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 September 30, 2014
 
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  x    
 
Accelerated filer  ¨
 
 
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 September 30, 2014
 
 
13,269,266
 


 
 

 

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
       
 
  
 
Page
PART I.
  
FINANCIAL INFORMATION
 
Item 1.
  
Financial Statements (unaudited)
 
   
Condensed Consolidated Statement of Income for the Three and Nine Months Ended September 30, 2014 and September 30, 2013
3
 
  
Condensed Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and September 30, 2013
4
 
  
Condensed Consolidated Balance Sheet at September 30, 2014 and December 31, 2013
5
 
  
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2014 and September 30, 2013
6
 
  
Notes to Condensed Consolidated Financial Statements
7
Item 2.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
  
Quantitative and Qualitative Disclosures about Market Risk
30
Item 4.
  
Controls and Procedures
31
PART II.
  
OTHER INFORMATION
32
Item 1.
 
Legal Proceedings
32
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
32
Item 6.
  
Exhibits
33
Signatures
33

 
2

 
Table of Contents

PART I
FINANCIAL INFORMATION
 
Item 1.                                Financial Statements (Unaudited).
 
 
 
Quaker Chemical Corporation
 
Condensed Consolidated Statement of Income
(Dollars in thousands, except per share data)
 
 
 
Unaudited
 
 
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
 
2014 
 
 
2013 
   
2014 
 
 
2013 
Net sales
 
$
198,867 
 
 
$
184,059 
   
$
571,827 
 
 
$
545,098 
Cost of goods sold
 
 
128,567 
 
 
 
118,069 
   
 
368,197 
 
 
 
349,186 
Gross profit
 
 
70,300 
 
 
 
65,990 
   
 
203,630 
 
 
 
195,912 
Selling, general and administrative expenses
 
 
49,747 
 
 
 
47,183 
   
 
142,759 
 
 
 
139,901 
Operating income
 
 
20,553 
 
 
 
18,807 
   
 
60,871 
 
 
 
56,011 
Other income (expense), net
 
 
914 
 
 
 
(685)
   
 
558 
 
 
 
1,962 
Interest expense
 
 
  (641)
 
 
 
(717)
   
 
(1,747)
 
 
 
(2,223)
Interest income
 
 
642 
 
 
 
267 
   
 
1,990 
 
 
 
665 
Income before taxes and equity in net income of associated companies
 
 
21,468 
 
 
 
17,672 
   
 
61,672 
 
 
 
56,415 
Taxes on income before equity in net income of associated companies
 
 
5,724 
 
 
 
5,972 
   
 
18,808 
 
 
 
16,933 
Income before equity in net income of associated companies
 
 
15,744 
 
 
 
11,700 
   
 
42,864 
 
 
 
39,482 
Equity in net income of associated companies
 
 
375 
 
 
 
1,605 
   
 
2,506 
 
 
 
4,689 
Net income
 
 
16,119 
 
 
 
13,305 
   
 
45,370 
 
 
 
44,171 
Less: Net income attributable to noncontrolling interest
 
 
423 
 
 
 
754 
   
 
1,517 
 
 
 
1,918 
Net income attributable to Quaker Chemical Corporation
 
$
15,696 
 
 
$
12,551 
   
$
43,853 
 
 
$
42,253 
Per share data:
 
 
 
 
 
 
 
   
 
 
 
 
 
 
Net income attributable to Quaker Chemical Corporation Common
 
 
 
 
 
 
 
   
 
 
 
 
 
 
Shareholders – basic
 
$
1.18 
 
 
$
0.95 
   
$
3.31 
 
 
$
3.21 
Net income attributable to Quaker Chemical Corporation Common
 
 
 
 
 
 
 
   
 
 
 
 
 
 
Shareholders – diluted
 
$
1.18 
 
 
$
0.95 
   
$
3.31 
 
 
$
3.21 
Dividends declared
 
$
0.300 
 
 
$
0.250 
   
$
0.850 
 
 
$
0.745 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 
Table of Contents

Quaker Chemical Corporation
 
Condensed Consolidated Statement of Comprehensive Income
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaudited
 
 
 
 
Three Months Ended
 
 
Nine Months Ended
 
 
 
 
September 30,
 
 
September 30,
 
 
 
 
2014 
 
 
2013 
 
 
2014 
 
 
2013 
 
 
Net income
 
$
16,119 
 
 
$
13,305 
 
 
$
45,370 
 
 
$
44,171 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustments
 
 
(11,655)
 
 
 
2,272 
 
 
 
(9,400)
 
 
 
(3,674)
 
 
Defined benefit retirement plans
 
 
1,797 
 
 
 
(180)
 
 
 
2,956 
 
 
 
1,688 
 
 
Unrealized loss on available-for-sale securities
 
 
(214)
 
 
 
(333)
 
 
 
(316)
 
 
 
(616)
 
 
Other comprehensive (loss) income
 
 
(10,072)
 
 
 
1,759 
 
 
 
(6,760)
 
 
 
(2,602)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
 
6,047 
 
 
 
15,064 
 
 
 
38,610 
 
 
 
41,569 
 
 
Less: comprehensive income attributable to noncontrolling interest
 
 
(177)
 
 
 
(499)
 
 
 
(1,470)
 
 
 
(699)
 
 
Comprehensive income attributable to Quaker Chemical Corporation
 
$
5,870 
 
 
$
14,565 
 
 
$
37,140 
 
 
$
40,870 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4

 
Table of Contents

Quaker Chemical Corporation
 
Condensed Consolidated Balance Sheet
(Dollars in thousands, except par value and share amounts)
 
 
 
 
Unaudited
 
 
September 30, 2014
 
 
December 31, 2013
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
        Cash and cash equivalents
 
$
64,221 
 
 
$
68,492 
 
        Accounts receivable, net
 
 
188,982 
 
 
 
165,629 
 
        Inventories
 
 
 
 
 
 
 
 
                Raw materials and supplies
 
 
40,348 
 
 
 
37,063 
 
                Work-in-process and finished goods
 
 
40,186 
 
 
 
34,494 
 
        Prepaid expenses and other current assets
 
 
19,818 
 
 
 
23,169 
 
                Total current assets
 
 
353,555 
 
 
 
328,847 
 
Property, plant and equipment, at cost
 
 
233,371 
 
 
 
233,865 
 
        Less accumulated depreciation
 
 
(149,575)
 
 
 
(148,377)
 
                Net property, plant and equipment
 
 
83,796 
 
 
 
85,488 
 
Goodwill
 
 
70,053 
 
 
 
58,151 
 
Other intangible assets, net
 
 
59,301 
 
 
 
31,272 
 
Investments in associated companies
 
 
21,149 
 
 
 
19,397 
 
Deferred income taxes
 
 
21,996 
 
 
 
24,724 
 
Other assets
 
 
34,360 
 
 
 
36,267 
 
                Total assets
 
$
644,210 
 
 
$
584,146 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
        Short-term borrowings and current portion of long-term debt
 
