SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549 -----------------------


FORM 10-Q [X]


xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________to____________

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________

Commission file number 0-7154 ------


QUAKER CHEMICAL CORPORATION ---------------------------------------------------------------- (Exact

(Exact name of Registrant as specified in its charter) Pennsylvania 23-0993790 ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Quaker Park, 901 Hector Street, Conshohocken, Pennsylvania 19428 - 0809 --------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's


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

OneQuakerPark,901HectorStreet,
Conshohocken, Pennsylvania
(Address of principal executive offices)

19428 – 0809
(Zip Code)

Registrant’s telephone number, including area code 610-832-4000 ------------

Not Applicable ---------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report.

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Xx No ___ --- o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes x No o

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date. Number of Shares of Common Stock Outstanding on July 31, 2002 9,311,598

NumberofSharesofCommonStock
Outstanding on July 31, 2003

9,459,380





QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheet at June 30, 2002 and December 31, 2001 Condensed Consolidated Statement of Income for the Three and Six Months ended June 30, 2002 and 2001 Condensed Consolidated Statement of Cash Flows for the Six Months ended June 30, 2002 and 2001 Notes to Condensed Consolidated

PARTI.

FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Condensed Consolidated Balance Sheet at June 30, 2003 and December 31, 2002

3

Condensed Consolidated Statement of Income for the Three and Six Months ended June 30, 2003 and 2002

4

Condensed Consolidated Statement of Cash Flows for the Six Months ended June 30, 2003 and 2002

5

Notes to Condensed Consolidated Financial Statements

6


* * * * * * * * * *

Quaker Chemical Corporation

Condensed Consolidated Balance Sheet Unaudited (dollars in thousands)
June 30, December 31, 2002 2001 * ---- ------ ASSETS Current assets Cash and cash equivalents $ 18,316 $ 20,549 Accounts receivable, net 55,828 44,787 Inventories Raw materials and supplies 10,868 9,673 Work-in-process and finished goods 9,749 9,112 Prepaid expenses and other current assets 12,594 8,809 --------- --------- Total current assets 107,355 92,930 --------- --------- Property, plant and equipment, at cost 111,036 97,367 Less accumulated depreciation 63,921 59,123 --------- --------- Total property, plant and equipment 47,115 38,244 Goodwill 22,097 14,960 Other intangible assets 6,337 1,442 Investments in associated companies 9,390 9,839 Deferred income taxes 8,837 9,085 Other assets 13,705 13,166 --------- --------- $ 214,836 $ 179,666 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term borrowings and current portion of long-term debt $ 24,905 $ 2,858 Accounts and other payables 26,229 20,196 Accrued compensation 7,973 8,109 Other current liabilities 15,449 14,343 --------- --------- Total current liabilities 74,556 45,506 Long-term debt 19,459 19,380 Deferred income taxes 1,152 1,233 Other noncurrent liabilities 25,632 24,212 --------- --------- Total liabilities 120,799 90,331 --------- --------- Minority interest in equity of subsidiaries 8,041 8,436 --------- --------- 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 576 357 Retained earnings 105,664 103,953 Unearned compensation (1,419) (1,597) Accumulated other comprehensive (loss) (23,632) (24,075) --------- --------- 90,853 88,302 Treasury stock, shares held at cost; 2002-356,898, 2001-526,865 (4,857) (7,403) --------- --------- Total shareholders' equity 85,996 80,899 --------- --------- $ 214,836 $ 179,666 ========= =========

 

 

Unaudited
(dollars in thousands,
except par value)

 

 

 


 

 

 

June 30,
2003

  

December 31,
2002 *

 

 

 


 


 

 

 

 

 

  

 

 

 

ASSETS

 

 

 

  

 

 

 

Current assets

 

 

 

  

 

 

 

Cash and cash equivalents

 

$

15,098

  

$

13,857

 

Accounts receivable, net

 

 

67,964

  

 

53,353

 

Inventories

 

 

 

  

 

 

 

Raw materials and supplies

 

 

13,352

  

 

11,342

 

Work-in-process and finished goods

 

 

14,739

  

 

12,294

 

Prepaid expenses and other current assets

 

 

12,298

  

 

12,827

 

 

 



 



 

Total current assets

 

 

123,451

  

 

103,673

 

 

 



 



 

Property, plant and equipment, at cost

 

 

123,125

  

 

113,207

 

Less accumulated depreciation

 

 

70,540

  

 

64,695

 

 

 



 



 

Net property, plant and equipment

 

 

52,585

  

 

48,512

 

Goodwill

 

 

24,155

  

 

21,927

 

Other intangible assets

 

 

5,771

  

 

5,852

 

Investments in associated companies

 

 

5,420

  

 

9,060

 

Deferred income taxes

 

 

10,566

  

 

10,609

 

Other assets

 

 

15,093

  

 

14,225

 

 

 



 



 

Total Assets

 

$

237,041

  

$

213,858

 

 

 



 



 

 

 

 

 

  

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

  

 

 

 

Current liabilities

 

 

 

  

 

 

 

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

 

$

19,987

  

$

12,205

 

Accounts and other payables

 

 

33,828

  

 

29,423

 

Accrued compensation

 

 

6,192

  

 

10,254

 

Other current liabilities

 

 

13,471

  

 

14,262

 

 

 



 



 

Total current liabilities

 

 

73,478

  

 

66,144

 

Long-term debt

 

 

16,620

  

 

16,590

 

Deferred income taxes

 

 

1,700

  

 

1,518

 

Other noncurrent liabilities

 

 

36,006

  

 

33,889

 

 

 



 



 

Total liabilities

 

 

127,804

  

 

118,141

 

 

 



 



 

Minority interest in equity of subsidiaries

 

 

9,585

  

 

7,662

 

 

 



 



 

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

 

 

1,174

  

 

626

 

Retained earnings

 

 

113,083

  

 

110,448

 

Unearned compensation

 

 

(931

)  

 

(1,245

)

Accumulated other comprehensive (loss)

 

 

(20,410

)  

 

(27,078

)

 

 



 



 

 

 

 

102,580

  

 

92,415

 

Treasury stock, shares held at cost; 2003 – 213,566, 2002 - 324,109

 

 

(2,928

)  

 

(4,360

)  

 

 



 



 

Total shareholders’ equity

 

 

99,652

  

 

88,055

 

 

 



 



 

 

 

$

237,041

  

$

213,858

 

 

 



 



 


The accompanying notes are an integral part of these condensed consolidated financial statements. * Condensed from audited financial statements.

*Condensed from audited financial statements.

Quaker Chemical Corporation

Condensed Consolidated Statement of Income
Unaudited (dollars in thousands, except per share data) Three Months ended June 30, Six Months ended June 30, ----------------------------- ------------------------------ 2002 2001 2002 2001 ----------- ------------ ------------ ----------- Net sales $ 69,457 $ 65,073 $ 129,384 $ 129,288 Cost of goods sold 40,495 37,988 76,065 76,381 ----------- ----------- ----------- ----------- Gross margin 28,962 27,085 53,319 52,907 Selling, general and administrative expenses 23,279 20,126 43,303 39,849 ----------- ----------- ----------- ----------- Operating income 5,683 6,959 10,016 13,058 Other (expense) income, net (28) 379 252 1,159 Interest expense (407) (499) (826) (991) Interest income 295 206 548 477 ----------- ----------- ----------- ----------- Income before taxes 5,543 7,045 9,990 13,703 Taxes on income 1,774 2,184 3,197 4,248 ----------- ----------- ----------- ----------- 3,769 4,861 6,793 9,455 Equity in net income of associated companies 201 216 184 496 Minority interest in net income of subsidiaries (734) (963) (1,383) (1,824) ----------- ----------- ----------- ----------- Net income $ 3,236 $ 4,114 $ 5,594 $ 8,127 =========== =========== =========== =========== Per share data: Net income - basic $ 0.35 $ 0.45 $ 0.61 $ 0.90 Net income - diluted $ 0.35 $ 0.45 $ 0.60 $ 0.90 Dividends declared $ 0.21 $ 0.205 $ 0.42 $ 0.41 Based on weighted average number of shares outstanding: Basic 9,249,925 9,064,679 9,202,378 8,983,623 Diluted 9,308,678 9,124,642 9,262,025 9,044,729

