Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

QUAKER CHEMICAL CORPORATION AND CONSOLIDATED SUBSIDIARIES


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2019 and March 31, 2018	2
	~~and March 31, 2017~~
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and March 31, 2018	3
	~~and March 31, 2017~~
	Condensed Consolidated Balance Sheets at March 31, ~~2018~~2019 and December 31, ~~2017~~2018	4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and March 31, 2018	5
	~~and March 31, 2017~~
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2021
Item 3.	Quantitative and Qualitative Disclosures ~~About~~about Market Risk	2730
Item 4.	Controls and Procedures	2831
PART II.	OTHER INFORMATION	2932
Item 1.	Legal Proceedings	2932
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2932
Item 6.	Exhibits	3033
Signatures		3033

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

Quaker Chemical Corporation

Condensed Consolidated Statements of Income

(Dollars in thousands, except per share data)

		Unaudited					Unaudited
		Three Months Ended March 31,					Three Months Ended March 31,
		2018		2017			2019		2018
Net sales	Net sales	$	212,055	$	194,909	Net sales	$	211,210	$	212,055
Cost of goods sold	Cost of goods sold		136,608		124,022	Cost of goods sold		135,443		136,608
Gross profit	Gross profit		75,447		70,887	Gross profit		75,767		75,447
Selling, general and administrative expenses	Selling, general and administrative expenses		50,007		48,054	Selling, general and administrative expenses		51,455		50,007
Combination-related expenses	Combination-related expenses		5,209		9,075	Combination-related expenses		4,483		5,209
Operating income	Operating income		20,231		13,758	Operating income		19,829		20,231
Other expense, net	Other expense, net		(369)		(105)	Other expense, net		(635)		(369)
Interest expense	Interest expense		(1,692)		(656)	Interest expense		(1,214)		(1,692)
Interest income	Interest income		489		523	Interest income		438		489
Income before taxes and equity in net (loss) income of associated companies			18,659		13,520
Taxes on income before equity in net (loss) income of associated companies			5,556		6,865
Income before equity in net (loss) income of associated companies			13,103		6,655
Equity in net (loss) income of associated companies			(316)		959
Income before taxes and equity in net income (loss) of associated companies						Income before taxes and equity in net income (loss) of associated companies		18,418		18,659
Taxes on income before equity in net income (loss) of associated companies						Taxes on income before equity in net income (loss) of associated companies		4,929		5,556
Income before equity in net income (loss) of associated companies						Income before equity in net income (loss) of associated companies		13,489		13,103
Equity in net income (loss) of associated companies						Equity in net income (loss) of associated companies		411		(316)
Net income	Net income		12,787		7,614	Net income		13,900		12,787
Less: Net income attributable to noncontrolling interest	Less: Net income attributable to noncontrolling interest		55		622	Less: Net income attributable to noncontrolling interest		56		55
Net income attributable to Quaker Chemical Corporation	Net income attributable to Quaker Chemical Corporation	$	12,732	$	6,992	Net income attributable to Quaker Chemical Corporation	$	13,844	$	12,732
Per share data:	Per share data:					Per share data:
	Net income attributable to Quaker Chemical Corporation common shareholders – basic	$	0.96	$	0.53	Net income attributable to Quaker Chemical Corporation common shareholders – basic	$	1.04	$	0.96
	Net income attributable to Quaker Chemical Corporation common shareholders – diluted	$	0.95	$	0.52	Net income attributable to Quaker Chemical Corporation common shareholders – diluted	$	1.03	$	0.95
	Dividends declared	$	0.355	$	0.345	Dividends declared	$	0.370	$	0.355

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

Quaker Chemical Corporation

Condensed Consolidated Statements of Comprehensive Income

(Dollars in thousands)

			Unaudited						Unaudited
			Three Months Ended March 31,						Three Months Ended March 31,
				2018		2017				2019		2018
Net income	Net income		$	12,787	$	7,614	Net income		$	13,900	$	12,787

Other comprehensive income, net of tax	Other comprehensive income, net of tax						Other comprehensive income, net of tax
	Currency translation adjustments			6,859		5,448	Currency translation adjustments			(432)		6,859
	Defined benefit retirement plans			84		318	Defined benefit retirement plans			706		84
	Unrealized (loss) gain on available-for-sale securities			(486)		200	Unrealized gain (loss) on available-for-sale securities			1,273		(486)
		Other comprehensive income		6,457		5,966		Other comprehensive income		1,547		6,457

Comprehensive income	Comprehensive income			19,244		13,580	Comprehensive income			15,447		19,244
Less: Comprehensive income attributable to noncontrolling interest	Less: Comprehensive income attributable to noncontrolling interest			(150)		(1,142)	Less: Comprehensive income attributable to noncontrolling interest			(55)		(150)
Comprehensive income attributable to Quaker Chemical Corporation	Comprehensive income attributable to Quaker Chemical Corporation		$	19,094	$	12,438	Comprehensive income attributable to Quaker Chemical Corporation		$	15,392	$	19,094

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

Quaker Chemical Corporation

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value and share amounts)

			Unaudited						Unaudited
			March 31,		December 31,				March 31,		December 31,
			2018		2017				2019		2018
ASSETS	ASSETS						ASSETS
Current assets	Current assets						Current assets
	Cash and cash equivalents		$	92,581	$	89,879	Cash and cash equivalents		$	71,960	$	104,147
	Accounts receivable, net			218,058		208,358	Accounts receivable, net			208,003		202,139
	Inventories						Inventories
		Raw materials and supplies		48,362		44,439		Raw materials and supplies		46,337		48,134
		Work-in-process and finished goods		47,934		42,782		Work-in-process and finished goods		46,610		45,956
	Prepaid expenses and other current assets			22,365		21,128	Prepaid expenses and other current assets			18,403		18,134
		Total current assets		429,300		406,586		Total current assets		391,313		418,510
Property, plant and equipment, at cost	Property, plant and equipment, at cost			262,623		255,990	Property, plant and equipment, at cost			254,400		254,237
	Less accumulated depreciation			(174,791)		(169,286)	Less accumulated depreciation			(172,084)		(170,314)
		Net property, plant and equipment		87,832		86,704		Net property, plant and equipment		82,316		83,923
Right of use lease assets							Right of use lease assets			26,069		—
Goodwill	Goodwill			86,708		86,034	Goodwill			83,204		83,333
Other intangible assets, net	Other intangible assets, net			70,872		71,603	Other intangible assets, net			61,421		63,582
Investments in associated companies	Investments in associated companies			25,033		25,690	Investments in associated companies			22,726		21,316
Non-current deferred tax assets	Non-current deferred tax assets			13,103		15,661	Non-current deferred tax assets			9,333		6,946
Other assets	Other assets			31,617		30,049	Other assets			32,141		32,055
		Total assets	$	744,465	$	722,327		Total assets	$	708,523	$	709,665

LIABILITIES AND EQUITY	LIABILITIES AND EQUITY						LIABILITIES AND EQUITY
Current liabilities	Current liabilities						Current liabilities
	Short-term borrowings and current portion of long-term debt		$	5,707	$	5,736	Short-term borrowings and current portion of long-term debt		$	661	$	670
	Accounts and other payables			103,525		97,732	Accounts and other payables			91,145		92,754
	Accrued compensation			14,855		22,846	Accrued compensation			15,959		25,727
	Other current liabilities			33,350		29,384	Other current liabilities			39,743		32,319
		Total current liabilities		157,437		155,698		Total current liabilities		147,508		151,470
Long-term debt	Long-term debt			69,648		61,068	Long-term debt			11,720		35,934
Long-term lease liabilities							Long-term lease liabilities			20,231		—
Non-current deferred tax liabilities	Non-current deferred tax liabilities			9,037		9,653	Non-current deferred tax liabilities			9,194		10,003
Other non-current liabilities	Other non-current liabilities			85,580		87,044	Other non-current liabilities			73,507		75,889
		Total liabilities		321,702		313,463		Total liabilities		262,160		273,296
Commitments and contingencies (Note 18)	Commitments and contingencies (Note 18)						Commitments and contingencies (Note 18)
Equity	Equity						Equity
	Common stock, $1 par value; authorized 30,000,000 shares; issued and						Common stock, $1 par value; authorized 30,000,000 shares; issued and
		outstanding 2018 – 13,322,550 shares; 2017 – 13,307,976 shares		13,323		13,308		outstanding 2019 – 13,333,668 shares; 2018 – 13,338,026 shares		13,334		13,338
	Capital in excess of par value			93,731		93,528	Capital in excess of par value			96,832		97,304
	Retained earnings			373,185		365,182	Retained earnings			413,992		405,125
	Accumulated other comprehensive loss			(58,738)		(65,100)	Accumulated other comprehensive loss			(79,167)		(80,715)
		Total Quaker shareholders’ equity		421,501		406,918		Total Quaker shareholders’ equity		444,991		435,052
Noncontrolling interest	Noncontrolling interest			1,262		1,946	Noncontrolling interest			1,372		1,317
Total equity	Total equity			422,763		408,864	Total equity			446,363		436,369
		Total liabilities and equity	$	744,465	$	722,327		Total liabilities and equity	$	708,523	$	709,665

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

Quaker Chemical Corporation

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

				Unaudited							Unaudited
				Three Months Ended March 31,							Three Months Ended March 31,
				2018		2017					2019		2018
Cash flows from operating activities	Cash flows from operating activities							Cash flows from operating activities
	Net income			$	12,787	$	7,614
	Adjustments to reconcile net income to net cash provided by operating activities:							Net income			$	13,900	$	12,787
		Depreciation			3,194		3,157	Adjustments to reconcile net income to net cash provided by operating activities:
		Amortization			1,853		1,773		Depreciation			3,047		3,194
		Equity in undistributed loss (earnings) of associated companies, net of dividends			511		(829)		Amortization			1,812		1,853
		Deferred compensation and other, net			428		(696)		Equity in undistributed earnings of associated companies, net of dividends			(186)		511
		Share-based compensation			1,083		1,153		Deferred compensation, deferred taxes and other, net			(6,842)		428
		Gain on disposal of property, plant, equipment and other assets			(52)		(15)		Share-based compensation			1,012		1,083
		Insurance settlement realized			(85)		(240)		Gain on disposal of property, plant, equipment and other assets			(9)		(52)
		Combination-related expenses, net of payments			2,161		8,415		Insurance settlement realized			(190)		(85)
		Pension and other postretirement benefits			(2,632)		(2,263)		Combination-related expenses, net of payments			(1,012)		2,161
	(Decrease) increase in cash from changes in current assets and current								Pension and other postretirement benefits			(1,346)		(2,632)
			liabilities, net of acquisitions:					(Decrease) increase in cash from changes in current assets and current
		Accounts receivable			(5,827)		(3,813)			liabilities, net of acquisitions:
		Inventories			(7,758)		(8,820)		Accounts receivable			(5,470)		(5,827)
		Prepaid expenses and other current assets			(1,055)		755		Inventories			946		(7,758)
		Accounts payable and accrued liabilities			(1,862)		2,279		Prepaid expenses and other current assets			366		(1,055)
		Restructuring liabilities			—		(148)		Accounts payable and accrued liabilities			(6,008)		(1,862)
			Net cash provided by operating activities		2,746		8,322			Net cash provided by operating activities		20		2,746

Cash flows from investing activities	Cash flows from investing activities							Cash flows from investing activities
		Investments in property, plant and equipment			(3,449)		(2,531)		Investments in property, plant and equipment			(2,537)		(3,449)
		Payments related to acquisitions, net of cash acquired			(500)		—		Payments related to acquisitions, net of cash acquired			(500)		(500)
		Proceeds from disposition of assets			29		15		Proceeds from disposition of assets			8		29
		Insurance settlement interest earned			19		9		Insurance settlement interest earned			65		19
			Net cash used in investing activities		(3,901)		(2,507)			Net cash used in investing activities		(2,964)		(3,901)

Cash flows from financing activities	Cash flows from financing activities							Cash flows from financing activities
		Proceeds from long-term debt			8,166		—		Proceeds from long-term debt			—		8,166
		Repayments of long-term debt			(197)		(474)		Repayments of long-term debt			(23,948)		(197)
		Dividends paid			(4,724)		(4,583)		Dividends paid			(4,935)		(4,724)
		Stock options exercised, other			(866)		(777)		Stock options exercised, other			(1,489)		(866)
		Distributions to noncontrolling affiliate shareholders			(834)		—		Distributions to noncontrolling affiliate shareholders			—		(834)
			Net cash provided by (used in) financing activities		1,545		(5,834)			Net cash (used in) provided by financing activities		(30,372)		1,545

			Effect of foreign exchange rate changes on cash		2,246		1,563			Effect of foreign exchange rate changes on cash		1,004		2,246

Net increase in cash, cash equivalents and restricted cash					2,636		1,544
Cash, cash equivalents and restricted cash at beginning of period					111,050		110,701
Cash, cash equivalents and restricted cash at end of period				$	113,686	$	112,245
Net (decrease) increase in cash, cash equivalents and restricted cash								Net (decrease) increase in cash, cash equivalents and restricted cash				(32,312)		2,636
Cash, cash equivalents and restricted cash at the beginning of the period								Cash, cash equivalents and restricted cash at the beginning of the period				124,425		111,050
Cash, cash equivalents and restricted cash at the end of the period								Cash, cash equivalents and restricted cash at the end of the period			$	92,113	$	113,686

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

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

Note 1 – Condensed Financial Information

The condensed consolidated financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial reporting and the United States Securities and Exchange Commission (“SEC”) regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments ~~(consisting only of normal recurring adjustments, except certain material adjustments, as discussed below)~~ which are necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods. The results for the three months ended March 31, ~~2018~~2019 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report filed on Form 10-K for the year ended December 31, ~~2017.~~2018.

~~During the first quarter~~Hyper-inflationary economies

Economies that have a cumulative three-year rate of ~~2018, the Company adopted~~ ~~guidance regarding the accounting for and disclosure of net sales and revenue recognition.~~ ~~The Company’s adoption, using the modified retrospective adoption approach, resulted in certain adjustments~~inflation exceeding 100 % are considered hyper-inflationary under U.S. GAAP. A legal entity which operates within an economy deemed to ~~its Condensed Consolidated Balance Sheet as of December 31, 2017. In addition, during the first quarter of 2018, the Company adopted an accounting standard update~~ ~~requiring that the statement of cash flows explain both the change in total cash and cash equivalents and also the amounts generally described as restricted cash or restricted cash equivalents. The guidance in this accounting standard update was~~be hyper-inflationary is required to ~~be applied retrospectively which resulted in certain adjustments~~remeasure its monetary assets and liabilities to the ~~Company’s Condensed Consolidated Statement of Cash Flows for~~applicable published exchange rates and record the ~~three months ended March 31, 2017. See Note 3 of Notes to Condensed Consolidated Financial Statements.~~

Venezuela’s economy has been considered hyper inflationary under U.S. GAAP since 2010, at which time the Company’s Venezuela equity affiliate, Kelko Quaker Chemical, S.A. (“Kelko Venezuela”), changed its functional currency from the bolivar fuerte (“BsF”) to the U.S. dollar. Accordingly, allassociated gains ~~and~~or losses resulting from the remeasurement ~~of Kelko Venezuela’s monetary assets and liabilities to published exchange rates are required to be recorded~~ directly to the Condensed Consolidated Statements of Income. The ~~current~~Company has a 50-50 joint venture in a Venezuelan ~~exchange rate system is a dual exchange rate system, which consists of a protected DIPRO exchange rate, with a rate fixed at 10 BsF per~~affiliate, Kelko Quaker Chemical, S.A. Venezuela’s economy has been considered hyper-inflationary under U.S. dollars and, also, a floating exchange rate known as the DICOM. The Company does not believe it has access to the DIPRO and, therefore, believes the DICOM to be the exchange rate system available to Kelko Venezuela. Due to ongoing economic and political instability in Venezuela, the DICOM BsF per U.S. dollar exchange rate significantly declined duringGAAP since 2010. During the three months ended March 31, 2018 ~~and~~ the Company recorded a ~~currency conversion charge of~~ $0.2 million remeasurement loss associated with the applicable currency conversions related to ~~remeasure~~Venezuela. These losses were recorded within equity in net income (loss) of associated companies in the Company’s Condensed Consolidated Statements of Income. Due to heightened foreign exchange controls and restrictions currently present within Venezuela, during the third quarter of 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 March 31, 2019 and December 31, 2018, the Company has no remaining carrying value for its ~~equity~~ investment in Kelko ~~Venezuela~~Venezuela.

Based on various indices or index compilations currently being used to monitor inflation in Argentina as well as recent economic instability, effective July 1, 2018, Argentina’s economy was considered hyper-inflationary under U.S. GAAP. As a result, the Company began applying hyper-inflationary accounting with respect to the ~~current DICOM BsF per U.S. dollar exchange rate. There were no similar charges recorded during~~Company's wholly owned Argentina subsidiary beginning July 1, 2018. As of, and for the three months ended March 31, ~~2017.~~As2019, the Company's Argentina subsidiary represented less than 1 % of the Company’s consolidated total assets and less than 1 % of the Company’s consolidated net sales. During the three months ended March 31, ~~2018~~,2019, the Company recorded a $0.2 million remeasurement loss associated with the applicable currency conversions related to Argentina. These losses were recorded within foreign exchange losses, net, which is a component of other expense, net, in the Company’s ~~equity investment in Kelko Venezuela was less than $0.1 million, valued at the current DICOM exchange rate~~Condensed Consolidated Statements of ~~approximately 50,000 BsF per U.S. dollar.~~Income.

