QUAKER CHEMICAL CORP (KWR) FY 2021 MD&A

Item 7.

Management’s Discussion and Analysis

of Financial Condition and Results of Operations.

As used in this Annual Report on Form 10-K (the “Report”), the terms “Quaker

Houghton,” the “Company,”

“we,” and “our”

refer to Quaker Chemical Corporation (doing business as Quaker

Houghton), its subsidiaries, and associated companies, unless the

context otherwise requires.

The term Legacy Quaker refers to the Company prior to the closing of its combination

with Houghton

International, Inc. (“Houghton”) (herein referred to as the “Combination”)

on August 1, 2019.

Throughout the Report, all figures

presented, unless otherwise stated, reflect the results of operations

of the combined company for the years ended December 31, 2020

and 2021; and for the year ended

December 31, 2019, the results of Legacy Quaker plus five months

of Houghton’s operations post-

closing of the Combination on August 1, 2019.

Executive Summary

Quaker Houghton is the global leader in industrial process fluids.

With a presence around the world, including

operations in over

25 countries, our customers include thousands of the world’s

most advanced and specialized steel, aluminum, automotive, aerospace,

offshore, can, mining, and metalworking companies.

Our high-performing, innovative and sustainable solutions are backed by best-

in-class technology,

deep process knowledge, and customized services.

Quaker Houghton is headquartered in Conshohocken,

Pennsylvania, located near Philadelphia in the U.S.

Overall, the Company’s 2021 performance

was highlighted by the continued recovery from the impacts of COVID-19 in

2020 as

well as the ongoing execution of integration activities and synergy

realization, which led to record net sales and adjusted EBITDA in

2021 despite the continued escalation in raw material cost headwinds

and global supply chain pressures.

Specifically, net sales of

$1,761.2 million in 2021

increased 24% compared to $1,417.7 million in 2020, primarily

due to higher volumes of approximately

13%, including additional net sales from acquisitions of 4%, increases from

selling price and product mix of approximately 8% and

the positive impact from foreign currency translation of 3%.

The increase in sales volumes

compared to 2020 was primarily a result

of continued new business wins and the year-over-year

improvement in end market conditions since the beginning of the COVID-19

pandemic in early 2020, partially offset by lower automotive

sales due to semiconductor shortages and delayed shipments due

to

supply chain challenges that occurred towards the end of 2021.

The increase in selling price and product mix is primarily the result of

the Company’s broad price

increases implemented during 2021 to help offset the unprecedented

increases in raw material costs as well

as global supply chain and logistics cost pressures the Company has experienced

throughout 2021.

The Company’s net income and

earnings per diluted share of $121.4 million and $6.77 in 2021, respectively,

increased compared

to $39.7 million and $2.22 per diluted share, respectively,

in 2020.

Excluding non-recurring items, including costs associated with the

Combination and other non-core items in each period, the Company’s

current year non-GAAP net income and non-GAAP earnings

per diluted share were $122.8 million and $6.85, respectively,

compared to $85.2 million and $4.78, respectively,

in 2020.

The

increase in the Company’s current

year earnings drove a 23% higher adjusted EBITDA to a full year record

of $274.1 million

compared to $222.0 million in 2020, primarily due to the significant increase

in net sales year-over-year as well as higher realized cost

synergies from the Combination, partially offset

by lower gross margins driven by higher raw material and input costs and the

impacts

of disruptions in the global supply chain experienced in 2021 as well as higher selling,

general and administrative expenses (“SG&A”)

including the impact of higher sales on direct selling expenses and additional

SG&A from recent acquisitions.

The Company’s 2021

operating performance in each of its four reportable segments: (i) Americas; (ii) EMEA;

(iii) Asia/Pacific;

and (iv) Global Specialty Businesses, reflect similar drivers to that of

its consolidated performance.

All four segments had higher net

sales compared to 2020 reflecting the continued rebound in 2021

from the negative impacts of COVID-19 on the Company’s

end

markets as well as continued success of winning new business in each of the

Company’s segments during 2021.

Each of the

Company’s geographic segments

benefited from higher organic sales volumes in 2021

while all of the Company’s segments also

benefitted from additional net sales from acquisitions, the positive impact

from foreign currency translation due to the strengthening of

most major currencies against the U.S. dollar,

and from increases in selling price and product mix.

As reported, each of the

Company’s reportable

segment operating earnings were higher compared to 2020 reflecting the increase

in net sales including the

benefits of acquisitions and other factors mentioned;

however, all of the Company’s

segment’s operating earnings were negatively

impacted by persistent raw material inflation, higher logistics, labor and manufacturing

costs, impacts of disruptions to the global

supply chain as well as higher SG&A which were a result of an increase

in direct selling expenses associated with year-over-year

inflation increases and increases due to the increase in net sales as well as the lower levels

of prior year SG&A as a result of

temporary cost saving measures implemented in response to COVID-19.

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 7, below.

The Company generated net operating cash flow of $48.9 million in 2021

compared to $178.4 million in 2020.

The decrease in

net operating cash flow year-over-year

was primarily driven by a significant change in working capital compared

to the prior year,

mainly increases in accounts receivable, due to higher net sales and in inventory,

due to higher costs as well as building inventories in

response to global supply chain and logistics pressures.

The key drivers of the Company’s operating

cash flow and overall liquidity

are further discussed in the Company’s

Liquidity and Capital Resources section of this Item 7, below.

Overall, the Company’s 2021 results

were good and reflected the Company’s

ability to navigate through persistent raw material

cost pressures, supply chain challenges and automotive semiconductor

shortages.

Increases in net sales in all segments were driven by

the continued year-over-year improvement

in the Company’s end-markets and increased

customer demand from lower levels

experienced during 2020 as a result of COVID-19; however,

each segment was negatively impacted by the significant

escalation of

24

raw material costs as well as higher levels of SG&A compared to the prior

year which included certain temporary cost saving

measures adopted during the onset of COVID-19.

Continued strong customer demand in 2021 coupled with ongoing new business

wins and the execution of integration activities and synergy realization

helped to partially offset the negative impacts from the

continued escalation of raw material costs and continued supply chain pressures.

As the Company looks toward 2022, the business is well positioned to

continue to outpace market growth rates and deliver value-

added solutions and services to its customers.

Demand remains healthy across most of our end markets; however,

the Company

expects raw material cost pressures and supply chain disruptions to persist throughout

2022.

To mitigate these headwinds,

the

Company continues to implement further price actions and is actively

managing its cost structure.

The Company believes these

actions will begin to drive a recovery in margins as it progresses through

2022.

The Company remains committed to advancing its

customer intimate strategy and sustainability program and delivering

earnings growth in 2022 and beyond.

On-going impact of COVID-19

The global outbreak of COVID-19 has negatively impacted all locations where

the Company does business.

Although the

Company has now operated in this COVID-19 environment for almost

two years, the full extent of the outbreak and related business

impacts continue to remain uncertain and volatile, and therefore the

full extent to which COVID-19 may impact the Company’s

future

results of operations or financial condition is uncertain.

This outbreak has significantly disrupted the operations of the Company

and

those of its suppliers and customers.

During the pandemic, the Company initially experienced volume declines

and lower net sales as

compared to pre-COVID-19 levels, as further described in this section.

Management continues to monitor the impact that the

COVID-19 pandemic is having on the Company,

the overall specialty chemical industry and the economies and markets in which the

Company operates.

The prolonged pandemic and resurgences of the outbreak including as new

variants continue to emerge, and

continued restrictions on day-to-day life and business

operations as well as increased border controls or closures and transportation

disruptions may result in volume declines and lower net sales in future periods.

To the extent that the Company’s

customers and

suppliers continue to be significantly and adversely impacted by

COVID-19, this could reduce the availability,

or result in delays, of

materials or supplies to or from the Company,

which in turn could significantly interrupt the Company’s

business operations.

Given

this ongoing uncertainty,

the Company cautions that its future results of operations could be significantly adversely

impacted by

COVID-19.

Further, management continues to evaluate

how COVID-19-related circumstances, such as remote work arrangements,

illness or staffing shortages and travel restrictions have affected

financial reporting processes and systems, internal control over

financial reporting, and disclosure controls and procedures.

While the circumstances have presented and are expected to continue

to

present challenges, and have necessitated additional time and resources

to be deployed to sufficiently address the challenges brought

on by the pandemic, at this time, management does not believe that COVID-19

has had a material impact on financial reporting

processes, internal controls over financial reporting, or disclosure controls

and procedures.

The Company’s top priority,

especially during this pandemic, is to protect the health and safety of its employees

and customers,

while working to ensure business continuity to meet customers’ needs.

The Company continues to take steps to protect the health and

wellbeing of its people in affected areas through various

actions, including enabling work at home where needed and practicable, and

employing social distancing standards, implementing

travel restrictions where applicable, enhancing onsite hygiene practices, and

instituting visitation restrictions at the Company’s

facilities.

The Company has not and does not expect that it will incur material

expenses implementing these health and safety policies.

All of the Company’s more than 30 production

facilities worldwide are open

and operating and are deemed as essential businesses in the jurisdictions where

they are operating.

The Company believes that to date

it has been able to meet the needs of all its customers across the globe despite

the current economic challenges.

The Company’s fiscal

year 2021 showed year-over-year improvement

from the prior fiscal year and continued a trend of gradual volume improvement which

began in the second half of 2020.

The Company continues to expect that the impacts from COVID-19 will gradually

decline subject

to the effective containment of the virus and its variants and successful

distribution and acceptance of the available vaccines and

treatments.

However, the incidence of reported cases of COVID-19

or a variant in several geographies where the Company has

significant operations remains high and continues to evolve and it remains

highly uncertain as to how long the global pandemic and

related economic challenges will last and when our customers’ businesses will recover

to pre-COVID-19 levels.

The Company took

various actions to temporarily conserve cash and reduce costs since the onset of

the pandemic and these temporary initiatives were

designed and implemented so that the Company could successfully manage

through the challenging COVID-19 situation while

continuing to protect the health of its employees, meet customers’ needs,

maintain the Company’s long-term competitive

advantages

and above-market growth, and enable it to continue to effectively

integrate Houghton.

While the actions taken to date to protect our

workforce, to continue to serve our customers with excellence and to conserve

cash and reduce costs, have been effective thus far,

further actions to respond to the pandemic and its effects may

be necessary as conditions continue to evolve.

Critical Accounting Policies and Estimates

Quaker Houghton’s discussion

and analysis of its financial condition and results of operations are based

upon its consolidated

financial statements which have been prepared in accordance with accounting

principles generally accepted in the United States (“U.S.

GAAP”).