 

 

Unaudited
(dollars in thousands, except per share data)

 

 

 


 

 

 

Three months ended June 30,

 

Six Months ended June 30,

 

 

 


 


 

 

 

2003

  

2002

  

2003

  

2002

 

 

 


 


 


 


 

Net sales

 

$

83,453

  

$

69,457

  

$

156,790

  

$

129,384

 

Cost of goods sold

 

 

54,506

  

 

40,495

  

 

99,477

  

 

76,065

 

 

 



 



 



 



 

Gross margin

 

 

28,947

  

 

28,962

  

 

57,313

 

 

53,319

 

Selling, general and administrative expenses

 

 

23,223

  

 

23,279

 

 

45,908

 

 

43,303

 

 

 



 



 



 



 

Operating income

 

 

5,724

 

 

5,683

 

 

11,405

 

 

10,016

 

Other income (expense), net

 

 

447

 

 

(28

)

 

535

 

 

252

 

Interest expense

 

 

(387

)

 

(407

)

 

(737

)

 

(826

)

Interest income

 

 

152

 

 

295

 

 

363

 

 

548

 

 

 



 



 



 



 

Income before taxes

 

 

5,936

 

 

5,543

 

 

11,566

 

 

9,990

 

Taxes on income

 

 

1,843

 

 

1,774

 

 

3,701

 

 

3,197

 

 

 



 



 



 



 

 

 

 

4,093

 

 

3,769

 

 

7,865

 

 

6,793

 

Equity in net income of associated companies

 

 

169

 

 

201

 

 

255

 

 

184

 

Minority interest in net income of subsidiaries

 

 

(787

)

 

(734

)

 

(1,538

)

 

(1,383

)

 

 



 



 



 



 

Net income

 

$

3,475

 

$

3,236

 

$

6,582

 

$

5,594

 

 

 



 



 



 



 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income – basic

 

$

0.37

 

$

0.35

 

$

0.71

 

$

0.61

 

Net income – diluted

 

$

0.36

 

$

0.35

 

$

0.69

 

$

0.60

 

Dividends declared

 

$

0.21

 

$

0.21

 

$

0.42

 

$

0.42

 

Based on weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

9,323,895

 

 

9,249,925

 

 

9,297,482

 

 

9,202,378

 

Diluted

 

 

9,671,578

 

 

9,308,678

 

 

9,593,466

 

 

9,262,025

 


The accompanying notes are an integral part of these condensed consolidated financial statements.

Quaker Chemical Corporation

Condensed Consolidated Statement of Cash Flows

For the Six Months endedEnded June 30,
Unaudited (dollars in thousands) 2002 2001 ---- ---- Cash flows from operating activities Net income $ 5,594 $ 8,127 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,327 2,376 Amortization 325 730 Equity in net income of associated companies (184) (496) Minority interest in earnings of subsidiaries 1,383 1,824 Deferred compensation and other postretirement benefits (329) 915 Other, net (1,938) 2,511 Increase (decrease) in cash from changes in current assets and current liabilities: Accounts receivable, net (4,532) (3,073) Inventories (798) 1,644 Prepaid expenses and other current assets (1,080) (1,509) Accounts payable and accrued liabilities 4,571 (4,858) Change in restructuring liabilities (1,167) (244) -------- -------- Net cash provided by operating activities 4,172 7,947 -------- -------- Cash flows from investing activities Investments in property, plant and equipment (5,060) (3,148) Payments related to acquisitions (21,576) (1,450) Other, net 298 1,111 -------- -------- Net cash (used in) investing activities (26,338) (3,487) -------- -------- Cash flows from financing activities Net increase in short-term borrowings 22,009 2,548 Dividends paid (3,802) (3,672) Treasury stock issued 2,404 2,427 Distributions to minority shareholders (1,335) (1,119) Other, net 85 (36) -------- -------- Net cash provided by financing activities 19,361 148 -------- -------- Effect of exchange rate changes on cash 572 (2,217) -------- -------- Net (decrease) increase in cash and cash equivalents (2,233) 2,391 Cash and cash equivalents at beginning of period 20,549 16,552 -------- -------- Cash and cash equivalents at end of period $ 18,316 $ 18,943 ======== ======== Noncash investing activities: Contribution of property, plant & equipment to real estate joint venture $ - $ 4,350

 

 

Unaudited
(dollars in thousands)

 

 

 


 

 

 

2003

 

2002

 

 

 


 


 

Cash flows from operating activities

 

 

 

  

 

 

 

Net income

 

$

6,582

 

$

5,594

 

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

 

 

 

 

 

 

 

Depreciation

 

 

3,394

 

 

2,327

 

Amortization

 

 

438

 

 

325

 

Equity in net income of associated companies

 

 

(255

)

 

(184

)

Minority interest in earnings of subsidiaries

 

 

1,538

 

 

1,383

 

Deferred compensation and other postretirement benefits

 

 

(382

)

 

(329

)

Pension and other, net

 

 

2,798

 

 

1,096

 

Increase (decrease) in cash from changes in current assets and current liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(11,380

)

 

(4,532

)

Inventories

 

 

(2,789

)

 

(798

)

Prepaid expenses and other current assets

 

 

1,204

 

 

(2,293

)

Accounts payable and accrued liabilities

 

 

(2,467

)

 

2,750

 

Change in restructuring liabilities

 

 

(866

)

 

(1,167

)

 

 



 



 

Net cash (used in) provided by operating activities

 

 

(2,185

)

 

4,172

 

 

 



 



 

Cash flows from investing activities

 

 

 

 

 

 

 

Investments in property, plant and equipment

 

 

(4,859

)

 

(5,060

)

Dividends and distributions from associated companies

 

 

3,890

 

 

307

 

Payments related to acquisitions

 

 

(1,105

)

 

(21,576

)

Other, net

 

 

53

 

 

(9

)

 

 



 



 

Net cash (used in) investing activities

 

 

(2,021

)

 

(26,338

)

 

 



 



 

Cash flows from financing activities

 

 

 

 

 

 

 

Net increase in short-term borrowings

 

 

7,747

 

 

22,009

 

Dividends paid

 

 

(3,924

)

 

(3,802

)

Treasury stock issued

 

 

1,697

 

 

2,404

 

Distributions to minority shareholders

 

 

(609

)

 

(1,335

)

Other, net

 

 

3

 

 

85

 

 

 



 



 

Net cash provided by financing activities

 

 

4,914

 

 

19,361

 

 

 



 



 

Effect of exchange rate changes on cash

 

 

533

 

 

572

 

 

 



 



 

Net increase (decrease) in cash and cash equivalents

 

 

1,241

 

 

(2,233

)

Cash and cash equivalents at beginning of period

 

 

13,857

 

 

20,549

 

 

 



 



 

Cash and cash equivalents at end of period

 

$

15,098

 

$

18,316

 

 

 



 



 


The accompanying notes are an integral part of these condensed consolidated financial statements.

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements (Dollars
(Dollars in Thousands)
(Unaudited)

Note 1 - Condensed Financial Information

The condensed consolidated financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain prior year amounts have been reclassified to conform to the 20022003 presentation. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods. The results for the three and six months ended June 30, 20022003 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Annual Report filed on Form 10-K for the year ended December 31, 2001. 2002.

