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QUAKER CHEMICAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

July 31, 2014

Executive Summary

Quaker Chemical Corporation is a leading global provider of process fluids, chemical specialties, and technical expertise to a wide range of industries, including steel, aluminum, automotive, mining, aerospace, tube and pipe, cans, and others. For nearly 100 years, Quaker has helped customers around the world achieve production efficiency, improve product quality, and lower costs through a combination of innovative technology, process knowledge, and customized services. Headquartered in Conshohocken, Pennsylvania USA, Quaker serves businesses worldwide with a network of dedicated and experienced professionals whose mission is to make a difference.

The Company's second quarter of 2014 was highlighted by a solid operating performance, with net sales growing 3.5% from the second quarter of 2013, primarily on increased product volumes. These higher sales volumes increased the Company's gross profit from the second quarter of 2013. Gross margin percentage, however, decreased in the second quarter of 2014 to 35.7% from 36.4% in the second quarter of 2013. This decrease was due to higher raw material costs, a change in price and product mix and additional manufacturing expenses to finalize the cost streamlining initiative in EMEA that began in 2013. Selling, general and administrative expenses ("SG&A") decreased $0.3 million in the second quarter of 2014 compared to the second quarter of 2013, as higher labor related costs and acquisition related costs were more than offset by lower incentive compensation costs and prior year expenses related to the cost streamlining initiative in South America. The increase to the Company's operating income during the second quarter of 2014 was supplemented by higher interest income and a lower tax rate, which are further discussed in the Company's consolidated operations review section below.

Overall, the Company's second quarter of 2014 operating performance was driven by the North America region, which experienced increased volumes and a slight improvement in gross margins on an improved domestic economy. The strong performance in North America was partially offset by lower operating results in the Company's other three regions. EMEA's decreased performance from the second quarter of 2013 was primarily driven by expenses to finalize the cost streamlining initiative that began in 2013. In the Asia/Pacific region, higher labor related costs offset gross profit gains from increased sales. Finally, South America sales were negatively impacted by low production in Brazil, as well as foreign exchange, which impacted both price and margin.

The net result was earnings per diluted share of $1.16 for the second quarter of 2014 compared to earnings per diluted share of $1.22 for the second quarter of 2013, with non-GAAP earnings per diluted share of $1.11 for the second quarter of 2014 increasing 11% from $1.00 for the second quarter of 2013. In addition, the Company's second quarter of 2014 adjusted EBITDA increased 6% to $25.8 million from $24.5 million in the second quarter of 2013, consistent with the operating income trends discussed above. See the Non-GAAP Measures section in this Item, below.

The Company generated net operating cash flows of approximately $10.1 million in the second quarter of 2014, which increased its year-to-date net operating cash flow to $8.3 million, compared to $27.5 million for the first six months of 2013. The Company's second quarter of 2014 operating cash flow continued to be impacted by working capital investment, as its accounts receivable levels increased primarily from higher sales volumes at the end of the second quarter of 2014 and a further delay in timing of cash receipts, its inventory was slightly higher due to a further build of raw material stock levels, and its accounts payable were down due to timing of payments to third party suppliers.

Overall, the Company is pleased with its performance in the second quarter of 2014, given the current uneven global economy, as well as negative impacts due to foreign exchange. Specifically, the Company's earnings growth is an indication that its business model and competitive positioning continue to serve the Company well. In addition, the Company was able to complete the acquisition of the remaining ownership interest in its Australian affiliate, which will further the Company's footprint in a market with several growth opportunities. Furthermore, the Company's liquidity remains its strength, as its cash position continued to exceed its debt at June 30, 2014 and, also, the Company's consolidated leverage ratio continued to be less than one times EBITDA. Going forward, the Company continues to expect modest growth in most of its major markets, although some countries, such as India and Brazil, could continue to be challenging. Also, the Company is beginning to experience an increase in some raw material costs throughout some of its markets. However, the Company believes its track record of increasing market share and leveraging recent acquisitions will continue, which should help offset these potential market issues. Overall, the Company remains confident in its future and expects 2014 to be another good year for Quaker as it strives to increase revenue and earnings for the fifth consecutive year.

Liquidity and Capital Resources

Quaker's cash and cash equivalents decreased to $60.2 million at June 30, 2014 from $68.5 million at December 31, 2013. The $8.3 million decrease was the result of $8.3 million of cash provided by operating activities, $4.5 million of cash used in investing activities, $12.0 million of cash used in financing activities and $0.1 million of a decrease due to foreign exchange.