$
571 
 
 
$
1,395 
 
        Accounts and other payables
 
 
85,888 
 
 
 
75,580 
 
        Accrued compensation
 
 
16,058 
 
 
 
20,801 
 
        Other current liabilities
 
 
28,362 
 
 
 
33,080 
 
               Total current liabilities
 
 
130,879 
 
 
 
130,856 
 
Long-term debt
 
 
62,009 
 
 
 
17,321 
 
Deferred income taxes
 
 
5,920 
 
 
 
6,729 
 
Other non-current liabilities
 
 
78,391 
 
 
 
84,544 
 
               Total liabilities
 
 
277,199 
 
 
 
239,450 
 
Equity
 
 
 
 
 
 
 
 
         Common stock $1 par value; authorized 30,000,000 shares; issued and outstanding
 
 
 
 
 
 
 
 
            2014 – 13,269,266 shares; 2013 – 13,196,140 shares
 
 
13,269 
 
 
 
13,196 
 
         Capital in excess of par value
 
 
96,717 
 
 
 
99,038 
 
         Retained earnings
 
 
290,876 
 
 
 
258,285 
 
         Accumulated other comprehensive loss
 
 
(41,413)
 
 
 
(34,700)
 
               Total Quaker shareholders’ equity
 
 
359,449 
 
 
 
335,819 
 
Noncontrolling interest
 
 
7,562 
 
 
 
8,877 
 
Total equity
 
 
367,011 
 
 
 
344,696 
 
         Total liabilities and equity
 
$
644,210 
 
 
$
584,146 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
5

 
Table of Contents

Quaker Chemical Corporation
 
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
 
   
Unaudited
   
For the Nine Months Ended
   
September 30,
   
2014 
   
2013 
Cash flows from operating activities
             
Net income
 
$
45,370 
   
$
44,171 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation
   
9,154 
     
9,219 
Amortization
   
2,754 
     
2,621 
Equity in undistributed earnings of associated companies, net of dividends
   
(2,306)
     
(2,525)
Deferred compensation and other, net
   
1,672 
     
(50)
Stock-based compensation
   
3,959 
     
3,133 
(Gain) loss on disposal of property, plant and equipment
   
(125)
     
193 
Insurance settlements realized
   
(1,214)
     
(731)
Pension and other postretirement benefits
   
178 
     
(561)
(Decrease) increase in cash from changes in current assets and current liabilities, net of acquisitions:
             
Accounts receivable
   
(23,061)
     
(13,222)
Inventories
   
(9,143)
     
(4,569)
Prepaid expenses and other current assets
   
1,332 
     
1,017 
Accounts payable and accrued liabilities
   
9,470 
     
13,256 
Net cash provided by operating activities
   
38,040 
     
51,952 
               
Cash flows from investing activities
             
Investments in property, plant and equipment
   
(8,376)
     
(7,330)
Payments related to acquisitions, net of cash acquired
   
(51,947)
     
(2,478)
Proceeds from disposition of assets
   
178 
     
391 
Interest earned on insurance settlements
   
34 
     
40 
Change in restricted cash, net
   
1,180 
     
691 
Net cash used in investing activities
   
(58,931)
     
(8,686)
               
Cash flows from financing activities
             
Proceeds from long-term debt
   
45,000 
     
— 
Repayment of long-term debt
   
(1,106)
     
(12,289)
Dividends paid
   
(10,580)
     
(9,721)
Stock options exercised, other
   
(194)
     
(510)
Excess tax benefit related to stock option exercises
   
430 
     
815 
Purchase of a noncontrolling interest in an affiliate
   
(7,422)
     
— 
Payment of acquisition-related earnout liability
   
(4,709)
     
— 
Distributions to noncontrolling affiliate shareholders
   
(1,806)
     
(30)
Net cash provided by (used in) financing activities
   
19,613 
     
(21,735)
Effect of exchange rate changes on cash
   
(2,993)
     
(133)
Net (decrease) increase in cash and cash equivalents
   
(4,271)
     
21,398 
Cash and cash equivalents at beginning of period
   
68,492 
     
32,547 
Cash and cash equivalents at end of period
 
$
64,221 
   
$
53,945 
               
Supplemental cash flow disclosures:
             
Non-cash activities:
             
Accrued property, plant and equipment purchases
 
$
— 
   
$
1,178 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
6

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share and 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 (“GAAP”) 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. During the first quarter of 2014, the Company revised its Consolidated Balance Sheet for December 31, 2013 with a $335 reduction to retained earnings and a corresponding increase to its long-term deferred tax liability, relating to an adjustment that would have occurred when the Company adopted the equity method of accounting for its interest in a captive insurance equity affiliate. Certain other reclassifications of prior year data have been made to improve comparability.  The results for the three and nine months ended September 30, 2014 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, 2013.
 
Venezuela currently operates three local exchange markets to obtain U.S. Dollars:  the CADIVI, SICAD I and SICAD II.   Under generally accepted principles in the United States, Venezuela’s economy is considered to be hyper inflationary, so, accordingly, all gains and losses resulting from the remeasurement of the Company’s Venezuelan equity affiliate Kelko Quaker Chemical, S.A. (“Kelko”) to the CADIVI published exchange are required to be recorded directly to the Condensed Consolidated Statement of Income.   As of September 30, 2014, the Company has a $1,644 investment in Kelko, which is currently valued at the CADIVI exchange rate.  The Company currently does not have access to trade on the SICAD I exchange rate.  During the second quarter of 2014, the Company recorded a charge of $321, or $0.02 per diluted share, related to the conversion of certain Venezuelan Bolivar Fuerte to U.S. Dollars on the SICAD II exchange.  During the first quarter of 2013, the Venezuelan Government announced a devaluation of the Bolivar Fuerte, which resulted in a charge of $357, or $0.03 per diluted share.
 
During 2002 and 2003, the Company’s Netherlands and Italian subsidiaries paid excise taxes on mineral oil sales in Italy for a total amount of approximately $2,000.  Alleging that the mineral oil excise tax was contrary to European Union directives, the subsidiaries filed with the Customs’ Authority of Milan (“Customs Office” or “Office”) requests to obtain a refund of the above-mentioned amount.  The parties appealed rulings to various levels of tax courts up through the Supreme Court of Italy.  In March 2012, the Supreme Court rejected the appeal of the Customs Office, ruling in favor of the subsidiaries and granting a refund for the amounts requested.  After filing an enforcement action, the Company collected approximately $2,057, along with approximately $483 of interest, in the second quarter of 2013.  This amount was recorded as other income on the Company’s Condensed Consolidated Statement of Income in the second quarter of 2013.
 
