QUAKER CHEMICAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . As used in this Report, the terms “Quaker Houghton,” the “Company,” “we” and “our” refer to Quaker Chemical Corporation (doing business as Quaker Houghton), its subsidiaries, and associated companies, unless the context otherwise requires. Executive Summary Quaker Houghton is the global leader in industrial process fluids. With a presence around the world, including operations in over 25 countries, our customers include thousands of the world’s most advanced and specialized steel, aluminum, automotive, aerospace, offshore, container, mining, and metalworking companies. Our high-performing, innovative and sustainable solutions are backed by best-in-class technology, deep process knowledge, and customized services. Quaker Houghton is headquartered in Conshohocken, Pennsylvania, located near Philadelphia in the U.S. Quaker Houghton delivered solid results in the second quarter of 2024. Net sales in the second quarter of 2024 were $463.6 million, a decrease of 6% compared to $495.4 million in the second quarter of 2023. This was primarily driven by a decrease in selling price and product mix of approximately 4%, a 1% decrease in sales volumes, and an unfavorable impact from foreign currency translation of 1%. The decrease in selling price and product mix was primarily attributable to our index-based customer contracts. The decline in sales volumes was a result of a continuation of soft end market conditions compared to the prior year, primarily in the Americas and EMEA segments, partially offset by an increase in end market activity in the Asia/Pacific segment as well as new business wins across all segments. The Company generated net income in the second quarter of 2024 of $34.9 million, or $1.94 per diluted share, compared to net income of $29.3 million, or $1.63 per diluted share in the second quarter of 2023. Excluding non-recurring and non-core items in each period, the Company’s second quarter 2024 non-GAAP earnings per diluted share was $2.13 compared to $1.93 in the prior year quarter and the Company’s current quarter adjusted EBITDA was $84.3 million compared to $80.2 million in the second quarter of 2023. The increase in current quarter earnings was primarily driven by an improvement in gross margins related to pricing actions, lower raw material costs and selling, general and administrative expenses (“SG&A”), and favorable impacts from foreign exchange, partially offset by higher professional fees. See the Non-GAAP Measures section of this Item below, as well as other items discussed in the Company’s Consolidated Operations Review in the Operations section of this Item, below. The Company’s second quarter 2024 operating performance in each of its three reportable segments: (i) Americas; (ii) Europe, Middle East and Africa (“EMEA”); and (iii) Asia/Pacific, reflects similar drivers to that of the Company’s consolidated performance. Operating earnings for the Asia/Pacific and EMEA segments increased compared to the prior year quarter, primarily driven by an improvement in operating margins in each segment. Operating earnings for the Americas segment decreased compared to the prior year quarter, primarily driven by lower sales partially offset by improved segment operating margins. Additional details of each segment’s operating performance are further discussed in the Company’s Reportable Segments Review, in the Operations section of this Item, below. Net cash flows provided by operating activities were $73.5 million in the first six months of 2024 compared to $116.1 million in the first six months of 2023. The lower operating cash flow year-over-year reflects an increase in the net cash outflows from working capital in the first six months of 2024 partially offset by higher operating performance in the first six months of 2024 compared to 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 solid results in the second quarter of 2024 highlighted by an improvement in margins which translated into earnings growth, notwithstanding the persistent macroeconomic and geopolitical challenges, continued soft end market conditions and other factors that have impacted the Company’s customers and end markets. Critical Accounting Policies and Estimates Our significant accounting policies are described in “Management’s Discussion and Analysis” and “Note 1 – Significant Accounting Policies” to the Consolidated Financial Statements in our 2023 Form 10-K. There have been no material changes to the critical accounting policies and estimates previously disclosed in its 2023 Form 10-K remain materially consistent. Recently Issued Accounting Standards See Note 3 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for a discussion regarding recently issued accounting standards. 21 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis Liquidity and Capital Resources As of June 30, 2024, we had cash and cash equivalents of $188.6 million. Total cash and cash equivalents were $194.5 million as of December 31, 2023. The approximately $6.0 million decrease in cash and cash equivalents was the net result of $73.5 million of cash provided by operating activities, offset by $39.3 million of cash used in financing activities, $33.2 million of cash used in investing activities and an unfavorable impact of foreign currency translation of approximately $7.0 million. Net cash flows provided by operating activities were $73.5 million in the first six months of 2024 compared to $116.1 million in the first six months of 2023. The decrease in net operating cash flow year-over-year reflects higher cash outflows from working capital in 2024, driven by an outflow from Inventory due to timing of sales and orders and higher Accounts payable and accrued liabilities outflows due primarily to higher incentive compensation payments in the current year. The decrease in net operating cash flows was partially offset by higher operating performance in 2024 compared to 2023. Net cash flows used in investing activities were $33.2 million in the first six months of 2024 compared to $17.0 million in the first six months of 2023. The increase in cash used in investing activities year-over-year