As part of the Company'sCompany’s chemical management services, certain third party products are transferred to customerscustomers. Where the Company acts as a principal, revenues are recognized on a gross reporting basis at no gross profit and accordingly, these transactions are notthe selling price negotiated with customers. Where the Company acts as an agent, such revenue is recorded inusing net sales or expense.reporting as service revenues, at the amount of the administrative fee earned by the Company for ordering the goods. Third party products transferred under these arrangementswhere the Company acts as an agent and revenue is recorded net totaled $14,187$13,440 and $10,099$14,187 for the six months ended June 30, 2003 and 2002, and 2001, respectively.

Note 2 - Recently Issued Accounting Standards

In June 2001,January 2003, the Financial Accounting Standards Board ("FASB"(“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 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. FIN 46 is effective for interim periods beginning after June 15, 2003 to VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has preliminarily determined that its real estate joint venture is a VIE and that the Company is not the primary beneficiary.

In January 2001, the Company contributed its Conshohocken, Pennsylvania property and buildings (the “Site”) to this 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. 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. As of June 30, 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 $27,045. 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. At June 30, 2003, the Venture had property with a net book value of $26,412, total assets of $29,024, and total liabilities of $27,362.

In April 2003, the FASB issued SFASStatement of Financial Accounting Standards (“SFAS”) No. 143, "Accounting for Asset Retirement Obligations." SFAS No 143 addresses149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This standard amends and clarifies financial accounting and reporting for obligations associated with the retirementderivative instruments and hedging activities, primarily as a result of tangible long-lived assets and the associated retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of this new standard. In July 2001,decisions made by the FASB issued SFAS No. 144, "Impairment or Disposal of Long-Lived Assets." The provisions of this statement provide a single accounting model for impairment of long-lived assets. The statement is effective for fiscal years beginning after December 15, 2001. The Company adopted this standard on January 1, 2002. Management has assessed the impact of the new standard and determined there to be no material impactDerivatives Implementation Group subsequent to the financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13 and Technical Corrections." For most companies, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. The statement also amended SFAS No. 13 for certain sales-leaseback and sublease accounting. The Company is required to adopt the provisionsoriginal issuance of SFAS No. 145133 and in connection with other FASB projects. This standard is generally effective January 1,prospectively for contracts and hedging relationships entered into or modified after June 30, 2003. The Company is currently evaluating the impact of this standard, but does not expect the adoption of this statement. to have a material impact on the financial statements. The Company is not currently a party to any derivative financial instruments.

In July 2002,May 2003, the FASB issued SFAS No. 146, "Accounting150 “Accounting for Costs AssociatedCertain Financial Instruments with Exit or Disposal Activities",Characteristics of both Liabilities and nullifies EITF Issue No. 94-3.Equity.” SFAS No. 146150 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 that a liabilitydisclosure regarding the terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 is generally effective for a cost associated with an exitall financial instruments entered into or disposal activity be recognized when the liabilitymodified after May 31, 2003, and is incurred, whereas EITF No 94-3 had recognized the liabilityotherwise effective at the commitment date to an exit plan.beginning of the first interim period beginning after

June 15, 2003. The Company is requiredin the process of evaluating this standard, but does not expect the adoption to adopthave a material impact on the financial statements.

Note 3 – Stock-Based Compensation

In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This standard amends the transition and disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 148, the Company continues 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 granted had an exercise price equal 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. 146 effective for exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the impact of adoption of this statement. 123.

 

 

Three Months ended
June 30,

 

Six Months ended
June 30,

 

 

 


 


 

 

 

2003

  

2002

  

2003

  

2002

 

 

 


 


 


 


 

Net Income – as reported

 

$

3,475

  

$

3,236

  

$

6,582

  

$

5,594

 

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

 

 

(23

)

 

174

  

 

152

 

 

275

 

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

 

 

(115

)

 

(302

)

 

(334

)

 

(505

)

 

 



 



 



 



 

Pro forma net income

 

$

3,337

 

$

3,108

 

$

6,400

 

$

5,364

 

 

 



 



 



 



 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic – as reported

 

$

0.37

 

$

0.35

 

$

0.71

 

$

0.61

 

Basic – pro forma

 

$

0.36

 

$

0.34

 

$

0.69

 

$

0.58

 

Diluted – as reported

 

$

0.36

 

$

0.35

 

$

0.69

 

$

0.60

 

Diluted – pro forma

 

$

0.35

 

$

0.33

 

$

0.67

 

$

0.58

 


Note 3 --Earnings4 – Earnings Per Share

The following table summarizes earnings per share (EPS) calculations for the three months ended June 30, 2002 and 2001: 2002 2001 ---- ---- Numerator for basic EPS and diluted EPS-- net income ............................................ $ 3,236 $ 4,114 ------- ------- Denominator for basic EPS--weighted average shares ........................................ 9,250 9,065 Effect of dilutive securities, primarily employee stock options ................................ 59 60 ------- ------- Denominator for diluted EPS--weighted average shares and assumed conversions. .......................................... 9,309 9,125 ======= ======= Basic EPS ............................................... $ .35 $ .45 Diluted EPS ............................................. $ .35 $ .45 The following table summarizes earnings per share (EPS) calculations for the six months ended June 30, 2002 and 2001: 2002 2001 ---- ---- Numerator for basic EPS and diluted EPS-- net income ......................................... $ 5,594 $ 8,127 ------- ------- Denominator for basic EPS--weighted average shares ..................................... 9,202 8,984 Effect of dilutive securities, primarily employee stock options ............................. 60 61 ------- ------- Denominator for diluted EPS--weighted average shares and assumed conversions......................................... 9,262 9,045 ======= ======= Basic EPS ............................................. $ .61 $ .90 Diluted EPS ........................................... $ .60 $ .90 calculations:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2003

 

2002

  

2003

 

2002

 

 

 


 


 


 


 

Numerator for basic EPS and diluted EPS– net income

 

$

3,475

 

$

3,236

  

$

6,582

 

$

5,594

 

 

 



 



 



 



 

Denominator for basic EPS–weighted average shares

 

 

9,324

 

 

9,250

 

 

9,297

 

 

9,202

 

Effect of dilutive securities, primarily employee stock options

 

 

348

 

 

59

 

 

296

 

 

60

 

 

 



 



 



 



 

Denominator for diluted EPS–weighted average shares and assumed conversions

 

 

9,672

 

 

9,309

 

 

9,593

 

 

9,262

 

 

 



 



 



 



 

Basic EPS

 

$

.37

 

$

.35

 

$

.71

 

$

.61

 

Diluted EPS

 

$

.36

 

$

.35

 

$

.69

 

$

.60

 


Note 4 -5 – Business Segments

The Company'sCompany’s reportable segments are as follows: (1) Metalworking process chemicals - products used as lubricants for various heavy industrial and manufacturing applications. (2) Coatings - temporary and permanent coatings for metal and concrete products and chemical milling maskants. (3) Other chemical products - other various chemical products.

(1)Metalworking process chemicals - products used as lubricants 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. costs.

The table below presents information about the reported segments for the six months endingended June 30: Metalworking Other Process Chemical Chemicals Coatings Products Total ---------------------------------------------------- 2002 Net sales $117,902 $ 9,383 $ 2,099 $129,384 Operating income 25,194 2,397 582 28,173 2001 Net sales $118,611 $ 8,760 $ 1,917 $129,288 Operating income 26,474 2,427 752 29,653 30, :

 

 

Metalworking
Process
Chemicals

 

Coatings

  

Other
Chemical
Products

 

Total

 

 

 


 


 


 


 

2003

 

 

 

 

 

 

  

 

 

 

 

 

 

Net sales

 

$

142,974

 

$

11,565

 

$

2,251

 

$

156,790

 

Operating income

 

 

25,751

 

 

3,016

 

 

438

 

 

29,205

 

2002

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

117,902

 

$

9,383

 

$

2,099

 

$

129,384

 

Operating income

 

 

25,194

 

 

2,397

 

 

582

 

 

28,173

 


Operating income comprises revenue less related costs and expenses. Non-operating items primarily consist of general corporate expenses identified as not being a cost of operation, interest expense, interest income, and license fees from non-consolidated associates.

