What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-04 · 239 added, 148 removed, 186 unchanged (68% of the section changed)

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Quaker Houghton is headquartered in Conshohocken, Pennsylvania, located near Philadelphia in the U.S.

Despite continued economic and geopolitical headwinds, the Company delivered a strong first quarter of 2023 performance.

Net sales in the first quarter of 2023 were a record $500.1 million, an increase of 5% compared to $474.2 million in the first quarter of 2022.

This was primarily driven by an increase in selling price and product mix of approximately 19%, partially offset by a decline in organic sales volumes of 11% and an unfavorable impact from foreign currency translation of 3%.

Despite a continued challenging economic environment, the Company delivered solid results in the second quarter of 2023.

Net sales in the second quarter of 2023 were $495.4 million, an increase of 1% compared to $492.4 million in the second quarter of 2022.

This was primarily driven by an increase in selling price and product mix of approximately 11%, partially offset by a decline in sales volumes of 10%.

The increase in selling price and product mix was primarily the result of value-based pricing initiatives implemented throughout 2022 to offset ongoing inflationary pressures.

The decline in organic sales volumes was primarily attributable to softer end market conditions, notably in EMEA and Asia/Pacific, the impact of the ongoing war in Ukraine, the wind-down of the tolling agreement for products previously divested related to the Combination and the Company’s ongoing value-based pricing initiatives, partially offset by new business wins .

The Company generated net income in the first quarter of 2023 of $29.5 million, or $1.64 per diluted share, compared to net income of $19.8 million, or $1.11 per diluted share in the first quarter of 2022.

Excluding non-recurring and non-core items in each period, the Company’s first quarter of 2023 non-GAAP earnings per diluted share were $1.89 compared to $1.42 in the prior year quarter and the Company’s current quarter adjusted EBITDA was $78.8 million compared to $60.4 million in the first quarter of 2022.

These results were primarily driven by the higher net sales in the current quarter, as described above, coupled with a recovery in gross margins compared to the prior year quarter, partially offset by higher selling, general and administrative expenses (“SG&A”) as a result of significant year-over-year inflationary pressures and higher labor-related costs.

The decline in sales volumes was primarily attributable to softer end market conditions across all regions, the Company’s value-based pricing initiatives and customer order patterns, as well as the impact of the ongoing war in Ukraine in the EMEA segment, and the wind-down of the tolling agreement for products previously divested related to the Combination, partially offset by new business wins .

The Company generated net income in the second quarter of 2023 of $29.3 million, or $1.63 per diluted share, compared to net income of $14.3 million, or $0.80 per diluted share in the second quarter of 2022.

Excluding non-recurring and non-core items in each period, the Company’s second quarter of 2023 non-GAAP earnings per diluted share were $1.93 compared to $1.32 in the prior year quarter and the Company’s current quarter adjusted EBITDA was $80.2 million compared to $58.5 million in the second quarter of 2022.

These strong current quarter results were primarily driven by a recovery in gross margins compared to the prior year quarter, partially offset by higher selling, general and administrative expenses (“SG&A”) as a result of year-over-year inflationary pressures and higher labor-related costs.

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.

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and (iii) Asia/Pacific.

The Company’s first quarter of 2023 operating performance in each of its three reportable segments reflect similar drivers to that of its consolidated performance.

Operating earnings for all segments increased compared to the prior year quarter, driven by higher net sales in the Americas and EMEA and an improvement in margins in all three segments.

The Company’s second quarter of 2023 operating performance in each of its three reportable segments reflect similar drivers to that of its consolidated performance.

Operating earnings for all segments increased compared to the prior year quarter, driven by an improvement in margins in all three segments.

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.

Net cash flows provided by operating activities were $37.8 million in the first three months of 2023 compared to net cash flows used in operating activities of $6.3 million in the first three months of 2022.

Th e net operating cash inflow year-over-year reflects higher operating performance in 2023 compared to 2022 as well as lower working capital investments year-over-year.

Net cash flows provided by operating activities were $116.1 million in the first six months of 2023 compared to net cash flows used in operating activities of $8.4 million in the first six months of 2022.

Th e net operating cash inflow year-over-year reflects higher operating performance in 2023 compared to 2022 as well as a favorable shift from working capital investment in the prior year to positive cash flow from working capital in the first six months of 2023.

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 a strong quarter including a record level of net sales, driven by strong price realization and a recovery in gross margin in the current period.

These factors contributed to the Company’s current quarter earnings growth despite ongoing inflationary pressures, macroeconomic and geopolitical challenges and other disruptions that impacted the Company’s customers and end markets.

Overall, the Company delivered a solid results in the second quarter of 2023 including an increase in net sales and an improvement in gross profit and gross margins.

These factors contributed to the Company’s current quarter earnings growth despite ongoing inflationary pressures, macroeconomic and geopolitical challenges and other disruptions that have impacted the Company’s customers and end markets.

Looking at the remainder of 2023, the Company remains focused on executing on items within its control as it manages through a continued uneven and uncertain macroeconomic and end market environment.

The Company is encouraged by its continued execution and the positive momentum of the first quarter of 2023 and continues to expect to deliver higher earnings in 2023 as compared to 2022.

The Company is encouraged by its continued execution and the positive momentum of the first half of 2023 and continues to expect to deliver higher earnings and cash flow in 2023 as compared to 2022.

Critical Accounting Policies and Estimates

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There have been no material changes to the critical accounting policies and estimates previously disclosed in its 2022 Form 10-K remain materially consistent.

Quaker Chemical Corporation

Management’s Discussion and Analysis

Recently Issued Accounting Standards

See Note 3 of Notes to Condensed Consolidated Financial Statements, in Part I, Item 1, of this Report for a discussion regarding recently issued accounting standards.

Quaker Chemical Corporation

Management’s Discussion and Analysis

Liquidity and Capital Resources

As of March 31, 2023, we had cash and cash equivalents of $189.9 million.

As of June 30, 2023, we had cash and cash equivalents of $189.4 million.

Total cash and cash equivalents was $181.0 million as of December 31, 2022.

The $8.9 million increase in cash and cash equivalents was the net result of $37.8 million of cash provided by operating activities and a positive impact due to the effect of foreign currency translation of $2.2 million partially offset by $24.9 million of cash used in financing activities and $6.2 million of cash used in investing activities.

The increase in net operating cash flow year-over-year reflects higher year-over-year operating performance as well as lower levels of working capital investment in the current year, reflecting a more stable period as compared to the prior year and demonstrating the Company’s ongoing focus on cash conversion, including managing inventory levels.

Net cash flows used in investing activities were $6.2 million in the first three months of 2023 compared to $18.2 million in the first three months of 2022.

The lower level of cash used in investing activities year-over-year is the result of slightly lower capital expenditures in the current year and the absence of payments related to acquisitions.

