse judgment as a result of the filing of this action or to assess whether the payment of such amount would be material to the Company.

Additionally, although there can be no assurance regarding the outcome of other environmental matters, the Company believes that it has made adequate accruals for costs associated with other environmental problems of which it is aware. Approximately $188 and $199$134 was accrued at December 31, 20032006 and December 31, 2002,2005, respectively, to provide for such anticipated future environmental assessments and remediation costs.

An inactive subsidiary of the Company that was acquired in 1978 sold certain products containing asbestos, primarily on an installed basis, and is among the defendants in numerous lawsuits alleging injury due to exposure to asbestos. The subsidiary discontinued operations in 1991 and has no remaining assets other than its existing insurance policies.policies and proceeds from an insurance settlement received in late 2005. To date, the overwhelming majority of these claims have been disposed of without payment and there have been no adverse judgementsjudgments against the subsidiary. Based on a continued analysis of the existing and anticipated future claims against this subsidiary, it is currently projected that the subsidiary’s total liability over the next 50 years for these claims is approximately $10,000$12,700 (excluding costs of defense). Although the Company has also been named as a defendant in certain of these cases, no claims have been actively pursued against the Company, and the Company has not contributed to the defense or settlement of any of these cases pursued against the subsidiary. These cases have been handled to date by the subsidiary’s 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 is challenging the applicability of these limits to the claims being brought against the subsidiary. In response to this challenge, one of these carriers entered into a settlement and release agreement with the subsidiary in late 2005 for $15,000. The proceeds of the settlement are restricted and can only be used to pay claims and costs of defense associated with the subsidiary’s asbestos litigation. Commencing in late 2005, the subsidiary is now paying out of these proceeds an allocated share of the defense costs and damages. The subsidiary has additional coverage under its excess policies. The Company believes, however, that if the coverage issues under the primary policies with the other carriers are resolved adversely to the subsidiary, the subsidiary’s insurance coverage will likely be exhausted. If exhausted, within the next three to four years. Assubsidiary may have limited additional coverage from a result,state guarantee fund established following the insolvency of one of the subsidiary’s primary insurer. Nevertheless, liabilities in respect of claims not yet asserted may exceed coverage available to the subsidiary.

48


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

See also Notes 16 and 17 of Notes to Consolidated Financial Statements.

If the subsidiary’s assets and insurance coverage were to be exhausted, claimants of the subsidiary may actively pursue claims against the Company because of the parent subsidiaryparent-subsidiary relationship. Although asbestos litigation is particularly difficult to predict, especially with respect to claims that are currently not being actively pursued against the Company, the Company does not believe that such claims would have merit or that the Company would be held to have liability for any unsatisfied obligations of the subsidiary as a result of such

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

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 Company’s own insurance and the Company’s strong defenses to claims that it should be held responsible for the subsidiary’s obligations because of the parent subsidiaryparent-subsidiary relationship, the Company believes it is not probable that the inactive subsidiary’s liabilitiesCompany 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 have a material impact on the Company’s financial condition, cash flowspossible to estimate additional losses or resultsrange of operations.

loss, if any.

The Company is party to other litigation which management currently believes will not have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

The Company leases certain manufacturing and office facilities and equipment under non-cancelable operating leases with various terms from one to 2515 years expiring in 2020.2016. Rent expense for 2003, 2002,2006, 2005 and 20012004 was $4,771, $4,415,$4,475, $5,165 and $3,359,$5,037, respectively. The Company’s minimum rental commitments under non-cancelable operating leases at December 31, 2003,2006, were approximately $4,560 in 2004, $3,798 in 2005, $2,894 in 2006, $2,640$4,073 in 2007, $2,417$3,623 in 2008, $2,667 in 2009, $1,991 in 2010, $1,733 in 2011, and $9,871$5,925 thereafter.

