UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2008March 31, 2009

OR

For the transition period from            to            

Commission file number 001-12019

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 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  ¨    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.

(Do not check if 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.

Table of Contents

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES

* * * * * * * *

PART I

FINANCIAL INFORMATION

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 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. Certain reclassifications of prior years’ data have been made to improve comparability and for the adoption of “SFAS 160.” The results for the three and six months ended June 30, 2008March 31, 2009 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, 2007.2008.

During the first quarter of 2008 and as required by SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” the Company changed the measurement date of its U.S. pension plan from November 30 to December 31 in order to coincide with the Company’s fiscal year end. This change did not have a material impact to the Company’s consolidated financial statements.

As previously disclosed on May 7,Effective October 3, 2008, Ronald J. Naples, Chairman, and Chief Executive Officer of the Company, has announced his plan to retireretired as Chief Executive Officer, effective October 3, 2008.Officer. The Company is recognizinghas been and will recognize certain accelerated and other costs in accordance with Mr. Naples’ Employment, Transition and Consulting Agreement. Over the courseThe Company expects to incur charges of the next three years, the Company anticipates taking a charge to earnings of approximately $5,800 of which $3,500 would be incurred in 2008, $1,900$2,400 later in 2009 and $400$1,000 in 2010.2010 related to Mr. Naples’ supplemental retirement income plan. The $1,880 charge, orCompany expects to obtain incremental net other savings of approximately $0.12 per diluted share, incurred$500 in 2009 and $600 in 2010 related to Mr. Naples retirement.

As of January 1, 2009, the Company adopted the provisions of Statement of Financial Standards No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements: An amendment of ARB No. 51”. SFAS 160 requires the Company to present its interest in less than 100% owned subsidiaries for which it retains control as a component of shareholders’ equity in the second quarterbalance sheet and recharacterize that component formerly known as minority interest as “noncontrolling interest in subsidiaries”. Furthermore, SFAS 160 requires the Company to show the amount of net income or loss attributable to both the Company and the noncontrolling interest on the face of the statement of income and in the summary of comprehensive income (see Note 10 – Comprehensive (Loss) Income). In accordance with the provisions of SFAS 160, the presentation and disclosure requirements of SFAS 160 have been adopted on a retrospective basis, and the Company’s balance sheet, income statement, statement of cash flows and summary of comprehensive (loss) income have been recharacterized accordingly. The effect of adoption on the Company’s balance sheet was an increase of $3,952 to total shareholders’ equity on the Company’s December 31, 2008 includes incremental equity compensation expense of $975,balance sheet, and a special bonus of $642, $65 related to his annual bonus, and incremental expense of $198 relatedcorresponding decrease to the “mezannine” minority interest. The Company is also required to measure future transactions involving noncontrolling interests at fair value, with any gains or losses arising from those transactions reported in equity. The adoption of SFAS 160 did not result in any material adverse effects on the Company’s Supplemental Retirement Income Plan.financial statements or results.

The Company adopted FASB Staff Position (“FSP”) EITF 03-06-1,“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” as of January 1, 2009. The FSP requires grants of restricted stock which receive non-forfeitable dividends to be included as part of the basic weighted average share calculation under the two-class method. The Company previously included such shares in its diluted weighted average share calculation under the treasury stock method, in accordance with SFAS 123(R). The FSP requires retrospective restatement of earnings per share for all prior periods presented. The effect of adoption of the FSP on the Company’s earnings per share for the quarter ended March 31, 2008 was not material. Refer to Note 58 – Stock-Based Compensation and the Company’s current report on Form 8-K, filed on May 13, 2008Earnings Per Share for further information.

During the second quarter of 2008, the Company received a net arbitration award of $956, or approximately $0.04 per diluted share, related to litigation with one of the former owners of the Company’s Italian affiliate. This net award was recorded in “Other income.”

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, revenues arerevenue 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$16,880 $4,831 and $26,848$8,588 for the sixthree months ended June 30,March 31, 2009 and 2008, and 2007, respectively.

Note 2 – Recently Issued Accounting Standards

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS 141(R)”),Business Combinations, and Statement of Financial Accounting Standards No. 160 (“SFAS 160”),Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. SFAS 141(R) will significantly change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. Some of the changes, such as the accounting for contingent consideration, will introduce more volatility into earnings. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141(R) will be applied prospectively. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 141(R) and SFAS 160 are effective for fiscal years beginning on or after December 15, 2008. The Company is currently assessing the impact of these standards on its financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standard No. 161 (“SFAS 161”),released FSP 132(R)-1, “Employer Disclosures about Derivative InstrumentsPostretirement Benefit Plan Assets”. This standard requires enhanced disclosures about postretirement benefit plan assets, including how investment decisions are made, the major categories of plan assets, inputs and Hedging Activities. SFAS 161 requires expanded disclosure aboutvaluation techniques used to measure the Company’s hedging activitiesfair value of plan assets and usesignificant concentrations of derivative instruments in its hedging activities. SFAS 161risk within plan assets. FSP 132(R)-1 is effective for fiscal years beginning on orending after NovemberDecember 15, 2008 and for interim periods within those fiscal years.2009. The Company is currently assessingevaluating the impacteffect of this standard on its financial statements.