The $8.4 million increase in cash and cash equivalents was the net result of $116.1 million of cash provided by operating activities partially offset by $89.0 million of cash used in financing activities, $17.0 million of cash used in investing activities and a negative impact due to the effect of foreign currency translation of approximately $1.6 million.

The increase in net operating cash flow year-over-year reflects higher year-over-year operating performance as well as a cash inflow from working capital, notably accounts receivable and inventory, in the current year, demonstrating the Company’s ongoing focus on cash conversion.

Comparatively, during the first six months of 2022, operating cash flow was negatively impacted by a significant working capital investment due to significant inflation impacts on inventory and related pricing impacts on accounts receivable.

Net cash flows used in investing activities were $17.0 million in the first six months of 2023 compared to $24.4 million in the first six months of 2022.

The lower level of cash used in investing activities year-over-year is the result of slightly higher capital expenditures in the current year more than offset by the absence of current year payments related to acquisitions which the Company had in the prior year.

See Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report.

Net cash flows used in financing activities were $24.9 million in the first three months of 2023 compared to net cash flows provided by financing activities of $20.6 million in the first three months of 2022.

The increase in net cash outflows was primarily related to net repayments of borrowings in the first three months of 2023, primarily under the Company’s Credit Facility, described further below, as compared to net borrowings in the first three months of 2022.

In addition, the Company paid $7.8 million of cash dividends during the first three months of 2023, a $0.4 million, or 5% increase, in cash dividends compared to the prior year quarter.

Net cash flows used in financing activities were $89.0 million in the first six months of 2023 compared to net cash flows provided by financing activities of $78.6 million in the first six months of 2022.

The increase in net cash outflows was primarily related to net repayments of borrowings in the first six months of 2023, primarily under the Company’s Credit Facility, described further below, as compared to net borrowings in the first six months of 2022, which included the impact of new borrowings, net of repayments of old borrowings and debt issuance costs, related to the June 2022 credit facility amendment, described further below.

In addition, the Company paid $15.6 million of cash dividends during the first six months of 2023, a $0.8 million, or 5% increase, in cash dividends compared to the prior year quarter.

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.

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The Company has the right to increase the amount of the Credit Facility by an aggregate amount not to exceed the greater of $300.0 million or 100% of Consolidated EBITDA, subject to certain conditions including the agreement to provide financing by any lender providing such increase.

As of March 31, 2023 , the Company had Credit Facility borrowings outstanding of $931.5 million.

As of June 30, 2023 , the Company had Credit Facility borrowings outstanding of $873.9 million .

As of December 31, 2022 , the Company had Credit Facility borrowings outstanding of $943.5 million.

The Company’s other debt obligations are primarily industrial development bonds, bank lines of credit and municipality-related loans, which totaled $11.3 million as of both March 31, 2023 and December 31, 2022 .

Total unused capacity under these arrangements as of March 31, 2023 was approximately $35 million .

The Company’s total net debt as of March 31, 2023, which consists of total borrowings of $942.8 million less cash and cash equivalents of $189.9, was $752.9 million.

The Company’s other debt obligations are primarily industrial development bonds, bank lines of credit and municipality-related loans, which totaled $11.2 million as of June 30, 2023 and $11.3 million as of December 31, 2022 .

Total unused capacity under these arrangements as of June 30, 2023 was approximately $34 million .

The Company’s total net debt as of June 30, 2023, which consists of total borrowings of $885.1 million less cash and cash equivalents of $189.4 million, was $695.7 million .

The Credit Facility contains affirmative and negative covenants, financial covenants and events of default.

Financial covenants contained in the Credit Facility include a consolidated interest coverage ratio test and a consolidated net leverage ratio test.

As of March 31, 2023, the Company was in compliance with all of the Credit Facility covenants.

As of June 30, 2023, the Company was in compliance with all of the Credit Facility covenants.

Refer to the description of the Company’s primary Credit Facility in Note 20 of Notes to Consolidated Financial Statements in its 2022 Form 10-K and in Note 14 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for more information about the covenants and events of default.

The weighted average variable interest rate incurred on the outstanding borrowings under the Credit Facility during the three months ended March 31, 2023 was approximately 5.8%.

As of March 31, 2023, the interest rate on the outstanding borrowings under the Credit Facility was approximately 5.9%.

The weighted average variable interest rate incurred on the outstanding borrowings under the Credit Facility during the three and six months ended June 30, 2023 was approximately 6.2% and 6.0%, respectively.

As of June 30, 2023, the interest rate on the outstanding borrowings under the Credit Facility was approximately 6.3%.

As part of the Credit Facility, in addition to paying interest on the outstanding principal, the Company is also required to pay an annual commitment fee ranging from 0.150% to 0.275% related to unutilized commitments under the Revolver, depending on the Company’s consolidated net leverage ratio.

The Company had unused capacity under the Revolver of approximately $311 million, which is net of bank letters of credit of approximately $3 million, as of March 31, 2023.

The Company had unused capacity under the Revolver of approximately $364 million, which is net of bank letters of credit of approximately $3 million, as of June 30, 2023.

Quaker Chemical Corporation

Management’s Discussion and Analysis

In order to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility, in the first quarter of 2023, the Company entered into $300.0 million notional amounts of three-year interest rate swaps to convert a portion of the Company’s variable rate borrowings into an average fixed rate obligation of 3.64% plus an applicable margin as provided in the Credit Facility based on the Company’s consolidated net leverage ratio.

As of March 31, 2023, the aggregate interest rate on the swaps, including the fixed base rate plus the applicable margin, was 5.2%.

In order to manage the Company’s exposure to variable interest rate risk associated with the Credit Facility, such as SOFR, in the first quarter of 2023, the Company entered into $300.0 million notional amounts of three-year interest rate swaps to convert a portion of the Company’s variable rate borrowings into an average fixed rate obligation of 3.64% plus an applicable margin as provided in the Credit Facility based on the Company’s consolidated net leverage ratio.

As of June 30, 2023, the aggregate interest rate on the swaps, including the fixed base rate plus the applicable margin, was 5.2%.

See Note 17 of Notes to Condensed Consolidated Financial Statements.

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These capitalized costs will collectively be amortized into Interest expense over the five-year term of the Credit Facility.

As of March 31, 2022, the Company had $1.9 million of debt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Balance Sheet and $4.1 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet.

As of June 30, 2023, the Company had $1.8 million of debt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Balance Sheet and $3.8 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet.

Comparatively, as of December 31, 2022, the Company had $2.0 million of debt issuance costs recorded as a reduction of Long-term debt on the Condensed Consolidated Balance Sheet and $4.3 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet.

The Company uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on certain assets and/or liabilities denominated in certain foreign currencies.

During the three months ended March 31, 2023, the Company entered into and settled forward contracts with an aggregate notional amount totaling $16.0 million, resulting in cash proceeds of $0.3 million .

During the first six months ended 2023, the Company entered into and settled forward contracts resulting in cash proceeds of $2.1 million .

See Note 17 of Notes to Condensed Consolidated Financial Statements.