Note 15—19—Quarterly Results (unaudited)

 

  First

  Second

  Third

  Fourth

  First  Second  Third  Fourth 

2003

            

2006

        

Net sales

  $73,337  $83,453  $89,713  $93,689  $109,816  $118,683  $116,425  $115,527 

Gross profit

   28,366   28,947   30,785   33,276   32,485   36,065   36,775   37,276 

Operating income

   5,681   5,724   6,326   6,384   5,123   6,276   5,290   4,943 

Net income

   3,107   3,475   4,136   4,115   2,542   2,992   3,139   2,994 

Net income per share—basic

  $.34  $.37  $.44  $.43  $0.26  $0.31  $0.32  $0.30 

Net income per share—diluted

  $.33  $.36  $.42  $.41  $0.26  $0.30  $0.32  $0.30 

2002

            

2005

        

Net sales

  $59,927  $69,457  $73,268  $71,869  $104,161  $107,042  $105,751  $107,079 

Gross profit

   24,357   28,962   29,399   28,859   30,927   32,709   33,877   32,301 

Operating income

   4,333   5,683   6,702   7,255   1,478   3,589   3,940   (5,853)

Net income

   2,358   3,236   4,289   4,414   3,126   1,795   2,212   (5,445)

Net income per share—basic

  $.26  $.35  $.47  $.48  $0.32  $0.19  $0.23  $(0.56)

Net income per share—diluted

  $.26  $.35  $.45  $.46  $0.32  $0.18  $0.23  $(0.56)

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A.Controls and Procedures.

Item 9A.    Conclusion regarding the Effectiveness of Disclosure Controls and Procedures.Procedures

EvaluationUnder the supervision and with the participation of disclosure controls and procedures.    The Company’sour management, including our principal executive officer and principal financial officer, have concluded that the Company’swe conducted an evaluation of our disclosure controls and procedures, (asas such term is defined in Exchange Act Rule 13a-15(e)), based on their evaluation of such controls and procedures as of the end of the

49


QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in thousands except per share amounts)

period covered by this Annual Report on Form 10-K, are effective to reasonably assure that information required to be disclosed by the Company in the reports it files promulgated under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized(the “1934 Act”). Based on this evaluation, our principal executive officer and reported within the time periods specified in the rulesour principal financial officer concluded that our disclosure controls and formsprocedures were effective as of the SEC.

end of the period covered by this annual report.

Management’s Report on Internal Control over Financial Reporting

The management of Quaker is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) promulgated under the 1934 Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Our management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based on its assessment, Quaker’s management has concluded that as of December 31, 2006, the Company’s internal control over financial reporting is effective based on those criteria.

PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in Item 8 of this Report, has included in its Report of Independent Registered Public Accounting Firm, included in Item 8, its attestation report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, which is incorporated herein by this reference.

Changes in internal controls.    As previously disclosed, theInternal Controls Over Financial Reporting

The Company is in the process of implementing a global ERP system. The Company completed its initial implementation of this system in the Netherlands during the fourth quarter of 2002. In the second quarter of 2003, the Company implemented the ERP system at its Spanish subsidiary. During the fourth quarter of 2003, the Company implemented the system at its primary U.S. Operations. At the end of 2003,2006, subsidiaries representing more than 50%70% of consolidated revenue arewere operational on the global ERP system. Additional subsidiaries and CMS sites are planned to be implemented during 2004 and 2005.2007. The Company is taking the necessary steps to monitor and maintain the appropriate internal controls during this period of change.

 

Item 9B.Other Information.

50None.


PART III

 

Item 10.    Directors and Executive Officers of the Registrant.

Item 10.Directors, Executive Officers and Corporate Governance.

Incorporated by reference is (i) the information beginning immediately following the caption “Item“Proposal 1—Election of Directors and Nominee Biographies” in the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held May 9, 2007 to be filed with the SEC no later than 120 days after the close of its fiscal year ended December 31, 20032006 (the “2004“2007 Proxy Statement”) to, but not including, the caption “Compensation of Directors,“Corporate Governance,the information in the 2004 Proxy Statement beginning immediately following the caption “Board Committees and Meeting Attendance” to, but not including, the caption “Item 2—Ratification of Selection of Independent Auditors” and(ii) the information appearing in Item 4(a) of this Report.

