What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-29 compared with 2023-02-23 · 610 added, 717 removed, 1177 unchanged (53% of the section changed)

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Consolidated Statements of Operations

Consolidated Statements of Comprehensive (Loss) Income

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Balance Sheets

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Quaker Chemical Corporation and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated related consolidated statements of income, of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheets of Quaker Chemical Corporation and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, of comprehensive income (loss), of changes in equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A.

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting appearing under Item 9A.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill Impairment Assessments for the EMEA Reporting Unit

As described in Note 16 to the consolidated financial statements, the Company’s consolidated goodwill balance was $515 million as of December 31, 2022, of which $35 million relates to the EMEA reporting unit.

Annual Goodwill Impairment Assessments for the EMEA and Asia/Pacific Reporting Units

As described in Notes 1, 15, and 23 to the consolidated financial statements, the Company’s consolidated goodwill balance was $513 million as of December 31, 2023, of which $66 million relates to the EMEA reporting unit and $163 million relates to the Asia/Pacific reporting unit.

Management completes its annual goodwill impairment test during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment in one or more of its reporting units.

Management monitors various financial, economic and geopolitical conditions impacting the Company and concluded that during the third and fourth quarters of 2022 these events adversely impacted the EMEA reporting unit and represented triggering events.

In completing a quantitative goodwill impairment test, management compares the reporting unit’s fair value, primarily based on future discounted cash flows, to its carrying value in order to determine if an impairment charge is warranted.

The estimates of future discounted cash flows involve considerable management judgment and are based upon certain significant assumptions including the weighted average cost of capital (WACC) as well as projected EBITDA, which includes assumptions related to revenue growth rates, gross margin levels and operating expenses.

Management completed its interim impairment assessment in the third quarter and its annual assessment as of October 1, 2022 and concluded no impairment charge was warranted.

As a result of the interim impairment assessment performed in the fourth quarter, an impairment charge of $93 million was recorded to write down the carrying value of the EMEA reporting unit.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments for the EMEA reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the EMEA reporting unit;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to weighted average cost of capital, revenue growth rates, gross margin levels, and operating expenses;

The determination of the estimated fair value requires management’s judgment and involves the use of significant estimates and assumptions, including revenue growth rates, gross margin levels, operating expenses, and weighted average cost of capital, among other items.

Management completed its annual impairment assessment as of October 1, 2023 and concluded no impairment existed.

The principal considerations for our determination that performing procedures relating to the annual goodwill impairment assessments for the EMEA and Asia/Pacific reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the EMEA and Asia/Pacific reporting units;

(ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, gross margin levels, and operating expenses used in the valuation of the EMEA reporting unit and revenue growth rates used in the valuation of the Asia/Pacific reporting unit;

and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s EMEA reporting unit.

These procedures also included, among others, (i) testing management’s process for developing the fair value estimates of the EMEA reporting unit;

(ii) evaluating the appropriateness of the discounted cash flow model;

These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the EMEA and Asia/Pacific reporting units.

These procedures also included, among others, (i) testing management’s process for developing the fair value estimates of the EMEA and Asia/Pacific reporting units;

(ii) evaluating the appropriateness of the discounted cash flow model used by management;

(iii) testing the completeness and accuracy of underlying data used in the discounted cash flow model;

and (iv) evaluating the reasonableness of management’s significant assumptions related to weighted average cost of capital, revenue growth rates, gross margin levels, and operating expenses.

Evaluating management’s assumptions related to revenue growth rates, gross margin levels, and operating expenses involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the EMEA reporting unit;

(ii) the consistency with external market and industry data;

and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the Company’s discounted cash flow model and (ii) the reasonableness of the weighted average cost of capital assumption.

and (iv) evaluating the reasonableness of significant assumptions used by management related to the revenue growth rates, gross margin levels, and operating expenses used in the valuation of the EMEA reporting unit and the revenue growth rates used in the valuation of the Asia/Pacific reporting unit.

