UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

~~For the quarterly period ended June 30, 2003~~

For the quarterly period ended June 30, 2004

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

~~For the transition period from ________________ to ________________~~

For the transition period fromto

Commission file number 0-7154

QUAKER CHEMICAL CORPORATION

(Exact name of Registrant as specified in its charter)


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

OneQuakerPark,901HectorStreet,

Conshohocken, Pennsylvania

19428 – 0809

(Address of principal executive offices)

~~19428 – 0809~~
(Zip Code)

Registrant’s telephone number, including area ~~code~~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 x No o¨

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

~~APPLICABLE ONLY TO CORPORATE ISSUERS:~~

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

NumberofSharesofCommonStock

Outstanding on July 31, ~~2003~~2004

~~9,459,380~~9,656,715

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES


PARTI.	FINANCIAL INFORMATION


Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheet at June 30, ~~2003~~2004 and December 31, ~~2002~~2003	3

	Condensed Consolidated Statement of Income for the Three and Six Months ended June, ~~30,~~2004 and 2003 ~~and 2002~~	4

	Condensed Consolidated Statement of Cash Flows for the Six Months ~~ended~~Ended June 30, ~~2003~~2004 and ~~2002~~2003	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

6Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4.	Controls and Procedures	18

PART II.	OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders	19

Item 6.	Exhibits and Reports on Form 8-K	19

Signature		20

* * * * * * * * * *

Item 1. Financial Statements

Quaker Chemical Corporation

Condensed Consolidated Balance Sheet

	Unaudited (dollars in thousands, except par value)

	June 30, 2003			December 31, 2002 ^*
							Unaudited (Dollars in thousands, except par value and share amounts)
							June 30, 2004			December 31, 2003*
ASSETS
Current assets
Cash and cash equivalents	$	15,098		$	13,857		$	24,470		$	21,915
Accounts receivable, net		67,964			53,353			81,791			78,121
Inventories
Raw materials and supplies		13,352			11,342			18,781			14,691
Work-in-process and finished goods		14,739			12,294			19,069			17,520
Prepaid expenses and other current assets		12,298			12,827			14,442			11,277

Total current assets		123,451			103,673			158,553			143,524

Property, plant and equipment, at cost		123,125			113,207			138,565			136,448
Less accumulated depreciation		70,540			64,695			76,619			74,057

Net property, plant and equipment		52,585			48,512			61,946			62,391
Goodwill		24,155			21,927			32,906			33,301
Other intangible assets		5,771			5,852
Other intangible assets, net								8,996			9,616
Investments in associated companies		5,420			9,060			5,923			6,005
Deferred income taxes		10,566			10,609			12,839			12,846
Other assets		15,093			14,225			19,718			19,664

Total Assets	$	237,041		$	213,858

Total assets							$	300,881		$	287,347

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short-term borrowings and current portion of long-term debt	$	19,987		$	12,205		$	54,164		$	42,992
Accounts and other payables		33,828			29,423			42,017			41,259
Accrued compensation		6,192			10,254			6,138			6,816
Other current liabilities		13,471			14,262			13,305			14,738

Total current liabilities		73,478			66,144			115,624			105,805
Long-term debt		16,620			16,590			17,946			15,827
Deferred income taxes		1,700			1,518			2,764			2,688
Other noncurrent liabilities		36,006			33,889			41,564			40,967

Total liabilities		127,804			118,141			177,898			165,287

Minority interest in equity of subsidiaries		9,585			7,662			11,021			9,708

Shareholders’ Equity
Shareholders’ equity
Common stock $1 par value; authorized 30,000,000 shares; issued (including treasury shares) 9,664,009 shares		9,664			9,664			9,664			9,664
Capital in excess of par value		1,174			626			2,489			2,181
Retained earnings		113,083			110,448			119,316			117,308
Unearned compensation		(931	)		(1,245	)		(488	)		(621	)
Accumulated other comprehensive (loss)		(20,410	)		(27,078	)		(18,790	)		(15,406	)

		102,580			92,415			112,191			113,126
Treasury stock, shares held at cost; 2003 – 213,566, 2002 - 324,109		(2,928	)		(4,360	)
Treasury stock, shares held at cost; 2004 – 8,832, 2003 – 54,178								(229	)		(774	)

Total shareholders’ equity		99,652			88,055			111,962			112,352

	$	237,041		$	213,858		$	300,881		$	287,347

*	Condensed from audited financial statements.

The accompanying notes are an integral part of these condensed consolidated 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,
													Unaudited (dollars in thousands, except per share data)
	2003			2002			2003			2002			Three Months ended June 30,						Six Months ended June 30,
													2004			2003			2004			2003
Net sales	$	83,453		$	69,457		$	156,790		$	129,384		$	98,683		$	83,453		$	196,814		$	156,790
Cost of goods sold		54,506			40,495			99,477			76,065			66,139			54,506			131,815			99,477

Gross margin		28,947			28,962			57,313			53,319			32,544			28,947			64,999			57,313
Selling, general and administrative expenses		23,223			23,279			45,908			43,303			27,209			23,223			53,807			45,908

Operating income		5,724			5,683			11,405			10,016			5,335			5,724			11,192			11,405
Other income (expense), net		447			(28	)		535			252			208			447			767			535
Interest expense		(387	)		(407	)		(737	)		(826	)		(547	)		(387	)		(1,017	)		(737	)
Interest income		152			295			363			548			198			152			353			363

Income before taxes		5,936			5,543			11,566			9,990			5,194			5,936			11,295			11,566
Taxes on income		1,843			1,774			3,701			3,197			1,636			1,843			3,558			3,701

		4,093			3,769			7,865			6,793			3,558			4,093			7,737			7,865
Equity in net income of associated companies		169			201			255			184			186			169			335			255
Minority interest in net income of subsidiaries		(787	)		(734	)		(1,538	)		(1,383	)		(897	)		(787	)		(1,916	)		(1,538	)

Net income	$	3,475		$	3,236		$	6,582		$	5,594		$	2,847		$	3,475		$	6,156		$	6,582

Per share data:
Net income – basic	$	0.37		$	0.35		$	0.71		$	0.61		$	0.30		$	0.37		$	0.64		$	0.71
Net income – diluted	$	0.36		$	0.35		$	0.69		$	0.60		$	0.29		$	0.36		$	0.62		$	0.69
Dividends declared	$	0.21		$	0.21		$	0.42		$	0.42		$	0.215		$	0.21		$	0.43		$	0.42
Based on weighted average number of shares outstanding:
Basic		9,323,895			9,249,925			9,297,482			9,202,378			9,604,142			9,323,895			9,587,393			9,297,482
Diluted		9,671,578			9,308,678			9,593,466			9,262,025			9,983,809			9,671,578			9,981,999			9,593,466

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 Ended June 30,~~

	Unaudited (dollars in thousands)

