form10q.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 




FORM 10-Q
 




 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011

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

For the transition period from              to             

Commission file number 001-12019
 






QUAKER CHEMICAL CORPORATION
(Exact name of Registrant as specified in its charter)
 


 

 
     
Pennsylvania
 
23-0993790
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
     
One Quaker Park, 901 E. Hector Street,
Conshohocken, Pennsylvania
 
19428 – 2380
(Address of principal executive offices)
 
(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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes   x     No   ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


 
Large accelerated filer  ¨    
 
Accelerated filer  x
 
 
Non-accelerated filer  ¨ (Do not check if smaller reporting company)
Smaller reporting Company ¨
 



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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
     
Number of Shares of Common Stock
Outstanding on June 30, 2011
 
 
12,823,294

 
 

 

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
         
 
  
 
  
Page
PART I.
  
FINANCIAL INFORMATION
  
 
Item 1.
  
Financial Statements (unaudited)
  
 
 
  
  
3
 
  
  
4
 
  
  
5
 
  
  
6
Item 2.
  
  
20
Item 3.
  
  
25
Item 4.
  
  
26
PART II.
  
  
27
Item 2.
   
27
Item 6.
  
  
28
Signatures
  
28

 
2


PART I
FINANCIAL INFORMATION

Item 1.                                Financial Statements (Unaudited).

Quaker Chemical Corporation
 
Condensed Consolidated Balance Sheet

   
Unaudited
 
   
(Dollars in thousands,
 
   
except par value
 
   
and share amounts)
 
   
June 30, 2011
   
December 31, 2010*
 
 
ASSETS
               
Current assets
               
        Cash and cash equivalents
 
$
23,541 
   
$
25,766 
 
        Accounts receivable, net
   
137,402 
     
116,266 
 
        Inventories
               
                Raw materials and supplies
   
43,580 
     
31,909 
 
                Work-in-process and finished goods
   
33,119 
     
28,932 
 
        Prepaid expenses and other current assets
   
16,032 
     
12,609 
 
                Total current assets
   
253,674 
     
215,482 
 
Property, plant and equipment, at cost
   
218,119 
     
205,359 
 
        Less accumulated depreciation
   
(138,414)
     
(128,824)
 
                Net property, plant and equipment
   
79,705 
     
76,535 
 
Goodwill
   
55,282 
     
52,758 
 
Other intangible assets, net
   
23,127 
     
24,030 
 
Investments in associated companies
   
9,407 
     
9,218 
 
Deferred income taxes
   
25,784 
     
28,846 
 
Other assets
   
43,840 
     
42,561 
 
                Total assets
 
$
490,819 
   
$
449,430 
 
                 
LIABILITIES AND EQUITY
               
Current liabilities
               
        Short-term borrowings and current portion of long-term debt
 
$
836 
   
$
890 
 
        Accounts and other payables
   
79,465 
     
63,893 
 
        Accrued compensation
   
11,026 
     
17,140 
 
        Other current liabilities
   
19,808 
     
19,268 
 
               Total current liabilities
   
111,135 
     
101,191 
 
Long-term debt
   
33,628 
     
73,855 
 
Deferred income taxes
   
6,817 
     
6,108 
 
Other non-current liabilities
   
77,534 
     
81,177 
 
               Total liabilities
   
229,114 
     
262,331 
 
Equity
               
         Common stock $1 par value; authorized 30,000,000 shares; issued and outstanding
               
            2011 – 12,823,294 shares; 2010 – 11,492,142 shares
   
12,823 
     
11,492 
 
         Capital in excess of par value
   
87,249 
     
38,275 
 
         Retained earnings
   
158,998 
     
144,347 
 
         Accumulated other comprehensive loss
   
(5,507)
     
(13,736)
 
               Total Quaker shareholders’ equity
   
253,563 
     
180,378 
 
Noncontrolling interest
   
8,142 
     
6,721 
 
Total equity
   
261,705 
     
187,099 
 
         Total liabilities and equity
 
$
490,819 
   
$
449,430 
 





*
Condensed from audited financial statements

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

 
3


Quaker Chemical Corporation
 
Condensed Consolidated Statement of Income

 
 
Unaudited
   
Unaudited
 
 
 
(Dollars in thousands,
   
(Dollars in thousands,
 
 
 
except per
   
except per
 
 
 
share and share amounts)
   
share and share amounts)
 
 
 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
 
 
2011
   
2010
   
2011
   
2010
 
Net sales
  $ 167,792     $ 135,991     $ 327,657     $ 264,311  
Cost of goods sold
    114,026       87,460       221,157       168,440  
Gross profit
    53,766       48,531       106,500       95,871  
Selling, general and administrative expenses
    38,825       35,118       77,459       68,787  
Operating income
    14,941       13,413       29,041       27,084  
Other income, net
    791       1,123       1,330       1,886  
Interest expense
    (1,200 )     (1,386 )     (2,418 )     (2,697 )
Interest income
    271       343       543       527  
Income before taxes and equity in net income of associated companies
    14,803       13,493       28,496       26,800  
Taxes on income before equity in net income of associated companies
    4,499       4,143       7,321       7,324  
Income before equity in net income of associated companies
    10,304       9,350       21,175       19,476  
Equity in net income of associated companies
    251       384       610       295  
Net income
    10,555       9,734       21,785       19,771  
Less: Net income attributable to noncontrolling interest
    714       581       1,344       1,199  
Net income attributable to Quaker Chemical Corporation
  $ 9,841     $ 9,153     $ 20,441     $ 18,572  
Per share data:
                               