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 the principal, revenue is recognized on a gross reporting basis at the selling price negotiated with customers. Where the Company acts as an agent, such revenue is recorded using net reporting as service revenues, at the amount of the administrative fee earned by the Company for ordering the goods.  Third-party products transferred under arrangements resulting in net reporting totaled $11,829 and $33,328 for the three and nine months ended September 30, 2014, respectively. Third-party products transferred under arrangements resulting in net reporting totaled $10,950 and $30,288 for the three and nine months ended September 30, 2013, respectively.
 
Note 2 – Recently Issued Accounting Standards
 
The Financial Accounting Standards Board (“FASB”) issued an accounting standard in August 2014 to outline specific requirements for an entity to evaluate its ability to continue as a going concern.  The new guidance requires a company to assess whether certain conditions or events exist at the date financial statements are issued that may raise substantial doubt about its ability to continue as a going concern for the next year.  If a company concludes that it is not able to continue as a going concern and it is not able to mitigate the conditions and events that resulted in the entity’s ability to continue as a going concern, footnote disclosure is required.  The guidance is effective for the annual and interim periods beginning after December 15, 2016.  Early adoption is permitted.  The Company is currently evaluating the effects of this guidance, but does not expect a material impact.
 
The FASB issued an accounting standard update in May 2014 regarding the accounting for and disclosures of revenue recognition.  Specifically, the update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which will be common to both GAAP and International Financial Reporting Standards (“IFRS”).  The model focuses on revenue recognition to reflect the actual consideration to which the entity expects to be entitled in exchange for the goods or services defined in the contract, including multiple performance obligations.  The guidance is effective for annual and interim periods beginning after December 15, 2016, which allows for full retrospective adoption of prior period data or a modified retrospective
 
 
7

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
 
adoption whereby the cumulative past effects are recorded and disclosed in the current period.  Early adoption is not permitted.  Currently, the Company is evaluating the effect that the guidance may have on its financial statements.
 
Note 3 – Out-of-Period Adjustment
 
During 2012, the Company reassessed its ability to significantly influence the operating and financial policies of its captive insurance equity affiliate, Primex.  Based on its ownership percentage and other factors, the Company determined that, during 2012, the Company obtained the ability to significantly influence Primex and, as a result, changed its method of accounting from the cost to equity method.   During the first quarter of 2013, the Company identified errors in Primex’s estimated 2012 financial statements, which primarily related to a reinsurance contract held by Primex.  The identified errors resulted in a cumulative $1,038 understatement of the Company’s equity in net income from associated companies for the year ended December 31, 2012.  The Company corrected the errors related to Primex in the first quarter of 2013, which had the net effect of increasing equity in net income from associated companies by $1,038 for the three months ended March 31, 2013.  The Company did not believe this adjustment was material to its consolidated financial statements for the years ended December 31, 2012 or December 31, 2013 and, therefore, did not restate any prior period amounts.
 
Note 4 – Business Segments
 
The Company’s reportable operating segments are organized by geography as follows: (i) North America, (ii) Europe, Middle East and Africa (“EMEA”), (iii) Asia/Pacific and (iv) South America.  Operating earnings, excluding indirect operating expenses, for the Company’s reportable operating segments are comprised of revenues less costs of goods sold and SG&A directly related to the respective regions’ product sales.  The indirect operating expenses consist of SG&A related expenses that are not directly attributable to the product sales of each respective reportable operating segment.  Other items not specifically identified with the Company’s reportable operating segments include interest expense, interest income, license fees from non-consolidated affiliates and other income (expense).
 
The following table presents information about the Company’s reported segments for the three and nine months ended September 30, 2014 and September 30, 2013:
 
 
   
Three Months Ended
   
Nine Months Ended
   
September 30,
   
September 30,
   
2014 
   
2013 
   
2014 
   
2013 
Net sales
                             
North America
 
$
87,909 
   
$
79,602 
   
$
247,137 
   
$
231,111 
EMEA
   
49,352 
     
44,452 
     
148,769 
     
140,314 
Asia/Pacific
   
49,601 
     
44,063 
     
136,661 
     
124,593 
South America
   
12,005 
     
15,942 
     
39,260 
     
49,080 
Total net sales
 
$
198,867 
   
$
184,059 
   
$
571,827 
   
$
545,098 
                               
Operating earnings, excluding indirect operating expenses
                             
North America
 
$
17,771 
   
$
15,203 
   
$
51,350 
   
$
46,238 
EMEA
   
8,589 
     
6,781 
     
24,794 
     
22,332 
Asia/Pacific
   
11,925 
     
11,214 
     
32,064 
     
31,612 
South America
   
883 
     
2,598 
     
3,281 
     
7,830 
Total operating earnings, excluding indirect operating expenses
   
39,168 
     
35,796 
     
111,489 
     
108,012 
Indirect operating expenses
   
(17,489)
     
(16,131)
     
(47,864)
     
(49,380)
Amortization expense
   
(1,126)
     
(858)
     
(2,754)
     
(2,621)
Consolidated operating income
   
20,553 
     
18,807 
     
60,871 
     
56,011 
Other income (expense), net
   
914 
     
(685)
     
558 
     
1,962 
Interest expense
   
(641)
     
(717)
     
(1,747)
     
(2,223)
Interest income
   
642 
     
267 
     
1,990 
     
665 
Consolidated income before taxes and equity in net income of associated companies
 
$
21,468 
   
$
17,672 
   
$
61,672 
   
$
56,415 
 
Inter-segment revenue for the three and nine months ended September 30, 2014 was $2,605 and $6,411 for North America, $5,801 and $16,582 for EMEA, $127 and $329 for Asia/Pacific and zero for South America, respectively.  Inter-segment revenue for the three and nine months ended September 30, 2013 was $2,486 and $7,333 for North America, $5,771 and $15,427 for EMEA, $58 and $363 for Asia/Pacific and zero for South America, respectively.  However, all inter-segment transactions have been eliminated from each reportable operating segment’s net sales and earnings for all periods presented above.
 
 
8

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
Note 5 – Stock-Based Compensation
 
The Company recognized the following share-based compensation expense in selling, general and administrative expenses in its Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2014 and the three and nine months ended September 30, 2013:
 
 
   
Three Months Ended
   
Nine Months Ended
   
September 30,
   
September 30,
   
2014 
   
2013 
   
2014 
   
2013 
Stock options
 
$
171 
   
$
140 
   
$
492 
   
$
378 
Nonvested stock awards and restricted stock units
   
593 
     
461 
     
1,758 
     
1,372 
Employee stock purchase plan
   
18 
     
17 
     
54 
     
43 
Non-elective and elective 401(k) matching contribution in stock
   
413 
     
347 
     
1,561 
     
1,283 
Director stock ownership plan
   
32 
     
16 
     
94 
     
57 
Total share-based compensation expense
 
$
1,227 
   
$
981 
   
$
3,959 
   
$
3,133 
 
As of September 30, 2014 and September 30, 2013, the Company recorded $430 and $815, respectively, of excess tax benefits in capital in excess of par value on its Condensed Consolidated Balance Sheets related to stock option exercises. The Company’s estimated taxes payable was sufficient to fully recognize these benefits as cash inflows from financing activities in its Condensed Consolidated Statement of Cash Flows, which represented the Company’s estimate of cash savings through the nine months ended September 30, 2014 and September 30, 2013, respectively.
 