Evaluating management’s assumptions related to the revenue growth rates, gross margin levels, and operating expenses involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the EMEA and Asia/Pacific reporting units;

(ii) whether the assumptions were consistent with evidence obtained in other areas of the audit;

and (iii) for revenue growth rates, whether the assumptions were consistent with external market and industry data.

Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Company’s discounted cash flow model.

/s/ PricewaterhouseCoopers, LLP

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Impairment charges — 93,000 —

Restructuring and related charges 3,163 1,433 5,541

Restructuring and related charges, net 7,588 3,163 1,433

Combination, integration and other acquisition-related expenses — 8,779 23,885

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Income before taxes and equity in net income of associated companies 153,124 7,118 146,991

Taxes on income (loss) before equity in net income of associated companies 24,925 34,939 ( 5,296 )

(Loss) income before equity in net income of associated companies ( 17,807 ) 112,052 32,435

Taxes on income before equity in net income of associated companies 55,585 24,925 34,939

Income (loss) before equity in net income of associated companies 97,539 ( 17,807 ) 112,052

Equity in net income of associated companies 15,333 1,965 9,379

Net (loss) income ( 15,842 ) 121,431 39,787

Net income (loss) 112,872 ( 15,842 ) 121,431

Net income attributable to noncontrolling interest 124 89 62

Net (loss) income attributable to Quaker Chemical Corporation $ ( 15,931 ) $ 121,369 $ 39,658

Net income (loss) attributable to Quaker Chemical Corporation $ 112,748 $ ( 15,931 ) $ 121,369

Per share data:

Net (loss) income attributable to Quaker Chemical Corporation common shareholders – basic $ ( 0.89 ) $ 6.79 $ 2.23

Net (loss) income attributable to Quaker Chemical Corporation common shareholders – diluted $ ( 0.89 ) $ 6.77 $ 2.22

Net income (loss) attributable to Quaker Chemical Corporation common shareholders – basic $ 6.27 $ ( 0.89 ) $ 6.79

Net income (loss) attributable to Quaker Chemical Corporation common shareholders – diluted $ 6.26 $ ( 0.89 ) $ 6.77

The accompanying notes are an integral part of these consolidated financial statements.

QUAKER CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

( Dollars in thousands )

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2023 2022 2021

Net (loss) income $ ( 15,842 ) $ 121,431 $ 39,787

Other comprehensive (loss) income, net of tax

Net income (loss) $ 112,872 $ ( 15,842 ) $ 121,431

Other comprehensive income (loss), net of tax

Currency translation adjustments 16,725 ( 82,368 ) ( 46,952 )

Defined benefit retirement plans

Net gain (loss) arising during the period, other 8,177 9,210 8,827

Net (loss) gain arising during the period, other ( 5,792 ) 8,177 9,210

Amortization of actuarial loss ( 385 ) 628 1,078

Amortization of prior service (gain) cost ( 228 ) 7 ( 69 )

Amortization of prior service cost (gain) 34 ( 228 ) 7

Current period change in fair value of derivatives 1,407 1,372 2,226

Unrealized (loss) gain on available-for-sale securities ( 1,881 ) ( 2,945 ) 2,091

Other comprehensive (loss) income ( 74,300 ) ( 37,376 ) 51,480

Comprehensive (loss) income ( 90,142 ) 84,055 91,267

Unrealized gain (loss) on available-for-sale securities 1,817 ( 1,881 ) ( 2,945 )

Other comprehensive income (loss) 13,806 ( 74,300 ) ( 37,376 )

Comprehensive income (loss) 126,678 ( 90,142 ) 84,055

Comprehensive income attributable to noncontrolling interest ( 106 ) ( 39 ) ( 78 )

Comprehensive (loss) income attributable to Quaker Chemical Corporation $ ( 90,181 ) $ 83,977 $ 91,230

Comprehensive income (loss) attributable to Quaker Chemical Corporation $ 126,572 $ ( 90,181 ) $ 83,977

The accompanying notes are an integral part of these consolidated financial statements.

