QUAKER CHEMICAL CORP 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Quaker Houghton is exposed to the impact of interest rates, foreign currency fluctuations, changes in commodity prices, and credit risk. The current economic environment associated with COVID-19 has led to significant volatility and uncertainty with each of these market risks. See Item 1A. “Risk Factors.” of this Report for additional discussions of the current and potential risks associated with the COVID-19 pandemic. Except as otherwise disclosed below, the market risks discussed below did not change materially from December 31, 2020. Interest Rate Risk. The Company’s exposure to changes in interest rates relates primarily to its borrowings under the Credit Facility. Borrowings under the Credit Facility bear interest at a specified benchmark plus an applicable margin based upon the Company’s consolidated net leverage ratio and the currency of the borrowing. In December 2021, the Company entered into the Second Amendment to provide an update for the use of a non-USD currency LIBOR successor rate. At this time, it remains uncertain what rate will succeed LIBOR for loans denominated in U.S. dollars. As a result of the variable interest rates applicable under the Credit Facility, including with respect to any future successor rate if interest rates rise significantly, the cost of debt to the Company could increase as well. This could have an adverse effect on the Company, depending on the extent of the Company’s borrowings outstanding throughout a given year. As of December 31, 2021, the Company had outstanding borrowings under the Credit Facility of approximately $889.6 million. The variable interest rate incurred on the outstanding borrowings under the Credit Facility during the year ended December 31, 2021 was approximately 1.6%. If interest rates had changed by 10% during 2021, the Company’s interest expense for the period ended December 31, 2021 on its credit facilities, including the Credit Facility borrowings outstanding post- closing of the Combination, would have correspondingly increased or decreased by approximately $0.8 million. The Credit Facility required the Company to fix its variable interest rates on at least 20% of its total Term Loans. In order to satisfy this requirement as well as to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility, in November 2019, the Company entered into $170.0 million notional amounts of three year interest rate swaps at a base rate of 1.64% plus an applicable margin as provided in the Credit Facility, based on the Company’s consolidated net leverage ratio. At the time the Company entered into the swaps and as of December 31, 2021, the aggregate interest rate on the swaps, including the fixed base rate plus an applicable margin, was 3.1%. These interest rate swaps are designated and qualify as cash flow hedges. The Company has previously used derivative financial instruments primarily for the purpose of hedging exposures to fluctuations in interest rates. Foreign Exchange Risk . A significant portion of the Company’s revenues and earnings are generated by its foreign operations. These foreign operations also represent a significant portion of Quake r Houghton’s assets and liabilities. Generally, all of these foreign operations use the local currency as their functional currency. Accordingly, Quaker Houghton’s financial results are affected by foreign currency fluctuations, particularly between the U.S. dollar and the euro, the British pound sterling, the Brazilian real, the Mexican peso, the Chinese renminbi and the Indian rupee. Quaker Houghton’s results can be materially affected depending on the volatility and magnitude of foreign exchange rate changes. If the euro, the British pound sterling, the Brazilian real, the Mexican peso, the Chinese renminbi and the Indian rupee had all weakened or strengthened by 10% against the U.S. dollar, the Company’s 2021 revenues and pre-tax earnings would have correspondingly decreased or increased by approximately $98.8 million and $11.7 million, respectively. The Company generally does not use financial instruments that expose it to significant risk involving foreign currency transactions. However, the size of its non-U.S. activities has a significant impact on reported operating results and the attendant net assets. During the past three years, sales by its non-U.S. subsidiaries accounted for approximately 60% to 70% of its consolidated net sales. In addition, the Company occasionally sources inventory among its worldwide operations. This practice can give rise to foreign exchange risk resulting from the varying cost of inventory to the receiving location, as well as from the revaluation of intercompany balances. The Company primarily mitigates this risk through local sourcing efforts. Commodity Price Risk . Many of the raw materials used by Quaker Houghton are derivatives of commodity chemicals, which can experience significant price volatility, and therefore Quaker Houghton’s earnings can be materially affected by market changes in raw material prices. At times, the Company has entered into fixed-price purchase contracts to manage this risk. These contracts provide protection to Quaker Houghton if the prices for the contracted raw materials rise; however, in certain circumstances, the Company may not realize the benefit if such prices decline. A gross margin change of one percentage point, would correspondingly have increased or decreased the Company’s pre-tax earnings by approximately $17.6 million. 41 Credit Risk . Quaker Houghton establishes allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Quaker Houghton’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Downturns in the overall economic climate may also exacerbate specific customer financial issues. A significant portion of the Company’s revenues are derived from sales to customers in the steel and automotive industries, including some of our larger customers, where bankruptcies have occurred in the past and where companies have experienced past financial difficulties. Though infrequent, when a bankruptcy occurs, Quaker Houghton must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process. In addition, as part of its terms of trade, Quaker Houghton may custom manufacture products for certain large customers and/or may ship product on a consignment basis. These practices may increase the Company’s exposure should a bankruptcy occur and may require a write-down or disposal of certain inventory due to its estimated obsolescence or limited marketability as well as of accounts receivable. Customer returns of products or disputes may also result in similar issues related to the realizability of recorded accounts receivable or returned inventory. The Company recorded expense to its provision for doubtful accounts by $0.7 million, $3.6 million and $1.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. A change of 10% to the expense recorded to the Company’s provision would have increased or decreased the Company’s pre-tax earnings by $0.1 million, $0.4 million and $0.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. 42