Stock option activity under all plans is as follows:
 
           
Weighted
           
Average
     
Weighted Average
 
Remaining
 
Number of
 
Exercise Price per
 
Contractual
 
Shares
 
Share
 
Term (years)
Options outstanding at December 31, 2013
75,251 
 
$
44.49 
   
Options granted
37,048 
   
73.47 
   
Options exercised
(3,292)
   
42.24 
   
Options outstanding at September 30, 2014
109,007 
 
$
54.41 
 
5.1 
Options exercisable at September 30, 2014
40,628 
 
$
39.76 
 
4.0 
 
As of September 30, 2014, the total intrinsic value of options outstanding was approximately $2,007, and the total intrinsic value of exercisable options was $1,330.  Intrinsic value is calculated as the difference between the current market price of the underlying security and the strike price of a related option.
 
 
9

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
A summary of the Company’s outstanding stock options at September 30, 2014 is as follows: 
 
                 
Weighted
 
Weighted
 
Number
   
Weighted
             
Number
 
Average
 
Average
 
Exercisable
   
Average
Range of
 
Outstanding
 
Contractual
 
Exercise
 
at
   
Exercise
Exercise Prices
 
at 9/30/2014
 
Life
 
Price
 
9/30/2014
   
Price
$
0.00
-
 
$
10.00 
 
— 
 
— 
 
$
— 
 
— 
   
$
— 
$
10.01 
-
 
$
20.00 
 
6,155 
 
2.3 
   
18.82 
 
6,155 
     
18.82 
$
20.01 
-
 
$
30.00 
 
— 
 
— 
   
— 
 
— 
     
— 
$
30.01 
-
 
$
40.00 
 
35,020 
 
4.1 
   
37.87 
 
23,954 
     
37.75 
$
40.01 
-
 
$
50.00 
 
2,192 
 
4.7 
   
46.21 
 
1,462 
     
46.21 
$
50.01 
-
 
$
60.00 
 
28,592 
 
5.4 
   
58.26 
 
9,057 
     
58.26 
$
60.01 
-
 
$
70.00 
 
— 
 
— 
   
— 
 
— 
     
— 
$
70.01 
-
 
$
80.00 
 
37,048 
 
6.4 
   
73.47 
 
— 
     
— 
             
109,007 
 
5.1 
   
54.41 
 
40,628 
     
39.76 
 
As of September 30, 2014, unrecognized compensation expense related to options granted during 2012 was $91, for options granted during 2013 was $304 and for options granted in 2014 was $658.
 
During the first quarter of 2014, the Company granted stock options under its 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:
 
 
2014 
 
Number of options granted
 37,048 
 
Dividend yield
2.00 
%
Expected volatility
43.34 
%
Risk-free interest rate
1.22 
%
Expected term (years)
4.0 
 
 
Approximately $68 and $159 of expense was recorded on these options during the three and nine months ended September 30, 2014, respectively.  The fair value of these awards is amortized on a straight-line basis over the vesting period of the awards.
 
Activity of nonvested shares granted under the Company’s LTIP plan is shown below:
 
 
     
Weighted
     
Average Grant
 
Number of
 
Date Fair Value
 
Shares
 
(per share)
Nonvested awards, December 31, 2013
115,984 
 
$
47.27 
Granted
55,258 
 
$
73.80 
Vested
(42,223)
 
$
40.51 
Forfeited
(3,895)
 
$
37.01 
Nonvested awards, September 30, 2014
125,124 
 
$
61.59 
 
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 September 30, 2014, unrecognized compensation expense related to these awards was $4,916 to be recognized over a weighted average remaining period of 2.37 years.
 
 
10

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
Activity of nonvested restricted stock units granted under the Company’s LTIP plan is shown below:
 
 
     
Weighted
     
Average Grant
 
Number of
 
Date Fair Value
 
units
 
(per unit)
Nonvested awards, December 31, 2013
4,018 
 
$
49.71 
Granted
3,140 
 
$
75.52 
Nonvested awards, September 30, 2014
7,158 
 
$
61.03 
 
The fair value of the nonvested restricted stock units 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 September 30, 2014, unrecognized compensation expense related to these awards was $243 to be recognized over a weighted average remaining period of 2.01 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.  An employee whose stock ownership of the Company exceeds five percent of the outstanding common stock is not eligible to participate in this plan.
 
2013 Director Stock Ownership Plan
 
In March 2013, the Company adopted the 2013 Director Stock Ownership Plan (the “Plan”), subject to the approval by the Company’s shareholders at the annual meeting, to encourage the Directors to increase their investment in the Company.  The Plan was approved at the Company’s May 2013 shareholders’ meeting.  The Plan authorizes the issuance of up to 75,000 shares of Quaker common stock in accordance with the terms of the Plan in payment of all or a portion of the annual cash retainer payable to each of the Company’s non-employee directors in 2013 and subsequent years during the term of the Plan.  Under the Plan, each director who, on May 1st of the applicable calendar year, owns less than 400% of the annual cash retainer for the applicable calendar year, divided by the average of the closing price of a share of Quaker Common Stock as reported by the composite tape of the New York Stock Exchange for the previous calendar year (the “Threshold Amount”), is required to receive 75% of the annual cash retainer in Quaker common stock and 25% of the retainer in cash, unless the director elects to receive a greater percentage of Quaker common stock (up to 100%) of the annual cash retainer for the applicable year.  Each director who owns more than the Threshold Amount may elect to receive common stock in payment of a percentage (up to 100%) of the annual cash retainer.  The annual retainer is $50 and the retainer payment date is June 1.  The Plan was adopted in order to replace the 2003 Director Stock Ownership Plan, which expired in May 2013.
 
Note 6 – Pension and Other Postretirement Benefits
 
The components of net periodic benefit cost for the three and nine months ended September 30, 2014 and September 30, 2013 are as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
             
Other
             
Other
             
Postretirement
             
Postretirement
 
Pension Benefits
 
Benefits
 
Pension Benefits
 
Benefits
   
2014 
   
2013 
   
2014 
   
2013 
   
2014 
   
2013 
   
2014 
   
2013 
Service cost
$
716 
 
$
789 
 
$
 
$
 
$
2,186 
 
$
2,355 
 
$
15 
 
$
26 
Interest cost and other
 
1,506 
   
1,394 
   
58 
   
46 
   
4,567 
   
4,172 
   
174 
   
138 
Expected return on plan assets
 
(1,588)
   
(1,476)
   
— 
   
— 
   
(4,796)
   
(4,417)
   
— 
   
— 
Actuarial loss amortization
 
763 
   
989 
   
16 
   
   
2,311 
   
2,961 
   
48 
   
24 
Prior service cost amortization
 
(21)
   
23 
   
— 
   
— 
   
830 
   
155 
   
— 
   
— 
Net periodic benefit cost
$
1,376 
 
$
1,719 
 
$
79 
 
$
63 
 
$
5,098 
 
$
5,226 
 
$
237 
 
$
188 
 
 
 
11

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
During 2013, it was discovered that the Company’s subsidiary in the United Kingdom did not appropriately amend a trust for a legacy change in its pension scheme, as it related to a past retirement age equalization law.  Given the lack of an official deed to the pension trust, the effective date of the change to the Subsidiary’s pension scheme differed from the Company’s historical beliefs, but the extent of the potential exposure was not estimable.  In the first quarter of 2014, the Company recorded costs of $902, or $0.05 per diluted share, related to prior service cost and interest cost, to appropriately reflect the past plan amendment related to the retirement age equalization law.
 