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Cash flows from operating activities

Net (loss) income $ ( 15,842 ) $ 121,431 $ 39,787

Adjustments to reconcile net income to net cash provided by operating activities:

Net income (loss) $ 112,872 $ ( 15,842 ) $ 121,431

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Amortization of debt issuance costs 1,413 2,942 4,749

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Loss on extinguishment of debt — 5,246 —

(Gain) loss on disposal of property, plant, equipment and other assets ( 168 ) ( 4,695 ) 871

Insurance settlement realized — — ( 1,035 )

Gain on disposal of property, plant, equipment and other assets ( 1,307 ) ( 168 ) ( 4,695 )

Impairment charges — 93,000 —

Gain on inactive subsidiary litigation and settlement reserve — — ( 18,144 )

Combination and other acquisition-related expenses, net of payments — ( 4,460 ) ( 1,974 )

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Pension and other postretirement benefits ( 2,079 ) ( 7,964 ) ( 6,330 )

(Decrease) increase in cash from changes in current assets and current liabilities, net of acquisitions:

Increase (decrease) in cash from changes in current assets and current liabilities, net of acquisitions:

Accounts receivable 32,169 ( 59,112 ) ( 67,473 )

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Accounts payable and accrued liabilities 5,937 ( 23,439 ) 37,998

Estimated taxes on (loss) income ( 2,688 ) 3,997 8,763

Estimated taxes on income (loss) 3,415 ( 2,688 ) 3,997

Net cash provided by operating activities 279,020 41,794 48,933

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Proceeds from disposition of assets 11,179 1,463 14,744

Insurance settlement interest earned — — 44

Net cash used in investing activities ( 27,621 ) ( 40,191 ) ( 49,130 )

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Stock options exercised, other ( 2,749 ) ( 378 ) 890

Purchase of noncontrolling interest in affiliates — — ( 1,047 )

Distributions to noncontrolling affiliate shareholders — — ( 751 )

Net cash provided by (used in) financing activities 24,672 ( 13,465 ) ( 75,255 )

Net cash (used in) provided by financing activities ( 238,606 ) 24,672 ( 13,465 )

Effect of foreign exchange rate changes on cash 771 ( 10,488 ) ( 3,057 )

Net increase (decrease) in cash, cash equivalents and restricted cash 15,787 ( 16,719 ) 38,340

Cash, cash equivalents and restricted cash at the beginning of the period 165,176 181,895 143,555

Cash, cash equivalents and restricted cash at the end of the period $ 180,963 $ 165,176 $ 181,895

Net increase (decrease) in cash and cash equivalents 13,564 15,787 ( 16,719 )

Cash and cash equivalents at the beginning of the period 180,963 165,176 181,895

Cash and cash equivalents at the end of the period $ 194,527 $ 180,963 $ 165,176

Supplemental cash flow disclosures:

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Balance as of December 31, 2020 $ 17,851 $ 905,171 $ 423,940 $ ( 26,598 ) $ 550 $ 1,320,914

Cumulative effect of an accounting change — — ( 911 ) — — ( 911 )

Balance as of January 1, 2020 17,735 888,218 412,068 ( 78,170 ) 1,604 1,241,455

Net income — — 121,369 — 62 121,431

Amounts reported in other comprehensive income (loss) — — — 51,572 ( 92 ) 51,480

Amounts reported in other comprehensive (loss) income — — — ( 37,392 ) 16 ( 37,376 )

Dividends declared ($ 1.62 per share)

— — ( 28,975 ) — — ( 28,975 )

Acquisition of noncontrolling interest — ( 707 ) — — ( 340 ) ( 1,047 )

Distributions to noncontrolling affiliate shareholders — — — — ( 751 ) ( 751 )

Shares issued upon exercise of stock options and other 17 1,677 — — — 1,694

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Balance as of December 31, 2021 17,897 917,053 516,334 ( 63,990 ) 628 1,387,922