	2003			2002			Unaudited (Dollars in thousands) For the Six Months Ended June 30,
							2004			2003
Cash flows from operating activities
Net income	$	6,582		$	5,594		$	6,156		$	6,582
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash (used in) operating activities:
Depreciation		3,394			2,327			4,098			3,394
Amortization		438			325			575			438
Equity in net income of associated companies		(255	)		(184	)		(335	)		(255	)
Minority interest in earnings of subsidiaries		1,538			1,383			1,916			1,538
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	)
Deferred compensation and other, net								245			226
Pension and other postretirement benefits								411			2,190
Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions:
Accounts receivable								(4,824	)		(11,380	)
Inventories		(2,789	)		(798	)		(6,110	)		(2,789	)
Prepaid expenses and other current assets		1,204			(2,293	)		(3,318	)		1,204
Accounts payable and accrued liabilities		(2,467	)		2,750			(213	)		(2,467	)
Change in restructuring liabilities		(866	)		(1,167	)		(327	)		(866	)

Net cash (used in) provided by operating activities		(2,185	)		4,172
Net cash (used in) operating activities								(1,726	)		(2,185	)

Cash flows from investing activities
Investments in property, plant and equipment		(4,859	)		(5,060	)		(4,915	)		(4,859	)
Dividends and distributions from associated companies		3,890			307			233			3,890
Payments related to acquisitions		(1,105	)		(21,576	)		—			(1,105	)
Other, net		53			(9	)		28			53

Net cash (used in) investing activities		(2,021	)		(26,338	)		(4,654	)		(2,021	)

Cash flows from financing activities
Net increase in short-term borrowings		7,747			22,009			11,165			7,747
Proceeds from long-term debt								2,463			—
Repayment of long-term debt								(255	)		—
Dividends paid		(3,924	)		(3,802	)		(4,091	)		(3,924	)
Treasury stock issued		1,697			2,404
Stock options exercised, other								716			1,700
Distributions to minority shareholders		(609	)		(1,335	)		(245	)		(609	)
Other, net		3			85

Net cash provided by financing activities		4,914			19,361			9,753			4,914

Effect of exchange rate changes on cash		533			572			(818	)		533

Net increase (decrease) in cash and cash equivalents		1,241			(2,233	)
Net increase in cash and cash equivalents								2,555			1,241
Cash and cash equivalents at beginning of period		13,857			20,549			21,915			13,857

Cash and cash equivalents at end of period	$	15,098		$	18,316		$	24,470		$	15,098

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

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements

(Dollars in ~~Thousands)~~thousands except per share amounts)

(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 ~~2003~~2004 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, ~~2003~~2004 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, ~~2002.~~2003.

As part of the Company’s chemical management services, certain third party ~~products~~product sales to customers are ~~transferred to customers.~~managed by the Company. Where the Company acts as a principal, revenues are recognized on a gross reporting basis at the selling price negotiated with customers. Where the Company acts as an agent, such revenue is recorded using net reporting as service revenues, at the amount of the administrative fee earned by the Company for ordering the goods. Third party products transferred ~~where the Company acts as an agent~~under arrangements resulting in net reporting totaled $17,518 and ~~revenue is recorded net totaled~~ $13,440 ~~and $14,187~~ for the six months ended June 30, 2004 and 2003, ~~and 2002,~~ respectively.

Note 2 – Recently Issued Accounting Standards

~~In January~~

On December 8, 2003, President Bush signed the ~~Financial~~Medicare Prescription Drug, Improvement and Modernization Act of 2003 (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. On May 20, 2004 the FASB issued FSP No. FAS 106-2, Accounting ~~Standards Board (“FASB”), issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation~~and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of ~~Certain Variable Interest Entities, (“VIEs”), which is an interpretation of Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements.” FIN 46 addresses~~2003. This FSP provides guidance on the ~~application of ARB No. 51 to VIEs, and generally would require that assets, liabilities and results~~accounting for the effects of the ~~activities of a VIE be consolidated into the financial statements~~new Medicare prescription drug benefit under Medicare Part D. The provisions of the ~~enterprise that is considered the primary beneficiary. FIN 46 is~~FSP are effective for the first interim ~~periods~~or annual period 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~~2004. For the Company, ~~is not~~ the ~~primary beneficiary.~~

~~In January 2001,~~provisions will be effective for 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 obligationsthird quarter of 2004 beginning on July 1, 2004. Therefore, measures of the ~~Company. The Venture renovated certain of~~accumulated postretirement benefit obligation or net periodic benefit cost for the ~~existing buildings at the Site, as well as built new office space (the “Project”). In December 2000, the Company entered into an agreement~~period ended June 30, 2004 do not reflect any amount associated 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 Statement of Financial Accounting Standards (“SFAS”) No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This standard amends and clarifies financial accounting and reporting for derivative instruments and hedging activities, primarily as a result of decisions made by the FASB Derivatives Implementation Group subsequent to the original issuance of SFAS No. 133 and in connection with other FASB projects. This standard is generally effective prospectively for contracts and hedging relationships entered into or modified after June 30, 2003.subsidy. The Company is ~~currently evaluating~~still assessing whether the ~~impact of this standard, but does not expect~~benefits provided by its retiree health care benefit plan are actuarially equivalent to the ~~adoption to have a material impact on~~Medicare Part D benefit under the ~~financial statements. The Company is not currently a party to any derivative financial instruments.~~Act.

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. The Company is in the process of evaluating this standard, but does not expect the adoption to have 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. 123.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

	Three Months ended June 30,						Six Months ended June 30,

	2003			2002			2003			2002			Three Months ended June 30,						Six Months ended June 30,
													2004			2003			2004			2003
Net Income – as reported	$	3,475		$	3,236		$	6,582		$	5,594		$	2,847		$	3,475		$	6,156		$	6,582
Add: Stock-based employee compensation expense included in net income, net of related tax effects		(23	)		174			152			275			—			(23	)		102			152
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax		(115	)		(302	)		(334	)		(505	)		(156	)		(115	)		(332	)		(334	)

Pro forma net income	$	3,337		$	3,108		$	6,400		$	5,364		$	2,691		$	3,337		$	5,926		$	6,400

Earnings per share:
Basic – as reported	$	0.37		$	0.35		$	0.71		$	0.61		$	0.30		$	0.37		$	0.64		$	0.71
Basic – pro forma	$	0.36		$	0.34		$	0.69		$	0.58		$	0.28		$	0.36		$	0.62		$	0.69
Diluted – as reported	$	0.36		$	0.35		$	0.69		$	0.60		$	0.29		$	0.36		$	0.62		$	0.69
Diluted – pro forma	$	0.35		$	0.33		$	0.67		$	0.58		$	0.27		$	0.35		$	0.59		$	0.67

Note 4 – Earnings Per Share

The following table summarizes earnings per share (EPS) calculations:

	Three Months Ended June 30,				Six Months Ended June 30,

	2003		2002		2003		2002		Three Months Ended June 30,				Six Months Ended June 30,
									2004		2003		2004		2003
Numerator for basic EPS and diluted EPS– net income	$	3,475	$	3,236	$	6,582	$	5,594	$	2,847	$	3,475	$	6,156	$	6,582

Denominator for basic EPS–weighted average shares		9,324		9,250		9,297		9,202		9,604		9,324		9,587		9,297
Effect of dilutive securities, primarily employee stock options		348		59		296		60		380		348		395		296

Denominator for diluted EPS–weighted average shares and assumed conversions		9,672		9,309		9,593		9,262		9,984		9,672		9,982		9,593

Basic EPS	$	.37	$	.35	$	.71	$	.61	$	0.30	$	0.37	$	0.64	$	0.71
Diluted EPS	$	.36	$	.35	$	.69	$	.60	$	0.29	$	0.36	$	0.62	$	0.69

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

Note 5 – Business Segments

The Company’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 – industrial process fluids for various heavy industrial and manufacturing applications.

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

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

Segment data includes direct segment costs as well as general operating costs.

The table below presents information about the reported ~~segments for the six months ended June 30, :~~segments:

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Metalworking Process Chemicals
Net Sales	$	91,016		$	75,991		$	182,631		$	142,974
Operating Income		13,741			12,662			28,410			25,751

Coatings
Net Sales		6,187			6,306			11,907			11,565
Operating Income		1,761			1,711			3,263			3,016

Other Chemical Products
Net Sales		1,480			1,156			2,276			2,251
Operating Income		287			162			405			438

Total
Net Sales		98,683			83,453			196,814			156,790
Operating Income		15,789			14,535			32,078			29,205

Non-operating expenses		(10,163	)		(8,588	)		(20,311	)		(17,362	)

Amortization		(291	)		(223	)		(575	)		(438	)

Interest expense		(547	)		(387	)		(1,017	)		(737	)

Interest income		198			152			353			363

Other income, net		208			447			767			535


Consolidated income before taxes	$	5,194		$	5,936		$	11,295		$	11,566

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~~Quaker Chemical Corporation

Notes to ~~total consolidated income before taxes, for the six months ended June 30, is as follows:~~Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

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

(Unaudited)

Note 6 – Comprehensive Income

The following table summarizes comprehensive income:

	Three Months Ended June 30,				Six Months Ended June 30,

	2003		2002		2003		2002		Three Months Ended June 30,					Six Months Ended June 30,
									2004			2003		2004			2003
Net income	$	3,475	$	3,236	$	6,582	$	5,594	$	2,847		$	3,475	$	6,156		$	6,582
Foreign currency translation adjustments		4,073		2,746		6,668		443		(1,939	)		4,073		(3,384	)		6,668

Comprehensive income	$	7,548	$	5,982	$	13,250	$	6,037	$	908		$	7,548	$	2,772		$	13,250

Note 7 – Restructuring and Related Activities

In 2001, Quaker’s management approved restructuring plans to realign ~~its~~the organization and reduce operating ~~costs.~~costs (2001 program). Quaker’s restructuring plans included the ~~closure~~decision to close and ~~sale of its~~sell manufacturing facilities in the U.K. and France. In addition, Quaker consolidated certain functions within its global business units and reduced administrative functions, as well as expensed costs related to abandoned acquisitions. Included in the restructuring charges are provisions for ~~the~~ severance of 53 employees.

Restructuring and related charges of $5,854 were recognized in 2001. The charge comprised ~~$2,644~~$2,807 related to employee separations, ~~$2,613~~$2,450 related to facility rationalization charges, and $597 related to abandoned acquisitions. Employee separation benefits ~~under each plan~~ varied depending on local regulations within certain foreign countries and included severance and other benefits. As of June 30, ~~2003,~~2004, Quaker had completed 5052 of the planned 53 employee separations under the 2001 ~~plans. During~~plan.

In 2003, Quaker’s management approved restructuring plans to further realign the ~~fourth quarter of 2002,~~organization (2003 program). Included in the ~~Company completed the sale of its U.K. manufacturing facility. Quaker closed this facility at the end of 2001.~~ 2003 restructuring charge are provisions for severance for 9 employees totaling $273.

Quaker expects to substantially complete the initiatives contemplated under the restructuring plans, including the sale of its former manufacturing facility in France ~~by the end of 2003.~~during 2004.

Accrued restructuring balances, included in other current liabilities ~~are as follows:~~

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 8 – Business Acquisition~~

~~In May 2003, the Company acquired a range of cleaners, wet temper fluids~~ and other products from KS Chemie, located in Dusseldorf, Germany for approximately $1,100. This acquisition strategically strengthens the Company’s global leadership position as a process fluids supplier to the steel industry. The Company recorded $345 of intangible assets comprised of product line technology to be amortized over a range of five to ten years. The Company also recorded $715 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.~~segment, are as follows:


	Employee Separations			Facility Rationalization			Total
2001 Program:
December 31, 2003 ending balance	$	450		$	525		$	975
Payments		(158	)		(59	)		(217	)
Currency translation and other		16			29			45

June 30, 2004 ending balance		308			495			803

2003 Program:
December 31, 2003 ending balance		228			—			228
Payments		(110	)		—			(110	)
Currency translation and other		2			—			2

June 30, 2004 ending balance		120			—			120

Total restructuring June 30, 2004 ending balance	$	428		$	495		$	923

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

Note 98 – Goodwill and Other Intangible Assets

The changes in carrying amount of goodwill for the six months ended June 30, ~~2003~~2004 are as follows:

	Metalworking process chemicals		Coatings		Total
							Metalworking process chemicals			Coatings		Total
Balance as of January 1, 2003	$	14,658	$	7,269	$	21,927
Balance as of December 31, 2003							$	26,032		$	7,269	$	33,301
Goodwill additions		779		—		779		262			—		262
Currency translation adjustments		1,449		—		1,449		(657	)		—		(657	)

Balance as of June 30, 2003	$	16,886	$	7,269	$	24,155
Balance as of June 30, 2004							$	25,637		$	7,269	$	32,906

Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of June 30, 2004 and December 31, 2003 are as follows:

	Gross carrying Amount		Accumulated Amortization
						Gross Carrying Amount				Accumulated Amortization
Amortized intangible assets						2004		2003		2004		2003
Customer lists and rights to sell	$	3,850	$	(602	)	$	6,142	$	6,181	$	1,620	$	865
Trademarks and patents		2,300		(1,553	)		1,788		1,786		1,146		1,584
Formulations and product technology		1,765		(278	)		3,278		3,276		635		435
Other		1,513		(1,224	)		1,947		1,959		1,358		1,302

Total	$	9,428	$	(3,657	)	$	13,155	$	13,202	$	4,759	$	4,186

The Company recorded $575 and $438 of amortization expense in the first six months of 2004 and 2003, respectively. Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows:

For the year ended December 31, 2003	$	882

For the year ended December 31, 2004	$	793	$	1,160
For the year ended December 31, 2005	$	760	$	1,127
For the year ended December 31, 2006	$	741	$	1,115
For the year ended December 31, 2007	$	337	$	707
For the year ended December 31, 2008	$	254	$	616
For the year ended December 31, 2009			$	606

The Company has one indefinite-lived intangible asset of $600 for trademarks recorded in connection with the Company’s 2002 acquisition of Epmar.