The preparation of these financial statements requires the Company

to make estimates and judgments that affect the

reported amounts of assets, liabilities, revenues and expenses, and related disclosure

of contingent assets and liabilities.

On an

ongoing basis, the Company evaluates its estimates, including those related

to customer sales incentives, product returns, bad debts,

inventories, property,

plant and equipment (“PP&E”), investments, goodwill, intangible assets, income taxes,

business combinations,

restructuring, incentive compensation plans (including equity-based

compensation), pensions and other postretirement benefits,

25

contingencies and litigation.

Quaker Houghton bases its estimates on historical experience and on various

other assumptions that are

believed to be reasonable under such circumstances, the results of which

form the basis for making judgments about the carrying

values of assets and liabilities that are not readily apparent from other sources.

However, actual results may differ from

these

estimates under different assumptions or conditions.

Quaker Houghton believes the following critical accounting policies describe

the more significant judgments and estimates used

in the preparation of its consolidated financial statements:

Accounts receivable and inventory exposures:

Quaker Houghton establishes allowances for doubtful accounts 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 may be required.

As part of

our terms of trade, we may custom manufacture products for certain large

customers and/or may ship products on a consignment basis.

Further, a significant portion of our revenue

is derived from sales to customers in industries where companies have experienced

past

financial difficulties.

If a significant customer bankruptcy occurs, then we must judge the amount of proceeds,

if any, that may

ultimately be received through the bankruptcy or liquidation process.

These matters may increase the Company’s

exposure should a

bankruptcy occur, and may require

a write down or a disposal of certain inventory as well as the failure to collect receivables.

Reserves for customers filing for bankruptcy protection are established

based on a percentage of the amount of receivables outstanding

at the bankruptcy filing date.

However, initially establishing this reserve

and the amount thereof is dependent on the Company’s

evaluation of likely proceeds to be received from the bankruptcy process, which

could result in the Company recognizing minimal or

no reserve at the date of bankruptcy.

We generally reserve

for large and/or financially distressed customers on a specific review

basis,

while a general reserve is maintained for other customers based on

historical experience.

The Company’s consolidated

allowance for

doubtful accounts was $12.3 million and $13.1 million as of December 31,

2021

and 2020, respectively.

The Company recorded

expense to increase its provision for doubtful accounts by $0.7 million,

$3.6 million and $1.9 million for the years ended December

31, 2021, 2020 and 2019, respectively.

Changing the amount of expense recorded to the Company’s

provisions by 10% would have

increased or decreased the Company’s

pre-tax earnings by $0.1 million, $0.4

million and $0.2 million for the years ended December

31, 2021, 2020 and 2019, respectively.

See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Environmental and litigation reserves:

Accruals

for environmental and litigation matters are recorded when

it is probable that a

liability has been incurred and the amount of the liability can be reasonably

estimated.

Environmental costs and remediation costs are

capitalized if the costs extend the life, increase the capacity or improve

the safety or efficiency of the property from the date acquired

or constructed, and/or mitigate or prevent contamination in the future.

Estimates for accruals for environmental matters are based on a

variety of potential technical solutions, governmental regulations and

other factors, and are subject to a wide range of potential costs

for remediation and other actions.

A considerable amount of judgment is required in determining the most likely

estimate within the

range of total costs, and the factors determining this judgment may vary

over time.

Similarly, reserves for litigation

and similar

matters are based on a range of potential outcomes and require considerable

judgment in determining the most probable outcome.

If

no amount within the range is considered more probable than any other

amount, the Company accrues the lowest amount in that range

in accordance with generally accepted accounting principles.

See Note 26 of Notes to Consolidated Financial Statements in Item 8 of

this Report.

Realizability of equity investments:

The Company holds equity investments in various foreign companies

where it has the

ability to influence, but not control, the operations of the entity

and its future results.

The Company would record an impairment

charge to an investment if it concluded that a decline in value that was other

than temporary occurred.

Adverse changes in market

conditions, poor operating results of underlying investments, devaluation

of foreign currencies or other events or circumstances could

result in losses or an inability to recover the carrying value of the investments,

potentially leading to an impairment charge in the

future.

The carrying amount of the Company’s

equity investments as of December 31, 2021

was $95.3

million, which included four

investments: $21.5 million for a 32% interest in Primex, Ltd. (Barbados);

$7.1 million for a 50% interest in Nippon Quaker Chemical,

Ltd. (Japan); $0.3 million for a 50% interest in Kelko Quaker Chemical, S.A.

(Panama); and $66.4 million for a 50% interest in Korea

Houghton Corporation (Korea).

The Company also has a 50% interest in a Venezuelan

affiliate, Kelko Quaker Chemical, S.A

(Venezuela).

Due to heightened foreign exchange controls, deteriorating economic circumstances

and other restrictions in Venezuela,

during 2018 the Company concluded that it no longer had significant

influence over this affiliate.

Prior to this determination, the

Company historically accounted for this affiliate under

the equity method.

As of December 31, 2021

and 2020, the Company had no

remaining carrying value for its investment in Venezuela.

See Note 17 of Notes to Consolidated Financial Statements in Item 8 of this

Report.

Tax

exposures, uncertain tax positions and valuation allowances:

Quaker Houghton records expenses and liabilities for taxes

based on estimates of amounts that will be determined as deductible in tax

returns filed in various jurisdictions.

The filed tax returns

are subject to audit, which often occur several years subsequent to

the date of the financial statements.

Disputes or disagreements may

arise during audits over the timing or validity of certain items or deductions,

which may not be resolved for extended periods of time.

The Company also evaluates uncertain tax positions on all income tax

positions taken on previously filed tax returns or expected to be

taken on a future tax return in accordance with FIN 48, which prescribes

the recognition threshold and measurement attributes for

financial statement recognition and measurement of tax positions taken

or expected to be taken on a tax return and, also, whether the

benefits of tax positions are probable or if they will be more likely than not to be sustained upon

audit based upon the technical merits

of the tax position.

For tax positions that are determined to be more likely than not to be sustained upon audit, the

Company

26

recognizes the largest amount of benefit that is greater

than 50% likely of being realized upon ultimate settlement in the financial

statements.

For tax positions that are not determined to be more likely than not

sustained upon audit, the Company does not recognize

any portion of the benefit in its financial statements.

In addition, the Company’s

continuing practice is to recognize interest and/or

penalties related to income tax matters in income tax expense.

Also, the Company nets its liability for unrecognized tax benefits

against deferred tax assets related to net operating losses or other tax credit carryforward

on the basis that the uncertain tax position is

settled for the presumed amount at the balance sheet date.

Quaker Houghton also records valuation allowances when necessary

to reduce its deferred tax assets to the amount that is more

likely than not to be realized.

While the Company has considered future taxable income and assesses the need for

a valuation

allowance, in the event Quaker Houghton were to determine that it would

be able to realize its deferred tax assets in the future in

excess of its net recorded amount, an adjustment to the deferred

tax asset would increase income in the period such determination was

made.

Likewise, should the Company determine that it would not be able to realize all or part of

its net deferred tax assets in the

future, an adjustment to the deferred tax asset would be charged

to income in the period such determination was made.

Both

determinations could have a material impact on the Company’s

financial statements.

Pursuant to the Tax

Cuts and Jobs Act (“U.S. Tax

Reform”), the Company recorded a $15.5 million transition tax liability

for

U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries.

As of December 31, 2021, $7.0 million in installment have

been paid with the remaining $8.5 million to be paid through installments in future

years.

However, the Company may also be subject

to other taxes, such as withholding taxes and dividend distribution taxes,

if these undistributed earnings are ultimately remitted to the

U.S.

As of December 31, 2021, the Company has a deferred tax liability of

$8.4 million, which primarily represents the estimate of

the non-U.S. taxes the Company will incur to remit certain previously

taxed earnings to the U.S.

It is the Company’s current intention

to reinvest its future undistributed earnings of non-U.S. subsidiaries to support

working capital needs and certain other growth

initiatives outside of the U.S.

The amount of such undistributed earnings at December 31, 2021

was approximately $377.4

million.

Any tax liability which might result from ultimate remittance of these earnings

is expected to be substantially offset by

foreign tax credits (subject to certain limitations).

It is currently impractical to estimate any such incremental tax expense.

See Note

10 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Goodwill and other intangible assets:

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, at their

acquisition date 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 requires management’s

judgment and often

involves the use of significant estimates and assumptions, including

assumptions with respect to future cash inflows and outflows,

discount rates, royalty rates, asset lives and market multiples, among other

items.

When necessary, the Company consults with

external advisors to help determine fair value.

For non-observable market values, the Company may determine fair value

using

acceptable valuation principles, including the excess earnings, relief

from royalty, lost profit or cost

methods.

The Company amortizes definite-lived intangible assets on a straight-line

basis over their useful lives.

Goodwill and intangible

assets that have indefinite lives are not amortized and are required to be assessed at least annually

for impairment.

The Company

completes its annual goodwill and indefinite-lived intangible asset impairment

test during the fourth quarter of each year, or

more

frequently if triggering events indicate a possible impairment.

The Company’s consolidated

goodwill at both December 31, 2021 and

2020 was $631.2 million.

The Company completed its annual impairment assessment over goodwill during

the fourth quarter of 2021

by performing a qualitative assessment.

Based on the assessment performed, the Company concluded that there

was no evidence of

events or circumstances that would indicate a material change from

the Company’s prior year quantitative

assessment by reporting

unit and, therefore, no impairment charges were

warranted.

The Company’s consolidated indefinite

-lived intangible assets at

December 31, 2021 and 2020 were $196.9 million and $205.1 million,

respectively, which primarily

consists of Houghton and

Fluidcare

TM

trademarks and tradename.

The Company completed its annual indefinite-lived intangible asset impairment assessment

during the fourth quarter of 2021, and determined that no impairment

charge was warranted.

The determination of estimated fair

value of these indefinite-lived intangible assets is based on a relief from royalty

valuation method, which requires management’s

judgment and often involves the use of significant estimates and assumptions,

including assumptions with respect to royalty rates, as

well as revenue growth rates and terminal growth rates.

The Company’s impairment assessment

concluded that the carrying value of

acquired Houghton and Fluidcare

TM

trademarks and tradename intangible assets exceeded fair value by

approximately 61%.

See Note

16 of Notes to Consolidated Financial Statements in Item 8 of this Report.

As previously disclosed, as of March 31, 2020, the Company concluded that

the impact of COVID-19 did not represent a

triggering

event with regards to any of the Company’s

indefinite-lived and long-lived assets, except for the Company’s

Houghton and

Fluidcare

TM

trademarks and tradename indefinite-lived intangible assets.