A reconciliation of total segment operating income to total consolidated income before taxes, for the six months ended June 30, is as follows: 2002 2001 ---- ---- Total operating income for reportable segments $ 28,173 $ 29,653 Non-operating expenses (17,832) (15,865) Amortization (325) (730) Interest expense (826) (991) Interest income 548 477 Other income, net 252 1,159 -------- -------- Consolidated income before taxes $ 9,990 $ 13,703 ======== ========

 

 

2003

 

2002

 

 

 


 


 

Total operating income for reportable segments

 

$

29,205

 

$

28,173

 

Non-operating expenses

 

 

(17,362

)

 

(17,832

)

Amortization

 

 

(438

)

 

(325

)

Interest expense

 

 

(737

)

 

(826

)

Interest income

 

 

363

 

 

548

 

Other income, net

 

 

535

 

 

252

 

 

 



 



 

Consolidated income before taxes

 

$

11,566

 

$

9,990

 

 

 



 



 

Note 5 -6 – Comprehensive Income

The following table summarizes comprehensive income for the three months ended June 30: 2002 2001 ------- -------- Net income $ 3,236 $ 4,114 Foreign currency translation adjustments 2,746 (2,092) ------- ------- Comprehensive income $ 5,982 $ 2,022 ======= ======= The following table summarizes comprehensive income for the six months ended June 30: 2002 2001 ------- ------- Net income $ 5,594 $ 8,127 Foreign currency translation adjustments 443 (7,223) ------- ------- Comprehensive income $ 6,037 $ 904 ======= ======= income:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2003

 

2002

 

2003

 

2002

 

 

 


 


 


 


 

Net income

 

$

3,475

 

$

3,236

 

$

6,582

 

$

5,594

 

Foreign currency translation adjustments

 

 

4,073

 

 

2,746

 

 

6,668

 

 

443

 

 

 



 



 



 



 

Comprehensive income

 

$

7,548

 

$

5,982

 

$

13,250

 

$

6,037

 

 

 



 



 



 



 

Note 6 -7 – Restructuring and Nonrecurring Expenses Related Activities

In the third and fourth quarters of 2001, Quaker'sQuaker’s management approved restructuring plans to realign its organization and reduce operating costs. Quaker'sQuaker’s restructuring plans includeincluded the closure and sale of its manufacturing facilities in the U.K. and France. In addition, Quaker consolidated certain functions within its global business units and reduced administrative functions, as well as expensed costs related to abandoned acquisitions. Included in the third and fourth quarter restructuring charges are provisions for the severance of 16 and 37 employees, respectively. 53 employees.

Restructuring and related charges of $2,958 and $2,896$5,854 were expensed during the third and fourth quarters of 2001, respectively.recognized in 2001. The third quarter charge comprised $520$2,644 related to employee separations, $2,038$2,613 related to facility rationalization charges and $400 related to abandoned acquisitions. The fourth quarter charge comprised $2,124 related to employee separations, $575 related to facility rationalization charges and $197$597 related to abandoned acquisitions. Employee separation benefits under each plan varied depending on local regulations within certain foreign countries and included severance and other benefits. As of June 30, 2002,2003, Quaker had completed 4850 of the planned 53 employee separations under the 2001 plans. During the fourth quarter of 2002, the Company completed the sale of its U.K. manufacturing facility. Quaker closed this facility at the end of 2001. Quaker expects to substantially complete the initiatives contemplated under the restructuring plans, including the dispositionsale of its manufacturing facility in France, by the manufacturing facilities, by early to midend of 2003.

Accrued restructuring balances, as of June 30, 2002included in other current liabilities, are as follows: - -------------------------------------------------------------------------------- Balance Currency Balance December translation June 31, 2001 Payments and other 30,2002 -------- -------- --------- ------- - -------------------------------------------------------------------------------- Employee separations $ 2,534 $ (752) $ 55 $ 1,837 - -------------------------------------------------------------------------------- Facility rationalization 1,439 (415) 77 1,101 ------- ------- ----- ------- - -------------------------------------------------------------------------------- Total $ 3,973 $(1,167) $ 132 $ 2,938 ======= ======== ===== ======= - --------------------------------------------------------------------------------

 

 

Balance
December 31,
2002

  

Payments

  

Currency
translation
and other

  

Balance
June 30,
2003

 

 

 


 


 


 


 

Employee separations

 

$

1,274

  

$

(735

)  

$

14

  

$

553

 

Facility rationalization

 

 

869

 

 

(131

)

 

11

 

 

749

 

 

 



 



 



 



 

Total

 

$

2,143

 

$

(866

)

$

25

 

$

1,302

 

 

 



 



 



 



 


Note 7 -8 – Business Acquisitions On March 1, 2002,Acquisition

In May 2003, the Company acquired certain assetsa range of cleaners, wet temper fluids and liabilities of United Lubricants Corporation ("ULC"), a North American manufacturer and distributor of specialty lubricantother products and chemical management services,from KS Chemie, located in Dusseldorf, Germany for approximately $13,676. The$1,100. This acquisition of ULC strategically strengthens the Company'sCompany’s global leadership supply position as a process fluids supplier to the steel industry. The following table shows the fair valueCompany recorded $345 of intangible assets and liabilitiescomprised of product line technology to be amortized over a range of five to ten years. The Company also recorded for the acquisition, subject to post-closing adjustments: Receivables $ 4,513 Inventories 868 Property, plant and equipment 4,166 Goodwill 4,930 Intangible assets 2,300 Other assets 74 ------- 16,851 ------- Accounts payable 2,148 Accrued expenses and other current liabilities 261 Other noncurrent liabilities 766 ------- 3,175 ------- Cash paid for acquisition $13,676 ======= The $4,930$715 of goodwill, which was assigned to the Metalworking process chemicals segment, and the entire amount is expected to be deductible for income tax purposes.segment. The $2,300 of intangible assets comprised $1,400 of branded customer lists, $700 of formulations, and $200 of trademarks. These intangibles are being amortized over a five-year period. The results of operations of ULC are included in the consolidated statement of income beginning March 1, 2002. Pro-formapro forma results of operations have not been provided because the effects arewere not material. On April 22, 2002, the Company acquired one hundred percent of the outstanding stock of Epmar Corporation ("Epmar"), a North American manufacturer of polymeric coatings, sealants, adhesives, and various other compounds, for approximately $7,500 and the assumption of $400 of debt. The acquisition of Epmar provides technological capability that is directly related to the Company's coatings business. The following table shows the fair value of assets and liabilities recorded for the acquisition, subject to post-closing adjustments: Receivables $ 848 Inventories 422 Property, plant and equipment 967 Goodwill 3,218 Intangible assets 2,920 Other assets 39 ------- 8,414 ------- Accounts payable 406 Accrued expenses and other current liabilities 108 Other noncurrent liabilities 400 ------- 914 ------- Cash paid for acquisition $ 7,500 ======= The $3,218 of goodwill was assigned to the Coatings segment, and the entire amount is expected to be deductible for income tax purposes. The $2,920 of intangible assets comprised: $1,600 of customer lists to be amortized over twenty years, $720 of product line technology to be amortized over ten years, and $600 of trademarks which have indefinite lives and will not be amortized. The results of operations of Epmar are included in the consolidated statement of income beginning April 22, 2002. Pro-forma results of operations have not been provided because the effects are not material.