Net cash flows provided by operating activities were $8.3 million in the first six months of 2014 compared to $27.5 million

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provided by operating activities in the first six months of 2013. The Company's $19.2 million lower operating cash flow was primarily due to higher working capital investment during the first six months of 2014 compared to the first six months of 2013. Specifically, the Company had higher cash outflows from accounts receivable primarily due to increased sales at the end of the second quarter of 2014 and a further delay in timing of cash receipts. Also, the Company had higher cash outflows from inventory due to reestablishing safety stock levels that were low at year-end 2013 and higher cash outflows from accounts payable and accrued liabilities primarily related to higher annual incentive compensation payouts on the Company's improved performance in the prior year. In addition, the Company's operating cash flow comparison was also affected by a dividend distribution received in the prior year from its captive insurance equity affiliate of $2.0 million.

Net cash flows used in investing activities decreased from $7.0 million in the first six months of 2013 to $4.5 million in the first six months of 2014. The $2.5 million decrease of cash used in investing activities was primarily the result of lower payments for acquisitions, as the Company paid $2.5 million in the first six months of 2013 for a business that primarily related to tin plating and a chemical milling maskants distribution network for the Company's North American segment. In addition, the Company had higher cash inflow during the first six months of 2014 from a change in the Company's restricted cash, which is dependent upon the timing of claims and payments associated with the subsidiary's asbestos litigation. These increases were partially offset by higher payments for property, plant and equipment during the first six months of 2014 for information technology development and other related initiatives primarily in its EMEA segment, compared to higher payments during the first six months of 2013 for the expansion of the Company's Asia/Pacific facilities.

Net cash flows used in financing activities were $12.0 million in the first six months of 2014 compared to $13.5 million of cash used in financing activities in the first six months of 2013. The $1.5 million decrease in cash used in financing activities was due to a change from repayments of external debt on the Company's revolving credit line made during the first six months of 2013 compared to the current year borrowings on the Company's revolving credit line. The current year borrowings were primarily used to fund the $7.5 million purchase of the remaining interest in the Company's Australian affiliate, a payment of an acquisition-related earnout and a dividend to a noncontrolling affiliate shareholder.

The Company's primary credit line is a $300.0 million syndicated multicurrency credit agreement with Bank of America, N.A. (administrative agent) and certain other major financial institutions, which matures in June 2018. At the Company's option, the principal amount available can be increased to $400.0 million if the lenders agree to increase their commitments and the Company satisfies certain conditions. At June 30, 2014, the Company had $7.5 million of borrowings outstanding under this facility, compared to no borrowings outstanding as of December 31, 2013. The Company's access to this credit is largely dependent on its consolidated leverage ratio covenant, which cannot exceed 3.50 to 1. At June 30, 2014 and December 31, 2013, the consolidated leverage ratio was below 1.0 to 1 and the Company was also in compliance with all of the facility's other covenants.

At June 30, 2014, the Company's gross liability for uncertain tax positions, including interest and penalties, was $17.0 million. The Company cannot determine a reliable estimate of the timing of cash flows by period related to its uncertain tax position liability. However, should the entire liability be paid, the amount of the payment may be reduced by up to $10.9 million as a result of offsetting benefits in other tax jurisdictions.

The Company believes it is capable of supporting its operating requirements, including pension plan contributions, payments of dividends to shareholders, possible acquisitions and business opportunities, capital expenditures and possible resolution of contingencies, through internally generated funds supplemented with debt or equity as needed.

Non-GAAP Measures

Included in this Form 10-Q filing are non-GAAP financial measures of non-GAAP earnings per diluted share and adjusted EBITDA. The Company believes these non-GAAP financial measures provide meaningful supplemental information as they enhance a reader's understanding of the financial performance of the Company, are more indicative of future operating performance of the Company, and facilitate a better comparison among fiscal periods, as the non-GAAP measures exclude items that are not considered core to the Company's operations. These non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP.