In the first three months of 2022 , the Company incurred $6.0 million of total Combination, integration and other acquisition-related expenses, which includes $2.0 million of other expenses related to indemnification assets, described in the Non-GAAP Measures section of this Item below.

The Company had net cash outflows related to the Combination, integration and other acquisition-related expenses during the first three months of 2022 of $4.2 million.

T he Company had no Combination, integration and other acquisition-related expenses in the first three months of 2023 .

During the first three months of 2023 , the Company incurred $2.1 million of strategic planning expenses for the planning phase as compared to $3.1 million during the first three months of 2022 .

In the first six months of 2022 , the Company incurred $5.9 million of total Combination, integration and other acquisition-related expenses, described in the Non-GAAP Measures section of this Item below.

The Company had net cash outflows related to the Combination, integration and other acquisition-related expenses during the first six months of 2022 of $3.9 million.

T he Company had no Combination, integration and other acquisition-related expenses in the first six months of 2023, except for $0.5 million in other income related to changes for an indemnification asset related to the Combination .

During the first six months of 2023 , the Company incurred $2.7 million of strategic planning expenses as compared to $3.1 million during the first six months of June 30, 2022 .

The Company expects to incur 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 function s in 2023 and thereafter.

The Company’s management approved, and the Company initiated, a global restructuring plan (the “QH Program”) in 2019 as part of its planned cost synergies associated with the Combination.

As of December 31, 2022, the Company has substantially completed all of the initiatives under the QH Program with only an immaterial amount of remaining severance still to be paid, which is expected to continue into 2023.

In the fourth quarter of 2022, the Company’s management initiated a global cost and optimization program to improve its cost structure and drive a more profitable and productive organization.

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The Company expects total cash costs of this program to be approximately 1 to 1.5 times savings.

The Company recognized Restructuring and related charges of $4.0 million and $0.8 million in the first three months of 2023 and 2022, respectively, as a result of these programs.

The Company made cash payments related to the settlement of restructuring liabilities under the restructuring programs during the first three months of 2023 of approximately $2.7 million compared to $0.4 million in the first three months of 2022.

The Company has remaining restructuring accruals as of March 31, 2023, for these programs of $6.8 million, which the Company expects to settle over the next twelve months.

The Company recognized Restructuring and related charges of $5.0 million and $0.8 million for the six months ended June 30, 2023, and 2022, respectively, as a result of these programs.

The Company made cash payments related to the settlement of restructuring liabilities under the restructuring programs during the first six months of 2023 of approximately $5.4 million compared to $0.4 million in the first six months of 2022.

The Company has remaining restructuring accruals, as of June 30, 2023, for these programs of $5.2 million, which the Company expects to settle over the next twelve months.

See Note 7 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report.

As of March 31, 2023, the Company’s gross liability for uncertain tax positions, including interest and penalties, was $20.2 million.

As of June 30, 2023, the Company’s gross liability for uncertain tax positions, including interest and penalties, was $20.3 million.

The Company cannot determine a reliable estimate of the timing of cash flows by period related to its uncertain tax position liability.

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Management’s Discussion and Analysis

The Company previously disclosed in its 2022 Form 10-K that two of the Company’s locations suffered property damages as a result of flooding and electrical fire, respectively.

The Company previously disclosed in its 2022 Form 10-K that two of the Company’s locations suffered property damage as a result of flooding and electrical fire, respectively.

The Company maintains property and flood insurance for all of its locations globally.

During the three months ended March 31, 2023, there have been no significant changes to the facts or circumstances of this previously disclosed matter, other than the ongoing work with the Company’s insurance adjuster and insurance carrier regarding the insurance claims submitted.

Through March 31, 2023, the Company has received cumulative payments from its insurers of $5.7 million associated with these events.

During the three months ended March 31, 2023, the Company recognized a gain on insurance recoveries of $0.8 million.

During the three and six months ended June 30, 2023, there have been no significant changes to the facts or circumstances of this previously disclosed matter, other than ongoing work with the Company’s insurance adjuster and insurance carrier regarding the insurance claims submitted.

Through June 30, 2023, the Company has received cumulative payments from its insurers of $5.9 million associated with these events.

During the three and six months ended June 30, 2023, the Company recognized a gain on insurance recoveries of $0.2 million and $1.0 million, respectively.

See Notes 10 and 18 of Notes to the 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, 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 that its existing cash, anticipated cash flows from operations and available 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, capital expenditures, other growth opportunities (including potential acquisitions), pension plan contributions, 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 Credit Facility, tax obligations and other long-term liabilities.

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Non-GAAP Operating Income and Margin Reconciliations Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Operating income $ 56,795 $ 31,903 $ 106,724 $ 61,306

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Non-GAAP operating income $ 58,761 $ 38,805 $ 115,054 $ 77,965

Non-GAAP operating margin (%) (j) 11.3 % 8.3 %

Non-GAAP operating margin (%) (k) 11.9 % 7.9 % 11.6 % 8.1 %

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Non-GAAP Net Income Reconciliations Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net income attributable to Quaker Chemical Corporation $ 29,346 $ 14,343 $ 58,880 $ 34,159

Depreciation and amortization (h) 20,510 20,727

Depreciation and amortization (j) 20,834 20,856 41,344 41,583

Interest expense, net 12,721 6,494 25,963 11,839

Taxes on income before equity in net income of associated companies (i) 9,533 2,866

Taxes on income before equity in net income of associated companies (k) 13,830 1,374 23,363 4,240

EBITDA 76,731 43,067 149,550 91,821

Equity (income) loss in a captive insurance company (f) (422) 244

Combination, integration and other acquisition-related expenses (a) — 6,032

Equity loss in a captive insurance company (f) 430 1,781 8 2,025

Combination, integration and other acquisition-related (credits) expenses (a) (475) 2,248 (475) 8,281

Restructuring and related charges, net (b) 1,043 (1) 5,015 819

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Russia-Ukraine conflict related expenses (d) — 929 — 2,095

Currency conversion impacts of hyper-inflationary economies (g) 1,184 36 1,640 224

Loss on extinguishment of debt (i) — 6,763 — 6,763

Other charges (e) 750 556 629 707

Adjusted EBITDA $ 80,242 $ 58,491 $ 159,033 $ 118,935

Adjusted EBITDA margin (%) (j) 15.8 % 12.7 %

Adjusted EBITDA margin (%) (l) 16.2 % 11.9 % 16.0 % 12.3 %

Adjusted EBITDA $ 80,242 $ 58,491 $ 159,033 $ 118,935

Depreciation and amortization (h) 20,510 20,727

Depreciation and amortization (j) 20,834 20,856 41,344 41,583

Interest expense, net 12,721 6,494 25,963 11,839

Taxes on income before equity in net income of associated companies - adjusted (a)(i) 11,047 8,902

Taxes on income before equity in net income of associated companies - adjusted (a)(k) 11,913 7,466 22,960 16,368