is the result of payments in the current year related to the IKV acquisition. See Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for further information about business acquisitions. Net cash flows used in financing activities were $39.3 million in the first six months of 2024 compared to net cash flows used in financing activities of $89.0 million in the first six months of 2023. The decrease in net cash outflows was primarily related to net borrowings on the Company’s revolving credit facility in the first six months of 2024 compared to net repayments in the first six months of 2023. In addition, during the first six months of 2024, the Company made payments of approximately $7.8 million for repurchases of its common stock under its share repurchase program. Also, the Company paid $16.4 million of cash dividends during the first six months of 2024, a $0.7 million, or 5%, increase compared to the prior year period. During June 2022, the Company, and its wholly owned subsidiary, Quaker Houghton B.V., as borrowers, Bank of America, N.A., as administrative agent, U.S. dollar swing line lender and letter of credit issuer, Bank of America Europe Designated Active Company, as Euro Swing Line Lender, certain guarantors and other lenders entered into an amendment to its primary credit facility. The amended credit facility (the “Credit Facility”) established (A) a $150.0 million Euro equivalent senior secured term loan (the “Euro Term Loan”), (B) a $600.0 million senior secured term loan (the “U.S. Term Loan”), and (C) a $500.0 million senior secured revolving credit facility (the “Revolver”), each maturing in June 2027. 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. 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 June 30, 2024, 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 19 of Notes to Consolidated Financial Statements in its 2023 Form 10-K. As of June 30, 2024 , the Company had Credit Facility borrowings outstanding of $726.5 million . As of December 31, 2023 , the Company had Credit Facility borrowings outstanding of $744.5 million. The Company’s other debt obligations are primarily industrial development bonds, bank lines of credit and municipality-related loans, which totaled $11.0 million as of June 30, 2024 and $11.1 million as of December 31, 2023 . Total unused capacity under these arrangements as of June 30, 2024 was approximately $34 million . The Company’s total net debt as of June 30, 2024, which consists of total borrowings of $737.4 million less cash and cash equivalents of $188.6 million, was approximately $548.9 million . The weighted average variable interest rate incurred on the outstanding borrowings under the Credit Facility during the three and six months ended June 30, 2024 were approximately 6.2% and 6.3%, respectively. As of June 30, 2024, the interest rate on the outstanding borrowings under the Credit Facility was approximately 6.1%. 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 $445 million, which is net of bank letters of credit of approximately $3 million, as of June 30, 2024. 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 June 30, 2024, the aggregate interest rate on the swaps, including the fixed base rate plus the applicable margin, was 5.3%. See Note 17 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for further information. 22 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis In connection with executing the original credit facility in 2019 and the amended Credit Facility during the second quarter of 2022, the Company capitalized certain third-party and creditor debt issuance costs. Costs attributed to the Euro Term Loan and U.S. Term Loan were recorded as a direct offset of Long-term debt on the Condensed Consolidated Balance Sheet. Costs attributed to the Revolver were recorded within Other assets on the Condensed Consolidated Balance Sheet. These capitalized costs are collectively being amortized into Interest expense over the five-year term of the Credit Facility. As of June 30, 2024, the Company had $1.3 million of debt issuance costs recorded as an offset of Long-term debt on the Condensed Consolidated Balance Sheets and $2.9 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet. Comparatively, as of December 31, 2023, the Company had $1.5 million of debt issuance costs recorded as an offset of Long-term debt on the Condensed Consolidated Balance Sheets and $3.3 million of debt issuance costs recorded within Other assets on the Condensed Consolidated Balance Sheet in Item 1 of this Report. 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 first six months of 2024, the Company entered into and settled forward contracts resulting in other expense of $0.7 million as compared to other income of $2.1 million during the first six months of 2023 . See Note 17 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for further information . During 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. The Company expects to generate full run-rate cost savings from the global cost and optimization program of approximately $20 million by the end of 2024. The Company expects total cash costs of this program to be approximately 1 to 1.5 times annualized savings. The Company recognized Restructuring and related charges of $2.2 million and $5.0 million for the six months ended June 30, 2024, and 2023, respectively, under this program. The Company made cash payments related to the settlement of restructuring liabilities under the restructuring program during the first six months of 2024 of approximately $4.4 million compared to $5.4 million in the first six months of 2023. The Company has remaining restructuring accruals, as of June 30, 2024, for this program of $1.0 million, which the Company expects to settle during 2024. See Note 7 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Report for further information. As of June 30, 2024, the Company’s gross liability for uncertain tax positions, including interest and penalties, was $19.6 million. The Company cannot determine a reliable estimate of the timing of cash flows by period related to its uncertain tax position liability. However, should the entire liability be paid, the amount