Note 8 -9 – 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 impairment assessment of its goodwill and did not incur an impairment charge related to the adoption of SFAS No. 142. The following is a reconciliation of previously reported financial information to pro-forma amounts exclusive of goodwill amortization for the three months ended June 30, 2001: Net income $4,114 Goodwill amortization expense, net of tax 176 ------ Pro-forma net income $4,290 ====== Earnings per share, basic and diluted $0.45 Goodwill amortization expense, net of tax 0.02 ----- Pro-forma earnings per share, basic and diluted $0.47 ===== The following is a reconciliation of previously reported financial information to pro-forma amounts exclusive of goodwill amortization for the six months ended June 30, 2001: Net income $8,127 Goodwill amortization expense, net of tax 357 ------ Pro-forma net income $8,484 ====== Earnings per share, basic and diluted $0.90 Goodwill amortization expense, net of tax 0.04 ----- Pro-forma earnings per share, basic and diluted $0.94 =====

The changes in carrying amount of goodwill for the six months ended June 30, 20022003 are as follows: Metalworking process chemicals Coatings Total ---------------------------------------- Balance as of January 1, 2002 $11,081 $3,879 $14,960 Goodwill additions 5,025 3,218 8,243 Currency translation adjustments (1,106) -- (1,106) ------- ------ ------- Balance as of June 30, 2002 $15,000 $7,097 $22,097 ======= ====== ======= Goodwill additions are subject to post-closing adjustments.

 

 

Metalworking
process chemicals

  

Coatings

  

Total

 

 

 


 


 


 

Balance as of January 1, 2003

 

$

14,658

  

$

7,269

  

$

21,927

 

Goodwill additions

 

 

779

  

 

  

 

779

 

Currency translation adjustments

 

 

1,449

  

 

  

 

1,449

 

 

 



 



 



 

Balance as of June 30, 2003

 

$

16,886

  

$

7,269

  

$

24,155

 

 

 



 



 



 


Gross carrying amounts and accumulated amortization for intangiblesintangible assets as of June 30, 2002,2003, are as follows: Gross carrying Accumulated Amount Amortization ----------------------------- Amortized intangible assets Customer lists and rights to sell $3,850 $ 179 Trademarks and patents 2,300 1,513 Formulations and product technology 1,420 53 Other 1,491 979 ------ ----- Total $9,061 $2,724 ====== ======

 

 

Gross carrying
Amount

  

Accumulated
Amortization

 

 

 


 


 

Amortized intangible assets

 

 

 

  

 

 

 

Customer lists and rights to sell

 

$

3,850

  

$

(602

)

Trademarks and patents

 

 

2,300

  

 

(1,553

)

Formulations and product technology

 

 

1,765

  

 

(278

)

Other

 

 

1,513

  

 

(1,224

)

 

 



 



 

Total

 

$

9,428

  

$

(3,657

)

 

 



 



 


Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows: For the year ended December 31, 2002 $692 For the year ended December 31,

For the year ended December 31, 2003

 

$

882

 

For the year ended December 31, 2004

 

$

793

 

For the year ended December 31, 2005

 

$

760

 

For the year ended December 31, 2006

 

$

741

 

For the year ended December 31, 2007

 

$

337

 

For the year ended December 31, 2008

 

$

254

 

Note 10 – Debt

In June 2003, $825 For the year ended December 31, 2004 $688 For the year ended December 31, 2005 $686 For the year ended December 31, 2006 $686 For the year ended December 31, 2007 $320 Note 9 - Debt In April 2002, the Company entered into a $20,000$10,000 committed credit facility with a bank, which expires in April 2003.June 2004. At the Company'sCompany’s option, the interest rate for borrowings under the agreement may be based on the lender's cost of funds plus a margin, LIBOReurodollar rate plus a margin or on the prime rate.rate plus a margin. The provisions of the agreement require that the Company maintain certain financial ratios and covenants, all of which the Company was in compliance with as of June 30, 2002. A total of $4,000 in borrowings was outstanding under2003. In July 2003, an amendment increased this committed credit facility as ofto $15,000.

In June 30, 2002. In April 2002,2003, the Company entered into a $10,000 uncommitted demand credit facility, with a different bank. At the same lender under similar terms. NoCompany’s option, the interest rate for borrowings under this facility werethe agreement may be based on the prime rate or the LIBOR rate plus a margin.

As a result of these agreements, the Company increased its credit facilities from $15,000 committed and $10,000 uncommitted at the end of March 2003 to its current position of $30,000 committed and $20,000 uncommitted. The Company had approximately $17,100 and $22,048 outstanding on its credit facilities as of June 30, 2002. These facilities replace2003 and 2002, respectively.

Note 11 – Commitments and Contingencies

The Company is involved in environmental clean-up activities and litigation in connection with an existing uncommitted facilityplant location and former waste disposal sites. The Company identified certain soil and groundwater contamination at AC Products, Inc. (“ACP”), a wholly owned subsidiary. 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 ranges from approximately $800 to $1,500, 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.

An inactive subsidiary of $18,000, whichthe Company that was fully drawnacquired in 1978 sold certain products containing asbestos, primarily on an installed basis, and is among the defendants in numerous lawsuits alleging injury due to exposure to asbestos. The subsidiary discontinued operations in 1991 and has no remaining assets other than its existing insurance policies. To date, the overwhelming majority of these claims have been disposed of without payment and there have been no adverse judgments against the subsidiary. Based on an initial 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 $15,000 (excluding the costs of defense). Although the Company has also been named as a defendant in certain of June 2002. This facilitythese 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 insurers who agreed to pay all defense costs and be responsible for all damages assessed against the subsidiary arising out of existing and future asbestos claims up to the aggregate limits of the policies. A significant portion of this primary insurance coverage was terminatedprovided by an insurer that is now insolvent, and the other primary insurers have recently 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. The subsidiary has

additional coverage under its excess policies. The Company believes, however, that if the coverage issues under the primary policies are resolved adversely to the subsidiary, the subsidiary’s insurance coverage will likely be exhausted within the next three to five years. As a result, liabilities in July 2002, with all remaining balances outstanding scheduledrespect of claims not yet asserted may exceed coverage available to the subsidiary.

If the subsidiary’s insurance coverage were to be repaid through borrowings underexhausted, claimants of the new facilities discussed above. subsidiary may actively pursue claims against the Company because of the parent-subsidiary relationship. Although asbestos litigation is particularly difficult to predict, especially with respect to claims that are currently not being actively pursued against the Company, the Company does not believe that such claims would have merit or that the Company would be held to have liability for any unsatisfied obligations of the subsidiary as a result of such claims. After evaluating the nature of the claims filed against the subsidiary and the small number of such claims that have resulted in any payment, the potential availability of additional insurance coverage at the subsidiary level, the additional availability of the Company’s own insurance coverage and the Company’s strong defenses to claims that it should be held responsible for the subsidiary’s obligations because of the parent-subsidiary relationship, the Company believes that the inactive subsidiary’s liabilities will not have a material impact on the Company’s financial condition, cash flows or results of operations.

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

Note 10 -12 – Subsequent Event Effective

In July 1, 2002,2003, the Company acquired a controlling interestall of Quaker Chemical South Africa (Pty.) Ltd (South Africa)the outstanding stock of Eural S.r.l., a previously fifty-percent owned joint venture. Asprivately held company located in Tradate, Italy for $5,700. Eural manufactures a result, South Africa, previously reported usingvariety of specialty metalworking fluids primarily for the equity method, will become a fully consolidated subsidiary commencing in July 2002.Italian market. The effectCompany is currently assessing the allocation of this change isthe purchase price. Pro-forma results of operations have not expected to be material tobeen presented because the financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations effects were not material.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

Quaker’s cash and cash equivalents increased to $15.1 million at June 30, 2003 from $13.9 million at December 31, 2002. The increase resulted primarily from $2.2 million cash used in operating activities, $2.0 million cash used in investing activities, offset by $4.9 million cash provided by financing activities.