Non-GAAP net income $ 34,774 $ 23,675 $ 68,766 $ 49,145

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Non-GAAP Earnings per Diluted Share Reconciliations Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders $ 1.63 $ 0.80 $ 3.27 $ 1.91

Equity (income) loss in a captive insurance company per diluted share (f) (0.02) 0.01

Combination, integration and other acquisition-related expenses per diluted share (a) — 0.25

Equity loss in a captive insurance company per diluted share (f) 0.02 0.10 0.00 0.11

Combination, integration and other acquisition-related (credits) expenses per diluted share (a) (0.03) 0.13 (0.03) 0.38

Restructuring and related charges, net per diluted share (b) 0.04 (0.00) 0.21 0.03

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Russia-Ukraine conflict related expenses per diluted share (d) — 0.04 — 0.10

Currency conversion impacts of hyper-inflationary economies per diluted share (g) 0.06 0.00 0.09 0.01

Loss on extinguishment of debt per diluted share (i) — 0.29 — 0.29

Other charges per diluted share (e) 0.04 0.03 0.02 0.03

Impact of certain discrete tax items per diluted share (g) (0.01) (0.19)

Non-GAAP earnings per diluted share (k) $ 1.89 $ 1.42

(a) Combination, integration and other acquisition-related expenses include certain legal, financial, and other advisory and consultant costs incurred in connection with the Combination integration activities.

These amounts also include expense associated with the Company's other recent acquisitions, including certain legal, financial, and other advisory and consultant costs incurred in connection with due diligence.

Impact of certain discrete tax items per diluted share (h) 0.14 (0.20) 0.13 (0.39)

Non-GAAP earnings per diluted share (m) $ 1.93 $ 1.32 $ 3.82 $ 2.74

(a) Combination, integration and other acquisition-related (credits) expenses in 2022 included certain legal, financial, and other advisory and consultant costs incurred in connection with the Combination integration activities and similar expenses associated with the Company's other recent acquisitions.

These costs are not indicative of the future operating performance of the Company.

Less than $0.1 million for the three months ended March 31, 2022 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 months ended March 31, 2022, the Company recorded $2.0 million of other expense related to an indemnification asset, which is included in the caption “Combination, integration 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.

There were no Combination, integration and other acquisition-related expenses incurred in the first quarter of 2023.

Approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2022 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 both the three and six months ended June 30, 2023, the Company recorded $0.5 million of other income due to changes in an indemnification asset related to the Combination.

Similarly, during the three and six months ended June 30, 2022, the Company recorded $0.4 million and $2.4 million, respectively, of other expense due to changes in a Combination-related indemnification asset.

The amounts recorded that are related to the changes in indemnification assets are included in the caption “Combination, integration and other acquisition-related (credits) 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.

See Notes 2, 10, and 11 of Notes to Condensed Consolidated Financial Statements, which appear in Item 1 of this Report.

(b) Restructuring and related charges represent the costs incurred by the Company associated with the Company’s restructuring programs.

(b) Restructuring and related charges, net represent the costs incurred by the Company associated with the Company’s restructuring programs.

These costs are not indicative of the future operating performance of the Company.

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These planning phase costs are one-time in nature and not indicative of the future operating performance of the Company.

(d) Russia-Ukraine conflict related expenses represent the costs associated with a specific reserve or changes to existing reserves for trade accounts receivable within the Company’s EMEA reportable segment related to certain customers who filed for bankruptcy protection as well as costs related to specific reserves recorded for certain customer accounts receivables which in each case were directly impacted by the ongoing conflict between Russia and Ukraine.

These expenses are not indicative of the future operating performance of the Company .

(e) Other charges include executive transition costs, facility remediation insurance recoveries, net, 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 whose local economies are designated as hyper-inflationary under U.S.

(d) Russia-Ukraine conflict related expenses represent the direct costs associated with the Company’s exit of operations in Russia during 2022, including costs 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 for certain customers who filed for bankruptcy protection and were directly impacted by the conflict between Russia and Ukraine.

These expenses are not indicative of the future operating performance of the Company.

(e) Other charges include executive transition costs, facility remediation insurance recoveries, net, charges incurred by an inactive subsidiary of the Company as a result of the termination of restrictions on insurance settlement reserves and non-service components of the Company’s pension and postretirement net periodic benefit income and expense.

See Notes 9 and 18 of Notes to Condensed Consolidated Financial Statements, which appear in Item 1 of this Report.

(f) Equity income in a captive insurance company represents the after-tax income attributable to the Company’s interest in Primex, Ltd.

(f) Equity loss in a captive insurance company represents the after-tax income attributable to the Company’s interest in Primex, Ltd.

(“Primex”), a captive insurance company.

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Management’s Discussion and Analysis

(g) 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 ended March 31, 2023.

Additionally, the Company has discrete items related to the remeasurement of deferred taxes on the transfer of intellectual property and the release of the reserves for uncertain tax positions settled during the period and certain taxes, penalties, and interest due as a result of the settlements.

(g) Currency conversion impacts of hyper-inflationary economies represents the foreign currency remeasurement impacts associated with the Company’s affiliates whose local economies are designated as hyper-inflationary under U.S.

During both the three and six months ended June 30, 2023 and 2022, the Company incurred non-deductible, pre-tax charges related to the Company’s Argentina and Türkiye affiliates.

The charges incurred related to the immediate recognition of foreign currency remeasurement in the Consolidated Statements of Income associated with these entities are not indicative of the future operating performance of the Company.

See Note 1 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.

(h) Depreciation and amortization for both the three months ended March 31, 2023 and 2022 include approximately $0.3 million of amortization expense recorded within equity in net income of associated companies in the Company’s Condensed Consolidated Statements of Operations, 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.

(i) Taxes on income before equity in net 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, integration and other acquisition-related expenses described in (a) resulted in incremental taxes of approximately $1.4 million for the three months ended March 31, 2022.

Restructuring and related charges, net described in (b) above resulted in incremental taxes of $1.0 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively.

Strategic planning expenses described in (c) above resulted in incremental taxes of $0.5 million and $0.7 million for the three months ended March 31, 2023 and 2022, respectively.

Russia-Ukraine conflict related expenses described in (d) resulted in incremental taxes of $0.3 million for the three months ended March 31, 2022.

Other charges described in (e) resulted in a net tax benefit of less than $0.1 million and incremental taxes of less than $0.1 million for the three months ended March 31, 2023 and 2022, respectively.

The impact of certain discrete items described in (g) resulted in incremental tax expense of less than $0.1 million and $3.4 million for the three months ended March 31, 2023 and 2022, respectively.

(j) 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.

(k) 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.

(h) The impacts of certain discrete tax items include changes in valuation allowances recorded on certain Brazilian branch foreign tax credits and the related deferred taxes.

These discrete items relate to tax law changes occurring in 2022 and 2023, both in the United States and Brazil which impacted the creditability of Brazilian foreign taxes in the U.S.