Net income — — 121,369 — 62 121,431

Net (loss) income — — ( 15,931 ) — 89 ( 15,842 )

Amounts reported in other comprehensive (loss) income — — — ( 74,250 ) ( 50 ) ( 74,300 )

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Balance as of December 31, 2022 17,950 928,288 469,920 ( 138,240 ) 667 1,278,585

Net (loss) income — — ( 15,931 ) — 89 ( 15,842 )

Amounts reported in other comprehensive (loss) income — — — ( 74,250 ) ( 50 ) ( 74,300 )

Net income — — 112,748 — 124 112,872

Amounts reported in other comprehensive income (loss) — — — 13,825 ( 19 ) 13,806

Dividends declared ($ 1.78 per share)

— — ( 32,027 ) — — ( 32,027 )

Distributions to noncontrolling interest affiliate shareholders — — — — ( 169 ) ( 169 )

Shares issued upon exercise of stock options and other 3 ( 2,836 ) — — — ( 2,833 )

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(Dollars in thousands, except per share amounts, unless otherwise stated)

Note 1 – Significant Accounting Policies

Note 1 – Basis of Presentation and Significant Accounting Policies

As used in these Notes to Consolidated Financial Statements, the terms “Quaker,” “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.

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(“Houghton”).

Basis of presentation:

The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States (“U.S.

GAAP”) and include the accounts of Quaker Houghton and its controlled subsidiaries.

Principles of consolidation:

All majority-owned subsidiaries are included in the Company’s consolidated financial statements, with appropriate elimination of intercompany balances and transactions .

Investments in associated companies (less than majority-owned and in which the Company has significant influence) are accounted for under the equity method.

For consolidated subsidiaries in which the Company’s ownership is less than 100%, the outside shareholders’ interests are reflected as non-controlling interests within the consolidated financial statements.

The Company applies the equity method of accounting to investments in which the Company has significant influence but does not control the operating and financial decisions of the investee.

This generally applies when the Company’s ownership interest in common stock of the investee is between 20% and 50%.

Such investments are presented on the Consolidated Balance Sheet at “Investments in associated companies.” We initially record our investment at cost and subsequently adjust the investment to recognize our share of net earnings and losses and distributions received.

The Company’s share of net income or losses in these investments in associated companies is included in the Consolidated Statements of Operations.

The Company periodically reviews these investments for impairments and, if necessary, would adjust these investments to their fair value when a decline in market value or other impairment indicators are deemed to be other than temporary.

See Note 17 of Notes to Consolidated Financial Statements.

The Company reviews these investments for impairments when events of changes in circumstances indicate that the carrying amount of the investment may be other-than-temporarily impaired.

See Note 16 for additional information.

The Company is not the primary beneficiary of any variable interest entities (“VIEs”) and therefore the Company’s consolidated financial statements do not include the accounts of any VIEs.

Accounting estimates:

The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and the accompanying notes.

Actual results could differ from such estimates.

Translation of foreign currency:

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Income and expense accounts are translated at average exchange rates prevailing during the year.

Translation adjustments resulting from this process are recorded directly in equity as accumulated other comprehensive (loss) income (“AOCI”) and will be included as income or expense only upon sale or liquidation of the underlying entity or asset.

Generally, all of the Company’s non-U.S.

subsidiaries use their local currency as their functional currency.

Cash and cash equivalents:

The Company invests temporary and excess funds in money market securities and financial instruments having maturities within 90 days.

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

The Company has not experienced losses from the aforementioned investments.

Accounts receivable and allowance for credit losses:

Trade accounts receivable subject the Company to credit risk.

Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest.

The Company recognizes an allowance for credit losses, which represents the portion of the receivable that the Company does not expect to collect over its contractual life, considering past events and reasonable and supportable forecasts of future economic conditions.

The Company’s allowance for credit losses on its trade accounts receivable is based on specific collectability facts and circumstances for each outstanding receivable and customer, the aging of outstanding receivables, and the associated collection risk the Company estimates for certain past due aging categories, and also, the general risk to all outstanding accounts receivable based on historical amounts determined to be uncollectible.

