Excerpt from 2008 Annual Report

Chairman,
Chief Executive Officer and President

Dear Fellow Shareholders,

I have been fortunate to be part of Quaker Chemical for over ten years. I joined Quaker in late 1998 and served as CFO for my first six years. Since then, I have held major regional and global business leadership roles and, last October, became CEO and President. While 2008 was certainly one of the most challenging years during my time at Quaker, I have never been more proud of our organization than during this past year.

Delivering Results Under Difficult Conditions. The external environment we faced throughout 2008 was anything but favorable. Yet through most of the year, we recorded significant achievements. In the first nine months of 2008, Quaker reported record sales and EBITDA. Our balance sheet was the strongest it has been since 2004 with a net debt-to-total capital ratio of 27%, and our stock price hit an all-time high of $33.82 in the third quarter. All this occurred in the face of unprecedented increases in our raw material costs, which escalated more in 2008 than the previous three years combined. In addition, the global economic environment was already weakening, especially in our large U.S. automotive and European steel markets. Despite these significant headwinds, we produced strong earnings through September.

Rapid Change And Difficult But Necessary Actions. During October, the economic downturn became much more severe, especially in our key steel and automotive markets. Many of our customers were forced to shut down or to significantly reduce production immediately, almost like turning off a light switch. The impact on our business was just as dramatic. Our global volumes declined 25% in the fourth quarter compared to the prior year and 39% in December compared to our average during the first nine months of 2008. For the fourth quarter, we reported a loss of $.25 per share and we completed the full year with earnings of $1.05 per share. While the full year was still profitable, it was clear our world had changed dramatically and we needed to change with it.

We responded quickly. In December, we implemented our first set of cost reductions. When it became clear the downturn was worse than expected, we took further actions in the first quarter of 2009. In total, we eliminated over 140 positions, mainly in the U.S. and Europe. We also reduced discretionary spending significantly, eliminated 2008 bonuses, implemented a salary freeze, and suspended our 401(k) match. These actions that directly impacted our associates, our most valuable resource, were clearly difficult decisions to make. However, they were necessary to address the market realities we faced and to ensure that Quaker emerges from these tough times as a strong competitor.

Besides cost reductions, we also took steps to increase our liquidity and protect our access to the credit markets. In February, we completed amendments to our debt agreements to provide the company with more financial flexibility.

Profitability Despite A Weakened Economy. While we do not expect the global economy to rebound quickly, we do expect to be profitable in 2009. We expect that our earnings will improve sequentially as we proceed throughout the year. Some of our major markets, such as automotive and steel, will remain a challenge in all parts of the world. However, our global reach should serve us well as our earnings from China are expected to achieve year-over-year growth. Plus, some of our markets like aerospace, coatings, and mining will provide opportunities for growth stemming from our differentiated product technologies. Just as we overcame immense hurdles in the first nine months of 2008 due to unprecedented raw material increases, we are confident that we can overcome the challenges we are facing in 2009 and have a profitable year. Most importantly, we will also be positioning Quaker for long-term growth and stability.

back to top

An Enduring Business Model. I strongly believe that our business model will sustain us through this difficult period and lead to opportunities for future growth. Our superior execution—our ability to deliver on our promises to customers—is fundamental to our business approach. We work proactively to achieve a lasting customer intimacy, long-term relationships that grow deeper and more meaningful over time. We move well beyond the usual customer/supplier relationship to create a partnership approach that enables us to demonstrate tangible value. We maintain an intense focus on service that spans a full range of involvement with a customer’s business—from specific product expertise to our on-site, multi-faceted Chemical Management Services program. We understand our customers, we’re focused on the problems they face, and we’re committed to improving their bottom line. 

I’m optimistic about our future because I’ve been on Quaker’s front lines, working closely with excellent people across all levels of our organization. I’ve experienced, first hand, how much our customers value this Quaker difference. They know that we can offer meaningful solutions that deliver results, and in turbulent times this is even more critical. Our customers need our expertise more than ever to reduce their overall costs and become more competitive, and our commitment to them in doing so is strong. Our products and services help them improve productivity, achieve energy savings, address environmental issues, and increase their product quality.

Confidence In Quaker’s Future. While the global recession will make 2009 a challenging year, I also see great opportunities within our business. Our geographic reach, with significant presence in all major industrial countries, allows us to take advantage of the higher growth areas, such as China, India, Brazil, Russia, and the Middle East over the next few years. We are also continuing to invest in new products and markets that will provide us with growth. Examples of these include new differential coatings for the aerospace, marine, cans, and construction markets, as well as additional penetration into fluid power markets such as mining and glass. Just as important, we see growth potential within our own traditional markets of steel and metalworking. We are focusing on capturing growth within our existing customers with additional products and services, as well as gaining new customers within these core traditional markets. In the following pages, you’ll read more about why we are confident that we can capitalize on these opportunities in the future.

In closing, my primary goal is very simple—to create value for all of you. I look forward to reporting significant progress to you throughout 2009.

Best regards,

Michael F. Barry
Chairman, Chief Executive Officer and President

back to top