SectionReport, (iii) the information in the 2007 Proxy Statement beginning with and including the caption, “Section 16(a) Beneficial Ownership Reporting Compliance.Compliance” to, but not including the caption “Ratification of Appointment of Independent Registered Public Accounting Firm,” and (iv) the information in the 2007 Proxy statement beginning with “Code of Ethics” to, but not including the caption “Meetings and Committees of the Board.”

 

Based solely on the Company’s review of certain reports filed with the SEC pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the “1934 Act”), as amended, and written representations of the Company’s officers and directors, the Company believes that, with the exception of one late filing on Form 4 by Mr. Ian F. Clark involving one transaction and one late filing on Form 4 by Mr. Robert P. Hauptfuhrer involving two transactions, all reports required to be filed pursuant to Section 16(a) of the 1934 Act with respect to transactions in the Company’s Common Stock through December 31, 2003 were filed on a timely basis.

The Company has a compliance program, the governing documents of which include a Code of Conduct (which is applicable to all of the company directors, executive officers and employees) and a Financial Code of Ethics for Senior Financial Officers (which is applicable to the Chief Executive Officer, Chief Financial Officer, Global Controller, Controllers of each of the company’s majority owned affiliates, Manager of Financial Reporting, and other individuals performing similar functions designated by the company’s Board of Directors). The Audit Committee oversees the administration of the program and is directly responsible for the disposition of all reported violations of the Financial Code of Ethics and complaints received regarding accounting, internal accounting controls, or audit matters. In addition, the Audit Committee approves any waivers to the Code of Conduct for directors and executive officers. The Code of Conduct, Financial Code of Ethics, Corporate Governance Guidelines and Audit, Compensation/Management Development and Governance Committee Charters have been posted on and are available free of charge from the Investors—Corporate Governance section of our website athttp://www.quakerchem.com or by written request addressed to Quaker Chemical Corporation, One Quaker Park, 901 Hector Street, Conshohocken, PA 19428 to the attention of Irene Kisleiko, Assistant Secretary.

The Board has affirmatively determined that three members of the Audit Committee, including its current Chairman, Robert P. Hauptfuhrer meet the criteria for a “financial expert” as defined by the SEC.

Item 11.    Executive Compensation.

Item 11.Executive Compensation.

Incorporated by reference is the information beginning immediately following the caption “Compensation of Directors” to, but not including, the caption “Board Committees and Meeting Attendance” in the 20042007 Proxy Statement the information beginning immediately following the caption “Executive Compensation” to, but not including, the caption “Report of the Compensation/Management Development Committee on Executive Compensation” and the information immediately following the caption “Compensation Committee Interlocks and Insider Participation” to, but not including, the caption “Report of the Audit Committee” contained in the 2004 Proxy Statement.

51


Item 12.    Security“Stock Ownership of Certain Beneficial Owners Management and Related Stockholder Matters.Management.”

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Incorporated by reference is the information in the 2007 Proxy Statement beginning immediately following the caption “Stock Ownership of Certain Beneficial Owners and Management” to, but not including, the subcaption “Section 16(a) Beneficial Ownership Reporting Compliance.”

The following table sets forth certain information relating to the Company’s equity compensation plans as of December 31, 2003.2006. Each number of securities reflected in the table is a reference to shares of Quaker common stock.

