QUAKER CHEMICAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . As used in this Report, the terms “Quaker Houghton,” the “Company,” “we” and “our” refer to Quaker Chemical Corporation (doing business as Quaker Houghton), its subsidiaries, and associated companies, unless the context otherwise requires. The term the “Combination” refers to the legacy Quaker combination with Houghton International, Inc. (“Houghton”) on August 1, 2019. Executive Summary Quaker Houghton is the global leader in industrial process fluids. With a presence around the world, including operations in over 25 countries, our customers include thousands of the world’s most advanced and specialized steel, aluminum, automotive, aerospace, offshore, container, mining, and metalworking companies. Our high-performing, innovative and sustainable solutions are backed by best-in-class technology, deep process knowledge, and customized services. Quaker Houghton is headquartered in Conshohocken, Pennsylvania, located near Philadelphia in the U.S. Overall, the Company’s second quarter of 2022 performance reflected continued progress navigating through a myriad of financial, economic and geopolitical headwinds, including persistent and significant raw material cost escalation and overall inflationary pressures, supply chain and logistics challenges, production and distribution disruptions due to COVID-19 related actions in China, the direct and indirect impacts of the ongoing war in Ukraine and foreign currency volatility. Despite these challenges, net sales in the second quarter of 2022 were a record $492.4 million, representing an increase of approximately 13% compared to $435.3 million in the second quarter of 2021. This was primarily driven by an increase in selling price and product mix of approximately 22% and additional net sales from acquisitions of 1%, partially offset by a decline in organic sales volumes of 4% and the unfavorable impact from foreign currency translation of 6%. The increase in selling price and product mix is primarily the result of strategic price increases implemented to help offset the ongoing inflationary pressures that began during 2021 and have continued into 2022. The decline in organic sales volumes was primarily attributable to COVID-19 related disruptions in China, the wind-down of the tolling agreement for products previously divested related to the Combination, the impact of the war in Ukraine and the Company’s ongoing value-based pricing initiatives. The Company generated net income in the second quarter of 2022 of $14.3 million, or $0.80 per diluted share, compared to net income of $33.6 million, or $1.88 per diluted share in the second quarter of 2021. Excluding non-recurring and non-core items in each period, the Company’s second quarter of 2022 non-GAAP earnings per diluted share were $1.32 compared to $1.82 in the prior year quarter and the Company’s current quarter adjusted EBITDA was $58.5 million compared to $70.1 million in the second quarter of 2021. These results were primarily driven by lower gross margins in the current quarter due to a significant increase in raw material and other input costs as well as the direct and indirect impacts of global supply chain disruptions, the unfavorable impact of foreign currency, and to a lesser extent, by higher selling, general and administrative expenses (“SG&A”). See the Non-GAAP Measures section of this Item below, as well as other items discussed in the Company’s Consolidated Operations Review in the Operations section of this Item, below. The Company’s second quarter of 2022 operating performance in each of its four reportable segments: (i) Americas; (ii) Europe, Middle East and Africa (“EMEA”); (iii) Asia/Pacific; and (iv) Global Specialty Businesses, reflect similar drivers to that of its consolidated performance as each of the Company’s reportable segments net sales benefitted year-over-year from double-digit increases in selling price and product mix and additional net sales from acquisitions, while those increases in net sales for most segments were partially offset by lower organic sales volumes and the unfavorable impact of foreign currency translation. Organic volumes for the Global Speciality Businesses increased in the second quarter of 2022 compared to the prior year quarter due to strong demand for this segment’s products . Operating earnings for the Global Specialty Businesses and Americas increased compared to the prior year quarter, whereas operating earnings for Asia/Pacific and EMEA declined, due to the persistent and significant inflationary pressures on raw materials and other costs, the impact of COVID-19 disruptions in China, and the negative impact of foreign currency translation, partially offset by continued price realization. Sequentially, operating earnings increased in Global Speciality Businesses and the Americas driven by higher selling prices, and was relatively consistent in Asia/Pacific. Operating margins for the three aforementioned segments increased sequentially, as price realization was able to help offset the inflationary pressures on each of the segment’s gross margins. Additional details of each segment’s operating performance are further discussed in the Company’s Reportable Segments Review, in the Operations section of this Item, below. Quaker Chemical Corporation Management’s Discussion and Analysis 27 The Company had a net operating cash outflow of $8.4 million in the first six months of 2022 as compared to a net operating cash outflow of $9.6 million in the first six months of 2021. The net operating cash outflow in both periods reflects a significant working capital investment primarily related to higher accounts receivable due to the increase in net sales as well as higher inventory due primarily to the rising cost of raw materials and to a lesser extent a build in certain inventory stock in response to global supply chain and logistics challenges. The key drivers of the Company’s operating cash flow and working capital are further discussed in the Company’s Liquidity and Capital Resources section of this Item, below. Overall, the Company delivered another quarter of strong net sales growth, driven by strong price realization and above market growth. The expected decline in earnings was primarily driven by ongoing inflationary pressures, COVID-19 disruptions in China, unfavorable currency translation, geopolitical issues and other disruptions that impacted our customers and end markets. Notwithstanding, we delivered double-digit year-over-year increases in selling price and largely stabilized the Company’s gross margins on a sequential basis despite continued increases in our costs. Looking at the remainder of 2022, the Company’s focus remains on executing on items within its control. The Company is encouraged by the momentum in its business and resilience of its end markets, with some regional differences. The Company continues to work with its customers to get the needed pricing to offset the persistent inflationary pressures on its margin while also exhibiting continued cost controls. Despite significant uncertainty caused by several macroeconomic factors, the Company continues to expect to deliver sequential gross margin expansion and earnings growth in the second half of 2022. On-going impact of COVID-19 The global outbreak of COVID-19 in March of 2020 has negatively impacted all locations where the Company does business. Although the Company has now operated in this COVID-19 environment for more than two years, the full extent of the outbreak and related business impacts continue to remain uncertain and volatile, and therefore the full extent to which COVID-19 may impact the Company’s future results of operations or financial condition is uncertain. This outbreak has significantly disrupted the operations of the Company and those of its suppliers and customers and, at times during the pandemic, the Company has experienced volume declines as compared to pre-COVID-19 levels. Management continues to monitor the impact that the COVID-19 pandemic is having on the Company, the overall specialty chemical industry and the economies and markets in which the Company operates. The prolonged pandemic and resurgences of the outbreak including as new variants continue to emerge, and continued restrictions on day- to-day life and business operations such as recent restrictions in China as well as border controls or closures and transportation disruptions may result in volume declines and lower net sales in future periods. To the extent that the Company’s customers and suppliers are adversely impacted by COVID-19, this could reduce the availability, or result in delays, of materials or supplies to or from the Company, which in turn could significantly interrupt the Company’s business operations. Given this ongoing uncertainty, the Company cautions that its future results of operations could be significantly and adversely impacted by COVID-19. While the circumstances have presented and are expected to continue to present challenges and have necessitated additional time and resources to be deployed to sufficiently address the challenges brought on by the pandemic at this time, Management does not believe that COVID-19 has had a material impact on its financial reporting processes, internal controls over financial reporting, or disclosure controls and procedures. The Company’s top priority is to protect the health and safety of its employees and customers, while working to ensure business continuity to meet customers’ needs. During the pandemic, the Company has taken incremental steps to protect the health and wellbeing of its people in affected areas through various actions, including enabling work at home where needed and practicable, and employing social distancing standards, implementing travel restrictions where applicable, enhancing onsite hygiene practices, and instituting visitation restrictions at the Company’s facilities. The Company has not and does not expect that it will incur material expenses implementing these health and safety policies. All of the Company’s more than 30 production facilities worldwide are open and operating and are deemed as essential businesses in the jurisdictions where they are operating. The Company continues to expect that the impacts from COVID-19 will gradually decline subject to the effective containment of the virus and its variants and successful distribution and acceptance of the available vaccines and treatments; however, the incidence