of the payment may be reduced by up to $6.6 million as a result of offsetting benefits in other tax jurisdictions. As previously disclosed in the Company’s 2023 Form 10-K, on February 28, 2024, the Board of Directors of the Company approved a new share repurchase program (“2024 Share Repurchase Program”), authorizing the Company to repurchase up to an aggregate of $150 million of the Company’s outstanding common stock and replacing the prior share repurchase program. The 2024 Share Repurchase Program was effective immediately and has no expiration date. The Company made certain repurchases under the 2024 Repurchase Program during the six months ended June 30, 2024, as mentioned above. See Item 2 within Part II of this Report for further information. The Company previously disclosed in its 2023 Form 10-K that one of its locations suffered property damage as a result of an electrical fire. The Company and its insurance carrier continue to review the impact of the electrical fire on the production facility’s operations as it relates to a potential business interruption insurance claim, and the Company has not recorded a gain contingency for a possible business interruption insurance claim as of June 30, 2024. Subsequent to the date of these financial statements, in July 2024, the Company and its insurance carrier settled this claim for $1.0 million. 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, share repurchases, 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 also 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, 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. The Company’s liquidity is affected by many factors, some based on normal operations of our business and others related to the impact of the pandemic and other global events on our business and on global economic conditions as well as industry uncertainties, which we cannot predict. We also cannot predict economic conditions and industry downturns or the timing, strength or duration of recoveries. We may seek, as we believe appropriate, additional debt or equity financing that would provide capital for corporate purposes, working capital funding, additional liquidity needs or to fund future growth opportunities, including possible acquisitions and organic investments. The timing and amount of potential capital requirements cannot be determined at this time and will depend on a number of factors, including the actual and projected demand for our products, specialty chemical industry conditions, competitive factors, and the condition of financial markets, among others. 23 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis Non-GAAP Measures The information in this Form 10-Q includes non-GAAP financial information that includes EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, taxes on income before equity in net income of associated companies – adjusted, non-GAAP net income and non-GAAP earnings per diluted share. The Company believes these non-GAAP financial measures provide meaningful supplemental information as they enhance a reader’s understanding of the Company’s financial performance and facilitate a comparison among fiscal periods, as the non-GAAP financial measures exclude items that are not considered indicative of future operating performance or not considered core to the Company’s operations. Non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP. In addition, our definitions of EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, taxes on income before equity in net income of associated companies – adjusted, non-GAAP net income and non-GAAP earnings per diluted share, as discussed and reconciled below to the most comparable respective GAAP measures, may not be comparable to similarly named measures reported by other companies. The Company presents EBITDA, which is calculated as net income attributable to the Company before depreciation and amortization, interest expense, net, and taxes on income before equity in net income of associated companies. The Company also presents adjusted EBITDA, which is calculated as EBITDA plus or minus certain items that are not considered indicative of future operating performance or not considered core to the Company’s operations. In addition, the Company presents non-GAAP operating income, which is calculated as operating income plus or minus certain items that are not considered indicative of future operating performance or not considered core to the Company’s operations. Adjusted EBITDA margin and non-GAAP operating margin are calculated as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales, respectively. The Company believes these non-GAAP measures provide transparent and useful information and are widely used by investors, analysts, and peers in our industry as well as by management in assessing the operating performance of the Company on a consistent basis. Additionally, the Company presents non-GAAP net income and non-GAAP earnings per diluted share as additional performance measures. Non-GAAP net income is calculated as adjusted EBITDA, defined above, less depreciation and amortization, interest expense, net, and taxes on income before equity in net income of associated companies, in each case adjusted, as applicable, for any depreciation, amortization, interest or tax impacts resulting from the non-core items identified in the reconciliation of net income attributable to the Company to adjusted EBITDA. Non-GAAP earnings per diluted share is calculated as non-GAAP net income per diluted share as accounted for under the “two-class share method.” The Company believes that non-GAAP net income and non-GAAP earnings per diluted share provide transparent and useful information and are widely used by investors, analysts, and peers in our industry as well as by management in assessing the operating performance of the Company on a consistent basis. Certain of the prior period non-GAAP financial measures presented in the following tables have been adjusted to conform with current period presentation. The following tables reconcile the Company’s non-GAAP financial measures (unaudited) to their most directly comparable GAAP (unaudited) financial measures (dollars in thousands