The Company does not have any off-balance-sheet credit exposure related to its customers.

See Note 13 of Notes to Consolidated Financial Statements.

Inventories are valued at the lower of cost or net realizable value, and are valued using the first-in, first-out method.

See Note 14 of Notes to Consolidated Financial Statements.

Right of use lease assets and lease liabilities:

The Company determines if an arrangement is a lease at its inception.

This determination generally depends on whether the arrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in exchange for consideration.

Control of an underlying asset is conveyed if the Company obtains the rights to direct the use of, and obtains substantially all of the economic benefits from the use of, the underlying asset.

Lease expense for variable leases and short-term leases is recognized when the obligation is incurred.

The lease term for all of the Company’s leases includes the non-cancellable period of the lease plus any additional periods covered by an option to extend the lease that the Company is reasonably certain it will exercise.

Operating leases are included in right of use lease assets, other accrued liabilities and long-term lease liabilities on the Consolidated Balance Sheet.

Right of use lease assets and liabilities are recognized at each lease’s commencement date based on the present value of its lease payments over its respective lease term.

Operating lease expense is recognized on a straight-line basis over the lease term.

The Company uses the stated borrowing rate for a lease when readily determinable.

When a stated borrowing rate is not available in a lease agreement, the Company uses its incremental borrowing rate based on information available at the lease’s commencement date to determine the present value of its lease payments.

In determining the incremental borrowing rate used to present value each of its leases, the Company considers certain information including fully secured borrowing rates readily available to the Company and its subsidiaries.

The Company includes finance leases in Property, plant and equipment (“PP&E”), current portion of long-term debt and long-term debt on the Consolidated Balance Sheet.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

Long-lived assets:

PP&E is stated at gross cost, less accumulated depreciation.

Depreciation is computed using the straight-line method on an individual asset basis over the following estimated useful lives:

buildings and improvements, 10 to 33 years, or the remaining term of the lease;

and machinery and equipment, 4 to 10 years, or the remaining term of the lease.

The carrying values of long-lived assets are evaluated whenever changes in circumstances or current events indicate the carrying amount of such assets may not be recoverable.

An estimate of undiscounted cash flows produced by the asset, or the appropriate group of assets, is compared with the carrying value to determine whether an impairment exists.

If necessary, the Company recognizes an impairment loss for the difference between the carrying amount of the assets and their estimated fair value.

Fair value is based on current and anticipated future cash flows.

Upon sale or other dispositions of long-lived assets, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount, less proceeds from disposals, is recorded in the Consolidated Statements of Operations.

Expenditures for renewals or improvements that increase the estimated useful life or capacity of the assets are capitalized, whereas expenditures for repairs and maintenance are expensed when incurred .

See Notes 9 and 15 of Notes to Consolidated Financial Statements.

Capitalized software:

The Company capitalizes certain costs in connection with developing or obtaining software for internal use, depending on the associated project.

These costs are amortized over a period of 3 to 5 years once the assets are ready for their intended use.

In connection with the implementations and upgrades to the Company’s global transaction, consolidation and other related systems, approximately $ 3.5 million and $ 3.6 million of net costs were capitalized in PP&E on the Company’s Consolidated Balance Sheets at December 31, 2022 and 2021, respectively.

Goodwill and other intangible assets:

The Company records goodwill, definite-lived intangible assets and indefinite-lived intangible assets at fair value at the date of acquisition.

Goodwill and indefinite-lived intangible assets are not amortized but tested for impairment at least annually.

These tests will be performed more frequently if triggering events indicate potential impairment.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, generally for periods ranging from 3 to 24 years.

The Company continually evaluates the reasonableness of the useful lives of these assets, consistent with the discussion of long-lived assets, above.

See Note 16 of Notes to Consolidated Financial Statements.

The Company’s operating segments, which are consistent with its 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 assesses the Company’s performance.