of reported cases of COVID-19 or a variant in several geographies where the Company has significant operations remains relatively high. Differing government responses to these reported cases continues to evolve and it therefore remains highly uncertain as to how long the global pandemic and related economic challenges will last in each of the jurisdictions where the Company conducts business and when our customers’ businesses will recover to pre-COVID-19 levels. Though the Company was able to supply customers with value added solutions, as a result of the government-imposed quarantine and lockdown measures implemented at the end of March 2022 and continuing in effect until early June 2022, the Company’s Shanghai, China-based locations were significantly impacted. The negative impact of those measures on our operations and liquidity was experienced during the second quarter of 2022 and the ultimate impact will depend on how quickly the Chinese economy recovers from the quarantine and lockdown measures that were temporarily implemented. While the actions the Company has taken to date to protect our workforce, to continue to serve our customers with excellence and to conserve cash and reduce costs as applicable, have been effective thus far, further actions to respond to the pandemic and its effects may be necessary as conditions continue to evolve. Quaker Chemical Corporation Management’s Discussion and Analysis 28 Impact of Political Conflicts A significant portion of the Company’s revenues and earnings are generated by non-U.S. operations. This subjects the Company to political and economic risks that could adversely affect the Company’s business, liquidity, financial position and results of operations. The existence of military conflicts, for example the Russian invasion of Ukraine, bring inherent risks such as the potential for supply chain disruptions, increased costs of resources including oil, decreased trade activity and other consequences related to economic or other sanctions. The U.S. government and other nations have imposed significant restrictions on most companies’ ability to do business in Russia as a result of the military conflict between Russia and Ukraine. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. The military conflict between Russia and Ukraine has had a negative impact on the Company’s ability to sell to, ship products to collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions including closures of air space. If this conflict continues or expands, it could increase the costs, risks and adverse impacts from these new challenges. The Company and its customers and suppliers may also be the subject of increased cyber-attacks. During the second quarter of 2022, the Company decided to cease its operations in Russia. The Company’s operations in the conflict areas including Russia, Ukraine and Belarus historically represented less than 2% of the Company’s consolidated net sales and less than 1% of the Company’s consolidated total assets. The Company’s primary exposure in the conflict areas related to outstanding customer accounts receivable. The Company is actively monitoring its outstanding Russian receivables for collections and has recorded incremental allowances for doubtful accounts where warranted. Liquidity and Capital Resources At June 30, 2022, the Company had cash and cash equivalents of $202.3 million. Total cash and cash equivalents was $165.2 million at December 31, 2021. The $37.2 million increase in cash and cash equivalents was the net result of $78.6 million of cash provided by financing activities partially offset by $8.4 million of cash used in operating activities, $24.4 million of cash used in investing activities and $8.6 million negative impact due to the effect of foreign currency translation. Net cash flows used in operating activities were $8.4 million in the first six months of 2022 compared to net cash flows used in operating activities of $9.6 million in the first six months of 2021. The net operating cash outflow in both periods reflects working capital investment primarily related to higher accounts receivable due to the increase in net sales and higher inventory due primarily to the rising cost of raw materials and to a lesser extent a build in certain inventory in response to global supply chain and logistics challenges. The slight improvement in operating cash flow year-over-year is a result of a lower working capital investment partially offset by lower earnings in the first six months of 2022 compared to the first six months of 2021. Net cash flows used in investing activities were $24.4 million in the first six months of 2022 compared to $21.7 million in the first six months of 2021. This increase in cash outflows was a result of lower cash proceeds from the disposition of assets which included the sale of certain held-for-sale real property assets related to the Combination in the prior year period, and higher capital expenditures in the current year largely related to certain infrastructure and sustainability-related spending. These increases in cash used in investing activities were partially offset by lower cash payments related to acquisitions as a result of the level of acquisition activity in each year. See Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report. Net cash flows provided by financing activities were $78.6 million in the first six months of 2022 compared to net cash flows used in financing activities of $4.4 million in the first six months of 2021. The increase in net cash flows was primarily related to an increase in borrowings in the current year under the Company’s credit facility, which was amended and extended, as further described below, in the second quarter of 2022. In addition, the Company paid $14.9 million of cash dividends during the first six months of 2022, a $0.7 million or 5% increase in cash dividends compared to the prior year. The Company, its wholly owned subsidiary, Quaker Chemical B.V., as borrowers, Bank of America, N.A., as administrative agent, U.S. Dollar swing line lender and letter of credit issuer, and the other lenders party thereto, entered into a credit agreement on August 1, 2019, as amended (the “Original Credit Facility”). During June 2022, the Company, and its wholly owned subsidiary, Quaker Houghton B.V., as borrowers, Bank of America, N.A., as administrative agent, U.S. Dollar swing line lender and letter of credit issuer, Bank of America Europe Designated Active Company, as Euro Swing Line Lender, certain guarantors and other lenders entered into an amendment to the Original Credit Facility (the “Amended Credit Facility”). The Company used the proceeds of the Amended Credit Facility to repay all outstanding loans under the Original Credit Facility, as well as accrued interest and fees, and to terminate the revolving credit commitments under the Original Credit Facility. Quaker Chemical Corporation Management’s Discussion and Analysis 29 The Company’s Amended Credit Facility is comprised of a $500.0 million multicurrency revolver, a $600.0 million term loan and a $150.0 million (as of June 17, 2022) Euro equivalent term loan (collectively, the “Amended Term Loans”) with the Company and Quaker Houghton B.V., as borrowers, each with a five-year term maturing in June 2027. Subject to the consent of the Administrative Agent and certain other conditions, the Company may designate additional borrowers. The Company has the right to increase the amount of the Amended Credit Facility by an aggregate amount not to exceed the greater of (i) $300 million and (ii) 100% of Consolidated EBITDA, subject to certain conditions, including the agreement to provide financing by any Lender providing any such increase. U.S. Dollar-denominated borrowings under the Amended Credit Facility bear interest, at the Company’s election, at the base rate or term Secured Overnight Financing Rate (“SOFR”) plus an applicable rate ranging from 1.00% to 1.75% for term SOFR loans and from 0.00% to 0.75% for base rate loans, depending upon the Company’s consolidated net leverage ratio. Loans based on term SOFR also include a spread adjustment equal to 0.10% per annum. Borrowings under the Amended Credit Facility denominated in currencies other than U.S. Dollars bear interest at the alternative currency term rate plus the applicable rate ranging from 1.00% to 1.75%. In addition to paying interest on outstanding principal under the Amended Credit Facility, the Company is required to pay a commitment fee ranging from 0.15% to 0.275% depending on the Company’s consolidated net leverage ratio to the Lenders under the Amended Revolver in respect of the unutilized commitments thereunder. The Amended Credit Facility contains affirmative and negative covenants, financial covenants and events of default that are customary for agreements of this nature. The Amended Credit Facility contains a number of customary business covenants, including without limitation restrictions on (a) the incurrence of additional indebtedness by the Company or certain of its subsidiaries, (b) investments in and acquisitions of other businesses, lines of business and divisions by the Company or certain of its subsidiaries, (c) the payment of dividends or capital stock purchases by the Company or certain of its subsidiaries and (d) dispositions of assets by the Company or certain of its subsidiaries. Dividends and share repurchases are permitted in annual amounts not exceeding the greater of $75 million annually and 25% of Consolidated EBITDA if there is no default. All restricted payments may be made if there is no default and if the consolidated net leverage ratio is less than 2.50 to 1.00. Financial covenants contained in the Amended Credit Facility include a consolidated interest coverage ratio test and a consolidated net leverage ratio test. The consolidated net leverage ratio at the end of a quarter may not be greater than 4.00 to 1.00, subject to a permitted increase during a four quarter period after certain acquisitions. The Company has the option of replacing the consolidated net leverage ratio test with a consolidated senior net leverage ratio test if the Company issues certain types of unsecured debt, subject to certain customary limitations. Customary events of default in the Amended Credit Facility include without limitation defaults for non-payment, breach of representations and warranties, non -performance of covenants, cross-defaults, insolvency, and a change of control of the Company in certain