unless otherwise noted, except per share amounts): Non-GAAP Operating Income and Margin Reconciliations Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Operating income $ 58,449 $ 56,795 $ 113,975 $ 106,724 Restructuring and related charges, net (a) 320 1,043 2,177 5,015 Strategic planning expenses (credits) (b) — 579 (109) 2,666 Customer insolvency costs (g) — — 1,522 — Other charges (d) 1,046 344 1,492 649 Non-GAAP operating income $ 59,815 $ 58,761 $ 119,057 $ 115,054 Non-GAAP operating margin (%) (l) 12.9 % 11.9 % 12.8 % 11.6 % 24 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and Non-GAAP Net Income Reconciliations Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net income attributable to Quaker Chemical Corporation $ 34,885 $ 29,346 $ 70,112 $ 58,880 Depreciation and amortization (j) 21,428 20,834 42,484 41,344 Interest expense, net 10,754 12,721 21,578 25,963 Taxes on income before equity in net income of associated companies (k) 15,778 13,830 28,286 23,363 EBITDA 82,845 76,731 162,460 149,550 Equity (income) loss in a captive insurance company (e) (475) 430 (981) 8 Restructuring and related charges, net (a) 320 1,043 2,177 5,015 Strategic planning expenses (credits) (b) — 579 (109) 2,666 Customer insolvency costs (g) — — 1,522 — Facility remediation recoveries (c) — (187) — (1,014) Product liability claim costs (h) — — 896 — Currency conversion impacts of hyper-inflationary economies (f) 613 1,184 (291) 1,640 Other charges (d) 988 462 1,899 1,168 Adjusted EBITDA $ 84,291 $ 80,242 $ 167,573 $ 159,033 Adjusted EBITDA margin (%) (l) 18.2 % 16.2 % 18.0 % 16.0 % Adjusted EBITDA $ 84,291 $ 80,242 $ 167,573 $ 159,033 Less: Depreciation and amortization (j) 21,428 20,834 42,484 41,344 Less: Interest expense, net 10,754 12,721 21,578 25,963 Less: Taxes on income before equity in net income of associated companies - adjusted (k) 13,877 11,913 27,606 22,960 Non-GAAP net income $ 38,232 $ 34,774 $ 75,905 $ 68,766 Non-GAAP Earnings per Diluted Share Reconciliations Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders $ 1.94 $ 1.63 $ 3.89 $ 3.27 Equity (income) loss in a captive insurance company per diluted share (e) (0.02) 0.02 (0.05) 0.00 Restructuring and related charges, net per diluted share (a) 0.01 0.04 0.09 0.21 Strategic planning expenses (credits) per diluted share (b) — 0.03 — 0.13 Customer insolvency costs per diluted share (g) — — 0.06 — Facility remediation recoveries per diluted share (c) — (0.01) — (0.05) Product liability claim costs per diluted share (h) — — 0.04 — Currency conversion impacts of hyper-inflationary economies per diluted share (f) 0.03 0.06 (0.02) 0.09 Other charges per diluted share (d) 0.04 0.02 0.08 0.04 Impact of certain discrete tax items per diluted share (i) 0.13 0.14 0.13 0.13 Non-GAAP earnings per diluted share (m) $ 2.13 $ 1.93 $ 4.22 $ 3.82 (a) Restructuring and related charges, net represent the costs incurred by the Company associated with the Company’s restructuring program. These costs are not indicative of the future operating performance of the Company. See Note 7 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report, for additional information. (b) Strategic planning expenses (credits) include consultant and advisory costs (credits) incurred in connection with long-term strategic planning, as well as planning to further optimize the Company’s footprint, processes and functions. These credits and costs recorded in SG&A are not indicative of the future operating performance of the Company. 25 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis (c) Facility remediation recoveries represent insurance recoveries of costs incurred for remediation and restoration of property damage to certain of the Company’s facilities. These costs and recoveries recorded in Other income (expense), net, are non-recurring and are not indicative of the future operating performance of the Company. There were no such gains recognized for the three and six months ended June 30, 2024. See Note 10 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report. (d) Other charges include executive transition costs, charges incurred by an inactive subsidiary of the Company as a result of the termination of restrictions on insurance settlement reserves, net gains recognized for the sale of certain facilities previously classified as held for sale, non-service components of the Company’s pension and postretirement net periodic benefit income and expense, and certain legal, financial, and other advisory and consultant costs and indemnification asset related adjustments incurred in connection with the Company's recent acquisitions. See Notes 2, 9, and 10 of Notes to Condensed Consolidated Financial Statements, which appear in Item 1 of this Report. (e) Equity (income) 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. The Company holds a 32% investment in and has significant influence over Primex, and therefore accounts for this interest under the equity method of accounting. The (income) loss attributable to Primex is not indicative of the future operating performance of the Company and is not considered core to the Company’s operations. (f) Currency conversion impacts of hyper-inflationary economies represents the foreign currency remeasurement impacts associated with the Company’s affiliates in Argentina and Türkiye whose local economies are designated as hyper-inflationary under U.S. GAAP. These pre-tax foreign currency remeasurement impacts are not deductible for tax purposes for both the three and six months ended June 30, 2024 and 2023. The charges (credits) incurred relate to the immediate recognition of foreign currency remeasurement in the Condensed Consolidated Statements of Operations and 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. (g) Customer insolvency costs represent charges associated with a specific reserve for trade accounts receivable within the Company’s EMEA reportable segment related to a specific customer that filed for bankruptcy protection. These expenses are not indicative of the future operating performance of the Company. (h) Product liability claim represents expense related to the payments by the Company in connection with a product