Employer Contributions:
 
The Company previously disclosed in its financial statements for the year ended December 31, 2013, that it expected to make minimum cash contributions of $6,172 to its pension plans and $607 to its other postretirement benefit plan in 2014.  However, the Company exercised its option under the provisions of the Moving Ahead for Progress in the 21st Century Act (“MAP-21”) to reduce its current contributions.  Currently, the Company expects to make minimum cash contributions of $5,257 to its pension plans and $607 to its other postretirement benefit plan in 2014.  As of September 30, 2014, $4,757 and $432 of contributions had been made to the Company’s pension plans and its other postretirement benefit plans, respectively.
 
Note 7 – Other Income (Expense)
 
Other Income (Expense) includes:
 
 
   
Three Months Ended
   
Nine Months Ended
   
September 30,
   
September 30,
   
2014 
   
2013 
   
2014 
   
2013 
Change in fair value of acquisition-related earnout liability
 
$
— 
   
$
— 
   
$
— 
   
$
(675)
Cost streamlining initiative
   
— 
     
(211)
     
— 
     
(211)
Income from third party license fees
   
181 
     
168 
     
736 
     
716 
Net foreign currency exchange gains (losses)
   
160 
     
(635)
     
(824)
     
(840)
Net gain on fixed asset disposals
   
25 
     
29 
     
130 
     
267 
Non-income tax refunds
   
531 
     
— 
     
531 
     
2,669 
Other non-operating income
   
88 
     
27 
     
152 
     
193 
Other non-operating expense
   
(71)
     
(63)
     
(167)
     
(157)
                               
Total other income (expense), net
 
$
 914 
   
$
 (685)
   
$
 558 
   
$
 1,962 

 
Note 8 – Income Taxes and Uncertain Income Tax Positions
 
The Company's effective tax rate for the first nine months of 2014 of 30.5% was higher than the first nine months of 2013 effective tax rate of 30.0%.  Both effective tax rates reflect decreases in reserves for uncertain tax positions due to the expiration of applicable statutes of limitations for certain tax years of approximately $0.06 and $0.13 per diluted share for the nine months ended September 30, 2014 and September 30, 2013, respectively.  The earnings per diluted share impact related to changes in uncertain tax positions was lower in the current year.  However, this impact was offset by recording tax expense at the statutory tax rate of 25% at one of the Company’s entities in its Asia/Pacific region in the prior year, while it awaited recertification of a concessionary tax rate.
 
As of September 30, 2014, the Company’s cumulative liability for gross unrecognized tax benefits was $11,317.  At December 31, 2013, the Company’s cumulative liability for gross unrecognized tax benefits was $12,596.
 
The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of taxes on income before equity in net income of associated companies in its Condensed Consolidated Statement of Income. The Company recognized $(6) and $(64) for interest and $(99) and $(1) for penalties on its Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2014, respectively, and recognized $39 and $(294) for interest and $101 and $342 for penalties on its Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2013, respectively. As of September 30, 2014, the Company had accrued $1,900 for cumulative interest and $1,939 for cumulative penalties, compared to $2,108 for cumulative interest and $2,100 for cumulative penalties at December 31, 2013.
 
During the three months ended September 30, 2014, the Company recognized a decrease in its cumulative liability for gross unrecognized tax benefits of $802 due to the expiration of the applicable statutes of limitations for certain tax years.  During the three months ended September 30, 2013, the Company recognized a decrease in its cumulative liability for gross unrecognized tax benefits of $472 due to the expiration of the applicable statutes of limitations for certain tax years.
 
 
12

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
During the nine months ended September 30, 2014, the Company recognized a decrease in its cumulative liability for gross unrecognized tax benefits of $1,877 due to the expiration of the applicable statutes of limitations for certain tax years. During the nine months ended September 30, 2013, the Company recognized a decrease in its cumulative liability for gross unrecognized tax benefits of $2,167 due to the expiration of the applicable statutes of limitations for certain tax years.
 
The Company estimates that during the year ending December 31, 2014 it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $1,900 to $2,000 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, 2014.
 
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 Brazil from 2000, the Netherlands from 2008, the United Kingdom from 2009, Spain, China and Italy from 2010, the United States from 2011, and various domestic state tax jurisdictions from 1993.
 
During the second quarter of 2012, the Italian tax authorities initiated a transfer pricing audit of the Company’s Italian subsidiary.  On July 7, 2012, the Company received a preliminary tax report related to this transfer pricing audit, which proposed several adjustments to the taxable income of the subsidiary.  During the fourth quarter of 2012, the Company’s Italian subsidiary received an assessment for the tax year 2007, which the Company appealed during the first quarter of 2013.  On September 16, 2013, the Provincial Tax Court of Varese delivered a decision confirming the Italian tax authorities’ proposed adjustment to the taxable income of the subsidiary, but denying the proposed assessment of penalties.  On January 24, 2014, the Company’s Italian subsidiary appealed the decision of the Provincial Tax Court of Varese.  On March 7, 2014, the Italian tax authorities appealed the decision of the Provincial Tax Court denying the assessment of penalties.
 
On November 29, 2013, the Italian tax authorities issued a tax assessment for the tax year 2008, raising identical issues as the assessment for 2007, noted above.  On March 28, 2014, the Company filed an appeal with the Provincial Tax Court of Varese.  The Company filed a request for competent authority relief between the Italian and Dutch tax authorities, and between the Italian and Spanish tax authorities.
 
On August 4, 2014, the Italian tax authorities issued a tax assessment for the tax year 2009, raising identical issues as the assessments for 2007 and 2008, noted above.
 
Related to each of the above events, the Company and outside counsel believe we should prevail on the merits of each case.  Therefore, the Company does not believe it has any exposures warranting an uncertain tax position reserve as of September 30, 2014.
 