circumstances. The occurrence of an event of default under the Amended Credit Facility could result in all loans and other obligations becoming immediately due and payable and the Amended Credit Facility being terminated. The Original Credit Facility required the Company to fix its variable interest rates on at least 20% of its total Original 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 Original 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 Original Credit Facility, based on the Company’s consolidated net leverage ratio. At the time the Company entered into the swaps, and as of June 30, 2022, the aggregate interest rate on the swaps, including the fixed base rate plus an applicable margin, was 3.1%. The Amended Credit Facility does not require the Company to fix variable interest rates on any portion of its borrowings. The Company previously capitalized $23.7 million of certain third-party debt issuance costs in connection with the Original Credit Facility. Approximately $15.5 million of the capitalized costs were attributed to the Original Term Loans and recorded as a direct reduction of Long-term debt on the Condensed Consolidated Balance Sheet. Approximately $8.3 million of the capitalized costs were attributed to the Original Revolver and recorded within Other assets on the Condensed Consolidated Balance Sheet. These capitalized costs were being amortized into Interest expense over the five-year term of the Original Credit Facility. As of December 31, 2021, the Company had $8.0 million of debt issuance costs recorded as a reduction of Long-term debt attributable to the Original Credit Facility. As of December 31, 2021, the Company had $4.3 million of debt issuance costs recorded within Other assets attributable to the Original Credit Facility. Prior to executing the Amended Credit Facility, the Company had $6.6 million of debt issuance costs recorded as a reduction of Long-term debt attributable to the Original Credit Facility and $3.5 million of debt issuance costs recorded within Other assets attributable to the Original Credit Facility. In connection with executing the Amended Credit Facility, the Company recorded a loss on extinguishment of debt of approximately $6.8 million which includes the write-off of certain previously unamortized deferred financing costs as well as a portion of the third party and creditor debt issuance costs incurred to execute the Amended Credit Facility. Also in connection with executing the Amended Credit Facility, during the second quarter of 2022, the Company capitalized $2.2 million of certain third-party debt issuance costs. Approximately $0.7 million of the capitalized costs were attributed to the Amended Euro Term Loan and Amended U.S. Term Loan. These costs were recorded as a direct reduction of Long-term debt on the Condensed Consolidated Balance Sheet. Approximately $1.5 million of the capitalized costs were attributed to the Amended Revolver and recorded within Other assets on the Condensed Consolidated Balance Sheet. These capitalized costs, as well as the previously capitalized costs that were not written off will collectively be amortized into Interest expense over the five-year Quaker Chemical Corporation Management’s Discussion and Analysis 30 term of the Amended Credit Facility. As of June 30, 2022, the Company had $2.2 million of debt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Balance Sheet and $4.8 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet. As of June 30, 2022, the Company had Amended Credit Facility borrowings outstanding of $977.6 million. As of December 31, 2021, the Company had Original Credit Facility borrowings outstanding of $889.6 million. The Company has unused capacity under the Amended Revolver of approximately $268 million, net of bank letters of credit of approximately $4 million, as June 30, 2022. The Company’s other debt obligations are primarily industrial development bonds, bank lines of credit and municipality -related loans, which totaled $11.5 million and $11.8 million as of June 30, 2022 and December 31, 2021, respectively. Total unused capacity under these arrangements as of June 30, 2022 was approximately $28 million. The Company’s total net debt as of June 30, 2022 was $786.7 million. The Company incurred $8.3 million of total Combination, integration and other acquisition-related expenses in the first six months of 2022, which includes $2.4 million of other expenses related to indemnification assets, described in the Non-GAAP Measures section of this Item below. Comparatively, in the first six months of 2021, the Company incurred $7.6 million of total Combination, integration and other acquisition-related expenses, which was net of a $5.4 million gain on the sale of certain held-for- sale real property assets and also included $0.5 million of accelerated depreciation. The Company had aggregate net cash outflows of approximately $9.2 million related to the Combination, integration and other acquisition -related expenses during the first six months of 2022 as compared to $14.8 million during the first six months of 2021. During the first six months of 2022, the Company incurred $6.2 million of strategic planning and transformation expenses. The Company expects that these additional operating costs and associated cash flows, as well as higher capital expenditures related to strategic planning, process optimization and the next phase of the Company’s long-term integration to further optimize its footprint, processes and other functions will continue in 2022 and potentially extend into the next several years. Quaker Houghton’s Management approved, and the Company initiated, a global restructuring plan (the “QH Program”) in the third quarter of 2019 as part of its planned cost synergies associated with the Combination. The QH Program includes restructuring and associated severance costs to reduce total headcount by approximately 400 people globally and plans for the closure of certain manufacturing and non-manufacturing facilities. The exact timing and total costs associated with the QH Program depe nds on a number of factors and is subject to change; however, reductions in headcount and site closures have occurred, and the Company currently expects additional headcount reductions and site closures to occur throughout 2022 and into 2023. The Company made cash payments related to the settlement of restructuring liabilities under the QH Program during the first six months of 2022 of approximately $0.8 million compared to $4.2 million in the first six months of 2021. As of June 30, 2022, the Company’s gross liability for uncertain tax positions, including interest and penalties, was $21.9 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 $6.9 million as a result of offsetting benefits in other tax jurisdictions. In 2021, two of the Company’s locations suffered significant property damage as a result of flooding and fire. The Company maintains property insurance for all of its facilities globally. The Company, its insurance adjuster and insurance carrier are actively managing the remediation and restoration activities associated with both of these events and at this time the Company has concluded, based on all available information and discussions with its insurance adjuster and insurance carrier, that the losses incurred during 2021 were covered under the Company’s property insurance coverage, net of an aggregate deductible of $2.0 million. The Company has received payments from its insurers of $2.1 million and has recorded an insurance receivable associated with these events of $0.9 million as of June 30, 2022. See Note 18 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report. The Company believes that its existing cash, anticipated cash flows from operations and available additional liquidity will be sufficient to support its operating requirements and fund its business objectives for at least the next twelve months, including but not limited to, payments of dividends to shareholders, costs related to ongoing acquisition integration and optimization, pension plan contributions, capital expenditures, other business opportunities (including potential acquisitions), implementing actions to achieve the Company’s sustainability goals and other potential known or anticipated contingencies. The Company believes it has sufficient additional liquidity to support its operating requirements and to fund its business obligations for the period beyond the next twelve months as well, including the aforementioned items which are expected to recur annually, as well as future principal and interest payments on the Company’s Amended Credit Facility, tax obligations and other long-term liabilities. The Company’s liquidity is affected by many factors, some based on normal operations of our business and others related to the impact of the pandemic and other global events on our business and on global economic conditions as well as industry uncertainties, which we cannot predict. We also cannot predict economic conditions and industry downturns or the timing, strength or duration of recoveries. We may seek, as we believe appropriate, additional debt or equity financing which would provide capital for corporate purposes, working capital funding, additional liquidity needs or to fund future growth opportunities, including possible acquisitions and organic investments. The timing and amount of potential capital requirements cannot be determined at this time and will depend on a number of factors, including the Quaker Chemical Corporation Management’s Discussion and Analysis 31 actual and projected demand for our products, specialty chemical indust ry conditions, competitive factors, and the condition of financial markets, among others. Non-GAAP Measures The information in this Form 10-Q includes non-GAAP (unaudited) financial information that includes EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non- GAAP earnings per diluted share. 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 indicative of future operating performance of the Company, and facilitate a comparison among fiscal periods, as the non-GAAP financial measures exclude items that are not considered indicative of future operating performance or not considered core to the Company’s operations. 