Equity Compensation Plans

 

Equity Compensation Plan Information


 

Plan Category


  Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights


  Weighted-average exercise
price of outstanding
options, warrants and
rights


  

Number of securities remaining
available for future issuance
under equity
compensation plans

(excluding securities reflected
in column (a))


 
   (a)  (b)  (c) 

Equity compensation plans approved by Security holders

  1,128,800  $18.42  949,342(1)
   
  

  

Equity compensation plans not approved by security holders

  —     —    —   
   
  

  

Total

  1,128,800  $18.42  949,342 
   
  

  

Equity Compensation Plan Information

 

Plan Category

  Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
  Weighted-average exercise
price of outstanding
options, warrants and rights
  Number of securities remaining
available for future issuance
under equity
compensation plans
(excluding securities reflected
in column (a))
 
   (a)  (b)  (c) 

Equity compensation plans approved by security holders

  1,092,420  20.69  1,286,376(1)
          

Equity compensation plans not approved by security holders

  —    —    —   
          

Total

  1,092,420  20.69  1,286,376 
          

(1)As of December 31, 2003, 400,0002006, 357,500 of these shares were available for issuance as restricted stock awards under the Company’s 2001 Global Annual Incentive Plan, 478,700859,500 shares were available for issuance upon the exercise of stock options and/or as restricted stock awards under the Company’s 2001 Long-term2006 Long-Term Performance Incentive Plan, and the other 70,64251,376 shares were available for issuance under the 2003 Director Stock Ownership Plan.

Item 13.    Certain Relationships and Related Transactions.

No information is required to be provided in response to this Item 13.

Item 14.    PrincipalAccountant Fees and Services.

Item 13.Certain Relationships and Related Transactions and Director Independence.

Incorporated by reference is the information in 2007 Proxy Statement beginning with the subcaption “Director Independence” to but not including the subcaption “Governance Committee Procedures for Selecting Director Nominees.”

Item 14.Principal Accountant Fees and Services.

Incorporated by reference is the information in the 2007 Proxy Statement beginning with the subcaption “Audit Fees” to, but not including the statement recommending a vote for ratification of the Company’s independent auditors contained in the 2004 Proxy Statement.

52auditors.


PART IV

 

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

Item 15.Exhibits and Financial Statement Schedules.

(a)Exhibits and Financial Statement Schedules

 

1.    Financial Statements and Supplementary Data.

1.Financial Statements and Supplementary Data.

 

   Page

Financial Statements:

  

Report of Independent AuditorsRegistered Public Accounting Firm

  2228

Consolidated Statement of Income

  2330

Consolidated Balance Sheet

  2431

Consolidated Statement of Cash Flows

  2532

Consolidated Statement of Shareholders’ Equity

  2633

Notes to Consolidated Financial Statements

  2734

2.Financial Statement Schedules

Schedule II—Valuation and Qualifying Accounts for the years 2003, 2002, and 2001

59

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

Financial statements of 50% or less owned companies have been omitted because none of the companies meets the criteria requiring inclusion of such statements.

 

3.    Exhibits (numbered in accordance with Item 601 of Regulation S-K)

3.Exhibits (numbered in accordance with Item 601 of Regulation S-K)

 

3(a) —  Amended and Restated Articles of Incorporation dated July 16, 1990. Incorporated by reference to Exhibit 3(a) as filed by Registrant with Form 10-K for the year 1996.
3(b) —  By-laws as amended through May 6, 1998. Incorporated by reference to Exhibit 3(b) as filed by Registrant with Form 10-K for the year 1998.
4 —  Shareholder Rights Plan dated March 6, 2000. Incorporated by reference to Form 8-K as filed by the Registrant on March 7, 2000.
10(a) —  Long-Term Performance Incentive Plan as approved May 5, 1993. Incorporated by reference to Exhibit 10(a) as filed by the Registrant with Form 10-K for the year 1993.*
10(i) —  Employment Agreement by and between the Registrant and Ronald J. Naples dated August 14, 1995. Incorporated by reference to Exhibit 10(i) as filed by Registrant with Form 10-Q for the quarter ended September 30, 1995.*
10(j) —  Amendment to the Stock Option Agreement dated October 2, 1995 by and between the Registrant and Ronald J. Naples. Incorporated by reference to Exhibit 10(j) as filed by Registrant with Form 10-Q for the quarter ended September 30, 1995.*
10(k) —  Employment Agreement by and between Registrant and José Luiz Bregolato dated June 14, 1993. Incorporated by reference to Exhibit 10(k) as filed by Registrant with Form 10-K for the year 1995.*
10(l) —Employment Agreement by and between Registrant and Daniel S. Ma dated May 18, 1993. Incorporated by reference to Exhibit 10(l) as filed by Registrant with Form 10-K for the year 1995.*