Net income attributable to Quaker Chemical Corporation Common
                               
Shareholders – basic
  $ 0.80     $ 0.82     $ 1.72     $ 1.66  
Net income attributable to Quaker Chemical Corporation Common
                               
Shareholders – diluted
  $ 0.79     $ 0.80     $ 1.69     $ 1.64  
Dividends declared
  $ 0.24     $ 0.235     $ 0.475     $ 0.465  
 
                               

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

 
4



Quaker Chemical Corporation
 
Condensed Consolidated Statement of Cash Flows

   
Unaudited
 
   
(Dollars in thousands)
 
   
For the Six Months Ended
 
   
June 30,
 
   
2011
   
2010
 
Cash flows from operating activities
           
Net income
  $ 21,785     $ 19,771  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    5,405       5,068  
Amortization
    973       462  
Equity in undistributed earnings of associated companies, net of dividends
    (32 )     (233 )
Deferred compensation and other, net
    4,162       (357 )
Stock-based compensation
    1,854       1,663  
Gain on disposal of property, plant and equipment
    (78 )     (22 )
Insurance settlement realized
    (864 )     (772 )
Pension and other postretirement benefits
    (4,168 )     (2,227 )
Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions:
               
Accounts receivable
    (17,392 )     (10,645 )
Inventories
    (13,986 )     (7,181 )
Prepaid expenses and other current assets
    (4,029 )     (1,641 )
Accounts payable and accrued liabilities
    6,537       6,409  
Net cash provided by operating activities
    167       10,295  
                 
Cash flows from investing activities
               
Investments in property, plant and equipment
    (6,641 )     (3,468 )
Proceeds from disposition of assets
    221       59  
Payments related to acquisitions, net of cash acquired
    (717 )      
Insurance settlement received and interest earned
    42       5,070  
Change in restricted cash, net
    822       (1,940 )
Net cash used in investing activities
    (6,273 )     (279 )
                 
Cash flows from financing activities
               
Net increase in short-term borrowings
          1,263  
Repayment of long-term debt
    (40,402 )     (2,614 )
Dividends paid
    (5,413 )     (5,119 )
Stock options exercised, other
    146       1,663  
Excess tax benefit related to stock option exercises
    162       1,236  
Proceeds from sale of common stock, net of related expenses
    48,143        
Net cash provided by (used in) financing activities
    2,636       (3,571 )
Effect of exchange rate changes on cash
    1,245       (3,890 )
Net (decrease) increase in cash and cash equivalents
    (2,225 )     2,555  
Cash and cash equivalents at beginning of period
    25,766       25,051  
Cash and cash equivalents at end of period
  $ 23,541     $ 27,606  
                 
Supplemental cash flow disclosures:
               
Non-cash activities:
               
Excess tax benefit related to stock option exercises
  $     $ 882  
Restricted insurance receivable (See also Note 13 of Notes to Condensed Consolidated Financial Statements)
          5,000  

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

 
5

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in 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 in the United States for interim financial reporting and the United States Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments, except as discussed below) 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, 2011 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2010.

Effective January 1, 2010, the Venezuelan economy was considered to be hyperinflationary under generally accepted accounting principles in the United States, since it has experienced a rate of general inflation in excess of 100% over the latest three-year period, based upon the blended Consumer Price Index and National Consumer Price Index.  Accordingly, all gains and losses resulting from the remeasurement of the Company’s Venezuelan 50% equity affiliate (Kelko Quaker Chemical, S.A.) are required to be recorded directly in the statement of operations.  On January 8, 2010, the Venezuelan government announced the devaluation of the Bolivar Fuerte.  As a result of the devaluation, the Company recorded a charge of approximately $0.03 per diluted share in the first quarter of 2010.

As part of the Company’s chemical management services, certain third-party product sales to customers are managed by the Company. Where the Company acts as principal, revenue is recognized on a gross reporting basis at the selling price negotiated with customers. Where the Company acts as agent, such revenue is recorded using net reporting as service revenues, at the amount of the administrative fee earned by the Company for ordering the goods. Third-party products transferred under arrangements resulting in net reporting totaled $24,276 and $27,995 for the six months ended June 30, 2011 and 2010, respectively.

Note 2 – Recently Issued Accounting Standards

The FASB updated its guidance in June 2011 regarding presentation of comprehensive income.  Comprehensive income will be required to be presented with the Consolidated Statement of Income or as a separate financial statement immediately following the Consolidated Statement of Income.  Presentation of comprehensive income will no longer be presented as part of the Statement of Shareholders’ Equity.  The guidance is effective for annual and interim fiscal periods beginning after December 15, 2011.   The Company is currently evaluating the effect of this guidance.