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The following is a reconciliation between the non-GAAP (unaudited) financial measure of non-GAAP earnings per diluted share to its most directly comparable GAAP (unaudited) measure: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 GAAP earnings per diluted share attributable to Quaker Chemical Corporation Common Shareholders $ 1.16$ 1.22$ 2.13$ 2.26UK pension plan amendment per diluted share - - 0.05 - Mineral oil excise tax refund per diluted share - (0.14 ) - (0.14 ) Change in acquisition-related earnout liability per diluted share - 0.03 - 0.03 Cost streamlining initiatives per diluted share 0.02 0.02 0.02 0.02 Currency conversion impacts of the Venezuelan Bolivar Fuerte per diluted share 0.02 - 0.02 0.03 Equity income in a captive insurance company per diluted share (0.09 ) (0.13 ) (0.15 ) (0.24 )



Non-GAAP earnings per diluted share $ 1.11$ 1.00$ 2.07$ 1.96

The following is a reconciliation between the non-GAAP (unaudited) financial measure of adjusted EBITDA to its most directly comparable GAAP (unaudited) financial measure: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net income attributable to Quaker Chemical Corporation $ 15,427$ 16,083$ 28,157$ 29,702 Depreciation and amortization 3,824 3,953 7,712 7,888 Interest expense 581 762 1,106 1,506 Taxes on income before equity in net income of associated companies 6,538 6,828 13,084 10,961 Equity income in a captive insurance company (1,225 ) (1,696 ) (2,071 ) (3,131 ) Mineral oil excise tax refund - (2,540 ) - (2,540 ) Change in acquisition-related earnout liability - 675 - 675 Cost streamlining initiatives 348 402 348 402 Currency conversion impacts of the Venezuelan Bolivar Fuerte 321 - 321 357 UK pension plan amendment - - 902 - Adjusted EBITDA $ 25,814$ 24,467$ 49,559$ 45,820 Out-of-Period Adjustment



During 2012, the Company reassessed its ability to significantly influence the operating and financial policies of its captive insurance equity affiliate, Primex. Based on its ownership percentage and other factors, the Company determined that, during 2012, the Company obtained the ability to significantly influence Primex and, as a result, changed its method of accounting from the cost to equity method. During the first quarter of 2013, the Company identified errors in Primex's estimated 2012 financial statements, which primarily related to a reinsurance contract held by Primex. The identified errors resulted in a cumulative $1.0 million understatement of the Company's equity in net income from associated companies for the year ended December 31, 2012. The Company corrected the errors related to Primex in the first quarter of 2013, which had the net effect of increasing equity in net income from associated companies by $1.0 million for the three months ended March 31, 2013. The Company did not believe this adjustment was material to its consolidated financial statements for the years ended December 31, 2012 or December 31, 2013 and, therefore, did not restate any prior period amounts. See Note 3 of Notes to Condensed Consolidated Financial Statements.

Consolidated Operations Review

Comparison of the Second Quarter of 2014 with the Second Quarter of 2013

Net sales for the second quarter of 2014 of $191.3 million increased approximately 3.5% from net sales of $184.8 million for the second quarter of 2013. Product volumes, including acquisitions, increased net sales by 3% and changes due to price and product mix increased net sales by 1%, net of a slight decrease of less than 1% due to foreign exchange rate translation.

Gross profit increased approximately $0.9 million, or approximately 1%, from the second quarter of 2013 on the increase in sales volumes, noted above. The Company's gross margin decreased to 35.7% for the second quarter of 2014 from 36.4% for the second

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quarter of 2013, which was primarily driven by a change in price and product mix and $0.3 million, or $0.02 per diluted share, of expenses to finalize the manufacturing cost streamlining initiative that began in the prior year in our EMEA segment.

Selling, general and administrative expenses ("SG&A") decreased approximately $0.3 million from the second quarter of 2013. The Company's decrease in SG&A was driven by lower incentive compensation costs in the current quarter and $0.4 million, or $0.02 per diluted share, of additional costs in the prior year related to a South American cost streamlining initiative, partially offset by higher labor related costs associated with higher sales and general year-over-year merit increases and additional acquisition related costs.

The Company had other income of $0.1 million in the second quarter of 2014 compared to $2.3 million in the second quarter of 2013, which primarily consisted of the prior year mineral oil excise tax refund of $2.5 million, or $0.14 per diluted share, net of expense related to a change in an acquisition-related earnout liability of $0.7 million, or $0.03 per diluted share.