Additionally, the Company has discrete items related to the remeasurement of deferred taxes on the transfer of intellectual property and the release of the reserves for uncertain tax positions.

See Note 11 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.

(i) In connection with executing the Amended Credit Facility, the Company recorded a loss on extinguishment of debt of approximately $6.8 million during the period ended June 30, 2022 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.

(j) Depreciation and amortization for both the three and six months ended June 30, 2023, and the same period of 2022 includes approximately $0.2 million and $0.5 million, respectively, of amortization expense recorded within equity in net income of associated companies in the Company’s Condensed Consolidated Statements of Operations, 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 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, integration and other acquisition-related (credits) expenses described in (a) resulted in a tax benefit of less than $0.1 million and incremental taxes of $1.4 million for the three and six months ended June 30, 2022.

Restructuring and related charges, net described in (b) above resulted in incremental taxes of $0.2 million and $1.2 million for the three and six months ended June 30, 2023, respectively, compared to an incremental benefit of less than $0.1 million and incremental taxes of $0.2 million for the three and six months ended June 30, 2022, respectively.

Strategic planning expenses described in (c) above resulted in incremental taxes of $0.1 million and $0.6 million for the three and six months ended June 30, 2023, respectively, compared to incremental taxes of $0.7 million and $1.4 million for the three and six months ended June 30, 2022, 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 $0.2 million for both the three and six months ended June 30, 2023, compared to incremental taxes of $0.2 million for both the three and six months ended June 30, 2022.

The impact of certain discrete items described in (g) resulted in a tax benefit of $2.5 million and $2.4 million for the three and six months ended June 30, 2023, respectively, compared to incremental taxes of $3.5 million and $6.9 million for the three and six months ended June 30, 2022, respectively.

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.

(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 March 31, 2023.

The Company’s off-balance sheet items outstanding as of March 31, 2023 includes approximately $5 million of total bank letters of credit and guarantees.

The Company had no material off-balance sheet commitments or obligations as of June 30, 2023.

The Company’s off-balance sheet items outstanding as of June 30, 2023 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.

Consolidated Operations Review – Comparison of the First Quarter of 2023 with the First Quarter of 2022

Net sales were $500.1 million in the first quarter of 2023 compared to $474.2 million in the first quarter of 2022.

The net sales increase of $25.9 million or 5% quarter-over-quarter reflects an increase in selling price and product mix of 19%, partially offset by a decline in organic sales volumes of approximately 11% and the unfavorable impact from foreign currency translation of approximately 3%.

The increase in selling price and product mix was primarily driven by year-over-year impact of our value-based pricing initiatives implemented to offset the significant increases in raw material and other input costs.

The decline in organic sales volumes was primarily attributable to softer end market conditions, notably in EMEA and Asia/Pacific, the impacts of the ongoing war in Ukraine, the wind-down of the tolling agreement for products previously divested related to the Combination, and the Company’s ongoing value-based pricing initiatives .

COGS were $326.7 million in the first quarter of 2023 compared to $328.1 million in the first quarter of 2022, a decrease of $1.4 million.

The relatively consistent level of COGS in both periods reflects lower spend on the decline in current year volumes, which more than offset higher costs due to inflationary pressures in the Company’s global raw material, manufacturing and supply chain and logistics costs compared to the prior year.

Gross profit was $173.5 million in the first quarter of 2023 compared to $146.1 million in the first quarter of 2022, an increase of $27.4 million or 19%.

The Company’s reported gross margin in the first quarter of 2023 was 34.7% compared to 30.8% in the first quarter of 2022 primarily driven by the year-over-year impact of our value-based pricing initiatives implemented to offset the significant increases in raw material and other input costs.

Quaker Chemical Corporation

Management’s Discussion and Analysis

SG&A was $119.5 million in the first quarter of 2023 compared to $111.8 million in the first quarter of 2022, an increase $7.8 million or 7%, driven by higher labor-related costs including year-over-year inflationary increases and higher levels of incentive compensation on improved Company performance, partially offset by lower SG&A due to foreign currency translation compared to the prior year.

The Company incurred $4.1 million of Combination, integration and other acquisition-related operating expenses in the first quarter of 2022, primarily due to various professional fees related to legal, financial and other advisory and consultant expenses for integration activities.

There were no similar expenses incurred in the first quarter of 2023.

Consolidated Operations Review – Comparison of the Second Quarter of 2023 with the Second Quarter of 2022

Net sales were $495.4 million in the second quarter of 2023 compared to $492.4 million in the second quarter of 2022.

The net sales increase of $3.0 million or 1% quarter-over-quarter reflects an increase in selling price and product mix of 11% partially offset by a decline in sales volumes of approximately 10%.

The decline in sales volumes was primarily attributable to softer end market conditions, the Company’s value-based pricing initiatives and customer order patterns, as well as the impacts of the ongoing war in Ukraine in the EMEA segment and the wind-down of the tolling agreement for products previously divested related to the Combination, partially offset by new business wins .

COGS were $317.8 million in the second quarter of 2023 compared to $342.8 million in the second quarter of 2022, a decrease of $25.1 million.

The decrease in COGS reflects lower spend on the decline in current year sales volumes, which more than offset higher costs due to inflationary pressures in the Company’s global raw material, manufacturing and supply chain and logistics costs compared to the prior year.

Gross profit was $177.7 million in the second quarter of 2023 compared to $149.6 million in the second quarter of 2022, an increase of $28.1 million or 19%.

The Company’s reported gross margin in the second quarter of 2023 was 35.9% compared to 30.4% in the second quarter of 2022 primarily driven by the year-over-year impact of our value-based pricing initiatives implemented throughout 2022 which offset significant increases in raw material and other input costs.

SG&A was $119.9 million in the second quarter of 2023 compared to $115.8 million in the second quarter of 2022, an increase of $4.0 million or 3%, driven by higher labor-related costs including year-over-year inflationary increases and higher levels of incentive compensation due to improved Company performance.

The Company incurred $1.8 million of Combination, integration and other acquisition-related operating expenses in the second quarter of 2022, primarily due to various professional fees related to legal, financial and other advisory and consultant expenses for Combination integration activities.

There were no similar expenses incurred in the second quarter of 2023.

See the Non-GAAP Measures section of this Item, above.

The Company incurred Restructuring and related charges of $4.0 million and $0.8 million during the first quarters of 2023 and 2022, respectively, related to reductions in headcount and site closures under the Company’s previous and current restructuring programs.

The Company incurred Restructuring and related charges of $1.0 million and a credit of less than $0.1 million during the second quarters of 2023 and 2022, respectively, related to reductions in headcount and site closures under the Company’s restructuring programs.

See the Non-GAAP Measures section of this Item, above.

Operating income in the first quarter of 2023 was $49.9 million compared to $29.4 million in the first quarter of 2022.

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 non-GAAP operating income increased to $56.3 million in the first quarter of 2023 as compared to $39.2 million in the first quarter of 2022 primarily due to higher gross profit partially offset by higher SG&A, described above.