Net cash flows provided byused in operating activities were $4.2$2.2 million in the first six months of 20022003 compared to $7.9cash flows provided by operating activities of $4.2 million in the same period of 2001.2002. The decrease was primarily due to lowerincreased cash out flows from working capital accounts offset by higher net income, depreciation and amortization expense. The change in 2002 and increases in the changes incash flows from accounts receivable inventories, andwas primarily due to $6.7 million of sales attributable to the Company’s recently awarded chemical management services (CMS) contracts, which were effective May 1, 2003. Increased business activity as well as higher raw material costs accounted for the increased inventory levels. Increased cash flows from prepaid expenses and other current assets offset by changesversus the prior year is primarily due to a $2.6 million refund related to a settlement from a tax audit at one of our foreign entities. The change in cash flows from accounts payable and accrued liabilities. liabilities is due to higher annual incentive compensation payments as well as timing related to high levels of accounts payable at December 31, 2002.

Net cash flows used in investing activities were $26.3$2.0 million in the first six months of 20022003 compared to $3.5$26.3 million in the same period of 2001.2002. The increasedecrease was primarily related to payments of $21.6 million in 2002 related to the acquisitions of United Lubricants Corporation ("ULC") and Epmar Corporation ("Epmar"), compared to a payment of $1.4 million related to an acquisition in 2001. Expenditures for property, plant, and equipment totaled $5.1 millioncash used in the first six months of 2002 comparedfor the acquisitions of United Lubricants Corporation (“ULC”) and Epmar Corporation (“Epmar”) versus $1.1 million used in 2003 for the acquisition of certain product lines from KS Chemie. Reference is made to $3.1Note 8 of the notes to condensed consolidated financial statements which appears in Item 1 of this Quarterly Report on Form 10-Q. In addition, the Company also received $4.2 million of priority cash distributions from its real estate joint venture in the same periodfirst six months of 2001. The increase in spending was primarily the result of the project to implement a global transaction system and the move into the new corporate headquarters. Capital expenditures for 2002 are expected to be approximately $13.0 million, which is down from the previous estimate of $17.0 million. 2003.

Net cash flows provided by financing activities were $19.4$4.9 million for the first six months of 20022003 compared with $0.1to $19.4 million for the same period of the prior year. The net change was primarily due to approximately $22.0 million of short-term borrowings incurred in the first six months of 2002 primarily used to finance the Company’s acquisitions of ULC and Epmar acquisitions, compared with $2.5 millionversus $7.7 of short-term borrowings in 2001. 2003 used to fund working capital needs.

In April 2002,June 2003, the Company entered into a $20.0$10.0 million committed credit facility with a bank, which expires in April 2003.June 2004. At the Company'sCompany’s option, the interest rate for borrowings under the agreement may be based on the lender's cost of funds plus a margin, LIBOReurodollar rate plus a margin or on the prime rate.rate plus a margin. The provisions of the agreement require that the Company maintain certain financial ratios and covenants, all of which the Company was in compliance with as of June 30, 2002. A total of $4.0 million in borrowings was outstanding under2003. In July 2003, an amendment increased this committed credit facility as ofto $15.0 million.

In June 30, 2002. In April 2002,2003, the Company entered into a $10.0 million uncommitted demand credit facility, with a different bank. At the same lender under similar terms. NoCompany’s option, the interest rate for borrowings under this facility werethe agreement may be based on the prime rate or the LIBOR rate plus a margin.

As a result of these agreements, the Company has increased its credit facilities from $15.0 million committed and $10.0 million uncommitted at the end of March 2003 to its current position of $30.0 million committed and $20.0 million uncommitted. The Company had approximately $17.1 and $22.0 million outstanding on its credit facilities as of June 30, 2002. These facilities replace an existing uncommitted facility in the amount of $18.0 million, which was fully drawn as of June 2002. This facility was terminated in July2003 and 2002, with all remaining balances outstanding scheduled to be repaid through borrowings under the new facilities discussed above. respectively.

The Company believes that inits balance sheet remains strong with a debt to total capital ratio of 27% at June 30, 2003 compared to 25% at the end of 2002 and 34% at June 30, 2002. The Company further believes it is capable of supporting its operating requirements paymentsincluding pension plan contributions, payment of dividends to shareholders, possible acquisition and business opportunities, and possible resolution of contingencies, through internally generated funds supplemented with debt as needed.

Operations

Comparison of First Six Months 20022003 with First Six Months 2001 2002

Consolidated net sales for the first six months of 2002 werethe year increased to a record $156.8 million, up 21% from $129.4 million essentially flat compared tofor the first six months of 2001. The sales comparison was2002. Foreign exchange rate translation and the timing of the Company’s 2002 acquisitions favorably impacted net sales by the inclusion of revenues from ULC$6.3 million and Epmar, partially offset by unfavorable foreign currency translations. At constant exchange rates and excluding ULC and Epmar revenues,$8.1 million, respectively. Year-to-date 2003 consolidated net sales would have been down approximately three percent compared to 2001. Cost of sales decreasedalso include $6.7 million from the Company’s recently awarded Chemical Management Services (CMS) contracts, which were effective May 1, 2003.

Gross margin as a percentage of sales declined from 59.1 percent41.2% for the first six months of 2002 to 36.6% for the first six months of 2003. As previously disclosed, the Company’s new CMS contracts result in 2001a different relationship between margins and revenue than has applied in the past for the Company’s traditional product business. At the majority of current CMS sites, the Company effectively acts as an agent and records revenue and costs from these sales on a net sales or “pass-through” basis. The new CMS contracts have a different structure that results in the Company recognizing in reported revenue the gross revenue received from the CMS site customer, and in cost of goods sold the third party product purchases, which substantially offset each other. The negative impact on gross margin for the first half of 2003 is approximately 2 percentage points. The company expects the negative impact to 58.8 percentgross margin in 2002.the second half of 2003, related to the new CMS contracts, to be approximately 4 to 5 percentage points. The improvementremaining decline in gross margin as a percentage of sales was primarily a result of favorabledue to increased raw material costs. costs, as well as product and regional sales mix. On a full year basis, the Company continues to expect raw material costs to be higher in 2003 versus 2002 in part due to the continued high oil prices. However, the Company also expects raw material prices to be somewhat more favorable in the second half of 2003 versus the first half of 2003.

Selling, general and administrative (SG&A) expenses of $43.3 million infor the first six months of 2002 were approximately nine percent higher than the $39.82003 increased $2.6 million reported in the first months of 2001. The increase was primarily the result of SG&A expenses of ULC and Epmar, and higher pension, insurance, and other administrative costs. Other income variance primarily reflects foreign exchange losses infrom the first six months of 2002 compared with2002. Increases due to foreign exchange gainsrates and the timing of the Company’s 2002 acquisitions were partially offset by reduced incentive compensation expense and cost containment efforts of the Company. Consistent with previous guidance, the Company expects increased SG&A costs for the full year 2003 partially due to increased costs associated with higher pension expense, insurance premiums and the Company’s ERP implementation.