Note 2 – Houghton Combination

On April 4, 2017, Quaker entered into a share purchase agreement with Gulf Houghton Lubricants, Ltd. to purchase the entire issued and outstanding share capital of Houghton International, Inc. (“Houghton”) (herein referred to as “the Combination”). The shares will be bought for aggregate purchase consideration consisting of: (i) $172.5 million in cash; (ii) a number of shares of common stock, $1.00 par value per share, of the Company comprising 24.5% of the common stock outstanding upon the closing of the Combination; and (iii) the Company’s assumption of Houghton’s net indebtedness as of the closing of the Combination, which was approximately $690 million at signing. At closing, the total aggregate purchase consideration is dependent on the Company’s stock price and the level of Houghton’s indebtedness.

The Company secured $1.15 billion in commitments from Bank of America Merrill Lynch and Deutsche Bank to fund the Combination and to provide additional liquidity, and has since replaced these commitments with a syndicated bank agreement (“the New Credit Facility”) with a group of lenders for $1.15 billion. The New Credit Facility is contingent upon and will not be effective until the closing of the Combination. During ~~April 2018,~~the first quarter of 2019, the Company extended the bank commitment for the New Credit Facility through ~~August 4, 2018. In connection with this extension, the Company adjusted slightly the currency mix of the term loan component of the New Credit Facility. As adjusted, the~~July 15, 2019. The New Credit Facility is ~~now~~ comprised of a $400.0 million multicurrency revolver, a $600.0 million USD term loan and a $150.0 million EUR equivalent term loan, each with a five-year term from the date the New Credit Facility becomes effective. The maximum amount available under the New Credit Facility can be increased by $200.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the New Credit Facility will bear interest at a base rate or LIBOR rate plus a margin. The Company currently estimates the annual floating rate cost will be in the ~~3.50%~~3.75% to ~~3.75%~~4.0% range based on current market interest rates. The New Credit Facility will be subject to certain financial and other covenants, including covenants that the Company’s consolidated net debt to adjusted EBITDA ratio cannot ~~initially~~ exceed 4.25 to 1 and the Company’s consolidated adjusted EBITDA to interest expense ratio cannot be less than 3.0 to 1. Both the USD and EUR equivalent term loans will have quarterly principal amortization during their respective five-year terms, with 5%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 amounts due at maturity. Until closing, the Company will incur certain interest costs paid to maintain the bank commitment (“ticking fees”), which began to accrue on September 29, 2017 and bear an interest rate of 0.30% per annum.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

~~the principal balance due in years 1 and 2, 7.5% in year 3, and 10% in years 4 and 5, with the remaining principal amounts due at maturity.Until closing, the Company will incur certain interest costs paid to maintain the~~ ~~bank commitment~~ ~~(“ticking fees”), which began to accrue on September 29, 2017 and bear an interest rate of 0.30% per annum.~~

In addition, the issuance of the Company’s shares at closing of the Combination was subject to approval by Quaker’s shareholders under the rules of the New York Stock Exchange. This approval was received at a meeting of the Company’s shareholders during the third quarter of 2017. Also, the Combination is subject to regulatory approval in the United States, Europe, China and Australia. The Company received regulatory approval for the Combination from China and Australia in 2017. ~~Depending on~~In addition, at a shareholder meeting held during 2017, the ~~timing~~Company’s shareholders overwhelmingly approved the issuance of the ~~remaining regulatory approvals and other customary terms and conditions set forth in~~new shares of the ~~share purchase agreement, the Company currently estimates~~Company’s common stock at closing of the Combination. The European Commission (“EC”) conditionally approved the Combination in December 2018, including the remedy proposed by Quaker and Houghton. The Company expects to receive final approval from the EC once certain conditions are met, including their review and approval of the final purchase agreement between Quaker, Houghton, and the buyer of the divested product lines, which was finalized and signed at the end of March 2019. The Company continues to be in productive discussions with the U.S. Federal Trade Commission (“FTC”). Given the time lapse since the Company’s initial filing, the FTC requested updated information as part of their approval process late in the fourth quarter of 2018. In addition, the government shutdown in the U.S. late in the fourth quarter of 2018 and early in 2019 extended the timeline to receive the final approval. Given current information, the Company expects that final approval from the FTC and EC and closing of the combination will occur ~~over~~in the next ~~few~~couple of months.

The Company incurred costs of ~~$6.1~~$5.3 million and ~~$9.1~~$6.1 million during the three months ended March 31, 2019 and 2018, ~~and 2017,~~ respectively, primarily for certain legal, ~~environmental,~~ financial, and other advisory and consultant costs related to ~~due diligence,~~ regulatory ~~and shareholder~~ approvals, integration planning associated with the Combination and certain one-time labor-related costs and ticking fees. As of March 31, ~~2018~~2019 and December 31, ~~2017~~2018, the Company had current liabilities related to the Combination of ~~$7.6~~$7.2 million and ~~$5.5~~ $8.2 million, respectively, primarily recorded within other current liabilities on its Condensed Consolidated Balance Sheets.

Note 3 – Recently Issued Accounting Standards

The Financial Accounting Standards Board (“FASB”) issued an accounting standard update in August 2018 that modifies certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this accounting standard update remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of certain disclosures, and add new disclosure requirements as relevant. The guidance within this accounting standard update is effective for annual periods beginning after December 15, 2020, and should be applied retrospectively to all periods presented. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.

The FASB issued an accounting standard update in August 2018 that clarifies the accounting for implementation costs incurred in a cloud computing arrangement under a service contract. This guidance generally aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement under a service contract with the requirements for capitalizing implementation costs related to internal-use software. The guidance within this accounting standard update is effective for annual periods beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.

The FASB issued an accounting standard update in August 2018 that modifies certain disclosure requirements for fair value measurements. The guidance removes certain disclosure requirements regarding transfers between levels of the fair value hierarchy as well as certain disclosures related to the valuation processes for certain fair value measurements. Further, the guidance added certain disclosure requirements including unrealized gains and losses and significant unobservable inputs used to develop certain fair value measurements. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2019, and should be applied prospectively in the initial year of adoption or prospectively to all periods presented, depending on the amended disclosure requirement. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.

The FASB issued an accounting standard update in February 2018 that allows a reclassification from accumulated other comprehensive (loss) income (“AOCI”) to retained earnings for stranded tax effects resulting from ~~the~~U.S. Tax ~~Cuts and Jobs Act~~Reform enacted in December 2017. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2018, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in ~~the~~U.S. Tax ~~Cuts and Jobs Act~~Reform is recognized. Early adoption was permitted. The Company adopted this guidance in the first quarter of 2019, as required, but elected not to reclassify any stranded tax effects resulting from U.S. Tax Reform, therefore adoption of this guidance did not have an impact on its financial statements.

The FASB issued an accounting standard update in June 2016 related to the accounting for and disclosure of credit losses. The guidance introduces a new model for recognizing credit losses on financial instruments, including customer accounts receivable, based on an estimate of current expected credit losses. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2019, and aspects of the guidance which may be applicable to Quaker should be applied on a modified retrospective basis. Early adoption is permitted. The Company has not early adopted the guidance and is currently evaluating its implementation.

The FASB issued an accounting standard update in January 2017 to clarify the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this accounting standard update provide a more robust framework to use in determining when a set of assets and activities is a business. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017. Early adoption was permitted in limited circumstances, and the amendments in this accounting standard update should be applied prospectively, with no disclosures required at transition. The Company adopted the guidance in the first quarter of 2018, as required, with no impact to its financial statements.

The FASB issued an accounting standard update in November 2016 requiring that the statement of cash flows explain both the change in the total cash and cash equivalents, and, also, the amounts generally described as restricted cash or restricted cash equivalents. This will require amounts generally described as restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning and ending amounts shown on the statement of cash flows. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017. Early adoption was permitted and the guidance requires application using a retrospective transition method to each period presented when adopted. The Company adopted the guidance in the first quarter of 2018, as required. Adoption of the guidance did not have an impact on the Company’s earnings or balance sheet but did result in changes to certain disclosures within the statement of cash flows, including cash flows from investing activities and total cash, cash equivalents and restricted cash. See Note 12 of Notes to Condensed Consolidated Financial Statements.

The FASB issued an accounting standard update in October 2016 to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The provisions in this update will allow an entity to recognize current and deferred income taxes of an intra-entity transfer of an asset other than inventory when the transfer occurs rather than when the asset has been sold to an outside party. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017. Early adoption was permitted and the guidance requires application on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted the guidance in the first quarter of 2018, as required, with no impact to its financial statements.

The FASB issued an accounting standard update in August 2016 to standardize how certain transactions are classified in the statement of cash flows. Specific transactions covered by the accounting standard update include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank owned life insurance policies, distributions received from equity method investments and beneficial interest in securitization transactions. The guidance within this accounting standard update is effective for annual and interim periods beginning after December 15, 2017. Early adoption was permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

~~a retrospective transition method. The Company adopted the guidance in the first quarter of 2018, as required, with no impact to its financial statements.~~

The FASB issued an accounting standard update in February 2016 regarding the accounting and disclosure for leases. ~~Specifically,~~During 2018 and 2019, the ~~update will require entities that lease assets~~FASB issued a series of accounting standard updates to ~~recognize the assets~~clarify and ~~liabilities for the rights and obligations created by those leases~~expand on the ~~balance sheet,~~original 2016 implementation guidance, including providing an accounting policy election for lessors, certain targeted improvements around comparative reporting requirements and accounting for lease and non-lease components by lessors as well as other technical corrections and improvements. The amendments in ~~most instances.~~these 2018 and 2019 updates did not change the core principles of the guidance previously issued in February 2016. The guidance within ~~this~~all of the leasing accounting standard ~~update is~~updates are effective for annual and interim periods beginning after December 15, 2018, and should be applied on a modified retrospective basis, ~~for~~applying the ~~reporting periods presented. Early adoption is permitted, but~~transition requirements either (a) at the ~~Company has not early adopted. As~~beginning of ~~March 31, 2018,~~ the Company has begun its impact assessment and implementation planning, including taking an inventory of its outstanding leases globally, establishing a cross functional project team and evaluating software solutions that could potentially assist in facilitating the end-to-end leasing process, including adoption of this lease accounting guidance. While the Company’s evaluation of this guidance isearliest period presented in the ~~early stages,~~financial statements in the ~~Company anticipates~~year of adoption (January 1, 2017) or (b) in the period of this guidance to have an impact on its balance sheet as it expects the majority of its operating leases will be recorded on its balance sheet by establishing right of use assets and associated lease liabilities.

The FASB issued an accounting standard update in May 2014 regarding the accounting for and disclosure of revenue recognition. Specifically, the update outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which will be common to both U.S. GAAP and International Financial Reporting Standards. The guidance was effective for annual and interim periods beginning after December 15, 2016, and allowed for full retrospective adoption ~~of prior period data or a modified retrospective adoption.~~(January 1, 2019). Early adoption was ~~not~~ permitted. In August 2015, the FASB issued an accounting standard update to delay the effective date of the new revenue standard by one year, or, in other words, to be effective for annual and interim periods beginning after December 15, 2017. Entities were permitted to adopt the new revenue standard early but not before the original effective date. During 2016 and 2017, the FASB issued a series of accounting standard updates to clarify and expand on the implementation guidance, including principal versus agent considerations, identification of performance obligations, licensing, other technical corrections and adding certain practical expedients. The amendments in these 2016 and 2017 updates did not change the core principles of the guidance previously issued in May 2014.

As part of the Company’s implementation planning and its impact assessment ~~for the implementation of~~related to the new ~~revenue recognition~~lease accounting guidance, the Company ~~reviewed its historical accounting policies~~developed a detailed project plan, identified and ~~practices to identify potential differences with the requirements of the new revenue recognition standard, as it related to the Company’s contracts~~established a cross-functional implementation team and ~~sales arrangements.~~developed pre-adoption internal controls. In addition, the ~~impact assessment and work performed included global and cross functional interviews and questionnaires, sales agreement and other sales document reviews, as well as technical considerations for~~Company gathered an inventory of the Company’s ~~future transactional accounting, financial reporting~~outstanding leases globally, performed certain review procedures to ensure completeness of its lease population and ~~disclosure requirements. The~~abstracted required information from its lease population for inclusion within the Company’s leasing software. Also, the Company ~~has also begun a preliminary assessment of~~is considering how the new ~~revenue recognition~~lease accounting guidance may impact Houghton ~~as it pertains to~~and the pending Combination.

The Company adopted the guidance in the first quarter of ~~2018,~~2019, as required, electing to use a modified retrospective ~~adoption~~transition approach and applied ~~to those contracts which were not completed~~transition requirements as of January 1, ~~2018.~~2019, as permitted. Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. In addition, the Company elected to apply certain of the permitted transition practical expedients within the ~~revenue recognition guidance~~new lease accounting related to lease identification, lease classification, and ~~make~~initial direct costs. The Company made certain accounting policy elections ~~including those related to significant financing~~as a result of adopting the new lease accounting guidance which include not separating lease and non-lease components, ~~sales taxes~~applying a portfolio approach in the development of the Company’s discount rates, applying the short-term lease exemption and ~~shipping and handling activities.~~ establishing a capitalization threshold policy.

Adoption of the ~~revenue recognition~~lease accounting guidance did not have a material impact on the Company’s reported earnings or cash flows, however, adoption did ~~increase the amount and level of disclosures concerning the Company’s net sales and did~~ result in ~~one adjustment~~a material impact to the Company’s balance ~~sheet. As a result~~sheet to establish the right of ~~the Company’s impact assessment~~use lease assets and ~~adoption using the modified retrospective adoption approach~~associated lease liabilities. Specifically, the Company recorded a cumulative effect of an adjustment to its Condensed Consolidated Balance Sheet as of December 31, 2017 to adjust the Company’s estimate of variable consideration relating to customers’ expected rights to return product. This adjustmentaccounting change that resulted in an increase to its right of use lease assets of $27.3 million, an increase of $5.3 million of short-term lease liabilities and $21.4 million of long-term lease liabilities, a decrease in property, plant and equipment, net of $1.1 million, a decrease in other current liabilities of ~~$1.0 million, an increase to non-current deferred tax assets of $0.2~~$0.4 million and a decrease to retained earnings of ~~$0.8~~less than $0.1 million. There were no other impacts recorded as a result of adopting the revenue recognition guidance. The impact of adoption of the new revenue recognition guidance was immaterial for the three months ended March 31, 2018 and the Company expects the impact to be immaterial on an ongoing basis. See Note 45 of Notes to Condensed Consolidated Financial Statements.

Note 4 – Net Sales and Revenue Recognition

Business Description

The Company develops, produces, and markets a broad range of formulated chemical specialty products and offers chemical management services (“CMS”) for various heavy industrial and manufacturing applications in a global portfolio throughout its four regions: North America, Europe, Middle East and Africa (“EMEA”), Asia/Pacific and South America. The major product lines in the Company’s global portfolio include: (i) rolling lubricants (used by manufacturers of steel in the hot and cold rolling of steel and by manufacturers of aluminum in the hot rolling of aluminum); (ii) machining and grinding compounds (used by metalworking customers in cutting, shaping, and grinding metal parts which require special treatment to enable them to tolerate the manufacturing process,

~~Quaker Chemical Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~ ~~- Continued~~

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

~~(Unaudited)~~

achieve closer tolerance, and improve tool life); (iii) corrosion preventives (used by steel and metalworking customers to protect metal during manufacture, storage, and shipment); (iv) hydraulic fluids (used by steel, metalworking, and other customers to operate hydraulic equipment); (v) specialty greases (used in automotive and aerospace production processes and applications, the manufacturing of steel, and various other applications); and (vi) metal finishing compounds (used to prepare metal surfaces for special treatments such as galvanizing and tin plating and to prepare metal for further processing).

A substantial portion of the Company’s sales worldwide are made directly through its own employees and its CMS programs, with the balance being handled through distributors and agents. The Company’s employees visit the plants of customers regularly, work on site, and, through training and experience, identify production needs which can be resolved or alleviated either by adapting the Company’s existing products or by applying new formulations developed in its laboratories. The chemical specialty industry comprises many companies of similar size as well as companies larger and smaller than Quaker. The offerings of many of the Company’s competitors differ from those of Quaker; some offer a broad portfolio of fluids, including general lubricants, while others have a more specialized product range. All competitors provide different levels of technical services to individual customers. Competition in the industry is based primarily on the ability to provide products that meet the needs of the customer, render technical services and laboratory assistance to the customer, and to a lesser extent on price.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

As part of the Company’s CMS, certain third-party product sales to customers are managed by the Company. Where the Company acts as a principal, revenues are recognized on a gross reporting basis at the selling price negotiated with its customers. Where the Company acts as an agent, revenue is recognized on a net reporting basis at the amount of the administrative fee earned by the Company for ordering the goods.In determining whether the Company is acting as a principal or an agent in each arrangement, the Company considers whether it is primarily responsible for fulfilling the promise to provide the specified good, has inventory risk before the specified good has been transferred to the customer and has discretion in establishing the prices for the specified goods. ~~Third-party~~The Company transferred third-party products ~~transferred~~ under arrangements ~~resulting in~~recognized on a net reporting ~~totaled $11.6~~basis of $10.4 million and ~~$10.4~~$11.6 million for the three months ended March 31, 2019 and 2018, ~~and 2017,~~ respectively.

A significant portion of the Company’s revenues are realized from the sale of process fluids and services to manufacturers of steel, automobiles, aircraft, appliances, and durable goods, and, therefore, the Company is subject to the same business cycles as those experienced by these manufacturers and their customers. The Company’s financial performance is generally correlated to the volume of global production within the industries it serves, rather than discretely related to the financial performance of such industries. Furthermore, steel customers typically have limited manufacturing locations compared to metalworking customers and generally use higher volumes of products at a single location. As previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, ~~2017,~~2018, during ~~2017~~2018 the Company’s five largest customers (each composed of multiple subsidiaries or divisions with semiautonomous purchasing authority) accounted for approximately ~~18%~~17 % of consolidated net sales, with its largest customer accounting for approximately 8%8% of consolidated net sales.

