UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended March 31,June 30, 2004

OR

For the transition period from            to            

Commission file number 0-7154

QUAKER CHEMICAL CORPORATION

(Exact name of Registrant as specified in its charter)

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

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

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES

* * * * * * * * * *

Item 1. Financial Statements

Quaker Chemical Corporation

Condensed Consolidated Balance Sheet

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

Quaker Chemical Corporation

Condensed Consolidated Statement of Income

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

Quaker Chemical Corporation

Condensed Consolidated Statement of Cash Flows

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

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands except per share amounts)

(Unaudited)

Note 1 – Condensed Financial Information

The condensed consolidated financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities and Exchange Commission regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Certain prior year amounts have been reclassified to conform to the 2004 presentation. In the opinion of management, the financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods. The results for the three and six months ended March 31,June 30, 2004 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Annual Report filed on Form 10-K for the year ended December 31, 2003.

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 a principal, revenues are recognized on a gross reporting basis at the selling price negotiated with customers. Where the Company acts as an agent, such revenue is recorded using net reporting as service revenues, at the amount of the administrative fee earned by the Company for ordering the goods. Third party products transferred under arrangements resulting in net reporting totaled $8,797$17,518 and $7,287$13,440 for the threesix months ended March 31,June 30, 2004 and 2003, respectively.

Note 2 – Recently Issued Accounting Standards

In JanuaryOn December 8, 2003, the Financial Accounting Standards Board (“FASB”), issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Certain Variable Interest Entities, (“VIEs”), which is an interpretation of Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements.” FIN 46 addresses the application of ARB No. 51 to VIEs, and generally would require that assets, liabilities and results of the activities of a VIE be consolidated into the financial statements of the enterprise that is considered the primary beneficiary. FIN 46, as revised by FIN 46 (revised December 2003), is effective for public entities that have interests in variable interest entities commonly referred to as special-purpose entities for periods ending December 15, 2003. Application for all other types of entities is required in financial statements for periods ending after March 15, 2004. The Company has determined that its real estate joint venture, which has always been accounted for under the equity method, is a VIE and that the Company is not the primary beneficiary. The consolidated financial statements include the accounts of the Company and all of its subsidiaries in which a controlling interest is maintained and would include any VIEs if the Company was the primary beneficiary pursuant to the provisions of FIN 46.

On January 12, 2004 the FASB issued FSP No. FAS 106-1, which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects ofPresident Bush signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). On December 8, 2003, President Bush signed the Act into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a Federal subsidy to companies which sponsor retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted underOn May 20, 2004 the FASB issued FSP No. 106-1,FAS 106-2, Accounting and Disclosure Requirements Related to the Company did not reflect the effectsMedicare Prescription Drug, Improvement and Modernization Act of this Act in its consolidated financial statements and accompanying notes. Specific authoritative2003. This FSP provides guidance on the accounting for the Federal subsidy is pending and that guidance, when issued, could requireeffects of the new Medicare prescription drug benefit under Medicare Part D. The provisions of the FSP are effective for the first interim or annual period beginning after June 15, 2004. For the Company, to change previously reported information.the provisions will be effective for the third quarter of 2004 beginning on July 1, 2004. Therefore, measures of the accumulated postretirement benefit obligation or net periodic benefit cost for the period ended June 30, 2004 do not reflect any amount associated with the subsidy. The Company is currentlystill assessing whether the impact ofbenefits provided by its retiree health care benefit plan are actuarially equivalent to the Medicare Part D benefit under the Act.

Note 3 – Stock-Based Compensation

In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This standard amends the transition and disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 148, the Company continues to account for stock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been recognized for stock options since all options granted had an exercise price equal to the market value of the underlying stock on the grant date. The following tables illustrate the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

Note 4 – Earnings Per Share

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

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

Note 5 – Business Segments

The Company’s reportable segments are as follows:

(1) Metalworking process chemicals – industrial process fluids for various heavy industrial and manufacturing applications.

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

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

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

The table below presents information about the reported segments:

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

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

Note 6 – Comprehensive Income

The following table summarizes comprehensive income:

Note 7 – Restructuring and Related Activities

In 2001, Quaker’s management approved restructuring plans to realign the organization and reduce operating costs (2001 program). Quaker’s restructuring plans included the decision to close and sell manufacturing facilities in the U.K. and France. In addition, Quaker consolidated certain functions within its global business units and reduced administrative functions, as well as expensed costs related to abandoned acquisitions. Included in the restructuring charges are provisions for severance of 53 employees. Restructuring and related charges of $5,854 were recognized in 2001. The charge comprised $2,807 related to employee separations, $2,450 related to facility rationalization charges, and $597 related to abandoned acquisitions. Employee separation benefits varied depending on local regulations within certain foreign countries and included severance and other benefits. As of March 31,June 30, 2004, Quaker had completed 52 of the planned 53 employee separations under the 2001 plan. In 2003, the Company reversed $216 of unused restructuring accruals related to the 2001 program.

In 2003, Quaker’s management approved restructuring plans to further realign the organization (2003 program). Included in the 2003 restructuring charge are provisions for severance for 9 employees totaling $273.

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

Accrued restructuring balances, included in other current liabilities and assigned to the Metalworking process chemicals segment, are as follows:

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

Note 8 – Goodwill and Other Intangible Assets

The changes in carrying amount of goodwill for the threesix months ended March 31,June 30, 2004 are as follows:

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

The Company recorded $284$575 and $215$438 of amortization expense in the first quartersix months of 2004 and 2003, respectively. Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows:

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

Note 9 – Debt

In April 2004, the Company entered into a $10.0 million$10,000 uncommitted demand credit facility with a bank. At the Company’s option, the interest rate for borrowings under this agreement may be based on the prime rate less a margin or a LIBOR rate plus a margin. This brings

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

The above actions bring the Company’s credit lines to a total of $60.0 million, $30.0 million$70,000, $40,000 committed and $30.0 million$30,000 uncommitted. At June 30, 2004, the Company had approximately $50,800 outstanding on its credit lines.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

Note 10 – Pension and Other Postretirement Benefits

The components of net periodic benefit cost, for the three and six months ended March 31,June 30, are as follows:

Employer Contributions:

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to make minimum cash contributions of $1,483 to its U.S. pension plan and $1,061 to its other postretirement benefit plan in 2004. As of March 31,June 30, 2004 $345$722 and $246$489 of contributions have been made, respectively.

Note 11 – Commitments and Contingencies

The Company is involved in environmental clean-up activities and litigation in connection with an existing plant location and former waste disposal sites operated by unaffiliated third parties. In April of 1992, the Company identified certain soil and groundwater contamination at AC Products, Inc. (“ACP”), a wholly owned subsidiary. Voluntarily in coordination with the Santa Ana California Regional Water Quality Board, ACP is remediating the contamination. The Company believes that the remaining potential-known liabilities associated with these matters ranges from approximately $900 to $1,500, for which the Company has sufficient reserves. Notwithstanding the foregoing, the Company cannot be certain that liabilities in the form of remediation expenses and damages will not be incurred in excess of the amount reserved.

Additionally, although there can be no assurance regarding the outcome of other environmental matters, the Company believes that it has made adequate accruals for costs associated with other environmental problems of which it is aware. Approximately $148$168 and $188 was accrued at March 31,June 30, 2004 and December 31, 2003, respectively, to provide for such anticipated future environmental assessments and remediation costs.

An inactive subsidiary of the Company that was acquired in 1978 sold certain products containing asbestos, primarily on an installed basis, and is among the defendants in numerous lawsuits alleging injury due to exposure to asbestos. The subsidiary discontinued operations in 1991 and has no remaining assets other than its existing insurance policies. To date, the overwhelming majority of these claims have been disposed of without payment and there have been no adverse judgments against the subsidiary. Based on a continued analysis of the existing and anticipated future claims against this subsidiary, it is currently projected that the subsidiary’s total liability over the next 50 years for these claims is approximately $10,000 (excluding costs of defense). Although the Company has also been named as a defendant in certain of these cases, no claims have been actively pursued against the Company and the Company has not contributed to the defense or settlement of any of these cases pursued against the subsidiary. These cases have been handled to date by the subsidiary’s primary and excess insurers who agreed to pay all defense costs and be responsible for all damages assessed against the subsidiary arising out of existing and future asbestos claims up to the aggregate limits of the policies. A significant portion of this primary insurance coverage was provided by an insurer that is now insolvent, and the other primary insurers have asserted that the aggregate limits of their policies have been exhausted. The subsidiary is challenging the applicability of these limits to the claims being brought against the subsidiary. The subsidiary has additional coverage under its excess policies. The Company believes, however, that if the coverage issues under the primary policies are resolved adversely to the subsidiary, the subsidiary’s insurance coverage will likely be exhausted within the next three to four years. As a result, liabilities in respect of claims not yet asserted may exceed coverage available to the subsidiary.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements—(Continued)

(Dollars in thousands except per share amounts)

(Unaudited)

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

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

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

Executive Summary

Quaker Chemical Corporation is a worldwide developer, producer, and marketer of chemical specialty products and a provider of chemical management services for various heavy industrial and manufacturing applications around the globe, with significant sales to the steel and automotive industries. Our strategies and initiatives flow from three business imperatives: (1) sell customer solutions - value - not just fluids, (2) operate as a globally integrated whole, and (3) harness the power of our global knowledge and learning. Success factors critical to the Company’s business include successfully differentiating ourselves from our competition, operating efficiently as a globally integrated whole, and increasing market share, customer penetration and profitability through internally developed programs and strategic acquisitions.

The Company operates in mature businesses, which are driven by demand for consumer durables and are, therefore, subject to the vulnerabilities of a cyclical economy. For the first quarter 2004, theThe Company saw signs of an improving global economy with sequential quarterly growth in all four of its regions with highexperienced significant revenue growth in the South Americansecond quarter of 2004 versus the second quarter of 2003, driven by acquisitions, its chemical management services (CMS) business, solid base business growth and Asia/Pacific markets.favorable foreign exchange. The Company expects 2004 to be a strong revenue growth year in all business segments and in all regions due to its business initiatives as well as an improvement in the global economy.

TheFor the second quarter 2004, the Company experienced significant revenuesaw high growth in the first quarter of 2004 versus the first quarter of 2003, driven by foreign exchange, acquisitionsSouth American and its chemical management services (CMS).Asia/Pacific markets. The revenue growth attributable to CMS was due to the award of new contracts in the North American automotive market, which were effective May 1, 2003. The profitability of this new business is dependent on the Company’s ability to identify and implement cost reduction programs and to achieve product conversions. Since inception,While the new CMS contracts made a profit impactcontribution in the second quarter of these contracts has been immaterial. During 2004, the Company continues to expect to realize increased profitability from this business as cost reductionswas behind in its expectations for both product conversions and product conversions are achieved.

Higher crude oil pricesusage reductions. In addition, higher raw material costs, and higher expenses including pension, insurance, Sarbanes-Oxley compliance, and the Company’s ERP implementation negatively impacted the Company’s firstsecond quarter results as compared to the prior year. DespiteThe Company does not anticipate raw material cost relief for the remainder of 2004. These trends were largely responsible for the shortfall in earnings for the quarter compared to the prior year despite record sales in the quarter.

Looking forward to the second half of the year, the Company announced and began implementing price increases and surcharges in the second quarter to help offset increases in raw material costs. Though delayed in implementing CMS product conversions and product usage reduction programs, the Company has recently been making considerable progress in both areas. The Company expects to realize the benefits of these trends,actions in the second half of the year. The Company is still optimistic that for the 2004 year, it will achieve earnings around our prior year level. Critical to making this happen are the continued economic recovery in the Company’s first quarter results were consistent with previous guidancekey markets, the contribution of announced price increases and strong follow-through on our progress in product conversion and product usage reduction programs in the Company’s 2004 outlook continues to be for a slight improvement in year-over-year earnings. In addition, the Company recently increased its quarterly dividend, which will result in the 32^nd consecutive year of annual dividend increases paid to shareholders.CMS business.

Liquidity and Capital Resources

Quaker’s cash and cash equivalents increased to $22.9$24.5 million at March 31,June 30, 2004 from $21.9 million at December 31, 2003. The increase resulted primarily from $1.9$1.7 million cash used in operating activities and $2.2$4.7 million cash used in investing activities, offset by $5.4$9.8 million cash provided by financing activities.

Net cash flows used in operating activities were $1.9$1.7 million in the first quarterhalf of 2004 compared to $3.6$2.2 million in the same period of 2003. Although the amounts are relatively consistent, there have been some significant movements in the Company’s working capital accounts. Accounts receivable in 2004 has had less of an impact on operating cash flow, reflective of the initial working capital investment associated with the Company’s new CMS contracts which began in the second quarter of 2003. In addition, in the first half of 2004 the Company entered into additional CMS contracts which have impacted our working capital accounts. The differenceincrease in inventory is primarily caused by increased cash flows from accounts payableattributable to higher business levels, particularly in the South American and accrued liabilities offset in part by aAsia/Pacific markets, the additional CMS contracts and higher raw material costs. The $4.5 million decrease to cash from the prior year in prepaid expenses and other current assets is reflective of a $2.6 million tax settlement received in the first half of 2003 as well as attributable to the timing of higher accounts receivable balances.prepaid insurance premiums in 2004. The increasedchange in cash flows from accounts payable and accrued liabilities was largely due to lower incentive compensation payments made in the first quarter 2004 versus 2003. The increase in accounts receivable was primarily due to the Company’s new CMS contracts as well as increased sales volume.

Net cash flows used in investing activities were $2.2$4.7 million in the first quarterhalf of 2004 compared to $0.4$2.0 million in the same period of 2004.2003. The increased use of cash was caused by slightly higher capital expenditures as well as a lower level of priority distributions received from the Company’s real estate joint venture compared to 2003 offset by payments related to the Company’s KS Chemie acquisition in 2003. In the first quarterhalf of 2004 capital expenditures were $2.3$4.9 million. Major projects included the Company’s U.S. lab renovation, global ERP implementation, and capital expansion related to the Vulcan acquisition. The Company is near completion on both the Vulcan acquisition related capital expenditures and the U.S. lab renovation. The capital expansion project related to the Vulcan acquisition will allowis complete and has allowed the Company to move essentially all of the production from Vulcan to other facilities and to save on external manufacturing costs. Also, capital expenditures related to the ERP implementation is expected to be considerably less in 2004 than over the past few years. Overall, the Company is expecting total 2004 capital expenditures to be slightly under $10.0 million, which would be a 20% reduction from the 2003 capital expenditure levels.

Net cash flows provided by financing activities were $5.4$9.8 million for the first quarterhalf of 2004 compared to $1.7$4.9 million for the same period in the prior year. The net change was primarily due to $7.6 million ofincreased short-term and long-term borrowings incurred in the first quarterhalf of 2004 used to finance the Company’s capital expenditures and continued working capital needs.

In April 2004, the Company entered into a $10.0 million uncommitted demand credit facility with a bank. At the Company’s option, the interest rate for borrowings under this agreement may be based on the prime rate less a margin or a LIBOR rate plus a margin. This bringsIn June 2004, the Company amended one of its committed credit facilities which was set to expire in June 2004. The amendment increased the facility from $15.0 million to $25.0 million and extended the expiry date to June 2005. These actions bring the Company’s credit lines to a total of $60.0$70.0 million, consisting of $30.0 million$40.0 committed and $30.0 uncommitted. At June 30, 2004 the Company had approximately $50.8 million uncommitted.