The Company had Other expense, net of $2.2 million in both the first quarter of 2023 and 2022.

Both the first quarter of 2023 and 2022 included foreign exchange transaction losses.

The first quarter of 2023 also included a gain on insurance recoveries, while the first quarter of 2022 included an expense related to a Combination-related indemnification asset.

Operating income in the second quarter of 2023 was $56.8 million compared to $31.9 million in the second quarter of 2022.

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 non-GAAP operating income increased to $58.8 million in the second quarter of 2023 as compared to $38.8 million in the second quarter of 2022 primarily due to higher gross profit partially offset by higher SG&A, described above.

The Company had Other expense, net of $3.6 million in the second quarter of 2023 as compared to $8.4 million in the second quarter of 2022.

Both the second quarter of 2023 and 2022 included foreign exchange transaction losses, which were higher in the current year.

The second quarter of 2022 included a $6.8 million of loss on extinguishment of debt related to the Company’s refinancing the Original Credit Facility.

See the Non-GAAP Measures section of this Item, above.

Interest expense, net, was $13.2 million in the first quarter of 2023 compared to $5.3 million in the first quarter of 2022, an increase of $7.9 million as a result of an increase in interest rates quarter-over-quarter, as well as higher average borrowings outstanding during the current year quarter.

The Company’s effective tax rates for the first quarters of 2023 and 2022 were 27.7% and 13.1%, respectively.

The Company’s effective tax rate for the three months ended March 31, 2023 was impacted by various items including foreign tax inclusions, withholding taxes, foreign tax credits, and net tax expense related to share-based compensation, partially offset with changes in uncertain tax positions and favorable return to provision adjustments.

Comparatively, the prior year effective tax rate was largely impacted by changes in the valuation allowance for foreign tax credits due to legislative guidance issued and audit settlements reached with Italian tax authorities.

In addition, the Company incurred higher tax expense during the three months ended March 31, 2022 related to one of the Company’s subsidiaries recording earnings at a statutory tax rate of 25% while the recertification of its concessionary 15% tax rate was pending receipt.

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 first quarters of 2023 and 2022 would have been approximately 27%.

Interest expense, net, was $12.7 million in the second quarter of 2023 compared to $6.5 million in the second quarter of 2022, an increase of $6.2 million as a result of an increase in interest rates quarter-over-quarter.

The Company’s effective tax rates for the second quarters of 2023 and 2022 were 34.2% and 8.1%, respectively.

The Company’s effective tax rate for the second quarter of 2023 was primarily impacted by changes to the valuation allowance for and the usage of foreign tax credits due to an enacted law change in Brazil and the effects of lower pre-tax earnings and the mix of such earnings.

Comparatively, the prior year effective tax rate was largely driven by state tax benefits, favorable audit settlements, a deferred tax benefit associated with an intercompany asset transfer, withholding taxes, and the effects of lower pre-tax earnings and the mix of such earnings.

In addition, the effective tax rate for the second quarter of 2022 was impacted by the Company recording earnings at a statutory tax rate of 25% while the recertification of its concessionary 15% tax rate was pending receipt.

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 the second quarters of 2023 and 2022 would have been approximately 27% and 24%, respectively.

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, 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 was $4.6 million in the first quarter of 2023 compared to $0.8 million in the first quarter of 2022, an increase of $3.8 million, primarily due to higher current year income from the Company’s interest in a captive insurance company as well as from the Company’s 50% interest in a joint venture in Korea.

Quaker Chemical Corporation

Management’s Discussion and Analysis

Equity in net income of associated companies was $2.8 million in the second quarter of 2023 compared to a net loss of $1.3 million in the second quarter of 2022, an increase of $4.0 million, primarily due to higher current year income from the Company’s interest in a captive insurance company as well as 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 quarter of 2023 and 2022.

Foreign exchange unfavorably impacted the Company’s first quarter of 2023 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 quarter as compared to the prior year first quarter.

Reportable Segments Review - Comparison of the First Quarter of 2023 with the First Quarter of 2022

Net income attributable to noncontrolling interest was less than $0.1 million in both the second quarter of 2023 and 2022.

Foreign exchange negatively impacted the Company’s second quarter of 2023 results by approximately 4% compared to the second quarter of 2022 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 2023 with the First Six Months of 2022

Net sales were $995.6 million in the first six months of 2023 compared to $966.6 million in the first six months of 2022.

The net sales increase of $29.0 million or 3% year-over-year reflects increases in selling price and product mix of approximately 15.0%, partially offset by a decline in sales volumes of approximately 11.0% and the unfavorable impact from foreign currency translation of 1.0%.

The decline in sales volumes was primarily attributable to softer end market conditions across all regions, the Company’s value-based pricing initiatives and customer order patterns, as well as the impacts of the ongoing war in Ukraine in the EMEA segment, and the wind-down of the tolling agreement for products previously divested related to the Combination, partially offset by new business wins, as mentioned above .

COGS were $644.5 million in the first six months of 2023 compared to $670.9 million in the first six months of 2022.

The decrease in COGS of $26.5 million or 4% reflects lower spend on the decline in current year sales volumes, which more than offset higher costs due to inflationary pressures in the Company’s global raw material, manufacturing and supply chain and logistics costs compared to the prior year.

Gross profit in the first six months of 2023 increased $55.5 million or 19% from the first six months of 2022.

The Company’s reported gross margin in the first six months of 2023 was 35.3% compared to 30.6% in the first six months of 2022.

The Company’s current year improvement in gross margin was primarily driven by the year-over-year impact of our value-based pricing initiatives implemented throughout 2022 to offset the significant increases in raw material and other input costs.

SG&A in the first six months of 2023 increased $11.8 million or 5% compared to the first six months of 2022 driven by higher labor-related costs including year-over-year inflationary increases and higher levels of incentive compensation on improved Company performance, partially offset by lower SG&A due to foreign currency translation compared to the prior year.

The Company incurred $5.9 million of Combination, integration and other acquisition related operating expenses in the first six months of 2022, primarily due to various professional fees related to legal, financial and other advisory and consultant expenses for integration activities including internal control remediation.

There were no similar costs in the first six months of 2023.

See the Non-GAAP Measures section of this Item, above.

The Company incurred Restructuring and related charges of $5.0 million and $0.8 million during the first six months of 2023 and 2022, respectively, related to reductions in headcount and site closures under the Company’s previous and current restructuring programs.

See the Non-GAAP Measures section of this Item, above.

Operating income in the first six months of 2023 was $106.7 million compared to $61.3 million in the first six months of 2022.

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 increased to $115.1 million for the first six months of 2023 compared to $78.0 million in the prior year’s first six months primarily due to higher gross profit partially offset by higher SG&A, described above.

The Company had Other expense, net, of $5.8 million in the first six months of 2023 compared to $10.6 million in the first six months of 2022.