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. The Company presents EBITDA which is calculated as net income attributable to the Company before depreciation and amortization, interest expense, net, and taxes on income before equity in net (loss) income of associated companies. The Company also presents adjusted EBITDA which is calculated as EBITDA plus or minus certain items that are not considered indicative of future operating performance or not considered core to the Company’s operations. In addition, the Company presents non-GAAP operating income which is calculated as operating income plus or minus certain items that are not considered indicative of future operating performance or not considered core to the Company’s operations. Adjusted EBITDA margin and non-GAAP operating margin are calculated as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales, respectively. The Company believes these non-GAAP measures provide transparent and useful information and are widely used by investors, analysts, and peers in our industry as well as by management in assessing the operating performance of the Company on a consistent basis. Additionally, the Company presents non-GAAP net income and non-GAAP earnings per diluted share as additional performance measures. Non-GAAP net income is calculated as adjusted EBITDA, defined above, less depreciation and amortization, interest expense, net, and taxes on income before equity in net (loss) income of associated companies, in each case adjusted, as applicable, for any depreciation, amortization, interest or tax impacts resulting from the non-core items identified in the reconciliation of net income attributable to the Company to adjusted EBITDA. Non-GAAP earnings per diluted share is calculated as non-GAAP net income per diluted share as accounted for under the “two-class share method.” The Company believes that non-GAAP net income and non- GAAP earnings per diluted share provide transparent and useful information and are widely used by investors, analysts, and peers in our industry as well as by management in assessing the operating performance of the Company on a consistent basis. Certain of the prior period non-GAAP financial measures presented in the following tables have been adjusted to conform with current period presentation. The following tables reconcile the Company’s non-GAAP financial measures (unaudited) to their most directly comparable GAAP (unaudited) financial measures (dollars in thousands unless otherwise noted, except per share amounts): Non-GAAP Operating Income and Margin Reconciliations Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Operating income $ 31,903 $ 38,816 $ 61,306 $ 83,710 Combination, restructuring and other acquisition-related expenses (a) 1,831 7,082 6,704 15,288 Strategic planning and transformation expenses (b) 3,112 — 6,200 — Executive transition costs (c) 645 308 1,184 812 Russia-Ukraine conflict related expenses (d) 929 — 2,095 — Other charges (e) 385 242 476 293 Non-GAAP operating income $ 38,805 $ 46,448 $ 77,965 $ 100,103 Non-GAAP operating margin (%) (l) 7.9% 10.7% 8.1% 11.6% Quaker Chemical Corporation Management’s Discussion and Analysis 32 EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Non-GAAP Net Income Reconciliations Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net income attributable to Quaker Chemical Corporation $ 14,343 $ 33,570 $ 34,159 $ 72,185 Depreciation and amortization (a)(j) 20,856 22,344 41,583 44,792 Interest expense, net 6,494 5,618 11,839 11,088 Taxes on income before equity in net (loss) income of associated companies (k) 1,374 15,218 4,240 25,907 EBITDA 43,067 76,750 91,821 153,972 Equity loss (income) in a captive insurance company (f) 1,781 (883) 2,025 (3,963) Combination, restructuring and other acquisition-related expenses (a) 2,248 6,956 9,100 9,359 Strategic planning and transformation expenses (b) 3,112 — 6,200 — Executive transition costs (c) 645 308 1,184 812 Russia-Ukraine conflict related expenses (d) 929 — 2,095 — Brazilian non-income tax credits (g) — (13,293) — (13,293) Loss on extinguishment of debt (h) 6,763 — 6,763 — Other charges (e) (54) 219 (253) 318 Adjusted EBITDA $ 58,491 $ 70,057 $ 118,935 $ 147,205 Adjusted EBITDA margin (%) (l) 11.9% 16.1% 12.3% 17.0% Adjusted EBITDA $ 58,491 $ 70,057 $ 118,935 $ 147,205 Less: Depreciation and amortization - adjusted (a) 20,856 22,218 41,583 44,251 Less: Interest expense, net 6,494 5,618 11,839 11,088 Less: Taxes on income before equity in net income of associated companies - adjusted (a)(k) 7,466 9,773 16,368 21,512 Non-GAAP net income $ 23,675 $ 32,448 $ 49,145 $ 70,354 Non-GAAP Earnings per Diluted Share Reconciliations Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders $ 0.80 $ 1.88 $ 1.91 $ 4.03 Equity loss (income) in a captive insurance company per diluted share (f) 0.10 (0.05) 0.11 (0.22) Combination, restructuring and other acquisition-related expenses per diluted share (a) 0.13 0.30 0.41 0.42 Strategic planning and transformation expenses per diluted share (b) 0.13 — 0.27 — Executive transition costs per diluted share (c) 0.03 0.02 0.05 0.04 Russia-Ukraine conflict related expenses per diluted share (d) 0.04 — 0.10 — Brazilian non-income tax credits per diluted share (g) — (0.44) — (0.44) Loss on extinguishment of debt per diluted share (h) 0.29 — 0.29 — Other charges per diluted share (e) (0.00) 0.01 (0.01) 0.02 Impact of certain discrete tax items per diluted share (i) (0.20) 0.10 (0.39) 0.08 Non-GAAP earnings per diluted share (m) $ 1.32 $ 1.82 $ 2.74 $ 3.93 Quaker Chemical Corporation Management’s Discussion and Analysis 33 (a) Combination, restructuring and other acquisition-related expenses include certain legal, financial, and other advisory and consultant costs incurred in connection with the Combination integration activities including internal control readiness and remediation as well as costs incurred by the Company associated with the QH restructuring program, which was initiated in the third quarter of 2019 as part of the Company’s plan to realize cost synergies associated with the Combination . These amounts also include expense associated with other of the Company’s acquisitions, including cost associated with selling inventory from acquired businesses which was adjusted to fair value as part of purchase accounting. These costs are not indicative of the future operating performance of the Company. Approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2022, respectively, and approximately $0.4 million and $0.5 million in the three and six months ended June 30, 2021, respectively, of these pre-tax costs were considered non-deductible for the purpose of determining the Company’s effective tax rate, and, therefore, taxes on income before equity in net income of associated companies - adjusted reflects the impact of these items. During the three and six months ended June 30, 2022, the Company recorded $0.4 million and $2.4 million, respectively, of other expense related to an indemnification asset, which is included in the caption “Combination, restructuring and other acquisition-related expenses” in the reconciliation of GAAP earnings per diluted share attributed to Quaker Chemical Corporation common shareholders to Non-GAAP earnings per diluted share as well as the reconciliation of net income attributable to Quaker Chemical Corporation to Adjusted EBITDA and Non-GAAP net income . During the three and six months ended June 30, 2021, the Company recorded $0.1 million $0.5 million, respectively, of accelerated depreciation related to certain of the Company’s facilities, which is included in the caption “Combination, restructuring and other acquisition-related expenses” in the reconciliation of operating income to non-GAAP operating income and included in the caption “Depreciation and amortization” in the reconciliation of net income attributable to the Company to EBITDA, but excluded from the caption “Depreciation and amortization - adjusted” in the reconciliation of adjusted EBITDA to non -GAAP net income attributable to the Company. During the six months ended June 30, 2021, the Company recorded a $5.4 million gain on the sale of certain held-for-sale real property assets related to the Combination which is included in the caption “Combination, restructuring and other acquisition-related expenses” in the reconciliation of GAAP earnings per diluted share attributed to Quaker Chemical Corporation common shareholders to Non-GAAP earnings per diluted share as well as the reconciliation of net income attributable to Quaker Chemical Corporation to Adjusted EBITDA and Non-GAAP net income. During the three and six months ended June 30, 2022, respectively, the Company recorded restructuring and related charges of less than $0.1 million and $0.8 million, respectively, and $0.3 million and $1.5 million during the three and six months ended June 30, 2021, respectively. During the six months ended June 30, 2021, the Company recorded $0.8 million related to the sale of inventory from acquired businesses which was adjusted to fair value. See Notes 2, 7, 10 and 11 of Notes to Condensed Consolidated Financial Statements, which appear in Item 1 of this Report. (b) Strategic planning and transformation expenses include certain consultant and advisory expenses for the Company’s long-term strategic planning, as well as process optimization and the next phase of the Company’s long-term integration to further optimize its footprint, processes and other functions. These costs are not indicative of the future operating performance of the Company. (c) Executive transition costs represent the costs related to the Company’s search, hiring and transition to a new CEO in connection with the executive transition that took place in 2021 as well as the search, hiring and transition for other officers during the first six months of 2022. These expenses are one-time in nature and not indicative of the future operating performance of the Company. (d) Russia-Ukraine conflict related expenses represent the direct costs associated with the Company’s exit of operations in Russia during the second quarter of 2022, primarily for employee separation benefits, as well as costs associated with establishing specific reserves or changes to existing reserves for trade accounts receivable within the Company’s EMEA reportable segment due to the economic instability associated with certain customer accounts receivables which have been directly impacted by the current economic conflict between Russia and Ukraine or the Company’s decision to end operations in Russia. These expenses are not indicative of the future operating performance of the Company. (e) Other charges include charges incurred by