Revenue Recognition Model

The Company applies the FASB’s guidance on revenue recognition which requires the Company to recognize revenue in an amount that reflects the consideration to which the Company expects to be entitled in exchange for goods or services transferred to its customers. To do this, the Company applies the five-step model in the FASB’s guidance, which requires the Company to: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation.

The Company identifies a contract with a customer when a sales agreement indicates approval and commitment of the parties; identifies the rights of the parties; identifies the payment terms; has commercial substance; and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In most instances, the Company’s contract with a customer is the customer’s purchase order. For certain customers, the Company may also enter into a sales agreement which outlines a framework of terms and conditions which apply to all future and subsequent purchase orders for that customer. In these situations, the Company’s contract with the customer is both the sales agreement as well as the specific customer purchase order. Because the Company’s contract with a customer is typically for a single transaction or customer purchase order, the duration of the contract is almost always one year or less. As a result, the Company has elected to apply certain practical expedients and omit certain disclosures of remaining performance obligations for contracts which have an initial term of one year or less as permitted by the FASB.

The Company identifies a performance obligation in a contract for each promised good or service that is separately identifiable from other promises in the contract and for which the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. The Company determines the transaction price as the amount of consideration it expects to be entitled to in exchange for fulfilling the performance obligations, including the effects of any variable

~~Quaker Chemical Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~ ~~- Continued~~

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

~~(Unaudited)~~

consideration, significant financing elements, amounts payable to the customer or noncash consideration. For any contracts that have more than one performance obligation, the Company allocates the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the Company expects to be entitled in exchange for satisfying each performance obligation.

In accordance with the last step of the FASB’s guidance, the Company recognizes revenue when, or as, it satisfies the performance obligation in a contract by transferring control of a promised good or service to the customer. The Company recognizes revenue over time whenever the customer simultaneously receives and consumes the benefits provided by the Company’s performance; the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or the Company’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment, including a profit margin, for performance completed to date. For performance obligations not satisfied over time, the Company determines the point in time at which a customer obtains control of a promised asset and the Company satisfies a performance obligation by considering when the Company has a ~~present~~ right to payment for the asset; the customer has legal title to the asset; the Company has transferred physical possession of the asset; the customer has the significant risks and rewards of ownership of the asset; or the customer has accepted the asset.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

The Company typically satisfies its performance obligations and recognizes revenue at a point in time for product sales, generally when products are shipped or delivered to the customer, depending on the terms underlying each arrangement. In circumstances where the Company’s products are on consignment, revenue is generally recognized upon usage or consumption by the customer. For any CMS or other services provided by the Company to the customer, the Company typically satisfies its performance obligations and recognizes revenue over time, as the promised services are performed. The Company uses input methods to recognize revenue over time related to these services, including labor costs and time incurred. The Company believes that these input methods represent the most indicative measure of the CMS or other service work performed by the ~~Company during a given period of time.~~Company.

Other Considerations

The Company does not have standard payment terms for all customers globally, however the Company’s general payment terms require customers to pay for products or services provided after the performance obligation is satisfied. The Company does not have significant financing arrangements with its customers. The Company does not have significant amounts of variable consideration in its contracts with customers and where applicable, the Company’s estimates of variable consideration are not constrained. The Company records certain third-party license fees in other ~~income (expense),~~expense, net, in its Condensed Consolidated ~~Statement~~Statements of Income, which generally include sales-based royalties in exchange for the license of intellectual property. These license fees are recognized in accordance with their agreed-upon terms and when performance obligations are satisfied, which is generally when the third party has a subsequent sale.

Practical Expedients and Accounting Policy Elections

The Company has made certain accounting policy elections and elected to use certain practical expedients as permitted by the FASB in applying the guidance on revenue recognition. It is the Company’s policy to not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less. In addition, it is the Company’s policy to expense costs to obtain a contract as incurred when the expected period of benefit, and therefore the amortization period, is one year or less. It is also the Company’s accounting policy to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, value added, excise and various other taxes. Lastly, the Company has elected to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfilment cost rather than an additional promised service.

Contract Assets and Liabilities

The Company recognizes a contract asset or receivable on its Condensed Consolidated Balance Sheet when the Company performs a service or transfers a good in advance of receiving consideration. A receivable is the Company’s right to consideration that is unconditional and only the passage of time is required before payment of that consideration is due. A contract asset is the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer. The Company had no material contract assets recorded on its Condensed Consolidated Balance Sheets as of March 31, ~~2018~~2019 or December 31, ~~2017.~~2018.

A contract liability is recognized when the Company receives consideration, or if it has the unconditional right to receive consideration, in advance of performance. A contract liability is the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration, or a specified amount of consideration is due, from the customer. The Company’s contract liabilities primarily represent deferred revenue recorded for customer payments received by the Company prior to the

~~Quaker Chemical Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~ ~~- Continued~~

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

~~(Unaudited)~~

Company satisfying the associated performance obligation. Deferred revenues are presented within other current liabilities in the Company’s Condensed Consolidated Balance ~~Sheets.~~Sheets. The Company had approximately $1.3 million and ~~$1.5~~$1.3 million of deferred revenue as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. During the three months ended March 31, ~~2018~~2019, the Company satisfied the associated performance obligations and recognized revenue of ~~$1.5~~$1.3 million related to advance customer payments ~~previously received.~~recorded as of December 31, 2018.

Disaggregated Revenue

The Company sells its various industrial process fluids, its chemical specialties and its technical expertise as a global product portfolio. The Company generally manages and evaluates its performance by geography first, and then by customer industry, rather than by individual product lines. The Company has provided annual net sales information for its product lines greater than 10% in its previously filed Form 10-K for the year ended December 31, ~~2017,~~2018, and those annual percentages are generally consistent with the current quarter’s net sales by product line. Also, net sales of each of the Company’s major product lines are generally spread throughout all four of the Company’s regions, and in most cases, approximately proportionate to the level of total sales in each region.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

The following ~~disaggregates~~tables disaggregate the Company’s net sales by region, customer industry, and timing of revenue recognized for the three months ended March 31, 2019 and 2018. The Company has made certain reclassifications of disaggregated customer industry disclosures for the three months ended March 31, 2018 to conform with the Company’s current period customer industry segmentation.

	Three Months Ended March 31, 2019
	North						South		Consolidated
	America		EMEA		Asia/Pacific		America		Total
Net sales	$	95,253	$	56,288	$	50,527	$	9,142	$	211,210

Customer Industries
Primary metals	$	39,685	$	24,883	$	32,092	$	5,290	$	101,950
Metalworking		40,436		28,248		16,468		3,761		88,913
Coatings and other		15,132		3,157		1,967		91		20,347
	$	95,253	$	56,288	$	50,527	$	9,142	$	211,210

Timing of Revenue Recognized
Product sales at a point in time	$	92,483	$	56,234	$	48,651	$	9,064	$	206,432
Services transferred over time		2,770		54		1,876		78		4,778
	$	95,253	$	56,288	$	50,527	$	9,142	$	211,210

	Three Months Ended March 31, 2018
	North						South		Consolidated
	America		EMEA		Asia/Pacific		America		Total
Net sales	$	91,820	$	62,055	$	48,777	$	9,403	$	212,055

Customer Industries
Primary metals	$	37,558	$	27,314	$	30,907	$	5,299	$	101,078
Metalworking		40,589		31,170		17,526		3,783		93,068
Coatings and other		13,673		3,571		344		321		17,909
	$	91,820	$	62,055	$	48,777	$	9,403	$	212,055

Timing of Revenue Recognized
Product sales at a point in time	$	88,986	$	61,999	$	46,848	$	9,319	$	207,152
Services transferred over time		2,834		56		1,929		84		4,903
	$	91,820	$	62,055	$	48,777	$	9,403	$	212,055

Note 5 - Leases

The Company determines if an arrangement is a lease at its inception. This determination generally depends on whether the arrangement conveys the right to control the use of an identified fixed asset explicitly or implicitly for a period of time in exchange for consideration. Control of an underlying asset is conveyed if the Company obtains the rights to direct the use of, and to obtain substantially all of the economic benefits from the use of, the underlying asset. Lease expense for variable leases and short-term leases is recognized when the obligation is incurred.

The Company has operating leases for certain facilities, vehicles and machinery and equipment with remaining lease terms up to 8 years. In addition, the Company has certain land use leases with remaining lease terms up to 96 years. The lease term for all of the Company’s leases includes the non-cancellable period of the lease plus any additional periods covered by an option to extend the lease that the Company is reasonably certain it will exercise. Operating leases are included in right of use lease assets, other current liabilities and long-term lease liabilities on the Condensed Consolidated Balance Sheet. Right of use lease assets and liabilities are recognized at each lease’s commencement date based on the present value of its lease payments over its respective lease term. The Company uses the stated borrowing rate for a lease when readily determinable. When a stated borrowing rate is not available in a lease agreement, the Company uses its incremental borrowing rate based on information available at the lease’s commencement date to determine the present value of its lease payments. In determining the incremental borrowing rate used to present value each of its

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

leases, the Company considers certain information including fully secured borrowing rates readily available to the Company and its subsidiaries. The Company has one immaterial finance lease, which is included in property, plant and equipment, current portion of long-term debt and long-term debt on the Condensed Consolidated Balance Sheet.

Operating lease expense is recognized on a straight-line basis over the lease term. Operating lease expense for the three months ended March 31, 2019 was $1.8 million. Short-term lease expense for the three months ended March 31, 2019 was $0.1 million. The Company has no material variable lease costs or sublease income for the three months ended March 31, 2019. Cash paid for operating leases during the three months ended March 31, 2019 was $1.7 million. Subsequent to the Company’s adoption of the new lease accounting guidance and cumulative effect of an accounting change on January 1, 2019, the Company recorded new right of use lease assets and associated lease liabilities of approximately $0.3 million during the three months ended March 31, 2019.

Supplemental balance sheet information related to the Company’s leases is as follows:

	March 31,
	2019
Right of use lease assets	$	26,069

Other current liabilities		5,258
Long-term lease liabilities		20,231
Total operating lease liabilities	$	25,489

Weighted average remaining lease term (years)		6.1
Weighted average discount rate		4.65%

Maturities of operating lease liabilities as of March 31, 2019 were as follows:

	March 31,
	2019
For the remainder of 2019	$	4,844
For the year ended December 31, 2020		5,465
For the year ended December 31, 2021		4,486
For the year ended December 31, 2022		3,534
For the year ended December 31, 2023		2,758
For the year ended December 31, 2024 and beyond		8,419
Total lease payments		29,506
Less: imputed interest		(4,017)
Present value of lease liabilities	$	25,489

Pursuant to the Company’s adoption of the new lease accounting guidance using a modified retrospective transition approach, as permitted, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. As previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, 2018, the following table presents the Company’s future minimum rental commitments under operating leases as of December 31, 2018:

Three Months Ended March 31, 2018

North

South

Consolidated

America

EMEA

Asia/Pacific

America

Total
Net sales
$
91,820

$
62,055

$
48,777

$
9,403

$
212,055

Customer Industries

Primary metals
$
41,273

$
27,317

$
30,878

$
5,299

$
104,767
Metalworking

36,874

31,161

17,573

3,783

89,391
Coatings and other

13,673

3,577

326

321

17,897

$
91,820

$
62,055

$
48,777

$
9,403

$
212,055

Timing of Revenue Recognized

Product sales at a point in time
$
88,986

$
61,999

$
46,848

$
9,319

$
207,152
Services transferred over time

2,834

56

1,929

84

4,903

$
91,820

$
62,055

$
48,777

$
9,403

$
212,055

For the year ended 2019	$	7,068
For the year ended 2020		5,635
For the year ended 2021		4,509
For the year ended 2022		3,523
For the year ended 2023		2,659
For the year ended 2024 and beyond		7,779

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

Note 56 – Business Segments

The Company’s reportable operating segments are organized by geography as follows: (i) North America, (ii) EMEA, (iii) Asia/Pacific and (iv) South America. Operating earnings, excluding indirect operating expenses, for the Company’s reportable operating segments is comprised of revenues less cost of goods sold (“COGS”) and selling, general and administrative expenses (“SG&A”) directly related to the respective region’s product sales. The indirect operating expenses consist of SG&A not directly attributable to the product sales of each respective reportable operating segment. Other items not specifically identified with the Company’s reportable operating segments include interest expense, interest income, license fees from non-consolidated affiliates, amortization expense and other ~~income (expense),~~expense, net.

The following table presents information about the performance of the Company’s reportable operating segments for the three months ended March 31, 2019 and 2018:

		Three Months Ended
		March 31,
		2019		2018
Net sales
	North America	$	95,253	$	91,820
	EMEA		56,288		62,055
	Asia/Pacific		50,527		48,777
	South America		9,142		9,403
Total net sales		$	211,210	$	212,055

Operating earnings, excluding indirect operating expenses
	North America	$	20,872	$	20,365
	EMEA		8,782		10,293
	Asia/Pacific		13,082		12,142
	South America		1,197		635
Total operating earnings, excluding indirect operating expenses			43,933		43,435
Combination-related expenses			(4,483)		(5,209)
Non-operating charges			(17,733)		(16,039)
Depreciation of corporate assets and amortization			(1,888)		(1,956)
Operating income			19,829		20,231
Other expense, net			(635)		(369)
Interest expense			(1,214)		(1,692)
Interest income			438		489
Income before taxes and equity in net income (loss) of associated companies		$	18,418	$	18,659

Inter-segment revenues for the three months ended March 31, 2019 and 2018 were $1.8 million and $3.1 million for North America, $5.3 million and $5.6 million for EMEA, less than $0.1 million and $0.4 million for Asia/Pacific and less than $0.1 million and $0 for South America, respectively. However, all inter-segment transactions have been eliminated from each reportable operating segment’s net sales and earnings for all periods presented above.

1113

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

~~The following table presents information about the performance of the Company’s reportable operating segments for the~~ ~~three months ended March 31, 2018 and 2017:~~

Three Months Ended

March 31,

2018

2017

Net sales







North America
$
91,820

$
87,341

EMEA

62,055


53,927

Asia/Pacific

48,777


45,150

South America

9,403


8,491

Total net sales
$
212,055

$
194,909

Operating earnings, excluding indirect operating expenses

North America
$
20,365

$
20,637

EMEA

10,293

9,246

Asia/Pacific

12,142

10,243

South America

635


797

Total operating earnings, excluding indirect operating expenses

43,435


40,923

Combination-related expenses

(5,209)

(9,075)

Indirect operating expenses

(16,142)


(16,317)

Amortization expense

(1,853)


(1,773)

Consolidated operating income

20,231

13,758

Other expense, net

(369)

(105)

Interest expense

(1,692)


(656)

Interest income

489


523

Consolidated income before taxes and equity in net (loss) income of associated companies
$
18,659

$
13,520

Inter-segment revenues for the three months ended March 31, 2018 and 2017 were $3.1 million and $2.1 million for North America, $5.6 million and $4.8 million for EMEA, $0.4 million and $0.1 million for Asia/Pacific and $0 and less than $0.1 million for South America, respectively. However, all inter-segment transactions have been eliminated from each reportable operating segment’s net sales and earnings for all periods presented above.

~~Note 6 –~~ ~~Restructuring and Related Activities~~

~~As previously disclosed~~ in ~~its Annual Report filed on Form 10-K for the year ended December 31, 2017,~~ in the fourth quarter of 2015 Quaker’s management approved a global restructuring plan (the “2015 Program”) to reduce its operating costs. The 2015 Program included provisions for the reduction of total headcount of approximately 65 employees globally. The Company completed all of the remaining initiatives under the 2015 Program during the first half of 2017 and does not expect to incur ~~further restructuring charges under this program.~~

~~Restructuring activity recognized by reportable operating segment in connection with the 2015 Program during the three months ended March 31, 2017 is as follows:~~

North

America

EMEA

Total

Accrued restructuring as of December 31, 2016
$
196

$
474

$
670

Cash payments

(70)

(78)

(148)

Currency translation adjustments

—

8

8

Accrued restructuring as of March 31, 2017
$
126

$
404

$
530

~~There were no accrued restructuring liabilities as of December 31, 2017 and no associated cash payments or other restructuring activity recognized during the three months ended March 31, 2018.~~

~~Quaker Chemical Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~ ~~- Continued~~

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

~~(Unaudited)~~

Note 7 – Share-Based Compensation

The Company recognized the following share-based compensation expense in SG&A in its Condensed Consolidated Statements of Income for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

Three Months Ended

March 31,

2018

2017

Stock options
$
252

$
227

Nonvested stock awards and restricted stock units

775

802

Employee stock purchase plan

22

23

Non-elective and elective 401(k) matching contribution in stock

—

64

Director stock ownership plan

34

37

Total share-based compensation expense
$
1,083

$
1,153

	Three Months Ended
	March 31,
	2019		2018
Stock options	$	260	$	252
Nonvested restricted stock awards and restricted stock units		698		775
Employee stock purchase plan		23		22
Director stock ownership plan		31		34
Total share-based compensation expense	$	1,012	$	1,083

During the first quarter of ~~2018,~~2019, the Company granted ~~stock options~~232 nonvested restricted shares under its long-term incentive ~~plan (“LTIP”) that are subject only to time vesting over a three-year period. For the purposes of determining the fair value~~plan. The Company had no grants of stock ~~option awards, the Company used the Black-Scholes option pricing model and the assumptions set forth in the table below:~~

~~Number of options granted~~	~~35,842~~
~~Dividend yield~~	~~1.37~~	%
~~Expected volatility~~	~~24.73~~	%
~~Risk-free interest rate~~	~~2.54~~	%
~~Expected term (years)~~	~~4.0~~

~~The fair value of these stocks~~ options ~~is amortized on a straight-line basis over the vesting period. As of March 31, 2018, unrecognized compensation expense related to~~or restricted stock ~~options granted was $2.1 million, to be recognized over a weighted average remaining period of 2.3 years.~~

~~During~~units during the first quarter of ~~2018, the Company granted 12,807 nonvested~~2019. Nonvested restricted shares ~~and 1,480 nonvested restricted stock units under its LTIP that~~granted are generally subject only to time vesting, generally over a three-year period. The fair value of ~~these awards is~~the nonvested restricted shares granted in the first quarter of 2019 are based on the trading price of the Company’s common stock on the date of grant. The Company adjusts the grant date fair value of these awards for expected forfeitures based on historical experience.