liability dispute with a customer during the six months ended June 30, 2024. See Note 10 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report. (i) The impacts of certain discrete tax items include certain impacts of tax law changes, valuation allowance adjustments, uncertain tax positions and prior year true-ups, and the impact on certain intercompany asset transfers. The Company does not believe these items are core or indicative of future performance of the Company. See Note 11 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report. (j) Depreciation and amortization for the three and six months ended June 30, 2024 and 2023 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 adjustments. (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 the adjustments occurred, subject to deductibility. (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 divided by the weighted average number of diluted shares outstanding using the “two-class share method.” Off-Balance Sheet Arrangements The Company’s off-balance sheet items outstanding as of June 30, 2024 include approximately $4 million of 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. 26 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis Operations Consolidated Operations Review – Comparison of the Second Quarter of 2024 with the Second Quarter of 2023 Net sales were $463.6 million in the second quarter of 2024 compared to $495.4 million in the second quarter of 2023. The net sales decrease of $31.8 million, or 6%, year-over-year reflects a decrease in selling price and product mix of approximately 4%, a decline in sales volumes of approximately 1%, and an unfavorable impact from foreign currency translation of 1%. The decrease in selling price and product mix was primarily attributable to our index-based customer contracts. The decline in sales volumes was primarily attributable to a continuation of soft end market conditions across the Company’s EMEA and Americas segments, partially offset by an increase in sales volumes in the Asia/Pacific segment, the IKV acquisition and new business wins in all segments . Cost of goods sold (“COGS”) was $287.8 million in the second quarter of 2024 compared to $317.8 million in the second quarter of 2023, a decrease of approximately $30.0 million, or 9%. The decrease in COGS reflects lower spend on the decline in current year sales volumes and a decline in the Company’s global raw material costs. Gross profit was $175.7 million in the second quarter of 2024 compared to $177.7 million in the second quarter of 2023, a decrease of $2.0 million, or 1%. The Company’s reported gross margin in the second quarter of 2024 was 37.9% compared to 35.9% in the second quarter of 2023 primarily driven by a reduction in raw material costs. SG&A expense was $116.9 million in the second quarter of 2024 compared to $119.9 million in the second quarter of 2023, a decrease of approximately $3.0 million, or 3%, driven by lower incentive compensation costs. The Company incurred Restructuring and related charges of $0.3 million and $1.0 million during the second quarters of 2024 and 2023, respectively, related to reductions in headcount and site closures under the Company’s restructuring program. See the Non-GAAP Measures section of this Item above for additional information. Operating income in the second quarter of 2024 was $58.4 million compared to $56.8 million in the second quarter of 2023. 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 $59.8 million in the second quarter of 2024 as compared to $58.8 million in the second quarter of 2023 primarily due to lower SG&A expense, as described above. The Company had Other income, net of $0.4 million in the second quarter of 2024 as compared to Other expense, net of $3.6 million in the second quarter of 2023. Both the second quarter of 2024 and 2023 included foreign exchange transaction losses, which were higher in the prior year. The second quarter of 2024 also included a gain on disposal of property, plant, equipment and other assets of $0.5 million from the sale of certain facilities previously classified as held for sale. Additionally, the Company had Other income from non-income tax credits of $0.9 million in both the second quarter of 2024 and 2023. See the Non-GAAP Measures section of this Item, above. Interest expense, net, was $10.8 million in the second quarter of 2024 compared to $12.7 million in the second quarter of 2023, a decrease of approximately $1.9 million, primarily as a result of lower outstanding borrowings. The Company’s effective tax rates for the second quarters of 2024 and 2023 were 32.8% and 34.2%, respectively. The Company’s effective tax rate for the second quarter of 2024 was largely driven by the mix of pre-tax earnings, certain one-time charges related to an intercompany intangible asset transfer, and withholding taxes. Comparatively, the effective tax rate for the second quarter of 2023 was largely driven by the mix of pre-tax earnings, changes to the valuation allowance for and the usage of certain foreign tax credits, and withholding taxes. 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 2024 and 2023 would have been approximately 28% and 27%, respectively. The Company may experience continued volatility in its effective tax rates due to several factors, including the timing of tax audits, the expiration of applicable statutes of limitations as they relate to uncertain tax positions, the unpredictability of timing and amount of certain incentives in various tax jurisdictions, and the timing and amount of certain share-based compensation-related tax benefits, among other factors. In addition, the foreign tax credit valuation allowance, or absence thereof, is based on a number of factors, including forecasted mix of earnings, which may vary. Equity in net income of associated companies was $2.6 million in the second quarter of 2024 compared to $2.8 million in the second quarter of 2023, a decrease of $0.2 million, primarily due to lower 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 second quarter of 2024 and 2023. 