In the first quarter of 2020, as a result of the impact of

COVID-19 driving a decrease in projected legacy Houghton net sales during

that year and the impact of the sales decline on projected

future legacy Houghton net sales as well as an increase in the weighted average

cost of capital assumption utilized in the quantitative

impairment assessment, the Company concluded that the estimated fair

values of the Houghton and Fluidcare

TM

trademarks and

tradename intangible assets were less than their carrying values.

As a result, an impairment charge of $38.0 million

was recorded

during the first quarter of 2020 to write down the carrying values of these intangible

assets to their estimated fair values.

27

Pension and Postretirement benefits:

The Company provides certain defined benefit pension and

other postretirement benefits

to current employees, former employees and retirees.

Independent actuaries, in accordance with U.S. GAAP,

perform the required

valuations to determine benefit expense and, if necessary,

non-cash charges to equity for additional minimum pension liabilities.

Critical assumptions used in the actuarial valuation include the weighted

average discount rate, which is based on applicable yield

curve data, including the use of a split discount rate (spot-rate approach)

for the U.S. plans and certain foreign plans, rates of increase

in compensation levels, and expected long-term rates of return

on assets.

If different assumptions were used, additional pension

expense or charges to equity might be required.

The following table highlights the potential impact on the Company’s

pre-tax earnings due to changes in assumptions with respect

to the Company’s defined benefit pension

and postretirement benefit plans, based on assets and liabilities as of December 31,

2021:

1/2 Percentage Point Increase

1/2 Percentage Point Decrease

(dollars in millions)

Foreign

U.S.

Total

Foreign

U.S.

Total

Discount rate (1)

$

(0.2)

$

0.2

$

0.0

$

0.3

$

(0.2)

$

0.1

Expected rate of return on plan

assets (2)

0.5

0.2

0.7

(0.5)

(0.2)

(0.7)

(1)

The weighted-average discount rate used to determine net periodic benefit

costs for the year ended December 31, 2021 was

1.4% for Foreign plans and 2.7% for U.S. plans.

(2)

The weighted average expected rate of return on plan assets used to determine

net periodic benefit costs for the year ended

December 31, 2021 was 2.1% for Foreign plans and 5.8% for U.S. plans.

Restructuring and other related liabilities:

A restructuring related program may consist of charges for

employee severance,

rationalization of manufacturing facilities and other related expenses.

To account for such, the

Company applies the Financial

Accounting Standards Board’s

guidance regarding exit or disposal cost obligations.

This guidance requires that a liability for a cost

associated with an exit or disposal activity be recognized when the liability

is incurred, is estimable, and payment is probable.

See

Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Recently Issued Accounting Standards

See Note 3 of Notes to the Consolidated Financial Statements in Item 8 of this Report

for a discussion regarding recently issued

accounting standards.

Liquidity and Capital Resources

At December 31, 2021, the Company had cash, cash equivalents and

restricted cash of $165.2 million.

Total cash, cash

equivalents and restricted cash was $181.9 million at December

31, 2020.

The $16.7 million decrease in cash, cash equivalents and

restricted cash was the net result $49.1 million of cash used in investing

activities, $13.5 million of cash used in financing activities

and approximately $3.1 million of negative impacts due to the effect

of foreign currency translation on cash, partially offset by $48.9

million of cash provided by operating activities.

Net cash flows provided by operating activities were $48.9 million in

2021 compared to $178.4 million in 2020.

The Company’s

current year net operating cash flow decrease was primarily driven by

a significant change in working capital which more than offset

the Company’s higher earnings in 2021

.

The significant increase in current year net sales resulted in a large

increase in accounts

receivable in 2021 as compared to a significant decrease during

2020 as net sales and the associated accounts receivables significantly

declined in 2020

due to the negative impact from COVID-19.

In addition, the Company has experienced an increase in inventory in

2021 as a result of continued rising raw material costs as well as a build in

inventory to ensure the Company has appropriate stock to

meet customer demands in response to ongoing stress on the global supply

chain.

Net cash flows used in investing activities were $49.1 million in 2021

compared to $71.4 million in 2020.

This $22.3 million

decrease in cash outflows used in investing activities was due to lower cash payments

related to acquisitions during 2021 as a result of

the level of acquisition activity in each year and higher cash proceeds

from the disposition of assets, which includes the sale of certain

held-for-sale real property assets related to the Combination.

Capital expenditures also increased to $21.5 million in 2021 compared

to $17.9 million in 2020 due to the continued strategic and integration related

capital investments the Company has and continues to

make.

Net cash flows used in financing activities were $13.5 million in 2021

compared to $75.3 million in 2020.

The $61.8 million

decrease in net cash outflows from financing activities was primarily

driven by an increase in borrowings in the current year under the

Company’s revolving credit

facility compared to repayments in the prior year which was driven by significant

working capital

investment in the current year described above.

In addition, the Company paid $28.6 million of cash dividend during

2021, a $1.0

million or 4% increase in cash dividends compared to the prior year due to cash dividend

per share increases.

Finally, during 2020,

the Company used $1.0 million to purchase the remaining noncontrolling

interest in one of its South African affiliates.

Prior to this

buyout, this South African affiliate made a distribution

to the prior noncontrolling affiliate shareholder of approximately $0.8

million

in 2020.

There were no similar noncontrolling interest activities in 2021.

28

The Company’s primary credit facility

(the “Credit Facility”) is comprised of a $400.0 million multicurrency

revolver (the

“Revolver”), a $600.0 million term loan (the “U.S. Term

Loan”), each with the Company as borrower, and

a $150.0 million (as of

August 1, 2019) Euro equivalent term loan (the “Euro Term

Loan” and together with the “U.S. Term

Loan”, the “Term Loans”)

with

Quaker Chemical B.V.,

a Dutch subsidiary of the Company as borrower,

each with a five year term maturing in August 2024.

Subject

to the consent of the administrative agent and certain other conditions,

the Company may designate additional borrowers.

The

maximum amount available under the Credit Facility can be increased by

up to $300.0 million at the Company’s request

if there are

lenders who agree to accept additional commitments and the Company has

satisfied certain other conditions.

Borrowings under the

Credit Facility bear interest at a base rate or LIBOR plus an applicable margin

based upon the Company’s consolidated

net leverage

ratio.

On December 10, 2021, the Company amended the Credit Facility to include an update

to provide for the use of a non-USD

currency LIBOR successor rate.

The weighted average interest rate incurred on the outstanding borrowings

under the Credit Facility

during the year ended and as of December 31, 2021 was approximately

1.6%.

In addition to paying interest on outstanding principal

under the Credit Facility,

the Company is required to pay a commitment fee ranging from 0.2% to 0.3% depending

on the Company’s

consolidated net leverage ratio to the lenders under the Revolver in respect of

the unutilized commitments thereunder.

The Credit Facility is subject to certain financial and other covenants.

The Company’s initial consolidated net

debt to

consolidated adjusted EBITDA ratio could not exceed 4.25 to 1,

with step downs in the permitted ratio over the term of the Credit

Facility.

As of December 31, 2021, the consolidated net debt to consolidated

adjusted EBITDA ratio may not exceed 3.75 to 1.

The

Company’s consolidated

adjusted EBITDA to interest expense ratio may not be less than 3.0 to 1 over the

term of the agreement.

The

Credit Facility also prohibits the payment of cash dividends

if the Company is in default or if the amount of the dividends

paid

annually exceeds the greater of $50.0 million and 20% of consolidated adjusted

EBITDA unless the ratio of consolidated net debt to

consolidated adjusted EBITDA is less than 2.0 to 1, in which case there is no

such limitation on amount.

As of December 31, 2021

and 2020, the Company was in compliance with all of the Credit Facility covenants.

The Term Loans have quarterly

principal

amortization during their five year terms, with 5.0% amortization of

the principal balance due in years 1 and 2, 7.5% in year 3, and

10.0% in years 4 and 5, with the remaining principal amount due at maturity.

The Credit Facility is guaranteed by certain of the

Company’s domestic subsidiaries

and is secured by first-priority liens on substantially all of the assets of the

Company and the

domestic subsidiary guarantors, subject to certain customary exclusions.

The obligations of the Dutch borrower are guaranteed only

by certain foreign subsidiaries on an unsecured basis.

The Credit Facility required the Company to fix its variable interest rates on at least 20%

of its total Term Loans.

In order to

satisfy this requirement as well as to manage the Company’s

exposure to variable interest rate risk associated with the Credit Facility,

in November 2019, the Company entered into $170.0

million notional amounts of three year interest rate swaps at a base rate of 1.64%

plus an applicable margin as provided in the Credit Facility,

based on the Company’s consolidated

net leverage ratio.

At the time the

Company entered into the swaps, and as of December 31, 2021, the

aggregate interest rate on the swaps, including the fixed base rate

plus an applicable margin, was 3.1%.

The Company capitalized $23.7 million of certain third-party debt issuance

costs in connection with executing the Credit Facility.

Approximately $15.5 million of the capitalized costs were attributed to

the Term Loans and recorded

as a direct reduction of long-

term debt on the Company’s Consolidated

Balance Sheet.

Approximately $8.3 million of the capitalized costs were attributed

to the

Revolver and recorded within other assets on the Company’s

Consolidated Balance Sheet.

These capitalized costs are being

amortized into interest expense over the five year term of the Credit Facility.

As of December 31, 2021, the Company had Credit Facility borrowings

outstanding of $889.6 million.

As of December 31, 2020,

the Company had Credit Facility borrowings outstanding of $887.1

million.

The Company has unused capacity under the Revolver of

approximately $184 million, net of bank letters of credit of approximately

$4 million, as of December 31, 2021.

The Company’s other

debt obligations are primarily industrial development bonds

,

bank lines of credit and municipality-related loans, which totaled $11.8

million and $12.1

million as of December 31, 2021

and 2020, respectively.

Total unused capacity under

these arrangements as of

December 31, 2021 was approximately $26 million.

The Company’s total net debt

as of December 31, 2021 was $736.2 million.

The Company estimates that it realized full year cost synergies related

to the Combination in 2021

of approximately $75 million

compared to $58 million in 2020.

The Company has fully achieved its annual target Combination cost synergies

of approximately $80

million going forward.

The Company incurred $18.6 million of total Combination, integration

and other acquisition-related expenses

in 2021, which includes $0.7 million of accelerated depreciation

and is net of a $5.4 million gain on the sale of certain held-for-sale

real property assets and $0.6 million of other income related to an indemnification

asset, described in the Non-GAAP Measures

section of this Item below.

The Company had aggregate net cash outflows of approximately $20.6 million

related to the Combination,

integration and other acquisition-related expenses during 2021.