As of March 31, ~~2018,~~2019, unrecognized compensation expense related to ~~the nonvested shares~~stock options granted was ~~$3.2~~$1.0 million, to be recognized over a weighted average remaining period of ~~2.2~~1.6 years, unrecognized compensation expense related to the nonvested restricted shares was $1.7 million, to be recognized over a weighted average remaining period of 1.6 years, and unrecognized compensation expense related to nonvested restricted stock units was ~~$0.3~~$0.2 million, to be recognized over a weighted average remaining period of ~~2.4~~1.7 years.

Note 8 – Pension and Other Postretirement Benefits

The components of net periodic benefit cost for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 are as follows:

Three Months Ended March 31,

Other

Pension Benefits

Postretirement Benefits

2018

2017

2018

2017

Service cost
$
988

$
918

$
2

$
3

Interest cost

1,049

1,008

33

33

Expected return on plan assets

(1,290)

(1,326)

—

—

Actuarial loss amortization

800

869

15

5

Prior service cost amortization

(31)

(23)

—

—

Total net periodic benefit cost
$
1,516

$
1,446

$
50

$
41

	Three Months Ended March 31,
					Other
	Pension Benefits				Postretirement Benefits
		2019		2018		2019		2018
Service cost	$	986	$	988	$	2	$	2
Interest cost		1,111		1,049		35		33
Expected return on plan assets		(984)		(1,290)		—		—
Actuarial loss amortization		775		800		—		15
Prior service cost amortization		(42)		(31)		—		—
Total net periodic benefit cost	$	1,846	$	1,516	$	37	$	50

The Company previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, 2018 that the Company began the process of terminating the Company’s primary non-contributory U.S. pension plan (the “U.S. Pension Plan”) during the fourth quarter of 2018. As part of this process, and considering the fully funded status of the U.S. Pension Plan, the asset allocation of the U.S. Pension Plan was adjusted modeling a glide path that is more heavily allocated to fixed income securities with lengthened durations to match the projected liabilities. As a result, the expected return on plan assets declined during the three months ended March 31, 2019 compared to the three months ended March 31, 2018. In order to terminate the U.S. Pension Plan in accordance with IRS and Pension Benefit Guaranty Corporation requirements, the Company will be required to fully fund the U.S. Pension Plan on a termination basis and will commit to contribute additional assets if necessary, to do so. The amount necessary to do so is not yet known but is currently estimated to be between $0 and $10 million. In addition, the Company expects to record a pension settlement charge at plan termination. This settlement charge will include the immediate recognition into expense of the related unrecognized losses within AOCI on the balance sheet as of the plan termination date. The Company does not have a current estimate for this future settlement charge, however, the gross AOCI related to the U.S. Pension Plan was approximately $19 million as of March 31, 2019. The Company currently estimates that the U.S. Pension Plan termination will be completed during 2020.

Employer Contributions

The Company previously disclosed in its ~~financial statements~~Annual Report filed on Form 10-K for the year ended December 31, ~~2017,~~2018 that it expected to make minimum cash contributions of ~~$9.9~~$5.2 million to its pension plans and approximately $0.4 million to its other postretirement benefit plans in ~~2018.~~2019. As of March 31, ~~2018, $3.9~~2019, $2.9 million and ~~$0.1~~$0.2 million of contributions have been made to the Company’s pension plans and its postretirement benefit plans, respectively.

1314

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

Note 9 – Other Expense, Net

The components of other expense, net for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 are as follows:

Three Months Ended

March 31,

2018

2017

Income from third party license fees
$
250

$
269

Foreign exchange losses, net

(229)

(214)

Gain on fixed asset disposals, net

52

15

Non-income tax refunds and other related credits

36

294

Pension and postretirement benefit costs, non-service components

(576)

(566)

Other non-operating income

157

131

Other non-operating expense

(59)

(34)

Total other expense, net
$
(369)

$
(105)

	Three Months Ended
	March 31,
	2019		2018
Income from third party license fees	$	220	$	250
Foreign exchange losses, net		(237)		(229)
Gain on fixed asset disposals, net		9		52
Non-income tax refunds and other related credits		152		36
Pension and postretirement benefit costs, non-service components		(896)		(576)
Other non-operating income		148		157
Other non-operating expense		(31)		(59)
Total other expense, net	$	(635)	$	(369)

Note 10 – Income Taxes and Uncertain Income Tax Positions

The Company’s effective tax rate for the three months ended March 31, ~~2018~~2019 was ~~29.8%~~26.8 % compared to ~~50.8%~~29.8 % for the three months ended March 31, ~~2017. The Company’s elevated~~2018. These effective tax ~~rate in~~rates include the ~~first quarter~~impacts of ~~2017 was primarily due to~~ certain non-deductible costs related to the pending ~~Houghton~~ Combination. The Company’s lower effective tax rate ~~in the first quarter of 2018 also included the impact of certain non-deductible combination-related expenses, but to a lesser extent. In addition, the Company’s effective tax~~ for the three months ended March 31, ~~2018 benefited from the decrease in the U.S. statutory tax rate from 35% in the prior year to 21% in the current quarter as a result of the~~ ~~Tax Cuts and Jobs Act (“U.S. Tax Reform”), partially offset~~2019 was largely driven by a ~~negative~~positive impact from changes in uncertain tax positions ~~quarter-over-quarter.~~and a shift in earnings to entities with lower effective tax rates compared to the three months ended March 31, 2018, which more than offset higher tax expense during the three months ended March 31, 2019 related to the Company recording earnings in one of its subsidiaries at a statutory tax rate of 25 % while it awaits recertification of a concessionary 15% tax rate, which was available to the Company during the first three months of 2018.

As previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as U.S. Tax Reform on December 22, 2017. U.S. Tax Reform includes multiple changes to the U.S. tax code with varying effects on the Company’s results for the three months ended March 31, 2018. The SEC staff issued guidance on accounting for the tax effects of U.S. Tax Reform and provided a one-year measurement period for companies to complete the accounting. Companies are required to reflect the income tax effects of those aspects of U.S. Tax Reform for which the accounting is complete. To the extent that a company’s accounting for certain income tax effects of U.S. Tax Reform are incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements. The Company has made reasonable interpretations and assumptions with regard to various uncertainties and ambiguities in the application of certain provisions of U.S. Tax Reform. It is possible that the Internal Revenue Service (“IRS”) could issue subsequent guidance or take positions on audit that differ from the Company’s interpretations and assumptions. The Company currently believes subsequent guidance issued or interpretations made by the IRS will not be materially different from the Company’s application of the provisions of U.S. Tax Reform. The Company is continuing to evaluate all of the provisions of U.S. Tax Reform and expects to finalize its assessment during the one-year measurement period provided for by the SEC to complete the accounting for U.S. Tax Reform. During the three months ended March 31, 2018, the Company ~~has not made any significant changes to its initial assessments made during~~recognized a deferred tax liability of $7.9 million in the fourth quarter of ~~2017.~~ 2018 related to the Company’s estimate of non-U.S. taxes it will incur to repatriate certain foreign earnings. The Company incurred tax payments related to the repatriation of a portion of these foreign earnings during the first quarter of 2019 and reduced this deferred tax liability by approximately $3.2 million.

As of March 31, 2019, the Company’s cumulative liability for gross unrecognized tax benefits was $7.7 million. As of December 31, 2018, the Company’s cumulative liability for gross unrecognized tax benefits was ~~$7.8~~$7.1 million. ~~As of December 31, 2017, the Company’s cumulative liability for gross unrecognized tax benefits was $6.8 million.~~

The Company continues to recognize interest and penalties associated with uncertain tax positions as a component of taxes on income before equity in net income (loss) of associated companies in its Condensed Consolidated Statements of Income. The Company recognized an expense of $0.1 million for interest and an expense of less than $0.1 million for penalties in its Condensed Consolidated Statement of Income for the three months ended March 31, ~~2018,~~2019, and recognized ~~a credit~~an expense of ~~$0.2~~$0.1 million for interest and an expense of ~~less than~~ $0.1 million for penalties in its Condensed Consolidated Statement of Income for the three months ended March 31, ~~2017.~~2018. As of March 31, ~~2018,~~2019, the Company had accrued $0.7 million for cumulative interest and ~~$1.2~~$0.8 million for cumulative penalties in its Condensed Consolidated Balance Sheets, compared to $0.6 million for cumulative interest and ~~$1.0~~$0.8 million for cumulative penalties accrued at December 31, ~~2017.~~2018.

During the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, the Company recognized a decrease of less than $0.1 million and ~~$0.4~~$0.1 million, respectively, in its cumulative liability for gross unrecognized tax benefits due to the expiration of the applicable statutes of limitations for certain tax years.

~~Quaker Chemical Corporation~~

~~Notes to Condensed Consolidated Financial Statements~~ ~~- Continued~~

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

~~(Unaudited)~~

The Company estimates that during the year ending December 31, ~~2018~~2019 it will reduce its cumulative liability for gross unrecognized tax benefits by approximately $1.0 ~~to $1.1~~ million due to the expiration of the statute of limitations with regard to certain tax positions. This estimated reduction in the cumulative liability for unrecognized tax benefits does not consider any increase in liability for unrecognized tax benefits with regard to existing tax positions or any increase in cumulative liability for unrecognized tax benefits with regard to new tax positions for the year ending December 31, ~~2018.~~2019.

The Company and its subsidiaries are subject to U.S. Federal income tax, as well as the income tax of various state and foreign tax jurisdictions. Tax years that remain subject to examination by major tax jurisdictions include Brazil from 2000 , Italy from 2007, the Netherlands and the United Kingdom from ~~2012,~~2013 , Mexico, Spain and China ~~and Mexico~~ from ~~2013,~~2014 , India from ~~its~~ fiscal year beginning April 1, ~~2013~~2016 and ending March 31, ~~2014,~~2017 , the ~~United States~~U.S. from ~~2014,~~2015 , and various ~~domestic~~U.S. state tax jurisdictions from ~~2008.~~2009.

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

As previously reported, the Italian tax authorities have assessed additional tax due from the Company’s subsidiary, Quaker Italia S.r.l., relating to the tax years 2007 through 2013. The Company has filed for competent authority relief from these assessments under the Mutual Agreement Procedures (“MAP”) of the Organization for Economic Co-Operation and Development for all years except 2007. During 2018, the Italian tax authorities assessed additional tax due from Quaker Italia, S.r.l., relating to the tax years 2014 and 2015. The Company met with the Italian tax authorities in the fourth quarter of 2018 to discuss these assessments and no resolution was agreed upon, so the Company filed an appeal with the first level of tax court in Italy. If the appeal is not successful in materially reducing the assessed tax, then the Company will further evaluate its options including potentially filing for competent authority relief from these assessments under MAP, consistent with the Company’s previous filings for 2008 through 2013.As of March 31, ~~2018,~~2019, the Company believes it has adequate reserves ~~where merited,~~ for uncertain tax positions with respect to these and all other audits.

Note 11 – Earnings Per Share

The following table summarizes earnings per share calculations for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

Three Months Ended

March 31,

2018

2017

Basic earnings per common share

Net income attributable to Quaker Chemical Corporation
$
12,732

$
6,992

Less: income allocated to participating securities

(62)

(55)

Net income available to common shareholders
$
12,670

$
6,937

Basic weighted average common shares outstanding

13,245,026

13,176,096

Basic earnings per common share
$
0.96

$
0.53

Diluted earnings per common share

Net income attributable to Quaker Chemical Corporation
$
12,732

$
6,992

Less: income allocated to participating securities

(62)

(54)

Net income available to common shareholders
$
12,670

$
6,938

Basic weighted average common shares outstanding

13,245,026

13,176,096

Effect of dilutive securities

33,580

44,965

Diluted weighted average common shares outstanding

13,278,606

13,221,061

Diluted earnings per common share
$
0.95

$
0.52

		Three Months Ended
		March 31,
		2019		2018
Basic earnings per common share
	Net income attributable to Quaker Chemical Corporation	$	13,844	$	12,732
	Less: income allocated to participating securities		(46)		(62)
	Net income available to common shareholders	$	13,798	$	12,670
	Basic weighted average common shares outstanding		13,291,589		13,245,026
Basic earnings per common share		$	1.04	$	0.96

Diluted earnings per common share
	Net income attributable to Quaker Chemical Corporation	$	13,844	$	12,732
	Less: income allocated to participating securities		(46)		(62)
	Net income available to common shareholders	$	13,798	$	12,670
	Basic weighted average common shares outstanding		13,291,589		13,245,026
	Effect of dilutive securities		46,901		33,580
	Diluted weighted average common shares outstanding		13,338,490		13,278,606
Diluted earnings per common share		$	1.03	$	0.95

Certain stock options and restricted stock units are not included in the diluted earnings per share calculation ~~since~~when the effect would have been anti-dilutive. ~~The calculated amount of~~There were no anti-dilutive shares ~~not included were 2,862 and 3,507~~ for the three months ended March 31, ~~2018~~ 2019. Comparatively, t~~and 2017, respectively.~~he calculated amount of anti-dilutive shares not included in the diluted earnings per share calculation were 2,862 for the three months ended March 31, 2018.

Note 12 – Restricted Cash

The Company has restricted cash recorded in other assets related to proceeds from an inactive subsidiary of the Company which previously executed separate settlement and release agreements with two of its insurance carriers for an original total value of $35.0 million. The proceeds of both settlements are restricted and can only be used to pay claims and costs of defense associated with the subsidiary’s asbestos ~~litigation~~.litigation. The proceeds of the settlement and release agreements have been deposited into interest bearing accounts which earned $0.1 million and less than $0.1 million in the three months ended March 31, 2019 and 2018, respectively, offset by $0.2 million and less than $0.1 million of net payments during the three months ended March 31, 2019 and 2018 respectively. Due to the restricted nature of the proceeds, a corresponding deferred credit was established in other non-current liabilities for an equal and offsetting amount, and will remain until the restrictions lapse or the funds are exhausted via payments of claims and costs of defense.The following table provides a reconciliation of cash, cash equivalents and restricted cash as of March 31, 2019 and 2018 and December 31, 2018 and 2017:

	March 31,				December 31,
	2019		2018		2018		2017
Cash and cash equivalents	$	71,960	$	92,581	$	104,147	$	89,879
Restricted cash included in other assets		20,153		21,105		20,278		21,171
Cash, cash equivalents and restricted cash	$	92,113	$	113,686	$	124,425	$	111,050

1516

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

~~The following table provides a reconciliation of cash, cash equivalents and restricted cash as of March 31, 2018 and 2017 and December 31, 2017 and 2016:~~

March 31,

December 31,

2018

2017

2017

2016

Cash and cash equivalents
$
92,581

$
90,593

$
89,879

$
88,818

Restricted cash included in other assets

21,105

21,652

21,171

21,883

Cash, cash equivalents and restricted cash
$
113,686

$
112,245

$
111,050

$
110,701

Note 13 – Goodwill and Other Intangible Assets

The Company completes its annual impairment test during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment in one or more of its reporting units. The Company continually evaluates financial performance, economic conditions and other relevant developments in assessing if an interim period impairment test for one or more of its reporting units is necessary. The Company has recorded no impairment charges in its past.

Changes in the carrying amount of goodwill for the three months ended March 31, ~~2018~~2019 were as follows:

North

South

America

EMEA

Asia/Pacific

America

Total
Balance as of December 31, 2017
$
47,571

$
20,504

$
15,456

$
2,503

$
86,034

Currency translation adjustments

16

387

272

(1)

674
Balance as of March 31, 2018
$
47,587

$
20,891

$
15,728

$
2,502

$
86,708

		North						South
		America		EMEA		Asia/Pacific		America		Total
Balance as of December 31, 2018		$	47,303	$	19,335	$	14,587	$	2,108	$	83,333
	Currency translation adjustments		82		(414)		232		(29)		(129)
Balance as of March 31, 2019		$	47,385	$	18,921	$	14,819	$	2,079	$	83,204

Gross carrying amounts and accumulated amortization for definite-lived intangible assets as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:

		Gross Carrying				Accumulated					Gross Carrying				Accumulated
		Amount				Amortization					Amount				Amortization
		2018		2017		2018		2017			2019		2018		2019		2018
Customer lists and rights to sell	Customer lists and rights to sell	$	76,663	$	76,581	$	26,626	$	25,394	Customer lists and rights to sell	$	74,574	$	74,989	$	30,565	$	29,587
Trademarks, formulations and product technology	Trademarks, formulations and product technology		34,221		33,025		15,007		14,309	Trademarks, formulations and product technology		33,128		33,275		17,011		16,469
Other	Other		6,123		6,114		5,602		5,514	Other		5,826		5,840		5,631		5,566
Total definite-lived intangible assets	Total definite-lived intangible assets	$	117,007	$	115,720	$	47,235	$	45,217	Total definite-lived intangible assets	$	113,528	$	114,104	$	53,207	$	51,622

The Company recorded ~~$1.9~~$1.8 million and ~~$1.8~~$1.9 million of amortization expense for the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, respectively. Estimated annual aggregate amortization expense for the current year and subsequent five years is as follows:

For the year ended December 31, 2018
$
7,473

For the year ended December 31, 2019

7,357

For the year ended December 31, 2020

7,065

For the year ended December 31, 2021

6,687

For the year ended December 31, 2022

6,525

For the year ended December 31, 2023

6,295

For the year ended December 31, 2019	$	7,148
For the year ended December 31, 2020		6,841
For the year ended December 31, 2021		6,491
For the year ended December 31, 2022		6,337
For the year ended December 31, 2023		6,120
For the year ended December 31, 2024		5,694

The Company has two indefinite-lived intangible assets totaling ~~$1.1~~$1.1 million for trademarks as of March 31, ~~2018~~2019 and December 31, ~~2017.~~2018.

