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  • 10-Q (Oct 29, 2013)
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  • 10-Q (Jul 30, 2012)
  • 10-Q (Apr 30, 2012)

 
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Quaker Chemical 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
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, 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 September 30, 2011
 
 
12,875,113

 
 

 

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
         
 
  
 
  
Page
PART I.
  
FINANCIAL INFORMATION
  
 
Item 1.
  
Financial Statements (unaudited)
  
 
 
  
  
3
 
  
  
4
 
  
  
5
 
  
  
6
Item 2.
  
  
22
Item 3.
  
  
27
Item 4.
  
  
28
PART II.
  
  
29
Item 2.
   
29
Item 6.
  
  
30
  
30


FINANCIAL INFORMATION

Item 1.                                Financial Statements (Unaudited).

Quaker Chemical Corporation
 
Condensed Consolidated Balance Sheet

   
Unaudited
 
   
(Dollars in thousands,
 
   
except par value
 
   
and share amounts)
 
   
September 30, 2011
   
December 31, 2010*
 
 
 
ASSETS
               
Current assets
               
        Cash and cash equivalents
 
$
20,579
   
$
25,766
 
        Accounts receivable, net
   
147,414
     
116,266
 
        Inventories
               
                Raw materials and supplies
   
44,718
     
31,909
 
                Work-in-process and finished goods
   
34,150
     
28,932
 
        Prepaid expenses and other current assets
   
15,744
     
12,609
 
                Total current assets
   
262,605
     
215,482
 
Property, plant and equipment, at cost
   
215,257
     
205,359
 
        Less accumulated depreciation
   
(135,066)
     
(128,824)
 
                Net property, plant and equipment
   
80,191
     
76,535
 
Goodwill
   
57,764
     
52,758
 
Other intangible assets, net
   
26,315
     
24,030
 
Investments in associated companies
   
7,937
     
9,218
 
Deferred income taxes
   
22,862
     
28,846
 
Other assets
   
42,159
     
42,561
 
                Total assets
 
$
499,833
   
$
449,430
 
                 
LIABILITIES AND EQUITY
               
Current liabilities
               
        Short-term borrowings and current portion of long-term debt
 
$
754
   
$
890
 
        Accounts and other payables
   
73,616
     
63,893
 
        Accrued compensation
   
13,997
     
17,140
 
        Other current liabilities
   
23,314
     
19,268
 
               Total current liabilities
   
111,681
     
101,191
 
Long-term debt
   
43,397
     
73,855
 
Deferred income taxes
   
7,492
     
6,108
 
Other non-current liabilities
   
78,033
     
81,177
 
               Total liabilities
   
240,603
     
262,331
 
Equity
               
         Common stock $1 par value; authorized 30,000,000 shares; issued and outstanding
               
            2011 – 12,875,113 shares; 2010 – 11,492,142 shares
   
12,875
     
11,492
 
         Capital in excess of par value
   
88,492
     
38,275
 
         Retained earnings
   
169,265
     
144,347
 
         Accumulated other comprehensive loss
   
(19,097)
     
(13,736)
 
               Total Quaker shareholders’ equity
   
251,535
     
180,378
 
Noncontrolling interest
   
7,695
     
6,721
 
Total equity
   
259,230
     
187,099
 
         Total liabilities and equity
 
$
499,833
   
$
449,430
 






*
Condensed from audited financial statements

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


 
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 September 30,
 
Nine Months Ended September 30,
 
 
 
2011
 
2010
 
2011
 
2010
Net sales
$
182,313
 
$
137,669
 
$
509,970
 
$
401,980
Cost of goods sold
 
122,827
 
 
88,641
 
 
343,984
 
 
257,081
Gross profit
 
59,486
 
 
49,028
 
 
165,986
 
 
144,899
Selling, general and administrative expenses
 
41,982
 
 
34,699
 
 
119,441
 
 
103,486
Non-income tax contingency charge
 
 
 
3,581
 
 
 
 
3,581
CEO transition costs
 
 
 
1,317
 
 
 
 
1,317
Operating income
 
17,504
 
 
9,431
 
 
46,545
 
 
36,515
Other income (expense), net
 
2,740
 
 
(320)
 
 
4,070
 
 
1,566
Interest expense
 
(1,166)
 
 
(1,345)
 
 
(3,584)
 