In June 2008, the FASB issued FASB Staff Position, FSP EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. FSP EITF 03-6-1 changes the way earnings per share is calculated for share-based payments that have not vested. FSP EITF 03-6-1 is effective for fiscal years beginning on or after December 15, 2008 and for interim periods within those fiscal years. The Company is currently assessing the impact of this standard on itsCompany’s financial statements.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 3 – Restructuring and Related Activities

In the fourth quarter of 2008, Quaker’s management approved a restructuring plan (2008 4^th Quarter Program) to reduce operating costs, primarily in North America and Europe. Included in the restructuring plans were provisions for severance for 57 employees. The Company recognized a $2,916 restructuring charge in the fourth quarter of 2008. Employee separation benefits varied depending on local regulations within certain foreign countries and included severance and other benefits. The Company expects to complete the initiatives contemplated under this program during 2009.

In the first quarter of 2009, Quaker’s management implemented an additional restructuring program which included provisions for severance for 60 employees totaling $2,289. The Company expects to complete the initiatives contemplated under this program during 2009. Accrued restructuring balances, assigned to the Metalworking Process Chemical segment, are as follows:

Note 34 – Uncertain Income Tax Positions

In June 2006,The Company applies the provisions of Financial Accounting Standards Board issued FASB Interpretation No. 48, “Accounting“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”109” (“FIN 48”). FIN 48 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. FIN 48 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. FIN 48 also provides guidance on de-recognition, classification, penalties and interest, accounting in interim periods disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48, effective January 1, 2007.disclosure.

At December 31, 2007, the Company’s cumulative liability for gross unrecognized tax benefits was $10,861. As of June 30, 2008, the Company’s cumulative liability for gross unrecognized tax benefits was $12,226.$10,012. As of March 31, 2009, the Company’s cumulative liability for gross unrecognized tax benefits was $9,825.

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 $1,211$1,345 for cumulative interest and $809$911 for cumulative penalties at December 31, 2007.2008. The Company has recognized $191 and $376$121 for interest and $10 and $45$33 for penalties on its Consolidated Statement of Income for the three-month period ended March 31, 2009 and six-month period ended June 30, 2008, respectively, and, as of June 30, 2008,at that date the Company had accrued $1,675$1,402 for cumulative interest and $895$909 for cumulative penalties.

During the quarter ended March 31, 2009, the Company derecognized certain uncertain tax positions due to expiration of the applicable statutes of limitations for certain tax years. As a result, the Company recognized a $3 decrease in its cumulative liability for gross unrecognized tax benefits.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

The Company estimates that during the year ended December 31, 2009 it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $500 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 ended December 31, 2009.

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 2003, Italy, United Kingdom, from 2001, Brazil, from 2002, the Netherlands and Spain from 2003, Italy and the United States from 2004, China and India from 2005 and various domestic state tax jurisdictions from 1993.

In 2007, the Internal Revenue Service commenced a routine examination of the Company’s U.S. corporate income tax returns for the tax years ended December 31, 2005 and December 31, 2006. Based on the outcome of this examination, the Company may recognize changes to its unrecognized tax benefit.

In addition, the Company was under audit by the French tax authorities for tax years 2001 through 2004. The French tax authorities made several adjustments to the Company’s transfer pricing transactions and inter-company charges. During the three-month period ended March 31, 2008, the Company resolved several of these issues through the French administrative appeals process and with Competent Authority as provided under the U.S./French tax treaty. As a result of this partial resolution of the issues, the Company recognized a $381 decrease in its cumulative liability for gross unrecognized tax benefits for the six-month period ended June 30, 2008.

Note 45 – Fair Value Measurements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”),Fair Value Measurement.Subsequently, the FASB issued FASB Staff Position (“FSP”) 157-1 and FSP 157-2, which provided exceptions to applying the guidance to leasing transactions and to non-recurring nonfinancial assets and liabilities.Effective January 1, 2008, the Company adopted SFAS 157, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring nonfinancial assets and nonfinancial liabilities for which the Company hasdid not appliedapply the provisions of SFAS 157 includeincluded those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, asset retirement obligations initially measured at fair value, and those initially measured at fair value in a business combination. The Company adopted the deferred provisions as of January 1, 2009. SFAS 157 establishes a common definition for fair value to be applied to U.S. GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.

The statement 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:

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

The Company values its interest rate swaps, company-owned life insurance policies and various deferred compensation assets and liabilities at fair value. The Company’s assets and liabilities subject to fair value measurement are as follows (in thousands):

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

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. The fair values of interest rate derivatives are based on quoted market prices from various banks for similar instruments.

Note 6 – Hedging Activities

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 161 (“SFAS 161”),Disclosures about Derivative Instruments and Hedging Activities: an amendment of FASB Statement No. 133. SFAS 161 requires additional disclosure about the Company’s derivative activities, but does not require any new accounting related to derivative activities. The Company has applied the requirements of SFAS 161 on a prospective basis. Accordingly, disclosures related to interim periods prior to the date of adoption have not been presented.

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 and credit risk. Quaker uses interest rate swaps to mitigate the impact of changes in interest rates. The swaps 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 currently uses no derivatives designated as fair value hedges and has no derivatives not designated as hedging instruments under SFAS 133.

Information about the Company’s interest rate derivatives is as follows (in thousands of dollars):

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 57 – Stock-Based Compensation

The Company applies Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”),Share-Based Payment. SFAS 123(R) requires the recognition of the fair value of stock compensation in net income. The Company elected the modified prospective method in adopting SFAS 123(R). Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption.