The FASB also updated its guidance in May 2011 regarding disclosures pertaining to assets and liabilities measured at fair value.  The guidance requires quantitative measures regarding unobservable inputs for Level 3 assets and liabilities.  Additionally, the guidance requires a sensitivity analysis regarding those inputs. The guidance is effective for annual and interim fiscal periods beginning after December 15, 2011.   The Company is currently evaluating the effect of this guidance.
 
 

Note 3 – Income Taxes and Uncertain Income Tax Positions

The Company's year-to-date 2011 effective tax rate of 25.7% was lower than the year-to-date 2010 effective tax rate of 27.3%.  Both year-to-date effective tax rates reflect the derecognition of uncertain tax positions due the expiration of applicable statutes of limitations for certain tax years of approximately $0.11 per diluted share.  The most significant other item affecting the comparison of year-to-date effective tax rates is a higher utilization of foreign tax credits in 2011 which were previously not benefited.

The FASB’s guidance regarding accounting for uncertainty in income taxes prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. The guidance further requires the determination of whether the benefits of tax positions will be more likely than not sustained upon audit based upon the technical merits of the tax position. For tax positions that are determined to be more likely than not sustained upon audit, a company recognizes the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained upon audit, a company does not recognize any portion of the benefit in the financial statements. Additionally, the guidance provides for derecognition, classification, penalties and interest, accounting in interim periods, disclosure and transition.

 
6

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)


At December 31, 2010, the Company’s cumulative liability for gross unrecognized tax benefits was $10,464. As of June 30, 2011, the Company’s cumulative liability for gross unrecognized tax benefits was $11,282.

The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of taxes on income in its Consolidated Statement of Income. The Company had accrued $1,824 for cumulative interest and $857 for cumulative penalties at December 31, 2010. The Company has recognized $184 and $59 for interest and $145 and $424 for penalties on its Consolidated Statement of Income for the three and six months ended June 30, 2011, respectively, and, as of June 30, 2011, the Company had accrued $2,008 for cumulative interest and $1,336 for cumulative penalties.

During the three months ended March 31, 2011, the Company derecognized uncertain tax positions due to expiration of the applicable statutes of limitations for certain tax years. As a result, the Company recognized a $922 decrease in its cumulative liability for gross unrecognized tax benefits.   During the three months ended June 30, 2011, the Company derecognized several uncertain tax positions due to the liquidation of the Company’s subsidiary in Wuxi China for certain tax years of approximately $36.

The Company estimates that during the year ending December 31, 2011 it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $1,400 to $1,600 due to the expiration of the statute of limitations with regard to certain tax positions. This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability for unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits with regard to new tax positions for the year ending December 31, 2011.

The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign tax jurisdictions. Tax years that remain subject to examination by major tax jurisdictions include the Netherlands from 2005, United Kingdom, Italy, Brazil, and Spain from 2006, China and the United States from 2007 and various domestic state tax jurisdictions from 1993.

Note 4 – Fair Value Measurements
 
The FASB’s guidance regarding fair value measurements establishes a common definition for fair value to be applied to guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.  The guidance does not require any new fair value measurements, but rather applies to all other accounting guidance that requires or permits fair value measurements.
 
The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
 
 
·
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
 
·
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
 
 
·
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
 
The Company values its interest rate swaps, company-owned life insurance policies and various deferred compensation assets and liabilities, as well as acquisition related contingent consideration at fair value.  The Company’s assets and liabilities subject to fair value measurement are as follows (in thousands):
 
 
7

Table of Contents
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
         
Fair Value Measurements at June 30, 2011
 
   
Fair Value
   
Using Fair Value Hierarchy
 
   
as of
                   
Assets
 
June 30, 2011
   
Level 1
   
Level 2
   
Level 3
 
Company-owned life insurance
  $ 1,557     $     $ 1,557     $  
Company-owned life insurance - Deferred compensation assets
    546             546        
Other deferred compensation assets
                               
Large capitalization registered investment companies
    69       69              
Mid capitalization registered investment companies
    4       4              
Small capitalization registered investment companies
    8       8              
International developed and emerging markets registered investment
                               
                companies
    39       39              
Fixed income registered investment companies
    8       8              
                                 
Total
  $ 2,231     $ 128     $ 2,103     $  

         
Fair Value Measurements at June 30, 2011
 
   
Fair Value
   
Using Fair Value Hierarchy
 
   
as of
                   
Liabilities
 
June 30, 2011
   
Level 1
   
Level 2
   
Level 3
 
Deferred compensation liabilities
                       
Large capitalization registered investment companies
  $ 341     $ 341     $     $  
Mid capitalization registered investment companies
    89       89              
Small capitalization registered investment companies
    74       74              
International developed and emerging markets registered investment
                               
                  companies
    206       206              
Fixed income registered investment companies
    49       49              
Fixed general account
    173             173        
Interest rate derivatives
    759             759        
Acquisition related contingent consideration
    5,738                   5,738  
                                 