 
(4,042)
Interest income
 
262
 
 
313
 
 
805
 
 
840
Income before taxes and equity in net income of associated companies
 
19,340
 
 
8,079
 
 
47,836
 
 
34,879
Taxes on income before equity in net income of associated companies
 
5,640
 
 
1,661
 
 
12,961
 
 
8,985
Income before equity in net income of associated companies
 
13,700
 
 
6,418
 
 
34,875
 
 
25,894
Equity in net income of associated companies
 
105
 
 
439
 
 
715
 
 
734
Net income
 
13,805
 
 
6,857
 
 
35,590
 
 
26,628
Less: Net income attributable to noncontrolling interest
 
447
 
 
517
 
 
1,791
 
 
1,716
Net income attributable to Quaker Chemical Corporation
$
13,358
 
$
6,340
 
$
33,799
 
$
24,912
Per share data:
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Quaker Chemical Corporation Common
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders – basic
$
1.04
 
$
0.56
 
$
2.77
 
$
2.22
 
Net income attributable to Quaker Chemical Corporation Common
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders – diluted
$
1.03
 
$
0.55
 
$
2.73
 
$
2.19
 
Dividends declared
$
0.24
 
$
0.235
 
$
0.715
 
$
0.70
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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



 
Condensed Consolidated Statement of Cash Flows

       
Unaudited
       
(Dollars in thousands)
       
For the Nine Months Ended
       
September 30,
       
2011
 
2010
Cash flows from operating activities
         
 
Net income
$
35,590
 
$
26,628
 
Adjustments to reconcile net income to net cash provided by operating activities:
         
   
Depreciation
 
8,527
   
7,448
   
Amortization
 
1,596
   
736
   
Equity in undistributed earnings of associated companies, net of dividends
 
(136)
   
(523)
   
Deferred compensation and other, net
 
6,987
   
1,559
   
Stock-based compensation
 
2,675
   
2,371
   
Non-cash gain from purchase of equity affiliate
 
(2,718)
   
   
Gain on disposal of property, plant and equipment
 
(61)
   
(24)
   
Insurance settlement realized
 
(1,242)
   
(1,225)
   
Pension and other postretirement benefits
 
(4,099)
   
(3,184)
 
(Decrease) increase in cash from changes in current assets and current liabilities, net of acquisitions:
         
   
Accounts receivable
 
(29,390)
   
(7,982)
   
Inventories
 
(16,334)
   
(8,645)
   
Prepaid expenses and other current assets
 
(3,061)
   
(2,656)
   
Accounts payable and accrued liabilities
 
6,196
   
5,007
     
Net cash provided by operating activities
 
4,530
   
19,510
                 
Cash flows from investing activities
         
   
Investments in property, plant and equipment
 
(8,914)
   
(6,259)
   
Payments related to acquisitions, net of cash acquired
 
(10,981)
   
(6,862)
   
Proceeds from disposition of assets
 
221
   
147
   
Insurance settlement received and interest earned
 
61
   
5,099
   
Change in restricted cash, net
 
1,181
   
(1,516)
     
Net cash used in investing activities
 
(18,432)
   
(9,391)
                 
Cash flows from financing activities
         
   
Net decrease in short-term borrowings
 
(185)
   
(1,394)
   
Proceeds from long-term debt
 
   
29
   
Repayment of long-term debt
 
(30,613)
   
(5,367)
   
Dividends paid
 
(8,492)
   
(7,768)
   
Stock options exercised, other
 
629
   
3,829
   
Excess tax benefit related to stock option exercises
 
153
   
2,294
   
Proceeds from sale of common stock, net of related expenses
 
48,143
   
     
Net cash provided by (used in) financing activities
 
9,635
   
(8,377)
Effect of exchange rate changes on cash
 
(920)
   
356
   
Net (decrease) increase in cash and cash equivalents
 
(5,187)
   
2,098
   
Cash and cash equivalents at beginning of period
 
25,766
   
25,051
   
Cash and cash equivalents at end of period
$
20,579
 
$
27,149
                 
Supplemental cash flow disclosures:
         
Non-cash activities:
         
   
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

 
 
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 nine months ended September 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.
 
During the third quarter of 2011, the Company purchased the remaining ownership interest in its Mexican equity affiliate.  In connection with this purchase, the Company revalued its previously held ownership interest to its fair value, resulting in a one-time, non-cash gain of approximately $2,718 or approximately $0.22 per diluted share.
 
During the third quarter of 2010, the Company incurred a net charge of approximately $3,581, or approximately $0.21 per diluted share, related to a non-income tax contingency.  Refer to Note 13 for further information.
 