Interest expense was lower in the second quarter of 2014 compared to the second quarter of 2013, primarily due to decreases in average borrowings and interest rates. Interest income was higher in the second quarter of 2014 compared to the second quarter of 2013, primarily due to interest received on several tax-related credits and an increase in the level of the Company's cash on hand in the current period.

The Company's effective tax rates for the second quarters of 2014 and 2013 were generally consistent at 30.6% and 31.7%, respectively, with certain timing items slightly decreasing the current quarter's effective tax rate.

Equity in net income of associated companies ("equity income") decreased $0.8 million from the second quarter of 2013 to the second quarter of 2014. The primary component of the Company's equity income is its interest in a captive insurance company. Earnings attributable to this equity interest were $1.2 million, or $0.09 per diluted share, for the second quarter of 2014 compared to $1.7 million, or $0.13 per diluted share, for the second quarter of 2013. In addition, the Company's equity income for the second quarter of 2014 includes a currency charge of approximately $0.3 million, or $0.02 per diluted share, related to the conversion of certain Venezuelan Bolivar Fuerte to U.S. Dollars.

Changes in foreign exchange rates, excluding the current quarter conversion of certain Venezuelan Bolivar Fuerte, negatively impacted the second quarter of 2014 net income by approximately $0.1 million, or $0.01 per diluted share.

Comparison of the First Six Months of 2014 with the First Six Months of 2013

Net sales for the first six months of 2014 of $373.0 million increased 3% from $361.0 million for the first six months of 2013. Product volumes, including acquisitions, increased net sales by 4% across most regions, which were net of a decrease of approximately $3.2 million, or 1%, due to foreign exchange rate translation.

Gross profit increased approximately $3.4 million, or approximately 3%, from the first six months of 2013, which was primarily driven by the increase in sales volumes, noted above, on stable gross margins of 35.7% and 36.0% for the first six months of 2014 and the first six months of 2013, respectively.

SG&A increased approximately $0.3 million from the first six months of 2013. The SG&A increase was primarily due to customary labor related costs associated with higher sales and general year-over-year merit increases, acquisition related costs and, also, $0.9 million, or $0.05 per diluted share, of additional costs related to an amendment to the Company's pension plan in the United Kingdom. These increases to the first six months of 2014 SG&A were net of lower incentive compensation costs, decreases in foreign currency exchange rate translation and additional costs of $0.4 million, or $0.02 per diluted share, of costs related to the prior year South American cost streamlining initiative.

The Company had other expense of $0.4 million in the first six months of 2014, which was primarily the result of foreign exchange losses net of third party license fee income. Compared to the prior year, the Company had other income of $2.6 million in the first six months of 2013, which primarily consisted of the prior year mineral oil excise tax refund and third party license fees, net of the expense related to a change in an acquisition-related earnout liability, noted above.

Interest expense was lower in the first six months of 2014 compared to the first six months of 2013, primarily due to decreases in average borrowings and interest rates. Interest income was higher in the first six months of 2014 compared to the first six months of 2013, primarily due to interest received on several tax-related credits and an increase in the level of the Company's cash on hand in the current period.

The Company's effective tax rates for the first six months of 2014 and 2013 were 32.5% and 28.3%, respectively. The primary contributors to the increase in the Company's effective tax rate were lower changes in reserves related to uncertain tax positions and certain one-time items that increased the first six months of 2014 effective tax rate. Although the tax rate remains inflated above our full year expectation, the Company estimates its full year 2014 effective tax rate to approximate 31%. The Company has experienced and expects to further experience volatility in its effective tax rates due to the varying timing of tax audits and the expiration of applicable statutes of limitations as they relate to uncertain tax positions, among other factors.

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The decrease in the Company's equity income of $1.0 million from the first six months of 2013 to the first six months of 2014 was primarily caused by lower earnings related to the Company's equity interest in a captive insurance company. Earnings attributable to this equity interest were $2.1 million, or $0.15 per diluted share, for the first six months of 2014 compared to $3.1 million, or $0.24 per diluted share, for the first six months of 2013, including a $1.0 million out-of-period adjustment. See the Out-of-Period Adjustment section in this Item, above. In addition, the Company's equity income for both the first six months of 2014 and the first six months of 2013 include currency charges related to the conversion of Venezuelan Bolivar Fuerte to the U.S. Dollar of $0.3 million, or $0.02 per diluted share, and $0.4 million, or $0.03 per diluted share, respectively.