Total
  $ 7,429     $ 759     $ 932     $ 5,738  

         
Fair Value Measurements at December 31, 2010
 
   
Fair Value
   
Using Fair Value Hierarchy
 
   
as of
                   
Assets
 
December 31, 2010
   
Level 1
   
Level 2
   
Level 3
 
Company-owned life insurance
  $ 2,033     $     $ 2,033     $  
Company-owned life insurance - Deferred compensation assets
    593             593        
Other deferred compensation assets
                               
Large capitalization registered investment companies
    69       69              
Mid capitalization registered investment companies
    4       4              
Small capitalization registered investment companies
    8       8              
International developed and emerging markets registered investment
                               
                 companies
    40       40              
Fixed income registered investment companies
    10       10              
                                 
Total
  $ 2,757     $ 131     $ 2,626     $  
 

 
 
8

Table of Contents
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)
 
         
Fair Value Measurements at December 31, 2010
 
   
Fair Value
   
Using Fair Value Hierarchy
 
   
as of
                   
Liabilities
 
December 31, 2010
   
Level 1
   
Level 2
   
Level 3
 
Deferred compensation liabilities
                       
Large capitalization registered investment companies
  $ 347     $ 347     $     $  
Mid capitalization registered investment companies
    88       88              
Small capitalization registered investment companies
    71       71              
International developed and emerging markets registered investment
                               
                 companies
    213       213              
Fixed income registered investment companies
    52       52              
Fixed general account
    182             182        
Interest rate derivatives
    1,026             1,026        
Acquisition related contingent consideration
    5,350                   5,350  
                                 
Total
  $ 7,329     $ 771     $ 1,208     $ 5,350  

The fair values of Company-owned life insurance (“COLI”) and COLI deferred compensation assets are based on quotes for like instruments with similar credit ratings and terms.  The fair values of other deferred compensation assets and liabilities are based on quoted prices in active markets, with the exception of the fixed general account, which is based on quotes for like instruments with similar credit ratings and terms.  The fair values of interest rate derivatives are based on quoted market prices from various banks for similar instruments.  The fair value of the acquisition related contingent consideration is based on unobservable inputs and is classified as Level 3.  Significant inputs and assumptions are management’s estimate of the probability of the earnout ultimately being met/paid and the discount rate used to present value the liability.
 
Changes in the fair value of the Level 3 liability during the six months ended June 30, 2011 was as follows:

 
Contingent
 
 
Consideration
 
Balance at December 31, 2010
  $ 5,350  
Interest accretion
    388  
Balance at June 30, 2011
  $ 5,738  

Note 5 – Hedging Activities
 
The Company is exposed to the impact of changes in interest rates, foreign currency fluctuations, changes in commodity prices and credit risk.  The Company does not use derivative instruments to mitigate the risks associated with foreign currency fluctuations, changes in commodity prices or credit risk.  Quaker uses interest rate swaps to mitigate the impact of changes in interest rates.  The swaps convert a portion of the Company’s variable interest rate debt to fixed interest rate debt and are designated as cash flow hedges and reported on the balance sheet at fair value.  The effective portions of the hedges are reported in Other Comprehensive Income (“OCI”) until reclassified to earnings during the same period the hedged item affects earnings.  The Company has no derivatives designated as fair value hedges and only has derivatives designated as hedging instruments under the FASB’s guidance.  The notional amount of the Company’s interest rate swaps was $15,000 as of June 30, 2011 and December 31, 2010.
 
Information about the Company’s interest rate derivatives is as follows (in thousands of dollars):

   
Fair Value
 
   
June 30,
 
December 31,
 
 
Balance Sheet Location
2011
 
2010
 
Derivatives designated as cash flow hedges:
             
Interest rate swaps
Other non-current liabilities
    759       1,026  
      $ 759     $ 1,026  
 
 
 
9

Table of Contents
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)
 

 
Cash Flow Hedges
 
Interest Rate Swaps
 
                           
   
Three Months Ended
 
Six Months Ended
 
   
June 30,
 
June 30,
 
   
2011
 
2010
 
2011
 
2010
 
Amount of Gain (Loss) Recognized in Accumulated OCI on Derivative
                         
(Effective Portion)
    $ 78     $ 191     $ 174     $ 296  
                                   
Amount and Location of Gain (Loss) Reclassified from Accumulated OCI into
                                 
Income (Effective Portion)
Interest Expense
  $ (165 )   $ (454 )   $ (328 )   $ (908 )
                                   
Amount and Location of Gain (Loss) Recognized in Income on Derivative
                                 
(Ineffective Portion and Amount Excluded from Effectiveness Testing)
Other Income
  $     $     $     $  

Note 6 – Stock-Based Compensation
 
The Company recognized approximately $1,854 of share-based compensation expense for the six months ended June 30, 2011. The compensation expense was comprised of $228 related to stock options, $671 related to nonvested stock awards, $23 related to the Company’s Employee Stock Purchase Plan, $902 related to the Company’s non elective 401(k) matching contribution and a portion of its elective 401(k) matching contribution in stock, and $30 related to the Company’s Director Stock Ownership Plan.
 