The Company recognized certain costs related to the retirement of the Company’s former CEO. Included in these costs was a final charge of $1,317, or approximately $0.08 per diluted share, recorded in the third quarter of 2010 related to the former CEO’s supplemental retirement plan.
 
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 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 $37,787 and $42,560 for the nine months ended September 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 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.

The FASB updated its guidance in September 2011 regarding goodwill impairment testing.  The updated guidance permits a Company to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.  If the Company determines that their reporting units’ fair value is more than likely above its carrying value, no further impairment testing would be required.  However, if the Company concludes otherwise, then the first step of the traditional two-step goodwill impairment test is required to be performed.  The guidance is effective for annual and interim fiscal periods beginning after December 15, 2011, with early adoption permitted if an entity’s financial statements have not been issued as of the date of the entity’s interim or annual impairment test.   The Company elected to test goodwill for impairment under the traditional two-step method during the current year but is currently evaluating the effect of this guidance for future applicability.


 
6

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

Note 3 – Income Taxes and Uncertain Income Tax Positions

The Company's year-to-date 2011 effective tax rate of 27.1% was higher than the year-to-date 2010 effective tax rate of 25.8%.  Both year-to-date effective tax rates  reflect the derecognition of uncertain tax positions due to the expiration of applicable statutes of limitations for certain tax years of approximately $0.14 and $0.15 per diluted share for 2011 and 2010, respectively. The most significant other item affecting the comparison of year-to-date effective tax rates is a change in the mix of income among tax jurisdictions.

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.

At December 31, 2010, the Company’s cumulative liability for gross unrecognized tax benefits was $10,464. As of September 30, 2011, the Company’s cumulative liability for gross unrecognized tax benefits was $10,548.

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 $63 and $122 for interest and $110 and $535 for penalties on its Consolidated Statement of Income for the three and nine months ended September 30, 2011, respectively, and, as of September 30, 2011, the Company had accrued $1,954 for cumulative interest and $1,378 for cumulative penalties.

During the three and nine months ended September 30, 2011, the Company derecognized uncertain tax positions due to expiration of the applicable statutes of limitations for certain tax years of approximately $424 and $1,382, respectively.

The Company estimates that during the year ending December 31, 2011 it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $1,600 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 and Brazil, from 2006, Spain from 2007, the United States from 2008, China from 2009 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.
 
 

 
7

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

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, acquisition-related consideration and an obligation related to a non-competition agreement at fair value.  The Company’s assets and liabilities subject to fair value measurement are as follows (in thousands):

         
Fair Value Measurements at September 30, 2011
   
Fair Value
 
Using Fair Value Hierarchy
   
as of
                 
Assets
September 30, 2011
 
Level 1
 
Level 2
 
Level 3
Company-owned life insurance
$
1,408
 
$
 
$
1,408
 
$
Company-owned life insurance - Deferred compensation assets
 
471
   
   
471
   
Other deferred compensation assets
                     
 
Large capitalization registered investment companies
 
57
   
57
   
   
 
Mid capitalization registered investment companies
 
4
   
4
   
   
 
Small capitalization registered investment companies
 
6
   
6
   
   
 
International developed and emerging markets registered investment
                     
                companies
 
31
   
31
   
   
 
Fixed income registered investment companies
 
8
   
8
   
   
                         
Total
$
1,985
 
$
106
 
$
1,879
 
$

         
Fair Value Measurements at September 30, 2011
   
Fair Value
 
Using Fair Value Hierarchy
   
as of
                 
Liabilities
September 30, 2011
 
Level 1
 
Level 2
 
Level 3
Deferred compensation liabilities
                     
 
Large capitalization registered investment companies
$
288
 
$
288
 
$
 
$
 
Mid capitalization registered investment companies
 
74
   
74
   
   
 
Small capitalization registered investment companies
 
60
   
60
   
   
 
International developed and emerging markets registered investment
                     
                  companies
 
162
   
162
   
   
 
Fixed income registered investment companies
 
50
   
50
   
   
 
Fixed general account
 
175
   
   
175
   
Interest rate derivatives
 
586
   
   
586
   
Acquisition-related consideration
 
7,748
   
   
   
7,748
Obligation related to a non-competition agreement
 
663
   
   
   
663
                         
Total
$
9,806
 
$
634
 
$
761
 
$
8,411

 
8

 
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
                 
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
 
$

         
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 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 acquisition-related 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 earnouts ultimately being met/paid and the discount rate used to present value the liabilities.  The fair value of the obligation related to a non-competition agreement is based on unobservable inputs and is classified as Level 3.  Significant inputs and assumptions are management’s estimate of the discount rate used to present value the liability.
 