Note 109 – Debt

In June 2003, the Company entered into a $10,000 committed credit facility with a bank, which expires in June 2004. At the Company’s option, the interest rate for borrowings under the agreement may be based on the eurodollar rate plus a margin or the prime rate plus a margin. 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, 2003. In July 2003, an amendment increased this committed credit facility to $15,000.

~~In June 2003,~~April 2004, the Company entered into a $10,000 uncommitted demand credit facility with a ~~different~~ bank. At the Company’s option, the interest rate for borrowings under ~~the~~this agreement may be based on the prime rate less a margin or ~~the~~a LIBOR rate plus a margin.

~~As a result of these agreements,~~

In June 2004, the Company ~~increased~~amended one of its committed credit facilities which was set to expire in June 2004. The amendment increased the facility from $15,000 to $25,000 and extended the expiry date to June 2005.

The above actions bring the Company’s credit lines to a total of $70,000, $40,000 committed and ~~$10,000 uncommitted at~~$30,000 uncommitted. At June 30, 2004, 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~~$50,800 outstanding on its credit ~~facilities~~lines.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

Note 10 – Pension and Other Postretirement Benefits

The components of net periodic benefit cost, for the three and six months ended June 30, are as follows:


	Three Months Ended June 30,										Six Months Ended June 30,
	Pension Benefits						Other Postretirement Benefits				Pension Benefits						Other Postretirement Benefits
	2004			2003			2004		2003		2004			2003			2004		2003
Service Cost	$	862		$	700		$	8	$	3	$	1,738		$	1,418		$	19	$	16
Interest cost and other		1,265			1,097			138		45		2,541			2,223			309		249
Expected return on plan assets		(1,107	)		(915	)		—		—		(2,227	)		(1,855	)		—		—
Other amortization, net		261			196			—		—		524			397			—		—

Net periodic benefit cost	$	1,281		$	1,078		$	146	$	48	$	2,576		$	2,183		$	328	$	265

Employer Contributions:

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to make minimum cash contributions of $1,483 to its U.S. pension plan and $1,061 to its other postretirement benefit plan in 2004. As of June 30, ~~2003~~2004 $722 and ~~2002,~~$489 of contributions have been made, respectively.

Note 11 – 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. The~~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. InVoluntarily 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~~$900 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.

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 $168 and $188 was accrued at June 30, 2004 and December 31, 2003, respectively, to provide for such anticipated future environmental assessments and remediation costs.

An inactive subsidiary of the Company that was acquired in 1978 sold certain products containing asbestos, primarily on an installed basis, and is among the defendants in numerous lawsuits alleging injury due to exposure to asbestos. The subsidiary discontinued operations in 1991 and has no remaining assets other than its existing insurance policies. To date, the overwhelming majority of these claims have been disposed of without payment and there have been no adverse judgments against the subsidiary. Based on ~~an initial~~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 ~~$15,000~~$10,000 (excluding ~~the~~ 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 agreed to pay all defense costs and be responsible for all damages assessed against the subsidiary arising out of existing and future asbestos claims up to the aggregate limits of the policies. A significant portion of this primary insurance coverage was provided by an insurer that is now insolvent, and the other primary insurers 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~~four years. As a result, liabilities in respect of claims not yet asserted may exceed coverage available to the subsidiary.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

If the subsidiary’s insurance coverage were to be exhausted, claimants of the subsidiary may actively pursue claims against the Company because of the ~~parent-subsidiary~~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~~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 12 – Subsequent Event~~

In July 2003, the Company acquired all of the outstanding stock of Eural S.r.l., a privately held company located in Tradate, Italy for $5,700. Eural manufactures a variety of specialty metalworking fluids primarily for the Italian market. The Company is currently assessing the allocation of the purchase price. Pro-forma results of operations have not been presented because the effects were not material.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
~~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 for various heavy industrial and manufacturing applications around the globe, with significant sales to the steel and automotive industries. Our strategies and initiatives flow from three business imperatives: (1) sell customer solutions - value - not just fluids, (2) operate as a globally integrated whole, and (3) harness the power of our global knowledge and learning. Success factors critical to the Company’s business include successfully differentiating ourselves from our competition, operating efficiently as a globally integrated whole, and increasing market share, customer penetration and profitability through internally developed programs and strategic acquisitions.

The Company operates in mature businesses, which are driven by demand for consumer durables and are, therefore, subject to the vulnerabilities of a cyclical economy. The Company experienced significant revenue growth in the second quarter of 2004 versus the second quarter of 2003, driven by acquisitions, its chemical management services (CMS) business, solid base business growth and favorable foreign exchange. The Company expects 2004 to be a strong revenue growth year due to its business initiatives as well as an improvement in the global economy.

For the second quarter 2004, the Company saw high growth in the South American and Asia/Pacific markets. The revenue growth attributable to CMS was due to the award of new contracts in the North American automotive market, which were effective May 1, 2003. The profitability of this new business is dependent on the Company’s ability to identify and implement cost reduction programs and to achieve product conversions. While the new CMS contracts made a profit contribution in the second quarter of 2004, the Company was behind in its expectations for both product conversions and product usage reductions. In addition, higher raw material costs, and higher expenses including Sarbanes-Oxley compliance, and the Company’s ERP implementation negatively impacted the second quarter results as compared to the prior year. The Company does not anticipate raw material cost relief for the remainder of 2004. These trends were largely responsible for the shortfall in earnings for the quarter compared to the prior year despite record sales in the quarter.

Looking forward to the second half of the year, the Company announced and began implementing price increases and surcharges in the second quarter to help offset increases in raw material costs. Though delayed in implementing CMS product conversions and product usage reduction programs, the Company has recently been making considerable progress in both areas. The Company expects to realize the benefits of these actions in the second half of the year. The Company is still optimistic that for the 2004 year, it will achieve earnings around our prior year level. Critical to making this happen are the continued economic recovery in the Company’s key markets, the contribution of announced price increases and strong follow-through on our progress in product conversion and product usage reduction programs in the Company’s CMS business.