Note 14 – Debt

The Company’s primary credit facility (“the Credit Facility”) is a $300.0 million syndicated multicurrency credit agreement with a group of lenders. The maximum amount available under the Credit Facility can be increased to $400.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the Credit Facility generally bear interest at a base rate or LIBOR rate plus a margin. The Credit Facility has certain financial and other covenants, with the key financial covenant requiring that the Company’s consolidated total debt to adjusted EBITDA ratio cannot exceed 3.50 to 1.As of March 31, 2019 and December 31, 2018, the Company’s total debt to adjusted EBITDA ratio was below 1.0 to 1, and the Company was also in compliance with all of its other covenants. During the first quarter of 2019, the Credit Facility was amended and restated to extend the maturity date to July 15, 2020. As of March 31, 2019 the Company had no Credit Facility borrowings outstanding. As of December 31, 2018, the Company had Credit Facility borrowings of $24.0 million. The Company’s other debt obligations are primarily industrial development bonds and municipality-related loans, which totaled $12.4 million as of March 31, 2019 and $12.6 million as of December 31, 2018.

1617

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

Note ~~14 – Debt~~

The Company’s primary credit facility (“the Credit Facility”) is a $300.0 million syndicated multicurrency credit agreement with a group of lenders which matures in June 2019. The maximum amount available under the Credit Facility can be increased to $400.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the Credit Facility generally bear interest at a base rate or LIBOR rate plus a margin. ~~The Credit Facility has certain financial and other covenants, with the key financial covenant requiring that the Company’s consolidated net debt to adjusted EBITDA ratio cannot exceed 3.50 to 1.~~As of March 31, 2018, and December 31, 2017, the Company’s net debt to adjusted EBITDA ratio was below 1.0 to 1, and the Company was also in compliance with all of its other covenants. As of March 31, 2018, and December 31, 2017, the Company had total credit facility borrowings of $57.2 million and $48.5 million, primarily under the Credit Facility. The Company’s other debt obligations were primarily industrial development bonds and municipality-related loans as of March 31, 2018 and December 31, 2017.

~~Note~~ 15 – Equity

The following tables present the changes in equity, net of tax, for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

									Accumulated														Accumulated
					Capital in				Other										Capital in				Other
			Common		Excess of		Retained		Comprehensive		Noncontrolling						Common		Excess of		Retained		Comprehensive		Noncontrolling
			Stock		Par Value		Earnings		Loss		Interest		Total				Stock		Par Value		Earnings		Loss		Interest		Total
Balance at December 31, 2018															Balance at December 31, 2018		$	13,338	$	97,304	$	405,125	$	(80,715)	$	1,317	$	436,369
															Cumulative effect of an accounting change			—		—		(44)		—		—		(44)
Balance at January 1, 2019															Balance at January 1, 2019			13,338		97,304		405,081		(80,715)		1,317		436,325
															Net income			—		—		13,844		—		56		13,900
															Amounts reported in other comprehensive
																income (loss)		—		—		—		1,548		(1)		1,547
															Dividends ($0.37 per share)			—		—		(4,933)		—		—		(4,933)
															Share issuance and equity-based
																compensation plans		(4)		(472)		—		—		—		(476)
Balance at March 31, 2019															Balance at March 31, 2019		$	13,334	$	96,832	$	413,992	$	(79,167)	$	1,372	$	446,363

Balance at December 31, 2017	Balance at December 31, 2017		$	13,308	$	93,528	$	365,182	$	(65,100)	$	1,946	$	408,864	Balance at December 31, 2017		$	13,308	$	93,528	$	365,936	$	(65,100)	$	1,946	$	409,618
															Cumulative effect of an accounting change			—		—		(754)		—		—		(754)
Balance at January 1, 2018															Balance at January 1, 2018			13,308		93,528		365,182		(65,100)		1,946		408,864
															Net income			—		—		12,732		—		55		12,787
	Net income			—		—		12,732		—		55		12,787	Amounts reported in other comprehensive
	Amounts reported in other comprehensive															income		—		—		—		6,362		95		6,457
		income		—		—		—		6,362		95		6,457	Dividends ($0.355 per share)			—		—		(4,729)		—		—		(4,729)
	Dividends ($0.355 per share)			—		—		(4,729)		—		—		(4,729)	Distributions to noncontrolling affiliate
	Distributions to noncontrolling affiliate			—		—		—		—		(834)		(834)		shareholders		—		—		—		—		(834)		(834)
	Share issuance and equity-based														Share issuance and equity-based
		compensation plans		15		203		—		—		—		218		compensation plans		15		203		—		—		—		218
Balance at March 31, 2018	Balance at March 31, 2018		$	13,323	$	93,731	$	373,185	$	(58,738)	$	1,262	$	422,763	Balance at March 31, 2018		$	13,323	$	93,731	$	373,185	$	(58,738)	$	1,262	$	422,763

Balance at December 31, 2016			$	13,278	$	112,475	$	364,414	$	(87,407)	$	9,846	$	412,606
	Net income			—		—		6,992		—		622		7,614
	Amounts reported in other comprehensive
		income		—		—		—		5,446		520		5,966
	Dividends ($0.345 per share)			—		—		(4,587)		—		—		(4,587)
	Share issuance and equity-based
		compensation plans		13		363		—		—		—		376
Balance at March 31, 2017			$	13,291	$	112,838	$	366,819	$	(81,961)	$	10,988	$	421,975

1718

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

The following tables show the reclassifications from and resulting balances of AOCI for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

							Unrealized										Unrealized
			Currency		Defined		Gain (Loss) in						Currency		Defined		Gain (Loss) in
			Translation		Benefit		Available-for-						Translation		Benefit		Available-for-
													Adjustments		Retirement Plans		Sale Securities		Total
Balance at December 31, 2018											Balance at December 31, 2018		$	(49,322)	$	(30,551)	$	(842)	$	(80,715)
											Other comprehensive (loss) income before
												reclassifications		(431)		160		1,707		1,436
											Amounts reclassified from AOCI			—		733		(96)		637
											Current period other comprehensive (loss) income			(431)		893		1,611		2,073
											Related tax amounts			—		(187)		(338)		(525)
											Net current period other comprehensive (loss) income			(431)		706		1,273		1,548
Balance at March 31, 2019											Balance at March 31, 2019		$	(49,753)	$	(29,845)	$	431	$	(79,167)
			Adjustments		Pension Plans		Sale Securities		Total
Balance at December 31, 2017	Balance at December 31, 2017		$	(31,893)	$	(34,093)	$	886	$	(65,100)	Balance at December 31, 2017		$	(31,893)	$	(34,093)	$	886	$	(65,100)
	Other comprehensive income (loss) before										Other comprehensive income (loss) before
		reclassifications		6,764		(697)		(443)		5,624		reclassifications		6,764		(697)		(443)		5,624
	Amounts reclassified from AOCI			—		783		(172)		611	Amounts reclassified from AOCI			—		783		(172)		611
	Current period other comprehensive income (loss)			6,764		86		(615)		6,235	Current period other comprehensive income (loss)			6,764		86		(615)		6,235
	Related tax amounts			—		(2)		129		127	Related tax amounts			—		(2)		129		127
	Net current period other comprehensive income (loss)			6,764		84		(486)		6,362	Net current period other comprehensive income (loss)			6,764		84		(486)		6,362
Balance at March 31, 2018	Balance at March 31, 2018		$	(25,129)	$	(34,009)	$	400	$	(58,738)	Balance at March 31, 2018		$	(25,129)	$	(34,009)	$	400	$	(58,738)

Balance at December 31, 2016			$	(52,255)	$	(36,168)	$	1,016	$	(87,407)
	Other comprehensive income (loss) before
		reclassifications		4,928		(341)		665		5,252
	Amounts reclassified from AOCI			—		850		(360)		490
	Current period other comprehensive income			4,928		509		305		5,742
	Related tax amounts			—		(191)		(105)		(296)
	Net current period other comprehensive income			4,928		318		200		5,446
Balance at March 31, 2017			$	(47,327)	$	(35,850)	$	1,216	$	(81,961)

Approximately 25% and 75% of the amounts reclassified from AOCI to the Condensed Consolidated Statements of Income for defined benefit retirement plans during the three months ended March 31, 2018 and 2017 were recorded in COGS and SG&A, respectively. See Note 8 of Notes to Condensed Consolidated Financial Statements for further information. All reclassifications related to unrealized gain (loss) in available-for-sale securities relate to the Company’s equity interest in a captive insurance company and are recorded in equity in net income (loss) ~~income~~ of associated companies. The amounts reported in other comprehensive income for non-controlling interest are related to currency translation adjustments.

Note 16 – Business Combinations and Asset Acquisitions

In March 2018, the Company purchased certain formulations and product technology for the mining industry for its North America reportable operating segment for $1.0 million. The Company allocated the entire purchase price to intangible assets representing formulations and product technology, to be amortized over 10 years. In accordance with the terms of the agreement, $0.5 million of the purchase price was paid at signing, with the remaining $0.5 million of the purchase price ~~expected to be~~ paid ~~within the next 12 months and recorded as an other current liability on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2018.~~

In December 2017, the Company acquired the remaining 45% ownership interest in its India affiliate, Quaker Chemical India Private Limited (“QCIL”) for 2,025.0 million INR, or approximately $31.8 million. In May 2017, the Company acquired assets associated with a business that markets, sells and manufactures certain metalworking fluids for its North America reportable operating segment for 7.3 million CAD, or approximately $5.4 million. In November 2016, the Company acquired Lubricor Inc. and its affiliated entities (“Lubricor”), a metalworking fluids manufacturer headquartered in Waterloo, Ontario, for its North America reportable operating segment for 16.0 million CAD, or approximately $12.0 million.

~~During~~during the first quarter of 2017, the Company identified and recorded an adjustment to the allocation of the purchase price for the Lubricor acquisition. The adjustment was the result of finalizing a post-closing settlement based on the Company’s assessment of additional information related to assets acquired and liabilities assumed. As of December 31, 2017, the allocation of the purchase price for all of the Company’s 2016 and 2017 acquisitions were finalized.2019.

The results of operations of ~~the~~ acquired businesses and assets are included in the Condensed Consolidated Statements of Income from their respective acquisition dates. Transaction expenses associated with ~~these~~ acquisitions are included in SG&A in the Company’s Condensed Consolidated Statements of Income. Certain pro forma and other information is not presented, as the operations of the acquired businesses and assets are not material to the overall operations of the Company for the periods presented.

1819

Quaker Chemical Corporation

Notes to Condensed Consolidated Financial Statements - Continued

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

(Unaudited)

Note 17 – Fair Value Measurements

The Company has valued its company-owned life insurance policies at fair value. These assets are subject to fair value measurement as follows:

				Fair Value Measurements at March 31, 2018										Fair Value Measurements at March 31, 2019
		Total			Using Fair Value Hierarchy							Total			Using Fair Value Hierarchy
Assets	Assets	Fair Value			Level 1		Level 2		Level 3		Assets	Fair Value			Level 1		Level 2		Level 3
Company-owned life insurance	Company-owned life insurance	$	1,544		$	—	$	1,544	$	—	Company-owned life insurance	$	1,635		$	—	$	1,635	$	—
Total	Total	$	1,544		$	—	$	1,544	$	—	Total	$	1,635		$	—	$	1,635	$	—

				Fair Value Measurements at December 31, 2017										Fair Value Measurements at December 31, 2018
		Total			Using Fair Value Hierarchy							Total			Using Fair Value Hierarchy
Assets	Assets	Fair Value			Level 1		Level 2		Level 3		Assets	Fair Value			Level 1		Level 2		Level 3
Company-owned life insurance	Company-owned life insurance	$	1,594		$	—	$	1,594	$	—	Company-owned life insurance	$	1,491		$	—	$	1,491	$	—
Total	Total	$	1,594		$	—	$	1,594	$	—	Total	$	1,491		$	—	$	1,491	$	—

The fair values of Company-owned life insurance assets are based on quotes for like instruments with similar credit ratings and terms. The Company did not hold any Level 3 investments as of March 31, ~~2018~~2019 or December 31, ~~2017,~~2018, respectively, so related disclosures have not been included.

Note 18 – Commitments and Contingencies

The Company previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, ~~2017~~2018 that AC Products, Inc. (“ACP”), a wholly owned subsidiary, has been operating a groundwater treatment system to hydraulically contain groundwater contamination emanating from ACP’s site, the principal contaminant of which is ~~perchloroethylene (“PERC”).~~perchloroethylene. As of March 31, ~~2018,~~2019, ACP believes it is close to meeting the conditions for closure of the groundwater treatment system but continues to operate this system while in discussions with the relevant authorities. As of March 31, ~~2018,~~2019, 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. Costs of operation include the operation and maintenance of the extraction well, groundwater monitoring and program management.

The Company previously disclosed in its Annual Report filed on Form 10-K for the year ended December 31, ~~2017~~2018 that an inactive subsidiary of the Company that was acquired in 1978 sold certain products containing asbestos, primarily on an installed basis, and is among the defendants in numerous lawsuits alleging injury due to exposure to asbestos. During the three months ended March 31, ~~2018,~~2019, there have been no significant changes to the facts or circumstances of this ~~matter~~ previously disclosed matter, aside from on-going claims, immaterial settlements and routine payments associated with this litigation. Based on a continued analysis of the existing and anticipated future claims against this subsidiary, it is currently projected that the subsidiary’s total liability over the next 50 years for these claims is approximately ~~$1.9~~$1.7 million (excluding costs of defense).

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 ~~$0.2~~$0.2 million was accrued as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, to provide for such anticipated future environmental assessments and remediation costs. The Company is party to other litigation which management currently believes will not have a material adverse effect on the Company’s results of operations, cash flows or financial condition.

1920

Quaker Chemical Corporation

Management’s Discussion and Analysis

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Executive Summary

Quaker Chemical Corporation is a leading global provider of process fluids, chemical specialties, and technical expertise to a wide range of industries, including steel, aluminum, automotive, mining, aerospace, tube and pipe, cans, and others. For ~~nearly~~over 100 years, Quaker has helped customers around the world achieve production efficiency, improve product quality, and lower costs through a combination of innovative technology, process knowledge, and customized services. Headquartered in Conshohocken , Pennsylvania USA, Quaker serves businesses worldwide with a network of dedicated and experienced professionals whose mission is to make a difference.

The ~~Company had a solid operating performance in the~~Company’s first quarter of ~~2018 as continued sales growth due to the positive impacts~~2019 operating performance was solid despite a significant negative impact from increases in volume, selling price and product mix, and the Company’s discipline in managing its selling, general and administrative expenses (“SG&A”) offset a lower gross margin quarter-over-quarter.foreign currency translation on reported results. Specifically, net sales ~~increased 9% to $212.1~~of $211.2 million in the first quarter of ~~2018 compared to $194.9 million in the first quarter of 2017, which includes the~~2019 benefited from a 3% increase in volume and ~~the benefit~~a 1% increase from selling price and product mix, ~~mentioned above, as well as~~but these were offset by a ~~6% positive~~negative impact from foreign currency ~~translation. Driven by~~translation of approximately 5%. Despite relatively flat net sales compared to the ~~increase in net sales,~~prior year, the Company’s gross profit increased 6% quarter-over-quarter ~~despite~~as a ~~lower~~result of a higher gross margin of ~~35.6%~~35.9% in the first quarter of ~~2018~~2019 compared to ~~36.4%~~35.6% in the ~~first quarter of 2017,~~prior year period, primarily due to ~~higher raw material costs quarter-over-quarter~~pricing initiatives and ~~a change in~~ the mix of certain products sold. ~~In addition, the current quarter’s operating~~

The Company reported first quarter of 2019 net income ~~benefited from the Company’s ability~~of $13.8 million or $1.03 per diluted share compared to ~~maintain a relatively consistent level of SG&A on its net sales increase. During~~ the first quarter of 2018 ~~the Company incurred $6.1~~net income of $12.7 million or ~~$0.38~~$0.95 per diluted ~~share~~share. Both the first quarters of ~~costs associated with~~2019 and 2018 results were impacted by expenses related to the Company’s ~~previously announced~~ pending combination with Houghton International, Inc. (“Houghton”) ~~(herein~~(herein referred to as “the Combination”)~~, which includes $0.9 million of interest~~. Excluding Houghton costs ~~(“ticking fees”) to maintain the bank commitment to fund the Combination,~~ ~~compared to $9.1 million, or $0.69 per diluted share of costs during the first quarter of 2017. Including these combination-related costs, the Company’s first quarter of 2018 net income~~ and earnings per diluted share were $12.7 million and $0.95, respectively, compared to net income of $7.0 million and earnings per diluted share of $0.52 in the first quarter of 2017. Excluding combination-related expenses andall other non-core items in each period, the Company’s solid current quarter operating performance, coupled with a lower effective tax rate as a result of U.S. Tax Reform, drove non-GAAP earnings per diluted share up 17% to $1.38 in the first quarter of 2018 compared to $1.18 in the prior year quarter, and an adjusted EBITDA ~~increase of 9%~~decreased slightly to ~~a record $30.8~~$29.6 million in the first quarter of ~~2018~~2019 compared to ~~$28.2~~$30.9 million in the prior year, due primarily to the negative impact from foreign exchange on earnings of approximately 4% in the current quarter. ~~The current quarter reported and~~Despite this negative foreign exchange impact of approximately $0.06 per diluted share, the Company’s non-GAAP earnings per diluted share ~~benefited from~~was $1.41 in both the ~~positive impact~~first quarters of ~~foreign currency translation on earnings~~2019 and 2018. See the Non-GAAP Measures section of ~~approximately 5% or $0.07 per diluted share.~~this Item below, as well as other items discussed in the Company’s Consolidated Operations Review in the Operations section of this Item, below.