During the first quarter of 2023, the Company reorganized its executive management team to align with its new business structure.

The Company’s new structure includes three reportable segments:

(i) Americas;

(ii) Europe, Middle East and Africa (“EMEA”);

and (iii) Asia/Pacific.

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

(i) Americas;

(iii) Asia/Pacific;

and (iv) Global Specialty Businesses.

Prior period segment financial information has been recast to align with segment change, including reportable segments and customer industry disaggregation.

See Notes 4, 5, and 15 for additional information.

Reclassifications:

Certain information has been reclassified to conform to the current year presentation.

Business combinations:

The Company accounts for business combinations under the acquisition method of accounting.

This method requires the recording of acquired assets, including separately identifiable intangible assets, and assumed liabilities at their respective acquisition date estimated fair values.

Any excess of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill.

The determination of the estimated fair value of assets acquired and liabilities assumed requires significant estimates and assumptions.

Based on the assessment of additional information during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the estimated fair value of assets acquired and liabilities assumed.

See Note 2 for additional information.

Revenue recognition:

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and (v) recognize revenue when, or as, the Company satisfies a performance obligation.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

The Company identifies a contract with a customer when a sales agreement indicates approval and commitment of the parties;

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The Company believes that these input methods represent the most indicative measure of the Fluidcare TM or other service work performed by the Company.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

The Company does not have standard payment terms for all customers, however the Company’s general payment terms require customers to pay for products or services provided after the performance obligation is satisfied.

The Company does not have standard payment terms for all customers;

however, the Company’s general payment terms require customers to pay for products or services provided after the performance obligation is satisfied.

The Company does not have significant financing arrangements with its customers.

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The Company does not have significant amounts of variable consideration in its contracts with customers and where applicable, the Company’s estimates of variable consideration are not constrained.

The Company records certain third-party license fees in other income (expense), net, in its Consolidated Statement of Operations, which generally include sales-based royalties in exchange for the license of intellectual property.

The Company records certain third-party license fees in Other (expense) income, net, in its Consolidated Statement of Operations, which generally include sales-based royalties in exchange for the license of intellectual property.

These license fees are recognized in accordance with their agreed-upon terms and when performance obligations are satisfied, which is generally when the third party has a subsequent sale.

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A contract liability is the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration, or a specified amount of consideration is due, from the customer.

See Note 5 of Notes to Consolidated Financial Statements.

See Note 5 for additional information.

Right of use lease assets and lease liabilities:

The Company determines if an arrangement is a lease at its inception.

Control of an underlying asset is conveyed if the Company obtains the rights to direct the use of, and obtains substantially all of the economic benefits from the use of, the underlying asset.

Lease expense for variable leases and short-term leases is recognized when the obligation is incurred.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollars in thousands, except per share amounts, unless otherwise stated)

Operating leases are included in right of use lease assets, other accrued liabilities and long-term lease liabilities on the Consolidated Balance Sheet.

Right of use lease assets and liabilities are recognized at each lease’s commencement date based on the present value of its lease payments over its respective lease term.

Operating lease expense is recognized on a straight-line basis over the lease term.

The Company uses the stated borrowing rate for a lease when readily determinable.

The Company includes finance leases in PP&E, current portion of long-term debt and long-term debt on the Consolidated Balance Sheet.

See Note 6 for additional information.

Restructuring activities:

Restructuring programs consist of employee severance, rationalization of manufacturing or other facilities and other related items.

To account for such programs, the Company recognizes a liability for a cost associated with an exit or disposal activity, when the liability is incurred, is estimable, and payment is probable.

See Note 7 for additional information.

Share-based compensation:

The Company recognizes the fair value of share-based compensation as a component of expense.

The Company has a long-term incentive program (“LTIP”) for key employees which provides for the granting of options to purchase stock at prices not less than its market value on the date of the grant.

Most options become exercisable within three years after the date of the grant for a period of time determined by the Company, but not to exceed seven years from the date of grant.

The Company did not grant any stock options during 2023.