Liquidity and Capital Resources

Quaker’s cash and cash equivalents increased to ~~$15.1~~$24.5 million at June 30, ~~2003~~2004 from ~~$13.9~~$21.9 million at December 31, ~~2002.~~2003. The increase resulted primarily from ~~$2.2~~$1.7 million cash used in operating activities ~~$2.0~~and $4.7 million cash used in investing activities, offset by ~~$4.9~~$9.8 million cash provided by financing activities.

Net cash flows used in operating activities were ~~$2.2~~$1.7 million in the first ~~six months~~half of ~~2003~~2004 compared to ~~cash flows provided by operating activities of $4.2~~$2.2 million in the same period of ~~2002. The decrease was primarily due to increased cash out flows from~~2003. Although the amounts are relatively consistent, there have been some significant movements in the Company’s working capital ~~accounts offset by higher net income, depreciation and amortization expense.~~accounts. Accounts receivable in 2004 has had less of an impact on operating cash flow, reflective of the initial working capital investment associated with the Company’s new CMS contracts which began in the second quarter of 2003. In addition, in the first half of 2004 the Company entered into additional CMS contracts which have impacted our working capital accounts. The ~~change~~increase in ~~cash flows from accounts receivable was primarily due to $6.7 million of sales~~inventory is attributable to higher business levels, particularly in the ~~Company’s recently awarded chemical management services (CMS)~~South American and Asia/Pacific markets, the additional CMS contracts ~~which were effective May 1, 2003. Increased business activity as well as~~and higher raw material ~~costs accounted for~~costs. The $4.5 million decrease to cash from the ~~increased inventory levels. Increased cash flows from~~prior year in prepaid expenses and other current assets ~~versus the prior year~~ is ~~primarily due to~~reflective of a $2.6 million ~~refund related~~tax settlement received in the first half of 2003 as well as attributable to ~~a settlement from a tax audit at one~~the timing of ~~our foreign entities.~~higher prepaid insurance premiums in 2004. The change in cash flows from accounts payable and accrued liabilities iswas largely due to ~~higher annual~~lower incentive compensation payments ~~as well as timing related to high levels of accounts payable at December 31, 2002.~~made in 2004 versus 2003.

Net cash flows used in investing activities were ~~$2.0~~$4.7 million in the first ~~six months~~half of ~~2003~~2004 compared to ~~$26.3~~$2.0 million in the same period of ~~2002.~~2003. The ~~decrease~~increased use of cash was primarily related to $21.6 million cash used in the first six months of 2002 for 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 Note 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 millioncaused by a lower level of priority ~~cash~~ distributions received from ~~its~~the Company’s real estate joint venture compared to 2003 offset by payments related to the Company’s KS Chemie acquisition in 2003. In the first ~~six months~~half of ~~2003.~~2004 capital expenditures were $4.9 million. Major projects included the Company’s U.S. lab renovation, global ERP implementation, and capital expansion related to the Vulcan acquisition. The Company is near completion on the U.S. lab renovation. The capital expansion project related to the Vulcan acquisition is complete and has allowed the Company to move essentially all of the production from Vulcan to other facilities and to save on external manufacturing costs. Also, capital expenditures related to the ERP implementation is expected to be considerably less in 2004 than over the past few years. Overall, the Company is expecting total 2004 capital expenditures to be slightly under $10.0 million, which would be a 20% reduction from the 2003 capital expenditure levels.

Net cash flows provided by financing activities were ~~$4.9~~$9.8 million for the first ~~six months~~half of ~~2003~~2004 compared to ~~$19.4~~$4.9 million for the same period ofin the prior year. The net change was primarily due to ~~$22.0 million of~~increased short-term and long-term borrowings incurred in the first ~~six months~~half of ~~2002~~2004 used to finance the Company’s ~~acquisitions of ULC~~capital expenditures and ~~Epmar versus $7.7 of short-term borrowings in 2003 used to fund~~continued working capital needs.

In June 2003, the Company entered into a $10.0 million committed credit facility with a bank, which expires in June 2004. At the Company’s option, the interest rate for borrowings under the agreement may be based on the eurodollar rate plus a margin or the prime rate plus a margin. 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, 2003. In July 2003, an amendment increased this committed credit facility to $15.0 million.

In ~~June 2003,~~April 2004, the Company entered into a $10.0 million uncommitted demand credit facility with a ~~different~~ bank. At the Company’s option, the interest rate for borrowings under ~~the~~this agreement may be based on the prime rate less a margin or ~~the~~a LIBOR rate plus a margin.

~~As a result of these agreements,~~ In June 2004, the Company ~~has~~amended one of its committed credit facilities which was set to expire in June 2004. The amendment increased ~~its credit facilities~~the facility from $15.0 million to $25.0 million and extended the expiry date to June 2005. These actions bring the Company’s credit lines to a total of $70.0 million, $40.0 committed and ~~$10.0 million uncommitted at~~$30.0 uncommitted. At June 30, 2004 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~~$50.8 million outstanding on its credit ~~facilities as~~lines.

The Company continues to have significant cash balances in many of ~~June 30, 2003 and 2002, respectively.~~

its consolidated foreign entities. The Company periodically remits this cash to the U.S. when it is advantageous from a tax perspective. The Company believes that its balance sheet remains strong with a ~~debt to total~~net debt-to-total capital ratio of ~~27%~~30% at June 30, ~~2003~~2004 compared to 25% at the end of ~~2002 and 34% at June 30, 2002.~~2003. The Company further believes it is capable of supporting its operating requirements, including pension plan contributions, payment 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.

~~Operations~~

Operations

Comparison of the First Six Months ~~2003~~2004 with First Six Months ~~2002~~of 2003

~~Consolidated net~~

Net sales for the first ~~six months~~half of the year increased to ~~a record $156.8~~$196.8 million, up ~~21%~~26% from ~~$129.4~~$156.8 million for the first ~~six months~~half of ~~2002.~~2003. Foreign exchange rate translation, the Company’s 2003 acquisitions, and the ~~timing of the~~ Company’s ~~2002 acquisitions~~new CMS contracts favorably impacted net sales by ~~$6.3~~$8.4 million, $11.3 million and ~~$8.1~~$13.7 million, respectively. ~~Year-to-date 2003 consolidated~~The remaining net sales ~~also include $6.7 million from~~increase of approximately 4% was due to double-digit growth in the ~~Company’s recently awarded~~Asia/Pacific and South American regions with lower sales in Europe offsetting increases in the U.S.