From a regional perspective, the Company’s first quarter of ~~2018~~2019 operating performance ~~was highlighted by continued~~reflected a mix of market share gains, ~~and~~base volume growth, and benefits from selling price increases in certain regions, as well as higher gross margins in certain regions. However, operating performance in all regions was negatively impacted by foreign currency translation. North America’s net sales increased 4% quarter-over-quarter driven primarily by increases in selling price and product mix, which resulted in higher gross profit and operating earnings in the ~~majority of its regions and the positive impact of foreign exchange in its three largest regions. Net sales in North America,~~ current quarter. The Europe, Middle East and Africa (“EMEA”) region’s net sales decreased 9% quarter-over-quarter, primarily due to negative foreign currency translation of 8%, which also resulted in a decrease in gross profit and ~~South America~~ operating earnings despite a slightly higher gross margin in the current quarter. Asia/Pacific’s net sales increased 4% quarter-over-quarter and benefited from ~~selling price increases implemented to help~~higher volumes of 11% partially offset ~~rising raw material costs that have continued into 2018. The~~by the negative impact of foreign currency translation of 6%. This increase in net sales, coupled with a higher gross margin quarter-over-quarter, ~~volume decrease~~drove an increase in ~~the Company’s EMEA region resulted from an atypical~~gross profit and operating earnings. South America’s net sales ~~pattern~~were also significantly impacted by negative foreign currency translation of 14% in the first quarter of ~~2017.~~ ~~A benefit across all~~2019, however, this was partially offset by higher volumes of ~~the Company’s regions was~~6% and an increase in selling price and product mix of 5%. Despite a ~~continued discipline~~decrease in ~~managing its SG&A which helped offset lower gross margins compared~~net sales of 3% due to ~~the prior year in the majority of the Company’s regions. The combination of these drivers resulted in~~negative foreign currency translation, South America’s operating earnings ~~growth in EMEA~~nearly doubled due to a higher gross margin quarter-over-quarter and ~~Asia/Pacific, while operating earnings in North America and South America decreased slightly due primarily to~~the benefit of lower ~~gross margins.~~SG&A. See the Reportable Operating Segments Review, in the Operations section of this Item, below.

The Company ~~generated~~had net operating cash ~~flows~~flow of less than $0.1 million in the first quarter of 2019 compared to $2.7 million in the first quarter of ~~2018 compared to $8.3 million~~2018. The decrease in ~~the first quarter of 2017,~~net operating cash flow quarter-over-quarter was primarily due to a higher ~~level~~cash tax payments as well as an increase in cash payments, net of ~~cash invested in its~~expenses incurred, related to the pending Houghton Combination, partially offset by improved working capital ~~during~~in the ~~first~~current quarter ~~of 2018~~compared to ~~support~~ the ~~increase in its net sales.~~prior year. The key drivers of the Company’s operating cash flow and working capital are further discussed in the Company’s Liquidity and Capital Resources section of this Item, below.

Overall, the Company is pleased to begin ~~2018~~2019 with ~~another~~a good quarter despite the negative impact from foreign exchange and a decline in the Company’s underlying markets in the first quarter. Despite these significant headwinds, the Company’s continued market share gains drove solid ~~quarter. The Company continued to deliver solid operating performance~~volume growth of 3% and benefited from the impact of foreign currency translation on both its net sales and earnings. Specifically, the Company began to see gross margin improvement when compared to the fourth quarter of 2017 as the benefit of recent ~~selling price~~pricing initiatives ~~more than offset raw material costs that continued to rise during~~and the ~~first quarter~~mix of ~~2018. In addition, continued market share gains~~products sold contributed to the volume growth quarter-over-quarter despite an atypical sales pattern in EMEA during the first quarter of 2017. Also, the Company showed continued discipline in managing its SG&A which helped to offset a lowerCompany’s gross margin ~~in the first quarter of 2018 as~~improvement compared to the first quarter of ~~2017. This~~2018. These improvements in the Company’s operating performance ~~drove a 9% increase in adjusted EBITDA~~offset approximately 4% or $0.06 per diluted share of negative foreign exchange impact on earnings and ~~coupled with a lower effective tax rate,~~ resulted ~~in a 17% increase~~ in non-GAAP earnings per diluted share ~~compared~~of $1.41 in the first quarter of 2019 which was comparable to the first quarter of ~~2017.~~2018.

Looking forward to the remainder of ~~2018,~~2019, the Company ~~currently~~ expects that ~~the closing of~~it will receive final regulatory approval and close the Combination ~~will occur over~~in the next few months, once regulatory approvals in the U.S. and Europe are received and other customary closing conditions are satisfied. During April 2018, the Company successfully extended its bank commitment to fund the Combination to August 4, 2018.couple of months. As previously disclosed, the Combination will approximately double the Company’s annual sales and adjusted EBITDA, not including

~~Quaker Chemical Corporation~~

~~Management’s Discussion and Analysis~~

estimated synergies, which are expected to meet or exceed $45 million once fully achieved by the third year. Depending upon the exact timing of the Combination’s close, the Company anticipates it will realize ~~a portion~~some of the Houghton sales and adjusted EBITDA in ~~2018.~~2019.

Quaker Chemical Corporation

Management’s Discussion and Analysis

For Quaker’s current business, the Company ~~continues~~expects the foreign currency headwinds and underlying market challenges it saw in the first quarter of 2019 to ~~forecast growth~~continue in ~~its volumes~~the second quarter of 2019. However, the Company expects more favorable comparisons in the second half of 2019 as many of the foreign exchange and ~~further leverage~~market headwinds the Company faced in ~~its SG&A~~the first quarter of 2019 began near the end of the second quarter of 2018 and ~~remains optimistic that its~~gradually worsened throughout the prior year. Related to gross margin, the Company anticipates continued incremental improvement in the second quarter of 2019 and expects gross margin will ~~trend upward over~~be in the ~~next few quarters and be around~~low to mid 36% in 2018. The Company expects that market share gains, on-going discipline in managing SG&A and the benefits of past acquisitions will continue to help offset its gross margin and other market challenges.range. Overall, the Company remains confident in its future and expects ~~2018~~2019 to be another good year ~~for both the~~with net sales and earnings growth in Quaker’s current ~~Quaker~~ business ~~and the combined new company post-closing of the Combination.~~despite its current market challenges.

Liquidity and Capital Resources

At March 31, ~~2018,~~2019, Quaker had cash, cash equivalents and restricted cash of ~~$113.7~~$92.1 million, including ~~$21.1~~$20.2 million of restricted cash. Total cash, cash equivalents and restricted cash was ~~$111.1~~$124.4 million at December 31, ~~2017,~~2018, which included ~~$21.2~~$20.3 million of restricted cash. The inclusion of restricted cash in total cash on the Company’s Condensed Consolidated Statements of Cash Flows is the result of a change in presentation required by the Financial Accounting Standards Board. See Note 3 of Notes to Condensed Consolidated Financial Statements. The approximate $2.6$32.3 million ~~increase~~decrease in cash, cash equivalents and restricted cash was the net result of ~~$2.7~~$3.0 million of cash used in investing activities and $30.4 million of cash used in financing activities, partially offset by less than $0.1 million of cash provided by operating activities ~~$1.5 million of cash provided by financing activities~~ and a ~~$2.2~~$1.0 million positive impact due to the effect of foreign currency translation on ~~cash, partially offset by $3.9 million of cash used in investing activities.~~cash.

Net cash flows provided by operating activities were less than $0.1 million in the first three months of 2019 compared to $2.7 million in the first three months of 2018. The Company’s operating cash flows for both the first three months of 2019 and 2018, ~~compared to $8.3 million~~respectively, were impacted by the timing and amount of combination-related expenses and associated cash payments, described below, with higher cash payments, net of expenses incurred, in the first three months of ~~2017. The $5.6 million decrease in net cash flows provided by operating activities was primarily~~2019. In addition, the ~~result of~~Company had higher cash ~~invested~~tax payments in the ~~Company’s working capital~~first three months of 2019, including withholding taxes previously reserved for and related to ~~support its net sales increase. Specifically,~~ the ~~increase~~repatriation of certain foreign earnings in the first quarter of 2019. These higher cash outflows were partially offset by lower cash invested in working capital ~~was~~in the current year primarily due to ~~higher~~lower levels of inventory partially offset by an associated decrease in accounts ~~receivable associated with~~payable. In addition, the ~~timing~~first three months of ~~the Company’s increased net sales quarter-over-quarter,~~2018 working capital was impacted by lower receipts on accounts receivable due to an uncommon significant collection from a certain customer during the fourth quarter of 2017, and higher cash outflows from accounts payable and accrued liabilities, primarily due to the timing of working capital management. The Company’s operating cash flows for both the first three months of 2018 and 2017, respectively, were also impacted by the timing and amount of combination-related expenses and associated cash payments, described below. Finally, the three months ended March 31, 2017 included restructuring payments made as part of the Company’s global restructuring program initiated in the fourth quarter of 2015 and completed during the first half of 2017, described below.2017.

Net cash flows used in investing activities ~~increased~~decreased from ~~$2.5 million in the first three months of 2017 to~~ $3.9 million in the first three months of ~~2018.~~2018 to $3.0 million in the first three months of 2019. This ~~increase~~decrease in cash outflows was ~~primarily due to higher~~driven by lower additions to property, plant and equipment year-over-year, primarily due to higher ~~expenditures for several small projects, as well as an increase~~purchases of certain machinery and equipment in ~~spending related to a new manufacturing facility in India that is expected to be completed~~the Company’s North America reportable operating segment during the first three months of 2018. In addition, during the ~~first~~ three months ofended March 31, 2018 the Company paid $0.5 million for certain formulations and product technology in the mining industry for its North America reportable operating ~~segment. In~~segment and, in accordance with the terms of the agreement, ~~an additional~~the remaining $0.5 million ~~of the~~ purchase price ~~is expected to be~~was paid ~~within the next 12 months. There were no similar cash outflows related to acquisitions~~ during the first three months of ~~2017.~~2019.

Net cash flows used in financing activities were $30.4 million in the first three months of 2019 compared to cash provided by financing activities ~~were~~of $1.5 million in the first three months of ~~2018 compared to~~2018. The $31.9 million increase in net cash ~~used in financing activities~~outflows was driven primarily by the Company’s use of ~~$5.8~~cash on hand for the repayments of long-term debt of $23.9 million in the first three months of ~~2017. The approximate $7.4 million increase in~~2019 compared to net ~~cash inflows was primarily due to~~ proceeds from long-term debt ~~net of repayments,~~ of $8.0 million in the first three months of ~~2018 compared to repayments of long-term debt of $0.5 million in the first three months of 2017.~~2018. In addition, the Company paid ~~a $4.7~~$4.9 million of cash ~~dividend~~dividends during the first quarter of ~~2018,~~2019, a $0.2 million or 4% increase in cash dividends compared to ~~a $4.6 million dividend in~~ the prior ~~year quarter.~~year. Finally, during the first three months of 2018, one of the Company’s less than 100% owned consolidated affiliates made a distribution to ~~the~~its noncontrolling affiliate shareholder of approximately $0.8 million. There were no similar distributions during the first three months of ~~2017.~~2019.

The Company’s primary credit facility (“the Credit Facility”) is a $300.0 million syndicated multicurrency credit agreement with a group of ~~lenders, which matures in June 2019.~~lenders. The maximum amount available under the Credit Facility can be increased to $400.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the Credit Facility generally bear interest at a base rate or LIBOR rate plus a margin. The Credit Facility has certain financial and other covenants, with the key financial covenant requiring that the Company’s consolidated ~~net~~total debt to adjusted EBITDA ratio cannot exceed 3.50 to 1. As of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company’s ~~net~~total debt to adjusted EBITDA ratio was below 1.0 to 1, and the Company was also in compliance with all of its other covenants. During the first quarter of 2019, the Credit Facility was amended and restated to extend the maturity date to July 15, 2020. As of March 31, ~~2018 and~~2019 the Company had no Credit Facility borrowings outstanding. As of December 31, ~~2017,~~2018, the Company had total ~~credit facility~~Credit Facility borrowings of ~~$57.2 million and $48.5 million, primarily under the Credit Facility.~~$24.0 million. The Company’s other debt obligations were primarily industrial development bonds and municipality-related loans, which totaled $12.4 million as of March 31, ~~2018~~2019 and $12.6 million as of December 31, ~~2017.~~

~~Quaker Chemical Corporation~~

~~Management’s Discussion and Analysis~~

Quaker’s management approved a global restructuring plan in the fourth quarter of 2015 (the “2015 Program”) to reduce its operating costs. The Company completed all of the initiatives under the 2015 Program during the first half of 2017. The Company has not incurred costs in 2018 and ~~does not expect to incur further restructuring charges under this program.~~ ~~During the three months ended March 31, 2017, the company incurred $0.1 million of cash payments utilizing operating cash flows for the settlement of these restructuring liabilities.~~2018.

On April 4, 2017, Quaker entered into a share purchase agreement with Gulf Houghton Lubricants, Ltd. to purchase the entire issued and outstanding share capital of Houghton. The shares will be bought for aggregate purchase consideration consisting of: (i) $172.5 million in cash; (ii) a number of shares of common stock, $1.00 par value per share, of the Company comprising 24.5% of the common stock outstanding upon the closing of the Combination; and (iii) the Company’s assumption of Houghton’s net indebtedness as of the closing of the Combination, which was approximately $690 million at signing. See Note 2 to Condensed Consolidated Financial Statements.

Quaker Chemical Corporation

Management’s Discussion and Analysis

In connection with the Combination, the Company secured $1.15 billion in commitments from Bank of America Merrill Lynch and Deutsche Bank to fund the purchase consideration and provide additional liquidity, and has since replaced these commitments with a syndicated bank agreement (“the New Credit Facility”) with a group of lenders for $1.15 billion. The New Credit Facility is contingent upon and will not be effective until the closing of the Combination. During ~~April 2018,~~the first quarter of 2019, the Company extended the bank commitment through ~~August 4, 2018. In connection with this extension, the Company adjusted slightly the currency mix of the term loan component of the New Credit Facility. As adjusted, the~~July 15, 2019. The New Credit Facility is ~~now~~ comprised of a $400.0 million multicurrency revolver, a $600.0 million USD term loan and a $150.0 million EUR equivalent term loan, each with a five-year term from the date the New Credit Facility becomes effective. The maximum amount available under the New Credit Facility can be increased by $200.0 million at the Company’s option if the lenders agree and the Company satisfies certain conditions. Borrowings under the New Credit Facility will bear interest at a base rate or LIBOR rate plus a margin, and the Company currently estimates the annual floating rate cost will be in the ~~3.50%~~3.75% to ~~3.75%~~4.0% range based on current market interest rates. The New Credit Facility will be subject to certain financial and other covenants, including covenants that the Company’s consolidated net debt to adjusted EBITDA ratio cannot ~~initially~~ exceed 4.25 to 1 and the Company’s consolidated adjusted EBITDA to interest expense ratio cannot be less than 3.0 to 1. Both the USD and EUR equivalent term loans will have quarterly principal amortization during their respective five-year terms, with 5% amortization of the principal balance due in years 1 and 2, 7.5% in year 3, and 10% in years 4 and 5, with the remaining principal amounts due at maturity. Until closing, the Company will incur certain interest costs paid to maintain the bank commitment (“ticking fees”), which began to accrue on September 29, 2017. The ticking fees bear an interest rate of 0.30% per annum.

The Company incurred ~~$6.1~~$5.3 million of total combination-related expenses during the first quarter of ~~2018, which includes~~2019, including $0.9 million of ticking fees, described in the Non-GAAP ~~measures~~Measures section of this Item below, and ~~made~~had net cash ~~payments~~outflows of ~~$3.9~~$6.4 million related to these costs. Comparatively, during the first quarter of ~~2017,~~2018, combination-related expenses totaled ~~$9.1~~$6.1 million, including $0.9 million of ticking fees, and net cash ~~payments made~~outflows related to these costs were ~~$0.7~~$3.9 million. ~~During 2018, the~~The Company currently estimates it will incur additional expenses and have associated cash outflows of approximately $25 to $30 million through closing of the Combination for similar combination-related expenses, including cash payments for bank fees which we expect to capitalize. In addition, post-closing of the combination, the Company expects it will incur significant additional costs and make associated cash payments to integrate the Company and Houghton and to begin realizing the Combination’s total anticipated cost synergies, which we currently estimate to meet or exceed $45 million. The timing and an accurate range of these additional costs and cash payments post-closing are not estimable at this time. However, based on market precedent, the Company currently projects these costs and cash payments to approximate one times anticipated synergies, and the Company expects them to be incurred over a three-year period post-close.