Restricted stock awards and restricted stock units issued under the LTIP program are subject to time vesting generally over a one to three year period.

In addition, as part of the Company’s Annual Incentive Plan, non-vested shares may be issued to key employees, which generally would vest over a two to five year period.

Prior to 2023, the Company generally has assumed a forfeiture rate of 13 % based on historical experience.

Beginning in 2023, the Company elected to account for forfeitures on new awards as they occur for service condition aspects of certain share-based awards.

The Company also issues various performance-dependent stock awards as a component of its LTIP.

For performance-dependent stock units for which the performance target is market-based and tied to Total Shareholder Return, the grant date fair value is based on grant-date stock price adjusted for the likelihood of attaining certain predetermined performance goals and is calculated by utilizing a Monte Carlo simulation model.

For performance-dependent stock units for which payout is linked to the achievement of a performance-based return on invested capital, the grant date fair value is based on the trading price of the Company’s stock on the grant date.

Compensation expense for the performance-dependent is recognized on a straight-line basis over the vesting period, generally three years .

See Note 8 for additional information.

Research and development costs:

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Research and development expenses were $ 50.3 million, $ 46.0 million and $ 44.9 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Environmental liabilities and expenditures:

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated.

If there is a range of estimated liability and no amount in that range is considered more probable than another, then the Company records the lowest amount in the range.

Environmental costs and remediation costs are capitalized if the costs extend the life, increase the capacity or improve safety or efficiency of the property from the date acquired or constructed, and/or mitigate or prevent contamination in the future.

See Note 26 of Notes to Consolidated Financial Statements.

Asset retirement obligations:

The Company assesses whether it has legal or conditional obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, or development and/or the normal operation of a long-lived asset, including any legal obligations that require disposal of a replaced part that is a component of a tangible long-lived asset.

As of December 31, 2022 and 2021, the Company had no significant exposure or liabilities recorded on its Consolidated Balance Sheets.

Pension and other postretirement benefits:

The Company maintains various noncontributory retirement plans, covering a portion of its employees in the U.S.

and certain other countries, including the Netherlands, the United Kingdom (“U.K.”), Mexico, Sweden, Germany and France.

The plans of the remaining non-U.S.

subsidiaries are, for the most part, either fully insured or integrated with the local governments’ plans.

The Company recognizes on a prospective basis the funded status of the defined benefit pension and other postretirement plans on its Consolidated Balance Sheets and, also, recognize as a component of AOCI, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost.

In addition, the Company recognizes a settlement charge in its Consolidated Statements of Operations when certain events occur, including plan termination or the settlement of certain plan liabilities.

A settlement charge represents the immediate recognition into expense of a portion of the unrecognized loss within AOCI on the balance sheet in proportion to the share of the projected benefit obligation that was settled.

The measurement date for the Company’s postretirement benefits plan is December 31.

Hyper-inflationary accounting:

Economies that have a cumulative three year rate of inflation exceeding 100 % are considered hyper-inflationary.

A legal entity that operates within an economy deemed to be hyper-inflationary is required to remeasure its monetary assets and liabilities to the applicable published exchange rates and record the associated gains or losses resulting from the remeasurement directly to the Consolidated Statements of Operations.

Argentina’s and Türkiye’s economies were considered hyper-inflationary effective July 1, 2018 and April 1, 2022, respectively.

As of, and for the year ended December 31, 2023, the Company's Argentine and Turkish subsidiaries represented a combined 1 % and 2 % of the Company’s consolidated total assets and net sales, respectively.

For the years ended December 31, 2023, 2022 and 2021, the Company recorded $ 7.8 million, $ 1.6 million, and $ 0.6 million, respectively, of remeasurement losses associated with the applicable currency conversions related to Argentina and Türkiye.

These losses were recorded within foreign exchange losses, net, which is a component of Other (expense) income, net, in the Company’s Consolidated Statements of Operations.