53


10(o) —  Amendment No. 1 to Employment Agreement dated January 1, 1997 by and between Registrant and Ronald J. Naples. Incorporated by reference to Exhibit 10(o) as filed by Registrant with Form 10-K for the year 1997.*

10(p) —  Amendment No. 1 to 1995 Naples Restricted Stock Plan and Agreement dated January 21, 1998 by and between Registrant and Ronald J. Naples. Incorporated by reference to Exhibit 10(p) as filed by Registrant with Form 10-K for the year 1997.*
10(s) —Employment Agreement by and between Registrant and Joseph W. Bauer dated March 9, 1998. Incorporated by reference to Exhibit 10(s) as filed by Registrant with Form 10-K for the year 1997.*
10(t) —  Employment Agreement by and between Registrant and Ronald J. Naples dated March 11, 1999. Incorporated by reference to Exhibit 10(t) as filed by Registrant with Form 10-K for the year 1998.*
10(u) —  Employment Agreement by and between Registrant and Michael F. Barry dated November 30, 1998. Incorporated by reference to Exhibit 10(u) as filed by Registrant with Form 10-K for the year 1998.*
10(v) —Employment Agreement by and between Registrant and Ian F. Clark dated March 15, 1999. Incorporated by reference to Exhibit 10(v) as filed by Registrant with Form 10-K for the year 1998.*
10(w) —Change in Control Agreement by and between Registrant and Joseph W. Bauer dated February 1, 1999. Incorporated by reference to Exhibit 10(w) as filed by Registrant with Form 10-K for the year 1998.*
10(x) —Change in Control Agreement by and between Registrant and Michael F. Barry dated November 30, 1998. Incorporated by reference to Exhibit 10(x) as filed by Registrant with Form 10-K for the year 1998.*
10(y) —Change in Control Agreement by and between Registrant and José Luiz Bregolato dated January 6, 1999. Incorporated by reference to Exhibit 10(y) as filed by Registrant with Form 10-K for the year 1998.*
10(aa) —Change in Control Agreement by and between Registrant and Daniel S. Ma dated January 15, 1999. Incorporated by reference to Exhibit 10(aa) as filed by Registrant with Form 10-K for the year 1998.*
10(dd) —  1999 Long-Term Performance Incentive Plan as approved May 12, 1999, effective January 1, 1999. Incorporated by reference to Exhibit 10(dd) as filed by Registrant with Form 10-K for the year 1999.*
10(ff) —  Deferred Compensation Plan as adopted by the Registrant dated December 17, 1999, effective July 1, 1997. Incorporated by reference to Exhibit 10(ff) as filed by Registrant with Form 10-K for the year 1999.*
10(gg) —  Supplemental Retirement Income Program adopted by the Registrant on November 6, 1984, as amended November 8, 1989. Incorporated by reference to Exhibit 10(gg) as filed by Registrant with Form 10-K for the year 1999.*
10(hh) —  2001 Global Annual Incentive Plan as approved May 9, 2001, effective January 1, 2001. Incorporated by reference to Exhibit 10(hh) as filed by Registrant with Form 10-K for the year 2001.*
10(ii) —  2001 Long-Term Performance Incentive Plan as approved May 9, 2001, effective January 1, 2001. Incorporated by reference to Exhibit 10(ii) as filed by Registrant with Form 10-K for the year 2001.*