The Company received regulatory approval for the Combination from China and Australia in 2017. In addition, at a shareholder meeting held during ~~the third quarter of~~ 2017, the Company’s shareholders overwhelmingly approved the issuance of the new shares of the Company’s common stock at closing of the Combination. ~~Currently,~~The European Commission (“EC”) conditionally approved the Combination in December 2018, including the remedy proposed by Quaker and Houghton. Quaker expects to receive final approval from the EC once certain conditions are met including their review and approval of the final purchase agreement between Quaker, Houghton, and the buyer of the divested product lines, which was finalized and signed at the end of March 2019. Quaker continues to be in productive discussions with the U.S. Federal Trade Commission (“FTC”). Given the time lapse since Quaker’s initial filing, the FTC requested updated information as part of their approval process late in the fourth quarter of 2018. In addition, the government shutdown in the U.S. late in the fourth quarter of 2018 and early in 2019 extended the timeline to receive the final approval. The proposed remedy being discussed with the FTC and conditionally approved by the EC continues to be consistent with Quaker’s previous guidance that the total divested product lines will be approximately 3% of the combined company’s revenue. Given current information, the Company expects that final approval from the FTC and EC and closing of the ~~Combination is expected over~~combination will occur in the next ~~few months, and is contingent upon customary closing conditions and the remaining regulatory approvals in the United States and Europe.~~couple of months. Given these contingencies and the overall timing of the Combination, the Company has not recorded any estimated costs for additional expenses that the Company expects, but had yet to incur, as of March 31, ~~2018,~~2019, related to the Combination.

In the fourth quarter of 2018, the Company began the process of terminating its primary non-contributory U.S. pension plan (the “U.S. Pension Plan”) after receiving approval from its Board of Directors. Participants of the U.S. Pension Plan will have their benefits either converted into a lump sum cash payment or an annuity contract placed with an insurance carrier. The U.S. Pension Plan is fully-funded on a U.S. GAAP basis. In order to terminate the U.S. Pension Plan in accordance with IRS and Pension Benefit Guaranty Corporation requirements, the Company will be required to fully fund the U.S. Pension Plan on a termination basis and will commit to contribute additional assets if necessary, to do so. The amount necessary to do so is not yet known but is currently estimated to be between $0 and $10 million. The Company currently estimates that the U.S. Pension Plan termination will be completed during 2020.

As of March 31,~~, 2018,~~ 2019, the Company’s gross liability for uncertain tax positions, including interest and penalties, was ~~$9.7~~$9.3 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 ~~$5.0~~$4.9 million as a result of offsetting benefits in other tax jurisdictions.

Quaker Chemical Corporation

Management’s Discussion and Analysis

The Company believes it is capable of supporting its operating requirements and funding its business objectives, including but not limited to, payments of dividends to shareholders, costs related to the Combination, pension plan contributions, capital expenditures, other business opportunities and other potential contingencies, through internally generated funds supplemented with debt or equity as needed.

~~Quaker Chemical Corporation~~

~~Management’s Discussion and Analysis~~

Non-GAAP Measures

~~Included~~The information in this Form 10-Q filing ~~are two~~includes non-GAAP (unaudited) financial ~~measures:~~information that includes EBITDA, adjusted EBITDA, non-GAAP operating income, non-GAAP net income and non-GAAP earnings per diluted ~~share and adjusted EBITDA.~~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 more indicative of future operating performance of the Company, and facilitate a better 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 ~~following tables reconcile~~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 (loss) 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 ~~(unaudited)~~as additional performance measures. Non-GAAP net income is calculated as adjusted EBITDA, defined above, less depreciation and amortization, interest expense, net - adjusted, and taxes on income before equity in net income (loss) of associated companies - 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.

During the first quarter of 2019, the Company updated its calculation methodology to include the use of interest expense net of interest income in its reconciliation of EBITDA and adjusted EBITDA, compared to the historical use of only interest expense, and also to include the non-service component of the Company’s pension and postretirement benefit costs in the reconciliation of adjusted EBITDA, non-GAAP net income attributable to Quaker Chemical Corporation and non-GAAP earnings per diluted share. Prior year amounts have been recast for comparability purposes and the change in calculation methodology does not produce materially different results. The Company believes these updated calculations better reflect its underlying operating performance and better aligns the Company’s calculations to those commonly used by analysts, investors, and competitors in our industry.

The following tables reconcile the non-GAAP financial measures (unaudited) to their most directly comparable GAAP (unaudited) financial ~~measures:~~measures (dollars in thousands unless otherwise notes, except per share amounts):

Three Months Ended

March 31,

2018

2017

GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders

$
0.95

$
0.52

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

0.03

(0.04)

Houghton combination-related expenses per diluted share (b)

0.38

0.69

Cost streamlining initiative per diluted share (c)

—

0.01

Currency conversion impact of the Venezuelan bolivar fuerte per diluted share (d)

0.02

—

Non-GAAP earnings per diluted share (e)

$
1.38

$
1.18

	Three Months Ended
	March 31,
		2019		2018
Operating income	$	19,829	$	20,231
Houghton combination-related expenses (a)		4,483		5,209
Non-GAAP operating income	$	24,312	$	25,440
Non-GAAP operating margin (%) (e)		11.5%		12.0%

Three Months Ended

March 31,

2018

2017

Net income attributable to Quaker Chemical Corporation

$
12,732

$
6,992

Depreciation and amortization

5,047

4,930

Interest expense (b)

1,692

656

Taxes on income before equity in net income of associated companies

5,556

6,865

Equity loss (income) in a captive insurance company (a)

372

(592)

Houghton combination-related expenses (b)

5,209

9,075

Cost streamlining initiative (c)

—

286

Currency conversion impact of the Venezuelan bolivar fuerte (d)

218

—

Adjusted EBITDA

$
30,826

$
28,212

Adjusted EBITDA margin (%) (f)

14.5%

14.5%

Quaker Chemical Corporation

Management’s Discussion and Analysis


	Three Months Ended
	March 31,
		2019		2018
Net income attributable to Quaker Chemical Corporation	$	13,844	$	12,732
Depreciation and amortization		4,859		5,047
Interest expense, net (a)		776		1,203
Taxes on income before equity in net income (loss) of associated companies		4,929		5,556
EBITDA	$	24,408	$	24,538
Equity (income) loss in a captive insurance company (b)		(346)		372
Houghton combination-related expenses (a)		4,483		5,209
Pension and postretirement benefit costs, non-service components (c)		896		576
Currency conversion impacts of hyper-inflationary economies (d)		194		218
Adjusted EBITDA	$	29,635	$	30,913
Adjusted EBITDA margin (%) (e)		14.0%		14.6%

Adjusted EBITDA	$	29,635	$	30,913
Less: Depreciation and amortization		4,859		5,047
Less: Interest expense, net - adjusted (a)		(86)		339
Less: Taxes on income before equity in net income (loss) of associated companies - adjusted (f)		6,040		6,659
Non-GAAP net income	$	18,822	$	18,868


	Three Months Ended
	March 31,
		2019		2018
GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders	$	1.03	$	0.95
Equity (income) loss in a captive insurance company per diluted share (b)		(0.03)		0.03
Houghton combination-related expenses per diluted share (a)		0.35		0.38
Pension and postretirement benefit costs, non-service components per diluted share (c)		0.05		0.03
Currency conversion impacts of hyper-inflationary economies per diluted share (d)		0.01		0.02
Non-GAAP earnings per diluted share (g)	$	1.41	$	1.41

(a) Houghton combination-related expenses include certain legal, financial, and other advisory and consultant costs incurred in connection with regulatory approvals and integration planning, as well as certain one-time labor costs associated with the pending Combination. These costs are not indicative of the future operating performance of the Company. Approximately $1.2 million and $1.8 million of these pre-tax costs were considered non-deductible for the purpose of determining the Company’s effective tax rate for the three months ended March 31, 2019 and 2018, respectively, and, therefore, taxes on income before equity in net income (loss) of associated companies - adjusted reflects the impact of these items. During both the three months ended March 31, 2019 and 2018, the Company incurred $0.9 million of ticking fees to maintain the bank commitment related to the pending 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 interest expense, net – adjusted in the reconciliation of adjusted EBITDA to non-GAAP net income attributable to the Company. See Note 2 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.

(b)Equity (income) loss ~~(income)~~ in a captive insurance company represents the after-tax (income) loss ~~(income)~~ attributable to the Company’s interest in Primex, Ltd. (“Primex”), a captive insurance company. The Company holds a 33% investment in and has significant influence over Primex, and therefore accounts for this interest 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.

~~(b)~~(c) ~~Houghton combination-related expenses include certain legal, environmental, financial,~~Pension and ~~other advisory and consultant~~postretirement benefit costs, ~~incurred in connection with~~non-service components represent the ~~strategic evaluation of, diligence on, and execution~~pre-tax, non-service component of the ~~definitive agreement to combine with Houghton, as well as regulatory~~Company’s pension and ~~shareholder approvals and integration planning associated with the Combination.~~postretirement net periodic benefit cost in each period. These costs are not indicative of the future operating performance of the Company. ~~Certain~~See Note 8 of ~~these costs were considered non-deductible for~~Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.

Quaker Chemical Corporation

Management’s Discussion and Analysis

(d)Currency conversion impacts of hyper-inflationary economies represents the ~~purpose of determining~~foreign currency remeasurement impacts associated with the Company’s ~~effective tax rate~~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 ~~therefore,~~liabilities to the ~~earnings per diluted share amount reflects this impact. In addition, during~~applicable published exchange rates and record the associated gains or losses resulting from the remeasurement directly to the Condensed 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. During the three months ended March 31, 2019, the Company incurred non-deductible, pre-tax charges related to the Company’s Argentina affiliate. During the three months ended March 31, 2018, the Company incurred ~~$0.9 million of ticking fees to maintain the bank commitment~~after-tax charges related to the ~~pending Combination. These interest costs are included~~Company’s Venezuela affiliate. The charges incurred related to the immediate recognition of foreign currency remeasurement in the ~~caption Houghton combination-related expenses in~~Condensed Consolidated Statements of Income associated with these entities are not indicative of the ~~reconciliation~~future operating performance of ~~GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders to Non-GAAP earnings per diluted share above, but are included in~~ the ~~caption Interest expense in the reconciliation of Net income attributable to Quaker Chemical Corporation to Adjusted EBITDA above.~~Company. See Note 21 of Notes to Condensed Consolidated Financial Statements, which appears in Item 1 of this Report.

~~(c)~~(e) ~~Cost streamlining initiative represents expenses associated with certain actions taken~~The Company calculates adjusted EBITDA margin and non-GAAP operating margin as the percentage of adjusted EBITDA and non-GAAP operating income to reorganize the Company’s corporate staff. Overall, these costs are non-core and are indirect operating expenses that are not attributable to the product sales of any respective reportable operating segment, and, therefore, are not indicative of the future operating performance of the Company.

~~Quaker Chemical Corporation~~consolidated net sales.

~~Management’s Discussion and Analysis~~

~~(d)~~(f) ~~Currency conversion impact~~Taxes on income before equity in net income (loss) of the Venezuelan bolivar fuerte represents losses incurred at the Company’s Venezuelan affiliate as a result of changes in Venezuela’s foreign exchange markets and controls leading to specific devaluations of the Venezuelan bolivar fuerte which are not indicative of the future operating performance of the Company.

~~(e)Within the Company’s calculation of Non-GAAP earnings per diluted share above, each reconciling item includes~~associated companies – adjusted presents the impact of any current and deferred income tax expense (benefit), as ~~applicable. The~~applicable, of the reconciling items presented in the reconciliation of net income ~~tax expense (benefit) related~~attributable to ~~these items~~Quaker Chemical Corporation to adjusted EBITDA, which was determined utilizing the applicable rates in the taxing jurisdictions in which these adjustments ~~occurred.~~occurred, subject to deductibility. Houghton combination-related expenses described in (a) resulted in incremental taxes of $0.9 million and $1.0 million for the three months ended March 31, 2019 and 2018, respectively. Pension and postretirement benefit costs, non-service components described in (c) resulted in incremental taxes of $0.2 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively.

~~(f)~~(g) The Company calculates ~~Adjusted EBITDA margin~~non-GAAP earnings per diluted share as non-GAAP net income attributable to the ~~percentage of Adjusted EBITDA into consolidated net sales.~~Company per weighted average diluted shares outstanding using the “two-class share method” to calculate such in each given period.

Operations

Consolidated Operations Review – Comparison of the First Quarter of ~~2018~~2019 with the First Quarter of ~~2017~~2018

Net sales ~~grew approximately $17.2 million or 9% in the first quarter of 2018, increasing to $212.1 million compared to $194.9~~were $211.2 million in the first quarter of ~~2017. The Company’s~~2019 compared to $212.1 million in the first quarter of ~~2018 net~~2018. Net sales ~~benefited~~decreased less than 1% or approximately $0.8 million quarter-over-quarter as the benefit from increases in volume ~~as well as~~of 3% and selling price and product mix of 1% ~~and 2%, respectively, and a positive~~were more than offset by the negative impact from foreign currency translation of ~~$11.0 million~~approximately 5% or ~~6%.~~$9.6 million.

Costs of goods sold (“COGS”) in the first quarter of ~~2018~~2019 of ~~$136.6~~$135.4 million ~~increased 10%~~decreased 1% from ~~$124.0~~$136.6 million in the first quarter of ~~2017.~~2018. The ~~increase~~decrease in COGS was primarily due to product mix and the positive impact of foreign currency translation partially offset by the increase in product volumes, noted ~~above, and the impact of product mix and certain raw material cost increases quarter-over-quarter.~~above.

Gross profit in the first quarter of ~~2018~~2019 increased ~~$4.6~~$0.3 million or 6%less than 1% from the first quarter of ~~2017.~~2018. The increase in gross profit was primarily due to ~~the increase in net sales, noted above, partially offset by~~ a ~~lower~~higher gross margin of 35.9% in the first quarter of 2019 compared to 35.6% in the first quarter of 2018, ~~compared to 36.4%~~partially offset by the slight decrease in ~~the first quarter of 2017~~.net sales, noted above. The ~~decrease~~increase in the Company’s first quarter of ~~2018~~2019 gross margin was primarily ~~due to higher raw material costs compared to the first quarter of 2017~~driven by pricing initiatives and ~~changes in~~ the mix of certain products sold.

SG&A in the first quarter of ~~2018~~2019 increased ~~$2.0~~$1.4 million compared to the first quarter of ~~2017~~2018 primarily due to the impact of ~~foreign currency translation.~~ ~~In addition, SG&A increased slightly on~~ higher labor-related costs, ~~primarily due to~~including annual merit increases, ~~which were~~and professional fees, partially offset by ~~decreases due to~~ the ~~Company’s continued discipline in managing its SG&A. In addition, the first quarter~~impact of ~~2017 SG&A included a $0.3 million charge for a cost streamlining initiative, described in the Non-GAAP measures section of this Item, above.~~foreign currency translation.

During the first quarter of ~~2018,~~2019, the Company incurred ~~$5.2~~$4.5 million of costs related to the pending Combination with Houghton, described in the Non-GAAP ~~measures~~Measures section of this Item, above. The Company incurred ~~$9.1~~$5.2 million of ~~costs related to the Combination~~similar combination-related expenses in the first quarter of ~~2017.~~2018.

Operating income in the first quarter of ~~2018~~2019 was ~~$20.2~~$19.8 million compared to ~~$13.8~~$20.2 million in the first quarter of ~~2017. The increase in operating income was due to solid net sales and gross profit increases as well as lower~~2018. Excluding Houghton combination-related expenses, ~~noted above, which offset a slight increase~~the Company’s current quarter non-GAAP operating income decreased to $24.3 million compared to $25.4 million in ~~SG&A not related~~the prior year due primarily to the ~~Houghton combination.~~negative impact from foreign currency translation on operating earnings.

The Company had other expense, net, of ~~$0.4~~$0.6 million and ~~$0.1~~$0.4 million in the first quarter of ~~2018~~2019 and ~~2017,~~2018, respectively. The current quarter increase of approximately $0.3 million ~~increase~~ in other expense, net, was primarily driven by an increase in non-service related pension and postretirement benefit costs. In addition, the Company had a ~~change~~consistent amount of reported foreign currency transaction losses in both the ~~timing~~first quarter of ~~local municipality-related grants received in one of~~2019 and 2018, respectively, however, the ~~Company’s regions quarter-over-quarter.~~

~~Interest expense increased $1.0 million~~losses in the first quarter of ~~2018~~2019 include approximately $0.2 million related to the Company’s Argentina subsidiary being designated as hyper-inflationary, described in the Non-GAAP Measures section of this Item, above.

Quaker Chemical Corporation

Management’s Discussion and Analysis

Interest expense decreased $0.5 million during the first quarter of 2019 compared to the first quarter of ~~2017,~~2018, primarily due to lower average outstanding borrowings on the Company’s existing credit facility during the current quarter ~~costs incurred~~as compared to ~~maintain~~ the ~~bank commitment for the pending Houghton Combination.~~prior year. Interest income was relatively consistent ~~at $0.5 million in both the first quarters of 2018 and 2017.~~quarter-over-quarter.