an inactive subsidiary of the Company as a result of the termination of restrictions on insurance settlement reserves, non-service components of the Company’s pension and postretirement net periodic benefit income and the foreign currency remeasurement impacts associated with the Company’s affiliates whos e local economies are designated as hyper-inflationary under U.S. GAAP. These expenses are not indicative of the future operating performance of the Company. See Notes 1 and 9 of Notes to Condensed Consolidated Financial Statements, which appear in Item 1 of this Report. (f) Equity loss (income) in a captive insurance company represents the after-tax loss (income) attributable to the Company’s interest in Primex, Ltd. (“Primex”), a captive insurance company. The Company holds a 32% investment in and has significant influence over Primex, and therefore accounts for this interest under the equity method of accounting. The loss (income) attributable to Primex is not indicative of the future operating performance of the Company and is not considered core to the Company’s operations. Quaker Chemical Corporation Management’s Discussion and Analysis 34 (g) Brazilian non-income tax credits represent indirect tax credits related to certain of the Company’s Brazilian subsidiaries prevailing in a legal claim as well as the Brazilian Supreme Court ruling on these non-income tax matters. The non-income tax credits arising from the claim and court ruling are non-recurring and not indicative of the future operating performance of the Company. See Note 18 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report. (h) In connection with executing the Amended Credit Facility, the Company recorded a loss on extinguishment of debt of approximately $6.8 million which includes the write-off of certain previously unamortized deferred financing costs as well as a portion of the third-party and creditor debt issuance costs incurred to execute the Amended Credit Facility. These expenses are not indicative of the future operating performance of the Company. See Note 14 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report. (i) The impacts of certain discrete tax items include changes in valuation allowances recorded on certain Brazilian branch foreign tax credits and the recording of deferred taxes on Brazilian branch income. Both of these discrete items related to tax law changes in the U.S. due to the issuance of final foreign tax credit regulations during the period. Additionally, the Company has discrete items related to the release of the reserves for uncertain tax positions settled during the quarter and certain taxes, penalties, and interest due as a result of the settlements. See Note 11 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report. (j) Depreciation and amortization for the three and six months ended June 30, 2022 includes approximately $0.2 million and $0.5 million, respectively, and for the three and six months ended June 30, 2021 includes $0.3 million and $0.6 million, respectively, of amortization expense recorded within equity in net loss (income) of associated companies in the Company’s Condensed Consolidated Statements of income, which is attributable to the amortization of the fair value step up for the Company’s 50% interest in a joint venture in Korea as a result of required purchase accounting. (k) Taxes on income before equity in net loss (income) of associated companies – adjusted presents the impact of any current and deferred income tax expense (benefit), as applicable, of the reconciling items presented in the reconciliation of net income attributable to Quaker Chemical Corporation to adjusted EBITDA, and was determined utilizing the applicable rates in the taxing jurisdictions in which these adjustments occurred, subject to deductibility. Combination, restructuring and other acquisition- related expenses described in (a) resulted in a tax benefit of approximatel y $0.1 million and incremental taxes of $1.6 million for the three and six months ended June 30, 2022, respectively, compared to $1.6 million and $2.2 million for the three and six months ended June 30, 2021, respectively. Strategic planning and transformation expenses describes in (b) above resulted in incremental taxes of $0.7 million and $1.4 million for the three and six months ended June 30, 2022, respectively. Executive transition costs described in (c) resulted in incremental taxes of $0.2 million and $0.3 million for the three and six months ended June 30, 2022, respectively, compared to $0.1 million and $0.2 million for the three and six months ended June 30, 2021, respectively. Russia-Ukraine conflict related expenses described in (d) resulted in incremental taxes of $0.2 million and $0.5 million for the three and six months ended June 30, 2022, respectively. Other charges described in (e) resulted in incremental taxes of less than $0.1 million and a tax benefit of less than $0.1 million for the three and six months ended June 30, 2022, respectively, compared to $0.1 million during each of the three and six months ended June 30, 2021. Brazilian non-income tax credits described in (g) resulted in incremental taxes of $5.3 million during the three and six months ended June 30, 2021. Loss on extinguishment of debt described in (h) resulted in incremental taxes of $1.6 million during the three and six months ended June 30, 2022. The impact of certain discrete items described in (i) resulted in a tax benefit of $3.5 million and $6.9 million for the three and six months ended June 30, 2022, respectively, compared to $1.9 million and $1.5 million for the three and six months ended June 30, 2021, respectively. (l) The Company calculates adjusted EBITDA margin and non-GAAP operating margin as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales. (m) The Company calculates non-GAAP earnings per diluted share as non -GAAP net income attributable to the Company per weighted average diluted shares outstanding using the “two-class share method” to calculate such in each given period. Off-Balance Sheet Arrangements The Company had no material off-balance sheet commitments or obligations as of June 30, 2022. The Company’s off -balance sheet items outstanding as of June 30, 2022 includes approximately $5 million of total bank letters of credit and guarantees. The bank letters of credit and guarantees are not significant to the Company’s liquidity or capital resources. See Note 14 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report. Quaker Chemical Corporation Management’s Discussion and Analysis 35 Operations Consolidated Operations Review – Comparison of the Second Quarter of 2022 with the Second Quarter of 2021 Net sales were $492.4 million in the second quarter of 2022 compared to $435.3 million in the second quarter of 2021. The net sales increase of $57.1 million or 13% quarter-over-quarter reflects increases in selling price and product mix of approximately 22% and additional net sales from acquisitions of 1% partially offset by the unfavorable impact from foreign currency translation of 6% and a decline in organic sales volumes of approximately 4%. The increase in selling price and product mix is primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and continued into 2022. The decline in organic sales volumes was primarily attributable to COVID-19 related production disruptions in China, the tolling agreement for products previously divested related to the Combination, the ongoing war in Ukraine and the Company’s ongoing value -based pricing initiatives. COGS were $342.8 million in the second quarter of 2022 compared to $280.8 million in the second quarter of 2021. The increase in COGS of $62.0 million or 22% was driven by the continued increases in the Company’s global raw material and supply chain and logistics costs compared to the prior year. Gross profit in the second quarter of 2022 decreased $4.9 million or 3% from the second quarter of 2021. The Company’s reported gross margin in the second quarter of 2022 was 30.4% compared to 35.5% in the second quarter of 2021. The Company’s current quarter gross margin reflects the continued significant increase in raw material and other input costs experienced throughout the second quarter of 2022 and the impacts of constraints on the global supply chain, partially offset by the Company’s ongoing value- based pricing initiatives. SG&A in the second quarter of 2022 increased $7.2 million or 7% compared to the second quarter of 2021 due primarily to the impact of sales increases on direct selling costs, inflation driven higher operating costs, costs associated with strategic planning and transformation initiatives (see the Non-GAAP Measures section of this Item, above), and additional SG&A from recent acquisitions partially offset by lower SG&A due to foreign currency translation compared to the prior year. During the second quarter of 2022, the Company incurred $1.8 million of Combination, integration and other acquisition-related operating expenses primarily for professional fees related to the Houghton integration and other acquisition-related activities. Comparatively, the Company incurred $6.7 million of expenses in the prior year second quarter, primarily due to various professional fees related to legal, financial and other advisory and consultant expenses for integration activities including internal control readiness and remediation. See the Non-GAAP Measures section of this Item, above. The Company initiated a restructuring program during the third quarter of 2019 as part of its global plan to realize cost synergies associated with the Combination. The Company incurred Restructuring and related (credits) charges for reductions in headcount and site closures under this program, net of adjustments to initial estimates for severance of a credit of less than $0.1 million and a charge of $0.3 million during the second quarters of 2022 and 2021, respectively. See the Non-GAAP Measures section of this Item, above. Operating income in the second quarter of 2022 was $31.9 million compared to $38.8 million in the second quarter of 2021. Excluding non-recurring and non-core expenses that are not indicat ive of the future operating performance of the Company described in the Non-GAAP Measures section of this Item, above, the Company’s current quarter non-GAAP operating income decreased to $38.8 million compared to $46.4 million in the prior year second quarter primarily due to the lower gross profit and higher SG&A described