54


10(jj) —  Agreement of Lease between Quaker Park Associates, L.P. and Quaker Chemical Corporation dated December 19, 2000. Incorporated by reference to Exhibit 10(jj) as filed by Registrant with Form 10-K for the year 2001.*
10(kk)10(ww) —  Asset Purchase Agreement between United Lubricants Corporation and ULC Acquisition Corp. dated January 23, 2002,2003 Director Stock Ownership Plan as amended by Amendment to Purchase Asset Agreement dated February 28, 2002.approved May 14, 2003. Incorporated by reference to Exhibit 10(kk)10(ww) as filed by the Registrant with Form 10-K for the year 2001.2003.*
10(mm)10(yy) —  CreditChange in Control Agreement by and between Registrant and ABN AMRO Bank N.V. in the amount of $20,000,000,D. Jeffry Benoliel dated April 12, 2002.June 10, 2004, effective May 14, 2004. Incorporated by reference to Exhibit 10(mm)10(yy) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2002.2004.*
10(nn)10(zz) —  Promissory NoteChange in the amount of $10,000,000 in favor of ABN AMRO Bank N.V.,Control Agreement by and between Registrant and Mark Featherstone dated April 15, 2002.June 10, 2004, effective May 14, 2004. Incorporated by reference to Exhibit 10(nn)10(zz) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2002.2004.*

10(oo)10(aaa) —

  Stock PurchaseChange in Control Agreement by and between Epmar CorporationRegistrant and Quaker Chemical CorporationJose Luiz Bregolato, dated April 22, 2002.June 23, 2004, effective May 14, 2004. Incorporated by reference to Exhibit 10(oo) as filed by the Registrant with Form 10-K for the year 2002.
10(pp) —First Amendment between Quaker Chemical Corporation and ABN Amro Bank N.V. dated March 25, 2003. Incorporated by reference to Exhibit 10(pp) as filed by the Registrant with Form 10-Q for the quarter ended March 31, 2003.
10(qq) —Credit Agreement between Registrant and PNC Bank, National Association in the amount of $10,000,000, dated June 19, 2003. Incorporated by reference to Exhibit 10(qq)10(aaa) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2003.2004.*
10(rr)10(ccc) —  Commercial NoteAmendment No. 1 to Employment Agreement dated March 11, 1999 between Registrant and National City Bank, National Association in the amount of $10,000,000, dated June 19, 2003.Ronald J. Naples, effective July 21, 2004. Incorporated by reference to Exhibit 10(rr)10(ccc) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2003.2004.*
10(ss)10(ddd) —  Employment Agreement by and between Registrant and Mark A. Harris,Neal E. Murphy, effective January 1, 2001.July 22, 2004. Incorporated by reference to Exhibit 10(ddd) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2004.*