The Company’s effective tax rates for the first quarters of 2019 and 2018 were 26.8% and ~~2017 were~~ 29.8% ~~and 50.8%~~, respectively. ~~Both the~~The Company’s first quarters of ~~2018~~2019 and ~~2017~~2018 effective tax rates include the ~~impact~~impacts of Houghton combination-related expenses, ~~noted above,~~ certain of which were ~~considered~~ non-deductible for the purpose of determining the Company’s effective tax rate. Excluding ~~these non-deductible costs,~~ the ~~Company’s~~impact of Houghton combination-related expenses and all other non-core items in each quarter, the Company estimates that its first quarters of ~~2018~~2019 and ~~2017~~2018 effective tax rates would have been approximately ~~26%~~24% and ~~28%~~26%, respectively. ~~This decrease quarter-over-quarter was primarily due to the decrease in the U.S. statutory~~The Company’s lower first quarter of 2019 effective tax rate ~~from 35% in the prior year to 21% in the current quarter which~~ was ~~partially offset~~largely driven by a ~~negative~~positive impact from changes in uncertain tax positions ~~quarter-over-quarter. Th~~eand a shift in earnings to entities with lower effective tax rates quarter-over-quarter, which more than offset higher current quarter tax expense related to the Company recording earnings in one of its subsidiaries at a statutory tax rate of 25% during the first quarter of 2019 while it awaits recertification of a concessionary 15% tax rate. This concessionary 15% tax rate was available to the Company during the first quarter of 2018. The Company has experienced and expects to continue to experience 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.

Equity in net income (loss) ~~income~~ of associated companies ~~decreased $1.3~~increased $0.7 million in the first quarter of ~~2018~~2019 compared to the first quarter of ~~2017.~~2018. The ~~decrease~~increase was primarily ~~due~~from earnings related to ~~a loss from~~ the Company’s interest in a captive insurance company in the current quarter compared to ~~income~~a loss in the prior year, as well as a currency conversion charge recorded at the Company’s Venezuela affiliate during the first quarter of 2018. These items are further described in the Non-GAAP Measures section of this Item, above.

~~Quaker Chemical Corporation~~

~~Management’s Discussion and Analysis~~

~~Net~~The Company’s net income attributable to noncontrolling interest ~~decreased $0.6~~was consistent at $0.1 million in both the first ~~quarter~~quarters of 2019 and 2018, ~~compared to the first quarter of 2017, primarily due to the Company’s purchase of the remaining interest in its India joint venture in December 2017.~~respectively.

Foreign ~~currency translation positively~~exchange negatively impacted the Company’s first quarter of ~~2018~~2019 earnings by approximately 5%4% or ~~$0.07~~$0.06 per diluted ~~share.~~share, primarily due to a negative impact from foreign currency translation partially offset by a slightly positive foreign currency transaction impact quarter-over-quarter.

Reportable Operating Segments Review - Comparison of the First Quarter of ~~2018~~2019 with the First Quarter of ~~2017~~2018

The Company sells its industrial process fluids, chemical specialties and technical expertise to a wide range of industries in a global product portfolio throughout its four segments: (i) North America, (ii) EMEA, (iii) Asia/Pacific and (iv) South America.

North America

North America represented approximately ~~43%~~45% of the Company’s consolidated net sales in the first quarter of ~~2018.~~2019. The segment’s net sales were ~~$91.8~~$95.3 million, an increase of ~~$4.5~~$3.4 million or 5%4% compared to the first quarter of ~~2017.~~2018. The increase in net sales was primarily due to an increase in selling price and product mix of approximately ~~3%, higher volumes of 1% and the positive impact of foreign currency translation of 1%~~4%. The foreign exchange impact was primarily due to a strengthening of the Mexican peso against the U.S. dollar, as this exchange rate averaged 18.72 in the first quarter of 2018 compared to 20.30 in the first quarter of 2017. This segment’s operating earnings, excluding indirect expenses, were ~~$20.4~~$20.9 million, ~~a decrease~~an increase of ~~approximately $0.3~~$0.5 million or 2% compared to the first quarter of ~~2017.~~2018. The ~~decrease~~increase in operating earnings was ~~the result of a decline in gross margin and slightly higher levels of SG&A which offset~~driven by higher gross profit on the increase in net sales, noted ~~above.~~above, as well as lower SG&A, partially offset by a decline in gross margin quarter-over-quarter. The decline in gross margin quarter-over-quarter was largely due to ~~increases~~a change in product mix and an increase in certain raw material costs and changes in product mix. The higher SG&A was primarily due to increases in labor-related costs primarily associated with annual merit increases as well as the impact of foreign currency translation.costs.

EMEA

EMEA represented approximately ~~29%~~27% of the Company’s consolidated net sales in the first quarter of ~~2018.~~2019. The segment’s net sales were ~~$62.1~~$56.3 million, ~~an increase~~a decrease of ~~approximately $8.1~~$5.8 million or ~~15%~~9% compared to the first quarter of ~~2017.~~2018. The ~~increase~~decrease in net sales was primarily due to the ~~positive~~negative impact of foreign currency translation of ~~15%~~8% and ~~an increase~~a decrease in selling price and product mix of ~~6%, partially~~1%. Volumes quarter-over-quarter increased less than 1% as continued market share gains were offset by ~~lower volumes of 6%. The~~a decrease in volume ~~quarter-over-quarter was primarily attributable to an atypical sales pattern in EMEA~~associated with a specific piece of business which the Company stopped selling during the ~~first quarter~~second half of ~~2017.~~2018 primarily due to its limited profitability. The foreign exchange impact was primarily due to a ~~strengthening~~weakening of the euro against the U.S. dollar, as this exchange rate averaged 1.14 in the first quarter of 2019 compared to 1.23 in the first quarter of ~~2018 compared to 1.07 in the first quarter of 2017.~~2018. This segment’s operating earnings, excluding indirect expenses, were ~~$10.3~~$8.8 million, ~~an increase~~a decrease of ~~approximately $1.0~~$1.5 million or ~~11%~~15% compared to the first quarter of ~~2017.~~2018. The decrease in operating earnings was driven by lower gross profit on the decrease in net sales primarily due to foreign currency translation, noted above, partially offset by a higher gross margin and slightly lower SG&A in the current quarter.

Quaker Chemical Corporation

Management’s Discussion and Analysis

Asia/Pacific

Asia/Pacific represented approximately 24% of the Company’s consolidated net sales in the first quarter of 2019. The segment’s net sales were $50.5 million, an increase of $1.8 million or 4% compared to the first quarter of 2018. The increase in net sales was primarily due to higher volumes of 11% partially offset by the negative impact of foreign currency translation of 6% and a decrease in selling price and product mix of 1%. The foreign exchange impact was primarily due to the weakening of the Chinese renminbi against the U.S. dollar, as this exchange rate averaged 6.75 in the first quarter of 2019 compared to 6.36 in the first quarter of 2018. This segment’s operating earnings, excluding indirect expenses, were $13.1 million, an increase of $0.9 million or 8% compared to the first quarter of 2018. The increase in operating earnings was ~~mainly~~primarily driven by higher gross profit on the increased net sales, noted above, ~~partially offset by an increase in SG&A. Gross~~as well as a higher gross margin in the first quarter of ~~2018~~2019 primarily due to favorable product mix. Partially offsetting these increases to operating earnings was ~~relatively consistent compared to the prior year quarter. The increase in~~higher SG&A quarter-over-quarter ~~was~~ primarily due to ~~the impact of foreign currency translation as well as an increase in labor-related~~higher labor costs ~~primarily~~ associated with annual merit increases ~~as well as~~and improved segment performance.

~~Asia/Pacific~~South America

~~Asia/Pacific~~South America represented approximately ~~23%~~4% of the Company’s consolidated net sales in the first quarter of ~~2018.~~2019. The segment’s net sales were ~~$48.8~~$9.1 million, ~~an increase~~a decrease of ~~$3.6~~$0.3 million or 8%3% compared to the first quarter of ~~2017.~~2018. The ~~increase~~decrease in net sales was primarily due to ~~higher volumes of 7% and~~ the ~~positive~~negative impact of foreign currency translation of 6%14%, partially offset by ~~a decrease~~higher volumes of 6% and an increase in selling price and product mix of 5%. The foreign exchange impact was primarily due to the ~~strengthening~~weakening of the ~~Chinese renminbi~~Brazilian real against the U.S. dollar, as this exchange rate averaged ~~6.36~~3.77 in the first quarter of ~~2018~~2019 compared to ~~6.89~~3.24 in the first quarter of ~~2017.~~2018. This segment’s operating earnings, excluding indirect expenses, were ~~$12.1~~$1.2 million, an increase of ~~$1.9~~$0.6 million ~~or 19%~~ compared to the first quarter of ~~2017.~~2018. The increase in operating earnings was primarily due to higher gross profit driven by an increase in gross ~~profit on the increased net sales, noted above, on relatively consistent levels of~~margin quarter-over-quarter as well as lower SG~~&A quarter-over-quarter. Gross~~&A. The increase in gross margin in the first quarter of ~~2018 increased slightly~~2019 compared to the ~~first quarter of 2017 attributed primarily to product mix.~~

~~South America~~

South America represented approximately 5% of the Company’s consolidated net sales in the first quarter of 2018. The segment’s net sales were $9.4 million, an increase of $0.9 million or 11% compared to the first quarter of 2017. The increase in net sales was primarily due to higher volumes of 13% and an increase in selling price and product mix of 5%, partially offset by the negative impact of foreign currency translation of approximately 7%. The foreign exchange impactprior year was primarily due to the ~~weakening~~benefits of both the Brazilian real and Argentine peso against the U.S. dollar, as these exchange rates averaged approximately 3.24 and 19.66 in the first quarter of 2018, respectively, compared to 3.14 and 15.66 in the first quarter of 2017, respectively. This segment’s operating earnings, excluding indirect expenses, were $0.6 million, a decrease of $0.2 million compared to the first quarter of 2017. The decrease in operating earnings was primarily due to lower gross profit driven by a decline in gross margin quarter-over-quarter as a result ofcertain selling price initiatives which offset higher raw material ~~costs and changes in product mix. SG&A was relatively consistent quarter-over-quarter.~~costs.

~~Quaker Chemical Corporation~~

~~Management’s Discussion and Analysis~~

Factors That May Affect Our Future Results

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

Certain information included in this Report and other materials filed or to be filed by Quaker with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contain or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. These forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, intentions, financial condition, results of operations, future performance, and business, including:

	•		statements relating to our business strategy;
	•		our current and future results and plans; and
	•		statements that include the words “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan” or similar expressions.

Such statements include information relating to current and future business activities, operational matters, capital spending, and financing sources. From time to time, forward-looking statements are also included in Quaker’s other periodic reports on Forms 10-K, 10-Q and 8-K, press releases, and other materials released to, or statements made to, the public.

Any or all of the forward-looking statements in this Report, in Quaker’s Annual Report to Shareholders for 2018 and in any other public statements we make may turn out to be wrong. This can occur as a result of inaccurate assumptions or as a consequence of known or unknown risks and uncertainties. Many factors discussed in this Report will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in Quaker’s subsequent reports on Forms 10-K, 10-Q, 8-K and other related filings should be consulted. Our forward-looking statements are subject to risks, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. A major risk is that the demand for the Company’s products and services is largely derived from the demand for our customers’ products, which subjects the Company to uncertainties related to downturns in a customer’s business and unanticipated customer production shutdowns. Other major risks and uncertainties include, but are not limited to, significant increases in raw material costs, customer financial stability, worldwide economic and political conditions, foreign currency fluctuations, significant changes in applicable tax rates and regulations, future terrorist attacks and other acts of violence. Other factors could also adversely affect us, including factors related to the previously announced pending Houghton combination and the risk that the transaction may not receive regulatory approval or that regulatory approval may include conditions or other terms not acceptable to us. Furthermore, the

Quaker Chemical Corporation

Management’s Discussion and Analysis

Company is subject to the same business cycles as those experienced by steel, automobile, aircraft, appliance, and durable goods manufacturers. These risks, uncertainties, and possible inaccurate assumptions relevant to our business could cause our actual results to differ materially from expected and historical results.

Other factors beyond those discussed in this Report, could also adversely affect us including, but not limited to the following related to the Combination:

	•		the risk that a required regulatory approval will not be obtained or is subject to conditions that are not anticipated or acceptable to us;
	•		the potential that regulatory authorities may require that we make divestitures in connection with the Combination of a greater amount than we anticipated, which would result in a smaller than anticipated combined business;
	•		the risk that a closing condition to the Combination may not be satisfied in a timely manner;
	•		risks associated with the financing of the Combination;
	•		the occurrence of any event, change or other circumstance that could give rise to ~~the termination of~~a material change in the share purchase agreement;
	•		potential adverse effects on Quaker Chemical’s business, properties or operations caused by the implementation of the Combination;
	•		Quaker Chemical’s ability to promptly, efficiently and effectively integrate the operations of Houghton and Quaker Chemical;
	•		risks related to each company’s distraction from ongoing business operations due to the Combination; and,
	•		the outcome of any legal proceedings that may be instituted against the companies related to the Combination.

Therefore, we caution you not to place undue reliance on our forward-looking statements. For more information regarding these risks and uncertainties as well as certain additional risks that we face, ~~you should~~ refer to the Risk Factors ~~detailed~~section, which appears in Item 1A of our Form 10-K for the year ended December 31, ~~2017,~~2018, as well as the proxy statement the Company filed on July 31, 2017 and in our quarterly and other reports filed from time to time with the SEC. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We have evaluated the information required under this Item that was disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, and we believe there has been no material change to that information.

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Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures. As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and our principal financial officer have concluded that as of the end of the period covered by this report our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective.

Changes in internal control over financial reporting. As required by Rule 13a-15(d) under the Exchange Act, our management, including our principal executive officer and principal financial officer, has evaluated our internal control over financial reporting to determine whether any changes to our internal control over financial reporting occurred during the quarter ended March 31, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, no such changes to our internal control over financial reporting occurred during the quarter ended March 31, ~~2018.~~2019.

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PART II.

OTHER INFORMATION

Items 1A, 3, 4 and 5 of Part II are inapplicable and have been omitted.

Item 1. Legal Proceedings.

Incorporated by reference is the information in Note 18 of the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1, of this Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information concerning shares of the Company’s common stock acquired by the Company during the period covered by this report:

(c)

(d)

(c)

(d)

Total Number of

Approximate Dollar

Total Number of

Approximate Dollar

(a)

(b)

Shares Purchased

Value of Shares that

(a)

(b)

Shares Purchased

Value of Shares that

Total Number

Average

as part of

May Yet be

Total Number

Average

as part of

May Yet be

of Shares

Price Paid

Publicly Announced

Purchased Under the

of Shares

Price Paid

Publicly Announced

Purchased Under the

Period

Purchased (1)

Per Share (2)

Plans or Programs

Plans or Programs (3)

Purchased (1)

Per Share (2)

Plans or Programs

Plans or Programs (3)

January 1 - January 31

1,414

155.54

—

86,065,026

740

192.39

—

86,865,026

February 1 - February 28

4,861

151.28

—

86,065,026

6,834

212.05

—

86,865,026

March 1 - March 31

6,615

152.80

—

86,065,026

1,946

202.88

—

86,865,026

Total

12,890

152.53

—

86,065,026

9,520

208.65

—

86,865,026

(1) All of these shares were acquired from employees upon their surrender of Quaker shares in payment of the exercise price of employee stock options exercised or for the payment of taxes upon exercise of employee stock options or the vesting of restricted stock.

(2) The price paid for shares acquired from employees pursuant to employee benefit and share-based compensation plans, is, in each case, based on the closing price of the Company’s common stock on the date of exercise or vesting, as specified by the plan pursuant to which the applicable option or restricted stock was granted.

(3) On May 6, 2015, the Board of Directors of the Company approved, and the Company announced, a new share repurchase program, pursuant to which the Company is authorized to repurchase up to $100,000,000 of Quaker Chemical Corporation common stock (the “2015 Share Repurchase Program”). The 2015 Share Repurchase Program, which replaced the Company’s other share repurchase plans then in effect, has no expiration date. There were no shares acquired by the Company pursuant to the 2015 Share Repurchase Program during the quarter ended March 31, ~~2018.~~2019.

2932

Item 6. ~~Exhibits.~~E xhibits.

(a) Exhibits	(a) Exhibits			(a) Exhibits

10.1		–	Amendment to Commitment Letter and Arranger Fee Letter for Senior Secured Credit Facilities, dated April 4, 2018, by and among Quaker Chemical Corporation, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank AG New York Branch and Deutsche Bank Securities Inc.
31.1		–	Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934		–	Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2		–	Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934		–	Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1		–	Certification of Chief Executive Officer of the Company Pursuant to 18 U.S. C. Section 1350		–	Certification of Chief Executive Officer of the Company Pursuant to 18 U.S. C. Section 1350
32.2		–	Certification of Chief Financial Officer of the Company Pursuant to 18 U.S. C. Section 1350		–	Certification of Chief Financial Officer of the Company Pursuant to 18 U.S. C. Section 1350
101.INS		–	XBRL Instance Document		–	XBRL Instance Document
101.SCH		–	XBRL Extension Schema Document		–	XBRL Extension Schema Document
101.CAL		–	XBRL Calculation Linkbase Document		–	XBRL Calculation Linkbase Document
101.DEF		–	XBRL Definition Linkbase Document		–	XBRL Definition Linkbase Document
101.LAB		–	XBRL Label Linkbase Document		–	XBRL Label Linkbase Document
101.PRE		–	XBRL Presentation Linkbase Document		–	XBRL Presentation Linkbase Document

*********

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


				QUAKER CHEMICAL CORPORATION (Registrant)

				/s/ Mary Dean Hall
Date: ~~April 30, 2018~~May 2, 2019				Mary Dean Hall, Vice President, Chief Financial Officer and Treasurer (officer duly authorized on behalf of, and principal financial officer of, the Registrant)

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	Emerging growth company [ ]

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1 par value	KWR	New York Stock Exchange