During 2003, the Company began a new approach to its Chemical Management Services (CMS) ~~contracts, which were effective May 1, 2003.~~

~~Gross margin as a percentage of sales declined from 41.2% for the first six months of 2002~~business in order to ~~36.6% for the first six months of 2003. As previously disclosed,~~further the Company’s ~~new CMS contracts result in a different relationship between margins and revenue than has applied in the past for~~strategic imperative to sell customer solutions - value - not just fluids. Under the Company’s traditional ~~product business. At the majority of current~~ CMS ~~sites,~~approach, the Company effectively acts as an agent whereby it purchases chemicals from other companies and ~~records~~resells the product to the customer at little or no margin and earns a set management fee for providing this service. Therefore, the profit earned on the management fee is relatively secure as the entire cost of the products is passed on to the customer. The new approach to CMS is dramatically different. The Company is not simply a purchasing agent but actually manages the application and use of chemicals at the customers’ sites. The Company receives a set management fee and the costs that relate to those management fees are largely connected to how well the Company controls product costs and achieves product conversions from other third party suppliers to its own products. With this new approach comes 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 new 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.

With this new approach, the Company was awarded a series of multi-year CMS contracts at General Motors Powertrain and Daimler Chrysler manufacturing sites in 2003. This business was an important step in building the Company’s share and leadership position in the automotive process fluids market and should position the Company well for penetration of CMS opportunities in other metalworking manufacturing sites. This new approach has also had a dramatic impact on the Company’s revenue and margins. Under the traditional CMS approach, where the Company effectively acts as an agent, the revenue and costs from these sales are reported on a net sales or “pass-through” basis. ~~The~~As discussed above, the structure of the new CMS ~~contracts have~~approach is different in that the Company’s revenue received from the customer is a ~~different structure that results in~~fee for products and services provided to the customer, which are indirectly related to the actual costs incurred. As a result, the Company ~~recognizing~~recognizes in reported ~~revenue~~revenues 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~~other until the Company achieves significant product conversions. Since inception, the profit impact of these contracts has been immaterial as the Company has relatively little of its own product converted at these sites. There are two critical success factors for this new approach. First, is to create savings for a customer based on ~~gross margin for~~our ability to help apply the ~~first half~~product better and improve the customer’s own processes. Second, is to convert more of ~~2003 is approximately 2 percentage points. The company~~the product being used to Quaker product rather than a competitor’s product. During 2004, particularly in the second quarter, the Company had lower than expected performance with regard to these success factors. Although performance was lower than expected, considerable progress was made and the Company expects to see the ~~negative impact to gross margin~~benefits in the second half of ~~2003, related to the~~2004.

The new CMS contracts ~~to be~~resulted in an increase in the Company’s reported revenue for the first six months of 2004 of approximately ~~4 to 5~~ $13.7 million and a corresponding decrease in gross margin as a percentage of sales of approximately 2.6

percentage points. The remaining decline in gross margin as a percentage of sales was primarily due to increased raw material ~~costs, as well as product~~costs. The Company has announced and ~~regional sales mix. On~~implemented a ~~full year basis, the Company continues~~number of price increases and surcharges to ~~expect~~help offset increases in raw material costs, and the positive impact from these actions is expected 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~~realized in the second half of 2004.

Selling, general and administrative expenses for the first half of the year increased $7.9 million compared to the first half of 2003. Foreign exchange rate translation and the Company’s 2003 acquisitions accounted for approximately half of the increase. The majority of the remaining increase was due to higher expenses associated with the Company’s ERP implementation, Sarbanes-Oxley compliance, as well as inflationary increases. In addition, the Company added infrastructure to support its growth initiatives in CMS and the Asia/Pacific region.

The increase in other income is primarily due to lower foreign exchange losses incurred in the first half of 2004 versus the prior year. The increase in net interest expense is primarily due to higher debt balances outstanding during the first half of 2004 versus the first half of 2003.

Selling, general and administrative (SG&A) expenses for the first six months of 2003 increased $2.6 million from the first six months of 2002. Increases due to foreign exchange rates 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 quarter of 2003 and $2.4 million received in the second quarter of 2003) of priority cash distributions received from the Company’s real estate joint venture during 2003. Interest expense is 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 first half 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 first half of 2003.

The year-to-date ~~2003~~ effective tax rate is ~~32% compared to~~31.5% versus 32% in the prior year. Many external and internal factors can impact this rate and the Company will continue to refine this percentage, if necessary, as the year ~~and down from 33%~~progresses. In August 2004, a U.S. Federal tax audit is scheduled to begin in ~~the first quarter of 2003. The decrease in the effective tax rate compared to the first quarter of 2003 is primarily due to~~accordance with the 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 the full 2003 year. However, the effective tax rate is dependent on many internal and external factors, and is assessed by the Company on a regular basis.normal three-year cycle.

The increase in equity income was primarily due to a stronger performance from the Company’s Mexico joint venture. The increase in minority interest expense is reflective of stronger performances from most of our minority interest affiliates.

Net income for the first half of the year was $6.2 million versus $6.6 million for the first half of 2003. Earnings per diluted share decreased from $0.69 per diluted share to $0.62 per diluted share. Despite record sales for the first half of the year, higher raw material prices and lower than expected performance in the Company’s new CMS business were largely responsible for the shortfall in earnings compared to the prior year.

Segment Reviews - Comparison of the First Six Months 2004 with First Six Months of 2003

Metalworking Process Chemicals:

Metalworking Process Chemicals consists of industrial process fluids for various heavy industrial and manufacturing applications and represent approximately 92% of our sales in the first six months of 2003 is due to improved results from the Company’s real estate joint venture offset in part by the consolidation of the 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 the Company’s South African joint venture.

~~Comparison of Second Quarter 2003 with Second Quarter 2002~~

~~Consolidated net sales~~2004. Reported revenues for the ~~second quarter~~first half of ~~2003~~2004 were ~~a record $83.5, a 20% increase~~up approximately 28% compared towith the second quarter of 2002. Foreign exchange rate translation and the timing of the Company’s 2002 acquisitions favorably impacted second quarter 2003 net sales by $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~~first half of 2003. The Company’s new CMS contracts accounted for approximately 10 percentage points of the revenue growth. Currency translation increased sales by 6 percentage points of the revenue growth as the average Euro to US Dollar rate was 1.23 in the first half of 2004 compared to 1.10 during the first half of 2003. The Company’s acquisitions of Vulcan, Eural and KS Chemie accounted for 8 percentage points of the revenue growth in this segment. Therefore, these three items accounted for 24% of the 28% growth in this segment. The remaining net sales increase of 4% was primarily due to 15% growth in South America and 21% growth in Asia/Pacific, on a constant currency basis. Increases in the U.S. were offset by decreases in our European sales, which were down 2% on a constant currency basis. The operating income in this segment increased by $2.7 million or 10% for the first half of 2004 compared to the first half of 2003. The disparity between the increase in sales and operating income is largely reflective of the Company’s new approach to its CMS business, discussed in the Comparison of the First Six Months 2004 with First Six Months of 2003. Further, this segment’s operating income was negatively impacted ~~gross margin for the second quarter 2003~~ by ~~approximately 3 percentage points. The remaining decline in gross margin as a percentage of sales was due to increased~~higher raw material costs, as well as product and regional sales mix.