Changes in foreign exchange rates negatively impacted the first six months of 2014 net income by approximately $0.8 million, or $0.06 per diluted share.

Reportable Operating Segment Review

The Company offers its industrial process fluids, chemical specialties and technical expertise to a wide range of industries in a global product portfolio throughout its four segments: (i) North America, (ii) Europe, Middle East and Africa ("EMEA"), (iii) Asia/Pacific and (iv) South America.

Comparison of the Second Quarter of 2014 with the Second Quarter of 2013

North America

North America represented approximately 43% of the Company's consolidated net sales in the second quarter of 2014, which increased approximately $5.8 million, or 8%, from the second quarter of 2013. The increase in net sales was generally attributable to higher base product volumes, including acquisitions, of 8%. This reportable segment's operating earnings, excluding indirect expenses, increased approximately $1.9 million, or 12%, from the second quarter of 2013. The second quarter of 2014 increase was mainly driven by higher gross profit on the increases to net sales, noted above, and a slight margin improvement on a change in product mix, partially offset by higher labor-related costs on improved segment performance and general year-over-year merit increases.

EMEA

EMEA represented approximately 26% of the Company's consolidated net sales in the second quarter of 2014, which increased approximately $1.1 million, or 2%, from the second quarter of 2013. The increase in net sales was primarily caused by a positive foreign currency exchange rate translation of 4%, partially offset by decreases related to product volumes of 1% and price and product mix of 1%. The foreign currency exchange rate translation impact was primarily due to an increase in the E.U. Euro to U.S. Dollar exchange rate, which averaged 1.37 in the second quarter of 2014 compared to an average of 1.31 in the second quarter of 2013. This reportable segment's operating earnings, excluding indirect expenses, decreased approximately $0.5 million, or 6%, from the second quarter of 2013. The second quarter of 2014 decrease was mainly driven by lower gross margin, primarily related to the current quarter costs to finalize the prior year manufacturing cost streamlining initiative, and, also, higher labor-related costs on general year-over-year merit increases.

Asia/Pacific

Asia/Pacific represented approximately 24% of the Company's consolidated net sales in the second quarter of 2014, which increased approximately $2.6 million, or 6%, from the second quarter of 2013. The increase in net sales was primarily due to higher product volumes of 4% and an increase due to price and product mix of 3%, partially offset by a decrease from foreign currency exchange rate translation of 1%. The foreign currency exchange rate translation impact was primarily due to a decrease in the Indian Rupee to U.S. Dollar exchange rate, which averaged 0.0167 in the second quarter of 2014 compared to 0.0180 in the second quarter of 2013. This reportable segment's operating earnings, excluding indirect expenses, decreased approximately $0.6 million, or 5%, from the second quarter of 2013. The second quarter of 2014 decrease was mainly driven by lower gross margin due to a change in price and product mix and higher labor-related costs on general year-over-year merit increases.

South America

South America represented approximately 7% of the Company's consolidated net sales in the second quarter of 2014, which decreased approximately $3.0 million, or 18%, from the second quarter of 2013. The decrease in net sales was generally attributable to lower product volumes of 11% and a decrease from foreign currency exchange rate translation of 11%, partially offset by an increase in price and product mix of 4%. The foreign currency exchange rate translation impact was primarily due to a decrease in the Brazilian Real and Argentinian Peso to U.S. Dollar exchange rates, which averaged 0.45 and 0.12 in the second quarter of 2014 compared to 0.48 and 0.19 in the second quarter of 2013, respectively. This reportable segment's operating earnings, excluding indirect expenses, decreased approximately $1.5 million, or 62%, from the second quarter of 2013. The second quarter of 2014 decrease was mainly driven by lower gross profit on the decreases to net sales, noted above, and a gross margin decline on a change in price and product mix, partially offset by the positive impacts from the cost streamlining initiatives taken in this segment during 2013.

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Comparison of the First Six Months of 2014 with the First Six Months of 2013

North America

North America represented approximately 43% of the Company's consolidated net sales in the first six months of 2014, which increased approximately $7.7 million, or 5%, from the first six months of 2013. The increase in net sales was generally attributable to higher base product volumes, including acquisitions, of 7%, net of a 2% decrease related to price and product mix. This reportable segment's operating earnings, excluding indirect expenses, increased approximately $2.5 million, or 8%, from the first six months of 2013. The increase during the first six months of 2014 was mainly driven by higher gross profit on the increases to net sales, noted above, and a slight margin improvement on a change in product mix, partially offset by higher labor-related costs on improved segment performance and general year-over-year merit increases.