Comparatively, in 2020, the

Company incurred $30.3 million of total

Combination, integration and other acquisition-related expenses, including

$0.8 million of accelerated depreciation, a $0.6 million loss

on the sale of held-for-sale assets, an $0.8 million of other income related to an indemnification

asset, and aggregate net cash outflows

related to these costs were approximately $29.4 million.

While the Company has incurred significant integration costs in 2019, 2020

and 2021, the Company expects to incur additional integration and operating

costs as well as higher capital expenditures to further

optimize its footprint, processes and other functions over the next several years.

29

Quaker Houghton’s management

approved, and the Company initiated, a global restructuring plan (the

“QH Program”) in the

third quarter of 2019 as part of its planned cost synergies associated

with the Combination and recorded $26.7 million in restructuring

and related charges in 2019.

The Company recognized an additional $1.4 million and $5.5 million

of restructuring and related charges

in 2021 and 2020, respectively,

as a result of the QH Program.

The QH Program includes restructuring and associated severance costs

to reduce total headcount by approximately 400 people globally and

plans for the closure of certain manufacturing and non-

manufacturing facilities.

In connection with the plans for closure of certain manufacturing and non-manufacturing

facilities, the

Company made a decision to make available for sale certain facilities during

the second quarter of 2020.

During the first quarter of

2021 and fourth quarter of 2020, certain of these facilities were sold

and the Company recognized a gain on disposal of $5.4 million

and a loss on disposal of $0.6 million, respectively,

included within other income (expense), net on the Consolidated Statement of

Income.

The exact timing and total costs associated with the QH Program will depend on a number of

factors and is subject to

change; however, reductions in headcount

and site closures have continued,

and the Company currently expects additional headcount

reductions and site closures to occur into 2022 and estimates that the anticipated

cost synergies realized under the QH Program will

approximate one-times restructuring costs incurred.

The Company made cash payments related to the settlement of restructuring

liabilities under the QH Program during 2021 of approximately $5.3 million

compared to $15.7 million in 2020.

During the first quarter of 2020, the Company completed the termination

of the Legacy Quaker U.S. Pension Plan and funded the

plan on a termination basis with approximately $1.8 million, subject to final

true up adjustments.

In the third quarter of 2020, the

Company finalized the amount of liability and related annuity payments and

received a refund in premium of $1.6 million.

In

addition, the Company recorded a non-cash pension settlement charge

at plan termination of approximately $22.7 million in the first

quarter of 2020.

As of December 31, 2021, the Company’s

gross liability for uncertain tax positions, including interest and penalties,

was $28.7

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 $7.3 million as a result of

offsetting benefits in other tax jurisdictions.

During the year ended 2021, the Company recorded $13.1 million of non-income tax

credits for certain of its Brazilian subsidiaries.

The Company expects to utilize these credits to offset certain Brazilian

federal tax

payments over approximately two years, which began in the fourth quarter

of 2021.

See Note 26 of Notes to Consolidated Financial

Statements in Item 8 of this Report.

During the third quarter of 2021, two of the Company’s

locations suffered property damage as a result of flooding and fire.

The

Company maintains property insurance for all of its facilities globally.

The Company, its insurance

adjuster and insurance carrier are

actively managing the remediation and restoration activities associated

with both of these events and at this time the Company has

concluded, based on all available information and discussions with its insurance

adjuster and insurance carrier, that the losses incurred

during 2021 will be covered under the Company’s

property insurance coverage, net of an aggregate deductible of $2.0 million.

The

Company has received payments from its insurers of $2.1 million and has

recorded an insurance receivable associated with these

events of $0.7 million as of December 31, 2021.

The Company and its insurance carrier continue to review the impact on operations

as it relates to a potential business interruption insurance claim; however,

as of the date of this report, the Company cannot reasonably

estimate any probable amount of business interruption insurance

claim recoverable, therefore the Company has not recorded a gain

contingency for a possible business interruption insurance claim as of December

31, 2021.

See Note 26 of Notes to Consolidated

Financial Statements in Item 8 of this Report.

The Company believes that its existing cash, anticipated cash flows from

operations and available additional liquidity will be

sufficient to support its operating requirements and fund

its business objectives for at least the next twelve months and beyond,

including but not limited to, payments of dividends to shareholders, costs

related to the Combination and other acquisitions and as

well as ongoing integration and optimization,

pension plan contributions, capital expenditures, other business opportunities

(including

potential acquisitions),

implementing actions to achieve the Company’s

sustainability goals and other potential contingencies.

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 on our business and on global economic conditions as well as industry

uncertainties, which we cannot predict.

We also

cannot predict economic conditions and industry downturns or the

timing, strength or duration of recoveries.

We may seek,

as we

believe appropriate, additional debt or equity financing which would

provide capital for corporate purposes, working capital funding,

additional liquidity needs or to fund future growth opportunities, including

possible acquisitions and 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.

30

The following table summarizes the Company’s

contractual obligations as of December 31, 2021, and the effect such

obligations

are expected to have on its liquidity and cash flows in future periods.

Pension and postretirement plan contributions beyond 2021 are

not determinable since the amount of any contribution is heavily dependent

on the future economic environment and investment

returns on pension trust assets.

The timing of payments related to other long-term liabilities which consists primarily

of deferred

compensation agreements and environmental reserves, also cannot

be readily determined due to their uncertainty.

Interest obligations

on the Company’s long-term

debt and capital leases assume the current debt levels will be outstanding for

the entire respective period

and apply the interest rates in effect as of December 31, 2021.

Payments due by period

(dollars in thousands)

2027 and

Contractual Obligations

Total

2022

2023

2024

2025

2026

Beyond

Long-term debt

$

900,633

$

56,759

$

75,553

$

758,045

$

122

$

80

$

10,074

Interest obligations

39,975

14,287

13,184

10,751

526

526

701

Capital lease obligations

868

219

212

196

176

65

-

Operating leases

41,395

11,346

9,041

7,017

5,292

4,197

4,502

Purchase obligations

3,652

3,197

416

39

-

-

-

Transition tax

8,500

-

1,529

3,099

3,872

-

-

Pension and other postretirement plan

contributions

13,347

13,347

-

-

-

-

-

Other long-term liabilities (See Note 22 of

Notes to Consolidated Financial Statements)

12,040

-

-

-

-

-

12,040

Total contractual

cash obligations

$

1,020,410

$

99,155

$

99,935

$

779,147

$

9,988

$

4,868

$

27,317

Non-GAAP Measures

The information in this Form 10-K filing includes non-GAAP (unaudited)

financial information that includes EBITDA, adjusted

EBITDA, adjusted EBITDA margin, non-GAAP operating

income, non-GAAP operating margin, non-GAAP net

income and non-

GAAP earnings per diluted share.

The Company believes these non-GAAP financial measures provide meaningful supplemental

information as they enhance a reader’s understanding

of the financial performance of the Company,

are indicative of future operating

performance of the Company,

and facilitate a comparison among fiscal periods, as the non-GAAP financial

measures exclude items

that are not indicative of future operating performance or not considered

core to the Company’s operations.

Non-GAAP results are

presented for supplemental informational purposes only and should not be

considered a substitute for the financial information

presented in accordance with GAAP.

The Company presents EBITDA which is calculated as net income attributable

to the Company before depreciation and

amortization, interest expense, net, and taxes on income before equity in net income

of associated companies.

The Company also

presents adjusted EBITDA which is calculated as EBITDA plus or minus

certain items that are not 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 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 analysts, investors, and competitors 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 analysts, investors, and

competitors in our industry as well as by management in assessing the operating

performance of the Company on a consistent basis.

31

The following tables reconcile the Company’s

non-GAAP financial measures (unaudited) to their most directly comparable

GAAP financial measures (dollars in thousands, unless otherwise noted,

except per share amounts):

Non-GAAP Operating Income and Margin Reconciliations

For the years ended December 31,

2021

2020

2019

Operating income

$

150,466

$

59,360

$

46,134

Houghton combination, integration and other

acquisition-related expenses (a)

24,611

30,446

35,945

Restructuring and related charges (b)

1,433

5,541

26,678

Fair value step up of acquired inventory sold (c)

801

226

11,714

Executive transition costs (d)

2,986

-

-

Inactive subsidiary's non-operating litigation costs (e)

819

-

-

Customer bankruptcy costs (f)

-

463

1,073

Facility remediation costs, net (g)

1,509

-

-

Charges related to the settlement of a non-core equipment sale (h)

-

-

384

Indefinite-lived intangible asset impairment (i)

-

38,000

-

Non-GAAP operating income

$

182,625

$

134,036

$

121,928

Non-GAAP operating margin (%) (r)

10.4%

9.5%

10.8%

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and

Non-GAAP Net Income Reconciliations

For the years ended December 31,

2021

2020

2019

Net income attributable to Quaker Chemical Corporation

$

121,369

$

39,658

$

31,622

Depreciation and amortization (a)(p)

87,728

84,494

45,264

Interest expense, net (a)

22,326

26,603

16,976

Taxes on income before

equity in net income of associated companies (q)

34,939

(5,296)

2,084

EBITDA

266,362

145,459

95,946

Equity income in a captive insurance company (j)

(4,993)

(1,151)

(1,822)

Houghton combination, integration and other

acquisition-related expenses (a)

17,917

29,538

35,361

Restructuring and related charges (b)

1,433

5,541

26,678

Fair value step up of acquired inventory sold (c)

801

226

11,714

Executive transition costs (d)

2,986

-

-

Inactive subsidiary’s non

-operating litigation cost (e)

819

-

-

Customer bankruptcy costs (f)

-

463

1,073

Facility remediation costs, net (g)

2,066

-

-

Charges related to the settlement of a non-core equipment sale (h)

-

-

384

Indefinite-lived intangible asset impairment (i)

-

38,000

-

Pension and postretirement benefit (income) costs,

non-service components (k)

(759)

21,592

2,805

Gain on changes in insurance settlement restrictions of an inactive

subsidiary and related insurance insolvency recovery (l)

-

(18,144)

(60)

Brazilian non-income tax credits (m)

(13,087)

-

-

Currency conversion impacts of hyper-inflationary economies (n)

564

450

1,033

Adjusted EBITDA

$

274,109

$

221,974

$

173,112

Adjusted EBITDA margin (%) (r)

15.6%

15.7%

15.3%

Adjusted EBITDA

$

274,109

$

221,974

$

173,112

Less: Depreciation and amortization - adjusted (a)

87,002

83,732

44,680

Less: Interest expense, net - adjusted (a)

22,326

26,603

14,896

Less: Taxes on income

before equity in net income

of associated companies - adjusted (o)(q)

41,976

26,488

24,825

Non-GAAP net income

$

122,805

$

85,151

$

88,711

32

Non-GAAP Earnings per Diluted Share Reconciliations

For the years ending December 31,

2021

2020

2019

GAAP earnings per diluted share attributable to

Quaker Chemical Corporation common shareholders

$

6.77

$

2.22

$

2.08

Equity income in a captive insurance company per diluted share (j)

(0.28)

(0.07)

(0.12)

Houghton combination, integration and other

acquisition-related expenses per diluted share (a)

0.79

1.31

2.05

Restructuring and related charges per diluted share (b)

0.07

0.23

1.34

Fair value step up of acquired inventory sold per diluted share (c)

0.03

0.01

0.58

Executive transition costs per diluted share (d)

0.13

-

-

Inactive subsidiary’s non

-operating litigation costs per diluted share (e)

0.04

-

-

Customer bankruptcy costs per diluted share (f)

-

0.02

0.05

Facility remediation costs, net per diluted share (g)

0.09

-

-

Charges related to the settlement of a non-core equipment

sale per diluted share (h)

-

-

0.02

Indefinite-lived intangible asset impairment per diluted share (i)

-

1.65

-

Pension and postretirement benefit costs, non-service

components per diluted share (k)

(0.04)

0.79

0.14

Gain on changes in insurance settlement restrictions of an inactive

subsidiary and related insurance insolvency recovery per diluted share (l)

-

(0.78)

0.00

Brazilian non-income tax credits per diluted share (m)

(0.46)

-

-

Currency conversion impacts of hyper-inflationary economies

per diluted share (n)

0.03

0.02

0.07

Impact of certain discrete tax items per diluted share (o)

(0.32)

(0.62)

(0.38)

Non-GAAP earnings per diluted share (s)

$

6.85

$

4.78

$

5.83

(a)

Houghton combination, integration and other acquisition-related

expenses include certain legal, financial, and other advisory and

consultant costs incurred in connection with post-closing integration

activities including internal control readiness and

remediation, as well as due diligence, regulatory approvals and closing

the Combination.

These costs are not indicative of the

future operating performance of the Company.

Approximately $0.6 million, $1.5 million and $9.4 million for the years ended

December 31, 2021, 2020 and 2019, respectively,

of these pre-tax costs were considered non-deductible for the purpose of

determining the Company’s

effective tax rate, and, therefore, taxes on income before equity in

net income of associated

companies - adjusted reflects the impact of these items.

During 2021, 2020 and 2019, the Company recorded $0.7 million, $0.8

million, and $0.6 million, respectively,

of accelerated depreciation related to certain of the Company’s

facilities, which is

included in the caption “Houghton combination, integration and other

acquisition-related expenses” in the reconciliation of

operating income to non-GAAP operating income and included in the

caption “Depreciation and amortization” in the

reconciliation of net income attributable to the Company to EBITDA, but

excluded from the caption “Depreciation and

amortization – adjusted” in the reconciliation of adjusted EBITDA to

non-GAAP net income attributable to the Company.

During

2019, the Company incurred $2.1 million of ticking fees to maintain the bank

commitment related to the Combination.

These

interest costs are included in the caption “Interest expense, net” in the reconciliation

of net income attributable to the Company to

EBITDA, but are excluded from the caption “Interest expense, net

– adjusted” in the reconciliation of adjusted EBITDA to non-

GAAP net income.

During 2021 and 2020, the Company recorded $0.6 million and $0.8 million, respectively,

of other income

related to an indemnification asset.

During 2021 and 2020, the Company recorded a gain of $5.4 million

and a loss of $0.6

million, respectively,

on the sale of certain held-for-sale real property assets related to

the Combination.

Each of these items are

included in the caption “Houghton combination, integration and other

acquisition expenses” in the reconciliation of GAAP

earnings per diluted share attributable to Quaker Chemical Corporation

common shareholders to Non-GAAP earnings per diluted

share as well as the reconciliation of Net Income attributable to Quaker

Chemical Corporation to Adjusted EBITDA and Non-

GAAP net income See Note 2 and Note 9 of Notes to Consolidated Financial

Statements, which appears in Item 8 of this Report.

(b)

Restructuring and related charges represent the

costs incurred by the Company associated with the QH restructuring program

which was initiated in the third quarter of 2019 as part of the Company’s

plan to realize cost synergies associated with the

Combination.

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

See Note 7 of Notes to

Consolidated Financial Statements,

which appears in Item 8 of this Report.

(c)

Fair value step up of inventory sold relates to expense associated with selling

inventory of acquired businesses which was

adjusted to fair value as part of purchase accounting.

This increases to costs of goods sold (“COGS”) are not indicative of the

future operating performance of the Company.

33

(d)

Executive transition costs represent the costs related to the Company’s

search, hiring and transition to a new CEO in connection

with the executive transition that look place in 2021.

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

Company.

(e)

Inactive subsidiary’s non

-operating litigation costs represents the charges incurred by

an inactive subsidiary of the Company and

are a result of the termination of restrictions on insurance settlement reserves.

These charges are not indicative of the future

operating performance of the Company.

See Note 26 of Notes to Consolidated Financial Statements, which appears

in Item 8 of

this Report.

(f)

Customer bankruptcy costs represent the cost associated with a specific

reserve for trade accounts receivable related to a customer

who filed for bankruptcy protection.

These expenses are not indicative of the future operating performance

of the Company.

See

Note 13 of Notes to Consolidated Financial Statements, which appears

in Item 8 of this Report.

(g)

Facility remediation costs, net, presents the gross costs associated with remediation,

cleaning and subsequent restoration costs

associated with the property damage to certain of the Company’s

facilities, net of insurance recoveries received.

These charges

are non-recurring and are not indicative of the future operating performance

of the Company.

See Note 26 of Notes to

Consolidated Financial Statements, which appears in Item 8 of this Report.

(h)

Charges related to the settlement of a non-core equipment

sale represent the pre-tax charge related to a one-time, uncommon,

customer settlement associated with a prior sale of non-core equipment.

These charges are not indicative of the future operating

performance of the Company.

(i)

Indefinite-lived intangible asset impairment represents the non-cash

charge taken to write down the value of certain indefinite-

lived intangible assets associated with the Combination.

The Company has no prior history of goodwill or intangible asset

impairments and this charge is not indicative of the future operating

performance of the Company.

See Note 16 of Notes to

Consolidated Financial Statements, which appears in Item 8 of this Report.

(j)

Equity income 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 investment under the equity method of

accounting.

The income attributable to Primex is

not indicative of the future operating performance of the Company

and is not considered core to the Company’s operations.

(k)

Pension and postretirement benefit (income) costs, non-service components

represent the pre-tax, non-service components of the

Company’s pension and postretirement

net periodic benefit cost in each period.

These costs are not indicative of the future

operating performance of the Company.

The year ended December 31, 2020 includes a $22.7 million settlement charge

for the

Company’s termination

of the Legacy Quaker U.S. Pension Plan.

See Note 21 of Notes to Consolidated Financial Statements,

which appears in Item 8 of this Report.

(l)

Gain on changes in insurance settlement restrictions of an inactive subsidiary

and related insurance insolvency recovery

represents income associated with the gain on the termination of restrictions

on insurance settlement reserves and the cash

receipts from an insolvent insurance carrier for previously submitted

claims by an inactive subsidiary of the Company.

This other

income is not indicative of the future operating performance of the Company.

See Notes 9 and 26 of Notes to Consolidated

Financial Statements, which appears in Item 8 of this Report.

(m)

Brazilian non-income tax credits represent indirect tax credits related to certain

of the Company’s Brazilian subsidiaries

prevailing in a legal claim as well as the Brazil Supreme Court ruling on these non

-income tax matters.

The non-income tax

credit is non-recurring and not indicative of the future operating performance

of the Company.

See Note 26 of Note to

Consolidated Financial Statements, which appears in Item 8 of this Report.

(n)

Currency conversion impacts of hyper-inflationary economies represents

the foreign currency remeasurement impacts associated

with the Company’s affiliates

whose local economies are designated as hyper-inflationary under

U.S. GAAP.

An entity which

operates within an economy deemed to be hyper-inflationary

under U.S. GAAP 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 Income.

Venezuela’s

economy has been considered hyper-inflationary under

U.S.

GAAP since 2010, while Argentina’s

economy has been considered hyper-inflationary beginning

July 1, 2018.

In addition, the

Company’s Argentine

Houghton subsidiary also applies hyper-inflationary accounting.

During 2021, 2020 and 2019, the

Company incurred non-deductible, pre-tax charges

related to the Company’s Argentine

affiliates.

The charges incurred related to

the immediate recognition of foreign currency remeasurement in the

Consolidated Statements of Income associated with these

entities are not indicative of the future operating performance of the Company.

See Notes 1, 9 and 17 of Notes to Consolidated

Financial Statements, which appears in Item 8 of this Report.

(o)

The impacts of certain discrete tax items includes

the impact of changes in certain valuation allowances

recorded on certain of the

Company’s foreign

tax credits, tax law changes in foreign jurisdictions, changes in withholding tax rates, the

tax impacts of non-

income tax credits associated with certain of the Company’s

Brazilian subsidiaries and the associated impact on previously

accrued for distributions at certain of the Company’s

Asia/Pacific subsidiaries, the one-time deferred tax benefit recorded on the

transfer of intangible assets between the Company’s

subsidiaries as well as the offsetting impact and amortization

of a deferred

34

tax benefit the Company recorded during 2020 and 2019 related to

similar intercompany intangible asset transfers.

Additionally,

the 2019 amounts include certain transition tax adjustments related to adjustments

to adopt U.S. Tax Reform.

See Note 10 of

Notes to Consolidated Financial Statements, which appears in Item

8 of this Report.

(p)

Depreciation and amortization for the years ended December 31, 2021,

2020 and 2019 includes $1.2 million, $1.2 million and

$0.4 million, respectively,

of amortization expense recorded within equity in net income of associated

companies in the

Company’s Consolidated

Statements of Income, which is attributable to the amortization of the fair value step up for

the

Company’s 50% interest Korea Houghton

Corporation as a result of required purchase accounting.

(q)

Taxes on income

before equity in net income of associated companies – adjusted presents the impact

of any current and deferred

income tax expense (benefit), as applicable, of the reconciling items presented

in the reconciliation of net income attributable to

Quaker Chemical Corporation to adjusted EBITDA, and was determined

utilizing the applicable rates in the taxing jurisdictions in

which these adjustments occurred, subject to deductibility.

Houghton combination, integration and other acquisition-related

expenses described in (a) resulted in incremental taxes of $4.2 million

for 2021, $6.9 million for 2020, and $6.7 million for 2019.

Restructuring and related charges described in (b)

resulted in incremental taxes of $0.3 million for 2021, $1.4 million for 2020

and $6.2 million for 2019.

Fair value step up of inventory sold described in (c) resulted in incremental taxes of $0.2 million,

less

than $0.1 million and $2.9 million for 2021, 2020 and 2019, respectively.

Executive transition expenses described in (d) resulted

in incremental taxes of $0.7 million for 2021.

Inactive subsidiary non-operating litigation costs described in (e) resulted in

incremental taxes of $0.2

million for 2021.

Customer bankruptcy costs described in (f) resulted in incremental taxes of $0.1

million in 2020 and $0.3 million in 2019.

Facility remediation costs, net described in (g) results in incremental taxes of $0.5

million for 2021.

Charges related to the settlement of a non-core equipment

sale described in (h) resulted in incremental taxes of

$0.1 million for 2019.

Indefinite-lived intangible asset impairment described in (i) resulted in

incremental taxes of $8.7 million

for 2020.

Pension and postretirement benefit (income) costs, non-service components

described in (k) resulted in a reduction of

taxes of $0.1 million for 2021 and incremental taxes of $7.5 million for 2020,

and $0.7 million for 2019.

Gain on changes in

insurance settlement restrictions of an inactive subsidiary

and related insurance insolvency recovery described in (l) resulted in a

reduction of taxes of $4.2 million in 2020 and less than $0.1 million in

2019.

Brazilian non-income tax credits described in (m)

resulted in a reduction of taxes of $4.8 million for 2021.

The impact of certain discrete items described in (o) resulted in a tax

benefit of $5.8 million for 2021, incremental taxes of $11.2

million for 2020, and a reduction of taxes of $5.7 million in 2019.

(r)

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.

(s)

The Company calculates non-GAAP earnings per diluted share as non

-GAAP net income attributable to the Company per

weighted average diluted shares outstanding using the “two-class share method”

to calculate such in each given period.

Off-Balance Sheet Arrangements

The Company had no material off-balance sheet commitments or

obligations as of December 31, 2021.

The Company’s only off-

balance sheet commitments or obligations outstanding as of December 31,

2021 represented approximately $6 million of total bank

letters of credit and guarantees.

The bank letters of credit and guarantees are not significant to the Company’s

liquidity or capital

resources.

See Note 20 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Operations

Consolidated Operations Review – Comparison of 2021 with 2020

Net sales were $1,761.2 million in 2021 compared to $1,417.7 million

in 2020.

The net sales increase of approximately $343.5

million or 24% year-over-year was primarily due to higher sales volumes of

13%, which includes additional net sales from recent

acquisitions of 4%, increases from selling price and product mix of 8% and

the positive impact of foreign currency translation of 3%.

The increase in organic sales volumes compared to 2020

was primarily the result of the continued year-over-year

improvement in end

market conditions from the prior year impacts of COVID-19 and continued

market share gains.

Sales from acquisitions is primarily

driven by the Company’s acquisition

of Coral Chemical Company (“Coral”) in December 2020 and

the tin-plating solutions business

acquired in February 2021.

The increase from selling price and product mix includes the impact of current

year selling price increases

implemented in response to the increases in raw material costs experienced

in 2021.

The positive impact from foreign currency

translation is primarily the result of the strengthening of the Chinese renminbi,

euro, Mexican peso, the Canadian dollar and the

British pound against the U.S. dollar year-over-year.

COGS were $1,166.5 million in 2021 compared to $904.2 million in 2020.

The increase in COGS of 29% was driven by the

associated COGS on the increase in net sales described above, and

continued increases in the Company’s global

raw material costs

compared to the prior year and the impacts of supply constraints in the current year.

Gross profit in 2021 of $594.6 million increased $81.2 million or approximately

16% from 2020, due primarily to the increase in

net sales noted above.

The Company’s reported gross margin

in 2021 was 33.8% compared to 36.2% in 2020.

The lower current year

gross margin is primarily attributable to increased raw materials and

other costs that began in the fourth quarter of 2020 and have

continued throughout 2021 and the impacts of constraints on the world’s

global supply chain partially offset by the Company’s

ongoing pricing initiatives.

35

SG&A in 2021 increased $38.1 million compared to 2020 due primarily to

the impact of sales increases on direct selling costs,

year-over-year inflation increases, additional

SG&A from recent acquisitions and higher SG&A due to foreign currency

translation,

partially offset by lower incentive compensation year-over

-year as well as the benefits of additional realized cost synergies associated

with the Combination year-over-year.

In addition, SG&A was lower in the prior year period as a result of temporary

cost saving

measures the Company implemented in response to COVID-19.

While the Company continues to manage costs during the on-going

pandemic, it has incurred higher SG&A year-over-year

as the global economy continues to gradually rebound.

During 2021 and 2020, the Company incurred $23.9 million and $29.8

million, respectively, of

Combination, integration and

other acquisition-related expenses primarily for professional fees related

to Houghton integration and other acquisition-related

activities.

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

The Company initiated a restructuring program during 2019 as part of

its global plan to realize cost synergies associated with the

Combination.

The Company incurred restructuring and related charges for reductions

in headcount and site closures under this

program, net of adjustments to initial estimates for severance, of

an expense of $1.4 million and $5.5 million during 2021 and 2020,

respectively.

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

Operating income in 2021 was $150.5 million compared to $59.4 million

in 2020.

Excluding Combination, integration and other

acquisition-related expenses, restructuring and related charges and

other non-core items, the Company’s

current year non-GAAP

operating income of $182.6 million increased compared to $134.0

million in the prior year, primarily due

to the increase in net sales

described above and the benefits from cost savings related to the Combination

offset by an increase in SG&A as well as the significant

increases in raw material costs year-over-year.

The Company estimates that it realized cost synergies associated with the

Combination

of approximately $75 million during 2021 compared to approximately

$58 million during 2020.

The Company had other income, net, of $18.9 million in 2021 compared

to other expense, net, of $5.6 million in 2020.

The year-

over-year change was primarily a result of other income related to certain

non-income tax credits recorded by the Company’s

Brazilian subsidiaries, the gain on the sale of certain held-for-sale real property assets and lower

foreign currency transaction losses in

2021 as compared to the prior year.

The Company had non-service components of pension and postretirement

benefit income in the

current year compared to an expense in the prior year as a result of the $22.7

million pension settlement charge directly related to the

termination of the Legacy Quaker U.S. pension plan partially offset

by a $18.1 million gain related to the lapse of restrictions over

certain cash that was previously designated solely for the settlement of

asbestos claims at an inactive subsidiary,

all of which are

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

Interest expense, net, decreased $4.3 million compared to 2020 driven

by lower current year average borrowings outstanding as a

result of the additional revolver borrowings drawn during part of 2020

at the onset of the pandemic to add additional liquidity,

coupled

with a decline in overall interest rates year-over-year,

as the weighted average interest rate incurred on borrowings under the

Company’s credit facility was approximately

1.6% during 2021 compared to approximately 2.2% during 2020.

The Company’s effective

tax rates for 2021 and 2020 were an expense of 23.8% and benefit of 19.5%, respectively.

The

Company’s higher current year

effective tax rate is driven by a higher level of pre-tax earnings and

mix of earnings, as well as

deferred tax expense related to the planned repatriation of non-U.S.

earnings.

In addition, the rate was impacted by certain one-time

charges and benefits related to an intercompany intangible

asset transfer and related royalty income recognition offset

by changes in

the valuation allowance for foreign tax credits.

Comparatively, the prior

year effective tax rate was impacted by the tax effect of

certain one-time tax charges and benefits related to a 2020 intercompany

intangible asset transfer, additional charges

for uncertain tax

positions relating to certain foreign tax audits, and the tax impact of the Company’s

termination of its Legacy Quaker U.S. pension

plan.

Excluding the impact of these items as well as all other non-core items in

each year, described in the Non-GAAP Measures

section of this Item, above, the Company estimates that the 2021 and 2020

effective tax rates would have been approximately 26%

and 25%, respectively.

The higher estimated current year tax rate was primarily driven by a higher level of pre

-tax earnings and the

impact of changes in mix of earnings,

deferred taxes related to the planned repatriation of non-U.S. earnings, and provision

to return

adjustments in the prior period.

The Company may experience continued volatility in its effective tax

rates due to several factors,

including the timing 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 variables, including forecasted earnings, which

may vary.

Equity in net income of associated companies increased $2.0 million in

2021 compared to 2020, primarily due to higher current

year income from the Company’s interest

in a captive insurance company partially offset by lower earnings

from the Company’s 50%

interest in a joint venture in Korea compared to the prior year.

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

Net income attributable to noncontrolling interest was less than $0.1 million

in 2021 compared to $0.1 million in 2020

primarily a

result of the first quarter of 2020 acquisition of the remaining ownership

interest in one of the Company’s South

African affiliates

.

Foreign exchange positively impacted the Company’s

yearly results by approximately 6% driven by the positive impact from

foreign currency translation on earnings as well as lower foreign exchange

transaction losses in the current year as compared to the

prior year.

36

Consolidated Operations Review – Comparison of 2020 with 2019

Net sales were $1,417.7 million in 2020 compared to $1,133.5 million

in 2019.

The net sales increase of 25% year-over-year

includes additional net sales from acquisitions, primarily Houghton

and Norman Hay, of $408.6 million.

Excluding net sales related

to acquisitions, the Company’s prior

year net sales would have declined approximately 11%

which reflects a decrease in sales volumes

of 9%, a negative impact from foreign currency translation of 1% and

a decrease from selling price and product mix of 1%.

The

primary driver of the volume decline in the prior year was the negative

impact of COVID-19 on global production levels.

COGS were $904.2 million in 2020 compared to $741.4 million in

2019.

The increase in COGS of 22% was primarily due to the

inclusion of a full year of Houghton and Norman Hay COGS and $0.8 million of

accelerated depreciation charges in 2020, partially

offset by lower prior year COGS on the decline in net sales due

to COVID-19 and 2019 charges of $11.7

million to increase acquired

inventory to its fair value, described in the Non-GAAP Measures section of this Item

above.

Gross profit in 2020 increased $121.3 million or 31% from 2019 due primarily

to additional gross profit from Houghton and

Norman Hay.

The Company’s reported gross

margin in 2020 was 36.2% compared to 34.6% in 2019, which included

the inventory

fair value step up described above.

Excluding one-time increases to COGS in both periods, the Company

estimates that its gross

margins for 2020 and 2019 would have been 36.3% and 35.7%,

respectively.