The first six months of 2023’s results include $1.0 million of facility remediation recoveries in the current year, while the prior year’s first six months of 2022 Other expense, net includes a $6.8 million of loss on extinguishment of debt related to the Company’s refinancing the Original Credit Facility.

See the Non-GAAP Measures section of this Item, above.

Also, there was higher foreign currency transaction losses year-over-year.

Interest expense, net, increased $14.1 million in the first six months of 2023 compared to the first six months of 2022, due to an increase in interest rates in the current year as compared to the prior year.

Quaker Chemical Corporation

Management’s Discussion and Analysis

The Company’s effective tax rates for the first six months of 2023 and 2022 were 31.2% and 10.9%, respectively.

The Company’s effective tax rate for the six months ended June 30, 2023 was primarily impacted by changes to the valuation allowance for and the usage of foreign tax credits due to an enacted law change in Brazil, the effects of lower pre-tax earnings and the mix of such earnings, foreign tax inclusions, withholding taxes, and net tax expense related to share-based compensation, partially offset with changes in uncertain tax positions and favorable return to provision adjustments.

Comparatively, the prior year six-month effective tax rate was impacted by changes in the valuation allowance for foreign tax credits, favorable audit settlements, state tax benefits, a reduction in reserves for uncertain tax positions, a deferred tax benefit associated with an intercompany asset transfer, withholding taxes, and the effects of lower pre-tax earnings and the mix of such earnings.

In addition, the effective tax rate during the six months ended June 30, 2022 was impacted by the Company recording earnings at a statutory tax rate of 25% while the recertification of its concessionary 15% tax rate was pending receipt.

Excluding the impact of 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 2023 and 2022 would have been approximately 27% and 26%, respectively.

Equity in net income (loss) of associated companies increased $7.8 million in the first six months of 2023 compared to the first six months of 2022, primarily due to higher current year income from the Company’s interest in a captive insurance company due to (see the Non-GAAP Measures section of this Item, above), as well as higher current year income from the Company’s 50% interest in a joint venture in Korea.

Net income attributable to noncontrolling interest was less than $0.1 million in both the first six months of 2023 and 2022.

Foreign exchange unfavorably impacted the Company’s first six months of 2023 results by approximately 5% 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 2023 with the Second Quarter of 2022

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.

3 unchanged sentences

and (iii) Asia/Pacific.

Quaker Chemical Corporation

Management’s Discussion and Analysis

The three geographic segments are comprised of the assets and operations in each respective region, including assets and operations formerly included in the Global Specialty Businesses segment.

The three segments are comprised of the assets and operations in each respective region, including assets and operations formerly included in the Global Specialty Businesses segment.

Prior to the Company’s reorganization, the Company’s historical reportable segments were:

6 unchanged sentences

Other items not specifically identified with the Company’s reportable segments include interest expense, net, and other expense, net.

Americas represented approximately 50% of the Company’s consolidated net sales in the first quarter of 2023.

The segment’s net sales were $251.4 million, an increase of $39.3 million or 19%, compared to the first quarter of 2022.

The increase in net sales was due to higher selling price and product mix of 22% and the favorable impact of foreign currency translation of 1%, partially offset by a decrease in organic sales volumes of 4%.

The increase in selling price and product mix was primarily driven by the year-over-year impact of price increases implemented throughout 2022 to offset the significant increases in raw material and other input costs.

The current quarter decline in organic sales volumes was primarily driven by softer market conditions, the wind-down of the tolling agreement for products previously divested related to the Combination and the Company’s ongoing value-based pricing initiatives partially offset by new business win s.

This segment’s operating earnings were $66.1 million, an increase of $21.1 million or 47%, compared to the first quarter of 2022 primarily driven by higher net sales coupled with a recovery in margins reflecting the Company’s ongoing initiatives aimed at offsetting the significant inflationary pressures impacting the business.

EMEA represented approximately 31% of the Company’s consolidated net sales in the first quarter of 2023 .

The segment’s net sales were $152.4 million, an increase of $5.6 million or 4%, compared to the first quarter of 2022 .

This was driven by higher selling price and product mix of 19%, partially offset by the unfavorable impact of foreign currency translation of 4% and a decrease in sales volumes of 11%.

The decline in sales volumes was primarily driven by softer market conditions, including the direct and indirect impacts of the ongoing war in Ukraine, as well as lower volumes associated with the Company’s ongoing value-based pricing initiatives and the wind-down of the tolling agreement for products previously divested related to the Combination.

The unfavorable foreign curren cy translation impact was primarily due to the strengthening of the U.S.

Americas represented approximately 50% of the Company’s consolidated net sales in the second quarter of 2023.

The segment’s net sales were $253.2 million, an increase of $17.4 million or 7%, compared to the second quarter of 2022.

The increase in net sales was due to higher selling price and product mix of 13% and a favorable impact of foreign currency translation of 1%, partially offset by a decrease in sales volumes of approximately 7%.

The increase in selling price and product mix was primarily driven by the year-over-year impact of price increases implemented to offset the significant increases in raw material and other input costs.

The favorable foreign exchange impact was primarily due to the weakening of the U.S.

dollar against the Mexican peso as this exchange rate averag ed 17.68 Mexi can peso per U.S.

dollar in the second quarter of 2023 compar ed to 20.02 Mexican peso per U.S.

dollar in the second quarter of 2022.

The current quarter decline in sales volumes compared to the prior year was primarily driven by softer market conditions, the Company’s value-based pricing initiatives, customer order patterns, and the wind-down of the tolling agreement for products previously divested related to the Combination, partially offset by new business win s.

This segment’s operating earnings were $69.0 million, an increase of $16.9 million or 32% , compared to the second quarter of 2022 primarily driven by higher net sales coupled with an improvement in operating margins.

Quaker Chemical Corporation

Management’s Discussion and Analysis

EMEA represented approximately 30% of the Company’s consolidated net sales in the second quarter of 2023 .

The segment’s net sales were $143.5 million, a decrease of $2.0 million or 1%, compared to the second quarter of 2022 .

This was driven by a decrease in sales volumes of 15%, partially offset by higher selling price and product mix of 11%, a favorable impact of foreign currency translation of 2% and an increase in net sales from acquisitions of 1%.

The decline in sales volumes was primarily driven by softer market conditions, the Company’s value-based pricing initiatives, customer order patterns, the impacts of the ongoing war in Ukraine, and the wind-down of the tolling agreement for products previously divested related to the Combination, partially offset by new business wins.

The favorable foreign curren cy translation impact was primarily due to the weakening of the U.S.

dollar against the euro as this exchange rate averaged 1.09 U.S.

dollar per euro in the first quarter of 2023 compared to 1.12 U.S.

dollar per euro in the first quarter of 2022.

This segment’s operating earnings were $27.6 million, an increase of $4.3 million or 19%, compared to the first quarter of 2022 .

The increase in segment operating earnings was primarily driven by higher net sales coupled with a recovery in margins reflecting the Company’s ongoing initiatives aimed at offsetting the significant inflationary pressures on impacting the business .