above. The Company had other expense, net, of $8.4 million in the second quarter of 2022 compared to other income, net of $14.0 million in the second quarter of 2021. The second quarter of 2022 includes a loss on extinguishment of debt of $6.8 million associated with the refinancing of the Original Credit Facility while the second quarter of 2021 included $13.3 million of income related to certain non-income tax credits recorded by the Company’s Brazilian subsidiaries. See the Non-GAAP Measures section of this Item, above. In addition, the Company incurred higher foreign exchange transaction losses in the second quarter of 2022 compared to the prior year quarter. Interest expense, net, increased $0.9 million compared to the second quarter of 2021 as a result of increases in the average borrowings outstanding in the second quarter of 2022 compared to the second quarter of 2021 coupled with an increase in interest rates quarter-over-quarter. The Company’s effective tax rates for the second quarters of 2022 and 2021 were 8.1% and 32.2%, respectively. The Company’s effective tax rate for the second quarter of 2022 was largely driven by state tax benefits, a reduction in reserves for uncertain tax positions relating to management fees, a deferred tax benefit associated with an intercompany asset transfer, withholding taxes for increased forecasted dividends, and the effects of lower pre-tax earnings and the mix of such earnings. In addition, the Company incurred higher tax expense during the second quarter of 2022 primarily related to the Company recording earnings in one of its subsidiaries at a statutory tax rate of 25% while it awaits recertification of a concessionary 15% tax rate, which was available to the Company during all of 2021. Comparatively, the prior year quarter effective tax rate was impacted by changes in foreign tax credit Quaker Chemical Corporation Management’s Discussion and Analysis 36 valuation allowances, tax law changes in foreign jurisdictions as well as the tax impacts of certain non-income tax credits recorded by the Company’s Brazilian subsidiaries. Excluding the impact of non-core items in each quarter, described in the Non-GAAP Measures section of this Item, above, the Company estimates that its effective tax rates for both the second quarters of 2022 and 2021 would have been approximately 24%. The Company expects continued volatility in its effective tax rates due to several factors, including the timing and scope of tax audits and the expiration of applicable statutes of limitations as they relate to uncertain tax positions, the unpredictability of the timing and amount of certain incentives in various tax jurisdictions, including the high technology incentive at one of our subsidiaries based in China which is currently up for triennial renewal, the treatment of certain acquisition-related costs and the timing and amount of certain share-based compensation-related tax benefits, among other factors. Equity in net income of associated companies decreased $2.9 million in the second quarter of 2022 compared to the second quarter of 2021, primarily due to lower current year income from the Company’s interest in a captive insurance company and from the Company’s 50% interest in a joint venture in Korea. See the Non-GAAP Measures section of this Item, above. Net income attributable to noncontrolling interest was less than $0.1 million in both the second quarters of 2022 and 2021. Foreign exchange unfavorably impacted the Company’s second quarter of 2022 results by approximately 11% driven by the impact from foreign currency translation on earnings as well as higher foreign exchange transaction losses in the current quarter as compared to the prior year second quarter. Consolidated Operations Review – Comparison of the First Six Months of 2022 with the First Six Months of 2021 Net sales were $966.6 million in the first six months of 2022 compared to $865.0 million in the first six months of 2021. The net sales increase of $101.5 million or 12% year-over-year reflects increases in selling price and product mix of approximately 19% and additional net sales from acquisitions of 2% partially offset by a decline in organic sales volumes of approximately 5% and the unfavorable impact from foreign currency translation of 4%. The increase in selling price and product mix is primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and continued into 2022. The decline in sales volumes was primarily attributable to the comparison to a very strong first half of 2021, and primarily the first quarter of 2021, where customers replenished their supply chains, the impact of lower volumes related to the tolling agreement for products previously divested related to the Combination, the ongoing war in Ukraine, COVID-19 disruptions in China and the Company’s ongoing value-based pricing initiatives. COGS were $670.9 million in the first six months of 2022 compared to $554.4 million in the first six months of 2021. The increase in COGS of $116.5 million or 21% was driven by the continued increases in the Company’s global raw material and supply chain and logistics costs compared to the prior year. Gross profit in the first six months of 2022 decreased $15.0 million or 5% from the first six months of 2021. The Company’s reported gross margin in the first six months of 2022 was 30.6% compared to 35.9% in the first six months of 2021. The Company’s current year gross margin reflects a significant increase in raw material and other input costs and the impacts of constraints on the global supply chain, partially offset by the Company’s ongoing value-based pricing initiatives. SG&A in the first six months of 2022 increased $14.6 million or 7% compared to the first six months of 2021 due primarily to the impact of sales increases on direct selling costs, inflation driven higher operating costs, costs associated with strategic planning and transformation initiatives (see the Non-GAAP Measures section of this Item, above), and additional SG&A from recent acquisitions partially offset by lower SG&A due to foreign currency translation compared to the prior year. In addition, SG&A was lower in the prior year period as a result of continued temporary cost saving measures the Company implemented in response to the onset of COVID-19. During the first six months of 2022, the Company incurred $5.9 million of Combination, integration and other acquisition-related operating expenses primarily for professional fees related to the Houghton integration and other acquisition-related activities. Comparatively, the Company incurred $12.5 million of expenses in the prior year’s first six months, primarily due to various professional fees related to legal, financial and other advisory and consultant expenses for integration activities including internal control readiness and remediation. See the Non-GAAP Measures section of this Item, above. The Company initiated a restructuring program during the third quarter of 2019 as part of its global plan to realize cost synergies associated with the Combination. The Company incurred Restructuring and related charges for reductions in headcount and site closures under this program, net of adjustments to initial estimates for severance of $0.8 million and $1.5 million during the first six months of 2022 and 2021, respectively. See the Non-GAAP Measures section of this Item, above. Operating income in the first six months of 2022 was $61.3 million compared to $83.7 million in the first six months of 2021. Excluding non-recurring and non-core expenses that are not indicative of the future operating performance of the Company described in the Non-GAAP Measures section of this Item, above, the Company’s current year non-GAAP operating income decreased to $78.0 million for the first six months of 2022 compared to $100.1 million in the prior year’s first six months primarily due to the lower gross profit and higher SG&A described above. Quaker Chemical Corporation Management’s Discussion and Analysis 37 The Company had other expense, net, of $10.6 million in the first six months of 2022 compared to other income, net of $18.7 million in the first six months of 2021. The first six months of 2022’s results include $6.8 million loss on extinguishment of debt related to the Company’s refinancing the Original Credit Facility and other expenses of $2.4 million related to the impact of certain adjustments to the Company’s Combination related indemnification receivables, while the prior year’s first six months of 2022 other income includes $13.3 million of income related to certain non-income tax credits recorded by the Company’s Brazilian subsidiary as well as a $5.4 million gain on the sale of certain held-for-sale real property assets. See the Non-GAAP Measures section of this Item, above. In addition, the Company incurred higher foreign exchange transaction losses in the first six months of 2022 compared to the prior year period. Interest expense, net, increased $0.8 million compared to the first six months of 2021, due to an increase in the average borrowings outstanding in the first six months of 2022 coupled with an increase in interest rates in the current year as compared to the prior year. The Company’s effective tax rates for the first six months of 2022 and 2021 were 10.9% and 28.4%, respectively. The Company’s eff ective tax rate for the six months ended June 30, 2022 was largely driven by changes in the valuation allowance for foreign tax credits due to recently issued legislative guidance, impacts due to settlements reached on certain tax audits, state tax benefits, a reduction in reserves for uncertain tax positions relating to management fees, a deferred tax benefit associated with an intercompany asset transfer, withholding taxes for increased forecasted dividends and the effects of lower pre-tax earnings and the mix of such earnings. Comparatively, the prior year six month effective tax rate was impacted by the sale of a subsidiary which included certain held-for-sale real property assets related to the Combination, certain U.S. tax law changes and the tax impact of certain non- income tax credits recorded by the Company’s Brazilian subsidiaries. Excluding the impact of all other non-core items in each period, described in the Non-GAAP Measures section of this Item, above, the Company estimates that its effective tax rates for the first six months of 2022 and 2021 would have been approximately 26% and 24%, respectively. In addition, the Company incurred