10(tt)10(eee) —  Change in Control Agreement by and between Registrant and Mark A. Harris,Neal E. Murphy, effective January 1, 2001.July 22, 2004. Incorporated by reference to Exhibit 10(eee) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2004.*
10(uu)10(fff) —  Employment1995 Naples Supplemental Retirement Income Program and Agreement by(as amended and restated effective May 14, 2004) between Registrant and L. Wilbert Platzer, effective January 1, 2001.Ronald J. Naples dated August 4, 2004. Incorporated by reference to Exhibit 10(fff) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2004.*
10(vv)10(hhh) —  Change in Control Agreement by and between Registrant and L. Wilbert Platzer,Michael F. Barry, effective January 1, 2001.May 14, 2004. Incorporated by reference to Exhibit 10(hhh) as filed by the Registrant with Form 10-Q for the quarter ended June 30, 2004.*
10(ww)10(iii) —  2003 Director Stock Ownership PlanLetter Agreement by and between Registrant and Joseph W. Bauer dated March 8, 2005. Incorporated by reference to Exhibit 10 as approved May 14, 2003.filed by the Registrant with Form 8-K dated March 10, 2005.*
10(xx)10(jjj) —Credit Agreement between Registrant and Bank of America, N.A. and ABN AMRO Bank, N.V. and Banc of America Securities LLC, in the amount of $100,000,000, dated October 14, 2005. Incorporated by reference to Exhibit 10(jjj) as filed by the Registrant with Form 10-Q for the quarter ended September 30, 2005.
10(kkk) —Directors’ Deferred Compensation Plan (Amended and Restated as of May 5, 2004). Incorporated by reference to Exhibit 10(kkk) as filed by the Registrant with Form 10-K for the year 2005.*
10(lll) —Amendment One to Registrant’s 2001 Long-Term Performance Incentive Plan, effective February 22, 2005. Incorporated by reference to Exhibit 10.1 as filed by Registrant with Form 8-K filed on March 15, 2005.*
10(mmm) —Form of Stock Option Agreement for associates under Registrant’s 2001 Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.2 as filed by Registrant with Form 8-K filed on March 15, 2005.*
10(nnn) —Settlement Agreement and Release between Registrant, an inactive subsidiary of the Registrant, and Hartford Accident and Indemnity Company dated December 12, 2005. Incorporated by reference to Exhibit 10(nnn) as filed by the Registrant with Form 10-K for the year 2005.
10(ooo) —Amendment to Registrant’s Deferred Compensation Plan for key officers dated December 20, 2005. Incorporated by reference to Exhibit 10 as filed by Registrant with Form 8-K filed on December 22, 2005.*
10(ppp) —Form of Restricted Stock Award Agreement for executive officers and other employees under Registrant’s 2001 Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit 10 as filed by Registrant with Form 8-K filed on March 6, 2006.*
10(qqq) —2001 Global Annual Incentive Plan, as amended and restated (incorporated by reference to Appendix D to the Corporation’s definitive proxy statement filed on March 31, 2006). *
10(rrr) —2006 Long-Term Performance Incentive Plan (incorporated by reference to Appendix E to the Corporation’s definitive proxy statement filed on March 31, 2006).*
10(sss) —Form of Stock Option Agreement provided for associates under the Registrant’s 2006 Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit 10.3 as filed by Registrant with Form 8-K filed on May 12, 2006.*
10(ttt) —Form of Restricted Stock Award Agreement for executive officers and other employees under Registrant’s 2006 Long-Term Performance Incentive Plan. Incorporated by reference to Exhibit 10 as filed by Registrant with Form 8-K filed on June 27, 2006.*

10(uuu)  Employment Agreement by and between Quaker Chemical Limited, a UK company and a subsidiary of Registrant, and Stephen D. Holland,Mark A. Harris, dated August 8, 2006. Incorporated by reference to Exhibit 10 as filed by the Registrant with Form 8-K filed on August 8, 2006.*
10(vvv) —Employment Agreement by and between L. Willem Platzer and Quaker Chemical B.V., a Netherlands corporation and a subsidiary of Registrant, dated August 21, 2006. Incorporated by reference to Exhibit 10 as filed by the Registrant with Form 8-K filed on August 22, 2006.*
10(www) —2006 Long-Term Performance Incentive Plan (amended and restated effective May 18, 2003.November 8, 2006).
10(xxx) —Amended and Restated Supplemental Retirement Income Program approved on November 8, 2006, to be effective January 1, 2005.
10(yyy) —Financing Agreement by and among Montgomery County Industrial Development Authority and Registrant and Brown Brothers Harriman & Co. dated February 1, 2007.
21 —  Subsidiaries and Affiliates of the Registrant
23 —  Consent of Independent AccountantsRegistered Public Accounting Firm
31.1 —  Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2 —  Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1 —  Certification of Ronald J. Naples pursuant to 18 U.S. C.U.S.C. Section 1350.
32.2 —  Certification of Michael F. BarryNeal E. Murphy pursuant to 18 U.S. C.U.S.C. Section 1350.