~~Selling, general~~

Coatings:

The Company’s Coatings segment represents approximately 6% of our sales in the first six months of 2004 and ~~administrative (SG&A) expenses~~contains products that provide temporary and permanent coatings for metal and concrete products. Revenues for this segment were up approximately 3% for the ~~quarter~~first six months of 2004 compared with the first six months of 2003 primarily due to higher chemical milling maskant sales to the aerospace industry. Operating income increased by $0.2 million over the first half of 2003, consistent with the noted volume increases.

Other Chemical Products:

Other Chemical Products represents approximately 2% of total sales in the first six months of 2004 and consists of sulfur removal products for industrial gas streams sold by the Company’s Q2 Technologies joint venture. Sales and operating income for the first half of 2004 were essentially flat with the first half of 2003.

Comparison of Second Quarter 2004 with Second Quarter of 2003

Net sales for the second quarter of ~~2002. Increases~~2004 were a record $98.7 million, up 18% from $83.5 million for the second quarter of 2003. Foreign exchange rate translation, the Company’s 2003 acquisitions, and the Company’s new CMS contracts favorably

impacted net sales by $1.9 million, $5.6 million and $4.0 million, respectively. The remaining net sales increase of approximately 4% was primarily due to ~~foreign exchange rates~~double-digit growth in the Asia/Pacific and South American regions with lower sales in Europe tempering increases in the ~~timing~~U.S.

Gross margins as a percentage of sales declined from 34.7% for the second quarter of 2003 to 33.0% for the second quarter of 2004. The different reporting of the Company’s ~~2002 acquisitions were offset by reduced incentive compensation expense and cost containment efforts~~new CMS business discussed in the six-month comparison, accounted for approximately one-half of the ~~Company.~~decline in gross margin as a percentage of sales. The remainder of the decline was due to higher raw material costs.

Selling, general and administrative expenses for the quarter increased $4.0 million compared to the second quarter of 2003. Foreign exchange rate translation and the Company’s 2003 acquisitions accounted for approximately one-third of the increase. The majority of the remaining increase was due to higher expenses associated with the Company’s ERP implementation, Sarbanes-Oxley compliance, as well as inflationary increases. In addition, the Company added infrastructure to support its growth initiatives in CMS and the Asia/Pacific region.

The ~~increase~~decrease in other income ~~primarily reflects a $0.3 million positive income impact related to a $2.4 million~~is reflective of higher priority ~~cash distribution received~~return distributions 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. In2003 versus the second quarter of ~~2002, the Company’s Brazilian entity had more cash, which was~~

~~earning~~2004. The increase in net interest ~~at a rate of nearly 20%. The Company made a mid-year 2002 decision to repatriate this cash to the U.S.~~expense is primarily due to higher debt balances outstanding during the ~~potential~~second quarter of 2004 versus the second quarter of 2003.

Net income for the ~~Real to weaken, which has resulted~~second quarter was $2.8 million versus $3.5 million for the second quarter of 2003. Earnings per diluted share were $0.29 per diluted share versus $0.36 per diluted share for the second quarter of 2003, as a result of the items discussed in ~~decreased interest income~~the Comparison of the First Six Months 2004 with First Six Months of 2003.

Segment Reviews - Comparison of the Second Quarter 2004 with Second Quarter of 2003

Metalworking Process Chemicals:

~~The effective tax rate~~2004. Reported revenues for the second quarter ~~2003 is 31% down from 32%~~of 2004 were up approximately 20% compared with the second quarter of 2003. The Company’s new CMS contracts accounted for approximately 5 percentage points of the revenue growth. Currency translation increased sales by 3 percentage points of the revenue growth as the average Euro to US Dollar rate was 1.21 in the second quarter of ~~2002 and 33% in~~2004 compared to 1.14 during the ~~first~~second quarter of 2003. The ~~decrease~~Company’s acquisitions of Vulcan, Eural and KS Chemie accounted for 7 percentage points of the revenue growth in this segment. Therefore, these three items accounted for 15% of the ~~effective tax rate is~~20% growth in this segment. The remaining net sales increase of 5% was primarily due to 15% growth in South America and 16% growth in Asia/Pacific, on a constant currency basis. Increases in the U.S. were offset by decreases in our European sales, which were down 6% on a constant currency basis. Although our market share in Europe remained stable during the quarter, the competitive pressures experienced last year are being realized in the quarterly comparisons. The operating income in this segment increased by $1.1 million or 9% for the first half of 2004 compared to the first half of 2003. The disparity between the increase in sales and operating income is largely reflective of the Company’s ~~favorable settlement of outstanding tax audits~~new approach to its CMS business, discussed in the six month comparison. Further, this segment’s operating income was negatively impacted by higher raw material costs, as well as product and ~~appeal issues related to several foreign subsidiaries.~~regional sales mix.

Coatings:

The ~~decrease~~Company’s Coatings segment represents approximately 6% of our sales in ~~equity~~the second quarter of 2004 and contains products that provide temporary and permanent coatings for metal and concrete products. Revenues and operating income for this segment were essentially flat for the second quarter of 2004 compared with the second quarter of 2003.

Other Chemical Products:

Other Chemical Products represents approximately 2% of total sales in the second quarter of 2004 and consists of sulfur removal products for industrial gas streams sold by the Company’s Q2 Technologies joint venture. Sales and operating income for the second quarter of ~~2003 is primarily due to~~2004 were flat with the ~~consolidation~~second quarter 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 real estate joint venture. The increase in minority interest was primarily due to the consolidation of the Company’s South African joint venture.2003.

~~Other Significant Items~~

In May 2003, the Company acquired a range of cleaners, wet temper fluids and other products from KS Chemie, located in Dusseldorf, Germany for approximately $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 of intangible assets comprised of product line technology to be amortized over a range of five to ten years. The Company also recorded $0.7 million of goodwill, which was assigned to the Metalworking process chemicals segment.

In July 2003, the Company acquired all of the outstanding stock of Eural S.r.l., a privately held company located in Tradate, Italy for $5.7 million. Eural manufactures a variety of specialty metalworking fluids primarily for the Italian market. The Company is currently assessing the allocation of the purchase price.

Factors that May Affect ~~our~~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 ~~Securities and Exchange Commission~~SEC (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~~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~~statements relating to our business strategy;

~~Our~~our current and future results and plans; and

~~Statements~~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-K and 8-K, press releases and other materials released to the public.