Based on historical experience, the Company has assumed a forfeiture rate of 13% on the nonvested stock. The Company will record additional expense if the actual forfeiture rate is lower than estimated, and will record a recovery of prior expense if the actual forfeiture is higher than estimated.
 
The Company has a long-term incentive program (“LTIP”) for key employees which provides for the granting of options to purchase stock at prices not less than market value on the date of the grant. Most options become exercisable between one and three years after the date of the grant for a period of time determined by the Company not to exceed seven years from the date of grant.  Common stock awards issued under the LTIP program are subject only to time vesting over a three to five-year period. In addition, as part of the Company’s Global Annual Incentive Plan (“GAIP”), nonvested shares may be issued to key employees, which generally vest over a two to five-year period.
 
Stock option activity under all plans is as follows:

           
Weighted
           
Average
     
Weighted Average
Remaining
 
Number of
 
Exercise Price per
Contractual
 
Shares
 
Share
Term (years)
Balance at December 31, 2010
303,444 
 
$
14.19 
   
Options granted
36,835 
   
37.37 
   
Options exercised
(10,163)
   
15.40 
   
Options forfeited
(11,018)
   
13.67 
   
Balance at June 30, 2011
319,098 
 
$
16.85 
 
4.5 
Exercisable at June 30, 2011
163,995 
 
$
14.48 
 
3.6 

As of June 30, 2011, the total intrinsic value of options outstanding was approximately $8,204, and the total intrinsic value of exercisable options was $4,605.  Intrinsic value is calculated as the difference between the current market price of the underlying security and the strike price of a related option.
 
A summary of the Company’s outstanding stock options at June 30, 2011 is as follows: 
 
 
 
10

Table of Contents
 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
 
           
Weighted
 
Weighted
 
Number
Weighted
         
Number
Average
 
Average
 
Exercisable
Average
Range of
Outstanding
Contractual
 
Exercise
 
at
Exercise
Exercise Prices
at 6/30/2011
Life
 
Price
 
6/30/2011
Price
$
3.74 
-
$
7.47 
125,155 
4.6 
 
$
6.93 
 
74,595 
$
6.93 
$
7.48 
-
$
18.69 
— 
— 
   
— 
 
— 
 
— 
$
18.70 
-
$
22.42 
119,264 
5.2 
   
18.92 
 
51,556 
 
19.04 
$
22.43 
-
$
26.16 
37,844 
0.3 
   
23.13 
 
37,844 
 
23.13 
$
26.17 
-
$
33.63 
— 
— 
   
— 
 
— 
 
— 
$
33.64 
-
$
37.37 
36,835 
6.7 
   
37.37 
 
— 
 
— 
         
319,098 
4.5 
   
16.85 
 
163,995 
 
14.48 

As of June 30, 2011, unrecognized compensation expense related to options granted during 2009 was $71, for options granted during 2010 was $341 and for options granted in 2011 was $444.
 
During the first quarter of 2011, the Company granted 36,835 stock options under the Company’s LTIP plan that are subject only to time vesting over a three-year period.  For the purposes of determining the fair value of stock option awards, the Company uses the Black-Scholes option pricing model and the assumptions set forth in the table below:

   
2011 
   
 
Dividend Yield
5.00 
%
 
 
Expected Volatility
62.13 
%
 
 
Risk-free interest rate
1.99 
%
 
 
Expected term (years)
5.0 
   
 
Expected forfeiture rate
3.00 
%
 

Approximately $55 of expense was recorded on these options during the first six months of 2011. The fair value of these awards is amortized on a straight-line basis over the vesting period of the awards.

Nonvested shares granted under the Company’s LTIP plans are shown below:
           
     
Weighted
 
     
Average Grant
 
 
Number of
 
Date Fair Value
 
 
Shares
 
(per share)
 
Nonvested awards, December 31, 2010
163,076 
 
$
14.89 
 
Granted
42,850 
 
$
39.29 
 
Vested
(39,412)
 
$
21.86 
 
Forfeited
(9,151)
 
$
11.65 
 
Nonvested awards, June 30, 2011
157,363 
 
$
19.97 
 

The fair value of the nonvested stock is based on the trading price of the Company’s common stock on the date of grant. The Company adjusts the grant date fair value for expected forfeitures based on historical experience for similar awards.  As of June 30, 2011, unrecognized compensation expense related to these awards was $1,892 to be recognized over a weighted average remaining period of 1.92 years.
 