Note 9 – Earnings Per Share
 
The following table summarizes earnings per share calculations for the three and nine months ended September 30, 2014 and September 30, 2013:
 
   
Three Months Ended
   
Nine Months Ended
     
September 30,
     
September 30,
   
2014 
   
2013 
   
2014 
   
2013 
Basic earnings per common share
                             
Net income attributable to Quaker Chemical Corporation
 
$
15,696 
   
 $
12,551 
   
$
43,853 
   
 $
42,253 
Less: income allocated to participating securities
   
(140)
     
(109)
     
(385)
     
(358)
Net income available to common shareholders
 
$
15,556 
   
$
12,442 
   
$
43,468 
   
$
41,895 
Basic weighted average common shares outstanding
   
13,133,668 
     
13,062,417 
     
13,114,553 
     
13,034,289 
Basic earnings per common share
 
$
1.18 
   
$
0.95 
   
$
3.31 
   
$
3.21 
                               
Diluted earnings per common share
                             
Net income attributable to Quaker Chemical Corporation
 
$
15,696 
   
$
12,551 
   
$
43,853 
   
$
42,253 
Less: income allocated to participating securities
   
(140)
     
(109)
     
(384)
     
(357)
Net income available to common shareholders
 
$
15,556 
   
$
12,442 
   
$
43,469 
   
$
41,896 
Basic weighted average common shares outstanding
   
13,133,668 
     
13,062,417 
     
13,114,553 
     
13,034,289 
Effect of dilutive securities
   
22,673 
     
22,488 
     
21,147 
     
25,909 
Diluted weighted average common shares outstanding
   
13,156,341 
     
13,084,905 
     
13,135,700 
     
13,060,198 
Diluted earnings per common share
 
$
1.18 
   
$
0.95 
   
$
3.31 
   
$
3.21 
 
 
 
13

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
The following number of stock options and restricted stock units are not included in diluted earnings per share since the effect would have been anti-dilutive: 6,146 and 2,858 for the three months ended September 30, 2014 and September 30, 2013, respectively, and 5,254 and 4,118 for the nine months ended September 30, 2014 and September 30, 2013, respectively.
 
Note 10 – Goodwill and Other Intangible Assets
 
The Company completed its annual impairment assessment as of the end of the third quarter of 2014 and no impairment charge was warranted.  The estimated fair value of each of the Company’s reporting units substantially exceeded its carrying value, with none of the Company’s reporting units at risk for failing step one of the goodwill impairment test.  In addition, the Company has recorded no impairment charges in the past.
 
Changes in the carrying amount of goodwill for the nine months ended September 30, 2014 were as follows:
 
   
North
                   
South
       
   
America
   
EMEA
   
Asia/Pacific
   
America
   
Total
Balance as of December 31, 2013
 
$
28,127 
   
$
11,184 
   
$
15,018 
   
$
3,822 
   
$
58,151 
Goodwill additions
   
13,429 
     
— 
     
— 
     
— 
     
13,429 
Currency translation adjustments
   
 (611)
     
 (341)
     
 (458)
     
 (117)
     
 (1,527)
Balance as of September 30, 2014
 
$
40,945 
   
$
10,843 
   
$
14,560 
   
$
3,705 
   
$
70,053 
 
Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of September 30, 2014 and December 31, 2013 are as follows:
 
   
Gross Carrying
   
Accumulated
   
Amount
   
Amortization
Definite-lived intangible assets
 
2014 
   
2013 
   
2014 
   
2013 
Customer lists and rights to sell
 
$
53,894 
   
$
33,559 
   
$
11,812 
   
$
10,221 
Trademarks and patents
   
6,628 
     
6,838 
     
3,628 
     
3,202 
Formulations and product technology
   
15,338 
     
5,808 
     
3,968 
     
3,709 
Other
   
6,540 
     
5,544 
     
4,791 
     
4,445 
Total
 
$
82,400 
   
$
51,749 
   
$
24,199 
   
$
21,577 
 
The Company recorded $2,754 and $2,621 of amortization expense in the nine months ended September 30, 2014 and September 30, 2013, respectively. Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows:
 
For the year ended December 31, 2014
$
4,198 
For the year ended December 31, 2015
$
5,777 
For the year ended December 31, 2016
$
5,302 
For the year ended December 31, 2017
$
4,643 
For the year ended December 31, 2018
$
4,619 
For the year ended December 31, 2019
$
4,543 
 
The Company has two indefinite-lived intangible assets totaling $1,100 for trademarks at September 30, 2014.
 
Note 11 – Debt
 
The Company’s primary credit line is a $300,000 syndicated multicurrency credit agreement with Bank of America, N.A. (administrative agent) and certain other major financial institutions, which matures in June 2018.  The maximum amount available under this facility can be increased to $400,000 at the Company’s option if the lenders agree and the Company satisfies certain conditions.  Access to this facility is dependent on meeting certain financial, acquisition and other covenants, but primarily depends on the Company’s consolidated leverage ratio calculation, which cannot exceed 3.50 to 1.  At September 30, 2014 and December 31, 2013, the consolidated leverage ratio was below 1.0 to 1 and the Company was also in compliance with all of the facility’s other covenants.  At September 30, 2014, the Company had approximately $45,000 outstanding under this facility.  At December 31, 2013, the Company had no borrowings outstanding under this facility.
 
 
14

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
Note 12 – Equity and Noncontrolling Interest
 
The following table presents the changes in equity and noncontrolling interest for the three and nine months ended September 30, 2014 and September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital in
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
Common
 
 
Excess of
 
 
Retained
 
 
Comprehensive
 
 
Noncontrolling
 
 
 
 
 
 
Stock
 
 
Par Value
 
 
Earnings
 
 
Loss
 
 
Interest
 
 
Total
Balance at June 30, 2014
 
$
13,242 
 
 
$
95,508 
 
 
$
279,161 
 
 
$
(31,587)
 
 
$
8,386 
 
 
$
364,710 
Net income
 
 
— 
 
 
 
— 
 
 
 
15,696 
 
 
 
— 
 
 
 
423 
 
 
 
16,119 
Amounts reported in other comprehensive income
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
(9,826)
 
 
 
(246)
 
 
 
(10,072)
Dividends ($0.30 per share)
 
 
— 
 
 
 
— 
 
 
 
(3,981)
 
 
 
— 
 
 
 
— 
 
 
 
(3,981)
Distributions to noncontrolling affiliate shareholders
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
(1,149)
 
 
 
(1,149)
Acquisition of noncontrolling interest
 
 
— 
 
 
 
 
 
 
— 
 
 
 
— 
 
 
 
148 
 
 
 
155 
Share issuance and equity-based compensation plans
 
 
27 
 
 
 
1,039 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
1,066 
Excess tax benefit from stock option exercises
 
 
— 
 
 
 
163 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
163 
Balance at September 30, 2014
 
$
13,269 
 
 
$
96,717 
 
 
$
290,876 
 
 
$
(41,413)
 
 
$
7,562 
 
 
$
367,011 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2013
 
$
13,168 
 
 
$
97,085 
 
 
$
238,580 
 
 
$
(45,252)
 
 
$
8,776 
 
 
$
312,357 
Net income
 
 
— 
 
 
 