Changes in the fair value of the Level 3 liabilities during the nine months ended September 30, 2011 was as follows:

           
Non-competition
       
   
Earnout
 
Hold-back
 
Agreement
       
   
Summit
 
Tecniquimia
 
Obligation
 
Total
 
Balance at December 31, 2010
$
5,350
 
$
 
$
 
$
5,350
 
 
Purchases, sales, acquisitions and settlements, net
 
   
1,754
   
900
   
2,654
 
 
Interest accretion
 
582
   
62
   
13
   
657
 
 
Payments
 
   
   
(250)
   
(250)
 
Balance at September 30, 2011
$
5,932
 
$
1,816
 
$
663
 
$
8,411
 

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 September 30, 2011 and December 31, 2010.
 
Information about the Company’s interest rate derivatives is as follows (in thousands of dollars):

           
Fair Value
 
           
September 30,
 
December 31,
 
     
Balance Sheet Location
 
2011
 
2010
 
 
Derivatives designated as cash flow hedges:
                 
   
Interest rate swaps
Other current liabilities
 
$
586
 
$
 
   
Interest rate swaps
Other non-current liabilities
   
   
1,026
 
           
$
586
 
$
1,026
 

Cash Flow Hedges
Interest Rate Swaps
                         
   
Three Months Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2011
 
2010
 
2011
 
2010
Amount of Gain Recognized in Accumulated OCI on Derivative
                       
(Effective Portion)
 
$
112
 
$
191
 
$
286
 
$
487
                         
Amount and Location of Loss Reclassified from Accumulated OCI into
                       
Income (Effective Portion)
Interest Expense
$
(168)
 
$
(444)
 
$
(496)
 
$
(1,352)
                         

Note 6 – Stock-Based Compensation
 
The Company recognized approximately $2,675 of share-based compensation expense for the nine months ended September 30, 2011. The compensation expense was comprised of $360 related to stock options, $1,031 related to nonvested stock awards, $33 related to the Company’s Employee Stock Purchase Plan, $1,206 related to the Company’s non elective 401(k) matching contribution and a portion of its elective 401(k) matching contribution in stock, and $45 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 as determined by the Company but 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.
 
 
10

 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
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
(36,748)
   
16.85
       
 
Options forfeited
(11,018)
   
13.67
       
Balance at September 30, 2011
292,513
 
$
16.79
     
4.5
Exercisable at September 30, 2011
137,410
 
$
13.91
     
3.7

As of September 30, 2011, the total intrinsic value of options outstanding was approximately $3,306, and the total intrinsic value of exercisable options was $1,766.  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 September 30, 2011 is as follows: 

               
Weighted
 
Weighted
 
Number
 
Weighted
           
Number
 
Average
 
Average
 
Exercisable
 
Average
Range of
Outstanding
 
Contractual
 
Exercise
 
at
 
Exercise
Exercise Prices
at 9/30/2011
 
Life
 
Price
 
9/30/2011
 
Price
$
3.74
-
 
$
7.47
117,157
 
4.4
 
$
6.93
 
66,597
 
$
6.93
$
7.48
-
 
$
18.69
 
   
 
   
$
18.70
-
 
$
22.42
113,677
 
5.0
   
18.91
 
45,969
   
19.04
$
22.43
-
 
$
26.16
24,844
 
0.01
   
23.13
 
24,844
   
23.13
$
26.17
-
 
$
33.63
 
   
 
   
$
33.64
-
 
$
37.37
36,835
 
6.4
   
37.37
 
   
           
292,513
 
4.5
   
16.79
 
137,410
   
13.91

As of September 30, 2011, unrecognized compensation expense related to options granted during 2009 was $44, for options granted during 2010 was $287 and for options granted in 2011 was $402.
 
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 $97 of expense was recorded on these options during the first nine months of 2011. The fair value of these awards is amortized on a straight-line basis over the vesting period of the awards.

 
11

 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
 
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
58,350
 
$
36.53
 
Vested
(42,412)
 
$
22.25
 
Forfeited
(9,151)
 
$
11.65
 
Nonvested awards, September 30, 2011
169,863
 
$
20.66
 

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, 2011, unrecognized compensation expense related to these awards was $2,010 to be recognized over a weighted average remaining period of 2.00 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, September 30, 2011
62,750
 
$
7.72
 

As of September 30, 2011, unrecognized compensation expense related to these awards was $81, to be recognized over a weighted average remaining period of 0.50 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 which would adjust the number of shares. As of September 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.