Asia/Pacific represented approximately 19% of the Company’s consolidated net sales in the first quarter of 2023.

The segment’s net sales were $96.3 million, a decrease of $19.0 million or 16%, compared to the first quarter of 2022.

The decrease in net sales was driven by lower organic sales volumes of 22% and an unfavorable impact from foreign currency translation of 6%, partially offset by higher selling price and product mix of 12%.

The decline in organic sales volumes was primarily driven by softer market conditions, including the impact of COVID-19 lockdown measures, primarily in China, as well as lower volumes associated with the Company’s ongoing value-based pricing initiatives.

dollars per euro in the second quarter of 2023 compared to 1.07 U.S.

dollars per euro in the second quarter of 2022.

This segment’s operating earnings were $25.6 million, an increase of $5.5 million or 27%, compared to the second quarter of 2022 .

The increase in segment operating earnings was primarily driven by an improvement in operating margins.

Asia/Pacific represented approximately 20% of the Company’s consolidated net sales in the second quarter of 2023.

The segment’s net sales were $98.7 million, a decrease of $12.4 million or 11%, compared to the second quarter of 2022.

The decrease in net sales was driven by lower sales volumes of 11% and an unfavorable impact from foreign currency translation of 5%, partially offset by higher selling price and product mix of 5%.

The decline in sales volumes was primarily driven by softer market conditions, the Company’s value-based pricing initiatives and customer order patterns, partially offset by new business wins.

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 6.84 Chinese renminbi per U.S.

dollar in the first quarter of 2023 compared to 6.35 Chinese renminbi per U.S.

dollar in the first quarter of 2022.

dollar against the Chinese renminbi as this exchange rate ave raged 7.01 Chinese renminbi per U.S.

dollar in the second quarter of 2023 compared to 6.60 Chinese renminbi per U.S.

dollar in the second quarter of 2022.

The increase in selling price and product mix was primarily driven by year-over-year impact of price increases implemented throughout 2022 to offset the significant increases in raw material and other input costs.

This segment’s operating earnings were $27.7 million, an increase of $3.2 million or 13% compared to the first quarter of 2022.

The increase in segment operating earnings was primarily driven by a recovery in margins reflecting the Company’s ongoing initiatives aimed at offsetting the significant inflationary pressures as well as slightly lower levels of SG&A, which more than offset the decline in net sales.

This segment’s operating earnings were $28.0 million, an increase of $3.1 million or 12% compared to the second quarter of 2022.

The increase in segment operating earnings was primarily driven by an improvement in operating margins as well as slightly lower levels of SG&A, which more than offset the decline in net sales.

Reportable Segments Review -Comparison of the First Six Months of 2023 with the First Six Months of 2022

Americas represented approximately 51% of the Company’s consolidated net sales in the first six months of 2023.

The segment’s net sales were $504.6 million , an increase of $56.7 million or 13% compared to the first six months of 2022 .

The increase in net sales was due to higher selling price and product mix of 17% and a favorable impact of foreign currency translation of 1% , partially offset by a decrease in sales volumes of 5% .

The favorable foreign currency impact was primarily due to the weakening of the U.S.

dollar against the Mexican peso as this exchange rate averag ed 18.16 Mexi can peso per U.S.

dollar in the first six months of 2023 compar ed to 20.26 Mexican peso per U.S.

dollar in the first six months of 2022.

The decline in sales volumes compared to the prior year was primarily driven by softer market conditions, the Company’s value-based pricing initiatives, customer order patterns, and the wind-down of the tolling agreement for products previously divested related to the Combination, partially offset by new business win s, as mentioned above.

This segment’s operating earnings were $135.1 million , an increase of $37.8 million or 39% compared to the first six months of 2022 .

The increase in segment operating earnings was primarily driven by higher net sales coupled with an improvement in operating margins, as mentioned above.

Quaker Chemical Corporation

Management’s Discussion and Analysis

EMEA represented approximately 30% of the Company’s consolidated net sales in the first six months of 2023 .

The segment’s net sales were $296.0 million, an increase of $3.6 million or 1% compared to the first six months of 2022.

The increase in net sales was a result of higher selling price and product mix of 15%, more than offset by the unfavorable impact of foreign currency translation of 1% and a decrease in sales volumes of 13%.

The net sales impact from acquisitions was favorable by less than 1% year-over-year.

The unfavorable foreign curren cy impact was primarily due to the strengthening of the U.S.

dollar against the euro as this exchange rate averaged 1.08 U.S.

dollars per euro in the first six months of 2023 compared to 1.09 U.S.

dollars per euro in the first six months of 2022.

The decline in sales volumes was primarily driven by softer market conditions, the Company’s value-based pricing initiatives, customer order patterns, the impacts of the ongoing war in Ukraine and the wind-down of the tolling agreement for products previously divested related to the Combination, partially offset by new business wins.

This segment’s operating earnings were $53.2 million, an increase of $9.8 million or 23% compared to the first six months of 2022.

The increase in segment operating earnings was primarily driven by higher net sales coupled with an improvement in operating margins , as mentioned above .

Asia/Pacific represented approximately 19% of the Company’s consolidated net sales in the first six months of 2023.

The segment’s net sales were $195.0 million, a decrease of $31.3 million or 14% compared to the first six months of 2022 .

The decrease in net sales was driven by lower sales volumes of 17% and an unfavorable impact of foreign currency translation of 5%, partially offset by higher selling price and product mix of 8%.

The decline in sales volumes was primarily driven by softer market conditions, customer order patterns, including the impact of COVID-19 lockdown measures, primarily in China, and the Company’s value-based pricing initiatives, partially offset by new business wins.

The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S.

dollar against the Chinese renminbi as this exchange rate ave raged 6.92 Chinese renminbi per U.S.

dollar in the first six months of 2023 compared to 6.47 Chinese renminbi per U.S.

dollar in the first six months of 2022.

This segment’s operating earnings were $55.6 million , an increase of $6.2 million or 13% compared to the first six months of 2022 .

The increase in segment operating earnings was primarily driven by a recovery in operating margins reflecting the Company’s ongoing initiatives aimed at offsetting the significant inflationary pressures as well as slightly lower levels of SG&A, which more than offset the decline in net sales, as mentioned above.

Factors That May Affect Our Future Results

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• our current and future results and plans including our sustainability goals;

Quaker Chemical Corporation

Management’s Discussion and Analysis

• statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions.

1 unchanged sentence

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 2022 and in any other public statements we make may turn out to be wrong.

Any or all of the forward-looking statements in this Report, in the Company’s 2022 Form 10-K and in any other public statements we make may turn out to be wrong.

This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties.

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Other factors could also adversely affect us, including those related to acquisitions and the integration of acquired businesses.

Quaker Chemical Corporation

Management’s Discussion and Analysis

Therefore, we caution you not to place undue reliance on our forward-looking statements.

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis