Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Quaker Houghton’s earnings, cash flows and financial position are exposed to the impact of fluctuations in interest rates, foreign currency exchange rates, and commodity prices, as well as credit risk. Except as otherwise disclosed below, the market risks discussed below did not change materially from December 31, 2024.
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Interest Rate Risk. During June 2022, the Company entered into an amendment to its primary credit facility (the “Credit Facility”). See Note 19, Debt, to the Consolidated Financial Statements for additional details. As of December 31, 2025, borrowings under the Credit Facility bear interest at either term SOFR or a base rate, in each case, plus an applicable margin based upon the Company’s consolidated net leverage ratio, and, in the case of term SOFR, a spread adjustment equal to 0.10% per annum. As a result of the variable interest rates applicable under the Credit Facility, if interest rates rise significantly, the cost of debt to the Company will increase. This may have an adverse effect on the Company, depending on the extent of the Company’s borrowings outstanding throughout a given year. As of December 31, 2025, the Company had outstanding borrowings under the Credit Facility of approximately $859.7 million. The interest rate applicable on outstanding borrowings under the Credit Facility was approximately 4.7% as of December 31, 2025. An interest rate change of 100 basis points would result in an approximate $8.6 million increase or decrease to interest expense for the year ended December 31, 2025.
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 December 31, 2025, the aggregate interest rate on the swaps, including the fixed base rate plus the applicable margin, was 5.0%. These interest rate swaps are designated and qualify as cash flow hedges.
Foreign Exchange Risk . A significant portion of the Company’s revenues and earnings are generated by its foreign operations. During the past three years, sales by its non-U.S. subsidiaries accounted for approximately 63% to 67% of its consolidated net sales. These foreign operations also represent a significant portion of the Company’s assets and liabilities. In addition, the Company occasionally sources inventory among its worldwide operations. This practice can give rise to foreign exchange risk resulting from the varying cost of inventory to the receiving location, as well as from the revaluation of intercompany balances. The Company primarily mitigates this risk through local sourcing efforts.
Generally, these foreign operations use the local currency as their functional currency. Accordingly, the Company’s financial results are affected by foreign currency fluctuations, particularly between the U.S. dollar and the euro, the British pound sterling, the Brazilian real, the Mexican peso, the Chinese renminbi and the Indian rupee. The Company’s results can be materially affected depending on the volatility and magnitude of foreign exchange rate changes. If the euro, the British pound sterling, the Brazilian real, the Mexican peso, the Chinese renminbi and the Indian rupee had all weakened or strengthened by 10% against the U.S. dollar, the Company’s 2025 revenues would have correspondingly decreased or increased by approximately $100.4 million. Similarly, pre-tax earnings would increase or decrease by approximately $10.5 million.
The Company uses cross currency swaps, designated as net investment hedges, to hedge portions of its net investment in its European and Japanese operations. The net investment hedges serve to offset the foreign currency translation risk from the Company’s foreign operations. See Note 24, Hedging Activities , to the Consolidated Financial Statements for additional details.
Commodity Price Risk . Many of the raw materials used by the Company are derivatives of commodity chemicals, which can experience significant price volatility, and therefore the Company’s earnings can be materially affected by market changes in raw material prices. At times, the Company has entered into fixed-price purchase contracts to manage this risk. These contracts provide protection to the Company if the prices for the contracted raw materials rise; however, in certain circumstances, the Company may not realize the benefit if such prices decline. A gross margin change of one percentage point would correspondingly have increased or decreased the Company’s pre-tax earnings by approximately $18.9 million.
Credit Risk . The Company establishes allowances for credit losses for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Downturns in the overall economic climate may also exacerbate specific customer financial issues. A significant portion of the Company’s revenues are derived from sales to customers in the steel and automotive industries, including some of our larger customers, where bankruptcies have occurred in the past and where companies have experienced past financial difficulties. Though infrequent, when a bankruptcy occurs, Quaker Houghton must judge the amount of proceeds, if any, that may ultimately be received through the bankruptcy or liquidation process.
In addition, as part of its terms of trade, the Company may custom manufacture products for certain large customers and may also ship products on a consignment basis. These practices may increase the Company’s exposure to customer credit risk, including bankruptcy and may require a write-down or disposal of inventory due to obsolescence or limited marketability as well as a reserve for accounts receivable. Customer product returns or disputes may also result in similar issues related to the realizability of accounts receivable or inventory. The Company recorded expense to increase its provision for credit losses by $0.7 million, $2.1 million and $1.3 million for the years ended December 31, 2025, 2024 and 2023, respectively. A change of 10% to the expense recorded to the Company’s provision would have increased or decreased the Company’s pre-tax earnings by $0.1 million, $0.2 million and $0.1 million for the years ended December 31, 2025, 2024 and 2023, respectively.
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