On May 7, 2008, Ronald J. Naples, Chairman and Chief Executive Officer of the Company, announced that he plans to retire as the Company’s Chief Executive Officer, effective October 3, 2008. In accordance with Mr. Naples’ Employment, Transition and Consulting Agreement, Mr. Naples’ equity-based compensation awards (both nonvested stock and stock options) had to be re-measured and vesting accelerated to coincide with the October 3, 2008 retirement date. These actions resulted in incremental equity compensation expense of approximately $975 ($396 nonvested stock and $579 stock options) during the six months ended June 30, 2008. These incremental expenses are included in the following reconciliation of total equity-based compensation expense.

The Company recognized approximately $1,762$352 of share-based compensation expense and $617$123 of related tax benefits in our unaudited condensed consolidated statement of incomeoperations for the sixthree months ended June 30, 2008.March 31, 2009. The compensation expense was comprised of $869$52 related to stock options, $806$181 related to nonvested stock awards, $23$19 related to the Company’s Employee Stock Purchase Plan, $68 related to the Company’s non elective 401k matching contribution in stock, and $64$32 related to the Company’s Director Stock Ownership Plan.

Based on our historical experience, we havethe Company has assumed a forfeiture rate of 13% on the nonvested stock. Under the true-up provisions of SFAS 123(R), we123R, the Company will record additional expense if the actual forfeiture rate is lower than we estimated, and we will record a recovery of prior expense if the actual forfeiture rate is higher than we estimated.

The Company has a long-term incentive program (“LTIP”) for key employees which provides for the granting of options to purchase stock at prices not less than market value on the date of the grant. Most options become exercisable between one and three years after the date of the grant for a period of time determined by the Company not to exceed seven years from the date of grant for options issued in 1999 or later and ten years for options issued in prior years. Beginning in 1999, the LTIP program provided for common

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

(Unaudited)

stock awards, the value of which was generally derived from Company performance over a three-year period. Common stock awards issued in 2006, 2007 and 2008 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.

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:

TheAs of March 31, 2009, the total intrinsic value of options exercised during the six months ended June 30, 2008outstanding was approximately $3,682.$171, and the total intrinsic value of exercisable options was zero. Intrinsic value is calculated as the difference between the current market price of the underlying security and the strike price of a related option. As of June 30, 2008, the total intrinsic value of options outstanding was approximately $3,401, and the total intrinsic value of exercisable options was approximately $1,751.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

A summary of the Company’s outstanding stock options at June 30, 2008March 31, 2009 is as follows:

As of June 30, 2008,March 31, 2009, unrecognized compensation expense related to options granted during 2006 was $174, for options granted during 2007 was $453 and$60, for options granted during 2008 was $716.$132 and for options granted in 2009 was $328.

During the first quarter of 2008,2009, the Company granted 145,184165,990 stock options under the Company’s LTIP plan that are subject only to time vesting over a three-year period. The options were valued using the Black-Scholes model with the following assumptions: dividend yield of 4.1%3.9%, expected volatility of 30.31%44.22%, a risk free interest rate of 3.15%2.09%, an expected term of 6six years, and a forfeiture rate of 3% over the remaining life of the options. Approximately $404$9 of expense was recorded on these options during the six months ended June 30, 2008.2009. The fair value of these awards is amortized on a straight-line basis over the vesting period of the awards.

Under the Company’s LTIP plan, 72,11089,791 shares of nonvested stock were outstanding at December 31, 2007.2008. In the first quarter of 2008, 48,4312009, 75,760 shares of nonvested stock were granted at a weighted average grant date fair value of $19.45. In the second quarter of 2008, 5,000 shares of nonvested stock were granted at a weighted average grant date fair value of $30.51. In addition, in the second quarter of 2008, 1,536 shares of nonvested stock were granted to Directors at a weighted average grant date fair value of $31.10.$6.93. As of June 30, 2008, 1,200 of these awards were vested, 900March 31, 2009, 1,500 shares were forfeited, 13,350 shares vested and 124,977 shares150,701 were outstanding. The fair value of the nonvested stock is based on the trading price of the Company’s common stock on the date of grant. The Company adjusts the grant date fair value for expected forfeitures based on historical experience for similar awards. As of June 30, 2008,March 31, 2009, unrecognized compensation expense related to these awards was $1,651,$1,297, to be recognized over a weighted average remaining period of 1.52.4 years.

Under the Company’s GAIP 42,500plan, 8,750 shares of nonvested stockwere outstanding at December 31, 2008. Through March 31, 2009, 66,000 shares were granted during the second quarter of 2005 at a weighted average grant date fair value of $20.12 per share. At December 31, 2007, 27,500$7.72, 4,375 shares were outstanding. Through June 30, 2008, 13,750 shares vested, and were issued, no shares were forfeited and 13,75070,375 shares were outstanding. As of June 30, 2008,March 31, 2009, unrecognized compensation expense related to these awards was $75,$527, to be recognized over a weighted average remaining period of 1.32.9 years.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

(Unaudited)

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 Committee. 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’sour Board of Directors approved a stock ownership plan for each member of theour 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 committee may elect to adjust the number of shares. As of June 30, 2008,March 31, 2009, 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 receives 20%25% of the annual retainer in Common Stock and 80%75% of the annual retainer in cash with the option to receive Common Stock in lieu of the cash portion of the retainer. The annual retainer is $28. 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

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

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. For the three and six months ended June 30,March 31, 2009 and 2008, the Company recorded expense of approximately $34$32 and $64 of compensation expense, respectively. For the three and six months ended June 30, 2007, the Company recorded approximately $30, and $61, respectively.