The increase in other income primarily reflects a $0.3 million positive income impact related to $4.2 million ($1.8 million received in the first six monthsquarter of 2001, as well as lower license fee revenue in 2002 compared with 2001. Net interest expense was favorable2003 and $2.4 million received in the first six monthssecond quarter of 2002 compared to2003) of priority cash distributions received from the Company’s real estate joint venture during 2003. Interest expense is below the prior year despite increased borrowingsprimarily due to fund the ULCdecreased average debt levels and Epmar acquisitions,lower borrowing rates. The decrease in interest income is due to lower borrowing rates andinterest income from the impactCompany’s international affiliates. In the first half of principal payments2002, the Company’s Brazilian entity had more cash, which was earning interest at a rate of nearly 20%. The Company made ona mid-year 2002 decision to repatriate this cash to the Company's long-term debt. EquityU.S. due to the potential for the Real to weaken, which has resulted in decreased interest income in the first six monthshalf of 20022003.

The year-to-date 2003 effective tax rate is 32% compared to 32% in the prior year and down from 33% in the first quarter of 2003. The decrease in the effective tax rate compared to the first six monthsquarter of 2001 reflects lower income year over year from the Company's joint venture in Mexico, as well as the start up of the Company's real estate joint venture in Conshohocken, PA. Minority interest was lower in the first six months of 2002 compared with the same period last year,2003 is primarily due to lower net income from the Company's subsidiary in Brazil.Company’s favorable settlement of outstanding tax audits and appeal issues related to several foreign subsidiaries. The Company currently expects the effective tax rate will be 32% for 2002 is currently 32%, compared to 31% in the priorfull 2003 year. TheHowever, the effective tax rate is dependent on many internal and external factors, and is assessed by the Company on a regular basis.

The Company has been assessed approximately $2 millionincrease in equity income for the first six months of additional taxes based on an audit2003 is due to improved results from the Company’s real estate joint venture offset in part by the consolidation of certainthe Company’s South African joint venture effective July 1, 2002 and a weaker performance from the Company’s Venezuelan affiliate. The increase in minority interest was primarily due to the consolidation of its subsidiaries for prior years. The Company has initiated an appeal process related to this assessment and currently believes its reserves are adequate. the Company’s South African joint venture.

Comparison of Second Quarter 20022003 with Second Quarter 2001 2002

Consolidated net sales for the second quarter of 20022003 were $69.5 million, a seven percentrecord $83.5, a 20% increase compared to the second quarter of 2001. The sales comparison was2002. Foreign exchange rate translation and the timing of the Company’s 2002 acquisitions favorably impacted by the inclusion of revenues from ULC and Epmar. The impact of foreign currency translations was not material to the quarterly comparison, as the strengthening Euro was largely offset by the weakening Brazilian Real and Argentine Peso. At constant exchange rates and excluding ULC and Epmar revenues, consolidatedsecond quarter 2003 net sales would have been downby $4.2 million and $2.5 million respectively. As noted above, second quarter 2003 sales include $6.7 million from the Company’s recently awarded CMS contracts.

Gross margin as a percentage of sales declined from 41.7% for the second quarter of 2002 to 34.7% for the second quarter of 2003. The Company’s new CMS contracts negatively impacted gross margin for the second quarter 2003 by approximately one percent compared to 2001. Cost of sales3 percentage points. The remaining decline in gross margin as a percentage of sales was essentially flat. due to increased raw material costs, as well as product and regional sales mix.

Selling, general and administrative (SG&A) expenses for the quarter were essentially flat with the second quarter of 2002. Increases due to foreign exchange rates and the timing of the Company’s 2002 acquisitions were offset by reduced incentive compensation expense and cost containment efforts of the Company.

The increase in other income primarily reflects a $0.3 million positive income impact related to a $2.4 million priority cash distribution received from the Company’s real estate joint venture in the second quarter of 2003. Interest expense is slightly below the prior year primarily due to decreased average debt levels and lower borrowing rates. The decrease in interest income is due to lower interest income from the Company’s international affiliates. In the second quarter of 2002, the Company’s Brazilian entity had more cash, which was

earning interest at a rate of nearly 20%. The Company made a mid-year 2002 decision to repatriate this cash to the U.S. due to the potential for the Real to weaken, which has resulted in decreased interest income in the second quarter of 2003.

The effective tax rate for the second quarter 2003 is 31% down from 32% in the second quarter of 2002 were up $3.2 million fromand 33% in the first quarter of 2003. The decrease in the effective tax rate is primarily due to the Company’s favorable settlement of outstanding tax audits and appeal issues related to several foreign subsidiaries.

The decrease in equity income for the second quarter of 2001. SG&A expenses of ULC and Epmar accounted for approximately one half of the quarterly increase. Higher pension, insurance, and other administrative costs were also factors. Other income variance primarily reflects foreign exchange losses in the second quarter of 2002 compared with foreign exchange gains in the second quarter of 2001. Net interest expense was favorable in the second quarter of 2002 compared to the prior year, despite increased borrowings to fund the ULC and Epmar acquisitions, due to lower borrowing rates and the impact of principal payments made on the Company's long-term debt. Equity income in the second quarter of 2002 was essentially flat compared to equity income in the second quarter 2001. Minority interest was lower in the second quarter of 2002 compared with the same period last year,2003 is primarily due to lower net incomethe consolidation of our South African joint venture effective July 1, 2002 and a weaker performance from our Venezuelan affiliate, offset in part by improved results from the Company's subsidiaryCompany’s real estate joint venture. The increase in Brazil. The effective tax rate for 2002 is currently 32%, comparedminority interest was primarily due to 31% in the prior year. consolidation of the Company’s South African joint venture.

Other Significant Items On March 1, 2002,

In May 2003, the Company acquired certain assetsa range of cleaners, wet temper fluids and liabilities of United Lubricants Corporationother products from KS Chemie, located in Dusseldorf, Germany for approximately $13.7$1.1 million. This acquisition strategically strengthens the Company’s global leadership position as a process fluids supplier to the steel industry. The Company recorded $0.3 million subjectof intangible assets comprised of product line technology to post-closing adjustments.be amortized over a range of five to ten years. The acquisition resulted in the recognition of approximately $4.9Company also recorded $0.7 million of goodwill, and $2.3 million of intangible assets. Pro-forma results of operations have not been presented becausewhich was assigned to the effects were not material. On April 22, 2002,Metalworking process chemicals segment.

In July 2003, the Company acquired all of the outstanding stock of Epmar CorporationEural S.r.l., a privately held company located in Tradate, Italy for $7.5 million and$5.7 million. Eural manufactures a variety of specialty metalworking fluids primarily for the assumption of $0.4 million of debt.Italian market. The acquisition resulted inCompany is currently assessing the recognition of approximately $3.2 million of goodwill and $2.9 million of intangible assets. Pro-forma results of operations have not been presented because the effects were not material. Euro Conversion On January 1, 1999, 11allocation of the 15 member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency - the euro. The euro trades on currency exchanges and may be used in business transactions. In January 2002, new euro-denominated bills and coins were issued, and legacy currencies were withdrawn from circulation. The Company's operating subsidiaries affected by the euro conversion executed plans to address the systems and business issues raised by the euro currency. The euro conversion did not have a material adverse impact on the Company's financial condition or results of operations. Forward-Looking and purchase price.

Factors that May Affect our Future Results

(Cautionary Statements Except for historical information and discussions, statements contained in this Form 10-Q may constitute forward-looking statements within the meaning ofUnder the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties1995)

Certain information included in this Report and other factorsmaterials filed or to be filed by Quaker with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us) contains 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.