Nonvested shares granted under the Company’s GAIP plan are shown below:

     
Weighted
 
     
Average Grant
 
 
Number of
 
Date Fair Value
 
 
Shares
 
(per share)
 
Nonvested awards, December 31, 2010
63,250 
 
$
7.72 
 
Granted
— 
 
$
— 
 
Vested
— 
 
$
— 
 
Forfeited
(500)
 
$
7.72 
 
Nonvested awards, June 30, 2011
62,750 
 
$
7.72 
 


 
11

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)


As of June 30, 2011, unrecognized compensation expense related to these awards was $121, to be recognized over a weighted average remaining period of 0.75 years.
 
Employee Stock Purchase Plan
 
In 2000, the Board adopted an Employee Stock Purchase Plan (“ESPP”) whereby employees may purchase Company stock through a payroll deduction plan. Purchases are made from the plan and credited to each participant’s account at the end of each month, the “Investment Date.” The purchase price of the stock is 85% of the fair market value on the Investment Date. The plan is compensatory and the 15% discount is expensed on the Investment Date. All employees, including officers, are eligible to participate in this plan. A participant may withdraw all uninvested payment balances credited to a participant’s account at any time by giving written notice to the Company. An employee whose stock ownership of the Company exceeds five percent of the outstanding common stock is not eligible to participate in this plan.
 
2003 Director Stock Ownership Plan
 
In March 2003, the Company’s Board of Directors approved a stock ownership plan for each member of the Company’s Board to encourage the Directors to increase their investment in the Company. The Plan was effective on the date it was approved and remains in effect for a term of ten years or until it is earlier terminated by the Board. The maximum number of shares of Common Stock which may be issued under the Plan is 75,000, subject to certain conditions that the Compensation/Management Development Committee (the “Committee”) may elect to adjust the number of shares. As of June 30, 2011, the Committee has not made any elections to adjust the shares under this plan. Each Director is eligible to receive an annual retainer for services rendered as a member of the Board of Directors. Currently, each Director who owns less than 7,500 shares of Company Common Stock is required to receive 75% of the annual retainer in Common Stock and 25% of the annual retainer in cash. Each Director who owns 7,500 or more shares of Company Common Stock may elect to receive payment of a percentage (up to 100%) of the annual retainer in shares of common stock. Currently, the annual retainer is $40.  The number of shares issued in payment of the fees is calculated based on an amount equal to the average of the closing prices per share of Common Stock as reported on the composite tape of the New York Stock Exchange for the two trading days immediately preceding the retainer payment date. The retainer payment date is June 1.

Note 7 – Earnings Per Share
 
The Company applies FASB’s guidance regarding the calculation of earnings per share using the two-class method.  The Company includes nonvested stock awards with rights to non-forfeitable dividends as part of its basic weighted average share calculation.
 
The following table summarizes earnings per share (EPS) calculations:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Basic Earnings per Common Share
                       
Net income attributable to Quaker Chemical Corporation
  $ 9,841     $ 9,153     $ 20,441     $ 18,572  
Less: income allocated to participating securities
    (182 )     (196 )     (384 )     (399 )
Net income available to common shareholders
  $ 9,659     $ 8,957     $ 20,057     $ 18,173  
Basic weighted average common shares outstanding
    12,043,858       10,973,547       11,668,657       10,926,647  
Basic earnings per common share
  $ 0.80     $ 0.82     $ 1.72     $ 1.66  
                                 
Diluted Earnings per Common Share
                               
Net income attributable to Quaker Chemical Corporation
  $ 9,841     $ 9,153     $ 20,441     $ 18,572  
Less: income allocated to participating securities
    (180 )     (194 )     (380 )     (394 )
Net income available to common shareholders
  $ 9,661     $ 8,959     $ 20,061     $ 18,178  
Basic weighted average common shares outstanding
    12,043,858       10,973,547       11,668,657       10,926,647  
Effect of dilutive securities, common shares outstanding
    174,919       203,417       175,905       158,314  
Diluted weighted average common shares outstanding
    12,218,777       11,176,964       11,844,562       11,084,961  
Diluted earnings per common share
  $ 0.79     $ 0.80     $ 1.69     $ 1.64  

The following number of stock options are not included in diluted earnings per share since the effect would have been anti-dilutive: 8,209 and 0 for the three months ended June 30, 2011 and 2010, and 10,208 and 7,300 for the six months ended June 30, 2011 and 2010, respectively.

 
12

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)


Note 8 – Business Segments
 
The Company organizes its segments by type of product sold.  The Company’s reportable segments are as follows:
 
(1) Metalworking process chemicals – industrial process fluids for various heavy industrial and manufacturing applications.
 
(2) Coatings – temporary and permanent coatings for metal and concrete products and chemical milling maskants.
 
(3) Other chemical products – other various chemical products.
 
Segment data includes direct segment costs as well as general operating costs.