27 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis Consolidated Operations Review – Comparison of the First Six Months of 2024 with the First Six Months of 2023 Net sales were $933.3 million in the first six months of 2024 compared to $995.6 million in the first six months of 2023. The net sales decrease of $62.3 million, or 6%, year-over-year reflects decreases in selling price and product mix of approximately 5% and a decline in sales volumes of approximately 1%. The decrease in selling price and product mix was primarily attributable to our index-based customer contracts. The decline in sales volumes was primarily attributable to a continuation of soft end market conditions across the Company’s EMEA and Americas segments, partially offset by an increase in sales volumes in the Asia/Pacific segment, the IKV acquisition and new business wins in all segments, as mentioned above . COGS were $576.0 million in the first six months of 2024 compared to $644.5 million in the first six months of 2023. The decrease in COGS of approximately $68.5 million, or 11%, reflects lower spend on the decline in current year sales volumes and a decline in the Company’s global raw material costs. Gross profit was $357.3 million in the first six months of 2024 compared to $351.1 million in the first six months of 2023, an increase of approximately $6.2 million, or 2%. The Company’s reported gross margin in the first six months of 2024 was 38.3% compared to 35.3% in the first six months of 2023. The Company’s current year-to-date improvement in gross margin was driven primarily by lower raw material costs compared to the prior year. SG&A was $241.1 million in the first six months of 2024 compared to $239.4 million in to the first six months of 2023, an increase of $1.7 million, or 1%, driven by 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 Restructuring and related charges of $2.2 million and $5.0 million during the first six months of 2024 and 2023, respectively, related to reductions in headcount and site closures under the Company’s restructuring program. See the Non-GAAP Measures section of this Item, above. Operating income in the first six months of 2024 was $114.0 million compared to $106.7 million in the first six months of 2023. 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 $119.1 million for the first six months of 2024 compared to $115.1 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 income, net of $1.5 million in the first six months of 2024 compared to Other expense, net of $5.8 million in the first six months of 2023, as the Company had lower foreign exchange losses of $1.2 million in the current year compared to losses of $7.6 million in the prior year period. The first six months of 2024 results also included $3.0 million of non-income tax refunds and other related credits partially offset by a $0.9 million expense associated with a payment related to a product liability dispute with one of the Company’s customers, whereas the prior year’s first six months of 2023 included $1.0 million of insurance reimbursements related to remediation and restoration of property damage to certain of the Company’s facilities. See the Non-GAAP Measures section of this Item, above. Interest expense, net, decreased $4.4 million in the first six months of 2024 compared to the first six months of 2023 as a result of lower outstanding borrowings. The Company’s effective tax rates for the first six months of 2024 and 2023 were 30.1% and 31.2%, respectively. The Company’s effective tax rate for the six months ended June 30, 2024 was primarily impacted by the mix of pre-tax earnings, certain one-time charges related to an intercompany intangible asset transfer, and withholding taxes, offset by changes in uncertain tax positions. Comparatively, the effective tax rate for the six months ended June 30, 2023 was largely driven by the mix of pre-tax earnings, changes to the valuation allowance for and the usage of certain foreign tax credits, and withholding taxes, partially offset with changes in uncertain tax positions and favorable return to provision adjustments. 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 2024 and 2023 would have been approximately 28% and 27%, 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. In addition, the foreign tax credit valuation allowance, or absence thereof, is based on a number of factors, including forecasted mix of earnings, which may vary. Equity in net income of associated companies decreased $2.8 million in the first six months of 2024 compared to the first six months of 2023, primarily due to lower 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 2024 and 2023. 28 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis Reportable Segments Review - Comparison of the Second Quarter of 2024 with the Second Quarter of 2023 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 performance. The Company has three reportable segments: (i) Americas; (ii) EMEA; and (iii) Asia/Pacific. Segment operating earnings for the Company’s reportable segments are comprised of net sales less COGS and SG&A directly related to the respective segment’s net sales. Operating expenses not directly attributable to the segments, such as certain corporate and administrative costs and Restructuring and related charges, net, are excluded from segment results. Other items not specifically identified with the Company’s reportable segments include Interest expense, net , and Other income (expense), net . Americas Americas represented approximately 48% of the Company’s consolidated net sales in the second quarter of 2024. This segment’s net sales were $223.5 million, a decrease of $29.7 million, or 12%, compared to the second quarter of 2023. This was driven by a decrease in sales volumes of approximately 5%, lower selling price and product mix of approximately 6%, and an unfavorable impact from foreign currency translation of 1%. The current quarter decline in sales volumes compared to the prior year was primarily driven by softer market conditions and customer outages, partially offset by new business win s. The decrease in selling price and product mix was primarily attributable to our index-based customer contracts. The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the Mexican peso. Segment o perating