The estimated increase in gross margin year-over-year

was primarily due to lower COGS as a result of the Company’s

progress on Combination-related logistics, procurement and

manufacturing cost savings initiatives, partially offset

by the lower sales volumes on certain fixed manufacturing costs.

SG&A in 2020 increased $96.9 million compared to 2019 due primarily to

additional SG&A from Houghton and Norman Hay,

partially offset by the impact of COVID-19 cost savings

actions, including lower travel expenses, and the benefits of realized costs

savings associated with the Combination.

During 2020, the Company incurred $29.8 million of Combination,

integration and other acquisition-related expenses, primarily

for professional fees related to Houghton integration and other acquisition

-related activities.

Comparatively,

the Company incurred

$35.5 million of similar expenses in 2019,

primarily due to various professional fees related to integration planning

and regulatory

approval as well as professional fees associated with closing the Combination.

See the Non-GAAP Measures section of this Item,

above.

The Company initiated a restructuring program during the third quarter

of 2019 as part of its global plan to realize cost synergies

associated with the Combination.

The Company recorded additional restructuring and related charges

of $5.5 million during 2020

compared

to $26.7 million during 2019 under this program.

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

During the first quarter of 2020, the Company recorded a $38.0 million

non-cash impairment charge to write down the value of

certain indefinite-lived intangible assets associated with the Combination.

This non-cash impairment charge is related to certain

acquired Houghton trademarks and tradenames and is primarily the

result of the negative impacts of COVID-19 on their estimated fair

values.

There were no additional impairment charges in the remainder of

2020 or in 2019.

See the Critical Accounting Policies and

Estimates section as well as the Non-GAAP Measures section, of this Item, above.

Operating income in 2020 was $59.4 million compared to $46.1 million

in 2019.

Excluding Combination, integration and other

acquisition-related expenses, restructuring and related charges, the

non-cash indefinite-lived intangible asset impairment charge,

and

other expenses that are not indicative of the Company’s

future operating performance, the Company’s

non-GAAP operating income

during 2020 of $134.0 million increased compared to $121.9 million

in 2019, primarily due to additional operating income from

Houghton and Norman Hay and the benefits from costs savings initiatives related

to the Combination, partially offset by the current

year negative impact due to COVID-19.

The Company’s other

expense, net, was $5.6 million in 2020 compared to $0.3 million in 2019.

The year-over-year increase in

other expense, net was primarily due to the first quarter of 2020 non-cash

settlement charge of $22.7 million associated with the

termination of the Legacy Quaker U.S. Pension Plan, partially offset

by a fourth quarter of 2020 gain of $18.1 million related to the

lapsing of restrictions over certain cash that was previously designated

solely for the settlement of asbestos claims at an inactive

subsidiary of the Company,

which are both described in the Non-GAAP Measures section of this Item, above.

Additionally, the

increase year-over-year in other expense,

net, includes higher foreign currency transaction losses in 2020.

Interest expense, net, increased $9.6 million in 2020 compared to 2019 primarily

due to a full year of borrowings under the

Company’s Credit Facility to

finance the closing of the Combination on August 1, 2019, partially offset

by lower overall interest rates

in the 2020.

The Company’s effective

tax rates for 2020 and 2019 were a benefit of 19.5% and an expense of 7.2%, respectively.

The

Company’s 2020 effective

tax rate was impacted by the tax effect of certain one-time

tax charges and benefits, including deferred tax

benefits related to an intercompany intangible asset transfer,

as well as changes in the valuation allowance for foreign tax credits,

additional charges for uncertain tax positions relating to

certain foreign tax audits, and the tax impact of the Company’s

termination of

its Legacy Quaker U.S. pension plan.

Comparatively, the 2019 effectiv

e

tax rate was primarily impacted by certain non-deductible

costs associated with the Combination as well as a deferred tax benefit related

to a separate intercompany intangible asset transfer.

Excluding the impact of all non-core items in each year,

described in the Non-GAAP measures section of this Item, above, the

Company estimates that its effective tax rates for 2020

and 2019 were approximately 25% and 22%, respectively.

The year-over-year

increase is driven primarily by higher U.S. income taxes resulting from a

change in certain deductions and the taxability of foreign

earnings in the U.S., partially offset by a change in the mix of earnings.

37

Equity in net income of associated companies increased $2.3 million in

2020 compared to 2019, primarily due to additional

earnings from our 50% interest in a joint venture in Korea partially offset

by lower earnings from the Company’s

interest in a captive

insurance company.

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

Net income attributable to noncontrolling interest was $0.1 million in

2020 compared to $0.3 million in 2019 primarily a result of

the first quarter of 2020 acquisition of the remaining ownership interest

in one of the Company’s South African

affiliates.

Foreign exchange negatively impacted the Company’s

2020 results by approximately $0.38 per diluted share, primarily due

to

higher foreign exchange transaction losses year-over-year and, to

a lesser extent, an aggregate negative impact from foreign currency

translation on earnings.

Reportable Segments Review - Comparison of 2021 with 2020

The Company’s reportable

segments reflect the structure of the Company’s

internal organization, the method by which the

Company’s resources are allocated

and the manner by which the chief operating decision maker of the Company

assesses its

performance.

The Company has four reportable segments: (i) Americas; (ii) EMEA; (iii)

Asia/Pacific; and (iv) Global Specialty

Businesses.

The three geographic segments are composed of the net sales and operations

in each respective region, excluding net

sales and operations managed globally by the Global Specialty Businesses

segment, which includes the Company’s

container, metal

finishing, mining, offshore, specialty coatings, specialty grease and

Norman Hay businesses.

Segment operating earnings for the Company’s

reportable segments are comprised of net sales less COGS and SG&A directly

related to the respective segment’s product

sales.

Operating expenses not directly attributable to the net sales of each respective

segment, such as certain corporate and administrative costs, Combination,

integration and other acquisition-related expenses,

Restructuring and related charges, and COGS related

to acquired inventory sold, which is adjusted to fair value as part of purchase

accounting, are not included in segment operating earnings.

Other items not specifically identified with the Company’s

reportable

segments include interest expense, net, and other income (expense),

net.

Americas

Americas represented approximately 33% of the Company’s

consolidated net sales in 2021.

The segment’s net sales were $572.6

million, an increase of $122.5 million or 27% compared to 2020.

The increase in net sales was driven by a benefit in selling price and

product mix of 11%, increases in organic

volumes of approximately 10%, additional net sales from acquisitions of 5%, and the

positive impact of foreign currency translation of 1%.

The current year organic volume increase was driven by the continued

improvement in end market conditions compared to the prior year which

was impacted by COVID-19.

The increase in selling price

and product mix is primarily driven by price increases implemented

to help offset the significant increases in raw material and other

input costs incurred during 2021.

The foreign exchange impact was primarily driven by the strengthening of

the Mexican peso against

the U.S. dollar, as this exchange rate averaged

20.27 in 2021 compared to 21.34 during 2020.

This segment’s operating earnings were

$124.9 million, an increase of $28.5 million or 30% compared to 2020.

The increase in segment operating earnings reflects the higher

net sales, described above, partially offset by lower gross

margins driven by the continued raw material cost increases and

global

supply chain and logistics pressures coupled with higher SG&A including

an increase in direct selling costs associated with higher net

sales, SG&A from acquisitions and an increase in SG&A as the prior year

included temporary cost savings measures implemented in

response to the onset of the COVID-19 pandemic.

EMEA

EMEA represented approximately 27% of the Company’s

consolidated net sales in 2021.

The segment’s net sales were $480.1

million, an increase of $96.9 million or 25% compared to 2020.

The increase in net sales was driven by a benefit from selling price

and product mix of 10%, increases in organic volumes of

approximately 9%, the positive impact of foreign currency translation of 4%,

and additional net sales from acquisitions of 2%.

The increase in selling price and product mix is primarily driven by price increases

implemented to offset the significant increase in raw

material and other input costs incurred during 2021.

The current year volume

increase was driven by the continued improvement in end market conditions

compared to the prior year which was heavily impacted

by COVID-19.

The foreign exchange impact was primarily driven by the strengthening

of the euro against the U.S. dollar as this

exchange rate averaged 1.18 in 2021 compared to 1.14 in 2020.

This segment’s operating earnings were

$85.2 million, an increase of

$16.0 million or 23% compared to 2020.

The increase in segment operating earnings reflects the higher net sales described

above,

partially offset by lower current year gross margins

driven by the continued raw material cost increases and global supply chain and

logistics pressures as well as higher SG&A including increases in direct selling

costs associated with higher net sales as well as

increases as the prior year included temporary cost savings measures implemented

in response to the onset of the COVID-19

pandemic.

Asia/Pacific

Asia/Pacific represented approximately 22% of the Company’s

consolidated net sales in 2021.

The segment’s net sales were

$388.2 million, an increase of approximately $72.9 million or 23%

compared to 2020.

The increase in net sales year-over-year was

driven by increases in volumes of approximately 15%, the positive impact

of foreign currency translation of 5%, increases from

selling price and product mix of 2% and additional net sales from

acquisitions of 1%.

The current year volume increase was driven by

the continued improvement in end market conditions compared to the prior

year which was impacted by COVID-19.

The foreign

38

exchange impact was primarily due to the strengthening of the Chinese renminbi

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

6.45 in 2021 compared to 6.90 in 2020.

This segment’s operating earnings were

$96.3 million, an increase of $8.0 million or 9%

compared to 2020.

The increase in segment operating earnings was driven by the higher net sales described above,

partially offset by

lower gross margins driven by the continued raw material cost increases

and global supply chain and logistics pressures as well as

higher direct selling costs associated with higher net sales and an increase

in SG&A as the prior year included temporary cost savings

measures implemented in response to the onset of the COVID-19 pandemic

.

Global Specialty Businesses

Global Specialty Businesses represented approximately 18% of the

Company’s consolidated net sales in

2021.

The segment’s net

sales were $320.2 million, an increase of $51.2 million or 19% compared

to 2020.

The increase in net sales was driven by increases in

selling price and product mix, including Norman Hay,

of 14%, additional net sales from acquisitions of 8%, and the positive impact

of

foreign currency translation of 2% partially offset by volume declines

of approximately 5%.

Both the changes in selling price and

product mix and sales volumes were primarily driven by higher amounts of

shipments of a lower priced product in the Company’s

mining business in the prior year.

The foreign exchange impact was a result of similar strengthening of certain

currencies in EMEA

and Americas as described above.

This segment’s

operating earnings were $90.6 million, an increase of $10.9 million or 14%

compared to 2020.