The table below presents information about the reported segments:
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Metalworking Process Chemicals
                       
Net sales
  $ 156,772     $ 126,962     $ 307,505     $ 248,167  
Operating income for reportable segments
    26,149       25,117       53,084       50,636  
Coatings
                               
Net sales
    10,487       8,510       18,969       15,274  
Operating income for reportable segments
    2,446       1,918       4,409       3,326  
Other Chemical Products
                               
Net sales
    533       519       1,183       870  
Operating income (loss) for reportable segments
    4       23       39       (34 )
Total
                               
Net sales
    167,792       135,991       327,657       264,311  
Operating income for reportable segments
    28,599       27,058       57,532       53,928  
Non-operating expenses
    (13,171 )     (13,437 )     (27,518 )     (26,382 )
Amortization
    (487 )     (208 )     (973 )     (462 )
Interest expense
    (1,200 )     (1,386 )     (2,418 )     (2,697 )
Interest income
    271       343       543       527  
Other income, net
    791       1,123       1,330       1,886  
Consolidated income before taxes and equity in net income of associated companies
  $ 14,803     $ 13,493     $ 28,496     $ 26,800  

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 affiliates.


 
13

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)


Note 9 – Equity, Noncontrolling Interest and Comprehensive Income
 
The following table presents the changes in equity, noncontrolling interest and comprehensive income for the three and six months ended June 30, 2011 and 2010:
 

 
 
 
   
 
   
 
   
Accumulated
   
 
   
 
   
 
 
 
 
 
   
Capital in
   
 
   
Other
   
 
   
 
   
 
 
 
 
Common
   
Excess of
   
Retained
   
Comprehensive
   
Noncontrolling
   
Comprehensive
   
 
 
 
 
Stock
   
Par Value
   
Earnings
   
Income (Loss)
   
Interest
   
Income
   
Total
 
Balance at March 31, 2011
  $ 11,531     $ 39,132     $ 152,237     $ (9,497 )   $ 7,359    
 
    $ 200,762  
Net income
                9,841               714     $ 10,555          
Currency translation adjustments
                      3,587       69       3,656          
Defined benefit retirement plans
                      325             325          
Current period changes in fair value of derivatives
                      78             78          
Unrealized gain on available-for-sale securities
                                           
Comprehensive income
                                            14,614       14,614  
Comprehensive loss attributable to
                                                       
  noncontrolling interest
                                            (783 )        
Comprehensive income attributable to
                                                       
  Quaker Chemical Corporation
                                          $ 13,831          
Dividends ($0.235 per share)
                (3,080 )                         (3,080 )
Stock offering, net of related expenses
    1,265       46,878                                 48,143  
Share issuance and equity-based compensation plans
    27       1,155                                 1,182  
Excess tax benefit from stock option exercises
          84                                 84  
Balance at June 30, 2011
  $ 12,823     $ 87,249     $ 158,998     $ (5,507 )   $ 8,142             $ 261,705  
 
                                                       
Balance at March 31, 2010
  $ 11,152     $ 30,277     $ 129,994     $ (14,058 )   $ 5,750             $ 163,115  
Net income
                9,153               581     $ 9,734          
Currency translation adjustments
                      (6,458 )     (268 )     (6,726 )        
Defined benefit retirement plans
                      269             269          
Current period changes in fair value of derivatives
                      191             191          
Unrealized loss on available-for-sale securities
                      (14 )           (14 )        
Comprehensive income
                                            3,454       3,454  
Comprehensive loss attributable to
                                                       
  noncontrolling interest
                                            (313 )        
Comprehensive income attributable to
                                                       
  Quaker Chemical Corporation
                                          $ 3,141          
Dividends ($0.235 per share)
                (2,650 )                         (2,650 )
Share issuance and equity-based compensation plans
    107       2,357                                 2,464  
Excess tax benefit from stock option exercises
          164                                 164  
Balance at June 30, 2010
  $ 11,259     $ 32,798     $ 136,497     $ (20,070 )   $ 6,063             $ 166,547  

 
14

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)



 
 
 
   
 
   
 
   
Accumulated
   
 
   
 
   
 
 
 
 
 
   
Capital in
   
 
   
Other
   
 
   
 
   
 
 
 
 
Common
   
Excess of
   
Retained
   
Comprehensive
   
Noncontrolling
   
Comprehensive
   
 
 
 
 
Stock
   
Par Value
   
Earnings
   
Income (Loss)
   
Interest
   
Income
   
Total
 
Balance at December 31, 2010
  $ 11,492     $ 38,275     $ 144,347     $ (13,736 )   $ 6,721    
 
    $ 187,099  
Net income
                20,441             1,344     $ 21,785          
Currency translation adjustments
                      7,400       77       7,477          
Defined benefit retirement plans
                      649             649          
Current period changes in fair value of derivatives
                      174             174          
Unrealized gain on available-for-sale securities
                      6             6          
Comprehensive income
                                            30,091       30,091  
Comprehensive loss attributable to
                                                       
  noncontrolling interest
                                            (1,421 )        
Comprehensive income attributable to
                                                       
  Quaker Chemical Corporation
                                          $ 28,670          
Dividends ($0.47 per share)
                (5,790 )                         (5,790 )
Stock offering, net of related expenses
    1,265       46,878                                 48,143  
Share issuance and equity-based compensation plans
    66       1,934                                 2,000  
Excess tax benefit from stock option exercises
          162                                 162  
Balance at June 30, 2011
  $ 12,823     $ 87,249     $ 158,998     $ (5,507 )   $ 8,142             $ 261,705  
 