Note 6—8 – Earnings Per Share

The Company adopted FASB Staff Position (“FSP”) EITF 03-06-1,“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” as of January 1, 2009. The FSP requires grants of restricted stock which receive non-forfeitable dividends to be included as part of the basic weighted average share calculation under the two-class method. The Company previously included such shares as part of its diluted share calculation under the treasury stock method, in accordance with SFAS 123(R). The FSP requires retrospective restatement of earnings per share for all prior periods presented.

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

The following number of stock options isare not included in the diluted earnings per share since in each case the exercise price is greater than the market price: 0price and 127,200the effect would have been anti-dilutive: 529,608 and 376,652 for the three months ended June 30,March 31, 2009 and 2008, and 2007, and 150,954 and 277,940 for the six months ended June 30, 2008 and 2007, respectively.

Note 79 – Business Segments

The Company’s reportable segments are as follows:

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

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:

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.affiliates.

Note 810 – Comprehensive (Loss) Income

The following table summarizes comprehensive (loss) income:

Note 911 – DebtAccounts Receivable and Restricted CashConcentration of Credit Risk

In MayTrade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in existing accounts receivable. Reserves for customers filing for bankruptcy protection are generally established at 75-100% of the amount owed at the filing date, dependent on the Company’s evaluation of likely proceeds from the bankruptcy process. Large and/or financially distressed customers are generally reserved for on a specific review basis while a general reserve is established for other customers based on historical experience. The Company performs a formal review of its allowance for doubtful accounts quarterly. Account balances are charged off against the allowance when the Company feels it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers. During 2008, the Company’s five largest customers accounted for approximately 28% of its consolidated net sales with the largest customer (Arcelor-Mittal Group) accounting for approximately 10% of consolidated net sales. The Company entered into a financing agreement to issue a $10,000 Industrial Development Revenue Bond to financeis closely monitoring the expansioncurrent circumstances surrounding Chrysler LLC and General Motors Corporation, two of the Company’s Middletown, OH manufacturing facility.largest customers, both of whom have pending requests for additional government funding. The bond is redeemableCompany’s accounts receivable for General Motors Corporation and Chrysler LLC were approximately $6,700 and $5,800,

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

respectively, as of March 31, 2009. Any change in the Company’s reserves for doubtful accounts for Chrysler LLC and General Motors Corporation will be dependent upon the amount outstanding on May 1, 2028,a potential bankruptcy filing date, the amount of receivables where the Company acts as an agent for the customer, the potential designation of the Company as a critical supplier, the priority assigned to the Company’s receivables under bankruptcy law and bears interestthe Company’s evaluation of likely proceeds from a potential bankruptcy process, among other factors. The Company has taken steps which it believes significantly reduces its exposure, and continues to pursue other measures to minimize this risk. When assessed at an annual ratea potential filing date these factors may significantly reduce the Company’s exposure and therefore may not correspond to the outstanding receivables as of 4.76%, payable monthly.March 31, 2009.

Proceeds fromNote 12 – Debt

As previously disclosed in a Current Report on Form 8-K filed on February 20, 2009 and in the bond issuance are restricted, and can be used only for capital expendituresCompany’s Annual Report on Form 10-K filed on March 5, 2009, the Company has amended its credit facility to provide covenant relief related to the expansion. Of2008 and 2009 restructuring programs and CEO transition costs. In addition, the $10,000 receivedamendment temporarily increases the maximum permitted leverage ratio from 3.5 to 1 to 4.0 to 1 during the period from June 30, 2009 to September 30, 2009, and to 3.75 to 1 during the period from December 31, 2009 to March 31, 2010. In February 2009, the Company also amended two Industrial Revenue Bonds totaling $15,000 million to provide for the same changes in terms as the credit facility. Also, as previously disclosed in a Current Report on Form 8-K filed on May 20, 2008, the Company’s Middletown, Ohio expansion project is being partially financed by a low interest rate $3,500 loan from the bond issuance, approximately $675 had been expended at June 30, 2008.Ohio Department of Development. During the first quarter of 2009, the Company drew $1,584 on this loan.

Note 1013 – Business Acquisitions and Divestitures

In March 2005, the Company acquired the remaining 40% interest in its Brazilian joint venture for $6,700. In addition, annual $1,000 payments for four years willwere to be paid subject to the former minority partners’ compliance with the terms of the purchase agreement. The thirdfourth and final $1,000 payment was made in February 20082009 and was recorded as goodwill assigned to the Metalworking Process Chemicals segment.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 1114 – Goodwill and Other Intangible Assets

The Company’s annual impairment assessment is completed as of the end of the third fiscal quarter. Given the downturn in general worldwide economic conditions and the recent volatility in the Company’s own stock price, the Company reevaluated its interim impairment as of December 31, 2008 and March 31, 2009, which did not require any changes to the Company’s previous conclusion.