— 
 
 
 
12,551 
 
 
 
— 
 
 
 
754 
 
 
 
13,305 
Amounts reported in other comprehensive income
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
2,014 
 
 
 
(255)
 
 
 
1,759 
Dividends ($0.25 per share)
 
 
— 
 
 
 
— 
 
 
 
(3,298)
 
 
 
— 
 
 
 
— 
 
 
 
(3,298)
Distributions to noncontrolling affiliate shareholders
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
(30)
 
 
 
(30)
Share issuance and equity-based compensation plans
 
 
19 
 
 
 
368 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
387 
Excess tax benefit from stock option exercises
 
 
— 
 
 
 
363 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
363 
Balance at September 30, 2013
 
$
13,187 
 
 
$
97,816 
 
 
$
247,833 
 
 
$
(43,238)
 
 
$
9,245 
 
 
$
324,843 
 
 
 
15

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital in
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
Common
 
 
Excess of
 
 
Retained
 
 
Comprehensive
 
 
Noncontrolling
 
 
 
 
 
 
Stock
 
 
Par Value
 
 
Earnings
 
 
Loss
 
 
Interest
 
 
Total
Balance at December 31, 2013
 
$
13,196 
 
 
$
99,038 
 
 
$
258,285 
 
 
$
(34,700)
 
 
$
8,877 
 
 
$
344,696 
Net income
 
 
— 
 
 
 
— 
 
 
 
43,853 
 
 
 
— 
 
 
 
1,517 
 
 
 
45,370 
Amounts reported in other comprehensive income
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
(6,713)
 
 
 
(47)
 
 
 
(6,760)
Dividends ($0.85 per share)
 
 
— 
 
 
 
— 
 
 
 
(11,262)
 
 
 
— 
 
 
 
— 
 
 
 
(11,262)
Distributions to noncontrolling affiliate shareholders
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
(1,806)
 
 
 
(1,806)
Acquisition of noncontrolling interest
 
 
— 
 
 
 
(6,443)
 
 
 
— 
 
 
 
— 
 
 
 
(979)
 
 
 
(7,422)
Share issuance and equity-based compensation plans
 
 
73 
 
 
 
3,692 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
3,765 
Excess tax benefit from stock option exercises
 
 
— 
 
 
 
430 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
430 
Balance at September 30, 2014
 
$
13,269 
 
 
$
96,717 
 
 
$
290,876 
 
 
$
(41,413)
 
 
$
7,562 
 
 
$
367,011 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
13,095 
 
 
$
94,470 
 
 
$
215,390 
 
 
$
(41,855)
 
 
$
8,576 
 
 
$
289,676 
Net income
 
 
— 
 
 
 
— 
 
 
 
42,253 
 
 
 
— 
 
 
 
1,918 
 
 
 
44,171 
Amounts reported in other comprehensive income
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
(1,383)
 
 
 
(1,219)
 
 
 
(2,602)
Dividends ($0.745 per share)
 
 
— 
 
 
 
— 
 
 
 
(9,810)
 
 
 
— 
 
 
 
— 
 
 
 
(9,810)
Distributions to noncontrolling affiliate shareholders
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
(30)
 
 
 
(30)
Share issuance and equity-based compensation plans
 
 
92 
 
 
 
2,531 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
2,623 
Excess tax benefit from stock option exercises
 
 
— 
 
 
 
815 
 
 
 
— 
 
 
 
— 
 
 
 
— 
 
 
 
815 
Balance at September 30, 2013
 
$
13,187 
 
 
$
97,816 
 
 
$
247,833 
 
 
$
(43,238)
 
 
$
9,245 
 
 
$
324,843 
 
The following tables show the reclassifications from and resulting balances of accumulated other comprehensive loss for the three and nine months ended September 30, 2014 and September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized
 
 
 
 
 
 
Currency
 
 
Defined
 
 
gain (loss) in
 
 
 
 
 
 
translation
 
 
benefit
 
 
available-for-
 
 
 
 
 
 
adjustments
 
 
pension plans
 
 
sale securities
 
 
Total
Balance at June 30, 2014
 
$
3,208 
 
 
$
(36,274)
 
 
$
1,479 
 
 
$
(31,587)
Other comprehensive (loss) income before reclassifications
 
 
(11,409)
 
 
 
1,698 
 
 
 
(24)
 
 
 
(9,735)
Amounts reclassified from accumulated other comprehensive loss
 
 
— 
 
 
 
759 
 
 
 
(300)
 
 
 
459 
Current period other comprehensive (loss) income
 
 
(11,409)
 
 
 
2,457 
 
 
 
(324)
 
 
 
(9,276)
Related tax amounts
 
 
— 
 
 
 
(660)
 
 
 
110 
 
 
 
(550)
Net current period other comprehensive (loss) income
 
 
(11,409)
 
 
 
1,797 
 
 
 
(214)
 
 
 
(9,826)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2014
 
$
(8,201)
 
 
$
(34,477)
 
 
$
1,265 
 
 
$
(41,413)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2013
 
$
(1,646)
 
 
$
(45,046)
 
 
$
1,440 
 
 
$
(45,252)
Other comprehensive income (loss) before reclassifications
 
 
2,527 
 
 
 
(1,016)
 
 
 
494 
 
 
 
2,005 
Amounts reclassified from accumulated other comprehensive loss
 
 
— 
 
 
 
1,019 
 
 
 
(998)
 
 
 
21 
Current period other comprehensive income (loss)
 
 
2,527 
 
 
 
 
 
 
(504)
 
 
 
2,026 
Related tax amounts
 
 
— 
 
 
 
(183)
 
 
 
171 
 
 
 
(12)
Net current period other comprehensive income (loss)
 
 
2,527 
 
 
 
(180)
 
 
 
(333)
 
 
 
2,014 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2013
 
$
881 
 
 
$
(45,226)
 
 
$
1,107 
 
 
$
(43,238)
 
 
 
16

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized
 
 
 
 
 
 
Currency
 
 
Defined
 
 
gain (loss) in
 
 
 
 
 
 
translation
 
 
benefit
 
 
available-for-
 
 
 
 
 
 
adjustments
 
 
pension plans
 
 
sale securities
 
 
Total
Balance at December 31, 2013
 
$
1,152 
 
 
$
(37,433)
 
 
$
1,581 
 
 
$
(34,700)
Other comprehensive (loss) income before reclassifications
 
 
(9,353)
 
 
 
1,842 
 
 
 
1,481 
 
 
 
(6,030)
Amounts reclassified from accumulated other comprehensive loss
 
 
— 
 
 
 
2,290 
 
 
 
(1,959)
 
 
 
331 
Current period other comprehensive (loss) income
 
 
(9,353)
 
 
 
4,132 
 
 
 
(478)
 
 
 
(5,699)
Related tax amounts
 
 
— 
 
 
 
(1,176)
 
 
 
162 
 
 
 