                                                       
Balance at December 31, 2009
  $ 11,086     $ 27,527     $ 123,140     $ (10,439 )   $ 4,981             $ 156,295  
Net income
                18,572               1,199     $ 19,771          
Currency translation adjustments
                      (10,456 )     (117 )     (10,573 )        
Defined benefit retirement plans
                      538             538          
Current period changes in fair value of derivatives
                      296             296          
Unrealized loss on available-for-sale securities
                      (9 )           (9 )        
Comprehensive income
                                            10,023       10,023  
Comprehensive loss attributable to
                                                       
  noncontrolling interest
                                            (1,082 )        
Comprehensive income attributable to
                                                       
  Quaker Chemical Corporation
                                          $ 8,941          
Dividends ($0.465 per share)
                (5,215 )                         (5,215 )
Share issuance and equity-based compensation plans
    173       3,153                                 3,326  
Excess tax benefit from stock option exercises
          2,118                                 2,118  
Balance at June 30, 2010
  $ 11,259     $ 32,798     $ 136,497     $ (20,070 )   $ 6,063             $ 166,547  

 
During the first half of 2011, the Company recorded $162 of excess tax benefits in capital in excess of par value on its Condensed Consolidated Balance Sheet, related to stock option exercises. During the first half of 2010, the Company recorded $2,118 of these benefits.  Prior to the first quarter of 2010, the Company’s actual taxable income in affected jurisdictions was not sufficient to recognize these benefits, while the Company’s full-year 2010 taxable income was sufficient to recognize these benefits.  As a result, the Company recognized $162 and $1,236 of these benefits as a cash inflow from financing activities in its Condensed Consolidated Statement of Cash Flows which represents the Company’s estimate of cash savings through June 30, 2011 and 2010, respectively.
 
The Company sold 1,265,000 shares of its common stock during the second quarter of 2011.  The Company received proceeds of $48,143, net of related offering expenses, commissions and underwriting fees.  The Company used the proceeds to repay a portion of its revolving credit line during the second quarter of 2011.


 
15

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)


Note 10 – Business Acquisitions
 
In July 2010, the Company completed the acquisition of the assets of D.A. Stuart’s U.S. aluminum hot rolling oil business from Houghton International for $6,793. This acquisition strategically strengthens the Company’s position in the non-ferrous industry, as the acquired product portfolio is complementary to its existing business. The Company allocated $2,351 to intangible assets, comprised of customer lists, to be amortized over 15 years; trade names, to be amortized over 10 years; and a trademark, to be amortized over one year.  In addition, the Company recorded $3,133 of goodwill, all of which will be tax-deductible, and was assigned to the metalworking process chemicals segment.
 
In December 2010, the Company completed the acquisition of Summit Lubricants, Inc. for approximately $29,116, subject to certain post closing adjustments.  The Company paid an additional $717 in the second quarter of 2011 to complete post closing adjustments.  Summit Lubricants manufactures and distributes specialty greases and lubricants and is complementary to the Company’s existing business.  The Company allocated $17,100 to intangible assets, comprised of formulations, to be amortized over 15 years; customer lists, to be amortized over 20 years; a non-competition agreement, to be amortized over 5 years; and a trademark, which was assigned an indefinite life.  In addition, the Company recorded $3,804 of goodwill, all of which will be tax deductible, and was assigned to the metalworking process chemicals segment.  Liabilities assumed include an earnout to be paid to the former shareholders if certain earnings targets are met by the end of 2013.
 
The following table shows the allocation of the purchase price of the assets and liabilities acquired as of June 30, 2011.  The pro forma results of operations have not been provided because the effects were not material:

   
D.A.
   
Summit
       
   
Stuart
   
Lubricants
   
Total
 
Current assets
  $ 1,176     $ 6,198     $ 7,374  
Fixed assets
    133       9,430       9,563  
Intangibles
    2,351       17,100       19,451  
Goodwill
    3,133       3,804       6,937  
Total assets
    6,793       36,532       43,325  
Current liabilities
          (1,349 )     (1,349 )
Earnout
          (5,350 )     (5,350 )
Total liabilities assumed
          (6,699 )     (6,699 )
Cash paid
  $ 6,793     $ 29,833     $ 36,626  

Subsequent to June 30, 2011, the Company acquired the remaining 60% ownership interest in its Mexican equity affiliate for approximately $10,500 in cash, with an additional $2,000 payable in the third quarter of 2012, subject to certain conditions.  The acquisition strengthens the Company’s position in the growing Mexican market.  In connection with the acquisition, the Company expects to record a one-time gain in the third quarter of 2011.

Note 11 – Goodwill and Other Intangible Assets
 
The changes in carrying amount of goodwill for the six months ended June 30, 2011 are as follows.  The Company has recorded no impairment charges in the past:

 
Metalworking
             
 
Process