~~The~~

Any or all of the forward-looking statements in this Report 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 ~~could impact~~are subject to change based on various important factors, some of which are beyond our control. A major risk is that the Company’s ~~future operations~~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 ~~results~~unanticipated customer production planning shutdowns. Other major risks and uncertainties include, but are not limited to, ~~further downturns in our customers’ businesses,~~ significant increases in raw material costs, worldwide economic and political conditions, foreign currency fluctuations, ~~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, and durable goods manufacturers. These risks, uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results. Other factors beyond those discussed below could also adversely affect us. Therefore, we caution you not to place undue reliance on our forward-looking statements. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Interest Rate ~~Risk~~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. Incorporated by reference is the information under the caption “Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 8 of the Notes to Consolidated Financial Statements beginning on pages 11 and 33, respectively, of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (the “2002 Form 10-K”). IfAccordingly, if interest rates rise significantly, the cost of short-term debt to Quaker will increase. This can have ~~a material~~an adverse effect on Quaker, depending on the extent of Quaker’s short-term borrowings. As of June 30, ~~2003,~~2004, Quaker had ~~$17.1~~$50.8 million ofin short-term ~~borrowings compared to $9.3 million as of December 31, 2002.~~borrowings.

Foreign Exchange Risk. A significant portion of Quaker’s revenues and earnings is generated by its foreign operations. ~~Incorporated by reference is the information concerning~~These foreign operations also hold a significant portion of Quaker’s ~~non-U.S. activities appearing in Note 11 of the Notes to Consolidated Financial Statements beginning on page 38 of the 2002 Form 10-K.~~assets and liabilities. All such ~~subsidiaries~~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, 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 ~~Quaker has used, on a limited basis, forward exchange contracts~~three years, sales by non-U.S. subsidiaries accounted for approximately 55% to ~~hedge foreign currency transactions and~~56% of the consolidated net annual sales.

In addition, the Company often sources inventory among its worldwide operations. This practice can give rise to foreign exchange ~~options~~risk resulting from the varying cost of inventory to ~~reduce exposure to changes in foreign exchange rates.~~the receiving location as well as from the revaluation of intercompany balances. 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.~~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. ~~Quaker has not been, nor is it currently a party to, any derivative financial instrument relative to commodities.~~

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 number of bankruptcies occurred during recent years. ~~In 2000, 2001, and early 2002,~~Through 2003, Quaker recorded additional provisions for doubtful accounts primarily related to bankruptcies in the U.S. steel industry. When a bankruptcy occurs, Quaker must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process. AsIn 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. Incorporated by reference is the information under the captions “Critical Accounting Policies and Estimates” and “Liquidity and Capital Resources” in Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on pages 8 and 11 respectively, of the 2002 Form 10-K.

~~Item 4.~~ ~~Controls and Procedures~~

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)~~13a-15(e)), based on their evaluation of such controls and procedures as of the end of the period covered by this Quarterly Report on Form 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~~The Company is in the process of implementing a global ERP system. The Company completed its initial implementation of this system in ~~the~~The Netherlands during ~~the fourth quarter of~~ 2002. ~~In the second quarter of~~During 2003, the Company implemented ~~the ERP~~this system in additional European subsidiaries, its ~~Spanish subsidiary. During the fourth quarter of 2003, the Company plans to implement the system in its US operations. By~~primary U.S. Operations and several CMS sites. At the end of 2003, subsidiaries representing more than 50% of consolidated revenue ~~are expected to be~~were operational on the global ERP system. The Company continued to implement this system at other CMS sites during the second quarter of 2004. Additional subsidiaries and CMS sites are planned to be implemented during ~~2004.~~2004 and 2005. 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,~~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 ~~2003~~2004 Annual Meeting of the Company’s shareholders was held on May ~~14, 2003.~~5, 2004. At the meeting, management’s nominees, ~~Donald R. Caldwell, Robert E. Chappell, William R. Cook,~~Joseph B. Anderson, Jr., Patricia C. Barron, and ~~Robert P. Hauptfuhrer~~Edwin J. Delattre were elected Class IIIII Directors. Voting (expressed in number of votes) was as follows: ~~Donald R. Caldwell, 23,331,952~~Joseph B. Anderson, Jr., 21,266,944 votes for, ~~276,622~~285,665 votes against or withheld, and no abstentions or broker non-votes; ~~Robert E. Chappell, 23,483,314~~Patricia C. Barron, 21,155,106 votes for, ~~125,260~~397,503 votes against or withheld, and no abstentions or broker non-votes; ~~William R. Cook, 23,336,380~~Edwin J. Delattre, 21,120,333 votes for, ~~272,194 votes against or withheld, and no abstentions or broker non-votes; Robert P. Hauptfuhrer, 23,493,071 votes for, 115,503~~432,276 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’s independent accountants to examine and report on its financial statements for the year ending December 31, ~~2003~~2004 by a vote of ~~23,347,361~~21,326,394 for, ~~161,498 votes~~219,164 against, ~~99,715~~7,051 abstentions, and no broker non-votes.

~~Item 6:~~

~~Exhibits and Reports on Form 8-K~~

~~(a)Exhibits.~~Item 6: Exhibits and Reports on Form 8-K

(a)

Exhibits.


10(yy) -
~~10(qq)~~	~~– Credit~~Change in Control Agreement by and between Registrant and ~~PNC Bank, National Association in the amount of $10,000,000,~~D. Jeffry Benoliel dated June ~~19, 2003.~~ 10, 2004, effective May 14, 2004.

10(zz) -
~~10(rr)~~	~~– Commercial Note~~Change in Control Agreement by and between Registrant and ~~National City Bank, National Association in the amount of~~ ~~$10,000,000,~~Mark Featherstone dated June ~~19, 2003.~~ 10, 2004, effective May 14, 2004.

10(aaa) -		Change in Control Agreement by and between Registrant and Jose Luiz Bregolato, dated June 23, 2004, effective May 14, 2004.

10(bbb) -		Change in Control Agreement by and between Registrant and Rex Curtis dated June 18, 2004, effective May 14, 2004.

10(ccc) -		Amendment No. 1 to Employment Agreement dated March 11, 1999 between Registrant and Ronald J. Naples, effective July 21, 2004.

10(ddd) -		Employment Agreement by and between Registrant and Neal E. Murphy, effective July 22, 2004.

10(eee) -		Change in Control Agreement by and between Registrant and Neal E. Murphy, effective July 22, 2004.

10(fff) -		1995 Naples Supplemental Retirement Income Program and Agreement (as amended and restated effective May 14, 2004) between Registrant and Ronald J. Naples dated August 4, 2004.

10(ggg) -		Change in Control Agreement by and between Registrant and Joseph W. Bauer, effective May 14, 2004.

10(hhh) -		Change in Control Agreement by and between Registrant and Michael F. Barry, effective May 14, 2004.

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 18 U.S. C. Section 1350

32.2 -	–	Certification of Michael F. Barry Pursuant to 18 U.S. C. Section 1350

(b)

Reports on Form 8-K.

~~(b)Reports on Form 8-K.~~

1. On ~~May 5, 2003~~April 30, 2004, the Company furnished on Form 8-K its First Quarter ~~2003~~2004 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/~~M~~ICHAEL~~ F. B~~ARRY~~
(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

Date: August 6, 2004

	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

	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

	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