higher tax expense during the six months ended June 30, 2022 primarily related to the Company recording earnings in one of its subsidiaries at a statutory tax rate of 25% while it awaits recertification of a concessionary 15% tax rate, which was available to the Company during all of 2021. Equity in net income of associated companies decreased $7.3 million in the first six months of 2022 compared to the first six months of 2021, primarily due to lower current year income from the Company’s interest in a captive insurance company and from the Company’s 50% interest in a joint venture in Korea. See the Non-GAAP Measures section of this Item, above. Net income attributable to noncontrolling interest was less than $0.1 million in both the first six months of 2022 and 2021. Foreign exchange unfavorably impacted the Company’s first six months of 2022 results by approximately 7% driven by the impact from foreign currency translation on earnings as well as higher foreign exchange transaction losses in the current year as compared to the prior year’s first six months. Reportable Segments Review - Comparison of the Second Quarter of 202 2 with the Second Quarter of 2021 The Company’s reportable segments reflect the structure of the Company’s internal organization, the method by which the Company’s resources are allocated and the manner by which the chief operating decision maker of the Company assesses its performance. The Company has four reportable segments: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty Businesses. The three geographic segments are composed of the net sales and operations in each respective region, excluding net sales and operations managed globally by the Global Specialty Businesses segment, which includes the Company’s container, metal finishing, mining, offshore, specialty coatings, specialty grease and Norman Hay businesses. Segment operating earnings for the Company’s reportable segments are comprised of net sales less COGS and SG&A directly related to the respective segment’s product sales. Operating expenses not directly attributable to the net sales of each respective segment, such as certain corporate and administrative costs, Combination, integration and other acquisition-related expenses, Restructuring and related charges, and COGS related to acquired inventory sold, which is adjusted to fair value as part of purchase accounting, are not included in segment operating earnings. Other items not specifically identified with the Company’s reportable segments include interest expense, net, and other (expense) income, net. Quaker Chemical Corporation Management’s Discussion and Analysis 38 Americas Americas represented approximately 35% of the Company’s consolidated net sales in the second quarter of 2022. The segment’s net sales were $172.7 million, an increase of $33.1 million or 24% compared to the second quarter of 2021. The increase in net sales was due to higher selling price and product mix of 28%, additional net sales from acquisitions of 1% and a favorable impact from foreign currency translation of 1%, partially offset by a 6% decline in organic sales volumes. The increase in selling price and product mix is primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and continued through the second quarter of 2022. The current quarter decline in organic sales volumes was primarily driven by the tolling agreement for previously divested products related to the Combination, the Company’s ongoing value- based pricing initiatives and lower volumes into the automotive industry due to the semiconductor supply constraints, partially offset by net new business wins. This segment’s operating earnings were $33.8 million, an increase of $0.1 million compared to the second quarter of 2021. The increase in segment operating earnings was primarily driven by higher net sales which were partially offset by on-going inflationary pressures on our business. EMEA EMEA represented approximately 25% of the Company’s consolidated net sales in the second quarter of 2022. The segment’s net sales were $123.1 million, a decrease of $0.4 million compared to the second quarter of 2021. This was driven by higher selling price and product mix of 21% and additional net sales from acquisitions of approximately 1%, partially offset by the unfavorable impact of foreign currency translation of 15% and a decrease in organic sales volumes of 7%. The increase in selling price and product mix was primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and continued through the second quarter of 2022. The decline in organic sales volumes was primarily driven by the current geopolitical and macroeconomic pressures including the direct and indirect impacts of the ongoing war in Ukraine and the impact of the economic and other sanctions by other nations on Russia in response to the war, as well as lower volumes associated with the Company’s ongoing value-based pricing initiatives, the tolling agreement for products previously divested related to the Combination and softer economic conditions in the region. The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the euro as this exchange rate averaged 1.07 in the second quarter of 2022 compared to 1.20 in the second quarter of 2021. This segment’s operating earnings were $13.3 million, a decrease of $10.1 million or 43% compared to the second quarter of 2021. The decrease in segment operating earnings was primarily a result of higher net sales which were more than offset by lower gross margins due to inflationary pressures on the Company’s costs exceeding its value-based pricing actions. Operating earnings were also negatively impacted by foreign currency translation. Asia/Pacific Asia/Pacific represented approximately 20% of the Company’s consolidated net sales in the second quarter of 2022. The segment’s net sales were $99.8 million, an increase of $8.3 million or 9% compared to the second quarter of 2021. The increase in net sales was driven by higher selling price and product mix of 17% partially offset by lower organic sales volumes of 4% and an unfavorable impact from foreign currency translation of 4%. The increase in selling price and product mix was primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and continued through the second quarter of 2022, partially offset by a net increase in volumes elsewhere in the region. The decline in organic sales volumes was primarily driven by lower sales volumes in China as a result of the government imposed COVID-19 quarantine and related production disruptions implemented at the end of March 2022 and continued throughout the second quarter of 2022. The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the Chinese renminbi as this exchange rate averaged 6.61 in the second quarter of 2022 compared to 6.46 in the second quarter of 2021. This segment’s operating earnings were $22.2 million, a decrease of $1.0 million or 4% compared to the second quarter of 2021. The decrease in segment operating earnings was primarily a result of higher net sales which was more than offset by lower gross margins due to inflationary pressures and higher costs as a result of the COVID-19 production disruptions in China. Global Specialty Businesses Global Specialty Businesses represented approximately 20% of the Company’s consolidated net sales in the second quarter of 2022. The segment’s net sales were $96.8 million, an increase of $16.2 million or 20% compared to the second quarter of 2021. The increase in net sales was driven by higher selling price and product mix of 11%, additional net sales from acquisitions of 3% and an increase in organic sales volumes of 10%, partially offset by the unfavorable impact from foreign currency translation of 4%. The increase in selling price and product mix was primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and continued through the second quarter of 2022. The increase in organic sales volumes was primarily attributable to a continued favorable demand environment for this segment’s products. The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the euro as described in the EMEA section above. This segment’s operating earnings were $27.8 million, an increase of $3.6 million or 15% compared to the second quarter of 2021. The increase in segment operating earnings reflects the higher net sales partially offset by lower gross margins in the current year and slightly higher operating expenses due to inflationary pressures. Quaker Chemical Corporation Management’s Discussion and Analysis 39 Reportable Segments Review - Comparison of the First Six months of 2022 with the First Six months of 2021 Americas Americas represented approximately 34% of the Company’s consolidated net sales in the first six months of 2022. The segment’s net sales were $326.9 million, an increase of $52.4 million or 19% compared to the first six months of 2021. The increase in net sales was due to higher selling price and product mix of 26%, additional net sales from acquisitions of 1% and the favorable impacts of foreign currency translation of 1%, partially offset by a decrease in organic sales volumes of 9%. The increase in selling price and product mix was primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and have continued into 2022. The current year decline in organic sales volumes was primarily driven by lower sales volumes into the automotive end market, the tolling agreement for previously divested products related to the Combination, the prior year period comparison which included a strong rebound from COVID-19 impacts and the Company’s ongoing value-based pricing initiatives, partially offset by net new business wins. This segment’s operating earnings were $63.0 million, a decrease of $2.9 million or 4% compared to the first six months of 2021. The decrease in segment operating earnings was primarily a result of higher net sales which was more than offset by lower gross margins driven by inflationary pressures. EMEA EMEA represented approximately 26% of the Company’s consolidated net sales in the first six months of 2022. The segment’s net sales were $248.7 million, an increase of $5.5 million or 2% compared to the first six months of 2021. The increase in net sales was due to higher selling price and product mix of 19% and additional net sales from acquisitions of 2%, partially offset by the unfavorable impact of foreign currency translation of 12% and a decrease in organic sales volumes of 7%. The increase in selling price and product mix was primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and have continued into 2022. The decline in organic sales volumes was primarily driven by the current geopolitical and macroeconomic pressures including the direct and indirect impacts of the ongoing war in Ukraine and the impact of the economic and other sanctions by other nations on Russia in respons e to the war, lower volumes associated with the Company’s ongoing value -based pricing initiatives, the tolling agreement for products previously divested related to the Combination, the prior year period comparison which included a strong rebound from COVID-19 impacts, and softer economic conditions in the region in the current period, partially offset by net new business wins. The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the euro as this exchange rate averaged 1.09 in the first six months of 2022 compared to 1.21 in first six months of 2021. This segment’s operating earnings were $30.0 million, a decrease of $18.6 million or 38% compared to the first six months of 2021. The decrease in segment operating earnings was primarily a result of higher net sales which was more than offset by lower gross margins driven by significant inflationary pressures and the negative impact of foreign currency translation year-over-year. Asia/Pacific Asia/Pacific represented approximately 21% of the Company’s consolidated net sales in the first six months of 2022. The segment’s net sales were $204.1 million, an increase of $15.8 million or 8% compared to the first six months of 2021. The increase in net sales was driven by higher selling price and product mix of 14% partially offset by lower organic sales volumes of 4% and the unfavorable impacts of foreign currency translation of 2%. The increase in selling price and product mix was primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and continued into 2022. The current year decline in organic sales volumes was primarily driven by lower sales volumes in China as a result of the government imposed COVID-19 quarantine and related production disruptions implemented at the end of March 2022 and which continued throughout the second quarter of 2022 and the prior year comparison which included a strong rebound from COVID-19 impacts as customers replenished their supply chains, partially offset by net new business wins. This segment’s operating earnings were $44.1 million, a decrease of $6.6 million or 13% compared to the first six months of 2021. The decrease in segment operating earnings was primarily a result of higher net sales which was more than offset by lower gross margins driven by significant inflationary pressures and the unfavorable impact of foreign currency translation. Quaker Chemical Corporation Management’s Discussion and Analysis 40 Global Specialty Businesses Global Specialty Businesses represented approximately 19% of the Company’s consolidated net sales in the first six months of 2022. The segment’s net sales were $186.9 million, an increase of $27.9 million or 18% compared to the first six months of 2021. The increase in net sales was driven by higher selling price and product mix of 11%, an increase in organic sales volumes of 6% and additional net sales from acquisitions of 4%, partially offset by the unfavorable impact from foreign currency translation of approximately 3%. The increase in selling price and product mix was primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs that began during 2021 and continued into 2022. The increase in organic sales volumes was primarily attributable to a continued favorable demand environment for this segment’s products. The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the euro described in the EMEA section above. This segment’s operating earnings were $52.9 million, an increase of $4.5 million or 9% compared to the first six months of 2021. The increase in segment operating earnings reflects higher net sales partially offset by lower gross margins driven by inflationary pressures and the negative impact of foreign currency translation year-over-year. Quaker Chemical Corporation Management’s Discussion and Analysis 41 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 Chemical Corporation 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, including statements regarding the potential effects of the COVID-19 pandemic and global supply chain constraints on the Company’s business, results of operations, and financial condition, our expectation that we will maintain sufficient liquidity and remediate any of our material weaknesses in internal control over financial reporting, and statements regarding the impact of increased raw material costs and pricing initiatives 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: • the potential benefits of the Combination and other acquisitions; • the impacts on our business as a result of the COVID-19 pandemic; • the timing and extent of the projected impacts on our business as a result of the Ukrainian and Russian conflict and actions taken by various governments and governmental organizat ions in response; • cost increases and the impacts of constraints and disruptions in the global supply chain; • the potential for a variety of macroeconomic events, including the possibility of global or regional recessions, inflation generally, cost increases in prices of raw materials such as oil and increasing interest rates, to impact the value of our assets or result in asset impairments; • our current and future results and plans including our sustainability goals; and • statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions. Such statements include information relating to current and future business activities, operational matters, capital spending, and financing sources. From time to time, forward-looking statements are also included in the Company’s other periodic reports on Forms 10-K, 10-Q and 8-K, press releases, and other materials released to, or statements made to, the public. Any or all of the forward-looking statements in this Report, in the Company’s Annual Report to Shareholders for 2021 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 conseque nce 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 the Company’s subsequent reports on Forms 10-K, 10-Q, 8-K and other related filings should be consulted. A major risk is that demand for the Company’s products and services is largely derived from the demand for our customers’ products, which subjects the Company to uncertainties related to downturns in a customer’s business and unanticipated customer production slowdowns and shutdowns, including as is currently being experienced by many automotive industry companies as a result of supply chain disruption. Other major risks and uncertainties include, but are not limited to, the primary and secondary impacts of the COVID-19 pandemic, including actions taken in response to the pandemic by various governments, which could exacerbate some or all of the other risks and uncertainties faced by the Company, as well as inflationary pressures, including the potential for significant increases in raw material costs, supply chain disruptions, customer financial instability, rising interest rates and the possibility of economic recession, worldwide economic and political disruptions including the impacts of the military conflict between Russia and Ukraine, the economic and other sanctions imposed by other nations on Russia, suspensions of activities in Russia by many multinational companies and the potential expansion of military activity, foreign currency fluctuations, significant changes in applicable tax rates and regulations, future terrorist attacks and other acts of violence. Furthermore, the Company is subject to the same business cycles as those experienced by our customers in the steel, automobile, aircraft, industrial equipment, and durable goods industries. The ultimate impact of COVID-19 on our business will depend on, among other things, the extent and duration of the pandemic, the severity of the disease and the number of people infected with the virus including new variants, the continued uncertainty regarding global availability, administration, acceptance and long- term efficacy of vaccines, or other treatments for COVID-19 or its variants, the longer-term effects on the economy of the pandemic, including the resulting market volatility, and by the measures taken by governmental authorities and other third parties restricting day- to-day life and business operations and the length of time that such measures remain in place, as well as laws and other governmental programs implemented to address the pandemic or assist impacted businesses, such as fiscal stimulus and other legislation designed to deliver monetary aid and other relief. Other factors could also adversely affect us, including those related to acquisitions and the Quaker Chemical Corporation Management’s Discussion and Analysis 42 integration of acquired businesses. Our forward-looking statements are subject to risks, uncertainties and assumptions about the Company and its operations that are subject to change based on various important factors, some of which are beyond our control. These risks, uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results. Therefore, we caution you not to place undue reliance on our forward-looking statements. For more information regarding these risks and uncertainties as well as certain additional risks that we face, refer to the Risk Factors section, which appears in Item 1A in our 2021 Form 10-K and in our quarterly and other reports filed from time to time with the SEC. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. Quaker Houghton on the Internet Financial results, news and other information about Quaker Houghton can be accessed from the Company’s website at https://www.quakerhoughton.com. This site includes important information on the Company’s locations, products and services, financial reports, news releases and career opportunities. The Company’s periodic and current reports on Forms 10-K, 10-Q, 8-K, and other filings, including exhibits and supplemental schedules filed therewith, and amendments to those reports, filed with the SEC are available on the Company’s website, free of charge, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Information contained on, or that may be accessed through, the Company’s website is not incorporated by reference in this Report and, accordingly, you should not consider that information part of this Report. 43