*This exhibit is a management contract or compensation plan or arrangement required to be filed as an exhibit to this Report.

55


(b)Reports on Form 8-K.

1. On October 31, 2003 the Company furnished on Form 8-K its Third Quarter 2003 Press Release.

(c)The exhibits Exhibits required by ItemRegulation 601 of Regulation S-K filed as part of this Report or incorporated herein by reference are listed in subparagraph

See (a)(3) 3 of this Item 15.15

(c) Financial Statement Schedules

56See (a) 2 of this Item 15


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

QUAKER CHEMICAL CORPORATION

Registrant

By:

 

/S/s/    RONALD J. NAPLES        


 

Ronald J. Naples

Chairman of the Board and Chief Executive Officer

Date: March 12, 2004

9, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures


  

Capacity


 

Date


/s/    RONALD J. NAPLES        


Ronald J. Naples

Chairman of the Board and Chief Executive Officer

  

Principal Executive Officer and Director

 March 10, 20047, 2007

/s/    NEAL E. MICHAEL F. BARRYURPHY        


Michael F. BarryNeal E. Murphy

Vice President, Chief Financial Officer and Treasurer

  

Principal Financial Officer

 March 10, 20047, 2007

/s/    MARK A. FEATHERSTONE        


Mark A. Featherstone

Vice President and Global Controller

  

Principal Accounting Officer

 March 10, 20047, 2007

/s/    JOSEPH B. ANDERSON, JR.        

Joseph B. Anderson, Jr.

  

Director

 March , 20047, 2007

/s/    PATRICIA C. BARRON        


Patricia C. Barron

  

Director

 March 10, 20047, 2007

/s/    PDETERONALD A. BR. CENOLIELALDWELL        


Peter A. Benoliel

Director

March 10, 2004

Donald R. Caldwell

  

Director

 March , 20047, 2007

/s/    ROBERT E. CHAPPELLHAPPEL        


Robert E. ChappellChappel

  

Director

 March 10, 20047, 2007

/s/    WILLIAM R. COOK        


William R. Cook

  

Director

 March 10, 20047, 2007

/s/    EDWIN J. DELATTRE        


Edwin J. Delattre

  

Director

 March 10, 2004

57


Signatures


Capacity


Date


7, 2007

/s/    RJOBERTEFFRY P. HD. FAUPTFUHRERRISBY        


Robert P. HauptfuhrerJeffry D. Frisby

  

Director

 March 10, 20047, 2007

/s/    ROBERT H. ROCK        


Robert H. Rock

  

Director

 March 10, 20047, 2007

 

5870


QUAKER CHEMICAL CORPORATION

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

   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


   (Dollars in thousands)

ALLOWANCE FOR DOUBTFUL ACCOUNTS

                    

Year ended December 31, 2003

  $6,118  $991  $(435) $89  $6,763

Year ended December 31, 2002

  $5,155  $1,365  $(493) $91  $6,118

Year ended December 31, 2001

  $2,960  $2,472  $(218) $(59) $5,155

59


EXHIBIT INDEX

Exhibit No.

Description


10(ss)Employment Agreement by and between Registrant and Mark A. Harris, effective January 1, 2001.
10(tt)Change in Control Agreement by and between Registrant and Mark A. Harris, effective January 1, 2001.
10(uu)Employment Agreement by and between Registrant and L. Wilbert Platzer, effective January 1, 2001.
10(vv)Change in Control Agreement by and between Registrant and L. Wilbert Platzer, effective January 1, 2001.
10(ww)2003 Director Stock Ownership Plan as approved by shareholders on May 14, 2003.
10(xx)Employment Agreement by and between Registrant and Stephen D. Holland, effective May 18, 2003.
21

Subsidiaries and Affiliates of the Registrant

23Consent of Independent Accountants
31.1Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1

Certification of Ronald J. Naples pursuant to U.S.C. Section 1350

32.2Certification of Michael F. Barry pursuant to U.S.C. Section 1350