(1,014)
Net current period other comprehensive (loss) income
 
 
(9,353)
 
 
 
2,956 
 
 
 
(316)
 
 
 
(6,713)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2014
 
$
(8,201)
 
 
$
(34,477)
 
 
$
1,265 
 
 
$
(41,413)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
3,336 
 
 
$
(46,914)
 
 
$
1,723 
 
 
$
(41,855)
Other comprehensive (loss) income before reclassifications
 
 
(2,455)
 
 
 
(468)
 
 
 
1,353 
 
 
 
(1,570)
Amounts reclassified from accumulated other comprehensive loss
 
 
— 
 
 
 
3,140 
 
 
 
(2,286)
 
 
 
854 
Current period other comprehensive (loss) income
 
 
(2,455)
 
 
 
2,672 
 
 
 
(933)
 
 
 
(716)
Related tax amounts
 
 
— 
 
 
 
(984)
 
 
 
317 
 
 
 
(667)
Net current period other comprehensive (loss) income
 
 
(2,455)
 
 
 
1,688 
 
 
 
(616)
 
 
 
(1,383)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2013
 
$
881 
 
 
$
(45,226)
 
 
$
1,107 
 
 
$
(43,238)
 
Approximately 30% and 70% of the amounts reclassified from accumulated other comprehensive loss to the Condensed Consolidated Statement of Income for defined benefit retirement plans during the three and nine months ended September 30, 2014 and September 30, 2013 were recorded in cost of goods sold and SG&A, respectively.  See Note 6 of Notes to Condensed Consolidated Financial Statements for further information.  All reclassifications related to unrealized gain (loss) in available-for-sale securities relate to the Company’s equity interest in a captive insurance company and are recorded in equity in net income of associated companies.  The amounts reported in other comprehensive income for noncontrolling interest are related to currency translation adjustments.
 
Note 13 – Business Acquisitions
 
In August 2014, the Company acquired ECLI Products, LLC (“ECLI”), a specialty grease manufacturer for its North American reportable operating segment for approximately $52,000. ECLI specializes in greases for OEM first-fill customers across several industry sectors, including automotive, industrial, aerospace/military, electronics, office automation and natural resources.  The Company allocated the purchase price to $31,110 of intangible assets, comprised of trademarks and formulations, to be amortized over 10 years; customer relationships, to be amortized over 15 years; and a non-compete agreement, to be amortized over 5 years. In addition, the Company recorded $13,429 of goodwill, all of which will be tax deductible.  As of September 30, 2014, the allocation of the purchase price, highlighted in the table below, has not been finalized.
 
 
 
 
 
2014 Acquisition
 
ECLI Products, LLC
Current assets
 
$
6,908 
Fixed assets
 
 
2,712 
Intangibles
 
 
31,110 
Goodwill
 
 
13,429 
Total assets purchased
 
 
54,159 
Current liabilities
 
 
(2,159)
Total liabilities assumed
 
 
(2,159)
Cash paid for an acquisition
 
$
52,000 
 
Included in the ECLI acquisition was approximately $53 of cash acquired.
 
In June 2014, the Company acquired the remaining 49% ownership interest in its Australian affiliate, Quaker Chemical (Australasia) Pty. Limited ("QCA") for Australian Dollars $8,000, or approximately $7,577, from its joint venture partner, Nuplex Industries.  QCA is a part of the Asia/Pacific reportable operating segment.  As this acquisition was a change in an existing controlling ownership, the
 
 
17

Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except share and per share amounts)
(Unaudited)
 
 
Company recorded $6,450 of excess of purchase price over the carrying value of the noncontrolling interest in Additional Paid in Capital.
 
In May 2013, the Company acquired a business that primarily related to tin plating for its North American reportable operating segment for net consideration of approximately $1,831.  The Company allocated the purchase price to $830 of intangible assets, comprised of formulations, to be amortized over 10 years; a non-competition agreement, to be amortized over 4 years; and a customer list, to be amortized over 10 years.  In addition, the Company recorded $277 of goodwill, all of which will be tax deductible.  The remaining purchase price was allocated between the acquisition date fair value of inventory purchased of $454 and fixed assets purchased of $270.
 
In January 2013, the Company acquired a chemical milling maskants distribution network for net consideration of approximately $647, which was assigned to the North America reportable operating segment.  The Company also assumed an additional $100 hold-back of consideration for potential indemnity obligations, which was paid to the former shareholders during the first quarter of 2014.  The acquired intangible was allocated to the Company’s customer lists and rights to sell intangible assets and will be amortized over 5 years.
 
Certain pro forma and other disclosures have not been provided for these acquisitions because the effects were not material.

 
Note 14 – Fair Value Measurements
 
The Company values its company-owned life insurance policies, various deferred compensation assets and liabilities, and certain acquisition-related consideration at fair value.  The Company’s assets and liabilities subject to fair value measurement are as follows:
 
 
 
 
 
 
 
Fair Value Measurements at September 30, 2014
 
 
Fair Value
 
 
Using Fair Value Hierarchy
 
 
as of
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
September 30, 2014
 
 
Level 1
 
 
Level 2
 
 
Level 3
Company-owned life insurance
 
$
1,323 
 
 
$
— 
 
 
$
1,323 
 
 
$
— 
Company-owned life insurance - Deferred compensation assets
 
 
316 
 
 
 
— 
 
 
 
316 
 
 
 
— 
Other deferred compensation assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Large capitalization registered investment companies
 
 
68 
 
 
 
68 
 
 
 
— 
 
 
 
— 
Mid capitalization registered investment companies
 
 
 
 
 
 
 
 
— 
 
 
 
— 
Small capitalization registered investment companies
 
 
12 
 
 
 
12 
 
 
 
— 
 
 
 
— 
International developed and emerging markets registered investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                companies
 
 
38 
 
 
 
38 
 
 
 
— 
 
 
 
— 
Fixed income registered investment companies
 
 
 
 
 
 
 
 
— 
 
 
 
— 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
1,769 
 
 
$
130 
 
 
$
1,639 
 
 
$
— 
 
 
 
 
 
 
 
Fair Value Measurements at September 30, 2014
 
 
Fair Value
 
 
Using Fair Value Hierarchy
 
 
as of
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
September 30, 2014
 
 
Level 1
 
 
Level 2
 
 
Level 3
Deferred compensation liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Large capitalization registered investment companies
 
$
390 
 
 
$
390 
 
 
$
— 
 
 
$
— 
Mid capitalization registered investment companies
 
 
102 
 
 
 
102 
 
 
 
— 
 
 
 
— 
Small capitalization registered investment companies
 
 
85 
 
 
 
85 
 
 
 
— 
 
 
 
— 
International developed and emerging markets registered investment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                  companies
 
 
187 
 
 
 
187 
 
 
 
— 
 
 
 
— 
Fixed income registered investment companies
 
 
40 
 
 
 
40 
 
 
 
— 
 
 
 
— 
Fixe