earnings were $64.1 million, a decrease of $4.9 million, or 7%, compared to the second quarter of 2023, primarily driven by lower sales partially offset by improved segment operating margins, driven primarily by lower raw material costs and lower SG&A expense. EMEA EMEA represented approximately 30% of the Company’s consolidated net sales in the second quarter of 2024 . This segment’s net sales were $138.0 million, a decrease of $5.5 million, or 4%, compared to the second quarter of 2023 . This was driven by lower selling price and product mix of approximately 3% and an unfavorable impact from foreign currency translation of 1%. Sales volumes were flat compared to the prior year quarter. The decrease in selling price and product mix was primarily attributable to our index-based customer contracts. Th e stable sales volumes reflect new business wins and the IKV acquisition, partially offset by softer market conditions compared to the prior year. The unfavorable foreign curren cy translation impact was primarily due to the strengthening of the U.S. dollar against the Euro . Segment operating earnings were $26.7 million, an increase of $1.1 million, or 4%, compared to the second quarter of 2023, as higher segment operating margins driven by lower raw material costs and lower SG&A expenses more than offset lower sales. Asia/Pacific Asia/Pacific represented approximately 22% of the Company’s consolidated net sales in the second quarter of 2024. This segment’s net sales were $102.0 million, an increase of $3.4 million, or 3%, compared to the second quarter of 2023. This was driven by higher sales volumes of 7%, partially offset by a decrease in selling price and product mix of 1% and an unfavorable impact from foreign currency translation of 3%. The increase in sales volumes was primarily driven by an increase in end market activity compared to the prior year period and new business wins. The decrease in selling price and product mix was primarily attributable to our index-based customer contracts . The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the Chinese renminbi. Segment operating earnings were $31.0 million, an increase of $3.0 million, or 11%, compared to the second quarter of 2023 primarily driven by an increase in net sales and an improvement in segment operating margins. Reportable Segments Review - Comparison of the First Six Months of 2024 with the First Six Months of 2023 Americas Americas represented approximately 49% of the Company’s consolidated net sales in the first six months of 2024. This segment’s net sales were $453.3 million , a decrease of $51.4 million, or 10%, compared to the first six months of 2023 . This was driven by a decrease in selling price and product mix of 6% and a decrease in sales volumes of 5%, partially offset by a favorable impact of foreign currency translation of 1%. The decrease in selling price and product mix was primarily attributable to the year-over-year impact our index-based customer contracts . The decline in sales volumes compared to the prior year was primarily driven by softer market conditions and customer order patterns and outages, partially offset by new business win s, as mentioned above. The favorable foreign exchange impact was primarily due to the weakening of the U.S. dollar against the Mexican peso during the first six months of 2024 compared to 2023. This segment’s operating earnings were $130.9 million , a decrease of $4.2 million, or 3%, compared to the first six months of 2023 primarily driven by lower net sales partially offset by an improvement in segment operating margins. 29 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis EMEA EMEA represented approximately 29% of the Company’s consolidated net sales in the first six months of 2024 . This segment’s net sales were $276.4 million, a decrease of $19.6 million, or 7%, compared to the first six months of 2023. This was a result of a decrease in selling price and product mix of 5% and a decrease in sales volumes of 2%. The decrease in selling price and product mix was primarily attributable to the year-over-year impact of our index-based customer contracts. The decline in sales volumes was primarily driven by softer market conditions, partially offset by new business wins and the IKV acquisition. This segment’s operating earnings were $56.2 million, an increase of $3.1 million, or 6%, compared to the first six months of 2023 primarily driven by an improvement in segment operating margins. Asia/Pacific Asia/Pacific represented approximately 22% of the Company’s consolidated net sales in the first six months of 2024. This segment’s net sales were $203.6 million, an increase of $8.7 million, or 4%, compared to the first six months of 2023 . This was driven by higher sales volumes of 11%, partially offset by an unfavorable impact of foreign currency translation of 4% and lower selling price and product mix of 3%. The higher sales volumes were primarily driven by a broad-based increase in end market activity compared to the prior year period and new business wins. The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the Chinese renminbi. The decrease in selling price and product mix was primarily attributable to the year-over-year impact of our index-based customer contracts , as mentioned above . This segment’s operating earnings were $61.4 million , an increase of $5.7 million, or 10%, compared to the first six months of 2023 . This was primarily driven by an improvement in segment operating margins coupled with the increase in net sales. Factors That May Affect Our Future Results Certain information included in this Report and other materials filed or to be filed by us with the SEC, as well as information included in oral statements or other written statements made or to be made by us, contain or may contain forward-looking statements that fall under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and the Securities Act of 1933, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts and can generally be identified by words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “outlook,” “target,” “possible,” “potential,” “plan” or similar expressions, but these terms are not the exclusive means of identifying such statements. We have based these forward-looking statements on assumptions, projections and expectations about future events that we believe are reasonable based on currently available information, including statements regarding the potential effects of the conflicts in Ukraine and the Middle East, inflation, and global supply chain constraints on the Company’s business, results of operations, and financial condition; our expectation that we will maintain sufficient liquidity and remain in compliance with the terms of the Company’s credit facility; expectations about future demand and raw material costs; and statements regarding the impact of increased raw material costs and pricing initiatives. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance, and business, which may differ materially from expectations, estimates and projections of many factors, including, but not limited to: • the timing and extent of the projected impacts on our business of acts of war or terrorism, including the conflicts in Ukraine and the Middle East, and actions taken by various governments and governmental organizations in response; • inflationary pressures, cost increases and the impacts of constraints and disruptions in the global supply chain; • the potential timing, impacts, benefits and other uncertainties of acquisitions and divestitures, including our ability to realize synergies, integrate acquisitions or separate divested assets and businesses; • the potential for changes in global and regional economic conditions and for a variety of macroeconomic events, including the possibility of global or regional slowdowns or recessions, a global pandemic, interest rate changes, inflation, deflation or stagflation and its impact on our business, raw materials purchases and/or profitability of our business impact the value of our assets; and • our future results and plans including our sustainability goals and enterprise strategy Such statements include information relating to current and future business activities, operational matters, capital spending, and financing sources. From time to time, forward-looking statements are also included in the Company’s other periodic reports on Forms 10-K, 10-Q and 8-K, press releases, and other materials released to, or statements made to, the public. 30 Table of Contents Quaker Chemical Corporation Management’s Discussion and Analysis Any or all of the forward-looking statements in this Report, in the Company’s 2023 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. Many factors discussed in this Report will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in the Company’s subsequent reports on Forms 10-K, 10-Q, 8-K and other related filings should be consulted. A major risk is that demand for the Company’s products and services is largely derived from the demand for our customers’ products, which subjects the Company to uncertainties related to downturns in a customer’s business and unanticipated customer production slowdowns and shutdowns. Other major risks and uncertainties include, but are not limited to, inflationary pressures, including the potential for continued significant increases in raw material costs; supply chain disruptions; customer financial instability; high interest rates and the possibility of economic recession; economic and political disruptions particularly in light of numerous elections globally and the possibility of regime changes and including the impacts of the military conflicts between Russia and Ukraine and between Israel and Hamas; legislative and regulatory developments including changes to existing laws and regulations, or the way they are interpreted, applied or enforced; tariffs, trade restrictions and the economic and other sanctions imposed by other nations on Russia and Belarus and/or other government organizations; suspensions of activities in Russia by many multinational companies and the potential expansion of military activity; foreign currency fluctuations; significant changes in applicable tax rates and regulations; future terrorist attacks and other acts of violence; the impacts of consolidation in our industry, including loss or consolidation of a major customer; and the potential occurrence of cyber-security breaches, cyber-security attacks and other technology outages and security incidents. Furthermore, the Company is subject to the same business cycles as those experienced by our customers in the steel, automobile, aircraft, industrial equipment, aluminum, and durable goods industries. Other factors could also adversely affect us, including those related to acquisitions and the integration of acquired businesses. Therefore, we caution you not to place undue reliance on our forward-looking statements. For more information regarding these risks and uncertainties as well as certain additional risks that we face, refer to the Risk Factors section, which appears in Item 1A in our 2023 Form 10-K and in our quarterly and other reports filed from time to time with the SEC. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. Quaker Houghton on the Internet Financial results, news and other information about Quaker Houghton can be accessed from the Company’s website at https://www.quakerhoughton.com. This site includes important information on the Company’s locations, products and services, financial reports, news releases and career opportunities. The Company’s periodic and current reports on Forms 10-K, 10-Q, 8-K, and other filings, including exhibits and supplemental schedules filed therewith, and amendments to those reports, filed with the SEC are available on the Company’s website, free of charge, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Information contained on, or that may be accessed through, the Company’s website is not incorporated by reference in this Report and, accordingly, you should not consider that information part of this Report. 31 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk. We have evaluated the information required under this Item that was disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2023, and we believe there has been no material change to that information.