The increase in segment operating earnings reflects the higher net sales, described

above, partially offset by lower

gross margins in the current year coupled with higher SG&A, including

an increase in direct selling costs associated with higher net

sales, SG&A from acquisitions and an increase in SG&A as the prior year

included temporary cost savings measures implemented in

response to the onset of the COVID-19 pandemic.

Reportable Segments Review – Comparison of 2020 with 2019

Americas

Americas represented approximately 32% of the Company’s

consolidated net sales in 2020.

The segment’s net sales were $450.2

million, an increase of $58.0 million or 15% compared to 2019.

The increase in net sales reflects additional net sales from

acquisitions of $120.4 million, primarily a result of the inclusion of

seven additional months of Houghton net sales, as the

Combination closed on August 1, 2019.

Excluding net sales from acquisitions, the segment’s

net sales decreased by approximately

16% due to lower volumes of 12% and a negative impact of foreign

currency translation of 4%.

The volume decline was driven by

the economic slowdown that began in late March and continued throughout

2020 due to the impacts of COVID-19.

The foreign

exchange impact was primarily due to the weakening of the Brazilian real

and the Mexican peso against the U.S. dollar,

as these

exchange rates averaged 5.10 and 21.34, respectively,

in 2020 compared to 3.94 and 19.24, respectively in 2019.

This segment’s

operating earnings were $96.4 million, an increase of $18.1 million or

23% compared to 2019.

The increase in segment operating

earnings reflects the inclusion of a full year of Houghton net sales, noted,

above, and the impacts on gross margins and SG&A due to

the Combination’s cost synergies

and costs savings actions related to COVID-19 year-over-year,

partially offset by the impact of

COVID-19 on sales volumes and higher COGS and SG&A due to seven additional

months of Houghton in 2020.

EMEA

EMEA represented approximately 27% of the Company’s

consolidated net sales in 2020.

The segment’s net sales were $383.2

million, an increase of $97.6 million or 34% compared to 2019.

The increase in net sales reflects additional net sales from

acquisitions of $117.9 million, primarily

a result of the inclusion of seven additional months of Houghton net sales, as the

Combination closed on August 1, 2019.

Excluding net sales from acquisitions, the segment’s

net sales decreased year-over-year by

approximately 7% due to lower volumes of 10%, partially offset by

a positive impact of foreign currency translation of 2% and

increases in selling price and product mix of 1%.

The current year volume decline was driven by the economic slowdown that began

in late March and continued throughout 2020 due to the impacts of COVID-19.

The foreign exchange impact was primarily due to the

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

1.14 in 2020 compared to 1.12 in 2019.

This

segment’s operating earnings were

$69.2 million, an increase of $22.1 million or 47% compared to 2019.

The increase in segment

operating earnings reflects the inclusion of a full year of Houghton net sales,

noted, above, and the impacts on gross margins and

SG&A due to the Combination’s cost synergies

and costs savings actions related to COVID-19 year-over-year,

partially offset by the

impact of COVID-19 on sales volumes and higher COGS and SG&A due

to seven additional months of Houghton in 2020.

Asia/Pacific

Asia/Pacific represented approximately 22% of the Company’s

consolidated net sales in 2020.

The segment’s net sales were

$315.3 million, an increase of $67.5 million or 27% compared to 2019.

The increase in net sales reflects the inclusion of seven

additional months of Houghton net sales of $79.7 million, as the Combination

closed on August 1, 2019.

Excluding Houghton net

sales, the segment’s net sales decreased

by approximately 5% year-over-year was due

to lower volumes of 3% and decreases in selling

price and product mix of 3% partially offset by the positive

impact of foreign currency translation of 1%.

The current year volume

decline was driven by the economic slowdown that began in the first quarter

of 2020 in China and in late March throughout the rest of

the region due to the impacts of COVID-19.

The foreign exchange impact was primarily due to the strengthening of the Chinese

renminbi against the U.S. dollar.

While this exchange rate averaged 6.90 in each of 2020 and 2019, respectively,

post the closing of

the Combination, this exchange rate strengthened in the last 5 months of 2020

to average 6.72 compared to 7.06 in the last 5 months of

2019, partially offset by the weakening of the Indian rupee against the

U.S. dollar as this exchange rate averaged 73.95 in 2020

compared to 70.35 in 2019.

This segment’s operating earnings were

$88.4 million, an increase of $20.8 million or 31% compared to

39

2019.

The increase in segment operating earnings reflects the inclusion of incremental

Houghton net sales, noted, above, and the

impacts on gross margins and SG&A due to the Combination’s

cost synergies and costs savings actions related to COVID-19 year-

over-year, partially offset

by the impact of COVID-19 on sales volumes and higher COGS and SG&A due

to seven additional months

of Houghton in 2020.

Global Specialty Businesses

Global Specialty Businesses represented approximately 19% of the

Company’s consolidated net sales in

2020.

The segment’s net

sales were $269.0 million, an increase of $61.1 million or 29% compared

to 2019.

The increase in net sales reflects the inclusion of

seven additional months of Houghton net sales and nine additional months

of Norman Hay net sales, totaling $90.6 million, as the

Combination closed on August 1, 2019 and the Norman Hay acquisition

closed on October 1, 2019.

Excluding Houghton and

Norman Hay net sales, the segment’s

net sales decreased by approximately 14% year-over-year

due to lower volumes of 7%,

decreases in selling price and product mix of 5% and a negative impact from foreign

currency translation of 2%.

The current year

volume decline was primarily due to a decrease in the Company’s

specialty coatings business driven by Boeing’s

decision to

temporarily stop production of the 737 Max aircraft and volume declines

due to the economic slowdown resulting from COVID-19.

Partially offsetting these volume declines, and

contributing to the decrease in selling price and product mix, were higher shipments of

a lower priced product in the Company’s

mining business compared to 2019.

The foreign exchange impact was primarily due to the

weakening of the Brazilian real against the U.S. dollar described

in the Americas section, above.

This segment’s operating earnings

were $79.7 million, an increase of $20.8 million or 35% compared

to 2019.

The increase in segment operating earnings reflects the

inclusion of incremental Houghton and Norman Hay net sales, noted

above, coupled with an increase in gross margin due to the

Company’s progress on Combination

-related logistics, procurement and manufacturing cost savings initiatives, partially

offset by

higher SG&A, including seven additional months of Houghton

and nine additional months of Norman Hay SG&A in 2020.

Environmental Clean-up Activities

The Company is involved in environmental clean-up activities in connection

with an existing plant location and former waste

disposal sites.

This includes certain soil and groundwater contamination the

Company identified in 1992 at AC Products, Inc.

(“ACP”), a wholly owned subsidiary.

In voluntary coordination with the Santa Ana California Regional Water

Quality Board, ACP

has been remediating the contamination.

In 2007, ACP agreed to operate two groundwater treatment systems, so as to hydraulically

contain groundwater contamination emanating from ACP’s

site until such time as the concentrations of contaminants are below

the

current Federal maximum contaminant level for four consecutive

quarterly sampling events.

In 2014, ACP ceased operation at one of

its two groundwater treatment systems, as it had met the above condition

for closure.

In 2020, the Santa Ana Regional Water

Quality

Control Board asked that ACP conduct some additional indoor

and outdoor soil vapor testing on and near the ACP site to confirm that

ACP continues to meet the applicable local standards and ACP has begun the

testing program.

Such testing began in 2020 and

continued into 2021.

As of December 31, 2021, ACP believes it is close to meeting the conditions for closure

of the remaining

groundwater treatment system but continues to operate this system while in

discussions with the relevant authorities.

As of December

31, 2021, the Company believes that the range of potential-known

liabilities associated with the balance of the ACP water remediation

program is approximately $0.1 million to $1.0 million.

The low and high ends of the range are based on the length of operation of the

treatment system as determined by groundwater modeling.

The Company is party to environmental matters related to certain domestic

and foreign properties.

The Company’s Sao Paulo,

Brazil site was required under Brazilian environmental, health and

safety regulations to perform an environmental assessment as part

of a permit renewal process.

Initial investigations identified soil and ground water contamination in

select areas of the site.

The site

has conducted a multi-year soil and groundwater investigation and

corresponding risk assessments based on the result of the

investigations.

In 2017, the site had to submit a new 5-year permit renewal request and was asked to

complete additional

investigations to further delineate the site based on review of the technical

data by the local regulatory agency,

Companhia Ambiental

do Estado de São Paulo (“CETESB”).

Based on review of the updated investigation data, CETESB issued a Technical

Opinion

regarding the investigation and remedial actions taken to date.

The site developed an action plan and submitted it to CETESB in 2018

based on CETESB requirements.

The site intervention plan primarily requires the site, among other actions,

to conduct periodic

monitoring for methane in soil vapors, source zone delineation, groundwater

plume delineation, bedrock aquifer assessment, update

the human health risk assessment, develop a current site conceptual model

and conduct a remedial feasibility study and provide a

revised intervention plan.

In 2019, the site submitted a report on the activities completed including the revised

site conceptual model

and results of the remedial feasibility study and recommended remedial

strategy for the site.

Other environmental matters include

participation in certain payments in connection with four currently

active environmental consent orders related to certain hazardous

waste cleanup activities under the U.S. Federal Superfund statute.

The Company has been designated a potentially responsible party

(“PRP”) by the Environmental Protection Agency along with other

PRPs depending on the site, and has other obligations to perform

cleanup activities at certain other foreign subsidiaries.

These environmental matters primarily require the Company to perform

long-

term monitoring as well as operating and maintenance at each of the applicable

sites.

The Company continually evaluates its obligations related to such matters,

and based on historical costs incurred and projected

costs to be incurred over the next 27 years, has estimated the present value range

of costs for these environmental matters, on a

discounted basis, to be between approximately $5.0 million and $6.0

million as of December 31, 2021, for which $5.6 million is

accrued within other accrued liabilities and other non-current liabilities on

the Company’s Consolidated

Balance Sheet as of

December 31, 2021.

Comparatively, as of

December 31, 2020, the Company had $6.0 million accrued with respect

to these matters.

40

The Company believes, although there can be no assurance regarding the

outcome of other unrelated environmental matters, that

it has made adequate accruals for costs associated with other environmental

problems of which it is aware.

Approximately $0.4

million and $0.1 million were accrued as of December 31, 2021

and 2020, respectively, to provide for

such anticipated future

environmental assessments and remediation costs.

Notwithstanding the foregoing, the Company cannot be certain that

future liabilities in the form of remediation expenses and

damages will not exceed amounts reserved.

See Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report

General

See Item 7A of this Report, below,

for further discussion of certain quantitative and qualitative disclosures

about market risk.