EMEA

EMEA represented approximately 27% of the Company's consolidated net sales in the first six months of 2014, which increased approximately $3.6 million, or 4%, from the first six months of 2013. The increase in net sales was primarily caused by a positive foreign currency exchange rate translation of 4% and an increase of 2% from higher product volumes, partially offset by decreases related to price and product mix of 2%. The foreign currency exchange rate translation impact was primarily due to an increase in the E.U. Euro to U.S. Dollar exchange rate, which averaged 1.37 in the first six months of 2014 compared to an average of 1.31 in the first six months of 2013. This reportable segment's operating earnings, excluding indirect expenses, increased approximately $0.7 million, or 4%, from the first six months of 2013. The increase in the first six months of 2014 was mainly driven by the increases to net sales noted above, on stable margins, partially offset by additional costs in the current year to finalize the prior year manufacturing cost streamlining initiative and, also, higher labor-related costs on general year-over-year merit increases.

Asia/Pacific

Asia/Pacific represented approximately 23% of the Company's consolidated net sales in the first six months of 2014, which increased approximately $6.5 million, or 8%, from the first six months of 2013. The increase in net sales was primarily due to higher product volumes of 7% and an increase due to price and product mix of 3%, partially offset by a decrease from foreign currency exchange rate translation of 2%. The foreign currency exchange rate translation impact was primarily due to a decrease in the Indian Rupee and Australian Dollar to U.S. Dollar exchange rates, which averaged 0.0165 and 0.91 in the first six months of 2014 compared to 0.0182 and 1.01 in the first six months of 2013, respectively. This reportable segment's operating earnings, excluding indirect expenses, decreased approximately $0.3 million, or 1%, from the first six months of 2013. The decrease in the first six months of 2014 was mainly driven by lower gross margin due to a change in price and product mix and, also, higher labor-related costs on general year-over-year merit increases.

South America

South America represented approximately 7% of the Company's consolidated net sales in the first six months of 2014, which decreased approximately $5.9 million, or 18%, from the first six months of 2013. The decrease in net sales was generally attributable to lower product volumes of 9% and a decrease from foreign currency exchange rate translation of 15%, partially offset by an increase in price and product mix of 6%. The foreign currency exchange rate translation impact was primarily due to a decrease in the Brazilian Real and Argentinian Peso to U.S. Dollar exchange rates, which averaged 0.44 and 0.13 in the first six months of 2014 compared to 0.49 and 0.20 in the first six months of 2013, respectively. This reportable segment's operating earnings, excluding indirect expenses, decreased approximately $2.8 million, or 54%, from the first six months of 2013. The first six months of 2014 decrease was mainly driven by lower gross profit on the decreases to net sales, noted above, and a gross margin decline on a change in product mix, partially offset by the positive impacts from the cost streamlining initiatives taken in this segment during 2013.

Factors That May Affect Our Future Results

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

Certain information included in this Report and other materials filed or to be filed by Quaker with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance and business, including:

? statements relating to our business strategy; ? our current and future results and plans; and ? statements that include the words "may," "could," "should," "would," "believe," "expect," "anticipate," "estimate," "intend," "plan" or similar expressions. 26



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Such statements include information relating, among other things, to current and future business activities, operational matters, capital spending, and financing sources. From time to time, forward-looking statements are also included in Quaker's other periodic reports on Forms 10-K, 10-Q and 8-K, as well as in press releases and other materials released to, or statements made to, the public.

Any or all of the forward-looking statements in this Report and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Report will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in Quaker's subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted. These forward-looking statements are subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. A major risk is that the Company's demand is largely derived from the demand for its customers' products, which subjects the Company to uncertainties related to downturns in a customer's business and unanticipated customer production shutdowns. Other major risks and uncertainties include, but are not limited to, significant increases in raw material costs, worldwide economic and political conditions, foreign currency fluctuations, terrorist attacks and other acts of violence. Furthermore, the Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, appliance, and durable goods manufacturers. These risks, uncertainties and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results. Other factors beyond those discussed could also adversely affect us. Therefore, we caution you not to place undue reliance on our forward-looking statements. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

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