The risks and uncertainties that could cause actualimpact the Company’s future operations and results to differ materially from those projected in such statements. Such risks and uncertainties include, but are not limited to, further downturns in our customers'customers’ businesses, significant increases in raw material costs, worldwide economic and political conditions, foreign currency fluctuations, and future security alerts and terrorist attacks such as those that occurred on September 11, 2001. Furthermore, the Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, appliance, orand durable goods manufacturers. Item 3. QuantitativeThese risks, uncertainties, and Qualitative Disclosures About Market Risk. 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 could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

Item 3.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'sRisk. Quaker’s exposure to market rate risk for changes in interest rates relates primarily to its short and long-term debt. Most of Quaker'sQuaker’s long-term debt has a fixed interest rate, while its short-term debt is negotiated at market rates which can be either fixed or variable. Incorporated by reference is the information in "Liquidityunder the caption “Liquidity and Capital Resources"Resources” in Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and Note 8 of the Notes to Consolidated Financial Statements beginning on pages 1011 and 31,33, respectively, of the Registrant's 2001Registrant’s Annual Report filed on Form 10-K. Accordingly, if10-K for the year ended December 31, 2002 (the “2002 Form 10-K”). If interest rates rise significantly, the cost of short-term debt to Quaker will increase. This can have a material adverse effect on Quaker depending on the extent of Quaker'sQuaker’s short-term borrowings. As of June 30, 2002,2003, Quaker had $22.0$17.1 million of short-term borrowings. borrowings compared to $9.3 million as of December 31, 2002.

Foreign Exchange Risk.Risk. A significant portion of Quaker'sQuaker’s revenues and earnings is generated by its foreign subsidiaries. These foreign subsidiaries also hold a significant portion of Quaker's assets and liabilities.operations. Incorporated by reference is the information concerning Quaker'sQuaker’s non-U.S. activities appearing in Note 11 of the Notes to Consolidated Financial Statements beginning on page 3538 of the Registrant's 2001 Annual Report filed on2002 Form 10-K. All such subsidiaries use the local currency as their functional currency. Accordingly, Quaker'sQuaker’s financial results are affected by risks typical of global business such as currency fluctuations, particularly between the U.S. dollar, the Brazilian real and the E.U. euro. As exchange rates vary, Quaker'sQuaker’s results can be materially adversely affected.

In the past, Quaker has used, on a limited basis, forward exchange contracts to hedge foreign currency transactions and foreign exchange options to reduce exposure to changes in foreign exchange rates. The amount of any gain or loss on these derivative financial instruments was immaterial. Quaker is not currently a party to any derivative financial instruments. Therefore, adoption of SFAS No. 133, as amended by SFAS No. 138, did not have a material impact on Quaker's operating results or financial position as of June 30, 2002.

Commodity Price Risk.Risk. Many of the raw materials used by Quaker are commodity chemicals, and, therefore, Quaker'sQuaker’s earnings can be materially adversely affected by market changes in raw material prices. In certain cases, Quaker has entered into fixed-price purchase contracts having a term of up to one year. These contracts provide for protection to Quaker if the price for the contracted raw materials rises, however, in certain limited circumstances, Quaker will not realize the benefit if such prices decline. Quaker has not been, nor is it currently a party to, any derivative financial instrument relative to commodities.

Credit Risk.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'sQuaker’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Downturns in the overall economic climate may also tend to exacerbate specific customer financial issues. A significant portion of Quaker'sQuaker’s revenues is derived from sales to customers in the U.S. steel industry where a number of bankruptcies occurred during recent years. In the first quarter2000, 2001, and early 2002, Quaker recorded additional provisions for doubtful accounts primarily related to bankruptcies in the U.S. steel industry. When a bankruptcy occurs, Quaker must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process. 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'sCompany’s exposure should a bankruptcy occur, and may require writedown or disposal of certain inventory due to its estimated obsolescence or limited marketability. Customer returns of products or disputes may also result in similar issues related to the realizability of recorded accounts receivable or returned inventory. Incorporated by reference is the information in "Criticalunder the captions “Critical Accounting Policies and Estimates"Estimates” and "Liquidity“Liquidity and Capital Resources"Resources” in Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations beginning on pages 8 and 1011 respectively, of the Registrant's 2001 Annual2002 Form 10-K.

Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures. The Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)), based on their evaluation of such controls and procedures as of the end of the period covered by this Quarterly Report filed on Form 10-K. 10-Q, are effective to reasonably assure that information required to be disclosed by the Company in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Changes in internal controls. As previously disclosed, 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 in its Spanish subsidiary. During the fourth quarter of 2003, the Company plans to implement the system in its US operations. By the end of 2003, subsidiaries representing more than 50% of consolidated revenue are expected to be operational on the global ERP system. Additional subsidiaries are planned to be implemented during 2004. The Company is taking the necessary steps to monitor and maintain the appropriate internal controls during this period of change.

PART II. OTHER INFORMATION

Items 1,2,3, and 5 of Part II are inapplicable and have been omitted. Item 4. Submission of Matters to a Vote of Security Holders

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

The 20022003 Annual Meeting of the Company'sCompany’s shareholders was held on May 8, 2002.14, 2003. At the Meeting, management'smeeting, management’s nominees, Peter A. Benoliel, Ronald J. Naples,Donald R. Caldwell, Robert E. Chappell, William R. Cook, and Robert H. RockP. Hauptfuhrer were elected Class III Directors. Voting (expressed in number of votes) was as follows: Peter A. Benoliel, 26,672,680Donald R. Caldwell, 23,331,952 votes for, 101,268276,622 votes against or withheld, and no abstentions or broker non-votes; Ronald J. Naples, 25,856,670Robert E. Chappell, 23,483,314 votes for, 917,278125,260 votes against or withheld, and no abstentions or broker non-votes; and Robert H. Rock, 26,672,680William R. Cook, 23,336,380 votes for, 101,268272,194 votes against or withheld, and no abstentions or broker non-votes; Robert P. Hauptfuhrer, 23,493,071 votes for, 115,503 votes against or withheld, and no abstentions or broker non-votes.

In addition at the meeting, the shareholders approved the 2003 Director Stock Ownership Plan by a vote of 21,796,524 votes for, 1,101,170 votes against, 710,880 abstentions, and no broker non-votes.

In addition, at the Meeting, the shareholders ratified the appointment of PricewaterhouseCoopers LLP as the Company'sCompany’s independent accountants to examine and report on its financial statements for the year ending December 31, 20022003 by a vote of 26,689,06123,347,361 for, 68,854161,498 votes against, 16,03399,715 abstentions, and no broker non-votes. Item 6. Exhibits and Reports on Form 8-K a)

Item 6:Exhibits and Reports on Form 8-K

(a)Exhibits. 10(mm) - Credit Agreement between Registrant and ABN AMRO Bank N.V. in the amount of $20,000,000, dated April 12, 2002. 10(nn) - Promissory Note in the amount of $10,000,000 in favor of ABN AMRO Bank N.V., dated April 15, 2002. 99.1 - Certification of Ronald J. Naples 99.2 -

10(qq)

– Credit Agreement between Registrant and PNC Bank, National Association in the amount of $10,000,000, dated
June 19, 2003.

10(rr)

– Commercial Note between Registrant and National City Bank, National Association in the amount of
$10,000,000, dated June 19, 2003.

31.1

– Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) or rule 15d-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) or rule 15d-14(a) of the
Securities Exchange Act of 1934

32.1

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

32.2

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


(b)Reports on Form 8-K. No reports

1. On May 5, 2003 the Company furnished on Form 8-K were filed during the quarter for which this report is filed. its First Quarter 2003 Press Release.

* * * * * * * * *

Pursuant to the requirements 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) /s/ Michael F. Barry ----------------------------------- Michael F. Barry, officer duly authorized to sign this report, Vice President and Chief Financial Officer Date: August 14, 2002

QUAKER CHEMICAL CORPORATION 
                          (Registrant)




/s/MICHAEL F. BARRY




Date: August 14, 2003

Michael F. Barry, officer duly
authorized to sign this report,
Vice President and Chief Financial Officer


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