The changes in carrying amount of goodwill for the sixthree months ended June 30, 2008March 31, 2009 are as follows:

Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of June 30, 2008March 31, 2009 and December 31, 20072008 are as follows:

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

The Company recorded $606$257 and $611$300 of amortization expense in the first sixthree months of 20082009 and 2007,2008, 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 1215 – Pension and Other Postretirement Benefits

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

Employer Contributions:

The Company previously disclosed in its financial statements for the year ended December 31, 2007,2008, that it expected to make minimum cash contributions of $6,669$12,584 to its pension plans and $1,000$1,060 to its other postretirement benefit plan in 2008.2009. As of June 30, 2008, $5,087March 31, 2009, $3,174 and $610$263 of contributions have been made, respectively.

During the first quarter of 2008 and as required by SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” the Company changed the measurement date of its U.S. pension plan from November 30 to December 31 in order to coincide with the Company’s fiscal year end. This change did not have a material impact to the Company’s consolidated financial statements.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

(Unaudited)

Note 1316 – Commitments and Contingencies

In April of 1992, the Company identified certain soil and groundwater contamination at AC Products, Inc. (“ACP”), a wholly owned subsidiary. In voluntary coordination with the Santa Ana California Regional Water Quality Board, ACP has been remediating the contamination, the principal contaminant of which is perchloroethylene (“PERC”). On or about December 18, 2004, the Orange County Water District (“OCWD”) filed a civil complaint in Superior Court, in Orange County, California against ACP and other parties potentially responsible for groundwater contamination. OCWD was seeking to recover compensatory and other damages related to the investigation and remediation of the contamination in the groundwater. Effective October 17, 2007, ACP and OCWD settled all claims related to this litigation. Pursuant to the settlement agreement with OCWD, ACP agreed to pay $2,000 in two equal installmentspayments of $1,000 (the first installmentpayment paid October 31, 2007 and the second installmentpayment paid on February 15, 2008). In addition to the $2,000 payment, ACP agreed to operate the two existing groundwater treatment systems associated with its extraction wells P-2 and P-3 so as to hydraulically contain groundwater contamination emanating from ACP’s site until such time as the concentrations of PERC are below the Federal maximum contaminant level for four consecutive quarterly sampling events. During the third quarter of 2007, the Company recognized a $3,300 charge made up of $2,000 for the settlement of the litigation, plus an increase in its reserve for its soil and water remediation program of $1,300. As of June 30, 2008,March 31, 2009, the Company believes that the range of potential-known liabilities associated with ACP contamination including the water and soil remediation program, is approximately $2,200$1,900 to $4,200,$3,900, for which the Company has sufficient reserves.

The low and high ends of the range are based on the length of operation of the two extraction wells as determined by groundwater modeling with planned higher maintenance costs in later years if a longer treatment period is required. Costs of operation include the operation and maintenance of the extraction wells, groundwater monitoring, one-time expenses to insure P-3 is hydraulically containing the PERC plume and program management. The duration of the well operation was estimated based on historical trends in concentrations in the monitoring wells within the proximity of the applicable extraction wells. Also factored into the model was the impact of water injected into the underground aquifer from a planned recharge basin adjacent to the ACP site as well as from an injection well to be installed and operated by OCWD as part of the groundwater treatment system for contaminants which are the subject of the aforementioned litigation. Based on the modeling, it is estimated that P-2 will operate for three and half years to up to five years and P-3 will operate for six years to up to nine years. Operation and maintenance costs were based on historical expenditures and estimated inflation. As mentioned above, a significantly higher maintenance expense was factored into the range if the system operates for the longer period. Also included in the reserve are anticipated expenditures to operate an on-site soil vapor extraction system.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements – (Continued)

(Dollars in thousands, except per share amounts)

(Unaudited)

The Company believes, although there can be no assurance regarding the outcome of other unrelated environmental matters, that it has made adequate accruals for costs associated with other environmental problems of which it is aware. Approximately $99 and $159 was accrued at June 30, 2008March 31, 2009 and December 31, 2007,2008, 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 the proceeds from insurance settlements received. 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 $13,800$12,200 (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 were handled by the subsidiary’s primary and excess insurers who had agreed in 1997 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 has challenged the applicability of these limits to the claims being brought against the subsidiary. In response to this challenge, two of the three carriers entered into separate settlement and release agreements with the subsidiary in late 2005 and in the first quarter of 2007 for $15,000 and $20,000, respectively. The payments under the latest settlement and release agreement are structured to be received over a four-year period with annual installments of $5,000, the first of which was received early in the second quarter of 2007, and the second of which was received in the first quarter of 2008.2008, and the third of which was received in the first quarter of 2009. The subsequent installments arefinal installment is contingent upon whether or not Federal asbestos legislation is adopted by the due date of each annualsuch installment. If Federal asbestos legislation is so enacted, and such legislation eliminates the carrier’s obligation to make the installment payment and requires the carrier to contribute into a trust or similar vehicle as a result of the policies issued to the subsidiary, then the insurance carrier’s obligation to make the subsequent installmentsfinal installment will be cancelled. The proceeds of both settlements are restricted and can only be used to pay claims and costs of defense associated with the

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share amounts)

(Unaudited)

subsidiary’s asbestos litigation. During the third quarter of 2007, the subsidiary and the remaining primary insurance carrier entered into a Claim Handling and Funding Agreement, under which the carrier will pay 27% of defense and indemnity costs incurred by or on behalf of the subsidiary in connection with asbestos bodily injury claims for a minimum of five years beginning July 1, 2007. At the end of the term of the agreement, the subsidiary may choose to again pursue its claim against this insurer regarding the application of the policy limits. The Company also believes, that if the coverage issues under the primary policies with the remaining carrier are resolved adversely to the subsidiary and all settlement proceeds were used, the subsidiary may have limited additional coverage from a state guarantee fund established following the insolvency of one of the subsidiary’s primary insurers. Nevertheless, liabilities in respect of claims may exceed the assets and coverage available to the subsidiary.