 
12

 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)
 
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
 
Nine Months Ended
     
September 30,
   
September 30,
   
2011
 
2010
 
2011
 
2010
Basic Earnings per Common Share
                     
 
Net income attributable to Quaker Chemical Corporation
$
13,358
 
 $
6,340
 
$
33,799
 
 $
24,912
 
Less: income allocated to participating securities
 
(224)
   
(126)
   
(611)
   
(522)
 
Net income available to common shareholders
$
13,134
 
$
6,214
 
$
33,188
 
$
24,390
 
Basic weighted average common shares outstanding
 
12,621,459
   
11,088,830
   
11,989,748
   
10,981,302
Basic earnings per common share
$
1.04
 
$
0.56
 
$
2.77
 
$
2.22
                         
Diluted Earnings per Common Share
                     
 
Net income attributable to Quaker Chemical Corporation
$
13,358
 
$
6,340
 
$
33,799
 
$
24,912
 
Less: income allocated to participating securities
 
(222)
   
(125)
   
(604)
   
(516)
 
Net income available to common shareholders
$
13,136
 
$
6,215
 
$
33,195
 
$
24,396
 
Basic weighted average common shares outstanding
 
12,621,459
   
11,088,830
   
11,989,748
   
10,981,302
 
Effect of dilutive securities, employee stock options
 
148,919
   
209,624
   
166,787
   
181,620
 
Diluted weighted average common shares outstanding
 
12,770,378
   
11,298,454
   
12,156,535
   
11,162,922
Diluted earnings per common share
$
1.03
 
$
0.55
 
$
2.73
 
$
2.19

The following number of stock options are not included in diluted earnings per share since the effect would have been anti-dilutive: 15,740 and 0 for the three months ended September 30, 2011 and 2010, and 11,356 and 0 for the nine months ended September 30, 2011 and 2010, respectively.

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.

 
13

 
Quaker Chemical Corporation
Notes to Condensed Consolidated Financial Statements - Continued
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
The table below presents information about the reported segments:
                         
   
Three Months Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2011
 
2010
 
2011
 
2010
Metalworking Process Chemicals
                     
 
Net sales
$
171,222
 
$
128,764
 
$
478,727
 
$
376,931
 
Operating income for reportable segments
 
30,443
   
25,290
   
83,527
   
75,926
Coatings
                     
 
Net sales
 
10,378
   
8,424
   
29,347
   
23,698
 
Operating income for reportable segments
 
2,452
   
1,980
   
6,861
   
5,306
Other Chemical Products
                     
 
Net sales
 
713
   
481
   
1,896
   
1,351
 
Operating income (loss) for reportable segments
 
32
   
(6)
   
71
   
(40)
Total
                     
 
Net sales
 
182,313
   
137,669
   
509,970
   
401,980
 
Operating income for reportable segments
 
32,927
   
27,264
   
90,459
   
81,192
Non-operating expenses
 
(14,800)
   
(12,661)
   
(42,318)
   
(39,043)
Non-income tax related contingency charge
 
   
(3,581)
   
   
(3,581)
CEO transition costs
 
   
(1,317)
   
   
(1,317)
Amortization
 
(623)
   
(274)
   
(1,596)
   
(736)
Interest expense
 
(1,166)
   
(1,345)
   
(3,584)
   
(4,042)
Interest income
 
262
   
313
   
805
   
840
Other income (loss), net
 
2,740
   
(320)
   
4,070
   
1,566
Consolidated income before taxes and equity in net income of associated companies
$
19,340
 
$
8,079
 
$
47,836
 
$
34,879

Operating income is comprised of 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.


 
14

 
 
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 nine months ended September 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 June 30, 2011
$
12,823
 
$
87,249
 
$
158,998
 
$
(5,507)
 
$
8,142
 
 
 
 
$
261,705
 
Net income
 
 
 
 
 
13,358
 
 
 
 
 
447
 
$
13,805
 
 
 
 
Currency translation adjustments
 
 
 
 
 
 
 
(13,042)
 
 
(894)
 
 
(13,936)
 
 
 
 
Defined benefit retirement plans
 
 
 
 
 
 
 
(637)
 
 
 
 
(637)
 
 
 
 
Current period changes in fair value of derivatives
 
 
 
 
 
 
 
112
 
 
 
 
112
 
 
 
 
Unrealized loss on available-for-sale securities
 
 
 
 
 
 
 
(23)
 
 
 
 
(23)
 
 
 
 
 
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(679)
 
 
(679)
 
 
Comprehensive income attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
447
 
 
 
 
 
Comprehensive loss attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Quaker Chemical Corporation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(232)
 
 
 
 
Dividends ($0.24 per share)
 
 
 
 
 
(3,091)
 
 
 
 
 
 
 
 
 
(3,091)
 
Share issuance and equity-based compensation plans
 
52
 
 
1,252
 
 
 
 
 
 
 
 
 
 
 
1,304
 
Excess tax benefit from stock option exercises
 
 
 
(9)
 
 
 
 
 
 
 
 
 
 
 
(9)
Balance at September 30, 2011
$
12,875
 
$
88,492
 
$
169,265
 
$
(19,097)
 
$
7,695
 
 
 
 
$
259,230
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2010
$
11,259
 
$
32,798
 
$
136,497
 
$
(20,070)
 
$
6,063
 
 
 
 
$
166,547
 
Net income
 
 
 
 
 
6,340
 
 
 
 
 
517
 
$
6,857
 
 
 
 
Currency translation adjustments
 
 
 
 
 
 
 
11,085
 
 
493
 
 
11,578
 
 
 
 
Defined benefit retirement plans
 
 
 
 
 
 
 
862
 
 
 
 
862
 
 
 
 
Current period changes in fair value of derivatives
 
 
 
 
 
 
 
191
 
 
 
 
191
 
 
 
 
Unrealized loss on available-for-sale securities
 
 
 
 
 
 
 
13
 
 
 
 
13
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19,501
 
 
19,501
 
 
Comprehensive loss attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,010)
 
 
 
 
 
Comprehensive income attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Quaker Chemical Corporation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
18,491
 
 
 
 
Dividends ($0.235 per share)
 
 
 
 
 
(2,676)
 
 
 
 
 
 
 
 
 
(2,676)
 
Share issuance and equity-based compensation plans
 
117
 
 
2,757
 
 
 
 
 
 
 
 
 
 
 
2,874
 
Excess tax benefit from stock option exercises
 
 
 
176
 
 
 
 
 
 
 
 
 
 
 
176
Balance at September 30, 2010
$
11,376
 
$
35,731
 
$
140,161
 
$
(7,919)
 
$
7,073
 
 
 
 
$
186,422

 
15

 
 
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
 
 
 
 
 
33,799
 
 
 
 
1,791
 
$
35,590
 
 
 
 
Currency translation adjustments
 
 
 
 
 
 
 
(5,642)
 
 
(817)
 
 
(6,459)
 
 
 
 
Defined benefit retirement plans
 
 
 
 
 
 
 
12
 
 
 
 
12
 
 
 
 
Current period changes in fair value of derivatives
 
 
 
 
 
 
 
286
 
 
 
 
286
 
 
 
 
Unrealized gain on available-for-sale securities
 
 
 
 
 
 
 
(17)
 
 
 
 
(17)
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
29,412
 
 
29,412
 
 
Comprehensive loss attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(974)
 
 
 
 
 
Comprehensive income attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Quaker Chemical Corporation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
28,438
 
 
 
 
Dividends ($0.71 per share)
 
 
 
 
 
(8,881)
 
 
 
 
 
 
 
 
 
(8,881)
 
Stock offering, net of related expenses
 
1,265
 
 
46,878
 
 
 
 
 
 
 
 
 
 
 
48,143
 
Share issuance and equity-based compensation plans
 
118
 
 
3,186
 
 
 
 
 
 
 
 
 
 
 
3,304
 
Excess tax benefit from stock option exercises
 
 
 
153
 
 
 
 
 
 
 
 
 
 
 
153
Balance at September 30, 2011
$
12,875
 
$
88,492
 
$
169,265
 
$
(19,097)
 
$
7,695
 
 
 
 
$
259,230
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2009
$
11,086
 
$
27,527
 
$
123,140
 
$
(10,439)
 
$
4,981
 
 
 
 
$
156,295
 
Net income
 
 
 
 
 
24,912
 
 
 
 
 
1,716
 
$
26,628
 
 
 
 
Currency translation adjustments
 
 
 
 
 
 
 
629
 
 
376