QUAKER CHEMICAL CORPORATION

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The Company’s global pension investment policies are designed to ensure that pension assets are invested in a manner consistent with meeting the future benefit obligations of the pension plans and maintaining compliance with various laws and regulations including the Employee Retirement Income Security Act of 1974.

The Company establishes strategic asset allocation percentage targets and benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk.

The Company’s investment horizon is generally long term, and, accordingly, the target asset allocations encompass a long-term perspective of capital markets, expected risk and return and perceived future economic conditions while also considering the profile of plan liabilities.

To the extent feasible, the short-term investment portfolio is managed to match the short-term obligations, the intermediate portfolio duration is matched to reduce the risk of volatility in intermediate plan distributions, and the total return portfolio is managed to maximize the long-term real growth of plan assets.

The critical investment principles of diversification, assessment of risk and targeting the optimal expected returns for given levels of risk are applied.

The Company’s investment guidelines prohibit the use of securities such as letter stock and other unregistered securities, commodities or commodity contracts, short sales, margin transactions, private placements (unless specifically addressed by addendum), or any derivatives, options or futures for the purpose of portfolio leveraging.

The target asset allocation is reviewed periodically and is determined based on a long-term projection of capital market outcomes, inflation rates, fixed income yields, returns, volatilities and correlation relationships.

The interaction between plan assets and benefit obligations is periodically studied to assist in establishing such strategic asset allocation targets.

Asset performance is monitored with an overall expectation that plan assets will meet or exceed benchmark performance over rolling five year periods.

The Company’s pension committee, as authorized by the Company’s Board of Directors (the “Board”), has discretion to manage the assets within established asset allocation ranges approved by senior management of the Company.

See Note 21 of Notes to Consolidated Financial Statements.

Comprehensive income (loss):

The Company presents Other comprehensive (loss) income in its Statements of Comprehensive (Loss) Income.

The Company discloses significant amounts reclassified from each component of AOCI, the related tax amounts and the income statement line items affected by such reclassifications.

See Note 23 of Notes to Consolidated Financial Statements.

Income taxes and uncertain tax positions:

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income taxes it would incur to ultimately remit these earnings to the U.S.

See Note 10 of Notes to Consolidated Financial Statements.

See Note 10 for additional information.

Earnings per share:

The Company calculates earnings per share for non-vested stock awards with rights to non-forfeitable dividends, which requires non-vested stock awards with rights to non-forfeitable dividends to be included as part of the basic weighted average share calculation under the two-class method.

See Note 11 for additional information.

Comprehensive income (loss):

The Company presents Other comprehensive income (loss) in its Statements of Comprehensive Income (Loss).

The Company discloses significant amounts reclassified from each component of AOCI, the related tax amounts and the income statement line items affected by such reclassifications.

See Note 22 for additional information.

Cash and cash equivalents:

The Company invests temporary and excess funds in money market securities and financial instruments having maturities within 90 days.

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

The Company has not experienced losses from the aforementioned investments.

Accounts receivable and allowance for credit losses:

Trade accounts receivable subject the Company to credit risk.

Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest.

The Company does not have any off-balance-sheet credit exposure related to its customers.

See Note 12 for additional information.

Inventories are valued at the lower of cost or net realizable value, and are valued using the first-in, first-out method.

See Note 13 for additional information.

QUAKER CHEMICAL CORPORATION

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The Company is exposed to the impact of changes in interest rates, foreign currency fluctuations, changes in commodity prices and credit risk.

Historically, the Company has utilized interest rate swap agreements to enhance its ability to manage risk, including exposure to variability in interest payments associated with its variable rate debt.

Derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures.

In October 2022, the Company’s interest rate swap contracts expired.

As of December 31, 2022, the Company has not entered into any similar interest rate swap contracts.

The Company previously recorded these instruments on a net basis within the Consolidated Balance Sheets.

The effective portion of the change in fair value of the agreement was recorded in AOCI and was recognized in the Consolidated Statements of Operations when cash was paid from the counterparties.

See Note 25 of Notes to Consolidated Financial Statements.