If the subsidiary’s assets and 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 it is not probable that the Company will incur any material losses. All of the asbestos cases pursued against the Company challenging the parent-subsidiary relationship are in the early stages of litigation. The Company has been successful in the past having claims naming it dismissed during initial proceedings. Since the Company may be in this early stage of litigation for some time, it is not possible to estimate additional losses or range of loss, if any.

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

Note 17 – Subsequent Events

The Company declared a dividend of $0.23 per share, payable on April 30, 2009 to holders of record at the close of business on April 16, 2009.

Item 2.

Item 2.

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

Executive Summary

Quaker Chemical Corporation is a worldwide developer, producer,leading global provider of process chemicals, chemical specialties, services, and marketertechnical expertise to a wide range of chemical specialtyindustries—including steel, automotive, mining, aerospace, tube and pipe, coatings and construction materials. Our products, technical solutions, and a provider of chemical management services (“CMS”) for various heavy industrialenhance our customers’ processes, improve their product quality, and manufacturing applications around the globe with significant sales to the steel and automotive industries.lower their costs.

The revenue growthdecline in the secondfirst quarter of 2009 compared to the first quarter of 2008 was primarilylargely due to increased selling prices, as volume growth in Asia/Pacific and South America, as well as higher revenue from Chemical Management Services (“CMS”), was largely offset by volume declines and unfavorable foreign exchange rate translation. Volumes were down 32% compared to the first quarter of 2008 and occurred in all of the Company’s other regions. Higher selling prices helpedregions as the global economic downturn continues to partially offset higher raw material costs resulting in a 5.1% increase in gross margin dollars but with a decrease inimpact the Company. Although the gross margin percentage asremained stable compared to the secondfirst quarter of 2007. Raw material costs are significantly higher than2008, the prior year with rapid increases occurring later inCompany realized a significant improvement from the second quarter and continuing into the thirdfourth quarter of 2008.2008 due to the cost reduction actions the Company has taken as well as a more favorable raw material cost environment. The Company’s selling, general and administrative expenses as a percentage of sales(“SG&A”) declined $7.8 million compared to 23.5% for the secondfirst quarter of 2008, compared2008. The decrease in SG&A was due to 25.7% forsavings realized from the second quarter of 2007. Investments in higher growth areas,Company’s restructuring activities, reduced discretionary spending, reduced incentive compensation, lower commissions on reduced sales as well as inflationary increases, wereforeign exchange rate translation.

The first quarter 2009 results included some unusual items. As previously announced, the Company implemented an additional restructuring program in the first quarter of 2009. The first quarter 2009 program included provisions for severance for 60 employees totaling $2.3 million. The fourth quarter 2008 program resulted in the elimination of more than offset by lower legal and environmental costs and lower incentive compensation expense.

The second quarter results include approximately $1.980 positions. Other income for 2009 includes a $1.2 million of incremental pre-tax charges, or approximately $0.12 per diluted share,gain related to the disposition of land in Europe. The tax benefit recorded for the first quarter of 2009 is due to the utilization of net operating losses, which were previously announced retirement of the Company’s Chief Executive Officer as discussed in the Company’s 8-K filed on May 13, 2008.not benefited.

The net result was breakeven earnings per diluted share, of $0.41down from $0.50 for the secondfirst quarter of 2008, consistent with $0.41 for the second quarter of 2007. The continued strength2008. Visibility of the underlying business environment is subject toactivity remains limited visibility due to continued raw material price volatility and an uncertain global economic environment. With crude oil at or near all time highsenvironment, as further discussed below in Liquidity and animal fats and vegetable oils impacted by increased biodiesel consumption, raw material prices continue to be a challenge. Any improvement in gross margin as a percentage of sales will depend in part upon a sustained period of stable or declining raw material costs. While demandCapital Resources. Demand is generally expected to remain stable, there are some signs of lowersoft for the foreseeable future due to the global economic activityenvironment and inflation in all regions. Volume in certain markets is limited by customer end-market issues, including reduced vehicle sales experienced by someparticularly related to our steel and automotive customers. The Company is closely monitoring the current circumstances surrounding Chrysler LLC and General Motors Corporation, two of the Company’s largest customers, particularly in North America.both of whom have pending requests for additional government funding. The Company’s accounts receivable for General Motors Corporation and Chrysler LLC were approximately $6.7 million and $5.8 million, respectively, as of March 31, 2009. The Company has taken steps which it believes significantly reduces its exposure, and continues to pursue other measures to minimize this risk. The Company will remain focused on pursuing revenue opportunities and managing its raw materialmargins and other costs, and pursuing pricing initiatives.cash flow.

CMS Discussion

In 2003, the Company began entering into new contracts under which it receives a set management fee and the costs that relate to those management fees were and are largely dependent on how well the Company controls product costs and achieves product conversions from other third-party suppliers to its own products. This approach came with new risks and opportunities, as the profit earned from the management fee is subject to movements in product costs as well as the Company’s own performance. The Company believes this expanded approach is a way for Quaker to become an integral part of our customers’ operational efforts to improve manufacturing costs and to demonstrate value that the Company would not be able to demonstrate as purely a product provider.

Consistent with the foregoing approach, the Company washas been awarded a series of multi-year CMS contracts, primarily at General Motors Powertrain, Chrysler and Ford manufacturing sites, over the last several years.since 2003. This business was an important step in building the Company’s share and leadership position in the automotive process fluids market and has positioned the Company well for penetration of CMS opportunities in other metalworking manufacturing sites. This alternative approach had a dramatic impact on the Company’s revenue and margins. Under the traditional CMS approach, where the Company effectively acts as an agent, revenues and costs from these sales are reported on a net sales or “pass-through” basis. The alternative structure is different in that the Company’s revenue received from the customer is a fee for products and services provided to the customer, which are indirectly related to the actual costs incurred. As a result, the Company recognizes in the alternative structure the Company recognizes in reported revenues the gross revenue received from the CMS site customer, and in cost of goods sold the third-party product purchases, which substantially offset each other until the Company achieves significant product conversions. As some contracts have been renewed or renegotiated, some of thethose contracts have reverted to a “pass-through” basis, while others have remained on a gross basis. Currently, the Company has a mix of contracts with both the traditional product pass-through structure and fixed priced contracts covering all services and products. The Company’s offerings will continue to include both approaches to CMS, depending on customer requirements and business circumstances.

Liquidity and Capital Resources

Quaker’s cash and cash equivalents increaseddecreased to $22.2$18.0 million at June 30, 2008March 31, 2009 from $20.2$20.9 million at December 31, 2007.2008. The increase$2.9 million decrease resulted primarily from $8.1$8.2 million of cash provided by operating activities, $16.6more than offset by $0.8 million of cash used in investing activities offset by $9.5and $10.2 million of cash provided byused in financing activities.

Net cash flows provided by operating activities were $8.1$8.2 million forin the first halfquarter of 2008,2009, compared to $2.9$6.2 million of cash used in operating activities for the first halfquarter of 2007. The increase2008. Improvements in working capital of $24.8 million, partially offset by lower net income, were the primary drivers for the change in cash flows was largely due to higher net income and a decreased investment in working capital compared to the prior year period. The Company remains focused on limiting the pace of its investment in working capital despite significant factors impacting the working capital accounts for the first half of 2008, such asfrom the first quarter paymentof 2008. The reduction in accounts receivable is reflective of the Company’s annualsales volume declines due to the continued global economic downturn. This reduced business activity is also seen in a reduction in inventory with partially offsetting cash outflows in accounts payable and other accrued liabilities. Significantly reduced incentive compensation costs is the most significant factor other than reduced business activity affecting the accounts payable and other accrued liabilities as well as the final $1.0 million payment pursuant to the settlement agreement between AC Products, Inc., a wholly owned subsidiary,deferred compensation and the Orange County Water District. See also Note 13 of Notes to Condensed Consolidated Financial Statements.other comparisons. In addition,2007, the Company had higher pension contributions compared toexceeded performance targets, while in 2008, results were below target levels. The Company’s disposition of land in Europe also impacted the prior year, as a result of a refund of pension premiums attributable to one of its foreign pension plans received in 2007. Further, the Company incurred significantly more stock-based compensation in the 2008 period versus the prior year period largely due to the previously announced retirement of the Company’s Chief Executive Officer.cash flow comparisons.

Net cash flows used in investing activities were $16.6$0.8 million forin the first halfquarter of 2008,2009, compared to $4.7$2.7 million in the first quarter of 2008. The decreased use of cash was primarily related to $1.6 million of cash proceeds in the first quarter of 2009 largely due to the Company’s disposition of land in Europe. The majority of the remaining change in cash flows used in investing activities for the first half of 2007. The increased use of cash was primarily related to the restricted proceeds received from the Company’s second quarter 2008 bond offering discussed below.related to the Company’s expansion of its Middletown, Ohio manufacturing facility. Capital expenditures were higher than the prior year primarily due to this project. Payments related to acquisitions in 2009 include the Company’s expansion of its Middletown, OH manufacturing facility. In the first quarter of 2008, the Company made the thirdfourth of four annual payments of $1.0 million related to the 2005 acquisition of the remaining 40% interest in itsthe Company’s Brazilian joint venture.

In addition, the second of four annual $5.0 million payments was received in the first quarter of 2008 pursuant to the settlement agreement and release entered into during the first quarter of 2007, by an inactive subsidiary of the Company reached a settlement agreement and release with one of its insurance carriers. Thesecarriers for $20.0 million. The proceeds of the settlement are restricted and can only be used to pay claims and costs of defense associated with thethis subsidiary’s asbestos litigation. The subsequentpayments are structured to be received over a four-year period with annual installments areof $5.0 million, the first of which was received in the second quarter of 2007, the second of which was received in the first quarter of 2008, and the third of which was received in the first quarter of 2009. The final installment is contingent upon whether or not Federal asbestos legislation is adopted by the due date of each annualthe installment. If Federal asbestos legislation is so enacted, and such legislation eliminates the carrier’s obligation to make the installment payment and requires the carrier to contribute into a trust or similar vehicle as a result of the policies issued to the subsidiary, then the insurance carrier’s obligation to make the subsequent installmentsfinal installment will be cancelled. See Note 16 of Notes to Condensed Consolidated Financial Statements.

Net cash flows provided byused in financing activities were $9.5was $10.2 million for the first halfquarter of 2008, as2009, compared to $5.7$8.5 million of cash provided by financing activities for the first quarter 2008. The majority of the change was the result of debt repayments in the first half of 2007. During the second quarter of 2008,2009 compared to debt borrowings in 2008. In the first quarter of 2009, the Company completedhad a $10.0$1.6 million industrial revenue bond offeringdraw on its Ohio Department of Development low interest rate loan, related to the Company’s expansion of its Middletown, OHOhio manufacturing facility. The proceeds of this bond are restricted and can only be used for capital expenditures related to the expansion. With strong cash flow generated from operations,reduced working capital investments enabled the Company was able to make otherfirst quarter 2009 net debt repayments versus borrowings in the prior year period.repayments. A high level of cash received from stock option exercises as compared toin the prior yearfirst quarter of 2008 also impacted the change in cash flows from financing activities.

Financial markets around the globe have been experiencing extreme disruption, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Further, concerns over slower economic activity, inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending could lead to further adverse business conditions for the Company. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse global economic conditions.

While currently these conditions have not impaired our ability to access credit lines and finance our operations, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies. The Company hadCompany’s primary credit line is a net debt-to-total-capital ratiosyndicated multicurrency credit agreement with Bank of 28% at June 30, 2008, compared to 42% at June 30, 2007America, N.A. (administrative agent) and 32% atcertain other major financial institutions, which expires in 2012. The maximum principal amount available for revolving credit borrowings is $125.0 million. At March 31, 2009 and December 31, 2007. At June 30, 2008, the Company had approximately $71.6$61.6 million and $71.5 million outstanding respectively. The Company’s access to this credit is largely dependent on its credit lines, comparedconsolidated leverage ratio covenant, which cannot exceed 3.5 to $73.8 million1; at March 31, 2009 and December 31, 2007. At2008, the consolidated leverage ratio was below 2.4 to 1. As discussed in a Current Report on Form 8-K filed on February 20, 2009 the Company has amended its credit facility to provide covenant relief related to the 2008 and 2009 restructuring programs and CEO transition costs. In addition, the amendment temporarily increases the maximum permitted leverage ratio from 3.5 to 1 to 4.0 to 1 during the period from June 30, 2009 to September 30, 2009, and to 3.75 to 1 during the period from December 31, 2009 to March 31, 2010. In February 2009, the Company also amended two Industrial Revenue Bonds totaling $15.0 million to provide for the same changes in terms as the credit facility. The Company has entered into interest rate swaps with a combined notional value of $40.0 million as of March 31, 2009, in order to fix a portion of its variable rate debt. Outstanding financial derivative instruments may expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. To manage credit risk, the Company limits its exposure to any one counterparty. However, the Company does not expect any of the counterparties to fail to meet their obligations.

The economic concerns noted above can affect our business in a number of ways including, but not limited to, those addressed in the following discussion. The tightening of credit in financial markets adversely affects the ability of customers to obtain financing. This has led certain customers to extend payment terms, which may directly impact our working capital investment and need for increased borrowings. Such events increase the Company’s exposure to concentration of credit risk, particularly in the automotive and steel industries. In addition, the Company believes demand for steel and automobiles will remain soft for the foreseeable future as a result of the reduced general level of economic activity. Downturns in the overall economic climate may also tend to exacerbate specific customer financial issues. The Company is closely monitoring the current circumstances surrounding Chrysler LLC and General Motors Corporation, two of the Company’s largest customers, both of whom have pending requests for additional government funding. The Company’s accounts receivable for General Motors Corporation and Chrysler LLC were approximately $6.7 million and $5.8 million, respectively, as of March 31, 2009. Any change in the Company’s reserves for doubtful accounts for Chrysler LLC and General Motors Corporation will be dependent upon the amount outstanding on a potential bankruptcy filing date, the amount of receivables where the Company acts as an agent for the customer, the potential designation of the Company as a critical supplier, the priority assigned to the Company’s receivables under bankruptcy law and the Company’s evaluation of likely proceeds from a potential bankruptcy process, among other factors. The Company has taken steps which it believes significantly reduces its exposure, and continues to pursue other measures to minimize this risk. When assessed at a potential filing date these factors may significantly reduce the Company’s exposure and therefore may not correspond to the outstanding receivables as of March 31, 2009.

The Company’s annual impairment assessment is completed as of the end of the third fiscal quarter. Given the downturn in general worldwide economic conditions and the recent volatility in the Company’s own stock price, the Company reevaluated its interim impairment as of December 31, 2008 and March 31, 2009, which did not require any changes to the Company’s previous conclusion.

At March 31, 2009, the Company’s gross FIN 48 liability, including accrued interest and penalties, and interest, was $14.8$12.1 million. The Company cannot determine a reliable estimate of the timing of the cash flows by period related to its FIN 48 liability. However, should the entire FIN 48 liability be paid, the amount of the payment may be reduced by up to $5.2 million as a result of offsetting benefits in other tax jurisdictions by $5.5 million.jurisdictions.

The Company’s net debt-to-total-capital ratio remained strong at 31% as of March 31, 2009, compared to 32% as of December 31, 2008. The Company believes it is capable of supporting its operating requirements, including pension plan contributions, payment of dividends to shareholders, possible acquisitions and business opportunities, capital expenditures and possible resolution of contingencies, through internally generated funds supplemented with debt as needed.

Operations

Comparison of SecondFirst Quarter 20082009 with SecondFirst Quarter 2007of 2008