Quaker Chemical 10K 2020 Annual report

0000081362 country:US 2020-01-01 2020-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-K

☒

ANNUAL REPORT PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended

December 31, 2020

☐

TRANSITION REPORT PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from

Commission file number

001-12019

QUAKER CHEMICAL CORPORATION

(Exact name of Registrant as specified in its charter)

Pennsylvania

Corporation

No.

23-0993790

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

901 E. Hector Street

Conshohocken

Pennsylvania

19428-2380

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (

610

)

832-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1 par value

KWR

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule

405 of the Securities Act.

Yes

☒

☐

Indicate by check mark if the Registrant is not required to file reports

pursuant to Section 13 or Section 15(d) of the Act.

Yes

☐

☒

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

☒

☐

Indicate by check mark whether the Registrant has submitted electronically

every Interactive Data File required to be submitted 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 such

files).

Yes

☒

☐

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.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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 has filed a report on and

attestation to its management’s assessment of the effectiveness of its internal control over

financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15

U.S.C. 7262(b)) by the registered public accounting firm that prepared or

issued its audit

report.

Yes

☒

☐

Indicate by check mark whether the Registrant is a shell company (as defined

in Rule 12b-2 of the Act).

Yes

☐

☒

State the aggregate market value of the voting and non-voting common equity

held by non-affiliates computed by reference to the price at which the common

equity

was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter. (The aggregate market value is

computed by reference to the last

reported sale on the New York Stock Exchange on June 30, 2020): $

3,273,904,147

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the

latest practicable date:

17,853,700

shares of Common Stock,

$1.00 Par Value, as of January 31, 2021.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement relating to the 2021 Annual Meeting of Shareholders

are incorporated by reference into Part III.

QUAKER CHEMICAL CORPORATION

Table of

Contents

Page

Part I

Item 1.

Business.

Item 1A.

Risk Factors.

Item 1B.

Unresolved Staff Comments.

Item 2.

Properties.

Item 3.

Legal Proceedings.

Item 4.

Mine Safety Disclosures.

Item 4(a).

Information about our Executive Officers.

Part II

Item 5.

Market for Registrant's Common Equity,

Related Stockholder Matters and Issuer Purchases of Equity Securities.

Item 6.

Selected Financial Data.

Item 7.

Management’s Discussion and

Analysis of Financial Condition and Results of Operations.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Item 8.

Financial Statements and Supplementary Data.

Item 9.

Changes in and Disagreements With Accountants

on Accounting and Financial Disclosure.

100

Item 9A.

Controls and Procedures.

100

Item 9B.

Other Information.

102

Part III

Item 10.

Directors, Executive Officers and Corporate

Governance.

103

Item 11.

Executive Compensation.

103

Item 12.

Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters.

103

Item 13.

Certain Relationships and Related Transactions,

and Director Independence.

103

Item 14.

Principal Accountant Fees and Services.

103

Part IV

Item 15.

Exhibits and Financial Statement Schedules.

104

Item 16.

Form 10-K Summary.

107

PART

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

the terms “Quaker Houghton”, the “Company”, “we”,

and “our”

refer to Quaker Chemical Corporation (doing business as Quaker

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

context otherwise requires.

The term Legacy Quaker refers to the Company prior to

the closing of its combination with Houghton

International, Inc. (“Houghton”) (herein referred

to as the “Combination”) on August 1, 2019.

Throughout the Report, all figures

presented, unless otherwise stated, reflect the results of

operations of the combined company for the year ended

December 31, 2020;

and for the year ended December 31, 2019, the results of

Legacy Quaker plus five months of Houghton’s

operations post-closing of

the Combination on August 1, 2019; and for the year

ended December 31, 2018, the results of only Legacy Quaker.

Item 1.

Business.

General Description

The Company was organized in 1918, incorporated

as a Pennsylvania business corporation in 1930,

and in August 2019

completed

the Combination with Houghton to form Quaker Houghton.

Quaker Houghton is a global leader in industrial process

fluids.

With a presence around the world,

including operations in over 25 countries, the Company’s

customers include thousands of

the world’s most advanced

and specialized steel, aluminum, automotive, aerospace,

offshore, can, mining, and metalworking

companies. Quaker Houghton develops, produces, and

markets a broad range of formulated chemical specialty

products and offers

chemical management services (which we refer to as “Fluidcare

”) for various heavy industrial and manufacturing applications

throughout its four segments: Americas; Europe, Middle

East and Africa (“EMEA”); Asia/Pacific; and Global Specialty

Businesses.

The major product lines of Quaker Houghton include

metal removal fluids, cleaning fluids, corrosion inhibitors, metal

drawing

and forming fluids, die cast mold releases, heat treatment

and quenchants, metal forging fluids, hydraulic fluids,

specialty greases,

offshore sub-sea energy control fluids,

rolling lubricants, rod and wire drawing fluids and surface treatme

nt chemicals.

The following

are the respective contributions to consolidated net sales of

each of our principal product lines representing more than 10% of

consolidated net sales for

any of the past three years based on the Company’s

current product line segmentation:

2020

2019

2018

Metal removal fluids

23.9

19.9

15.4

Rolling lubricants

21.8

21.9

25.5

Hydraulic fluids

13.3

13.0

Houghton Combination

On August 1, 2019, the Company completed the Combination

and acquired all of the issued and outstanding shares of

Houghton

from Gulf Houghton Lubricants, Ltd. (“Gulf”) and certain other

selling shareholders in exchange for a combination of cash and

of the Company’s common

stock in accordance with the share purchase agreement dated

April 4, 2017 (the “Share Purchase

Agreement”).

The shares were bought for an aggregate purchase consideration

consisting of: (i) $170.8 million in cash; (ii) the

issuance of approximately 4.3 million shares of the

Company’s common stock, $1.00

par value per share, comprising 24.5% of the

common stock outstanding upon the closing of the Combination;

and (iii) the Company’s refinancing

of Houghton’s net indebtedness

as of the closing of the Combination of approximately

$702.6 million.

Houghton is a leading global provider of specialty chemicals and

technical services for metalworking and other industrial

applications, and, the combination with Legacy Quaker

created a leading global supplier of industrial process fluids.

The

Combination expanded the Company’s

addressable metalworking, metals and industrial end markets, including

steel, aluminum,

aerospace, defense, transportation-original equipment

manufacturer (“OEM”), transportation-components, offshore

sub-sea energy,

architectural aluminum, construction, tube and pipe,

can and container, mining, specialty coatings

and specialty greases.

The

Combination also strengthened the product portfolio of the

combined Company.

Notable Recent Acquisition Activity

In December 2020, the Company completed its acquisition

of Coral Chemical Company (“Coral”), a privately held,

U.S.-based

provider of metal finishing fluid solutions, for approximately

$53 million, net of cash acquired.

Coral provides technical expertise and

product solutions for pre-treatment, metalworking and wastewater

treatment applications to the beverage can and general industrial

end markets.

In February 2021, the Company acquired certain assets related to

tin-plating solutions primarily for steel end markets for

approximately $25 million.

Impact of COVID-19

During 2020, the global outbreak of COVID-19 and

subsequent pandemic negatively impacted all locations where

the Company

does business.

Although the Company has now operated during several

quarters in this COVID-19 environment, the full extent of

the

pandemic and related business impacts remains

uncertain and volatile, and therefore the full extent to which

COVID-19 may impact

the Company’s future

results of operations or financial condition is uncertain.

The pandemic has disrupted the operations of the

Company and its suppliers and customers and, as a result,

the Company experienced volume declines and lower net sales during

2020

as further described in Item 7 of this Report.

The initial impact was at its China subsidiaries in the first quarter

of 2020 and beginning

in late March continued throughout 2020 in the rest of

the business as the pandemic led to a global economic slowdown.

Management

continues to monitor the impact of the COVID-19

pandemic on the Company,

the overall specialty chemical industry and the

economies and markets in which the Company operates.

Sales Revenue

A substantial portion of the Company’s

sales worldwide are made directly through its own employees

and its Fluidcare programs,

with the balance sold through distributors and agents.

The Company’s employees typically

visit the plants of customers regularly,

work on site, and through training and experience,

identify production needs which can be resolved or otherwise addressed

either by

utilizing the Company’s

existing products or by applying new formulations developed

in its laboratories.

The Company recognizes revenue in an amount that

reflects the consideration that the Company expects to receive

in exchange

for the goods or services transferred to its customers.

To do this, the Company

applies a five-step model that 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.

As part of the Company’s

Fluidcare business, certain third-party product sales to customers are

managed by the Company.

Where

the Company acts as 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

the Company for ordering the goods.

The Company transferred third-party products under arrangements resulting

in net reporting of

$42.5 million,

$48.0 million and $47.1 million for the years ended December

31, 2020,

2019 and 2018,

respectively.

Competition

The specialty chemical industry comprises a number

of companies similar in size to the Company,

as well as companies larger

and smaller than Quaker Houghton.

The Company cannot readily determine its precise position in

every industry it serves.

However,

the Company estimates it holds a leading global position

in the market for industrial process fluids including significant

global

positions in the markets for process fluids in portions of

the automotive and industrial markets, and a leading position in

the market for

process fluids to produce sheet steel and aluminum.

The offerings of many of the Company’s

competitors differ from those of Quaker

Houghton; some offer a broad portfolio of

fluids, including general lubricants, while others have more

specialized product ranges.

All

competitors provide different levels of technical

services to individual customers.

Competition in the industry is based primarily on

the ability to supply products that meet the needs of the

customer and provide technical services and laboratory assistance

to the

customer, and to a lesser extent, on

price.

Major Customers and Markets

In 2020,

Quaker Houghton’s five largest

customers (each composed of multiple subsidiaries or divisions

with semi-autonomous

purchasing authority) accounted for approximately

10% of consolidated net sales, with its largest customer

accounting for

approximately 3% of consolidated net sales.

A significant portion of the Company’s

revenues are realized from the sale of process

fluids and services to manufacturers of steel, aluminum,

automobiles, aircraft, industrial equipment, and durable goods and,

therefore,

Quaker

Houghton 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

directly related to the financial performance of its customers.

Furthermore, steel and aluminum customers typically have limited

manufacturing locations compared to metalworking

customers and generally use higher volumes of products at a single

location.

Raw Materials

Quaker Houghton uses approximately 3,000 raw materials,

including animal fats, vegetable oils, mineral oils, oleochemicals,

ethylene, solvents, surfactant agents, various chemical compounds

that act as additives to our base formulations, and a wide variety

other organic and inorganic compounds

and various derivatives of the foregoing.

The price of mineral oil and its derivatives can be

affected by the price of crude oil and industry

refining capacity.

Animal fat and vegetable oil prices, as well as the prices of

other raw

materials, are impacted by their own unique supply

and demand factors, and by biodiesel consumption which

is affected by the price

of crude oil.

Accordingly, significant fluctuations

in the price of crude oil can have a material impact on

the cost of these raw

materials.

In addition, many of the raw materials used by Quaker

Houghton are commodity chemicals which can experience

significant price volatility.

Accordingly, the

Company’s earnings could be

affected by market changes in raw material prices.

Reference is made to the disclosure contained in Item 7A

of this Report.

Patents and Trademarks

Quaker Houghton has a limited number of patents and patent

applications including patents issued, applied for,

or acquired in the

U.S. and in various foreign countries, some of which may

prove to be material to its business, with the earliest patent expiry

in 2021.

The Company principally relies on its proprietary formulae

and its applications know-how and experience to meet

customer needs.

Quaker Houghton products are identified by numerous trademarks

that are registered throughout its marketing area.

Research and Development—Laboratories

The Company maintains approximately thirty separate laboratory

facilities worldwide that are primarily devoted to applied

research and development.

In addition, the Company maintains quality control labs at

each of its manufacturing facilities.

Quaker

Houghton research and development is directed primarily

toward applied technology since the nature of the Company’s

business

requires continual modification and improvement of formulations

to provide specialty chemicals to satisfy customer requirements.

problems are encountered which cannot be resolved

by local laboratories, the problem is referred to one of our ten principal

laboratories, located in Conshohocken, Pennsylvania; Valley

Forge, Pennsylvania; Aurora, Illinois; Santa Fe Springs,

California;

Uithoorn, the Netherlands; Coventry,

United Kingdom; Dortmund, Germany; Barcelona, Spain; Turin,

Italy or Qingpu, China.

Research and development costs are expensed as incurred.

Research and development expenses during the years ended

December 31, 2020,

2019 and 2018 were $40.0 million,

$32.1 million and $24.5 million, respectively.

Regulatory Matters

In order to facilitate compliance with applicable federal,

state, and local statutes and regulations relating to occupational

health

and safety and protection of the environment, the Company

has an ongoing program of site assessment for the

purpose of identifying

capital expenditures or other actions that may be

necessary to comply with such requirements.

The program includes periodic

inspections of each facility by the Company and/or independent

experts, as well as ongoing inspections and training by on-site

personnel.

Such inspections address operational matters, record keeping, reporting

requirements and capital improvements.

Capital

expenditures directed solely or primarily to regulatory

compliance amounted to approximately $3.7

million, $4.4 million and $1.5

million during the years ended December 31, 2020,

2019 and 2018,

respectively.

Company Segmentation

The Company’s operating

segments, which are consistent with its reportable segments,

reflect the structure of the Company’s

internal organization, the method by which

the Company’s resources are allocated

and the manner by which the Company and the

chief operating decision maker assess performance.

The Company’s reportable segments

are: (i) Americas; (ii) EMEA; (iii)

Asia/Pacific; and (iv) Global Specialty Businesses.

See Note 4 of Notes to Consolidated Financial Statements in Item

8 of this Report,

incorporated herein by this reference.

Non-U.S. Activities

Since significant revenues and earnings are generated by

non-U.S. operations, the Company’s

financial results are affected by

currency fluctuations, particularly between the U.S.

dollar and the euro, the British pound sterling, the Brazilian

real, the Mexican

peso, the Chinese renminbi and the Indian rupee,

and the impact of those currency fluctuations on the underlying economies.

Incorporated by reference is (i) the foreign exchange

risk information contained in Item 7A of this Report, (ii)

the geographic

information in Note 4 of Notes to Consolidated Financial

Statements included in Item 8 of this Report, and (iii) information

regarding

risks attendant to foreign operations included in Item

1A of this Report.

Number of Employees

On December 31, 2020, Quaker Houghton had approximately

4,200 full-time employees globally of whom approximately 900

were employed by the parent company and its U.S. subsidiaries,

and approximately 3,300 were employed by its non

-U.S. subsidiaries.

Associated companies of Quaker Houghton (in which

it owns 50% or less and has significant influence) employed

approximately 600

people on December 31, 2020.

Core Values

Quaker Houghton considers its employees as its greatest strength

in differentiating our business and strengthening our

market

positions.

We have established

core values that are inclusive of embracing diversity and

creating a culture where we learn from and

are inspired by the many cultures, backgrounds and knowledge

of our team members.

The Company’s goal is to have

an organization

that is inclusive of all its people and is representative

of the communities in which we operate.

The Company’s core

values are (i) live safe; (ii) act with integrity; (iii) drive results;

(iv) exceed customer expectations; (v)

embrace diversity; and (vi) do great things together.

Our core values embody who we are as a company,

guide our decisions and

inspire us.

Our commitment to these values, in words and actions, builds

a safer, stronger Quaker Houghton

and these values guide

the Company’s internal

conduct and its relationship with the outside world.

By fostering a culture and environment that exemplifies

our core values, we gain, as a company,

unique perspectives, backgrounds and varying experiences

to ensure continued long-term

success.

The Company respects and values all of its employees and

believes inclusion, diversity and equality are essential pillars to

drive the Company’s

success.

Workplace

Safety

We are committed

to maintaining a strong safety culture and to emphasizing

the importance of our employees’ role in identifying,

mitigating and communicating safety risks.

We maintain policies

and operational practices that communicate a culture

where all

levels of employees are responsible for safety.

We believe that

the achievement of superior safety performance is both

an important

short-term and long-term strategic goal in managing our

operations.

We emphasize

ten “lifesaving” rules which make a significant

difference in preventing serious injuries and

fatalities.

We also require

all employees to regularly complete safety training.

Additionally, our

senior management team is closely involved in our safety programs

and conducts regular reviews of safety

performance metrics and reviews the Company’s

safety performance during Company-wide meetings.

Talent

Management and Retention

Maintaining a robust pipeline of talent is crucial to

our

continued success and is a key aspect of succession planning efforts

across

the organization.

Our leadership and human resources teams are responsible for

attracting and retaining top talent by facilitating an

environment where employees want to show up to work

and do great things together.

To achieve sustained high

performance,

management invests in the development, safety,

and wellbeing of our employees.

Additionally, we regularly

evaluate our

compensation and benefits package,

including health and wellness benefits, paid-time off policies,

monetary compensation, and

educational reimbursements,

to ensure that our total compensation and benefits packages are aligned

with our business strategy,

organizational culture, and diversity and inclusion

philosophy while ensuring that we remain competitive in

the markets we serve

while following local and statutory wage and benefits

laws and guidelines.

Sustainability Report

The Company publishes annual sustainability reports which

are available free of charge on its corporate

website under “Investors

- Commitment to Sustainability - Sustainability Report.”

The Company’s 2019 Sustainability Report

reflects the most recent available

data on a variety of topics, including

specific information relating to: (i) the Company’s

environmental footprint and climate change

initiatives;

(ii) the Company’s diversity

initiatives;

(iii) certain safety metrics; and (iv) training courses our

employees completed.

Information included in these sustainability reports is not intended

to be incorporated into this Report.

Quaker Houghton on the Internet

Financial results, news and other information about

Quaker Houghton can be accessed from the Company’s

website at

https://www.quakerhoughton.com

This site includes important information on the Company’s

locations, products and services,

financial reports, news releases and career opportunities.

The Company’s periodi

and current reports on Forms 10-K, 10-Q, 8-K, and

other filings, including exhibits and supplemental

schedules filed therewith, and amendments to those reports, filed with

the Securities

and Exchange Commission (“SEC”) are available on

the Company’s website, free of

charge, as soon as reasonably practicable after

they are electronically filed with or furnished to the SEC.

Information contained on, or that may be accessed through,

the Company’s

website is not incorporated by reference in this Report and,

accordingly, you

should not consider that information part of this Report.

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 Chemical Corporation

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, including statements regarding

the potential effects of the

COVID-19 pandemic on the Company’s

business, results of operation, and financial condition, and our expectations

that we will

maintain sufficient liquidity and remediate any

of our material weaknesses in internal control over financial

reporting 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:

•

the potential benefits of the Combination and other acquisitions;

•

the impacts on our business as a result of the COVID-19

pandemic and any projected global economic rebound

anticipated positive results due to Company actions taken

in response to the pandemic;

•

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

the Company’s other periodic

reports on Forms

10-K, 10-Q and 8-K, press releases, and other materials released

to, or statements made to, the public.

Any or all of the forward-looking statements in this Report,

in the Company’s Annual

Report to Shareholders for 2020 and in any

other public statements we make may turn out to be wrong.

This can occur as a result of inaccurate assumptions

or as a consequence

of known or unknown risks and uncertainties.

Many factors discussed in this Report will be important in determining

our future

performance.

Consequently, actual results may

differ materially from those that might be anticipated

from our forward-looking

statements.

We undertake

no obligation to publicly update any forward-looking statements,

whether as a result of new information, future

events or otherwise.

However, any further disclosures made

on related subjects in the Company’s

subsequent reports on Forms 10-K,

10-Q, 8-K and other related filings should be consulted.

A major risk is that demand for the Company’s

products and services is

largely derived from the demand for our customers’

products, which subjects the Company to uncertainties related

to downturns in a

customer’s business and unanticipated customer

production shutdowns.

Other major risks and uncertainties include, but are not

limited to, the primary and secondary impacts of the COVID-19

pandemic including actions taken in response to the pandemic by

various governments, which could exacerbate some

or all of the other risks and uncertainties faced by the Company,

including the

potential for significant increases in raw material costs, supply

chain disruptions, customer financial instability,

worldwide economic

and political disruptions, foreign currency fluctuations,

significant changes in applicable tax rates and regulations,

future terrorist

attacks and other acts of violence, each of which

is discussed in greater detail in Item 1A of this Report.

Furthermore, the Company is

subject to the same business cycles as those experienced

by our customers in the steel, automobile, aircraft, industrial

equipment, and

durable goods industries.

The ultimate significance of COVID-19 impacts on our business will depend

on, among other things, the

extent and duration of the pandemic, the severity of the

disease and the number of people infected with the

virus, the continued

uncertainty regarding availability,

administration and long-term efficacy of a

vaccine, or other treatments, including on new strands or

mutations of the virus, the longer term effects on

the economy, including

the resulting market volatility,

and the measures taken by

governmental authorities and other

third parties restricting day-to-day life and business operations

and the length of time that such

measures remain in place, as well as laws and other governmental

programs implemented to address the pandemic or assist impacted

businesses, such as fiscal stimulus and other legislation

designed to deliver monetary aid and other relief.

Other factors could also

adversely affect us, including those related to

the Combination and other acquisitions and the integration of

the acquired businesses.

Our forward-looking statements are subject to risks, uncertainties

and assumptions about the Company and its operations

that are

subject to change based on various important factors,

some of which are beyond our control.

These risks, uncertainties, and possibly

inaccurate assumptions relevant to our business could

cause our actual results to differ materially from expected

and historical results.

Therefore, we caution you not to place undue reliance

on our forward-looking statements.

For more information regarding these

risks and uncertainties as well as certain additional

risks that we face, refer to the Risk Factors section in Item

1A of this Report, 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.

Item 1A.

Risk Factors.

There are many factors that may affect our

business and results of operations, including the following

risks relating to: (1) the

demand for our products and services and our ability

to grow our customer base; (2) our business operations, including

internal and

external factors that may impact our operational

continuity; (3) our international operations; (4) our supply chain

;

(5) domestic and

foreign taxation and government regulation and oversight;

and (6) more general risk factors that may impact our business.

Risks Related to the Demand for our Products

and Services and our Customer Base

Changes to the industries and markets that we serve could

have a material adverse effect on our liquidity,

financial position and

results of operations.

As a leader in industrial process fluids, the Company

is subject to the same business cycles as those experienced by our

customers

that participate in the steel, automobile, aircraft, industrial

equipment, aerospace, aluminum and durable goods industries.

Because

demand for our products and services is largely

derived from the global demand for their products, we are subject

to uncertainties

related to downturns in our customers’ businesses and unanticipated

shutdowns or curtailments of our customers’ production,

including as a result of adverse changes affecting

national, regional and global economies or increased competitive

pressure within our

customers’

industries.

For example, our business was adversely affected by the

production slowdown of the Boeing 737 Max aircraft

that occurred in 2020.

Our customers may experience deterioration of their businesses, cash

flow shortages and difficulty obtaining

financing, leading them to delay or cancel plans to purchase

products, and they may not be able to fulfill their obligations

in a timely

fashion.

We have limited ability to

adjust our costs contemporaneously with changes in sales; thus,

a significant sudden downturn in

sales due to reductions in global production within the industries we

serve and/or weak end-user markets could have a

material

adverse effect on our liquidity,

financial position and results of operations.

Further, our suppliers and other business partners

may

experience similar conditions, which could impact their

ability to fulfill their obligations to us and also result in material

adverse

effects on our liquidity,

financial position and results of operations.

Changes in competition in the industries and markets we serve

could have a material adverse effect on our liquidity,

financial

position and results of operations.

The specialty chemical industry is highly competitive

and there are many companies with significant financial resources

and/or

customer relationships that compete with us to provide

similar products and services.

Some competitors may be able to offer more

favorable or flexible pricing and service terms or,

due to their larger size or greater access to resources,

may be better able to adapt to

changes in conditions in our industries, fluctuations

in the costs of raw materials or changes in global economic conditions,

potentially

resulting in reduced profitability and/or a loss of market

share for us.

The pricing decisions of our competitors could lead us to

decrease our prices which could negatively affect

our margins and profitability.

In addition, our competitors could potentially

consolidate their businesses to gain scale to better position

their product offerings, which could have a negative

impact on our

profitability and market share.

Competition in our industry historically has also been

based on the ability to provide products that

meet the needs of the customer and render technical

services and laboratory assistance, which our competitors may be

able to

accomplish more effectively than we are

able to do.

Further, in connection with obtaining regulatory

approval of the Combination, we

divested certain of Houghton’s products

and related assets to a competitor which they may use to compete

with us in certain areas

where we continue to sell those products.

If we are unsuccessful with differentiating ourselves, it could

have a material adverse effect

on our liquidity,

financial position and results of operations and we could lose

market share to our competitors.

Loss of a significant customer,

bankruptcy of a major customer,

or the closure of or significant reduction in production at a

customer site could have a material adverse effect

on our liquidity, financial position and

results of operations.

During 2020, the Company’s

top five largest customers (each composed of multiple

subsidiaries or divisions with semi-

autonomous purchasing authority) together accounted

for approximately 10% of our consolidated net sales, with the

largest customer

accounting for approximately 3% of our consolidated

net sales.

The loss of a significant customer could have a material adverse

effect

on our liquidity,

financial position and results of operations.

Also, a significant portion of our revenues is derived from

sales to

customers in the cyclical steel, aerospace, aluminum

and automotive industries where bankruptcies have occurred

in the past and

where companies have periodically experienced financial

difficulties.

If a significant customer experiences financial difficulties

files for bankruptcy protection, we may be unable to collect

on our receivables, and customer manufacturing sites may

be closed or

contracts voided.

The bankruptcy of a major customer could therefore have a material

adverse effect on our liquidity,

financial

position and results of operations.

Also, some of our customers, primarily in the steel, aluminum

and aerospace industries, often have

fewer manufacturing locations compared to other metalworking

customers and generally use higher volumes of products at

a single

location.

The loss, closure or significant reduction in production at one or more

of these locations or other major sites of a significant

customer could have a material adverse effect

on our business.

We may not

be able to timely develop, manufacture and gain market acceptance

of new and enhanced products required to

maintain or expand our business, which could adversely affect

our competitive position and our liquidity, financial

position and

results of operations.

We believe that

our continued success depends on our ability to continuously

develop and manufacture new products and product

enhancements on a timely and cost-effective

basis in response to customer demands for higher performance

process chemicals and

other product offerings.

Our competitors may develop new products or enhancements to

their products that offer performance,

features and lower prices that may render our products less competitive

or obsolete, and we may lose business and/or significant

market share.

The development and commercialization of new products requires

significant expenditures over an extended period of

time, and some products that we seek to develop may

fail to gain traction or never become profitable.

In any event, ongoing

investments in research and development for the future

do not yield an immediate beneficial impact on our operating

results and

therefore could result in higher costs without a proportional

increase in revenues.

In addition, our customers use our specialty chemicals for

a broad range of applications.

Changes in our customers’ products or

processes or changes in regulatory,

legislative or industry requirements may lead our customers to reduce

consumption of the specialty

chemicals that we produce or make them unnecessary

or less attractive.

Customers may also adopt alternative materials or processes

that do not require our products.

An example of such evolving customer demands and

industry trends is the movement towards light

weighting of materials and electric vehicles.

Should a customer decide to use a different material due

to price, performance or other

considerations, we may not be able to supply a product that

meets the customer’s new requirements.

Consequently, it is important

that

we develop new products to replace the products that

mature and decline in use.

Despite our efforts, we may not be able to develop

and introduce products incorporating new technologies in a

timely manner that will satisfy our customers’ future needs or achieve

market acceptance.

Moreover, new products may have

lower margins than the products they replace.

Our business, results of

operations, cash flows and margins could

be materially adversely affected if we are unable to manage

successfully the maturation or

obsolescence of our existing products and the introduction

of new products.

Risks Related to Business Operations, Including Internal

and External Factors that May Impact Our Operational

Continuity

Our ability to profitably operate our consolidated company

as anticipated requires us to effectively complete

the integration of our

consolidated operations.

An inability to appropriately capitalize on growth, including organic

growth and future acquisitions,

could adversely affect our liquidity,

financial position and results of operations.

Completing the integration of the combined Quaker Houghton

presents the Company with significant risks, which may affect

our

ability to achieve expected cost synergies or

expand our combined business into new markets and geographies.

These risks include,

among others:

●

the diversion of management time and focus from operating

our business to address challenges that may arise in the

continued integration of Houghton;

●

the transition of further operations and customers of Houghton

to the combined business, including across different

cultures

and languages, and the need to address the particular economic,

currency, political, and

regulatory risks associated with

specific countries;

●

the failure to realize anticipated operational or financial

synergies;

●

delays in the implementation or remediation of controls, procedures,

and policies at Houghton;

●

possible liabilities for activities of Houghton before the acquisition,

such as possible violations of laws, commercial disputes,

tax liabilities (as discussed in Note 26 of Notes to Consolidated

Financial Statements included in Item 8 of this Report),

and

other known and unknown liabilities that may not be sufficiently

protected against in the Share Purchase Agreement.

In addition to the Combination, we have completed several

other acquisitions over the past several years as discussed

in Note 2 of

the Notes to the Consolidated Financial Statements included in

Item 8 of this Report.

Acquired companies may have significant latent

liabilities that may not be discovered before they are acquired

and may not be reflected in the price we pay.

Acquisitions also could

have a dilutive effect on our financial results and

while they generally result in goodwill, goodwill could be impaired

in the future

resulting in a charge to earnings.

Our ability to implement our growth strategy may be

limited by our ability to identify appropriate acquisition

or joint

venture

candidates, our financial resources, including available

cash and borrowing capacity,

and our ability to negotiate and complete suitable

arrangements.

Further, the success of our growth

depends on our ability to navigate risks similar to those listed above

and

successfully integrate acquisitions, including, but not

limited to, our ability to:

●

successfully execute the integration or consolidation

of the acquired or additional business into existing processes and

operations;

●

develop or modify financial reporting, information

systems and other related financial tools to ensure overall financial

integrity and adequacy of internal control procedures;

●

identify and take advantage of potential synergies,

including cost reduction opportunities, while retaining

legacy business and

other related attributes;

●

adequately address challenges arising from the increased scope,

geographic diversity and complexity of our operations; and

●

further penetrate existing, and expand into new,

markets with the product capabilities acquired in acquisitions.

If we fail to successfully integrate acquisitions into our

existing business, our financial condition and results of operations

could

be adversely affected.

We may fail

to obtain the benefits we anticipate from the Combination

or our other recently completed or

future acquisitions or joint ventures and we may not

create the appropriate infrastructure to support such additional

growth from

organic or acquired businesses, which could

also have a material adverse effect on our liquidity,

financial position and results of

operations.

Gulf and its wholly-owned subsidiary,

QH Hungary Holdings Limited, have a significant minority stake in the Company

and the

contractual ability to nominate certain directors of the Company,

which may enable them to influence the direction of our business

and significant corporate decisions.

As a result of the Combination, Gulf and its wholly

-owned subsidiary, QH Hungary

Holdings Limited (together, the

“Gulf

Affiliates”), have become our largest shareholders.

Subject to certain restrictions over timing and amount of sales in the

shareholders

agreement they have entered into with the Company,

if they were to make available for sale a portion of their shares,

that portion

could represent a significant amount of common

stock of the Company being sold which could have an adverse impact

on the

Company’s stock price.

In addition, the Gulf Affiliates currently have

the right to designate three individuals for election to our board

of directors (the

“Board”) and this right, together with their share ownership,

gives them substantial influence over our business, including

over matters

submitted to a vote of our shareholders, including the election

of directors, amendment of our organizational documents,

acquisitions

or other business combinations involving the Company,

and potentially the ability to prevent extraordinary transactions such

as a

takeover attempt or business combination.

The concentration of ownership of our shares held by the Gulf

Affiliates may make some

future actions more difficult without their support.

The Gulf Affiliates, however,

among other provisions in the shareholders

agreement, have agreed that for so long as any of their designees

are on the Board, and for six months thereafter,

they will vote all

Quaker Houghton shares consistent with the recommendations of

the Board for each director nominee as reflected in each proxy

statement of the Company,

including in support

of any Quaker Houghton directors nominated for election or

re-election to the Board

(except as would conflict with their rights to designees on

the Board).

Nevertheless, the interests of Gulf may conflict with our

interests or the interests of our other shareholders, though

we are not aware of any such existing conflicts of interest at this time.

Failure to comply with any material provision of our principal

credit facility or other debt agreements could have a material

adverse effect on our liquidity,

financial position and results of operations.

We significantly

increased our level of indebtedness in connection with

the closing of the Combination.

Our principal credit

facility requires the Company to comply with certain

provisions and covenants, and, while we do not currently

consider these

provisions and covenants to be overly restrictive, they

could become more difficult to comply with as business or

financial conditions

change.

We will also be subject

to interest rate risk due to the variable interest rates within the

credit facility and if interest rates rise

significantly, these

interest costs would increase as well.

Our principal credit facility contains provisions that

are customary for facilities of its type, including affirmative

and negative

covenants, financial covenants and events of default,

including restrictions on (a) the incurrence of additional

indebtedness, (b)

investments in and acquisitions of other businesses, lines of

business and divisions, (c) the making of dividends or capital stock

purchases and (d) dispositions of assets.

We may declare

dividends and make share repurchases in annual amounts not

exceeding the

greater of $50 million annually and 20% of consolidated

EBITDA (earnings before interest, taxes, depreciation and

amortization) if

we are otherwise in compliance with the credit facility

and we may also distribute certain other amounts to our shareholders if

satisfy a consolidated net leverage ratio.

Other financial covenants contained in our principal credit

facility include a consolidated

interest coverage test and a consolidated net leverage

test.

Customary events of default in the credit facility include,

among others,

defaults for non-payment, breach of representations and warranties,

non-performance of covenants, cross-defaults, insolvency,

and a

change of control of the Company in certain circumstances.

If we are unable to comply with the financial and

other provisions of our

principal facility,

we could become in default.

The occurrence of an event of default under the credit facility

could result in all loans

and other obligations becoming immediately due and payable and

the facility being terminated.

In addition, deterioration in the

Company’s results of

operations or financial position could significantly increase

borrowing costs.

Changes to the LIBOR calculation method or the replacement

of LIBOR may have adverse consequences for the Company

that

cannot yet reasonably be predicted.

The Company’s principal

credit facility permits interest on certain borrowings to be calculated based

on LIBOR.

The LIBOR

benchmark has been subject of national, international,

and other regulatory guidance and proposals for reform and is currently

expected to be discontinued after 2021.

The transition away from LIBOR presents various risks and challenges,

including with

respect to our borrowings and hedging arrangements that

rely on the LIBOR benchmark.

Further, the overall financial market

may be

disrupted as a result of the phase-out or replacement of

LIBOR.

Various

parties are working on industry wide and company specific

transition plans related to derivatives and cash markets exposed

to LIBOR.

The U.S. Federal Reserve, in conjunction with the

Alternative Reference Rates Committee, a steering

committee comprised of large U.S. financial institutions,

is considering replacing

LIBOR with the Secured Overnight Financing Rate (“SOFR”),

a new index calculated using short-term repurchase agreements,

backed by Treasury securities.

At this time, the future of LIBOR remains uncertain.

It is not possible to predict whether SOFR will

attain market traction as a LIBOR replacement or to

predict any other reforms to LIBOR that may be enacted.

The potential effect of

the phase-out or replacement of LIBOR on the Company’s

financial position or results of operations cannot yet be predicted,

but we

do not believe it would have a material adverse impact

on the financial results of the Company.

Risks Related to our International Operations

Our global presence subjects us to political and economic

risks that could adversely affect our business, liquidity,

financial

position and results of operations.

A significant portion of our revenues and earnings are generated

by non-U.S. operations.

Our success as a global business will

depend, in part, upon our ability to succeed across different

legal, regulatory, economic,

social and political conditions by developing,

implementing and maintaining policies and strategies that

are effective in all of the locations where we do

business.

Risks inherent in

our global operations include:

●

increased transportation and logistics costs, or transportation

may be restricted;

●

increased cost or decreased availability of raw materials;

●

trade protection measures including import and export

controls, trade embargoes, and trade sanctions between

countries or

regions we serve that could result in our losing access to customers

and suppliers in those countries or regions;

●

unexpected adverse changes in export duties, quotas and

tariffs and difficulties in obtaining export licenses;

●

termination or substantial modification of international

trade agreements that may adversely affect our access to

raw

materials and to markets for our products;

●

our agreements with counterparties in countries outside

the U.S. may be difficult for us to enforce

and related receivables

may take longer or be difficult for us to collect;

●

difficulties of staffing and managing

dispersed international operations;

●

less protective foreign intellectual property laws, and

more generally, legal

systems that may be less developed and

predictable than those in the U.S.;

●

limitations on ownership or participation in local enterprises as well

as the potential for expropriation or nationalization

enterprises;

●

the impact of widespread public health crises, such as the

COVID-19 pandemic;

●

instability in or adverse changes to the economic, political

social, legal or regulatory conditions in a country or region where

we do business, including hyperinflationary conditions or

as a result of terrorist activities; and

●

complex and dynamic local tax regulations, including

changes in foreign laws and tax rates or U.S. laws and tax

rates with

respect to foreign income that may unexpectedly increase

the rate at which our income is taxed, impose new and additional

taxes on remittances, repatriation or other payments by

subsidiaries, or cause the loss of previously recorded tax benefits.

The current global geopolitical and trade environment

creates the potential for increased escalation of domestic and international

tariffs and retaliatory trade policies.

Further changes in U.S. trade policy and additional

retaliatory actions by U.S. trade partners

could result in a worsening of economic conditions.

If we are unable to successfully manage these and other

risks associated with our

international businesses, the risks could have a material

adverse effect on our business, results of operations

or financial condition.

Additionally, on

January 31, 2020, the United Kingdom’s

(“U.K.”) ended its membership in the European Union (“EU”)

(commonly referred to as “Brexit”).

The U.K. and the EU entered into a trade and cooperation agreement

effective January 1, 2021,

but uncertainty remains regarding its implications and

implementation,

and whether any new trade agreements with other countries or

territories will be agreed upon and implemented and how any

such agreements may impact our business.

The long-term economic,

legal, political and social implications of Brexit, including

regarding data protection in the U.K. and the free movement

of goods,

services, and people between the U.K., the EU, and

elsewhere, also remains unclear.

Brexit has caused and could cause further

disruptions to, and create uncertainty surrounding, our

business in the U.K. and EU, including affecting our

relationships with our

existing and future customers, suppliers and employees.

Brexit could lead to legal uncertainty and potentially divergent

national laws

and regulations as the U.K. determines which EU laws to

replace or replicate.

Brexit could also lead to calls for similar referendums

in other European jurisdictions which could cause increased

economic volatility in the European and global markets.

Uncertainty

around these and related issues could lead to adverse

effects on the economy of the U.K. or in the other economies

in which we

operate.

There can be no assurance that any or all of these events will not

have a material adverse effect on our business operations,

results of operations and financial condition.

The scope of our international operations subjects us to risks from

currency fluctuations that could adversely affect

our liquidity,

financial position and results of operations.

Our non-U.S. operations generate significant revenues

and earnings.

Fluctuations in foreign currency exchange rates may affect

product demand and may adversely affect the

profitability in U.S. dollars of the products and services we provide

in international

markets where payment for our products and services is made

in the local currency.

Our financial results are affected by currency

fluctuations, particularly between the U.S. dollar and

the euro, the Brazilian real, the Mexican peso, the Chinese renminbi,

and the

Indian rupee, and the impact of those currency fluctuations

on the underlying economies.

During the past three years, sales by our

non-U.S. subsidiaries, which use their local currencies as their

functional currency,

accounted for approximately 60% to 70% of our

consolidated net sales.

We generally do

not use financial instruments that expose us to significant risk

involving foreign currency

transaction; however, the relative size

of our non-U.S. activities has a significant impact on reported

operating results and our net

assets.

Therefore, as exchange rates change, our results can

be materially affected.

Incorporated by reference is the foreign exchange

risk information contained in Item 7A of this Report

and the geographic information in Note 4 of Notes to Consolidated

Financial

Statements included in Item 8 of this Report.

Also, we occasionally source inventory in a different

country than that of the intended sale.

This practice can give rise to foreign

exchange risk.

We seek to mitigate this

risk through local sourcing of raw materials in the majority

of our locations.

Risks Relating to Our Supply Chain

If we are unable to obtain price increases or contract concessions sufficient

to offset increases in the costs of raw materials,

this

could result in a loss of sales, gross profit, and/or market

share and could have a material adverse effect

on our liquidity, financial

position and results of operations.

Conversely, if we fail to adjust prices in a

declining raw material cost environment, we could

lose sales, gross profit, and/or market share which could have

a material adverse effect on our liquidity,

financial position and

results of operations.

Quaker Houghton uses approximately 3,000 different

raw materials, including animal fats, vegetable oils, mineral oils,

oleochemicals, ethylene, solvents, surfactant agents, various

chemical compounds that act as additives to our base formulations,

and a

wide variety of other organic and inorganic

compounds, and various derivatives of the foregoing.

The price of mineral oils and their

derivatives can be affected by the price of

crude oil and industry refining capacity.

Animal fat and vegetable oil prices, as well as the

prices of other raw materials, are impacted by their

own specific supply and demand factors, as well as by biodiesel

consumption

which is also affected by the price of crude

oil.

Accordingly, significant

fluctuations in the price of crude oil in the past have had and

are expected to continue to have a material impact on the

cost of our raw materials.

In addition, many of the raw materials we use are

commodity chemicals, which can experience significant

price volatility.

We generally

attempt to pass through changes in the prices of raw materials to

our customers, but we may be unable to do so (or

may be delayed in doing so).

In addition, raising prices we charge to

our customers in order to offset increases in the

prices we pay

for raw materials could cause us to suffer

a loss of sales volumes.

Although we have been successful in the past in recovering

substantial amount of raw material cost increases while retaining

our customers, there can be no assurance that we will be able to

continue to offset higher raw material costs or

retain customers in the future.

A significant change in margin or the loss of customers

due to pricing actions could result in a material adverse

effect on our liquidity,

financial position, and results of operations.

Lack of availability of raw materials and issues associated with sourcing

from single suppliers and suppliers in volatile economic

environments could have a material adverse effect

on our liquidity, financial position, and

results of operations.

The specialty chemical industry periodically experiences

supply shortages for certain raw materials.

In addition, we source some

materials from a single supplier or from suppliers in

jurisdictions that have experienced political or economic

instability.

Even if we

have multiple suppliers of a particular raw material, there

are occasionally shortages.

Any significant disruption in supply could affect

our ability to obtain raw materials or satisfactory substitutes or

could increase the cost of such raw materials or substitutes, which

could have a material adverse effect on our

liquidity, financial position and

results of operations.

In addition, certain raw materials

that we use are subject to various regulatory laws, and

a change in our ability to legally use such raw materials may impact the

products or services we are able to offer which

could negatively affect our ability to compete and could

adversely affect our liquidity,

financial position and results of operations.

Loss of a significant manufacturing facility or disruptions within

our supply chain or in transportation could have a

material

adverse effect on our liquidity,

financial position and results of operations.

Our manufacturing facilities are located throughout

the world.

While we have some redundant capabilities, if one of our facilities

is forced to shut down or curtail operations because of damage

or other factors, including natural disasters, labor difficulties

widespread public health crises, such as the ongoing

COVID-19 pandemic, we may not be able to timely supply

our customers.

This

could result in a loss of sales over an extended period

or permanently.

While the Company seeks to mitigate this risk through business

continuity and contingency planning and other measures,

the loss of production in any one region over an extended period of time

could have a material adverse effect on our

liquidity, financial position and

results of operations.

In addition, the coronavirus

pandemic has caused and may in the future cause significant

travel disruptions, quarantines and/or closures, which could result

disruptions to our manufacturing and production operations

at our facilities, as well as those of our suppliers and customers.

Any

losses due to these events may not be covered by our existing

insurance policies or may be subject to certain deductibles.

We could

be similarly adversely affected by disruptions

to our supply chain and transportation network.

The Company relies

heavily on railroads, ships, and over-the-road shipping methods to

transport raw materials to its manufacturing facilities and to

transport finished products to customers.

The costs of transporting our products could be negatively

affected by factors outside of our

control, including shipping container shortages or global

imbalances in shipping capabilities, rail service interruptions or rate

increases, extreme weather events, tariffs,

rising fuel costs and capacity constraints.

Significant delays or increased costs affecting our

supply chain could materially affect our financial

condition and results of operations.

Disruptions at our suppliers could lead to short

term or longer term increases in raw material or energy

costs and/or reduced availability of materials or energy,

potentially affecting

our financial condition and results of operations.

Risks Relating to Domestic and Foreign Taxation

and Government Regulation and Oversight

Changes in tax laws could result in fluctuations in our effective

tax rate and have a material effect on our liquidity,

financial

position and results of operation.

We pay income

taxes in the U.S. and various foreign jurisdictions.

Our effective tax rate is derived from a combination

of local

tax rates and tax attributes applicable to our operations in

the various countries, states and other jurisdictions in which we

operate.

Our effective tax rate and respective tax liabilities could

therefore be materially affected by changes in

the mix of earnings in countries

with differing statutory tax rates, changes in tax

rates, expiration or lapses of tax credits or incentives, changes

in uncertain tax

positions, changes in the valuation of deferred tax

assets and liabilities, or changes in tax laws or in how they are

interpreted or

enforced, including matters such as transfer pricing.

One example is the impact of the U.S. Tax

Cuts and Jobs Act, enacted in the U.S.

in 2017 (“U.S. Tax

Reform”).

We have made

various interpretations and assumptions with regard to uncertainties

and ambiguities in

the application of certain provisions of U.S. Tax

Reform which could turn out to be incorrect.

In addition, we are regularly under

audit by tax authorities, and the final decisions of

such audits could materially affect our current tax estimates and

tax positions.

See

Note 10 and Note 26 of Notes to Consolidated Financial

Statements in Item 8 of this Report for a discussion of certain

income and

non-income tax audits and inspections.

Any of these factors or similar tax-related risks could cause our

effective tax rate and tax-

related payments,

including any such payments related to tax liabilities of businesses we have

acquired, to significantly differ from

previous periods and current or future expectations

which could have a material effect on our liquidity,

financial position and results

of operations.

Pending and future legal proceedings including environmental

matters could have a material adverse effect on

our liquidity,

financial position, and results of operations, as well as our reputation

in the markets it serves.

The Company and its subsidiaries are routinely party

to proceedings, cases, and requests for information from, and negotiations

with, various claimants and federal and state agencies relating

to various legal matters, including tax and environmental

matters.

See

Note 10 and Note 26 of Notes to Consolidated Financial

Statements in Item 8 of this Report, which describes uncertain

tax positions

and tax audits and inspections, as well as certain information

concerning pending asbestos-related litigation against

an inactive

subsidiary, amounts

accrued associated with certain environmental, non-capital remediation

costs and other potential commitments or

contingencies.

An adverse result in one or more pending or ongoing matters

or any potential future matter of a similar nature could

materially and adversely affect our liquidity,

financial position, and results of operations, as well as our reputation

in the markets we

serve.

Failure to comply with the complex global regulatory

environment in which we operate could have an adverse impact

on our

reputation and/or a material adverse effect

on our liquidity, financial position and

results of operations.

We are subject

to government regulation in all of the jurisdictions in which

we conduct our business.

Changes in the regulatory

environments

in which we operate, particularly,

but not limited to, the U.S., Mexico, Brazil, China, India, Thailand,

Australia, the

U.K. and the EU, could lead to heightened regulatory compliance

costs and scrutiny, could

adversely impact our ability to continue

selling certain products in the U.S. or foreign markets,

and/or could otherwise increase the cost of doing business.

While we seek to

mitigate these risks through a variety of actions,

including receiving Responsible Care Certification, ongoing

employee training,

and

employing a comprehensive environmental, health and

safety program, there is no guarantee these actions will prevent all potential

regulatory compliance issues.

For instance, failure to comply with the EU’s

Registration, Evaluation, Authorization and Restriction of

Chemicals (“REACH”) regulations or other similar laws and

regulations could result in our inability to sell certain

products or we

could incur fines, ongoing monitoring obligations or other

future business consequences, which could have a material adverse

effect

on our liquidity,

financial position and results of operations.

In addition, the U.S. Toxic

Substances Control Act (“TSCA”) requires

chemicals to be assessed against a risk-based safety standard

and that unreasonable risks identified during risk

evaluation be

eliminated.

This regulation and other pending initiatives at the U.S. state

level, as well as initiatives in Canada, Asia and other

regions, could potentially require toxicological testing

and risk assessments of a wide variety of chemicals, including chemicals

used

or produced by us.

These assessments may result in heightened concerns about

the chemicals involved and additional requirements

being placed on their production, handling, labeling

or use.

These concerns and additional requirements could also

increase the cost

incurred by our customers to use our chemical products

and otherwise limit their use which could lead to a

decrease in demand for

these products.

A decrease in demand due to these issues could have an adverse

impact on our business and results of operation.

Further, we are subject to the

U.S. Foreign Corrupt Practices Act (the “FCPA”),

the U.K. Bribery Act and other anti-bribery,

anti-

corruption and anti-money laundering laws in jurisdictions around

the world.

The FCPA, the

U.K. Bribery Act and similar laws

generally prohibit companies and their officers,

directors, employees and third-party intermediaries, business partners

and agents,

from making improper payments or providing other improper

items of value to government officials or other

persons.

While we have

policies and procedures and internal controls designed

to address compliance with such laws, we cannot guarantee that

our employees

and third-party intermediaries, business partners and

agents will not take, or be alleged to have taken, actions in violation of

such

policies and laws for which we may be ultimately held

responsible.

Detecting, investigating and resolving actual or alleged violations

can be extensive and require a significant diversion of

time, resources and attention from senior management.

Any violation of the

FCPA, the U.K.

Bribery Act or other applicable anti-bribery,

anti-corruption and anti-money laundering laws could

result in

whistleblower complaints, adverse media coverage,

investigations, loss of export privileges, and criminal or

civil sanctions, penalties

and fines, any of which could adversely affect

our business and financial condition.

The shipment of goods, services and technology

across international borders subjects us to extensive trade laws and

regulations.

Our import activities are governed by the unique customs

laws and regulations in each of the countries where we operate.

Moreover,

many countries, including the U.S., control the export and

re-export of certain goods, services and technology and impose related

export record-keeping and reporting obligations.

Governments may also impose economic sanctions against certain

countries, persons

and entities that may restrict or prohibit transactions

involving such countries, persons and entities, which may limit

or prevent our

conduct of business in certain jurisdictions.

The laws and regulations concerning import activity,

export record-keeping and reporting, export control and

economic sanctions

are complex and constantly changing.

These laws and regulations can cause delays in shipments and

unscheduled operational

downtime.

Moreover, any failure to comply with applicable

legal and regulatory trading obligations could result in

criminal and civil

penalties and sanctions such as fines, imprisonment,

debarment from governmental

contracts, seizure of shipments and loss of import

and export privileges.

In addition, investigations by governmental authorities as well

as legal, social, economic and political issues in

these countries could have a material adverse effect

on our business, results of operations and financial condition.

We are also subject

to the risks that our employees, joint venture partners

and agents outside of the U.S. may fail to comply with

other applicable laws.

Uncertainty related to environmental regulation and industry standards

relating to, as well as physical risks of, climate change and

biodiversity loss, could impact our results of operations and

financial position.

Increased public and stakeholder awareness and concern

regarding global climate change, biodiversity

loss, and other

environmental risks may result in more extensive international,

regional and/or federal requirements or industry standards to reduce

mitigate the effects of these changes.

These regulations could mandate even more restrictive standards

or industry standards than the

voluntary goals that we have established or require changes

to be adopted on a more accelerated time frame.

There continues to be a

lack of consistent climate legislation, which

creates economic and regulatory uncertainty.

For example, the new U.S. presidential

administration has issued Executive Orders seeking to

adopt new regulations and policies to address climate change and

to suspend,

revise, or rescind prior agency actions that are identified

as conflicting with the administration’s

climate policies.

The new

presidential administration also announced that in February

2021, the U.S. will formally re-join the Paris Agreement.

The Paris

Agreement requires countries to review and “represent

a progression” in their intended nationally determined contributions

which set

greenhouse gas emission reduction goals every five

years.

Though we are closely following developments in this area

and changes in

the regulatory landscape in the U.S., we cannot predict

how or when those challenges may ultimately impact our business.

While

certain climate change initiatives may result in new

business opportunities for us in the area of alternative

fuel technologies and

emissions control, compliance with these initiatives may also result

in additional costs to us including, among other things, increased

production costs, additional taxes, reduced emission allowances

or additional restrictions on production or operations.

In addition, the potential physical impacts of climate change

and biodiversity loss are highly uncertain and

will be particular to the

circumstances developing in various geographical regions.

These may include extreme weather events and long-term

changes in

temperature levels and water availability as well as damaged ecosystems.

The physical risks of climate change and biodiversity loss

may impact our facilities, our customers and suppliers, and

the availability and costs of materials and natural resources, sources

and

supply of energy,

product demand and manufacturing.

In particular, climate change serves as a risk multiplier

increasing both the

frequency and severity of natural disasters that may affect

our business operations.

If environmental laws or regulations or industry standards

are either changed or adopted and impose significant operational

restrictions and compliance requirements upon us or

our products, or our operations are disrupted due to physical impacts of

climate

change or biodiversity loss, our business, capital expenditures,

results of operations, financial condition and competitive

position could

be negatively impacted.

We are subject to

stringent labor and employment laws in many jurisdictions in which

we operate, and our relationship with our

employees could deteriorate which could adversely impact

our operations.

A majority of our full-time employees are employed outside

the U.S.

In many jurisdictions where we operate, labor and

employment laws grant significant job protection to certain

employees including rights on termination of employment.

In addition, in

certain countries our employees are represented by

works councils or are governed by collective bargaining

agreements.

We are often

required to consult with and seek the consent or advice of

works councils or labor unions.

These regulations and laws, together with

our obligations to seek consent or consult with the relevant

unions or works councils, could have a significant impact

on our flexibility

in managing costs and responding to market changes.

While the Company believes it has generally positive relations with its labor

unions and employees, there is no guarantee the Company

will be able to successfully negotiate new or renew labor

agreements

without work stoppages, labor difficulties or

unfavorable terms.

If we were to experience any extended interruption of operations

any of our facilities because of strikes or other work stoppages,

our results of operations and financial condition could be

materially

and adversely affected.

We may be

unable to adequately protect our proprietary rights and trade brands,

which may limit our ability to compete in our

markets and could adversely affect our liquidity,

financial position and results of operations.

We have a

limited number of patents and patent applications, including

patents issued, applied for, or acquired

in the U.S. and in

various foreign countries, some of which are material

to our business.

However, we rely principally on our

proprietary formulae and

the applications know-how and experience to meet

customer needs.

Also, our products are identified by trademarks that are registered

throughout our marketing area.

Despite our efforts to protect our proprietary information

through patent and trademark filings, and

the use of appropriate trade secret protections, it is possible

that competitors or other unauthorized third parties may obtain, copy,

use,

disclose or replicate our formulae, products, and proces

ses.

Similarly, third

parties may assert claims against us and our customers

and distributors alleging our products infringe upon

third-party intellectual property rights.

In addition, the laws and/or judicial

systems of foreign countries in which we design, manufacture,

market and sell our products may afford little or

no effective protection

of our proprietary technology or trade brands.

Also, security over our global information technology structure

is subject to increasing

risks associated with cyber-crime and other related cyber-security

threats.

These potential risks to our proprietary information, trade

brands and other intellectual property could subject us to

increased competition and a failure to protect, defend or enforce our

intellectual property rights could negatively impact

our liquidity, financial position

and results of operations.

General Risk Factors

Our business could be adversely affected

by environmental, health and safety laws and regulations or by

potential product, service

or other related liability claims.

The development, manufacture and sale of specialty

chemical products and other related services involve inherent

exposure to

potential product liability claims, service level claims, product

recalls and related adverse publicity.

Some customers have and may in

the future require us to represent that our products conform

to certain product specifications provided by them.

Any failure to comply

with such specifications could result in claims or legal

action against us.

Any of the foregoing potential product or service risks could

also result in substantial and unexpected expenditures

and affect customer confidence in our products and

services, which could have a

material adverse effect on our liquidity,

financial position and results of operations.

In addition, our business is subject to hazards associated

with the manufacturing, handling, use, storage, and transportation

chemical materials and products, including historical operations

at our current and former facilities.

These potential hazards could

cause personal injury and loss of life, severe damage

to, or destruction of, property or equipment and environmental contamination

other environmental damage, which could have an adverse

effect on our business, financial condition or results

of operations.

In the

jurisdictions in which we operate, we are subject to numerous U.S.

and non-U.S. national, federal, state and local environmental,

health and safety laws and regulations, including those

governing the discharge of pollutants into the air and

water, the management

and disposal of hazardous substances and wastes and the

cleanup of contaminated properties.

We currently

use, and in the past have

used, hazardous substances at many of our facilities, and

we have in the past been, and may in the future be, subject

to claims relating

to exposure to hazardous materials.

We also have

generated, and continue to generate, hazardous wastes at a number

of our facilities.

Liabilities associated with the investigation and

cleanup of hazardous substances, as well as personal injury,

property damages or

natural resource damages arising from the release of,

or exposure to, such hazardous substances, may be imposed in many situations

without regard to violations of laws or regulations

or other fault, and may also be imposed jointly and severally (so

that a responsible

party

may be held liable for more than its share of the losses involved,

or even the entire loss).

These liabilities may also be imposed

on many different entities, including, for

example, current and prior property owners or operators, as well as entities

that arranged for

the disposal of the hazardous substances.

The liabilities may be material and can be difficult to identify

or quantify.

In addition, the

occurrence of disruptions, shutdowns or other material

operating problems at our facilities or those of our customers

due to any of

these risks could adversely affect our reputation

and have a material adverse effect on our operations

as a whole, including our results

of operations and cash flows, both during and after the

period of operational difficulties.

Further, some of the raw materials we handle

are subject to government regulation.

These regulations affect the manufacturing

processes, handling, uses and applications of our products.

In addition, our production facilities and a number of our distribution

centers require numerous operating permits.

Due to the nature of these requirements and changes in our operations,

our operations

may exceed limits under permits or we may not have

the proper permits to conduct our operations.

Ongoing compliance with environmental laws, regulations

and permits that impact registration/approval requirements,

transportation and storage of raw materials and finished

products, and storage and disposal of wastes could require

us to make changes

in manufacturing processes or product formulations and

could have a material adverse effect on our results

of operations.

We may

incur substantial costs, including fines, damages, criminal

or civil sanctions and remediation costs, or experience

interruptions in our

operations, including as a result of revocation, non-renewal

or modification of the Company’s

operating permits and revocation of the

Company’s product

registrations, for violations arising under these laws or permit

requirements.

Any such revocation, modification or

non-renewal may require the Company to cease or limit

the manufacture and sale of its products at one or more of its facilities, which

may limit or prevent the Company’s

ability to meet product demand or build new facilities and

may have a material adverse effect on

the Company’s business, financial

position, results of operations and cash flows.

Additional information may arise in the future

concerning the nature or extent of our liability with

respect to identified sites, and additional sites may be identified

for which we are

alleged to be liable, that could cause us to materially increase

our environmental accrual or the upper range of the

costs we believe we

could reasonably incur for such matters.

Increased compliance costs may not affect competitors

in the same way that they affect us

due to differences in product formulations,

manufacturing locations or other factors, and we could be at a competitive

disadvantage,

which might adversely affect our financial performance.

We could be

subject to indemnity claims and liable for other payments relating to

properties or businesses we have divested.

In connection with the sale of certain properties and

businesses, we agreed to indemnify the purchasers of such

properties for

certain types of matters, such as certain breaches of representations

and warranties, taxes and certain environmental matters.

With

respect to environmental matters, the discovery of

contamination arising from properties that we have divested may

expose us to

indemnity obligations under the sale agreements with

the buyers of such properties or cleanup obligations and

other damages

under

applicable environmental laws, even if we were not

aware of the contamination.

We may not have

insurance coverage for such

indemnity obligations.

Further, we cannot predict the nature of

and the amount

of any indemnity or other obligations we may have to

the applicable purchaser.

These payments may be costly and may adversely affect

our financial condition and results of operations.

Our insurance may not fully cover all potential exposures.

We maintain

product, property,

business interruption, casualty,

and other general liability insurance, but this may not cover

all

risks associated with the hazards of our business and these

coverages are subject to limitations, including deductibles

and coverage

limits.

We may incur

losses beyond the limits, or outside the coverage, of our insurance

policies, including liabilities for

environmental remediation.

In addition, from time to time, various types of insurance

for companies in the specialty chemical

industry have not been available on commercially acceptable

terms and, in some cases, have not been available at all.

We are

potentially at additional risk if one or more of our

insurance carriers fail.

Additionally, severe disruptions

in the domestic and global

financial

markets could adversely impact the ratings and survival

of some of our insurers.

Future downgrades in the ratings of enough

insurers could adversely impact both the availability of

appropriate insurance coverage and its cost.

In the future, we may not be able

to obtain coverage at current levels, if at all, and our

premiums may increase significantly on coverage that

we maintain.

Impairment evaluations of goodwill, intangible assets, investments or other

long-lived assets could result in a reduction in our

recorded asset values which could have a material

adverse effect on our financial position and results of

operation.

We perform

reviews of goodwill and indefinite-lived intangible assets on

an annual basis, or more frequently if triggering events

indicate a possible impairment.

We test goodwill

at the reporting unit level by comparing the carrying value of

the net assets of the

reporting unit, including goodwill, to the reporting unit's fair

value.

Similarly, we test indefinite

-lived intangible assets by comparing

the fair value of the assets to their carrying values.

If the carrying values of goodwill or indefinite-lived intangible

assets exceed their

fair value, the goodwill or indefinite-lived intangible assets would

be considered impaired.

In addition, we perform a review of a

definite-lived intangible asset or other long-lived

asset when changes in circumstances or events indicate a possible

impairment.

any impairment or related charge is warranted,

then our financial position and results of operations could be

materially affected. See

Note 16 of Notes to Consolidated Financial Statements included

in Item 8 of this Report.

Disruption of critical information systems or material breaches

in the security of our systems could adversely affect

our business

and our customer relationships, and subject us to fines or other

regulatory actions.

We rely on

information technology systems to obtain, process, analyze, manage,

transmit, and store electronic information in our

day-to-day operations.

We also rely

on our technology infrastructure in all aspects of our business, including

to interact with

customers and suppliers, fulfill orders and bill, collect

and make payments, ship products, provide support to customers,

and fulfill

contractual obligations.

Our information technology systems are subject to potential

disruptions, including significant network or

power outages, cyberattacks, computer viruses, other malicious codes,

and/or unauthorized access attempts, any of which, if

successful, could result in data leaks or otherwise compromise

our confidential or proprietary information and disrupt

our operations.

Security breaches could result in unauthorized disclosure

of confidential information or personal data belonging to

our employees,

partners, customers or suppliers for which we may

incur liability.

Cybersecurity incidents, such as these, are becoming

sophisticated and frequent, and there can be no assurance

that our protective measures will prevent security breaches that could

have a

significant impact on our business, reputation and financial

results.

We are subject

to the data privacy and protection laws and regulations adopted

by federal, state and foreign legislatures and

governmental agencies in various countries in which we

operate, including the EU General Data Protection Regulation.

Implementing

and complying with these laws and regulations may

be more costly or take longer than we anticipate, or could

otherwise affect our

business operations.

Breaches, cyber incidents and disruptions, or failure to

comply with laws and regulations related to information security or

privacy could result in legal claims or proceedings against us

by governmental entities or individuals, significant

fines, penalties or

judgements, disruption of our operations, remediation

requirements, changes to our business practices, and damage

to our reputation.

Therefore, a failure to monitor, mainta

in or protect our information technology systems and data

integrity effectively or to anticipate,

plan for and recover from significant disruptions to

these systems could have a material adverse effect on our

business, results of

operations or financial condition.

Our business depends on attracting and retaining qualified

management and other key personnel.

Due to the specialized and technical nature of our business, our

future performance is dependent on our ability to attract, develop

and retain qualified management, commercial, technical,

and other key personnel. Competition for such personnel is intense,

and we

may be unable to continue to attract or retain such personnel.

In an effort to mitigate such risks, the Company

utilizes retention

bonuses, offers competitive pay and maintains continuous

succession planning, including for our senior executive officers.

However,

there can be no assurance that these mitigating factors

will be adequate to attract or retain qualified management or other key

personnel.

Failure to retain key employees could also adversely affect

our ability to complete the integration of the Combination.

Increasing scrutiny and changing expectations from

stakeholders with respect to our environmental, social and governance

(“ESG”) practices may impose additional costs on us or expose

us to new or additional risks.

Companies across all industries are facing increasing

scrutiny from stakeholders related to their ESG practices.

Investor

advocacy groups, certain institutional investors, investment

funds, and other influential investors are also increasingly focused on

ESG

practices and in recent years have placed increasing

importance on the implications and social cost of their investments.

Regardless of

the industry, investors’

increased focus and activism related to ESG and similar matters

may impact access to capital, as investors may

decide to reallocate capital or to not commit capital as a

result of their assessment of a company’s

ESG practices.

We face pressures

from certain stakeholders to prioritize and promote

sustainable practices and reduce our carbon footprint. Our

stakeholders may pressure us to implement ESG procedures

or standards beyond those we have in place in order

to continue engaging

with us, to remain invested in us, or before they will make

further investments in us.

Additionally, we may

face reputational

challenges in the event our ESG procedures or standards do

not meet the standards set by certain constituencies.

We have adopted

certain practices as highlighted in the Company’s

Sustainability Report, including with respect to environmental stewardship.

Further, as we work to align

with the recommendations of the Financial Stability Board’s

Task Force on

Climate-related Financial

Disclosures and the Sustainability Accounting Standards

Board, we continue to expand our disclosures in these areas.

This is

consistent with our commitment to executing on a

strategy that reflects the economic, social, and environmental

impact we have on

the world while advancing and complementing our

business strategy.

Our disclosures on these matters and standards we set for

ourselves or a failure to meet these standards, may

influence our reputation and the value of our brand.

It is possible that our

stakeholders might not be satisfied with our ESG efforts

or the speed of their adoption.

If we do not meet our stakeholders’

expectations, our business and/or our ability to access

capital could be harmed.

Any harm to our reputation resulting from setting

these standards or our failure or perceived failure to meet

such standards could adversely affect our business, financial

performance,

and growth.

Additionally, adverse

effects upon our customers’ industries related to

the worldwide social and political environment, including

uncertainty or instability resulting from climate change

or biodiversity loss, changes in political leadership and environmental

policies,

changes in geopolitical-social views toward fossil fuels and

renewable energy,

concern about the environmental impact of climate

change or biodiversity loss, and investors’ expectation

regarding ESG matters, may also adversely affect

demand for our services.

Any long-term material adverse effect on

our customers or their industries could have a significant financial

and operational adverse

impact on our business.

Terrorist

attacks, other acts of violence or war,

natural disasters, widespread public health crises or other uncommon

global events

may affect the markets in which we operate and

our profitability which could adversely affect our liquidity,

financial position and

results of operations.

Terrorist attacks,

other acts of violence or war, natural

disasters, widespread public health crises, including the

ongoing COVID-

19 pandemic, or other uncommon global events may negatively

affect our operations.

There can be no assurance that there will not be

terrorist attacks against the U.S. or other locations where we

do business.

Also, other uncommon global events such as earthquakes,

hurricanes, fires and tsunamis cannot be predicted.

Terrorist attacks,

other acts of violence or armed conflicts, and natural disasters, which

may be amplified by ongoing global

climate change and biodiversity loss, may directly

impact our physical facilities and/or those of our suppliers or customers.

addition, terrorist attacks or natural disasters may disrupt

the global insurance and reinsurance industries with the result

that we may

not be able to obtain insurance at historical terms and

levels, if at all, for all of our facilities.

In addition, available insurance coverage

may not be sufficient to cover all of the damage

incurred or, if available, may be prohibitively

expensive.

Widespread public health

crises could also disrupt operations of the Company,

its suppliers and customers which could have a material adverse

impact on our

results of operations.

For example, refer to “The COVID-19 pandemic and its impact

on business and economic conditions have negatively affected

our

business, results of operations and financial condi

tion and the extent and duration of those effects is uncertain,”

included in this “Risk

Factors” section.

The consequences of terrorist attacks, other acts of violence

or armed conflicts, natural disasters, widespread public

health crises or other uncommon global events can

be unpredictable, and we may not be able to foresee or

effectively plan for these

events, resulting in a material adverse effect

on our business, results of operations or financial condition.

The COVID-19 pandemic and its impact on business and economic

conditions have negatively affected our business, results

operations and financial condition and the extent and

duration of those effects is uncertain.

The COVID-19 pandemic that began in the first quarter

of 2020 and the resulting impacts significantly disrupted the global

economy and financial markets and adversely affected

the Company’s operations as well as those

of its suppliers and customers.

The

pandemic and its impacts adversely affected

the Company’s results of operations

and financial condition in 2020 and the adverse

effects have continued into 2021.

The Company initially experienced disruptions as a result of COVID-19

at its China subsidiaries

and subsequently throughout the rest of the business due

to the global economic slowdown that ensued and continues.

We have

experienced, and may experience in the future, temporary

site or facility closures at our own facilities or those of our

customers in

response to illness or government mandates in some of

the jurisdictions in which we operate.

Even in facilities that are not closed, we

could be affected by reductions in employee

availability and productivity,

changes in operating procedures, and increased costs.

The

Company anticipates that its future results of operations may

continue to be adversely impacted by COVID-19 until

effective vaccines

have been widely administered.

In particular, the spread of COVID-19

and efforts to contain the virus have:

●

reduced the demand for our products and services as many

customers have reduced production levels;

●

driven declines in volume and net sales across all reportable

segments;

●

required us to adjust certain of our facility operating procedures

and to take steps to reduce costs and preserve liquidity;

and

●

negatively affected the estimated fair value of

certain of the Company’s reporting

units or other indefinite-lived or long-lived

assets, namely the Company’s

Houghton and Fluidcare trademarks and tradename indefinite-lived

intangible assets, such that

their estimated fair values were less than their carrying

values and required adjustments.

These effects are likely to increase or become

exacerbated the longer the crisis continues,

and the pandemic in the future could

(or, in some instances, could further):

●

limit the availability and reduce the productivity of our

employees;

●

challenge our financial reporting systems and processes, internal

control over financial reporting, and disclosure controls and

procedures, including our ability to ensure that information

required to be disclosed in our reports under the Exchange Act is

recorded, processed, summarized and reported within the

time periods specified in the SEC’s rules

and forms,

and that such

information is accumulated and communicated to our

management, including our chief executive officer

and chief financial

officer, to allow for timely

decisions regarding required disclosure;

●

present challenges as a result of travel restrictions and remote work

arrangements, including, as further described in Item 9A

of this Report, impacting the planning, execution and timing

of the Company’s remediation

and integration plan activities,

including the implementation of new or enhanced business process

and information technology general controls, as

necessary,

as well as impacting the timing of the Company’s

on-going enterprise resource planning system implementations

;

●

increase our costs as a result of emergency

measures that we may take or that may be imposed on us by regulatory

authorities;

●

cause a delay in customer payments or cause a deterioration

of the credit quality of other counterparties that could

result in

credit losses or force both customer and supplier bankruptcies;

●

cause delays and disruptions in the availability of and timely

delivery of materials and components used in our operations;

●

cause us to breach covenants in our existing credit

facility, including

covenants regarding our consolidated interest coverage

ratio and consolidated net leverage ratio, or increase our

cost of capital or make additional capital, including the refinancing

of our existing credit facility,

more difficult or available only on terms less favorable

to us;

●

impact our liquidity position and cost of and ability to access funds

from financial institutions and capital markets;

●

negatively affect the estimated fair values of the

Company’s reporting units or other

indefinite-lived or long-lived assets; and

●

cause other risks to impact us, including the other risks described

in this “Risk Factors” section.

Although we have implemented business continuity

and emergency response plans as well as health and

safety measures to

permit us to continue to provide services and products to customers

and support our operations, there can be no assurance that the

continued spread of COVID-19 and efforts to

contain the virus (including, but not limited to, voluntary and

mandatory quarantines,

restrictions on travel, limiting gatherings of people, reduced

operations and extended closures of

many businesses and institutions)

will not further impact our business, results of operations

and financial condition.

However, given the unprecedented

and continually

evolving developments with respect to this pandemic,

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

estimate the full

extent of the impact to its future results of operations or

to the ability of it or its customers to resume more normal operations.

further prolonged outbreak or resurgence

and period of continued restrictions on day-to-day life and business operations

would likely

result in volume declines and lower net sales into 2021

periods as well.

The ultimate significance of COVID-19 impacts on our

business will depend on, among other things, the extent and

duration of

the pandemic, the severity of the disease and the number

of people infected with the virus, the development and continued uncertainty

regarding availability,

administration and long-term efficacy of a vaccine or

other treatments, including on new strains or mutations of

the virus, the longer-term effects on the

economy, including market

volatility, and the

measures taken by governmental authorities and

other third parties restricting day-to-day life and the

length of time that such measures remain in place, as well as laws and

other

governmental programs implemented to address the pandemic or

assist impacted businesses, such as fiscal stimulus and other

legislation designed to deliver monetary aid and other relief.

Epidemic diseases could negatively affect various

aspects of our business, make it more difficult to

meet our obligations to our

customers, and could result in reduced demand from

our customers.

These could have a material adverse effect

on our business,

financial condition, results of operations, or cash flows.

Our business could be adversely affected

by the effects of a widespread outbreak of

contagious disease, similar to the COVID-19

impacts described above.

A significant outbreak of contagious diseases in the human population

could result in a widespread health

crisis that could adversely affect the economies and

financial markets of many countries, resulting in an economic

downturn that could

affect demand for our products and likely

impact our operating results.

To the extent that

the Company’s customers and

suppliers are

materially and adversely impacted by a widespread

outbreak of contagious disease, this could reduce the availability,

or result in

delays, of materials or supplies to or from the Company,

which in turn could materially interrupt the Company’s

business operations.

We have identified

material weaknesses in our internal control over financial reporting

that could, if not remediated, result in

material misstatements in our financial statements and in the

inability of our independent registered public accounting

firm to

provide an unqualified audit opinion which could have a material

adverse effect on us.

As a public company,

we are required to comply with the SEC’s rules

implementing Sections 302 and 404 of the Sarbanes-Oxley

Act of 2002, or the Sarbanes-Oxley Act, which require

management to certify financial and other information in our quarterly

and

annual reports and provide an annual management report on

the effectiveness of controls over financial reporting.

As disclosed under “Item 9A. Controls and Procedures”

of this Report, during the course of preparing our audited financial

statements for the Company’s

annual report on Form 10-K (the “2019 Form 10-K”), we,

in conjunction with our independent

registered public accounting firm, identified certain

material weaknesses as of December 31, 2019.

A material weakness is a

deficiency, or combination

of deficiencies, in internal control over financial reporting,

such that there is a reasonable possibility that a

material misstatement of annual or interim financial

statements will not be prevented or detected on a timely

basis.

We identified

certain deficiencies in our application of the principles associated

with the criteria set forth by the Committee of

Sponsoring Organizations of the Treadway

Commission in Internal Control—Integrated Framework (2013)

that management

concluded constituted a material weakness.

We did not

design and maintain effective controls in response

to the risks of material

misstatement.

Specifically, changes

to existing controls or the implementation of new controls

were not sufficient to respond to

changes to the risks of material misstatement in financial

reporting as a result of becoming a larger,

more complex global organization

due to the Combination.

This material weakness also contributed to an additional material

weakness as we did not design and

maintain effective controls over the review

of pricing, quantity and customer data to verify that revenue

recognized was complete and

accurate.

During 2020, management began developing its full remediation

plan and executing

what will be a multi-step remediation process

to completely and fully remediate its identified material weaknesses

as further described in Item 9A of this Report. However,

the

Company has not yet remediated the previously identified

material weakness over

the review of pricing, quantity and customer data to

verify that revenue recognized was complete and

accurate as of December 31, 2020, and as a result, the Company

also did not

remediate the previously identified material weakness related

to risk assessment.

Until the remediation plans are deemed effective,

cannot assure you that our actions will adequately remediate

these material weaknesses or that additional material weaknesses in

our

internal controls will not be identified in the future.

Although the Company expects to be able to remedy these material

weaknesses

during 2021, it may be unable to do so due to the impact

of the COVID-19 pandemic or for other reasons, in which case we

would

continue to be subject to the risk that a material misstatement

of annual or interim financial statements will not be prevented

detected on a timely basis.

Any failure to identify and correct material weaknesses in a

timely manner could have a material adverse

effect on the financial condition of the Company.

As a result of these material weaknesses, management

determined that both our disclosure controls and procedures and

internal

control over financial reporting were not effective

as of December 31, 2020 and our independent registered public

accounting firm

likewise issued an opinion indicating that we had not maintained

effective internal control over financial reporting

as of December 31,

2020.

Because these control deficiencies could have resulted

in misstatements of interim or annual consolidated financial statements

and

disclosures that could have resulted in a material misstatement

that would not be prevented or detected, we performed additional

analysis and procedures to ensure that our consolidated

financial statements presented in this Annual Report on Form 10-K were

prepared in accordance with GAAP and fairly reflected

our financial position and results of operations as of and

for the year ended

December 31, 2020.

Subsequently, notwithstanding

these material weaknesses, the Company has concluded that

these control

deficiencies did not result in a misstatement to the related

balances and disclosures for the year ended December

31, 2020.

Our management,

including our chief executive officer and chief financial

officer, does not expect that

our internal control over

financial reporting will prevent all errors and all fraud.

A control system, no matter how well designed and operated,

can provide only

reasonable, not absolute, assurance that the control

system’s objectives will be met.

Further, the design of a control system must

reflect the fact that there are resource constraints,

and the benefits of controls must be considered relative

to their costs.

Controls can

be circumvented by the individual acts of some persons,

by collusion of two or more people, or by management override

of the

controls.

Over time, controls may become inadequate because of changes in

circumstances or deterioration in the degree of

compliance with policies or procedures may occur.

Because of the inherent limitations in a cost-effective

control system,

misstatements due to error or fraud may occur and may

not be detected.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

Quaker Houghton’s corporate

headquarters and a laboratory facility are located in

its Americas segment’s Conshohocken,

Pennsylvania location.

The Company’s other principal

facilities in its America’s segment

are located in Detroit, Michigan;

Middletown, Ohio; Dayton, Ohio; Strongsville, Ohio;

Carrollton, Georgia; Zion, Illinois; Waterloo,

Ontario; Monterrey, N.L.,

Mexico; Rio de Janeiro, Brazil and Sao Paulo, Brazil.

The Company’s EMEA segment

has principal facilities in Uithoorn, The

Netherlands; Manchester, U.K.; Dortmund,

Germany; Barcelona, Spain; Navarra, Spain; Karlshamn, Sweden;

Tradate, Italy; and

Turin, Italy.

The Company’s Asia/Pacific segment

operates out of its principal facilities located in Qingpu,

China; Songjiang, China;

Kolkata, India; Rayong, Thailand; Sydney,

Australia; and Moorabbin, Australia.

The Company’s Global Specialty

Businesses

segment operates out of its principal facilities in Aurora,

Illinois; Santa Fe Springs, California; Batavia, New York;

Zion, Illinois; and

Coventry, U.K..

With the exception of the Conshohocken,

Santa Fe Springs, Aurora, Karlshamn, Rayong, Coventry,

and Sydney

sites, which are leased, the remaining principal facilities are

owned by the Company and, as of December 31,

2020, were mortgage

free.

Quaker Houghton also leases sales, laboratory,

manufacturing, and warehouse facilities in other locations.

Quaker Houghton’s principal

facilities consist of various manufacturing, administrative,

warehouse, and laboratory buildings.

Substantially all of the buildings are of fire-resistant construction

and are equipped with sprinkler systems.

The Company has a

program to identify needed capital improvements that

are implemented as management considers necessary or desirable.

Most

locations have raw material storage tanks, ranging from

1 to 200 at each location with capacities ranging from 1,000

to 82,000 gallons,

and processing or manufacturing vessels ranging in capacity

from 8 to 29,000 gallons.

Each of Quaker’s non-U.S. associated companies

(in which it owns a 50% or less interest and has significant

influence) owns or

leases a plant and/or sales facilities in various locations

with the exception of Primex, Ltd.

Item 3.

Legal Proceedings.

The Company is a party to proceedings, cases, and requests for

information from, and negotiations with, various claimants and

Federal and state agencies relating to various matters, including

environmental matters.

For information concerning pending asbestos-

related litigation against an inactive subsidiary,

certain environmental non-capital remediation costs and other

legal-related matters,

reference is made to Note 26 of Notes to Consolidated

Financial Statements, included in Item 8 of this Report, which

is incorporated

herein by this reference.

The Company is a party to other litigation which management currently

believes will not have a material

adverse effect on the Company’s

results of operations, cash flow or financial condition.

Item 4.

Mine Safety Disclosures.

Not Applicable.

Item 4(a).

Information about our

Executive Officers.

Set forth below is information regarding the executive

officers of the Company,

each of whom have been employed by the

Company or by Houghton for at least five years, including

the respective positions and offices with the Company

(or Houghton) held

by each over the respective periods indicated.

Each of the executive officers, with the exception

of Mr. Hostetter,

is appointed

annually to a one-year term.

Mr. Hostetter is considered

an executive officer in his capacity as principal accounting

officer for

purposes of this Item.

Name, Age, and Present

Position with the Company

Business Experience During the Past Five

Years

and Period Served as an Officer

Michael F. Barry,

Chairman of the Board, Chief Executive

Officer,

President and Director

Mr. Barry,

who has been employed by the Company since 1998, has served

Chairman of the Board since May 2009, in addition

to his position as Chief

Executive Officer and President held since October

2008.

He served as interim

Chief Financial Officer from October through November

2015.

He served as Senior

Vice President and Managing

Director – North America from January 2006 to

October 2008.

He served as Senior Vice President

and Global Industry Leader –

Metalworking and Coatings from July through December

2005.

He served as Vice

President and Global Industry Leader – Industrial Metalworking

and Coatings from

January 2004 through June 2005 and Vice

President and Chief Financial Officer

from 1998 to August 2004.

Joseph A. Berquist, 49

Senior Vice President,

Global Specialty

Businesses and Chief Strategy Officer

Mr. Berquist, who has

been employed by the Company since 1997, has served as

Senior Vice President,

Global Specialty Businesses and Chief Strategy Officer

since

August 2019.

He served as Vice President and

Managing Director – North America

from April 2010 until July 2019.

Jeewat Bijlani, 44

Senior Vice President,

Managing Director - Americas

Mr. Bijlani has served as Senior

Vice President, Managing

Director - Americas

since he joined the Company in August 2019.

Prior to joining the Company,

Mr.

Bijlani served as President, Americas and Global Strategic

Businesses of Houghton

from March 2015 until July 2019.

Prior to that role, he served as Senior Vice

President M&A, Business Development and Strategic Planning

to execute

Houghton’s growth initiatives

with key customers and in business segments from

December 2011 to March 2015.

Prior to joining Houghton, Mr. Bijlani

served as a

Director in the Private Equity Group at Celerant Consulting

from March 2006 to

November 2011 where he led

strategic and business transformation engagements in

the Chemicals and Manufacturing sector.

Mary Dean Hall, 63

Senior Vice President,

Chief Financial Officer

and Treasurer

Ms. Hall, who has been employed by the Company since

November 2015, has

served as Senior Vice

President, Chief Financial Officer and Treasurer

since August

2019.

She served as Vice President,

Chief Financial Officer and Treasurer

from

November 2015 until July 2019.

Prior to joining the Company,

Ms. Hall served as

the Vice President and

Treasurer of Eastman Chemical Company

from April 2009

until October 2015.

Prior to that role, she held various senior-level financial

positions of increasing responsibility with Eastman from

1995 through 2009,

including Treasurer,

Vice President and Controller,

and Vice President, Finance.

Shane W.

Hostetter, 39

Vice President, Finance

and Chief

Accounting Officer

Mr. Hostetter,

who has been employed by the Company since July 2011,

has served

as Vice President, Finance

and Chief Accounting Officer since August

2019.

served as Global Controller and Principal Accounting Officer

from September 2014

until July 2019.

Kym Johnson, 50

Senior Vice President,

Chief Human

Resources Officer

Ms. Johnson has served as Senior Vice

President, Chief Human Resources Officer

since she joined the Company in August 2019.

Prior to joining the Company,

Ms. Johnson served as Senior Vice

President Global Human Resources of Houghton

from June 2015 until July 2019.

Prior to joining Houghton, she served as Vice

President, Human Resources and Chief Human Resources Officer

of FMC

Corporation from July 2013 to October 2014. Prior

to that role, she held various

senior-level human resources roles with FMC from July 1992

to October 2014,

including Director, Global Talent

Management and HR Director, Asia Pacific.

Name, Age, and Present

Position with the Company

Business Experience During the Past Five

Years

and Period Served as an Officer

Dieter Laininger, 57

Senior Vice President,

Managing

Director - Asia / Pacific

Mr. Laininger,

who has been employed by the Company since 1991, has served

Senior Vice Present, Managing

Director – Asia / Pacific since August 2019.

served as Vice President

and Managing Director – Asia / Pacific from April 2018

until July 2019, in addition to his role as Vice

President and Managing Director -

South America, a position he assumed in January

2013 and held until July 2019.

Mr. Laininger also served

as Vice President and Global

Leader – Primary Metals, a

position which he assumed in June 2011

and held until July 2019.

Wilbert Platzer,

Senior Vice President,

Global Operations,

Environmental Health & Safety (“EHS”) and

Procurement

Mr. Platzer,

who has been employed by the Company since 1995, has served

Senior Vice President,

Global Operations, EHS and Procurement since August

2019.

He served as Vice President,

Global Operations, EHS and Procurement from

April 2018 until July 2019.

He served as Vice President and

Managing Director –

EMEA from January 2006 through March 2018.

Dr. David Slinkman, 56

Senior Vice President,

Chief Technology

Officer

Dr. Slinkman

has served

as Senior

Vice President,

Chief Technology

Officer since

he joined

the Company

in August 2019.

Prior to joining

the Company,

Dr. Slinkman

served as

Vice President

of Technology

of Houghton

from March

2012 until

July 2019.

Prior to joining

Houghton, Dr.

Slinkman served

as Global

Technology

Leader of

Nalco Chemical

Company from

2008 until

2012.

Prior to

that role,

he held various

positions

with Nalco

from December

1990 until

2008

including

Manager,

Research and

Development

for the finishing

technologies

group, which

encompassed

both metal

working fluids

and surface

treatment

products,

and Technical

Director

for the paper

chemicals

group.

Adrian Steeples, 60

Senior Vice President,

Managing

Director – EMEA

Mr. Steeples, who has been

employed by the Company since 2010, has served as

Senior Vice President,

Managing Director – EMEA since August 2019.

He served

as Vice President and Managing

Director – EMEA from April 2018 until July 2019.

He served as Vice President

and Managing Director - Asia/Pacific from July 2013

through March 2018.

Robert T. Traub,

Senior Vice President,

General Counsel and

Corporate Secretary

Mr. Traub,

who has been employed by the Company since 2000, has served

Senior Vice President,

General Counsel and Corporate Secretary since August 2019.

He served as Vice President,

General Counsel and Corporate Secretary from April

2015 until July 2019.

He served as the Corporation’s

General Counsel from March

2012 through March 2015.

He has also served

as Director of Global Corporate

Compliance since January 2009.

PART

Item 5.

Market for Registrant’s Common

Equity, Related Stockholder Matters and

Issuer Purchases of Equity Securities.

The Company’s common

stock is listed on the New York

Stock Exchange (“NYSE”) under the trading symbol KWR.

Our Board

declared cash dividends that totaled $1.56 per share

of outstanding common stock or $27.8 million during

the year ended December

31, 2020 and $1.525 per share of outstanding common

stock or $23.7 million during the year ended December

31, 2019.

In February

and May 2020, our Board declared quarterly cash dividends

of $0.385 per share of outstanding common stock, payable

to shareholders

of record in April 2020 and July 2020, respectively.

Subsequently, our Board

declared quarterly dividends of $0.395 per share of

outstanding common stock in September and November

2020, respectively, payable

to shareholders of record in October 2020 and

January 2021, respectively.

We currently

expect to continue to pay comparable cash dividends on a quarterly

basis in the future.

Future declaration of dividends and the establishment of future

record dates and payment dates are subject to the final

determination of

our Board, and will be based on our future financial condition,

results of operations, capital requirements, capital expenditure

requirements, contractual restrictions, anticipated cash

needs, business prospects, provisions of applicable law and other

factors our

Board may deem relevant.

There are no restrictions that the Company believes are

likely to materially limit the payment of future dividends.

However,

under the Credit Facility there are certain restrictions, including

a limit on dividends paid not to exceed the greater of $50.0

million

annually and 20% of consolidated EBITDA so long as there

is no default under the Credit Facility.

Reference is made to the

“Liquidity and Capital Resources” disclosure contained

in Item 7 of this Report.

As of January 15, 2021,

17,853,463 shares of Quaker common stock were issued

and outstanding and were held by 712

shareholders of record.

Each share of common stock is entitled to one vote per share.

Reference is made to the information in Item 12

of this Report under the caption “Equity Compensation

Plans,” which is

incorporated herein by this reference.

The following table sets forth information concerning

shares of the Company’s

common stock acquired by the Company during

the fourth quarter of 2020 for the period covered by

this report:

Issuer Purchases of Equity Securities

(c)

(d)

Total

Number of

Approximate Dollar

(a)

(b)

Shares Purchased

Value of

Shares that

Total

Number

Average

as part of Publicly

May Yet

of Shares

Price Paid

Announced Plans

Purchased Under the

Period

Purchased (1)

Per Share (2)

or Programs

Plans or Programs (3)

October 1 - October 31, 2020

—

86,865,026

November 1 - November 30, 2020

—

86,865,026

December 1 - December 31, 2020

—

86,865,026

Total

—

86,865,026

(1)

The Company did not acquire any shares of the Company’s

common stock from employees during the fourth quarter

of 2020.

All shares that would be acquired from employees are related

to the surrender of Quaker Chemical Corporation 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 Company did not acquire any shares of the Company’s

common stock from employees during the fourth quarter

of 2020.

The price that would be paid for shares acquired from employees

pursuant to employee benefit and share-based compensation

plans is 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 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 has no expiration date.

There

were no shares acquired by the Company pursuant

to the 2015 Share Repurchase Program during the quarter ended

December 31, 2020.

Stock Performance Graph:

The following graph

compares the cumulative

total return (assuming

reinvestment of dividends)

from

December 31, 2015 to December 31,

2020 for (i) Quaker’s common stock,

(ii) the S&P MidCap 400 Index (the

“MidCap Index”), (iii)

the S&P 400

Materials Group Index

(the “Materials 400

Group Index”) and

(iv) the S&P

600 Materials Group

Index (the “Materials

600 Group Index”).

The graph assumes the investment

of $100 on December

31, 2015 in each of

Quaker’s common stock,

the stocks

comprising the

MidCap Index and

the Materials Group

Index, respectively.

The comparison of

the Materials 400

Group Index was

added in 2020 to provide a closer comparison to the

MidCap Index comparison.

12/31/2015

12/31/2016

12/31/2017

12/31/2018

12/31/2019

12/31/2020

Quaker

100.00

168.15

200.14

237.98

222.13

345.21

MidCap Index

100.00

120.74

140.35

124.80

157.49

179.00

Materials 400 Group Index

100.00

137.25

166.82

132.84

160.57

177.66

Materials 600 Group Index

100.00

154.70

170.04

132.20

159.40

195.55

Item 6.

Selected Financial Data.

The Company has omitted the table for selected

financial data pursuant to the SEC Final Rule Release Nos. 33

-10890, which

among other revisions, amends certain disclosure requirements required

by Regulation S-K relating to selected financial data (Item

301) and supplementary financial information (Item 302).

The Company has early adopted the guidance on an Item-by-Item

basis and

eliminated Items 301 and 302 in its consolidated financial

statements.

Item 7.

Management’s Discussion and Analysis

of Financial Condition and Results of Operations.

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

the terms “Quaker Houghton”, the “Company”, “we”,

and “our”

refer to Quaker Chemical Corporation (doing business as Quaker

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

context otherwise requires.

The term Legacy Quaker refers to the Company prior to

the closing of its combination with Houghton

International, Inc. (“Houghton”) (herein referred

to as the “Combination”) on August 1, 2019.

Throughout the Report, all figures

presented, unless otherwise stated, reflect the results of

operations of the combined company for the year ended

December 31, 2020,

for the year ended December 31, 2019 includes the

result of Legacy Quaker plus five months of Houghton’s

operations post-closing of

the Combination on August 1, 2019, and for the year ended

December 31, 2018, the results only of Legacy Quaker.

Executive Summary

Quaker Houghton is a global leader in industrial process

fluids.

With a presence around the world,

including operations in over

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

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

offshore, can, mining, and metalworking

companies.

Our high-performing, innovative and sustainable solutions are

backed by best-

in-class technology,

deep process knowledge, and customized services.

Quaker Houghton is headquartered in Conshohocken,

Pennsylvania, located near Philadelphia in the U.S.

Overall, the Company’s

2020 performance, like most other companies in the

world, was negatively impacted by the COVID-19

pandemic and its impact on the global economy,

including

most of the Company’s

customers.

However, the Company’s

acquisition

activity in late 2019, including the Houghton Combination

and the Norman Hay acquisition, drove a 25% increase in 2020 net

sales to

$1,417.7

million compared to $1,133.5 million in 2019.

Excluding net sales from acquisitions, current year net

sales would have

declined approximately 11% primarily

due to a 9% decrease in sales volumes associated with the negative

impacts of COVID-19 on

global production levels throughout each of the Company’s

segments.

Similar to net sales, the Company’s

gross profit and selling,

general and administrative expenses (“SG&A”) also increased

due to the full year inclusion of Houghton and Norman

Hay, but both

also benefited from the realization of cost savings associated with

synergies achieved with the Combination as well

as the impact of

cost saving measures put in place to help offset

the impacts of COVID-19.

The Company’s 2020 reported operating

income of $59.4

million increased compared to $46.1 million in 2019.

Excluding all one-time costs and other non-core items that largely

related to the

Combination and Norman Hay in each period, the Company’s

non-GAAP operating income of $134.0 million

increased 10%

compared to $122.0 million in 2019, primarily due to

the net sales increases and cost synergies and savings

mentioned above.

Further

details of the Company’s

consolidated operating performance are discussed in the Company’s

Consolidated Operations Review,

in the

Operations section of this Item, below.

The Company’s net income

and earnings per diluted share of $39.7 million and $2.22 in

2020, respectively, increased

compared

to $31.6 million and $2.08 per diluted share, respectively,

in 2019.

Excluding all one-time costs and other non-core items that largely

related to the Combination and Norman Hay in each

period, the Company’s current

year non-GAAP net income and non-GAAP

earnings per diluted share were $85.2 million and $4.78,

respectively, compared

to $88.7 million and $5.83, respectively,

in 2019.

The increase in the Company’s current

year reported earnings drove a 28% higher adjusted EBITDA of

$222.0 million compared to

$173.1 million in 2019, primarily due to the Houghton

and Norman Hay acquisitions as well as the benefit of costs savings

associated

with the Combination,

partially offset by the negative impacts of COVID-19.

See the Non-GAAP Measures section of this Item,

below.

The Company’s 2020

operating performance in each of its four reportable segments: (i)

Americas; (ii) Europe, Middle East and

Africa (“EMEA”); (iii) Asia/Pacific; and (iv) Global Specialty

Businesses, reflect similar drivers to that of its consolidated

performance.

Each segment’s net sales benefited

from a full year of Houghton and the Company’s

Global Specialty Businesses

segment also benefited from a full year of Norman Hay.

Without the inclusion of Houghton and

Norman Hay, net sales would

have

been lower in all segments compared to the prior year,

primarily driven by declines in volume primarily due to the

negative impacts of

COVID-19 on the Company’s

end markets.

As reported, all of the Company’s

segment operating earnings were higher compared to

2019 because of the inclusion of a full year of Houghton and

Norman Hay as well as cost synergies achieved

with the Combination

and other cost savings actions taken due to COVID-19,

partially offset by the negative impacts of COVID-19

on global sales volumes.

Additional details of each segment’s

operating performance are further discussed in the Company’s

reportable segments review,

in the

Operations section of this Item, below.

The Company generated net operating cash flow of $178.4

million in 2020 compared to $82.4 million in 2019.

The 117%

increase in net operating cash flow year-over

-year was primarily driven by the inclusion of a full year of earnings

from Houghton and

Norman Hay, as well as

higher operating cash flow due to changes in working

capital.

The key drivers of the Company’s

operating

cash flow

and overall liquidity are further discussed in the Company’s

Liquidity and Capital Resources section of this Item, below

Overall, the Company’s

2020 results reflect the fact that the negative impacts of COVID-19

were partially offset by the positive

impacts of a full year of Houghton and Norman Hay performance

Combination synergies and cost savings actions

The Company’s

performance showed a good quarterly growth trend across the

globe beginning after the second quarter of 2020, during

which the

impacts of COVID-19 were most severe, indicating

a gradual improvement in the Company’s

end markets and continued market share

gains.

Despite these challenges, the Company was able to generate significant

net operating cash flow in 2020, continue to pay its

regular dividends, pay down its debt above its required commitments

and continue to execute its integration plans for the

Combination.

The global economic slowdown and other impacts due

to COVID-19 posed an unprecedented challenge in 2020, but the

Company successfully navigated this downturn, demonstrating

its ability to respond quickly to changing market conditions and

deliver

on the benefits it anticipated from the Combination

with Houghton.

In 2020, the Company continued to service and supply its

customers despite very difficult economic

conditions, it continued to gain share in the market, it completed

a significant part of the

integration activities, and realized $58 million of cost

synergies which exceeded the original estimate of $35

million.

The Company

also made recent bolt-on acquisitions which are expected

to contribute towards earnings growth in 2021 and, even with those

acquisitions, the Company reduced its net debt by

12% or $94 million during 2020.

As the Company looks forward, it

expects some

short-term headwinds from higher raw material costs and

lower than expected volumes in the automotive market due

to the

semiconductor shortage.

However, the Company expects 2021

to result in a step change in its profitability from 2020 as the Company

completes its integration cost synergies, continues

to take further share in the marketplace, benefits from a projected

gradual rebound

in demand, and sees the positive impact of its recent acquisit

ions.

Impact of COVID-19

In early 2020, the global outbreak of COVID-19

negatively impacted all locations where the Company

does business.

Although

the Company has now operated during several quarters

in this COVID-19 environment, the full extent of the outbreak

and related

business impacts remains

uncertain and volatile, and therefore the full extent to which COVID-19

may impact the Company’s future

results of operations or financial condition is uncertain.

This outbreak has significantly disrupted the operations

of the Company and

those of its suppliers and customers.

The Company has experienced significant volume declines and

lower net sales as further

described in this section, initially at its China subsidiaries in the

first quarter of 2020 and, beginning in late March continued

throughout the rest of its business due to the global economic

slowdown brought on by COVID-19.

Management continues to

monitor the impact that the COVID-19 pandemic is having

on the Company,

the overall specialty chemical industry and the

economies and markets in which the Company operates.

Given the speed and frequency of the continuously evolving developments

with respect to this pandemic, the Company cannot, as

of the date of this Report, reasonably estimate the

magnitude or the full extent of the impact to its future results of

operations or to the

ability of it or its customers to resume more normal

operations, even as certain restrictions are lifted.

The prolonged pandemic and a

resurgence of the outbreak, and continued

restrictions on day-to-day life and business operations may result

in volume declines and

lower net sales in future periods as compared to pre-COVID-19

levels.

To the extent that the Company’s

customers and suppliers

continue to be significantly and adversely impacted by

COVID-19, this could reduce the availability,

or result in delays, of materials

or supplies to or from the Company,

which in turn could significantly interrupt the Company’s

business operations.

Given this

ongoing uncertainty,

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

adversely impacted by COVID-

19.

Further, management continues to

evaluate how COVID-19-related circumstances, such as remote

work arrangements, illness or

staffing shortages and travel restrictions have affected

financial reporting processes and systems, internal control

over financial

reporting, and disclosure controls and procedures.

While the circumstances have presented and are expected

to continue to present

challenges, and have necessitated additional time

and resources to be deployed to sufficiently address the

challenges brought on by the

pandemic, at this time, except as otherwise noted in

Item 9A of this Report, management does not believe that

COVID-19 has had a

material impact on financial reporting processes, internal

controls over financial reporting, or disclosure controls and procedures.

For

additional information regarding the potential impact of COVID-19,

see Item 1A of Part I of this Report.

The Company’s top

priority is, and especially during this pandemic remains, to protect the health

and safety of its employees and

customers, while working to ensure business continuity

to meet customers’ needs:

●

Our People

– The Company has taken steps to protect the health and wellbeing

of its people in affected areas through various

actions, including enabling work at home where needed and

possible, and employing social distancing standards,

implementing travel restrictions where applicable, enhancing

onsite hygiene practices, and instituting visitation restrictions

the Company’s facilities.

The Company does not expect that it will incur material

expenses implementing health and safety

policies for employees, contractors, and customers.

●

Our Operations

– Currently, all of

the Company’s 31 production

facilities worldwide are open and operating and are deemed

as essential businesses in the jurisdictions where they are

operating.

The Company believes that to date it has been able to

meet the needs of all its customers across the globe

despite the current economic challenges.

●

Our Business Conditions

– The Company’s second

half of 2020 showed solid improvement over the first half,

which was

consistent with expectations that April and May would

be the worst months of the year and that the Company

would show

gradual quarterly improvement sequentially throughout

the remainder of the year.

However, demand still remained lower

than pre-COVID-19 levels as many customers maintained

reduced production levels through the end of 2020.

Excluding

Houghton and Norman Hay net sales, all four of the Company’s

reportable segments showed declines in net sales due to

COVID-19 during 2020 compared to the prior year,

with the Americas and EMEA being the most impacted and

Asia/Pacific

being the least impacted.

The Company currently expects that the impact from COVID-19

will gradually improve each

quarter in 2021 subject to the effective containment

of the virus and successful distribution of a vaccine.

However, the

incidence of reported cases of COVID-19 appears to

be again increasing in several geographies where we have

significant

operations and it remains highly uncertain as to how long

the global pandemic and related economic challenges will last and

when our customers’ businesses will recover.

●

Our Actions

– The Company took various actions to temporarily conserve

cash and reduce costs during 2020.

Some of these

actions during 2020 included eliminating all discretionary

expenditures, delaying or freezing salary increases where legally

permitted, reducing executives’ salaries for a period of

time, lowering 2020 planned capital expenditures by approximately

30%, and accelerating and fine-tuning the Company’s

integration plans.

These temporary initiatives were designed and

implemented so that the Company could successfully manage through

the challenging COVID-19 situation while continuing

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

maintain the Company’s

long-term competitive advantages and

above-market growth, and enable it to continue to

effectively integrate Houghton.

While the actions taken in 2020 to protect

our workforce, to continue to serve our customers with excellence

and to conserve cash and reduce costs, have been effective

thus far, further actions to respond

to the pandemic and its effects may be necessary as conditions

continue to evolve.

Critical Accounting Policies and Estimates

Quaker Houghton’s discussion

and analysis of its financial condition and results of operations

are based upon its consolidated

financial statements which have been prepared in accordance with

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

GAAP”).

The preparation of these financial statements requires the Company

to make estimates and judgments that affect the

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

related disclosure of contingent assets and liabilities.

On an

ongoing basis, the Company evaluates its estimates, including

those related to customer sales incentives, product returns, bad

debts,

inventories, property,

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

assets, income taxes, business combinations,

restructuring, incentive compensation plans (including

equity-based compensation), pensions and other postretirement benefits,

contingencies and litigation.

Quaker Houghton bases its estimates on historical experience

and on various other assumptions that are

believed to be reasonable under such circumstances, the

results of which form the basis for making judgments about the

carrying

values of assets and liabilities that are not readily apparent

from other sources.

However, actual results may differ

from these

estimates under different assumptions or

conditions.

Quaker Houghton believes the following critical accounting

policies describe the more significant judgments and

estimates used

in the preparation of its consolidated financial statements:

Accounts receivable and inventory exposures:

Quaker Houghton establishes allowances for doubtful accounts

for estimated

losses resulting from the inability of its customers to

make required payments.

If the financial condition of the Company’s

customers

were to deteriorate, resulting in an impairment of their

ability to make payments, additional allowances may be required.

As part of

our terms of trade, we may custom manufacture products

for certain large customers and/or may ship products

on a consignment basis.

Further, a significant portion of our

revenue is derived from sales to customers in industries where

companies have experienced past

financial difficulties.

If a significant customer bankruptcy occurs, then we must judge

the amount of proceeds, if any,

that may

ultimately be received through the bankruptcy or liquidation

process.

These matters may increase the Company’s

exposure should a

bankruptcy occur, and may require

a write down or a disposal of certain inventory as well as the failure

to collect receivables.

Reserves for customers filing for bankruptcy protection

are established based on a percentage of the amount of receivables

outstanding

at the bankruptcy filing date.

However, initially establishing

this reserve and the amount thereof is dependent on the Company’s

evaluation of likely proceeds to be received from the

bankruptcy process, which could result in the Company

recognizing minimal or

no reserve at the date of bankruptcy.

We generally reserve

for large and/or financially distressed customers on

a specific review basis,

while a general reserve is maintained for other customers

based on historical experience.

The Company’s consolidated

allowance for

doubtful accounts was $13.1 million and $11.7

million as of December 31, 2020 and 2019, respectively.

The Company recorded

expense to increase its provision for doubtful accounts by

$3.6 million, $1.9 million and $0.5 million for the years

ended December

31, 2020, 2019 and 2018, respectively.

Changing the amount of expense recorded to the Company’s

provisions by 10% would have

increased or decreased the Company’s

pre-tax earnings by $0.4 million, $0.2 million and $0.1 million

for the years ended December

31, 2020,

2019 and 2018,

respectively.

See Note 13 of Notes to Consolidated Financial Statements in Item

8 of this Report.

Environmental and litigation reserves:

Accruals for environmental and litigation matters are

recorded when it is probable that a

liability has been incurred and the amount of the liability

can be reasonably estimated.

Environmental costs and remediation costs are

capitalized if the costs extend the life, increase the

capacity or improve the safety or efficiency of the property

from the date acquired

or constructed, and/or mitigate or prevent contamination

in the future.

Estimates for accruals for environmental matters are based on a

variety of potential technical solutions, governmental regulations

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

costs

for remediation and other actions.

A considerable amount of judgment is required in determining

the most likely estimate within the

range of total costs, and the factors determining this judgment

may vary over time.

Similarly, reserves for

litigation and similar

matters are based on a range of potential outcomes and

require considerable judgment in determining the

most probable outcome.

no amount within the range is considered more probable

than any other amount, the Company accrues the lowest amount

in that range

in accordance with generally accepted accounting principles.

See Note 26 of Notes to Consolidated Financial Statements in

Item 8 of

this Report.

Realizability of equity investments:

The Company holds equity investments in various foreign

companies where it has the

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

entity and its future results.

The Company would record an impairment

charge to an investment if it concluded that a

decline in value that was other than temporary occurred.

Adverse

changes in market

conditions, poor operating results of underlying investments,

devaluation of foreign currencies or other events or circumstances

could

result in losses or an inability to recover the carrying value

of the investments, potentially leading to an impairment charge

in the

future.

The carrying amount of the Company’s

equity investments as of December 31, 2020 was $95.8 million,

which included four

investments: $19.4 million for a 32% interest in Primex, Ltd.

(Barbados); $7.8 million for a 50%

interest in Nippon Quaker Chemical,

Ltd. (Japan); $0.3 million for a 50% interest in Kelko

Quaker Chemical, S.A. (Panama); and $68.3 million for a 50% interest

in Korea

Houghton Corporation (Korea).

The Company also has a 50% interest in a Venezuelan

affiliate, Kelko Quaker Chemical, S.A

(Venezuela).

Due to heightened foreign exchange controls, deteriorating

economic circumstances and other restrictions in Venezuela,

during 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 December 31, 2020 and 2019, the

Company had no remaining carrying value for its investment

in Venezuela.

See Note 17 of Notes to Consolidated Financial

Statements in Item 8 of this Report.

Tax

exposures, uncertain tax positions and valuation

allowances:

Quaker Houghton records expenses and liabilities for taxes

based on estimates of amounts that will be determined as deductible

in tax returns filed in various jurisdictions.

The filed tax returns

are subject to audit, which often occur

several years subsequent to the date of the financial statements.

Disputes or disagreements may

arise during audits over the timing or validity of certain

items or deductions, which may not be resolved for extended

periods of time.

The Company also evaluates uncertain tax positions on

all income tax positions taken on previously filed tax returns or

expected to be

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

which prescribes the recognition threshold and measurement attributes

for

financial statement recognition and measurement of tax

positions taken or expected to be taken on a tax return

and, also, whether the

benefits of tax positions are probable or if they will be more

likely than not to be sustained upon audit based upon the

technical merits

of the tax position.

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

be sustained upon audit, the Company

recognizes the largest amount of benefit that

is greater than 50% likely of being realized upon ultimate

settlement in the financial

statements.

For tax positions that are not determined to be more

likely than not sustained upon audit, the Company does not recognize

any portion of the benefit in its financial statements.

In addition, the Company’s

continuing practice is to recognize interest and/or

penalties related to income tax matters in income tax expense.

Also, the Company nets its liability for unrecognized tax benefits

against deferred tax assets related to net operating

losses or other tax credit carryforward on the basis that the uncertain

tax position is

settled for the presumed amount at the balance sheet

date.

Quaker Houghton also records valuation allowances

when necessary to reduce its deferred tax assets to the amount

that is more

likely than not to be realized.

While the Company has considered future taxable income

and assesses the need for a valuation

allowance, in the event Quaker Houghton were

to determine that it would be able to realize its deferred tax assets in the future

excess of its net recorded amount, an adjustment to

the deferred tax asset would increase income in the period

such determination was

made.

Likewise, should the Company determine that it would not be able

to realize all or part of its net deferred tax assets in the

future, an adjustment to the deferred tax asset would be

charged to income in the period such determination was made.

Both

determinations could have a material impact on the Company’s

financial statements.

In 2017, the U.S. government enacted comprehensive

tax legislation commonly referred to as “U.S. Tax

Reform”

which

implemented significant changes, particularly impacting

taxation for non-U.S. earnings and dividends from certain

foreign

subsidiaries.

Based on interpretations and assumptions the Company

believes to be reasonable with regard to various uncertainties

and ambiguities in the application of certain provisions

of U.S. Tax Reform

and subsequent to numerous temporary regulations,

notices, and other formal guidance published by the Internal Revenue

Service (“I.R.S.”), U.S. Treasury,

and various state taxing

authorities in 2018, the Company completed its accounting

for the tax effects of U.S. Tax

Reform as of December 22, 2018.

It is

possible that the I.R.S. could issue subsequent guidance

or take positions on audit that differ from the Company’s

interpretations and

assumptions.

The Company currently believes that subsequent guidance

or interpretations made by the I.R.S. will not be materially

different from the Company’s

application of the provisions of U.S. Tax

Reform and would not have a material adverse effect on

the

Company’s tax liabilities,

earnings, or financial condition.

Pursuant to U.S. Tax

Reform, the Company recorded a $15.5 million transition

tax liability for U.S. income taxes on the

undistributed earnings of non-U.S. subsidiaries.

As of December 31, 2020, $7.0 million in installment have

been paid with the

remaining $8.5 million to be paid through installments

in future years.

However, the Company may also be subject

to other taxes,

such as withholding taxes and dividend distribution

taxes, if these undistributed earnings are ultimately remitted to

the U.S.

As of

December 31, 2020,

the Company has a deferred tax liability of $5.9 million, which

primarily represents the estimate of the non-U.S.

taxes the Company will incur to remit certain previously taxed

earnings to the U.S.

It is the Company’s current

intention to reinvest

its future undistributed earnings of non-U.S. subsidiaries

to support working capital needs and certain other growth

initiatives outside

of the U.S.

The amount of such undistributed earnings at December 31, 2020

was approximately $322.6 million.

Any tax liability

which might result from ultimate remittance of these

earnings is expected to be substantially offset by foreign

tax credits (subject to

certain limitations).

It is currently impractical to estimate any such incremental

tax expense.

See Note 10 of Notes to Consolidated

Financial Statements in Item 8 of this Report.

Goodwill and other intangible assets:

The Company accounts for business combinations und

er the acquisition method of

accounting.

This method requires the recording of acquired assets, including

separately identifiable intangible assets, at their

acquisition date fair values.

Any excess of the purchase price over the estimated fair value of

the identifiable net assets acquired is

recorded as goodwill.

The determination of the estimated fair value of assets acquired

requires management’s judgment

and often

involves the use of significant estimates and assumptions,

including assumptions with respect to future cash inflows

and outflows,

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

other items.

When necessary, the Company

consults with

external advisors to help determine fair value.

For non-observable market values, the Company may determine

fair value using

acceptable valuation principles, including the excess earnings,

relief from royalty,

lost profit or cost methods.

The Company amortizes definite-lived intangible assets on

a straight-line basis over their useful lives.

Goodwill and intangible

assets that have indefinite lives are not amortized and are

required to be assessed at least annually for impairment.

The Company

completes its annual goodwill and indefinite lived intangible

asset impairment test during the fourth quarter of each

year, or more

frequently if triggering events indicate a possible impairment.

In completing a quantitative impairment test, the Company compares

the reporting units’ or indefinite lived intangible assets fair

value to their carrying value, primarily based on future discounted

cash

flows, in order to determine if an impairment charge

is warranted.

The estimates of future discounted cash flows involve considerable

management judgment and are based upon certain significant

assumptions.

These assumptions include the weighted average cost of

capital (“WACC”)

as well as projected revenue growth rates and operating

income, which result in estimated EBITDA and EBITDA

margins.

As of March 31, 2020, the Company evaluated the initial impact

of COVID-19 on the Company’s

operations, as well as the

volatility and uncertainty in the economic outlook as a

result of COVID-19, to determine if this indicated it was more likely

than not

that the carrying value of any of the Company’s

indefinite-lived or long-lived assets was not recoverable.

The Company considered

the negative effect of COVID-19 on the Company’s

operations and, at the time, the impact it expected to have

on its full year 2020

results in evaluating if a triggering event was present for

one or more of the Company indefinite-lived or long-lived

assets and, also,

the Company took into consideration the carrying value

and estimated fair value for each of its assets.

The Company concluded that

the impact of COVID-19 did not represent a triggering

event as of March 31, 2020 with regards to any of the Company’s

indefinite-

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

Houghton and Fluidcare trademarks

and tradename indefinite-lived intangible

assets.

Given the relatively short period of time between the

fair value determination of the acquired Houghton and Fluidcare

trademarks

and tradename intangible assets as of the closing of the

Combination on August 1, 2019, and the 2019 annual impairment testing date

of October 1, the Company’s

2019 annual impairment assessment concluded that

the $242.0 million carrying value of acquired

Houghton and Fluidcare trademarks and tradename intangible

assets generally approximated fair value, with excess fair

value of less

than 5%.

Because of the previously concluded relatively narrow gap

between its fair value and its carrying value, the Company

concluded in the first quarter of 2020 that the expected

current year impact from COVID-19 on the Company’s

net sales represented a

triggering event.

As a result of the conclusion, the Company completed an interim

quantitative indefinite-lived intangible asset

impairment assessment as of March 31, 2020.

The determination of estimated fair value of the Houghton

and Fluidcare trademarks

and tradename intangible assets was based

on a relief from royalty valuation method which requires

management’s judgment

and often involves the use of significant estimates

and assumptions, including assumptions with respect to

the WACC

and royalty rates, as well as revenue growth rates

and terminal

growth rates.

In completing the interim quantitative impairment assessment as of March

31, 2020, the Company used a WACC

assumption of approximately 10% as well as current year

forecasted net sales and management��s

estimates with respect to future net

sales growth

rates specific to legacy Houghton’s

net sales.

As a result of an increase in the WACC

assumption as of March 31, 2020,

compared to the prior year fourth quarter annual impairment

assessment, and the significant decline in current year projected

legacy

Houghton net sales due to the impact of COVID-19,

the Company concluded that the estimated fair values of these intangible

assets

were less than their carrying values and that an

impairment charge to write down their carrying values

to their estimated fair values

was warranted.

This resulted in a first quarter of 2020 non-cash impairment

charge of $38.0 million for these indefinite-lived

intangible assets, primarily related to the Houghton trademarks

and tradename.

The book value of these assets as of December 31,

2020 was $204.0 million.

The Company’s consolidated

goodwill at December 31, 2020 and 2019 was $631.2

million and $607.2 million, respectively.

The

Company completed its annual impairment assessment over

goodwill during the fourth quarter of 2020, and no impairment

charges

were warranted.

Furthermore, the estimated fair value of each of the Company’s

reporting units substantially exceeded their carrying

value, with none of the Company’s

reporting units at risk for failing the goodwill impairment test.

The Company used a WACC

assumption for each of its reporting units of approximately

9.5%, and this assumption would have had to increase

by approximately

59%, or 6 percentage points, before any of the Company’s

reporting units would be considered potentially impaired.

Separately,

the

Company’s assumption

of future and projected EBITDA margins by reporting

unit would have had to decrease by more than

approximately 75%

before any of the Company’s

reporting units would be considered potentially impaired.

The Company’s

consolidated indefinite-lived intangible assets at December

31, 2020 and 2019 were $205.1 million and $243.1 million,

respectively.

The Company completed its annual indefinite lived

intangible asset impairment assessment during the fourth quarter

of 2020, and

determined that no impairment charge was

warranted.

The Company’s impairment assessment

concluded that the $204.0 million

carrying value of acquired Houghton and Fluidcare

trademarks and tradename intangible assets exceeded fair value

by approximately

18%.

See Note 16 of Notes to Consolidated Financial Statements in

Item 8 of this Report.

Pension and Postretirement benefits:

The Company provides certain defined benefit pension

and other postretirement benefits

to current employees, former employees and retirees.

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

perform the required

valuations to determine benefit expense and, if necessary,

non-cash charges to equity for additional minimum

pension liabilities.

Critical assumptions used in the actuarial valuation include

the weighted average discount rate, which is based on applicable

yield

curve data,

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

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

in compensation levels, and expected long-term rates of

return on assets.

If different assumptions were used, additional

pension

expense or charges to equity might be required.

The Company had two noncontributory U.S. pension plan

s, one of which (the “Legacy Quaker U.S. Pension Plan”) had

November 30 year-end and a measurement date of December

31.

As previously disclosed, the Company began the process of

terminating the Legacy Quaker U.S. Pension Plan during

the fourth quarter of 2018.

During the third quarter of 2019, the Company

received a favorable termination determination letter

from the Internal Revenue Service (“I.R.S.”) and completed the

Legacy Quaker

U.S. Pension Plan termination during the first quarter

of 2020.

In order to terminate the Legacy Quaker U.S. Pension Plan

accordance with I.R.S. and Pension Benefit Guaranty Corporation

requirements, the Company was required to fully fund the Legacy

Quaker U.S. Pension Plan on a termination basis and

the amount necessary to do so was approximately $1.8 million, subject to

final

true up adjustments.

In the third quarter of 2020, the Company finalized the amount

of the liability and related annuity payments and

received a refund in premium of approximately $1.6

million.

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

charge

at plan termination of approximately $22.7 million.

This settlement charge included the immediate recognition

into expense of the

related unrecognized losses within accumulated other

comprehensive income (loss) (“AOCI”) on the balance sheet

as of the plan

termination date.

The following table highlights the potential impact

on the Company’s pre

-tax earnings due to changes in assumptions with respect

to the Company’s defined

benefit pension and postretirement benefit plans, based on assets and

liabilities as of December 31, 2020:

1/2 Percentage Point Increase

1/2 Percentage Point Decrease

(dollars in millions)

Foreign

U.S.

Total

Foreign

U.S.

Total

Discount rate (1)

0.4

0.2

0.6

(0.4)

(0.2)

(0.6)

Expected rate of return on plan

assets (2)

0.9

0.2

1.1

(1.0)

(0.2)

(1.2)

(1)

The weighted-average discount rate used to determine

net periodic benefit costs for the year ended December 31, 2020 was

2.3%

for Foreign plans and 3.1% for

U.S. plans.

(2)

The weighted average expected rate of return on plan

assets used to determine net periodic benefit costs for the year ended

December 31, 2020 was 2.2% for Foreign plans and

6.5% for U.S. plans.

Restructuring and other related liabilities:

A restructuring related program may consist of charges

for employee severance,

rationalization of manufacturing facilities and other related

expenses.

To account for

such, the Company applies the Financial

Accounting Standards Board’s

guidance regarding exit or disposal cost obligations.

This guidance requires that a liability for a cost

associated with an exit or disposal activity be recognized

when the liability is incurred, is estimable, and payment is probable.

See

Note 7 of Notes to Consolidated Financial Statements in

Item 8 of this Report.

Recently Issued Accounting Standards

See Note 3 of Notes to the Consolidated Financial Statements in

Item 8 of this Report for a discussion regarding recently issued

accounting standards.

Liquidity and Capital Resources

At December 31, 2020, the Company had cash,

cash equivalents and restricted cash of $181.9 million.

Total cash, cash

equivalents and restricted cash was $143.6 million

at December 31, 2019.

The $38.3 million increase in cash, cash equivalents and

restricted cash was the net result of $178.4 million

of cash provided by operating activities and $6.6 million

of positive impacts due to

the effect of foreign currency translation on

cash, partially offset by $75.3 million of cash used in financing

activities and $71.4

million of cash used in investing activities.

Net cash flows provided by operating activities were $178.4

million in 2020 compared to $82.4 million in 2019.

The Company’s

current year net operating cash flow increase was largely

due to higher earnings from including a full year of Houghton

and Norman

Hay, lower net

cash outflows than in 2019 associated with restructuring and the Combination

and other acquisition-related expenses,

higher cash dividends received from its equity affiliated

companies year-over-year, and higher operating

cashflow from changes in

working capital.

The operating cashflow improvement due to working capital

changes includes benefits from changes in accounts

payable and accrued liabilities due to more favorable negotiated

vendor terms and other benefits from the Combination, impacts

due to

volume declines related to COVID-19, and lower

cash tax payments due to current year mix of earnings and deductibility of

one-time

expenses.

Net cash flows used in investing activities were $71.4

million in 2020 compared to $908.6 million in 2019.

This $837.2 million

decrease in cash outflows used in investing activities

was largely due to a decrease in payments related to

acquisitions as the prior year

$893.4 million outflow included the closing of the

Combination on August 1, 2019, as further described below,

compared to the

current year payments related to acquisitions

of $56.2 million that were mainly driven by the acquisition of Coral

for approximately

$53.1

million,

net of cash acquired, further described below,

and a post-closing adjustment related to Norman Hay of approximately

$3.2 million.

In addition, the Company had higher investments in property,

plant and equipment in the current year due to the

inclusion of a full year of both Houghton and Norman

Hay, including higher

expenditures related to integrating the companies during

2020.

These higher outflows were partially offset by approximately

$2.6 million of higher proceeds from disposition of assets in

2020, which was mainly driven by the sale of certain

assets as part of its Combination integration plan.

Net cash flows used in financing activities

were $75.3 million in 2020 compared to cash provided

in financing activities of $844.1

million in 2019.

The $919.4 million decrease in net cash flows from financing

activities was due primarily to $897.1 million of

additional term loan and revolving credit facility borrowings in

the prior year used to close the Combination compared

to $49.1

million of current year debt repayments in accordance with

its term loan agreements and other reductions in borrowings

under its

revolving credit facilities.

Also, as part of the Combination, the Company incurred and

paid debt issuance costs of approximately

$23.7 million in the prior year.

In addition, the Company paid $27.6 million of cash dividends

during 2020, a $5.7 million or 26%

increase in cash dividends compared to the prior year,

primarily due to the approximately 4.3 million shares issued at closing

of the

Combination, as well as both the current year and

prior year cash dividend per share increases.

Finally, during

2020, the Company

used $1.0 million to purchase the remaining noncontrolling

interest in one of its South African affiliates.

Prior to this buyout, this

South African affiliate made a distribution

to the prior noncontrolling affiliate shareholder of approximately

$0.8 million in 2020.

There were no similar noncontrolling interest activities in

2019.

On August 1, 2019, the Company completed the Combination,

whereby the Company acquired all of the issued and outstanding

shares of Houghton from Gulf Houghton Lubricants, Ltd.

in accordance with the Share Purchase Agreement dated

April 4, 2017.

The

final purchase consideration was comprised of:

(i) $170.8 million in cash; (ii) the issuance of approximately

4.3 million shares of

common stock of the Company with par value of $1.00,

comprising 24.5% of the common stock of the Company

at closing; and (iii)

the Company’s refinancing

of $702.6 million of Houghton’s

indebtedness at closing.

Cash acquired in the Combination was $75.8

million.

Prior to the Combination, the Company secured commitments

from certain banks for a new credit facility (as amended,

the

“Credit Facility”).

The Credit Facility is comprised of a $400.0 million multicurrency

revolver (the “Revolver”), a $600.0 million term loan (the

“U.S. Term Loan”),

each with the Company as borrower,

and a $150.0 million (as of August 1, 2019) Euro equivalent term

loan (the

“Euro Term Loan”

and together with the “U.S. Term

Loan”, the “Term

Loans”) with Quaker Chemical B.V.,

a Dutch subsidiary of the

Company as borrower, each

with a five-year term maturing in August 2024.

Subject to the consent of the administrative agent and

certain other conditions, the Company may designate

additional borrowers.

The maximum amount available under the Credit Facility

can be increased by up to $300.0 million at the Company’s

request if there are lenders who agree to accept additional commitments

and the Company has satisfied certain other conditions.

Borrowings under the Credit Facility bear interest at a base rate

or LIBOR

plus an applicable margin based upon the

Company’s consolidated net leverage

ratio.

There are LIBOR replacement provisions that

contemplate a further amendment if and when LIBOR ceases

to be reported.

The interest rate incurred on the outstanding borrowings

under the Credit Facility during 2020 was approximately

2.1%.

At December 31, 2020, the interest rate on the

outstanding

borrowings under the Credit Facility was approximately

1.9%.

In addition to paying interest on outstanding principal under

the Credit

Facility, the Company

is required to pay a commitment fee ranging from 0.2% to

0.3% depending on the Company’s

consolidated net

leverage ratio to the lenders under the Revolver in

respect of the unutilized commitments thereunder.

The Credit Facility is subject to certain financial and

other covenants.

The Company’s initial consolidated

net debt to

consolidated adjusted EBITDA ratio could not exceed

4.25 to 1, with step downs in the permitted ratio over the

term of the Credit

Facility.

As of December 31, 2020, the consolidated net debt to consolidated

adjusted EBITDA ratio may not exceed 4.00 to 1.

The

Company’s consolidated

adjusted EBITDA to interest expense ratio may not be less than

3.0 to 1 over the term of the agreement.

The

Credit Facility also prohibits

the payment of cash dividend if the Company is in default

or if the amount of the dividend paid annually

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

adjusted EBITDA unless the ratio of consolidated

net debt to

consolidated adjusted EBITDA is less than 2.0 to 1,

in which case there is no such limitation on amount.

As of December 31, 2020

and December 31, 2019, the Company was in compliance

with all of the Credit Facility covenants.

The Term Loans have

quarterly

principal amortization during their five-year terms,

with 5.0% amortization of the principal balance due in years 1 and

2, 7.5% in year

3, and 10.0% in years 4 and 5, with the remaining principal

amount due at maturity.

The Credit Facility is guaranteed by certain of the

Company’s domestic subsidiaries

and is secured by first priority liens on substantially all of

the assets of the Company and the

domestic subsidiary guarantors, subject to certain customary exclusions.

The obligations of the Dutch borrower are guaranteed only

by certain foreign subsidiaries on an unsecured basis.

The Credit Facility required the Company to fix its variable

interest rates on at least 20% of its total Term

Loans.

In order to

satisfy this requirement as well as to manage the

Company’s exposure to variable

interest rate risk associated with the Credit Facility,

in November 2019, the Company entered into $170.0

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

rate of

1.64% plus an applicable margin as provided

in the Credit Facility, based on

the Company’s consolidated net

leverage ratio.

At the

time the Company entered into the swaps, and as

of December 31, 2020, the aggregate interest rate on the swaps,

including the fixed

base rate plus an applicable margin, was 3.1%.

The Company capitalized $23.7 million of certain third-party

debt issuance costs in connection with executing the

Credit Facility.

Approximately $15.5 million of the capitalized costs were attributed

to the Term Loans and

recorded as a direct reduction of long-

term debt on the Company’s

Consolidated Balance Sheet.

Approximately $8.3 million of the capitalized costs were

attributed to the

Revolver and recorded within other assets on the Company’s

Consolidated Balance Sheet.

These capitalized costs are being

amortized into interest expense over the five-year term

of the Credit Facility.

As of December 31, 2020, the Company had Credit Facility

borrowings outstanding of $887.1 million.

As of December 31, 2019,

the Company had Credit Facility borrowings outstandin

of $922.4 million.

The Company has unused capacity under the Revolver of

approximately $234 million, net of bank letters of

credit of approximately $6 million, as of December 31, 2020.

The Company’s other

debt obligations are primarily industrial development

bonds, bank lines of credit and municipality-related loans, which

totaled $12.1

million and $12.6 million as of December 31, 2020 and

2019, respectively.

Total unused capacity

under these arrangements as of

December 31, 2020 was approximately $40 million.

The Company’s total net debt

as of December 31, 2020 was $717.3 million.

The Company estimates that it realized full year cost synergies

in 2020 of approximately $58 million compared to

$7 million in

2019.

The Company continues to expect to realize Combination cost synergies

of approximately $75 million in 2021 and $80 million

in 2022.

The Company expects to continue to incur additional costs

and make associated cash payments to integrate Quaker

and Houghton

and continue realizing the Combination’s

total anticipated cost synergies.

The Company expects total cash payments, including those

pursuant to the QH Program, described below,

but excluding incremental capital expenditures related to

the Combination, will be in

the range of 1.3 times its total anticipated 2022 cost

synergies of $80 million.

A significant portion of these costs were already

incurred in 2019 and 2020, but the Company expects

to continue to incur such costs through 2021.

The Company incurred $30.3

million of total Combination, integration and other acquisition-related

expenses in 2020, including $0.8 million of accelerated

depreciation, a $0.6 million loss on the sale of held-for-sale

assets, and $0.8 million of other income related to an indemnification

asset, described in the Non-GAAP Measures section of this

Item below.

The Company had aggregate net cash outflows of

approximately $29.4 million related to the Combination,

integration and other acquisition-related expenses during

2020.

Comparatively,

in 2019, the Company incurred $38.0 million of total Combination,

integration and other acquisition-related expenses,

including $2.1 million of ticking fees as well as $0.6

million of accelerated depreciation, and aggregate net cash outflows related

these costs were approximately $52.4 million.

Quaker Houghton’s management

approved, and the Company initiated, a global restructuring

plan (the “QH Program”) in the

third quarter of 2019 as part of its planned cost synergies

associated with the Combination and recorded $26.7

million in restructuring

and related charges in 2019.

The Company recognized an additional $5.5 million of

restructuring and related charges in 2020 as

result of the QH Program.

The QH Program includes restructuring and associated severance costs to

reduce total headcount by

approximately 350 people globally and plans for the

closure of certain manufacturing and non-manufacturing

facilities.

In connection

with the plans for closure of certain manufacturing and

non-manufacturing facilities, the Company made a decision

to make available

for sale certain facilities during the second quarter of 2020.

During the fourth quarter of 2020, certain of these facilities were

sold and

the Company recognized a loss on disposal of $0.6 million

included within other expense, net on the Consolidated Statement

Income.

Additionally, certain

buildings and land with an aggregate book value of

approximately $10.0 million have been reclassified

to other current assets from property,

plant and equipment as of December 31, 2020.

The Company expects to receive amounts

excess of net book value for the properties held for sale.

The exact timing and total costs associated with the QH Program

will depend

on a number of factors and is subject to change;

however, the Company currently expects

reduction in headcount and site closures will

continue to occur into 2021 under the QH Program

and estimates that the anticipated cost synergies realized

under this program will

approximate one-times restructuring costs incurred.

The Company made cash payments related to the settlement

of restructuring

liabilities under the QH Program during 2020 of approximately

$15.7 million compared to $8.9 million in 2019.

As described above, in the first quarter of 2020, the

Company completed the termination of the Legacy Quaker U.S. Pension

Plan

and funded the plan on a termination basis with approximately

$1.8 million, subject to final true up adjustments.

In the third quarter

of 2020, the Company finalized the amount of liability and

related annuity payments and received a refund in premium

of $1.6

million.

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

at plan termination of approximately $22.7 million

in the first quarter of 2020.

On December 22, 2020, the Company closed its acquisition

of Coral Chemical Company (“Coral”), a privately held,

U.S. based

provider of metal finishing fluid solutions.

The purchase price was $54.1 million,

on a cash-free and debt-free basis, subject to routine

and customary post-closing adjustments related to working

capital and net indebtedness levels.

The Company expects to finalize its

post-closing adjustments for the Coral acquisition in the first quarter

of 2021.

Cash paid for Coral in the fourth quarter of 2020 was

approximately $53.1 million, net of cash acquired.

In February 2021, the Company acquired certain assets related to

tin-plating

solutions primarily for steel end markets for approximately

$25 million.

As of December 31, 2020, the Company’s

gross liability for uncertain tax positions, including interest

and penalties, was $28.9

million.

The Company cannot determine a reliable estimate of the

timing of cash flows by period related to its uncertain tax position

liability.

However, should the entire liability

be paid, the amount of the payment may be reduced by up

to $7.5 million as a result of

offsetting benefits in other tax jurisdictions.

During the fourth quarter of 2020, one of the Company’s

subsidiaries received a notice of

inspection from a taxing authority in a country where certain

of its subsidiaries operate, which related to a non-income

(indirect) tax

that may be applicable to certain products the subsidiary

sells.

To date, the Company

has not received any assessment from the

authority related to potential liabilities that may be due

from the Company’s subsidiary.

Consequently there is substantial uncertainty

with respect to the Company’s

ultimate liability with respect to this indirect tax.

See Note 26 of Notes to Consolidated Financial

Statements in Item 8 of this Report.

The Company believes that its existing cash, anticipated

cash flows from operations and available additional liquidity

will be

sufficient to support its operating requirements

and fund its business objectives for at least the next twelve

months, including but not

limited to, payments of dividends to shareholders, costs related

to the Combination and integration, pension plan contributions,

capital

expenditures, other business opportunities (including

potential acquisitions) and other potential contingencies.

The Company’s

liquidity is affected by many factors, some

based on normal operations of our business and others related

to the impact of the

pandemic on our business and on global economic

conditions as well as industry uncertainties, which we cannot

predict.

We also

cannot predict economic conditions and industry downturns

or the timing, strength or duration of recoveries.

We may seek,

as we

believe appropriate, additional debt or equity financing

which would provide capital for corporate purposes, working

capital funding,

additional liquidity needs or to fund future growth opportunities, including

possible acquisitions and investments.

The timing and

amount of potential capital requirements cannot be

determined at this time and will depend on a number of factors,

including the

actual and projected demand for our products, specialty

chemical industry conditions, competitive factors, and the

condition of

financial markets, among others.

The following table summarizes the Company’s

contractual obligations as of December 31, 2020, and the effect

such obligations

are expected to have on its liquidity and cash flows in

future periods.

Pension and postretirement plan contributions beyond 2021

are

not determinable since the amount of any contribution

is heavily dependent on the future economic environment and investment

returns on pension trust assets.

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

consists primarily of deferred

compensation agreements and environmental reserves,

also cannot be readily determined due to their uncertainty.

Interest obligations

on the Company’s long-term

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

for the entire respective period

and apply the interest rates in effect as of

December 31, 2020.

Payments due by period

(dollars in thousands)

2026 and

Contractual Obligations

Total

2021

2022

2023

2024

2025

Beyond

Long-term debt

898,789

38,686

57,754

76,856

715,155

172

10,166

Interest obligations

52,997

14,514

13,703

12,583

10,444

526

1,227

Capital lease obligations

439

109

Operating leases

43,544

12,342

8,395

6,220

4,610

3,836

8,141

Purchase obligations

2,377

2,279

Transition tax

8,500

1,529

3,099

3,872

Pension and other postretirement plan

contributions

10,280

Other long-term liabilities (See Note 22 of

Notes to Consolidated Financial Statements)

12,494

Total contractual

cash obligations

1,029,420

78,210

80,040

97,281

733,380

8,465

32,044

Non-GAAP Measures

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

financial information that includes EBITDA, adjusted

EBITDA, adjusted EBITDA margin, non-GAAP operating

income, non-GAAP operating margin, non-GAAP

net income and non-

GAAP earnings per diluted share.

The Company believes these non-GAAP financial measures provide

meaningful supplemental

information as they enhance a reader’s understanding

of the financial performance of the Company,

are indicative of future operating

performance of the Company,

and facilitate a comparison among fiscal periods, as the

non-GAAP financial measures exclude items

that are not considered indicative of future operating performance

or not considered core to the Company’s

operations.

Non-GAAP

results are presented for supplemental informational

purposes only and should not be considered a substitute for the

financial

information presented in accordance with GAAP.

The Company presents EBITDA which is calculated as net income

attributable to the Company before depreciation and

amortization, interest expense, net, and taxes on income

before equity in net income of associated companies.

The Company also

presents adjusted EBITDA which is calculated as EBITDA plus

or minus certain items that are not considered indicative

of future

operating performance or not considered core to the Company’s

operations.

In addition, the Company presents non-GAAP operating

income which is calculated as operating income plus or

minus certain items that are not considered indicative of future operating

performance or not considered core to the Company’s

operations.

Adjusted EBITDA margin and non-GAAP operating

margin are

calculated as the percentage of adjusted EBITDA and

non-GAAP operating income to consolidated net sales, respectively.

The

Company believes these non-GAAP measures provide

transparent and useful information and are widely used by analysts, investors,

and competitors in our industry as well as by management

in assessing the operating performance of the Company on

a consistent

basis.

Additionally, the

Company presents non-GAAP net income and non-GAAP earnings

per diluted share as additional performance

measures.

Non-GAAP net income is calculated as adjusted EBITDA, defined

above, less depreciation and amortization, interest

expense, net, and taxes on income before equity in

net income of associated companies, in each case adjusted,

as applicable, for any

depreciation, amortization, interest or tax impacts resulting

from the non-core items identified in the reconciliation

of net income

attributable to the Company to adjusted EBITDA.

Non-GAAP earnings per diluted share is calculated as non

-GAAP net income per

diluted share as accounted for under the “two-class share

method.”

The Company believes that non-GAAP net income and non-

GAAP earnings per diluted share provide transparent

and useful information and are widely used by analysts, investors,

and

competitors in our industry as well as by management in

assessing the operating performance of the Company on a consistent

basis.

The following tables reconcile the Company’s

non-GAAP financial measures (unaudited) to their most

directly comparable

GAAP financial measures (dollars in thousands, unless otherwise

noted, except per share amounts):

Non-GAAP Operating Income and Margin Reconciliations

For the years ended December 31,

2020

2019

2018

Operating income

59,360

46,134

87,781

Fair value step up of inventory sold (a)

226

11,714

—

Houghton combination, integration and other

acquisition-related expenses (b)

30,446

35,945

16,661

Restructuring and related charges (c)

5,541

26,678

—

Customer bankruptcy costs (d)

463

1,073

—

Charges related to the settlement of a non-core

equipment sale (e)

—

384

—

Indefinite-lived intangible asset impairment (f)

38,000

—

Non-GAAP operating income

134,036

121,928

104,442

Non-GAAP operating margin (%) (o)

9.5%

10.8%

12.0%

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin and

Non-GAAP Net Income Reconciliations

For the years ended December 31,

2020

2019

2018

Net income attributable to Quaker Chemical Corporation

39,658

31,622

59,473

Depreciation and amortization (b)(m)

84,494

45,264

19,714

Interest expense, net (b)

26,603

16,976

4,041

Taxes on income

before equity in net income of associated companies (n)

(5,296)

2,084

25,050

EBITDA

145,459

95,946

108,278

Equity income in a captive insurance company (g)

(1,151)

(1,822)

(966)

Fair value step up of inventory sold (a)

226

11,714

—

Houghton combination, integration and other

acquisition-related expenses (b)

29,538

35,361

16,051

Restructuring and related charges (c)

5,541

26,678

—

Customer bankruptcy costs (d)

463

1,073

—

Charges related to the settlement of a non-core

equipment sale (e)

—

384

—

Indefinite-lived intangible asset impairment (f)

38,000

—

Pension and postretirement benefit costs, non-service components

(h)

21,592

2,805

2,285

Gain on changes in insurance settlement restrictions of an

inactive

subsidiary and related insurance insolvency recovery (i)

(18,144)

(60)

(90)

Gain on liquidation of an inactive legal entity (j)

—

(446)

Currency conversion impacts of hyper-inflationary economies (k)

450

1,033

664

Adjusted EBITDA

221,974

173,112

125,776

Adjusted EBITDA margin (%) (o)

15.7%

15.3%

14.5%

Adjusted EBITDA

221,974

173,112

125,776

Less: Depreciation and amortization - adjusted (b)

83,732

44,680

19,714

Less: Interest expense, net - adjusted (b)

26,603

14,896

593

Less: Taxes on income

before equity in net income

of associated companies - adjusted (l)(n)

26,488

24,825

22,978

Non-GAAP net income

85,151

88,711

82,491

Non-GAAP Earnings per Diluted Share Reconciliations

For the years ending December 31,

2020

2019

2018

GAAP earnings per diluted share attributable to

Quaker Chemical Corporation common shareholders

2.22

2.08

4.45

Equity income in a captive insurance company per diluted

share (g)

(0.07)

(0.12)

(0.07)

Fair value step up of

inventory sold per diluted share (a)

0.01

0.58

—

Houghton combination, integration and other

acquisition-related expenses per diluted share (b)

1.31

2.05

1.21

Restructuring and related charges per diluted

share (c)

0.23

1.34

—

Customer bankruptcy costs per diluted share (d)

0.02

0.05

—

Charges related to the settlement of a non-core

equipment

sale per diluted share (e)

—

0.02

—

Indefinite-lived intangible asset impairment per diluted

share (f)

1.65

—

Pension and postretirement benefit costs, non-service

components per diluted share (h)

0.79

0.14

0.13

Gain on changes in insurance settlement restrictions of an

inactive

subsidiary and related insurance insolvency recovery per diluted

share (i)

(0.78)

(0.00)

(0.01)

Gain on liquidation of an inactive legal entity per diluted

share (j)

—

(0.03)

Currency conversion impacts of hyper-inflationary economies

per diluted share (k)

0.02

0.07

0.06

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

(0.62)

(0.38)

0.43

Non-GAAP earnings per diluted share (p)

4.78

5.83

6.17

(a)

Fair value step up of inventory sold relates to expenses associated

with selling inventory from acquired businesses which

was

adjusted to fair value as part of purchase accounting.

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

of the

future operating performance of the Company.

(b)

Houghton combination, integration and other acquisition-related

expenses include certain legal, financial, and other advisory

and

consultant costs incurred in connection with due diligence,

regulatory approvals and closing the Combination, as well as

integration planning and post-closing integration activities including

internal control readiness and remediation.

These cost also

include certain one-time labor costs associated with the Company’s

acquisition-related activities.

These costs are not indicative

of the future operating performance of the Company.

Approximately $1.5 million, $9.4 million and $5.1 million for

the years

ended December 31, 2020, 2019 and 2018, respectively,

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

purpose of

determining the Company’s

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

equity in net income of associated

companies - adjusted reflects the impact of these items.

During 2020 and 2019, the Company recorded $0.8 million

and $0.6

million, respectively,

of accelerated depreciation related to certain of the Company’s

facilities, which is included in the caption

“Houghton combination, integration and other acquisition

-related expenses” in the reconciliation of operating income

to non-

GAAP operating income and included in the caption

“Depreciation and amortization” in the reconciliation of net

income

attributable to the Company to EBITDA, but excluded from

the caption “Depreciation and amortization – adjusted” in the

reconciliation of adjusted EBITDA to non-GAAP net

income attributable to the Company.

During 2019 and 2018, the Company

incurred $2.1 million and $3.5 million, respectively,

of ticking fees to maintain the bank commitment related

to the Combination.

These interest costs are included in the caption “Interest expense,

net” in the reconciliation of net income attributable to

the

Company to EBITDA, but are excluded from the caption

“Interest expense, net – adjusted” in the reconciliation of adjusted

EBITDA to non-GAAP net income.

During 2020, the Company recorded $0.8 million of other income

related to an

indemnification asset.

During 2020 and 2018, the Company recorded a loss of

$0.6 million and a gain of $0.6 million,

respectively, on the

sale of held-for-sale assets related to the Combination.

Each of these items are included in the caption

“Houghton combination, integration and other acquisition

expenses” in the reconciliation of GAAP earnings per diluted

attributable to Quaker Chemical Corporation common shareholders

to Non-GAAP earnings per diluted share as well as the

reconciliation of Net Income attributable to Quaker Chemical Corporation

to Adjusted EBITDA and Non-GAAP net income See

Note 2 and Note 9 of Notes to Consolidated Financial Statements,

which appears in Item 8 of this Report.

(c)

Restructuring and related charges represent

the costs incurred by the Company associated with the QH restructuring

program

which was initiated in the third quarter of 2019 as part

of the Company’s plan

to realize cost synergies associated with the

Combination.

These costs are not indicative of the future operating performance

of the Company.

See Note 7 of Notes to

Consolidated Financial Statements, which appears in Item

8 of this Report.

(d)

Customer bankruptcy costs represent the cost associated

with a specific reserve for trade accounts receivable related

to a customer

who filed for bankruptcy protection.

These expenses are not indicative of the future operating

performance of the Company.

See

Note 13 of Notes to Consolidated Financial Statements, which

appears in Item 8 of this Report.

(e)

Charges related to the settlement of a non-core

equipment sale represent the pre-tax charge related to

a one-time, uncommon,

customer settlement associated with a prior sale of non

-core equipment.

These charges are not indicative of the future operating

performance of the Company.

(f)

Indefinite-lived intangible asset impairment represents the

non-cash charge taken to write down the value

of certain indefinite-

lived intangible assets associated with the Houghton

Combination.

The Company has no prior history of goodwill or intangible

asset impairments and this charge is not indicative

of the future operating performance of the Company.

See Note 16 of Notes to

Consolidated Financial Statements, which appears in Item

8 of this Report.

(g)

Equity income in a captive insurance company represents the

after-tax income attributable to the Company’s

interest in Primex,

Ltd. (“Primex”), a captive insurance company.

The Company holds a 32% investment in and has significant

influence over

Primex, and therefore accounts for this investment under

the equity method of accounting.

The income attributable to Primex is

not indicative of the future operating performance of the

Company and is not considered core to the Company’s

operations.

(h)

Pension and postretirement benefit costs, non-service components

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

Company’s pension and

postretirement net periodic benefit cost in each period.

These costs are not indicative of the future

operating performance of the Company.

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

settlement charge for the

Company’s termination

of the Legacy Quaker U.S. Pension Plan.

See Note 21 of Notes to Consolidated Financial Statements,

which appears in Item 8 of this Report.

(i)

Gain on changes in insurance settlement restrictions of an

inactive subsidiary and related insurance insolvency recovery

represents income associated with the gain on the termination

of restrictions on insurance settlement reserves and the cash

receipts from an insolvent insurance carrier for previously

submitted claims by an inactive subsidiary of the Company.

This other

income is not indicative of the future operating performance

of the Company.

See Notes 9 and 26 of Notes to Consolidated

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

(j)

Gain on liquidation of an inactive legal entity represents

the decrease in historical cumulative currency translation adjustments

associated with an inactive legal entity which was closed.

These cumulative currency translation adjustments were the result of

remeasuring the legal entity’s

monetary assets and liabilities to the applicable published

exchange rates and were a component of

accumulated other comprehensive loss, which was included

in total shareholder’s equity on the Company’s

Consolidated Balance

Sheet.

As required under U.S. GAAP,

when a legal entity is liquidated, any amount attributable to that

legal entity and

accumulated in the currency translation adjustment component

of equity is required to be removed from equity and reported

part of the gain or loss on liquidation of the legal entity

during the period in which the liquidation occurs.

This non-deductible

recognized gain is not indicative of the future operating

performance of the Company.

See Note 9 of Notes to Consolidated

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

(k)

Currency conversion impacts of hyper-inflationary economies represents

the foreign currency remeasurement impacts associated

with the Company’s affiliates

whose local economies are designated as hyper-inflationary

under U.S. GAAP.

An entity which

operates within an economy deemed to be hyper-inflationary

under U.S. GAAP is required to remeasure its monetary

assets and

liabilities to the applicable published exchange rates and

record the associated gains or losses resulting from the remeasurement

directly to the Consolidated Statements of Income.

Venezuela’s

economy has been considered hyper-inflationary

under U.S.

GAAP since 2010, while Argentina’s

economy has been considered hyper-inflationary beginning

July 1, 2018.

In addition, the

Company acquired an Argentine Houghton

subsidiary which also applies hyper-inflationary accounting.

During 2020 and 2019,

the Company incurred non-deductible, pre-tax charges

related to the Company’s Argentine

affiliates.

During 2018, the Company

incurred non-deductible, pre-tax charges related

to the Company’s Legacy

Quaker Argentine affiliate as well as after

-tax charges

related to the Company’s

Venezuela

joint venture.

The charges incurred related to the immediate recognition

of foreign currency

remeasurement in the Consolidated Statements of

Income associated with these entities are not indicative of the

future operating

performance of the Company.

See Notes 1, 9 and 17 of Notes to Consolidated Financial

Statements, which appears in Item 8 of

this Report.

(l)

The impacts of certain discrete tax items included the impact of

changes in the valuation allowance for foreign tax credits

acquired with the Combination, changes in withholding

tax rates and the associated impact on previously accrued

for distributions

at certain of the Company’s

Asia/Pacific subsidiaries, additional reserves for uncertain

tax positions related to tax audits at certain

of the Company’s EMEA

subsidiaries.

This line item also includes deferred tax benefits the Company

recorded in 2020 and 2019

related to intercompany intangible asset transfers and

the related amortization of these deferred tax benefits.

Additionally, the

2019 and 2018 amounts include certain transition tax adjustments

related to adjustments to adopt U.S. Tax

Reform.

See Note 10

of Notes to Consolidated Financial Statements, which appears

in Item 8 of this Report.

(m)

Depreciation and amortization for the years ended

December 31, 2020 and 2019 includes $1.2 million and $0.4 million,

respectively, of

amortization expense recorded within equity in net income of

associated companies in the Company’s

Consolidated Statements of Income, which is attributable

to the amortization of the fair value step up for the Company’s

50%

interest in a Houghton joint venture in Korea as a result

of required purchase accounting.

(n)

Taxes on income

before equity in net income of associated companies – adjusted

presents the impact of any current and deferred

income tax expense (benefit), as applicable, of

the reconciling items presented in the reconciliation of net income attributable

Quaker Chemical Corporation to adjusted EBITDA, and

was determined utilizing the applicable rates in the taxing jurisdictions

which these adjustments occurred, subject to deductibility.

Fair value step up of inventory sold described in (a) resulted

incremental taxes of less than $0.1 million and $2.9

million for 2020 and 2019, respectively.

Houghton combination,

integration

and other acquisition-related expenses described in

(b) resulted in incremental taxes of $6.9 million for 2020

$6.7 million for

2019, and $3.1 million for 2018.

Restructuring and related charges described in (c) resulted

in incremental taxes of $1.4 million

for 2020 and $6.2 million for 2019.

Customer bankruptcy costs described in (d) resulted in incremental

taxes of $0.1 million in

2020 and $0.3 million in 2019.

Charges related to the settlement of a non-core

equipment sale described in (e) resulted in

incremental taxes of $0.1 million for 2019.

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

in incremental

taxes of $8.7 million for 2020.

Pension and postretirement benefit costs, non-service components

described in (h) resulted in

incremental taxes of $7.5 million for 2020, $0.7 million

for 2019, and $0.5 million for 2018.

Gain on changes in insurance

settlement restrictions of an inactive subsidiary and related

insurance insolvency recovery described in (i) resulted in a reduction

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

million in 2019 and 2018.

Gain on liquidation of an inactive legal entity

described in (k) resulted in a reduction of taxes of $0.1

million in 2018.

The impact of certain discrete items described in (m)

resulted in incremental taxes of $11.2

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

of $5.8 million in 2018.

(o)

The Company calculates adjusted EBITDA margin

and non-GAAP operating margin as the percentage

of adjusted EBITDA and

non-GAAP operating income to consolidated net sales.

(p)

The Company calculates non-GAAP earnings per diluted share

as non-GAAP net income attributable to the Company

per

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

method” to calculate such in each given period.

Off-Balance Sheet Arrangements

The Company had no material off-balance

sheet items, as defined under Item 303(a)(4) of Regulation S-K as of

December 31,

2020.

The Company’s only off

-balance sheet items outstanding as of December 31,

2020 represented approximately $10 million of

total bank letters of credit and guarantees.

The bank letters of credit and guarantees are not significant to

the Company’s liquidity or

capital resources.

See Note 20 of Notes to Consolidated Financial Statements in

Item 8 of this Report.

Operations

Consolidated Operations Review – Comparison of 2020

with 2019

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

million in 2019.

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

includes additional net sales from acquisitions, primarily

Houghton and Norman Hay,

of $408.6 million.

Excluding net sales related

to acquisitions, the Company’s

current year net sales would have declined approximately

11% which reflects a decrease in

sales

volumes of 9%, a negative impact from foreign currency

translation of 1% and a decrease from selling price and product

mix of 1%.

The primary driver of the volume decline in the current

year was the negative impact of COVID-19 on global production

levels.

COGS were $904.2 million in 2020 compared to $741.4

million in 2019.

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

inclusion of a full year of Houghton and Norman Hay COGS and

$0.8 million of accelerated depreciation charges in

the current year,

partially offset by lower current year COGS on

the decline in net sales due to COVID-19 and prior year charges

of $11.7 million to

increase acquired inventory to its fair value, described

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

Gross profit in 2020 increased $121.3 million or 31%

from 2019 due primarily to additional gross profit from

Houghton and

Norman Hay.

The Company’s reported

gross margin in the current period

was 36.2% compared to 34.6% in 2019, which included the

inventory fair value step up described above.

Excluding one-time increases to COGS in both periods,

the Company estimates that its

gross margins for 2020 and 2019 would have

been 36.3% and 35.7%, respectively.

The estimated increase in gross margin year-over-

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

progress on Combination-related logistics, procurement and

manufacturing cost savings initiatives, partially offset

by the lower current year sales volumes on certain fixed

manufacturing costs.

SG&A in 2020 increased $96.9 million compared

to 2019 due primarily to additional SG&A from Houghton and Norman

Hay,

partially offset by the impact of COVID-19

cost savings actions, including lower travel expenses, and the

benefits of realized costs

savings associated with the Combination.

During 2020, the Company incurred $29.8 million

of Combination, integration and other acquisition-related

expenses, primarily

for professional fees related to Houghton integration

and other acquisition-related activities.

Comparatively,

the Company incurred

$35.5 million of similar expenses in the prior year,

primarily due to various professional fees related to integration

planning and

regulatory approval as well as professional fees associated

with closing the Combination.

See the Non-GAAP Measures section of

this Item, above.

The Company initiated a restructuring program during

the third quarter of 2019 as part of its global plan to realize cost

synergies

associated with the Combination.

The Company recorded additional restructuring and related charges

of $5.5 million during 2020

compared to $26.7 million during 2019 under this program.

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

During the first quarter of 2020, the Company recorded

a $38.0 million non-cash impairment charge to write

down the value of

certain indefinite-lived intangible assets associated with the

Combination.

This non-cash impairment charge is related to certain

acquired Houghton trademarks and tradenames and

is primarily the result of the current year negative impacts of

COVID-19 on their

estimated fair values.

There were no additional impairment charges in the

remainder of 2020 or in the prior year.

See the Critical

Accounting Policies and Estimates section as well as the Non

-GAAP Measures section,

of this Item, above.

Operating income in 2020 was $59.4 million compared

to $46.1 million in 2019.

Excluding Combination, integration and other

acquisition-related expenses, restructuring and related

charges, the non-cash indefinite-lived intangible

asset impairment charge, and

other expenses that are not indicative of the Company’s

future operating performance,

the Company’s current year

non-GAAP

operating income of $134.0 million increased compared

to $121.9 million in the prior year, primarily

due to additional operating

income from Houghton and Norman Hay and

the benefits from costs savings initiatives related to the Combination

partially offset by

the current year negative impact due to COVID-19.

The Company’s other

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

2019.

The year-over-year increase in

other expense, net was primarily due to the first quarter

of 2020 non-cash settlement charge of $22.7 million

associated with the

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

partially offset by a fourth quarter of 2020 gain

of $18.1 million related to the

lapsing of restrictions over certain cash that was previously

designated solely for the settlement of asbestos claims at

an inactive

subsidiary of the Company,

which are both described in the Non-GAAP Measures section of this

Item, above.

Additionally, the

increase year-over-year in other expense,

net, includes higher foreign currency transaction losses in the current

year.

Interest expense, net, increased $9.6 million in 2020 compared

to 2019 primarily due to a full year of borrowings under the

Company’s Credit Facility

to finance the closing of the Combination on August 1,

2019, partially offset by lower overall interest rates

in the current year.

The Company’s effective

tax rates for 2020 and 2019 were a benefit of 19.5% and an expense of

7.2%, respectively.

The

Company’s current year

effective tax rate was impacted by the tax effect

of certain one-time tax charges and benefits in the

current

period, including deferred tax benefits related to an intercompany

intangible asset transfer, as well as changes in

the valuation

allowance for foreign tax credits acquired with the Combination,

additional charges for uncertain tax positions relating

to certain

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

termination of its Legacy Quaker U.S. pension plan.

Comparatively, the prior

year effective tax rate was primarily impacted

by certain non-deductible costs associated with the Combination

as well as a prior year

deferred tax benefit related to a separate intercompany

intangible asset transfer.

Excluding the impact of all non-core items in each

year, described in the Non-GAAP measures

section of this Item, above, the Company estimates that its effective

tax rates for 2020 and

2019 were approximately 25% and 22%, respectively.

The year-over-year increase is driven primarily

by higher U.S. income taxes

resulting from a change in certain deductions and

the taxability of foreign earnings in the U.S., partially offset

by a change in the mix

of earnings.

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, valuation

allowances

necessary on certain of the Company’s

tax positions, 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 of associated companies increased $2.3

million in 2020 compared to 2019, primarily due to additional

earnings from our 50% interest in a joint venture

in Korea partially offset by lower earnings as compared

to the prior year period from

the Company’s interest in

a captive insurance company.

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

Net income attributable to noncontrolling interest was $0.1

million in 2020 compared to $0.3 million in 2019

primarily a result of

the first quarter of 2020 acquisition of the remaining

ownership interest in one of the Company’s

South African affiliates.

Foreign exchange negatively impacted the Company’s

2020 results by approximately $0.38 per diluted share, primarily

due to

higher foreign exchange transaction losses year-over-year

and, to a lesser extent, an aggregate negative

impact from foreign currency

translation on earnings.

Consolidated Operations Review – Comparison of 2019

with 2018

Net sales were $1,133.5 million in 2019 compared to

$867.5 million in 2018.

The net sales increase of 31% year-over-year

includes additional net sales from Houghton and

Norman Hay of $319.4 million.

Excluding Houghton and Norman Hay net sales, the

Company’s 2019 net sales would

have declined 6% compared to the prior year,

reflecting a decrease in sales volumes of

approximately 3% and a negative impact from foreign

currency translation of 3%.

COGS in 2019 of $741.4 million increased approximately

$186.2 million or 34% from $555.2 million in 2018.

The increase in

COGS was primarily due to the inclusion of Houghton

and Norman Hay COGS, as well as the fair value inventory step

up and

accelerated depreciation charges described in

the Non-GAAP Measures section of this Item above, partially

offset by lower COGS on

the decline in Legacy Quaker net sales.

Gross profit in 2019 increased $79.8 million from 2018

due primarily to Houghton and Norman Hay net sales noted above.

The

Company’s reported

gross margin in 2019 was 34.6%, which includes

an aggregate $11.7 million of expense

associated with selling

Houghton and Norman Hay acquired inventory adjusted

to fair value as well as 2019 accelerated depreciation

charges, both of which

are described in the Non-GAAP Measures section of this

Item above.

Excluding these one-time increases to COGS, the Company

estimates that its gross margin would have been

approximately 35.7% in 2019 compared to 36.0% in 2018.

The decrease in gross

margin year-over-year

was primarily the result of price and product mix attributed

to lower Houghton gross margin compared to

Legacy Quaker.

SG&A in 2019 increased $76.0 million compared to 2018 driven

by additional Houghton and Norman Hay SG&A as

well as charges related to the settlement of a

non-core equipment sale and certain customer bankruptcy costs, both

of which are

described in the Non-GAAP Measures section of this Item

above, partially offset by lower SG&A due to

foreign currency translation,

the impact of the year-over-year base

sales decline noted above on direct selling costs, and the benefits

of realized cost savings

associated with the Combination.

During 2019, the Company incurred $35.5 million

of Combination and other acquisition-related expenses,

primarily for legal,

financial, and other advisory and consultant expenses for

integration planning and regulatory approvals, fees associated

with the

closing of the Combination and costs associated with various integration

activities.

Comparatively, the Company

incurred $16.7

million of expenses in 2018, primarily due to various professional

fees related to integration planning and regulatory approval.

See

the Non-GAAP Measures section of this Item above.

The Company initiated a restructuring program during

the third quarter of 2019 as part of its global

plan to realize cost synergies

associated with the Combination.

The Company expects reductions in headcount and site closures to occur

over the next two years

under this program.

The Company recorded restructuring expense during 2019 of $26.7

million related to this program.

There were

no similar restructuring expenses recorded during the prior

year.

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

Operating income in 2019 was $46.1 million compared

to $87.8 million in 2018.

Excluding the Combination and other

acquisition-related charges, restructuring

expenses and other non-core items, described in the Non-GAAP Measures

section of this

Item, above, the Company’s

2019 non-GAAP operating income increased to $121.9 million

compared to $104.4 million in 2018,

primarily due to additional net sales and operating income

from Houghton and Norman Hay.

The Company had other expense, net, of $0.3 million

in 2019 compared to $0.6 million in 2018.

The decrease in other expense,

net, was primarily driven by foreign currency transaction

gains in 2019 compared to foreign currency transaction

losses in 2018.

The

Company’s 2019 and

2018 foreign currency transaction gains and losses included

both recurring transactional activity as well as

foreign currency transaction losses of approximately $1.0

million and $0.4 million, respectively,

related to the Company’s Argentine

subsidiaries and, in 2018, a foreign currency transaction

gain of approximately $0.4 million related to the liquidation

of an inactive

legal entity, both

of which are described in the Non-GAAP measures section of

this Item, above.

In addition, the Company had an

increase in receipts of local municipality-related grants in

one of the Company’s regions year

-over-year, partially offset

by an increase

in pension and postretirement benefit costs, non-service

components, in 2019 compared to 2018.

Lastly, in 2018, the

Company

recorded a gain of $0.6 million for the sale of a

held-for-sale asset.

Interest expense, net, increased $12.9 million in 2019

compared to 2018, primarily as a result of additional borrowings

under the

Company’s Credit Facility

to finance the closing of the Combination on August 1,

2019.

The Company’s effective

tax rates for 2019 and 2018 were 7.2% and 30.1%, respectively.

The Company’s low 2019

effective tax

rate was primarily driven by a one-time deferred tax

benefit related to an intercompany intangible asset transfer,

described in the Non-

GAAP measures section of this Item, above.

Comparatively, the Company’s

higher 2018 effective tax rate was largel

driven by

combination-related expenses incurred, certain of which

were non-deductible for the purpose of determining the

Company’s effective

tax rate, as well as tax charges related to an

adjustment to the Company’s

initial estimate of the impact from U.S. Tax

Reform.

Excluding the impact of these and all other non-core items

in each period, described in the Non-GAAP Measures section

of this Item,

above, the Company estimates that its effective tax

rates would have been approximately 22% in each year.

Equity in net income of associated companies increased $3.3 million

in 2019 compared to 2018, primarily due to additional

earnings from the Company’s

50% interest in a Houghton joint venture in Korea and

higher earnings from the Company’s

interest in a

captive insurance company.

Net income attributable to noncontrolling interest was relatively

consistent in both 2019 and 2018.

Foreign exchange negatively impacted the Company’s

2019 earnings by approximately 2% or $0.09 per diluted share, as the

negative impact from foreign currency translation

of approximately 3% due to the strengthening of the U.S.

dollar in 2019 was

partially offset by higher 2019 foreign exchange

transaction gains.

Reportable Segments Review – Comparison of 2020

with 2019

The Company’s reportable

segments reflect the structure of the Company’s

internal organization, the method by which the

Company’s resources are

allocated and the manner by which the chief operating decision

maker assesses the Company’s

performance.

During the third quarter of 2019 and in connection with the

Combination, the Company reorganized its executive

management team to

align with its new business structure which reflects the method

by which the Company assesses its performance and allocates its

resources.

The Company’s current

reportable segment structure includes four segments: (i) Americas;

(ii) EMEA; (iii) Asia/Pacific;

and (iv) Global Specialty Businesses.

The three geographic segments are composed of

the net sales and operations in each respective

region, excluding net sales and operations managed globally

by the Global Specialty Businesses segment, which includes the

Company’s container,

metal finishing, mining, offshore, specialty coatings,

specialty grease and Norman Hay businesses.

Segment operating earnings for each of the Company’s

reportable segments are comprised of the segment’s

net sales less directly

related COGS and SG&A.

Operating expenses not directly attributable to the net sales of

each respective segment are not included in

segment operating earnings, such as certain corporate

and administrative costs, Combination,

integration and other acquisition-related

expenses, Restructuring and related charges

and COGS related to acquired inventory sold, which is adjusted

to fair value as part of

purchase accounting.

Other items not specifically identified with the Company’s

reportable segments include interest expense, net

and other expense, net.

Certain immaterial reclassifications within the segment disclosures for

the years ended December 31, 2019

have been made to conform with the Company’s

current customer industry segmentation and reflected in the prior

year comparisons

below.

Americas

Americas represented approximately 32% of the Company’s

consolidated net sales in 2020.

The segment’s net sales were $450.2

million, an increase of $58.0 million or 15% compared

to 2019.

The increase in net sales reflects additional net sales from

acquisitions of $120.4 million, primarily a result of

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

Combination closed on August 1 in the prior year.

Excluding net sales from acquisitions, the segment’s

net sales decreased

year-over-

year by approximately 16% due to lower volumes of 12%

and a negative impact of foreign currency translation of 4%.

The current

year volume decline was driven by the economic slowdown

that began in late March and continued throughout 2020

due to the

impacts of COVID-19.

The foreign exchange impact was primarily due to the weakening

of the Brazilian real and the Mexican peso

against the U.S. dollar, as these exchange

rates averaged 5.10 and 21.34, respectively,

in 2020 compared to 3.94 and 19.24,

respectively in 2019.

This segment’s operating earnings

were $96.4 million, an increase of $18.1 million or 23% compared

to 2019.

The increase in segment operating earnings reflects the

inclusion of a full year of Houghton net sales, noted,

above, and the impacts on

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

cost synergies and costs savings actions related to COVID-19

year-over-year,

partially offset by the impact of COVID-19

on current year sales volumes and higher COGS and SG&A due

to seven additional

months of Houghton in the current year.

EMEA

EMEA represented approximately 27% of the Company’s

consolidated net sales in 2020.

The segment’s net

sales were $383.2

million, an increase of $97.6 million or 34% compared

to 2019.

The increase in net sales reflects additional net sales from

acquisitions of $117.9 million, primarily

a result of the inclusion of seven additional months of Houghton net

sales, as the

Combination closed on August 1 in the prior year.

Excluding net sales from acquisitions, the segment’s

net sales decreased

year-over-

year by approximately 7% due to lower volumes of

10%, partially offset by a positive impact of foreign

currency translation of 2%

and increases in selling price and product mix of 1%.

The current year volume decline was driven by the economic slowdown

that

began in late March and continued throughout 2020

due to the impacts of COVID-19.

The foreign exchange impact was primarily

due to the strengthening of the euro against the U.S. dollar

as this exchange rate averaged 1.14 in 2020 compared to 1.12

in 2019.

This segment’s operating

earnings were $69.2 million, an increase of $22.1

million or 47% compared to 2019. The increase in

segment operating earnings reflects the inclusion of

a full year of Houghton net sales, noted, above, and the impacts on

gross margins

and SG&A due to the Combination’s

cost synergies and costs savings actions related

to COVID-19 year-over-year,

partially offset by

the impact of COVID-19 on current year sales volumes

and higher COGS and SG&A due to seven additional months of

Houghton in

the current year.

Asia/Pacific

Asia/Pacific represented approximately 22% of the

Company’s consolidated net

sales in 2020.

The segment’s net sales were

$315.3 million,

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

The increase in net sales reflects the inclusion of seven

additional months of Houghton net sales of $79.7 million,

as the Combination closed on August 1 in the prior year.

Excluding

Houghton net sales, the segment’s

net sales decreased

by approximately 5% year-over-year was due to

lower volumes of 3% and

decreases in selling price and product mix of 3% partially offset

by the positive impact of foreign currency translation

of 1%.

The

current year volume decline was driven by the economic

slowdown that began in the first quarter in China and in late March

throughout the rest of the region due to the impacts of

COVID-19.

The foreign exchange impact was primarily due to the

strengthening of the Chinese renminbi against the U.S. dollar.

While this exchange rate averaged

6.90 in each of 2020 and 2019,

respectively, post

the closing of the Combination, this exchange rate strengthened

in the last 5 months of 2020 to average 6.72

compared to 7.06 in the last 5 months of 2019, partially offset

by the weakening of the Indian rupee against the U.S.

dollar as this

exchange rate averaged

73.95 in 2020 compared to 70.35 in 2019.

This segment’s operating earnings

were $88.4 million, an increase

of $20.8 million or 31% compared to 2019.

The increase in segment operating earnings reflects the inclusion

of incremental

Houghton net sales, noted, above, and the impacts on

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

cost synergies and costs

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

partially offset by the impact of COVID-19 on current

year sales volumes and

higher COGS and SG&A due to seven additional months

of Houghton in the current year.

Global Specialty Businesses

Global Specialty Businesses represented approximately

19% of the Company’s consoli

dated net sales in 2020.

The segment’s net

sales were $269.0 million, an increase of $61.1 million

or 29%

compared to 2019.

The increase in net sales reflects the inclusion of

seven additional months of Houghton net sales and nine

additional months of Norman Hay net sales, totaling $90.6

million, as the

Combination closed on August 1 and the Norman Hay

acquisition closed on October 1 in the prior year.

Excluding Houghton and

Norman Hay net sales, the segment’s

net sales decreased by approximately 14%

year-over-year due to lower volumes of 7%,

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

impact from foreign currency translation of 2%.

The current year

volume decline was primarily due to a decrease in

the Company’s specialty coatings

business driven by Boeing’s

decision to

temporarily stop production of the 737 Max aircraft and

volume declines due to the economic slowdown resulting

from COVID-19.

Partially offsetting these volume declines,

and contributing to the decrease in selling price and product mix

were higher shipments of

a lower priced product in the Company’s

mining business compared to the prior year.

The foreign exchange impact was primarily due

to the weakening of the Brazilian real against the U.S.

dollar described in the Americas section, above.

This segment’s operating

earnings were $79.7 million, an increase of $20.8

million or 35%

compared to 2019.

The increase in segment operating earnings

reflects the inclusion of incremental Houghton and Norman

Hay net sales, noted above, coupled with an increase in

gross margin due

to the Company’s progress

on Combination-related logistics, procurement and manufacturing

cost savings initiatives, partially offset

by higher SG&A, including seven additional months of

Houghton and nine additional months of Norman Hay SG&A in the current

year.

Reportable Segments Review – Comparison of 2019

with 2018

Americas

Americas represented approximately 35% of the Company’s

consolidated net sales in 2019.

The segment’s net sales were $392.1

million, an increase of $94.5 million or 32% compared

to 2018.

The increase in net sales reflects the inclusion of Houghton

net sales

of $110.1 million.

Excluding Houghton net sales, the segment’s

net sales decrease year-over-year of 5% was due

primarily to lower

volumes of 6% and a negative impact from foreign

currency translation of 1% partially offset by a positive impact

from selling price

and product mix of 2%.

The decline in volumes compared to 2018 was driven by compounding

conditions of weak automotive and

steel markets, a generally weaker overall industrial environment

in the region and some customer inventory corrections.

The

segment’s operating earnings

were $78.3 million, an increase of $15.6 million or 25%

compared to 2018.

The increase in segment

operating earnings reflects the inclusion of Houghton

net sales, partially offset by a lower gross margin

due to price and product mix,

including lower Houghton gross margins compared

to Legacy Quaker and higher SG&A, including Houghton

SG&A.

EMEA

EMEA represented approximately 25% of the Company’s

consolidated net sales in 2019.

The segment’s net

sales were $285.6

million, an increase of $68.6 million or 32% compared

to 2018.

The increase in net sales reflects the inclusion of Houghton

net sales

of $92.5 million.

Excluding Houghton net sales, the segment’s

net sales decrease year-over-year of 11%

was due to a negative impact

of foreign currency translation of 5%, lower volumes of

approximately 5% and a decrease from selling price and product

mix of 1%.

The foreign exchange impact was primarily due to the

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

1.12 in 2019 compared to 1.18 in 2018.

The decline in volumes compared to 2018 was driven by a weak

automotive market and the

challenging overall industrial environment in the region,

as well as a decrease in volume associated with a specific piece

of business

which the Company stopped selling during the second

half of 2018 primarily due to its limited profitability.

This segment’s operating

earnings were $47.0 million, an increase of $10.9

million or 30% compared to 2018.

The increase in segment operating earnings

reflects the inclusion of Houghton net sales and

a slightly higher gross margin, partially offset by

higher SG&A, including Houghton

SG&A.

Asia/Pacific

Asia/Pacific represented approximately 22% of the

Company’s consolidated net

sales in 2019.

The segment’s net sales were

$247.8 million, an increase of $55.3 million or 29%

compared to 2018.

The increase in net sales reflects the inclusion of Houghton

net sales of $67.4 million.

Excluding Houghton net sales, the segment’s

net sales decreased 6% year-over-year due

primarily to the

negative impact of foreign currency translation of 3% and

lower volumes of approximately 3%.

The foreign exchange impact was

primarily due to the weakening of the Chinese renminbi

and India rupee against the U.S. dollar as these exchange rates

averaged 6.90

and 70.3, respectively,

in 2019 compared to 6.60 and 68.18, respectively,

in 2018.

The decline in volumes was driven by weak

automotive and steel markets and the challenging overall

industrial environment in the region.

This segment’s operating earnings

were $67.5 million, an increase of $13.8 million or 26%

compared to 2018.

The increase in segment operating earnings reflects the

inclusion of Houghton net sales, and relatively consistent gross margins,

partially offset by higher SG&A, including

Houghton SG&A.

Global Specialty Businesses

Global Specialty Businesses represented approximately

18% of the Company’s consolidated

net sales in 2019.

The segment’s net

sales were $208.0 million, an increase of $47.5 million

or 30% compared to 2018.

The increase in net sales reflects the inclusion of

Houghton and Norman Hay net sales of $49.4 million.

Excluding Houghton and Norman Hay net sales, the segment’s

net sales

decreased 1% year-over-year driven

by a decline in selling price and product mix of 5% and

a negative impact from foreign currency

translation of less than 1% partially offset by

an increase in volume of 4%.

This segment’s operating earnings

were $58.9 million, an

increase of approximately $15.9 million or 37% compared

to 2018.

The increase in segment operating earnings reflects the inclusion

of Houghton and Norman Hay net sales, and relatively

consistent gross margins, partially offset by

higher SG&A, including Houghton

and Norman Hay.

Environmental Clean-up Activities

The Company is involved in environmental clean-up

activities in connection with an existing plant location and former

waste

disposal sites.

This includes certain soil and groundwater contamination

the Company identified in 1992 at AC Products, Inc.

(“ACP”), a wholly owned subsidiary.

In voluntary coordination with the Santa Ana California Regional

Water Quality

Board, ACP

has been remediating the contamination.

In 2007, ACP agreed to operate two groundwater treatment systems,

so as to hydraulically

contain groundwater contamination emanating from ACP’s

site until such time as the concentrations of contaminants

are below the

current Federal maximum contaminant level for four

consecutive quarterly sampling events.

In 2014, ACP ceased operation at one of

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

condition for closure.

In 2020, the Santa Ana Regional Water

Quality

Control Board asked that ACP conduct some additional

indoor and outdoor soil vapor testing on and near the ACP site to

confirm that

ACP continues to meet the applicable local standards

and ACP has begun the testing program.

As of December 31, 2020, ACP

believes it is close to meeting the conditions for closure of the

remaining groundwater treatment system, but continues to

operate this

system while in discussions with the relevant authorities.

As of December 31, 2020, 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.

As a result of the closing of the Combination on August

1, 2019, the Company is party to environmental matters related

to certain

Houghton domestic and foreign properties currently or previously

owned.

Houghton’s Sao Paulo, Brazil site

was required under

Brazilian environmental, health and safety regulations to

perform an environmental assessment as part of a permit renewal process.

Initial investigations

identified soil and ground water contamination in select areas

of the site.

The site has conducted a multi-year soil

and groundwater investigation and corresponding

risk assessments based on the result of the investigations.

In 2017, the site had to

submit a new 5-year permit renewal request and was asked

to complete additional investigations to further delineate

the site based on

review of the technical data by the local regulatory agency,

Companhia Ambiental do Estado de São Paulo (“CETESB”).

Based on

review of the updated investigation data, CETESB issued a Technical

Opinion regarding the investigation and remedial actions taken

to date.

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

based on CETESB requirements.

The site

intervention plan primarily requires the site, among

other actions, to conduct periodic monitoring for methane in

soil vapors, source

zone delineation, groundwater plume delineation, bedrock

aquifer assessment, update the human health risk assessment, develop

current site conceptual model and conduct a remedial feasibility

study and provide a revised intervention plan.

In December 2019, the

site submitted a report on the activities completed including

the revised site conceptual model and results of the remedial feasibility

study and recommended remedial strategy for the site.

Other Houghton environmental matters include participation in

certain

payments in connection with four currently active environmental

consent orders related to certain hazardous waste cleanup

activities

under the U.S. Federal Superfund statute.

Houghton has been designated a potentially responsible party (“PRP”)

by the

Environmental Protection Agency along with other PRPs depending

on the site, and has other obligations to perform cleanup

activities

at certain other foreign subsidiaries.

These environmental matters primarily require the

Company to perform long-term monitoring as

well as operating and maintenance at each of the applicable

sites.

The Company continually evaluates its obligations related

to such matters and, based on historical costs incurred and projected

costs to be incurred over the next 28 years, has estimated the present

value range of costs for all of the Houghton environmental

matters, on a discounted basis, to be between approximately

$5.5 million and $6.5 million as of December 31,

2020, for which $6.0

million is accrued within other accrued liabilities and

other non-current liabilities on the Company’s

Consolidated Balance Sheet as of

December 31, 2020.

Comparatively, as of

December 31, 2019, the Company had $6.6 million accrued

with respect to these matters.

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 $0.1

million and $0.2 million were accrued as of December

31, 2020 and 2019, respectively,

to provide for such anticipated future

environmental assessments and remediation costs.

Notwithstanding the foregoing, the Company cannot be

certain that future liabilities in the form of remediation expenses and

damages will not exceed amounts reserved.

See Note 26 of Notes to Consolidated Financial Statements in Item

8 of this Report

General

See Item 7A of this Report, below,

for further discussion of certain quantitative and qualitative

disclosures about market risk.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Quaker Houghton is exposed to the impact of interest

rates, foreign currency fluctuations, changes in commodity prices,

and

credit risk.

The current economic environment associated with COVID-19 has led

to significant volatility and uncertainty with each

of these market risks.

See Item 1A. “Risk Factors.” of this Report for additional

discussions of the current and potential risks

associated with the COVID-19 pandemic.

Except as otherwise disclosed below,

the market risks discussed below did not change

materially from December 31, 2019.

Interest Rate Risk.

The Company’s exposure

to changes in interest rates relates primarily to its borrowings

under the Credit

Facility as of December 31, 2020 and 2019.

Borrowings under the Credit Facility bear interest at a base rate

or LIBOR plus an

applicable margin based upon the Company’s

consolidated net leverage ratio.

As a result of the variable interest rates applicable

under the Credit Facility,

if interest rates rise significantly,

the cost of debt to the Company could increase as

well.

This could have an

adverse effect on the Company,

depending on the extent of the Company’s

borrowings outstanding throughout a given year.

As of

December 31, 2020, the Company had outstanding borrowings

under the Credit Facility of approximately $887.1 million.

The

variable interest rate incurred on the outstanding

borrowings under the Credit Facility during the year ended

December 31, 2020 was

approximately 2.2%.

If interest rates had changed by 10% during 2020, the Company’s

interest expense for the period ended

December 31, 2020 on its credit facilities, including the

Credit Facility borrowings outstanding post-closing of the Combination,

would have correspondingly increased or decreased

by approximately $0.8 million.

The Credit Facility required the Company to fix its variable

interest rates on at least 20% of its total Term

Loans.

In order to

satisfy this requirement as well as to manage the

Company’s exposure to variable

interest rate risk associated with the Credit Facility,

in November 2019, the Company entered into $170.0

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

rate of

1.64% plus an applicable margin as provided

in the Credit Facility, based on

the Company’s consolidated net

leverage ratio.

At the

time the Company entered into the swaps and as of December

31, 2020, the aggregate interest rate on the swaps, including

the fixed

base rate plus an applicable margin, was 3.1%.

These interest rate swaps are designated and qualify as cash flow

hedges.

The

Company has previously used derivative financial instruments

primarily for the purpose of hedging exposures to fluctuations

interest rates.

Foreign Exchange Risk

A significant portion of the Company’s

revenues and earnings are generated by its foreign operations.

These foreign operations also represent a significant portion

of Quaker Houghton’s assets and

liabilities.

Generally, all of these

foreign operations use the local currency as their functional

currency.

Accordingly, Quaker Houghton’s

financial results are affected

by foreign currency fluctuations, particularly between the

U.S. dollar and the euro, the British pound sterling, the Brazilian real,

the

Mexican peso, the Chinese renminbi and the Indian

rupee.

Quaker Houghton’s results

can be materially affected depending on the

volatility and magnitude of foreign exchange rate

changes.

If the euro, the British pound sterling, the Brazilian real,

the Mexican

peso, the Chinese renminbi and the Indian rupee had

all weakened or strengthened by 10% against the U.S. dollar,

the Company’s

2020 revenues and pre-tax earnings would have correspondingly

decreased or increased by approximately $78.9 million and

$7.4

million, respectively.

The Company generally does not use financial instruments

that expose it to significant risk involving foreign currency

transactions.

However, the size of its non-U.S. activities

has a significant impact on reported operating results and

the attendant net

assets.

During the past three years, sales by its non-U.S.

subsidiaries accounted for approximately 60% to 70% of

its consolidated net

sales.

In addition, the Company occasionally sources inventory

among its worldwide operations.

This practice can give rise to

foreign exchange risk resulting from the varying cost of

inventory to the receiving location, as well as from the revaluation

intercompany balances.

The Company primarily mitigates this risk through local sourcing

efforts.

Commodity Price Risk

Many of the raw materials used by Quaker Houghton

are derivatives of commodity chemicals, which can

experience significant price volatility,

and therefore Quaker Houghton’s

earnings can be materially affected by market changes

in raw

material prices.

At times, the Company has entered into fixed-price purchase

contracts to manage this risk.

These contracts provide

protection to Quaker Houghton if the prices for the contracted

raw materials rise; however, in certain

circumstances, the Company

may not realize the benefit if such prices decline.

A gross margin change of one percentage point,

would correspondingly

have

increased or decreased the Company’s

pre-tax earnings by approximately $14.2 million.

Credit Risk

Quaker Houghton establishes allowances for doubtful

accounts for estimated losses resulting from the inability of its

customers to make required payments.

If the financial condition of Quaker Houghton’s

customers were to deteriorate, resulting in an

impairment of their ability to make payments, additional allowances

might be required.

Downturns in the overall economic climate

may also exacerbate specific customer financial issues.

A significant portion of the Company’s

revenues are derived from sales to

customers in the steel and automotive industries, including

some of our larger customers, where bankruptcies

have occurred in the past

and where companies have experienced past financial

difficulties.

Though infrequent, when a bankruptcy occurs, Quaker Houghton

must judge the amount of proceeds, if any,

that may ultimately be received through the bankruptcy or

liquidation process.

In addition,

as part of its terms of trade, Quaker Houghton may custom

manufacture products for certain large customers

and/or may ship product

on a consignment basis.

These practices may increase the Company’s

exposure should a bankruptcy occur and may require a write-

down or disposal of certain inventory due to its estimated obsolescence

or limited marketability as well as of accounts receivable.

Customer returns of products or disputes may also result in

similar issues related to the realizability of recorded

accounts receivable or

returned inventory.

The Company recorded expense to its provision for doubtful

accounts by $3.6 million, $1.9 million and $0.5

million for the years ended December 31, 2020, 2019

and 2018, respectively.

A change of 10% to the expense recorded to the

Company’s provision

would have increased or decreased the Company’s

pre-tax earnings by $0.4 million, $0.2 million and $0.1

million for the years ended December 31, 2020, 2019

and 2018, respectively.

Item 8.

Financial Statements and Supplementary Data.

QUAKER CHEMICAL CORPORATION

INDEX TO CONSOLIDATED

FINANCIAL STATEMENTS

Page

Financial Statements:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Changes in Equity

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting

Firm

the Board of Directors and Shareholders of Quaker Chemical Corporation

Opinions on the Financial Statements and Internal Control over

Financial Reporting

We have audited

the accompanying consolidated balance sheets of Quaker

Chemical Corporation and its subsidiaries (the

“Company”) as of December 31, 2020 and 2019, and the

related consolidated statements of income, of comprehensive

income, of

changes in equity and of cash flows for each of the three

years in the period ended December 31, 2020, including

the related notes

(collectively referred to as the “consolidated financial statements”).

We also have

audited the Company's internal control over

financial reporting as of December 31, 2020, based on criteria

established in Internal Control - Integrated Framework

(2013) issued by

the Committee of Sponsoring Organizations

of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred

to above present fairly,

in all material respects, the financial position of

the Company as of December 31, 2020 and 2019, and the

results of its operations and its cash flows for each of the three

years in the

period ended December 31, 2020 in conformity with accounting

principles generally accepted in the United States of America.

Also

in our opinion, the Company did not maintain, in all material

respects, effective internal control over financial

reporting as of

December 31, 2020, based on criteria established in

Internal Control - Integrated Framework

(2013) issued by the COSO because

material weaknesses in internal control over financial

reporting existed as of that date as the Company did not design

and maintain

effective controls (i) in response to the risks of

material misstatement and (ii) over the review of pricing,

quantity and customer data to

verify that revenue recognized was complete and

accurate.

A material weakness is a deficiency,

or a combination of deficiencies, in internal control over financial

reporting, such that there is a

reasonable possibility that a material misstatement of the

annual or interim financial statements will not be prevented

or detected on a

timely basis.

The material

weaknesses referred to above are described in Management’s

Report on Internal Control over Financial

Reporting appearing under Item 9A.

We considered

these material weaknesses in determining the nature, timing,

and extent of audit

tests applied in our audit of the 2020 consolidated financial

statements, and our opinion regarding the effectiveness

of the Company’s

internal control over financial reporting does not affect

our opinion on those consolidated financial statements.

Change in Accounting Principle

As discussed in Note 6 to the consolidated financial statements,

the Company changed the manner in which

it accounts for leases in

2019.

Basis for Opinions

The Company's management is responsible for

these consolidated financial statements, for maintaining effective

internal control over

financial reporting, and for its assessment of the effectiveness

of internal control over financial reporting, included

in management's

report referred to above.

Our responsibility is to express opinions on the Company’s

consolidated financial statements and on the

Company's internal control over financial reporting based

on our audits.

We are a public

accounting firm registered with the Public

Company Accounting Oversight Board (United States) (PCAOB) and

are required to be independent with respect to the Company in

accordance with the U.S. federal securities laws and the

applicable rules and regulations of the Securities and

Exchange Commission

and the PCAOB.

We conducted

our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform

the

audits to obtain reasonable assurance about whether

the consolidated financial statements are free of material misstatement,

whether

due to error or fraud, and whether effective

internal control over financial reporting was maintained in all material

respects.

Our audits of the consolidated financial statements included

performing procedures to assess the risks of material misstatement

of the

consolidated financial statements, whether due to error

or fraud, and performing procedures that respond to those

risks. Such

procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the consolidated

financial

statements.

Our audits also included evaluating the accounting

principles used and significant estimates made by management, as well

as evaluating the overall presentation of the consolidated

financial statements.

Our audit of internal control over financial reporting

included obtaining an understanding of internal control over financial

reporting, assessing the risk that a material weakness exists, and

testing and evaluating the design and operating effectiveness

of internal control based on the assessed risk.

Our audits also included

performing such other procedures as we considered necessary

in the circumstances.

We believe that our

audits provide a reasonable

basis for our opinions.

As described in Management’s

Report on Internal Control over Financial Reporting, management

has excluded Tel

Nordic ApS and

Coral Chemical Company from its assessment of internal

control over financial reporting as of December 31, 2020,

because they were

acquired by the Company in purchase business combinations during

2020.

These excluded entities are wholly owned subsidiaries,

whose total assets represent less than 1% and approximately 2%,

respectively,

and whose total revenues each represent less than 1%,

of the related consolidated financial statement amounts

as of and for the year ended December 31, 2020.

Definition and Limitations of Internal Control over Financial

Reporting

A company’s internal

control over financial reporting is a process designed to provide

reasonable assurance regarding the reliability of

financial reporting and the preparation of financial statements

for external purposes in accordance with generally

accepted accounting

principles.

A company’s internal control

over financial reporting includes those policies and procedures

that (i) pertain to the

maintenance of records that, in reasonable detail, accurately

and fairly reflect the transactions and dispositions of the

assets of the

company; (ii) provide reasonable assurance that transactions are

recorded as necessary to permit preparation of financial statements

accordance with generally accepted accounting principles,

and that receipts and expenditures of the company are being

made only in

accordance with authorizations of management and directors

of the company; and (iii) provide reasonable assurance

regarding

prevention or timely detection of unauthorized acquisition,

use, or disposition of the company’s

assets that could have a material effect

on the financial statements.

Because of its inherent limitations, internal control

over financial reporting may not prevent or detect misstatements.

Also, projections

of any evaluation of effectiveness to future

periods are subject to the risk that controls may become

inadequate because of changes in

conditions, or that the degree of compliance with the

policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter

arising from the current period audit of the consolidated financial

statements

that was communicated or required to be communicated

to the audit committee and that (i) relates to accounts or disclosures that

are

material to the consolidated financial statements and (ii)

involved our especially challenging, subjective, or complex judgments.

The

communication of critical audit matters does not alter

in any way our opinion on the consolidated financial statements,

taken as a whole,

and we are not, by communicating the critical audit

matter below, providing

a separate opinion on the critical audit matter or on the

accounts or disclosures to which it relates.

Houghton Trademarks and

Tradename Impairment Assessments

As described in Note 16 to the consolidated financial

statements, the Company’s consolidated

Other intangible assets, net balance was

$1,081.4

million as of December 31, 2020, and the indefinite-lived

intangible asset was $205.1 million, which substantially relates to

the Houghton trademarks and tradename.

Management completes its annual indefinite-lived intangible

asset impairment test during

the fourth quarter of each year, or

more frequently if triggering events indicate a potential impairment.

An impairment exists when it

is determined that it is more likely than not that the indefinite

-lived intangible asset carrying value exceeds its fair value and

is not

recoverable.

In the first quarter of 2020, as a result of the impact of COVID-19

driving a decrease in projected legacy Houghton net

sales in the current year and the impact of the current year

decline on projected future legacy Houghton net sales as well as an

increase

in the weighted average cost of capital (“WACC”)

assumption utilized in the quantitative impairment

assessment, the Company

concluded that the estimated fair value of the Houghton

trademarks and tradename intangible asset was less than its carrying

value.

As a result, an impairment charge of $38.0

million, primarily related to the Houghton trademarks and tradename,

was recorded in the

first quarter of 2020. The Company completed its annual

impairment assessment during the fourth quarter of 2020

for the Houghton

trademarks and tradename and concluded no impairment charge

was warranted.

The determination of estimated fair value of the

Houghton trademarks and tradename is based on a relief

from royalty valuation method which requires management’s

judgment and

often involves the use of significant estimates and assumptions

with respect to the WACC

and royalty rates, as well as revenue growth

rates and terminal growth rates.

The principal considerations for our determination that

performing procedures relating to the Houghton trademarks

and tradename

impairment assessments is a critical audit matter are

(i) the significant judgment by management when determining

the fair value

measurement of the Houghton trademarks and tradename;

(ii) a high degree of auditor judgment, subjectivity,

and effort in performing

procedures and evaluating

management’s significant

assumptions related to the WACC,

royalty rates, revenue growth rates and

terminal growth rates; and (iii) the audit effort

involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and

evaluating audit evidence in connection with forming our overall opinion

on the consolidated financial statements.

These procedures included testing the effectiveness of controls

relating to management’s

indefinite-lived intangible assets impairment assessments, including

controls over the valuation of the Houghton trademarks and

tradename.

These procedures also included, among others (i) testing management’s

process for determining the fair value estimate;

(ii) evaluating the appropriateness of the relief from

royalty valuation method; (iii) testing the completeness

and accuracy of

underlying data used in the estimate; and (iv) evaluating

the reasonableness of significant assumptions related to

the WACC,

royalty

rates, revenue growth rates and terminal growth rates.

Evaluating management’s

assumptions related to the royalty rates, revenue

growth rates and terminal growth rates involved evaluating

whether the assumptions used by management were

reasonable

considering (i) the current and past performance of the

legacy Houghton business; (ii) the consistency with external

market and

industry data; and (iii) whether these assumptions were consistent with

evidence obtained in other areas of the audit.

Professionals

with specialized skill and knowledge were used to

assist in evaluating the appropriateness of the relief from

royalty valuation method

and evaluating the reasonableness

of royalty rates and the WACC.

/s/PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

March 1, 2021

We have served

as the Company’s auditor since

at least 1972. We

have not been able to determine the specific year we began

serving

as auditor of the Company.

QUAKER CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS

OF INCOME

(

Dollars in thousands, except per share data

)

Year

Ended December 31,

2020

2019

2018

Net sales

1,417,677

1,133,503

867,520

Cost of goods sold (excluding amortization expense -

See Note 16)

904,234

741,386

555,206

Gross profit

513,443

392,117

312,314

Selling, general and administrative expenses

380,752

283,828

207,872

Indefinite-lived intangible asset impairment

38,000

Restructuring and related charges

5,541

26,678

Combination, integration and other acquisition-related

expenses

29,790

35,477

16,661

Operating income

59,360

46,134

87,781

Other expense, net

(5,618)

(254)

(642)

Interest expense, net

(26,603)

(16,976)

(4,041)

Income before taxes and equity in net income of associated companies

27,139

28,904

83,098

Taxes on income

before equity in net income of associated companies

(5,296)

2,084

25,050

Income before equity in net income of associated companies

32,435

26,820

58,048

Equity in net income of associated companies

7,352

5,064

1,763

Net income

39,787

31,884

59,811

Less: Net income attributable to noncontrolling intere

129

262

338

Net income attributable to Quaker Chemical Corporation

39,658

31,622

59,473

Per share data:

Net income attributable to Quaker Chemical Corporatio

common

shareholders – basic

2.23

2.08

4.46

Net income attributable to Quaker Chemical Corporation

common

shareholders – diluted

2.22

2.08

4.45

The accompanying notes are an integral

part of these consolidated financial statements.

QUAKER CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS

OF COMPREHENSIVE INCOME

(

Dollars in thousands

)

Year

Ended December 31,

2020

2019

2018

Net income

39,787

31,884

59,811

Other comprehensive income (loss), net of tax

Currency translation adjustments

41,601

4,779

(17,519)

Defined benefit retirement plans

Net gain (loss) arising during the period, other

8,827

(6,289)

1,119

Amortization of actuarial loss

2,308

2,458

2,507

Amortization of prior service gain

(69)

(151)

(84)

Current period change in fair value of derivatives

(3,278)

(320)

Unrealized gain (loss) on available-for-sale securities

2,091

2,093

(1,728)

Other comprehensive income (loss)

51,480

2,570

(15,705)

Comprehensive income

91,267

34,454

44,106

Less: Comprehensive income attributable to noncontrolling

interest

(37)

(287)

(248)

Comprehensive income attributable to Quaker Chemical Corporation

91,230

34,167

43,858

The accompanying notes are an integral

part of these consolidated financial statements.

QUAKER CHEMICAL CORPORATION

CONSOLIDATED BALANCE

SHEETS

(

Dollars in thousands, except par value and share amounts

)

December 31,

2020

2019

ASSETS

Current assets

Cash and cash equivalents

181,833

123,524

Accounts receivable, net

372,974

375,982

Inventories, net

187,764

174,950

Prepaid expenses and other current assets

50,156

41,516

Total current

assets

792,727

715,972

Property, plant and

equipment, net

203,883

213,469

Right of use lease assets

38,507

42,905

Goodwill

631,212

607,205

Other intangible assets, net

1,081,358

1,121,765

Investments in associated companies

95,785

93,822

Deferred tax assets

16,566

14,745

Other non-current assets

31,796

40,433

Total assets

2,891,834

2,850,316

LIABILITIES AND EQUITY

Current liabilities

Short-term borrowings and current portion of long-term debt

38,967

38,332

Accounts payable

191,821

164,101

Dividends payable

7,051

6,828

Accrued compensation

43,300

45,620

Accrued restructuring

8,248

18,043

Accrued pension and postretirement benefits

1,466

3,405

Other accrued liabilities

92,107

83,605

Total current

liabilities

382,960

359,934

Long-term debt

849,068

882,437

Long-term lease liabilities

27,070

31,273

Deferred tax liabilities

192,763

211,094

Non-current accrued pension and postretirement benefits

63,890

56,828

Other non-current liabilities

55,169

66,384

Total liabilities

1,570,920

1,607,950

Commitments and contingencies (Note 26)

Equity

Common stock, $

1.00

par value; authorized

30,000,000

shares; issued and outstanding

2020 –

17,850,616

shares; 2019

–

17,735,162

17,851

17,735

Capital in excess of par value

905,171

888,218

Retained earnings

423,940

412,979

Accumulated other comprehensive loss

(26,598)

(78,170)

Total Quaker

shareholders’ equity

1,320,364

1,240,762

Noncontrolling interest

550

1,604

Total equity

1,320,914

1,242,366

Total liabilities and

equity

2,891,834

2,850,316

The accompanying notes are an integral

part of these consolidated financial statements.

��

QUAKER CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS

OF CASH FLOWS

(

Dollars in thousands

)

Year Ended

December 31,

2020

2019

2018

Cash flows from operating activities

Net income

39,787

31,884

59,811

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

Amortization of debt issuance costs

4,749

1,979

Depreciation and amortization

83,246

44,895

19,714

Equity in undistributed earnings of associated companies, net of dividends

4,862

(2,115)

2,784

Acquisition-related fair value adjustments related to inventory

229

11,714

Deferred income taxes

(38,281)

(24,242)

8,197

Uncertain tax positions (non-deferred portion)

1,075

958

(89)

Non-current income taxes payable

856

(8,181)

Deferred compensation and other, net

(471)

(6,789)

2,914

Share-based compensation

10,996

4,861

3,724

Loss (gain) on disposal of property, plant, equipment and other assets

871

(58)

(657)

Insurance settlement realized

(1,035)

(822)

(1,055)

Indefinite-lived intangible asset impairment

38,000

Gain on inactive subsidiary litigation and settlement reserve

(18,144)

Combination and other acquisition-related expenses, net of payments

860

(14,414)

2,727

Restructuring and related charges

5,541

26,678

Pension and other postretirement benefits

16,535

(1,392)

Increase (decrease) in cash from changes in current assets and current

liabilities, net of acquisitions:

Accounts receivable

17,170

19,926

(2,822)

Inventories

(3,854)

10,844

(10,548)

Prepaid expenses and other current assets

927

(4,640)

(1,540)

Change in restructuring liabilities

(15,745)

(8,899)

Accounts payable and accrued liabilities

22,308

(8,915)

190

Estimated taxes on income

8,763

(1,373)

4,932

Net cash provided by operating activities

178,389

82,374

78,779

Cash flows from investing activities

Investments in property, plant and equipment

(17,901)

(15,545)

(12,886)

Payments related to acquisitions, net of cash acquired

(56,230)

(893,412)

(500)

Proceeds from disposition of assets

2,702

103

866

Insurance settlement interest earned

222

162

Net cash used in investing activities

(71,385)

(908,632)

(12,358)

Cash flows from financing activities

Payments of long-term debt

(37,615)

Proceeds from term loan debt

750,000

(Repayments) borrowings on revolving credit facilities, net

(11,485)

147,135

(21,120)

Repayments on other debt, net

(661)

(8,798)

(5,671)

Financing-related debt issuance costs

(23,747)

Dividends paid

(27,563)

(21,830)

(19,319)

Stock options exercised, other

3,867

1,370

Purchase of noncontrolling interest in affiliates

(1,047)

Distributions to noncontrolling affiliate shareholders

(751)

(877)

Net cash (used in) provided by financing activities

(75,255)

844,130

(46,905)

Effect of foreign exchange rate changes on cash

6,591

1,258

(6,141)

Net increase in cash, cash equivalents and restricted cash

38,340

19,130

13,375

Cash, cash equivalents and restricted cash at the beginning of the period

143,555

124,425

111,050

Cash, cash equivalents and restricted cash at the end of the period

181,895

143,555

124,425

Supplemental cash flow disclosures:

Cash paid during the year for:

Income taxes, net of refunds

20,253

15,499

19,617

Interest

23,653

19,553

2,417

Non-cash activities:

Change in accrued purchases of property, plant and equipment, net

(1,376)

1,978

281

The accompanying notes are an integral

part of these consolidated financial statements.

QUAKER CHEMICAL CORPORATION

CONSOLIDATED STATEMENTS

OF CHANGES IN EQUITY

(

Dollars in thousands, except per share amounts

)

Accumulated

Capital in

other

Common

excess of

Retained

comprehensive

Noncontrolling

stock

par value

earnings

loss

interest

Total

Balance as of December 31, 2017

13,308

93,528

365,936

(65,100)

1,946

409,618

Cumulative effect of an accounting change

(754)

Balance as of January 1, 2018

13,308

93,528

365,182

(65,100)

1,946

408,864

Net income

59,473

338

59,811

Amounts reported in other comprehensive loss

(15,615)

(90)

(15,705)

Dividends declared ($

1.465

per share)

(19,530)

Distributions to noncontrolling affiliate

shareholders

(877)

Shares issued upon exercise of stock options

and other

(432)

(423)

Shares issued for employee stock purchase plan

502

505

Share-based compensation plans

3,706

3,724

Balance as of December 31, 2018

13,338

97,304

405,125

(80,715)

1,317

436,369

Cumulative effect of an accounting change

(44)

Balance as of January 1, 2019

13,338

97,304

405,081

(80,715)

1,317

436,325

Net income

31,622

262

31,884

Amounts reported in other comprehensive income

2,545

2,570

Dividends declared ($

1.525

per share)

(23,724)

Shares issued related to the Combination

4,329

784,751

789,080

Shares issued upon exercise of stock options

and other

871

894

Shares issued for employee stock purchase plan

473

476

Share-based compensation plans

4,819

4,861

Balance as of December 31, 2019

17,735

888,218

412,979

(78,170)

1,604

1,242,366

Cumulative effect of an accounting change

(911)

Balance as of January 1, 2020

17,735

888,218

412,068

(78,170)

1,604

1,241,455

Net income

39,658

129

39,787

Amounts reported in other comprehensive income

51,572

(92)

51,480

Dividends declared ($

1.560

0 per share)

(27,786)

Acquisition of noncontrolling interest

(707)

(340)

(1,047)

Distributions to noncontrolling affiliate

shareholders

(751)

Shares issued upon exercise of stock options

and other

6,714

6,780

Share-based compensation plans

10,946

10,996

Balance as of December 31, 2020

17,851

905,171

423,940

(26,598)

550

1,320,914

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

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Note 1 – Significant Accounting Policies

As used in these Notes to Consolidated Financial Statements,

the terms “Quaker”, “Quaker Houghton”, the “Company”, “we”,

and “our” refer to Quaker Chemical Corporation (doing

business as Quaker Houghton), its subsidiaries, and associated companies,

unless the context otherwise requires.

As used in these Notes to Consolidated Financial Statements, the

term Legacy Quaker refers to

the Company prior to the closing of its combination with

Houghton International, Inc. (“Houghton”) (herein referred

to as the

“Combination”).

Principles of consolidation:

All majority-owned subsidiaries are included in the

Company’s consolidated financial

statements,

with appropriate elimination of intercompany balances and

transactions.

Investments in associated companies (less than majority-

owned and in which the Company has significant

influence) are accounted for under the equity method.

The Company’s share of net

income or losses in these investments in associated companies

is included in the Consolidated Statements

of Income.

The Company

periodically reviews these investments for impairments

and, if necessary, would adjust

these investments to their fair value when a

decline in market value or other impairment indicators are

deemed to be other than temporary.

See Note 17 of Notes to Consolidated

Financial Statements.

The Company is not the primary beneficiary of any

variable interest entities (“VIEs”) and therefore the

Company’s consolidated

financial statements do not include the accounts of any VIEs.

Translation of

foreign currency:

Assets and liabilities of non-U.S. subsidiaries and associated comp

anies are translated into

U.S. dollars at the respective rates of exchange prevailing

at the end of the year.

Income and expense accounts are translated at

average exchange rates prevailing during the year.

Translation adjustments resulting

from this process are recorded directly in equity

as accumulated other comprehensive (loss) income

(“AOCI”) and will be included as income or expense only upon

sale or liquidation

of the underlying entity or asset.

Generally, all of the

Company’s non-U.S. subsidiaries

use their local currency as their functional

currency.

Cash and cash equivalents:

The Company invests temporary and excess funds in money market securities and financial

instruments having maturities within 90 days. The Company considers all highly liquid investments with original maturities of three

months or less to be cash equivalents.

The Company has not experienced losses from the aforementioned

investments.

Inventories:

Inventories are valued at the lower of cost or net realizable

value, and are valued using the first-in, first-out method.

See Note 14 of Notes to Consolidated Financial Statements.

Long-lived assets:

Property, plant and

equipment (“PP&E”) are stated at gross cost, less accumulated depreciation.

Depreciation

is computed using the straight-line method on an individual

asset basis over the following estimated useful lives: building

and

improvements,

years; and machinery and equipment,

years.

The carrying values of long-lived assets are evaluated

whenever changes in circumstances or current events indicate

the carrying amount of such assets may not be recoverable.

An estimate

of undiscounted cash flows produced by the asset, or the

appropriate group of assets, is compared with the carrying value to

determine

whether an impairment exists.

If necessary, the Company

recognizes an impairment loss for the difference between

the carrying

amount of the assets and their estimated fair value.

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

Upon sale or

other dispositions of long-lived assets, the applicable amounts of

asset cost and accumulated depreciation are removed from

the

accounts and the net amount, less proceeds from

disposals, is recorded in the Consolidated Statements of Income.

Expenditures for

renewals or improvements that increase the estimated useful

life or capacity of the assets are capitalized, whereas

expenditures for

repairs and maintenance are expensed when incurred.

See Notes 9 and 15 of Notes to Consolidated Financial

Statements.

Capitalized software:

The Company capitalizes certain costs in connection with developing

or obtaining software for internal

use, depending on the associated project.

These costs are amortized over a period of

years once the assets are ready for their

intended use.

In connection with the implementations and upgrades to

the Company’s global transaction,

consolidation and other

related systems, approximately

$2.3

million and

$2.6

million of net costs were capitalized in PP&E on the

Company’s Consolidated

Balance Sheets at December 31, 2020 and 2019, respectively.

Goodwill and other intangible assets:

The Company records goodwill, definite-lived intangible

assets and indefinite-lived

intangible assets at fair value at the date of acquisition.

Goodwill and indefinite-lived intangible assets are not amortized

but tested for

impairment at least annually.

These tests will be performed more frequently if triggering

events indicate potential impairment.

Definite-lived intangible assets are amortized on a straight

-line basis over their estimated useful lives, generally for periods ranging

from

years.

The Company continually evaluates the reasonableness of

the useful lives of these assets, consistent with the

discussion of long-lived assets, above.

See Note 16 of Notes to Consolidated Financial Statements.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Revenue recognition:

The Company applies the Financial Accounting Standards

Board’s (“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.

See Note 5 of Notes to Consolidated

Financial Statements.

Accounts receivable and allowance for doubtful

accounts:

Trade accounts receivable subject the Company

to credit risk.

Trade accounts receivable are recorded

at the invoiced amount and generally do not bear interest.

The allowance for doubtful

accounts is the Company’s

best estimate of the amount of expected credit losses with its existing

accounts receivable.

The Company

adopted ASU 2016-13,

Financial Instruments - Credit Losses (Topic

326): Measurement of Credit

Losses on Financial Instruments

a modified retrospective basis, effective January

1, 2020.

See Note 3 of Notes to the Consolidated Financial Statements.

The Company recognizes an allowance for credit losses, which

represents the portion of the receivable that the Company does

not

expect to collect over its contractual life, considering

past events and reasonable and supportable forecasts of

future economic

conditions.

The Company’s allowance for

credit losses on its trade accounts receivable is based on specific

collectability facts and

circumstances for each outstanding receivable and customer,

the aging of outstanding receivables, and the associated

collection risk

the Company estimates for certain past due aging categories,

and also, the general risk to all outstanding accounts receivable

based on

historical amounts determined to be uncollectible.

The Company does not have any off-balance-sheet credit

exposure related to its

customers.

See Note 13 of Notes to Consolidated Financial Statements.

Research and development costs

Research and development costs are expensed as incurred

and are included in selling, general

and administrative expenses (“SG&A”).

Research and development expenses were

$40.0

million,

$32.1

million and

$24.5

million for

the years ended December 31, 2020, 2019 and 2018,

respectively.

Environmental liabilities and expenditures:

Accruals for environmental matters are recorded

when it is probable that a liability

has been incurred and the amount of the liability can

be reasonably estimated.

If there is a range of estimated liability and no amount

in that range is considered more probable than another,

then the Company records the lowest amount in the range in accordance

with

generally accepted accounting principles in the United

States (“U.S. GAAP”).

Environmental costs and remediation costs are

capitalized if the costs extend the life, increase the

capacity or improve safety or efficiency of the property

from the date acquired or

constructed, and/or mitigate or prevent contamination

in the future.

See Note 26 of Notes to Consolidated Financial Statements.

Asset retirement obligations:

The Company follows the FASB’s

guidance regarding asset retirement obligations,

which

addresses the accounting and reporting for obligations

associated with the retirement of tangible long-lived assets and the associated

retirement costs.

Also, the Company follows the FASB’s

guidance for conditional asset retirement obligations

(“CARO”), which

relates to legal obligations to perform an asset retirement

activity in which the timing and (or) method of settlement are

conditional on

a future event that may or may not be within the control

of the entity.

In accordance with this guidance, the Company records a

liability when there is enough information regarding the

timing of the CARO to perform a probability-weighted discounted cash

flow

analysis.

As of December 31, 2020 and 2019, the Company

had limited exposure to such obligations and had immaterial

liabilities

recorded for such on its Consolidated Balance Sheets.

Pension and o

ther postretirement benefits:

The Company maintains various noncontributory retirement

plans, covering a

portion of its employees in the U.S. and certain other

countries, including the Netherlands, the United Kingdom

(“U.K.”), Mexico,

Sweden, Germany and France.

These retirement plans are subject to the provisions of FASB’s

guidance regarding employers’

accounting for defined benefit pension plans.

The plans of the remaining non-U.S. subsidiaries are, for

the most part, either fully

insured or integrated with the local governments’ plans and

are not subject to the provisions of the guidance.

The guidance requires

that employers recognize on a prospective basis the

funded status of their defined benefit pension and other

postretirement plans on

their consolidated balance sheet and, also, recognize

as a component of AOCI, net of tax, the gains or losses and prior

service costs or

credits that arise during the period but are not recognized

as components of net periodic benefit cost.

In addition, the guidance

requires that an employer recognize a settlement charge

in their consolidated statement of income when certain events occur,

including plan termination or the settlement of certain

plan liabilities.

A settlement charge represents the immediate

recognition into

expense of a portion of the unrecognized loss within AOCI on

the balance sheet in proportion to the share of the projected benefit

obligation that was settled.

The Company’s Legacy

Quaker U.S. pension plan year ends on November 30 and the

measurement date is

December 31.

The measurement date for the Company’s

other postretirement benefits plan is December 31.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The Company’s global

pension investment policies are designed to ensure that

pension assets are invested in a manner consistent

with meeting the future benefit obligations of the pension

plans and maintaining compliance with various laws and regulations

including the Employee Retirement Income Security

Act of 1974.

The Company establishes strategic asset allocation percentage

targets and benchmarks for significant asset classes

with the aim of achieving a prudent balance between

return and risk.

The

Company’s investment

horizon is generally long term, and, accordingly,

the target asset allocations encompass a long-term

perspective of capital markets, expected risk and return

and perceived future economic conditions while also considering

the profile of

plan liabilities.

To the extent

feasible, the short-term investment portfolio is managed

to match the short-term obligations, the

intermediate portfolio duration is matched to reduce

the risk of volatility in intermediate plan distributions, and the

total return

portfolio is managed to maximize the long-term real

growth of plan assets.

The critical investment principles of diversification,

assessment of risk and targeting the optimal expected

returns for given levels of risk are applied.

The Company’s investment

guidelines prohibit the use of securities such as letter stock and

other unregistered securities, commodities or commodity contracts,

short sales, margin transactions, private placements

(unless specifically addressed by addendum), or any derivatives, options or

futures

for the purpose of portfolio leveraging.

The target asset allocation is reviewed periodically

and is determined based on a long-term projection of capital market

outcomes,

inflation rates, fixed income yields, returns, volatilities and

correlation relationships.

The interaction between plan assets and benefit

obligations is periodically studied to assist in establishing such

strategic asset allocation targets.

Asset performance is monitored with

an overall expectation that plan assets will meet or exceed

benchmark performance over rolling five-year periods.

The Company’s

pension committee, as authorized by the Company’s

Board of Directors, has discretion to manage the assets within

established asset

allocation ranges approved by senior management of the

Company.

See Note 21 of Notes to Consolidated Financial Statements.

Comprehensive income (loss):

The Company presents other comprehensive income (loss) in its Statements

of Comprehensive

Income.

The Company follows the FASB’s

guidance regarding the disclosure of reclassifications from

AOCI which requires the

disclosure of significant amounts reclassified from each

component of AOCI, the related tax amounts and the income

statement line

items affected by such reclassifications.

See Note 23 of Notes to Consolidated Financial Statements.

Income taxes and uncertain tax positions:

The provision for income taxes is determined using the asset and

liability approach

of accounting for income taxes.

Under this approach, deferred taxes represent the future tax consequences

expected to occur when the

reported amounts of assets and liabilities are recovered

or paid.

The provision for income taxes represents income taxes paid

payable for the current year and the change in deferred taxes

during the year.

Deferred taxes result from differences between the

financial and tax bases of the Company’s

assets and liabilities and are adjusted for changes in tax rates and

tax laws when changes are

enacted.

Valuation

allowances are recorded to reduce deferred tax assets when it is more

likely than not that a tax benefit will not be

realized.

The FASB’s

guidance regarding accounting for uncertainty in income

taxes prescribes the recognition threshold and

measurement attributes for financial statement recognition

and measurement of tax positions taken or expected to be

taken on a tax

return.

The guidance further requires the determination of whether

the benefits of tax positions are probable or more likely than not

sustained upon audit based upon the technical merits of

the tax position.

For tax positions that are determined to be more likely than

not sustained upon audit, a company recognizes the largest

amount of benefit that is greater than

% likely of being realized upon

ultimate settlement in the financial statements.

For tax positions that are not determined to be more likely

than not sustained upon

audit, a company does not recognize any portion of the

benefit in the financial statements.

Additionally, the Company

monitors and

adjusts for derecognition, classification, and penalties and

interest in interim periods, with appropriate disclosure and

transition

thereto.

Also, the amount of interest expense and income related to uncertain

tax positions is computed by applying the applicable

statutory rate of interest to the difference

between the tax position recognized, including timing differences,

and the amount previously

taken or expected to be taken in a tax return.

The Company recognizes

interest and/or penalties related to income tax matters in

income tax expense.

Finally, when applicable,

the Company nets its liability for unrecognized tax benefits

against deferred tax assets

related to net operating losses or other tax credit carryforwards

that would apply if the uncertain tax position were settled

for the

presumed amount at the balance sheet date.

Pursuant to the Tax

Cuts and Jobs Act (“U.S. Tax

Reform”), specifically the one-time tax on deemed repatriation

(the “Transition

Tax”),

the Company has provided for U.S. income tax on its undistributed

earnings of non-U.S. subsidiaries, however,

the Company is

subject to and will incur other taxes, such as withholding taxes and

dividend distribution taxes, if these undistributed earnings were

ultimately remitted to the U.S.

The Company currently intends to reinvest its future undistributed

earnings of non-U.S. subsidiaries to

support working capital needs and certain other growth

initiatives of those subsidiaries.

However, in certain cases the Company

has

and may in the future change its indefinite reinvestment

assertion for any or all of these undistributed earnings.

In this case, the

Company would estimate and record a tax liability and

corresponding tax expense for the amount of non-U.S.

income taxes it would

incur to ultimately remit these earnings to the U.S.

See Note 10 of Notes to Consolidated Financial Statements.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Derivatives:

The Company is exposed to the impact of changes in interest rates,

foreign currency fluctuations, changes in

commodity prices and credit risk.

The Company utilizes interest rate swap agreements to enhance

its ability to manage risk, including

exposure to variability in interest payments associated with its variable

rate debt.

Derivative instruments are entered into for periods

consistent with the related underlying exposures and do not

constitute positions independent of those exposures.

As of December 31,

2020 and 2019,

the Company had certain interest rate swap agreements that

were designated as cash flow hedges.

Interest rate swaps

are entered into with a limited number of counterparties,

each of which allows for net settlement of all contracts through

a single

payment in a single currency in the event of a default

on or termination of any one contract.

The Company records these instruments

on a net basis within the Consolidated Balance Sheets.

The effective portion of the change in fair value

of the agreement is recorded

in AOCI and will be recognized in the Consolidated Statements

of Income when the hedge item affects earnings

or losses or it

becomes probable that the forecasted transaction will not occur.

See Note 25 of Notes to Consolidated Financial Statements.

Fair value measurements:

The Company utilizes the FASB’s

guidance regarding fair value measurements,

which establishes a

common definition for fair value to be applied to guidance

requiring use of fair value, establishes a framework for

measuring fair

value and expands disclosure about such fair value measurements.

Specifically, the guidance

utilizes a fair value hierarchy that

prioritizes the inputs to valuation techniques used to measure fair

value into three broad levels.

See Notes 21 and 24 of Notes to

Consolidated Financial Statements.

The following is a brief description of those three levels:

•

Level 1: Observable inputs such as quoted prices (unadjusted)

in active markets for identical assets or liabilities.

•

Level 2: Inputs other than quoted prices that are observable

for the asset or liability,

either directly or indirectly.

These

include quoted prices for similar assets or liabilities in active

markets and quoted prices for identical or similar assets or

liabilities in markets that are not active.

•

Level 3: Unobservable inputs that reflect the reporting entity's own assumptions.

Share-based compensation:

The Company applies the FASB’s

guidance regarding share-based payments, which

requires the

recognition of the fair value of share-based compensation

as a component of expense.

The Company has a long-term incentive

program (“LTIP”)

for key employees which provides for the granting of options

to purchase stock at prices not less than its market

value on the date of the grant.

Most options become exercisable within

three years

after the date of the grant for a period of time

determined by the Company,

but not to exceed

seven years

from the date of grant.

Restricted stock awards and restricted stock units

issued under the LTIP

program are subject to time vesting generally over a

one

three-year

period.

In addition, as part of the

Company’s Annual Incentive

Plan, nonvested shares may be issued to key employees,

which generally would vest over a

two

five

year period.

In addition, while the FASB’s

guidance permits the Company to make an accounting

policy election to account for forfeitures as

they occur for service condition aspects of certain share-based

awards, the Company has decided not to elect this accounting

policy

and instead has elected to continue utilizing a forfeiture

rate assumption.

Based on historical experience, the Company has assumed a

forfeiture rate of

% on certain of its nonvested stock awards.

The Company will record additional expense if the actual forfeiture

rate is lower than estimated and will record a recovery

of prior expense if the actual forfeiture is higher than

estimated.

The Company also issues performance-dependent

stock awards as a component of its LTIP.

The fair value of the performance-

dependent stock awards is based on their grant-date market

value adjusted for the likelihood of attaining certain pre

-determined

performance goals and is calculated by utilizing a Monte Carlo

Simulation model.

Compensation expense is recognized on a straight-

line basis over the vesting period, generally

three years

See Note 8 of the Notes to Consolidated Financial Statements.

Earnings per share:

The Company follows the FASB’s

guidance regarding the calculation of earnings per

share for nonvested

stock awards with rights to non-forfeitable dividends.

The guidance requires nonvested stock awards with rights to

non-forfeitable

dividends to be included as part of the basic weighted

average share calculation under the two-class method.

See Note 11 of Notes to

Consolidated Financial Statements.

Segments:

The Company’s reportable

segments reflect the structure of the Company’s

internal organization, the method by

which the Company’s resources

are allocated and the manner by which the Company

and the chief operating decision maker assess its

performance

See Note 4 of Notes to Consolidated Financial Statements.

Hyper-inflationary accounting:

Economies that have a cumulative three-year rate of inflation

exceeding

100

% are considered

hyper-inflationary in accordance with U.S. GAAP.

A legal entity that operates within an economy deemed

to be hyper-inflationary is

required to remeasure its monetary assets and liabilities to the

applicable published exchange rates and record the associated gains

losses resulting from the remeasurement directly to the Consolidated

Statements of Income.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Venezuela’s

economy has been considered hyper-inflationary

under U.S. GAAP since 2010.

The Company has a

% equity

interest in a Venezuelan

affiliate, Kelko Quaker Chemical, S.A (“Kelko Venezuela”).

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 December 31, 2020 and 2019, the Company had

remaining carrying value for its investment in Kelko

Venezuela.

See Note 17 of Notes to Consolidated Financial Statements.

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 Company's wholly owned

Argentine subsidiary beginning

July 1, 2018.

In addition, Houghton has an Argentine subsidiary to

which hyper-inflationary accounting also is applied.

As of, and

for the year ended December 31, 2020, the Company's Argentine

subsidiaries represented less than

% of the Company’s consolidated

total assets and net sales, respectively.

During the years ended December 31, 2020, 2019 and 2018, the Company recorded $0.4

million, $1.0 million, and $0.7 million, respectively, of remeasurement losses associated with the applicable currency conversions

related to Venezuela and Argentina.

Business combinations:

The Company accounts for business combinations under

the acquisition method of accounting.

This

method requires the recording of acquired assets, including

separately identifiable intangible assets and assumed liabilities at their

respective acquisition date estimated fair values.

Any excess of the purchase price over the estimated fair value

of the identifiable net

assets acquired is recorded as goodwill.

The determination of the estimated fair value of assets acquired and

liabilities assumed

requires significant estimates and assumptions.

Based on the assessment of additional information during the measurement

period,

which may be up to one year from the acquisition date,

the Company may record adjustments to the estimated fair value of assets

acquired and liabilities assumed.

See Note 2 of Notes to Consolidated Financial Statements.

Restructuring activities:

Restructuring programs consist of employee severance,

rationalization of manufacturing or other

facilities and other related items.

To account for

such programs,

the Company applies FASB’s

guidance regarding exit or disposal

cost obligations.

This guidance requires that a liability for a cost associated with an

exit or disposal activity be recognized when the

liability is incurred, is estimable, and payment is probable.

See Note 7 of Notes to Consolidated Financial Statements.

Reclassifications:

Certain information has been reclassified to conform

to the current year presentation.

Accounting estimates:

The preparation of financial statements in conformity

with generally accepted accounting principles

requires management to make estimates and assumptions that

affect the reported amounts of assets, liabilities

and disclosure of

contingencies at the date of the financial statements and

the reported amounts of net sales and expenses during the reporting

period.

Actual results could differ from such estimates.

Note 2 – Business Combinations

Houghton

August 1, 2019

, the Company completed the Combination, whereby the Company

acquired all of the issued and outstanding

shares of Houghton from Gulf Houghton Lubricants, Ltd.

and certain other selling shareholders in exchange for a combination

of cash

and shares of the Company’s

common stock in accordance with the Share Purchase Agreement

dated April 4, 2017.

Houghton is a

leading global provider of specialty chemicals and technical

services for metalworking and other industrial applications.

The

Company believes that combining the Legacy Quaker

and Houghton products and service offerings allows Quaker

Houghton to better

serve its customers in its various end markets.

The Combination was subject to certain regulatory

and shareholder approvals.

At a shareholder meeting held during 2017, the

Company’s shareholders

approved the issuance of new shares of the Company’s

common stock at closing of the Combination.

Also

in 2017, the Company received regulatory approvals for

the Combination from China and Australia.

The Company received

regulatory approvals from the European Commission

(“EC”) during the second quarter of 2019 and the U.S. Federal

Trade

Commission (“FTC”) in July 2019.

The approvals from the FTC and the EC required the concurrent

divestiture of certain steel and

aluminum related product lines of Houghton, which

were sold by Houghton on August 1, 2019 for approximately

million in cash.

The final remedy agreed with the EC and the FTC was consistent

with the Company’s

previous expectation that the total divested

product lines would be approximately

% of the combined company’s

net sales.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The following table summarizes the fair value of consideration

transferred in the Combination:

Cash transferred to Houghton shareholders (a)

170,829

Cash paid to extinguish Houghton debt obligations

702,556

Fair value of common stock issued as consideration (b)

789,080

Total fair value

of consideration transferred

1,662,465

(a)

A portion is held in escrow by a third party,

subject to indemnification rights that lapse upon the achievement

of certain

milestones.

(b)

Amount was determined based on approximately

4.3

million shares, comprising

24.5

% of the common stock of the Company

immediately after the closing, and the closing price per

share of Quaker Chemical Corporation common stock

of $

182.27

August 1, 2019.

The Company accounted for the Combination under the

acquisition method of accounting.

This method requires the recording of

acquired assets, including separately identifiable

intangible assets, at their fair value on the acquisition date.

Any excess of the

purchase price over the estimated fair value of

the identifiable net assets acquired is recorded as goodwill.

The determination of the

estimated fair value of assets acquired, including indefinite

and definite-lived intangible assets, requires management’s

judgment and

often involves the use of significant estimates and assumptions,

including assumptions with respect to future cash inflows and

outflows, discount rates, customer attrition rates, royalty

rates, asset lives and market multiples, among other items.

Fair values were

determined by management using a variety of methodologies

and resources, including external independent valuation

experts.

The

valuation methods included physical appraisals, discounted

cash flow analyses, excess earnings, relief from

royalty, and other

appropriate valuation techniques to determine the fair value

of assets acquired and liabilities assumed.

The following table presents the final estimated fair

values of Houghton net assets acquired:

Measurement

August 1,

Period

August 1, 2019

2019 (1)

Adjustments

(as adjusted)

Cash and cash equivalents

75,821

Accounts receivable

178,922

Inventories

95,193

Prepaid expenses and other assets

10,652

666

11,318

Property, plant and

equipment

115,529

(66)

115,463

Right of use lease assets

10,673

Investments in associated companies

66,447

Other non-current assets

4,710

1,553

6,263

Intangible assets

1,028,400

Goodwill

494,915

4,625

499,540

Total assets purchased

2,081,262

6,778

2,088,040

Short-term borrowings, not refinanced at closing

9,297

Accounts

payable, accrued expenses and other accrued liabilities

150,078

1,127

151,205

Deferred tax liabilities

205,082

4,098

209,180

Long-term lease liabilities

6,607

Other non-current liabilities

47,733

1,553

49,286

Total liabilities assumed

418,797

6,778

425,575

Total consideration

paid for Houghton

1,662,465

Less: cash acquired

75,821

Less: fair value of common stock issued as consideration

789,080

Net cash paid for Houghton

797,564

(1) As previously disclosed in the Company’s

2019 Form 10-K.

During 2020, the allocation of the purchase price for

the Combination was finalized and the

one-year

measurement period has

ended.

Houghton assets acquired and liabilities assumed were assigned to

each of the Company’s reportable

segments on a specific

identification or allocated basis, as applicable.

Prior to finalizing the purchase price allocation, certain measurement

period

adjustments were recorded during 2020 related primarily

to increasing the valuation allowances against the deferred

tax assets

associated with foreign tax credits acquired as part of

the Combination as additional information became available and

was used to

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

update the Company’s initial

estimates of expenses allocated to foreign source income

and expected creditable foreign taxes.

addition, measurement period adjustments included

the recognition of additional other non-current assets and other non-current

liabilities based on additional information obtained regarding

certain tax audits and associated rights to indemnification,

and certain

non-income tax liabilities payable upon closing of the

Combination in certain countries.

The Company allocated $

1,028.4

million of the purchase price to intangible assets, including certain

measurement period

adjustments, comprised of $

242.0

million of trademarks and tradename, to which management has

assigned indefinite lives; $

677.3

million of customer relationships, to be amortized over

years; and $

109.1

million of existing product technology,

to be

amortized over

years.

In addition, the Company recorded $

499.5

million of goodwill, including measurement period adjustments,

related to expected value not allocated to other acquired

assets, none of which will be tax deductible.

See Note 16 of Notes to

Consolidated Financial Statements.

Factors contributing to the purchase price that resulted in

goodwill included the acquisition of

management, business processes and personnel that

will allow Quaker Houghton to better serve its customers.

The expanded portfolio

is expected to generate significant cross-selling opportunities and

allow further expansion into certain emerging

growth markets.

Commencing August 1, 2019, the Company’s

Consolidated Statements of Income included the results of

Houghton.

Net sales of

Houghton subsequent to closing of the Combination and included

in the Company’s Consolidated

Statements of Income for the year

ended December 31, 2019 were $

299.8

million.

The following unaudited pro forma consolidated financial information

has been

prepared as if the Combination had taken place

on January 1, 2018.

The unaudited pro forma results include certain adjustments to

each company’s historical

actual results, including: (i) additional depreciation and amort

ization expense based on the initial estimates

of fair value step up and estimated useful lives of depreciable

fixed assets, definite-lived intangible assets and investment in

associated

companies acquired; (ii) adoption of required accounting

guidance and alignment of related accounting policies, (iii)

elimination of

transactions between Legacy Quaker and Houghton;

(iv) elimination of results associated with the divested product

lines; (v)

adjustment to interest expense, net, to reflect the impact

of the financing and capital structure of the combined Company;

and (vi)

adjustment for certain Combination,

integration and other acquisition-related costs to reflect such costs as

if they were incurred in the

period immediately following the pro-forma closing

of the Combination on January 1, 2018.

The adjustments described in (vi)

include an expense recorded in costs of goods sold (“COGS”)

associated with selling inventory acquired in the Combination which

was adjusted to fair value as part of purchase accounting,

restructuring expense incurred associated with the Company’s

global

restructuring program initiated post-closing of the Combination

and certain other integration costs incurred post-closing included

combination and other acquisition-related expenses.

These costs have been presented in the unaudited pro forma

table below as these

costs on a pro forma basis were incurred during the year

ended December 31, 2018.

Unaudited pro forma results are not necessarily

indicative of the results that would have occurred if the

acquisition had occurred on the date indicated, or that may result in the

future

for various reasons, including the potential impact of revenue

and cost synergies on the business.

For the years ending

Unaudited Pro Forma

December 31,

(as if the Combination occurred on

January 1, 2018)

2019

2018

Net sales

1,562,427

1,654,588

Net income attributable to Quaker Chemical Corporation

94,537

35,337

Combination,

integration and other acquisition-related expenses have been

and are expected to continue to be significant.

The

Company incurred total costs of $

30.3

million, $

38.0

million and $

19.5

million for the years ended December 31, 2020, 2019 and

2018

related to the Combination,

integration and other acquisition-related activities.

These costs included certain legal, financial and

other advisory

and consultant costs related to due diligence, regulatory approvals

and closing the Combination,

as well as integration

planning and post-closing integration activities including

internal control readiness and remediation.

These costs also include interest

costs to maintain the bank commitment (“ticking fees”)

for the Combination during each of the years ended December

31, 2019 and

2018,

accelerated depreciation charges during the year

ended December 31, 2020 and 2019, a loss on the sale of a held-for-sale

asset

during the year ended December 31, 2020, and a gain

on the sale of a held-for-sale asset during the year ended

December 31, 2018.

As of December 31, 2020 and 2019, the Company

had current liabilities related to the Combination and other acquisition-related

activities of $

7.5

million and $

6.6

million, respectively,

primarily recorded within other accrued liabilities on its Consolidated

Balance

Sheets.

Norman Hay

October 2019

, the Company completed its acquisition of the operating divisions

Norman Hay plc

(“Norman Hay”), a private

U.K. company

that provides specialty chemicals, operating equipment, and

services to industrial end markets.

The acquisition adds

new technologies in automotive, original equipment

manufacturer (“OEM”), and aerospace, as well as engineering

expertise which is

expected to strengthen the Company’s

existing equipment solutions platform.

The acquired Norman Hay assets and liabilities were

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

assigned to the Global Specialty Businesses reportable segment.

The original purchase price was

80.0

million GBP,

on a cash-free

and debt-free basis, subject to routine and customary

post-closing adjustments related to working capital and

net indebtedness levels.

The following table presents the final estimated fair

values of Norman Hay net assets acquired:

Measurement

October 1,

Period

October 1, 2019

2019 (1)

Adjustments

(as adjusted)

Cash and cash equivalents

18,981

Accounts receivable

15,471

Inventories

8,213

(49)

8,164

Prepaid expenses and other assets

4,203

138

4,341

Property, plant and

equipment

14,981

Right of use lease assets

10,608

Intangible assets

51,088

Goodwill

29,384

(82)

29,302

Total assets purchased

152,929

152,936

Long-term debt included current portions

485

Accounts payable, accrued expenses and other accrued

liabilities

13,488

(732)

12,756

Deferred tax liabilities

12,746

905

13,651

Long-term lease liabilities

8,594

Total liabilities assumed

35,313

173

35,486

Total consideration

paid for Norman Hay

117,616

(166)

117,450

Less: estimated purchase price settlement (2)

3,287

(3,287)

Less: cash acquired

18,981

Net cash paid for Norman Hay

95,348

3,121

98,469

(1) As previously disclosed in the Company’s

2019 Form 10-K.

(2) The Company finalized its post-closing adjustments for

the Norman Hay acquisition and paid approximately

2.5

million GBP

during the first quarter of 2020 to settle such adjustments.

During 2020, the allocation of the purchase price for

Norman Hay was finalized and the

one-year

measurement period has ended.

The Company allocated $

51.1

million of the purchase price to intangible assets, comprised

of $

36.9

million of customer relationships,

to be amortized over

years; $

7.5

million of existing product technology,

to be amortized over

years; $

6.3

million of

trademarks, to be amortized over

years; and $

0.4

million of non-compete agreements, to be amortized over

years.

addition, the Company recorded $

29.3

million of goodwill related to expected value not allocated to

other acquired assets, none of

which will be tax deductible.

Factors contributing to the purchase price that resulted

in goodwill included the acquisition of

management, business processes and personnel that

will allow Quaker Houghton to better serve its customers.

The results of operations of Norman Hay are included

in the Consolidated Statements of Income as of October 1, 2019.

Transaction expenses associated with

this acquisition are included in Combination,

integration and other acquisition-related expenses

in the Company’s Consolidated

Statements of Income.

Certain pro forma and other information is not presented, as the operations

Norman Hay are not considered material to the overall

operations of the Company for the periods presented.

Coral Chemical Company

December 2020

, the Company completed its acquisition of

Coral Chemical Company

(“Coral”), a privately held, U.S.-based

provider of metal finishing fluid solutions.

The acquisition provides

technical expertise and product solutions for pre-treatment,

metalworking and wastewater treatment applications

to the beverage cans and general industrial end markets.

The acquired Coral

assets and liabilities were assigned to the Americas and Global

Specialty Businesses reportable segments.

The original purchase price

was approximately $

54.1

million, subject to routine and customary post-closing adjustments related

to working capital and net

indebtedness levels.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The following table presents the preliminary estimated fair

values of Coral net assets acquired:

December 22,

2020

Cash and cash equivalents

958

Accounts receivable

8,473

Inventories

4,527

Prepaid expenses and other assets

181

Property, plant and

equipment

10,467

Intangible assets

30,300

Goodwill

2,814

Total assets purchased

57,720

Long-term debt included current portions

183

Accounts payable, accrued expenses and other accrued liabilities

3,482

Total liabilities assumed

3,665

Total consideration

paid for Coral

54,055

Less: cash acquired

958

Net cash paid for Coral

53,097

The Company allocated $

30.3

million of the purchase price to intangible assets, comprised

of $

22.0

million of customer

relationships, to be amortized over

years; $

4.7

million of existing product technology,

to be amortized over

years;

3.6

million of trademarks, to be amortized over

years.

In addition, the Company recorded $

2.8

million of goodwill related to

expected value not allocated to other acquired assets, none

of which will be tax deductible.

Factors contributing to the purchase price

that resulted in goodwill included the acquisition of

management, business processes and personnel that will

allow Quaker Houghton

to better serve its customers.

As of December 31, 2020, the allocation of the purchase

price for Coral has not been finalized and the

one-year

measurement

period has not ended.

Further adjustments may be necessary as a result of the

Company’s on-going assessment of

additional

information related to the fair value of assets acquired

and liabilities assumed.

The preliminary purchase price allocations are based

upon the valuation of assets and these estimates and assumptions

are subject to change as the Company obtains additional information

during the measurement period.

These assets pending finalization include fixed assets and intangible

assets which could also result in

adjustments to goodwill.

The results of operations of Coral subsequent to the

acquisition date are included in the Consolidated Statements of

Income as of

December 31, 2020.

Transaction expenses associated with this acquisition

are included in Combination,

integration and other

acquisition-related expenses in the Company’s

Consolidated Statements of Income.

Certain pro forma and other information is not

presented, as the operations of Coral are not considered

material to the overall operations of the Company for the

periods presented.

Other Acquisitions

In February 2021, the Company acquired certain assets related

to tin-plating solutions in the steel end market for approximately

million.

The results of operations of the acquired assets are not

included in the Consolidated Statements of Income, because the

date of closing was after December 31, 2020.

Transaction expenses associated with this acquisition

that were incurred during the year

ended December 31, 2020 are included in Combination,

integration and other acquisition-related expenses in the Company’s

Consolidated Statements of Income.

A preliminary purchase price allocation of assets acquired

and liabilities assumed has not been

presented as that information is not available as of

the date of these Consolidated Financial Statements.

In May 2020, the Company acquired Tel

Nordic ApS (“TEL”), a company that specializes in lubricants and engineering

primarily

in high pressure aluminum die casting for its Europe,

Middle East and Africa (“EMEA”) reportable segment.

Consideration paid was

in the form of a convertible promissory note in the amount

20.0

million DKK, or approximately $

2.9

million, which was

subsequently converted into shares of the Company’s

common stock.

An adjustment to the purchase price of approximately

0.4

million DKK, or less than $

0.1

million, was made as a result of finalizing a post-closing

settlement in the second quarter of 2020.

The

Company allocated approximately $

2.4

million of the purchase price to intangible assets to be amortized

over

years.

In addition,

the Company recorded approximately $

0.5

million of goodwill, related to expected value not allocated to

other acquired assets, none

of which will be tax deductible.

The allocation of the purchase price of TEL has not been

finalized and the one-year measurement

period has not ended.

Further adjustments may be necessary as a result of the

Company’s on-going assessment of

additional

information related to the fair value of assets acquired

and liabilities assumed.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

In March 2020, the Company acquired the remaining

% ownership interest in one of its South African affiliates,

Quaker

Chemical South Africa Limited (“QSA”) for

16.7

million ZAR, or approximately $

1.0

million, from its joint venture partner PQ

Holdings South Africa.

QSA is a part of the Company’s

EMEA reportable segment.

As this acquisition was a change in an existing

controlling ownership, the Company recorded $

0.7

million of excess purchase price over the carrying value of

the noncontrolling

interest in Capital in excess of par value.

In March 2018, the Company purchased certain formulations

and product technology for the mining industry for $

1.0

million.

The Company allocated the entire purchase price to intangible

assets representing formulations and product technology,

to be

amortized over

years.

In accordance with the terms of the applicable purchase agreement,

0.5

million of the purchase price was

paid at signing, and the remaining $

0.5

million of the purchase price was paid during the first quarter of 2019.

Note 3 – Recently Issued Accounting Standards

Recently Issued Accounting Standards

Adopted

The FASB issued

Account Standards Update (“ASU”)

2020-04,

Reference Rate Reform (Topic

848): Facilitation of the Effects of

Reference Rate Reform on Financial

Reporting

in March 2020.

The amendments provide temporary optional expedients and

exceptions for applying GAAP to contract modifications,

hedging relationships and other transactions to ease the potential

accounting

and financial reporting burden associated with transitioning

away from reference rates that are expected to be discontinued,

including

the London Interbank Offered Rate (“LIBOR”).

ASU 2020-04 is effective for the

Company as of March 12, 2020 and generally can

be applied through December 31, 2022.

As of December 31, 2020,

the expedients provided in ASU 2020-04 do not impact the

Company; however, the Company

will continue to monitor for potential impacts on its consolidated

financial statements.

The FASB issued

ASU 2018-15

, Customer’s

Accounting for Implementation Costs Incurred

in a Cloud Computing Arrangement

That Is a Service Contract

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 prospec

tively to all implementation costs incurred after the date of

adoption.

Early

adoption was permitted.

The Company adopted this standard on a prospective basis, effective

January 1, 2020.

There was no

cumulative effect of adoption recorded within

retained earnings on January 1, 2020.

The FASB issued

ASU 2018-14,

Disclosure Framework — Changes to

the Disclosure Requirements

for Defined Benefit Plans

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 was permitted.

The Company adopted this standard on a prospective basis, effective

January 1, 2020.

ASU 2018-14

addresses disclosures only and will not

have an impact on the Company’s

consolidated financial statements.

The FASB issued

ASU 2018-13, Fair Value

Measurement (Topic 820):

Disclosure Framework – Changes to the Disclosure

Requirements for Fair Value

Measurement in August 2018 that modifies certain disclosure

requirements for employers that sponsor

defined benefit pension or other postretirement plans.

The amendments in this ASU 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, 2019, and should be

applied retrospectively to all periods presented.

The Company adopted this standard on a prospective basis, effective

January 1, 2020.

There was no cumulative effect of adoption

recorded within retained earnings on January 1, 2020.

The FASB issued

ASU 2016-13,

Financial Instruments - Credit Losses (Topic

326): Measurement of Credit

Losses on Financial

Instruments

in June 2016 related to the accounting for and disclosure of

credit losses.

The FASB subsequently

issued several

additional accounting standard updates which amended

and clarified the guidance, but did not materially change

the guidance or its

applicability to the Company.

This accounting 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 Company adopted

the guidance in this accounting standard update, including

all applicable subsequent updates to this accounting guidance, as required,

on a modified retrospective basis, effective January

1, 2020.

Adoption did not have a material impact to the Company’s

financial

statements as expected.

However, as a result of this adoption,

the Company recorded a cumulative effect of

accounting change that

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

resulted in an increase to its allowance for doubtful

accounts of approximately $

1.1

million, a decrease to deferred tax liabilities of

0.2

million and a decrease to retained earnings of $

0.9

million.

In accordance with this guidance, the Company recognizes

an allowance for credit losses reflecting the net amount expected to

collected from its financial assets, primarily trade accounts

receivable.

This allowance represents the portion of the receivable that the

Company does not expect to collect over its contractual

life, considering past events and reasonable and supportable forecasts of

future

economic conditions.

The Company’s allowance for

credit losses on its trade accounts receivable is based on

specific collectability

facts and circumstances for each outstanding receivable and

customer, the aging of outstanding

receivables and the associated

collection risk the Company estimates for certain past due

aging categories, and also, the general risk to all outstanding accounts

receivable based on historical amounts determined to

be uncollectible.

See Note 13 of Notes to the Consolidated Financial

Statements.

Recently Issued Accounting Standards

Not Yet Adopted

The FASB

issued ASU 2020-01,

Investments – Equity Securities (To

pic 321), Investments – Equity Method and Joint Ventures

(Topic

323), and Derivatives and Hedging (Topic

815) –Clarifying the Interactions between Topic

321, Topic

323, and Topic

815

January 2020 clarifying the interaction among the

accounting standards related to equity securities, equity method investments,

and

certain derivatives.

The new guidance, among other things, states that a company

should consider observable transactions that require

a company to either apply or discontinue the equity method

of accounting, for the purposes of applying the fair value

measurement

alternative immediately before applying or upon discontinuing

the equity method.

The new guidance also addresses the measurement

of certain purchased options and forward contracts used

to acquire investments.

The guidance within this accounting standard update

is effective for annual and interim periods beginning

after December 15, 2020 and is to be applied prospectively.

Early adoption is

permitted.

The Company will adopt this standard, as required, on a prospective

basis, effective January 1, 2021, and does not expect

adoption to have an impact to its financial statements.

The FASB issued

ASU 2019-12

, Income Taxes

(Topic

740): Simplifying the Accounting for Income Taxes

in December 2019.

The guidance within this accounting standard update

removes certain exceptions, including the exception to the incremental

approach

for certain intra-period tax allocations, to the requirement

to recognize or not recognize certain deferred tax liabilities for

equity

method investments and foreign subsidiaries, and to the

general methodology for calculating income taxes in

an interim period when a

year-to-date loss exceeds the anticipated loss for

the year.

Further, the guidance simplifies the accounting

related to franchise taxes,

the step up in tax basis for goodwill, current and deferred

tax expense, and codification improvements for income taxes

related to

employee stock ownership plans.

The guidance is effective for annual and interim

periods beginning after December 15, 2020.

Early

adoption is permitted.

The Company will adopt this standard, as required, effective

January 1, 2021, and is currently evaluating its

implementation and any potential adoption impact.

Note 4 – Business Segments

The Company’s operating

segments, which are consistent with its reportable segments,

reflect the structure of the Company’s

internal organization, the method by which

the Company’s resources are allocated

and the manner by which the chief operating

decision

maker assess the Company’s

performance.

During the third quarter of 2019 and in connection with the

Combination, the

Company reorganized its executive management

team to align with its new business structure, which reflects the

method by which the

chief operating decision maker assesses the Company’s

performance and allocates its resources.

The Company’s current reportable

segment structure includes four segments: (i) Americas;

(ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty Businesses.

The three

geographic segments are composed of the net sales and

operations in each respective region, excluding net sales and

operations

managed globally by the Global Specialty Businesses segment,

which includes the Company’s

container, metal finishing, mining,

offshore, specialty coatings, specialty grease and

Norman Hay businesses.

Although the Company changed its reportable segments in

the third quarter of 2019, the calculation of the reportable

segments’

measures of earnings remains otherwise generally

consistent with past practices.

Segment operating earnings for each of the

Company’s reportable

segments are comprised of the segment’s

net sales less directly related

COGS and SG&A.

Operating expenses

not directly attributable to the net sales of each respective

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

integration and other acquisition-related expenses, and Restructuring

and related charges, are not included in segment operating

earnings.

Other items not specifically identified with the Company’s

reportable segments include interest expense, net and other

expense, net.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The following tables present information about the performance

of the Company’s reportable segments

for the years ended

December 31, 2020, 2019 and 2018.

Certain immaterial reclassifications within the segment disclosures

for the years ended

December 31, 2019 and 2018 have been made to conform with

the Company’s current customer

industry segmentation.

2020

2019

2018

Net sales

Americas

450,161

392,121

297,601

EMEA

383,187

285,570

216,984

Asia/Pacific

315,299

247,839

192,502

Global Specialty Businesses

269,030

207,973

160,433

Total

net sales

1,417,677

1,133,503

867,520

2020

2019

2018

Segment operating earnings

Americas

96,379

78,297

62,686

EMEA

69,163

47,014

36,119

Asia/Pacific

88,356

67,512

53,739

Global Specialty Businesses

79,690

58,881

42,931

Total

segment operating earnings

333,588

251,704

195,475

Combination, integration and other acquisition-related

expenses

(29,790)

(35,477)

(16,661)

Restructuring and related charges

(5,541)

(26,678)

Fair value step up of inventory sold

(226)

(11,714)

Indefinite-lived intangible asset impairment

(38,000)

Non-operating and administrative expenses

(143,202)

(104,572)

(83,515)

Depreciation of corporate assets and amortization

(57,469)

(27,129)

(7,518)

Operating income

59,360

46,134

87,781

Other expense, net

(5,618)

(254)

(642)

Interest expense, net

(26,603)

(16,976)

(4,041)

Income before taxes and equity in net income

associated companies

27,139

28,904

83,098

The following tables present information regarding the

Company’s reportable segments’

assets and long-lived assets, including

certain identifiable assets as well as an allocation of

shared assets, of December 31, 2020, 2019 and 2018:

2020

2019

2018

Segment assets

Americas

969,551

926,122

180,037

EMEA

697,821

688,663

149,984

Asia/Pacific

713,004

685,476

205,424

Global Specialty Businesses

511,458

550,055

174,220

Total segment assets

2,891,834

2,850,316

709,665

2020

2019

2018

Segment long-lived assets

Americas

122,302

139,170

60,745

EMEA

69,344

56,108

23,383

Asia/Pacific

119,233

126,166

26,217

Global Specialty Businesses

59,091

69,184

26,949

Total segment long-lived

assets

369,970

390,628

137,294

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The following tables present information regarding the

Company’s reportable segments’

capital expenditures and depreciation for

identifiable assets for the years ended December 31,

2020, 2019 and 2018:

2020

2019

2018

Capital expenditures

Americas

6,451

6,404

3,401

EMEA

3,844

3,263

2,081

Asia/Pacific

5,688

3,857

6,059

Global Specialty Businesses

1,918

2,021

1,345

Total segment capital

expenditures

17,901

15,545

12,886

2020

2019

2018

Depreciation

Americas

12,322

7,500

4,225

EMEA

6,813

4,560

3,434

Asia/Pacific

4,672

3,458

2,552

Global Specialty Businesses

3,544

2,248

1,985

Total segment depreciation

27,351

17,766

12,196

During the years ended December 31, 2020, 2019 and 2018,

the Company had approximately

$963.2

million,

$719.8

million and

$534.6

million of net sales, respectively,

attributable to non-U.S. operations.

As of December 31, 2020, 2019 and 2018, the Company

had approximately

$176.6

million,

$174.4

million and

$60.8

million of long-lived assets, respectively,

attributable to non-U.S.

operations.

Inter-segment revenue for the years ended December

31, 2020, 2019 and 2018 was

$9.1

million,

$7.3

million and

$8.3

million for

Americas,

$22.0

million,

$20.3

million and

$21.9

million for EMEA,

$0.6

million,

$0.2

million and

$0.5

million for Asia/Pacific and

$4.7

million,

$5.4

million and

$5.3

million for Global Specialty Businesses, respectively.

However, all inter-segment

transactions

have been eliminated from each reportable operating

segment’s net sales and earnings

for all periods presented in the above tables.

Note 5 – 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 (“Fluidcare”) for various heavy

industrial and manufacturing applications throughout its four

segments.

The

Combination increased the Company’s

addressable metalworking, metals and industrial end markets, including

steel, aluminum,

aerospace,

defense, transportation-OEM, transportation-components, offshore

sub-sea energy,

architectural aluminum, construction,

tube and pipe, can and container,

mining, specialty coatings and specialty greases.

The Combination also strengthened the product

portfolio of the combined Company.

The major product lines of Quaker Houghton include metal removal

fluids, cleaning fluids,

corrosion inhibitors, metal drawing and forming fluids, die

cast mold releases, heat treatment and quenchants, metal forging

fluids,

hydraulic fluids, specialty greases, offshore

sub-sea energy control fluids, rolling lubricants, rod

and wire drawing fluids and surface

treatment chemicals.

A substantial portion of the Company’s

sales worldwide are made directly through its own employees

and its Fluidcare programs,

with the balance being handled through distributors and

agents.

The Company’s employees typic

ally visit the plants of customers

regularly, work

on site, and, through training and experience, identify production

needs,

which can be resolved or otherwise addressed

either by adapting the Company’s

existing products or by applying new formulations developed

in its laboratories.

The specialty

chemical industry comprises many companies similar in

size to the Company,

as well as companies larger and smaller than Quaker

Houghton.

The offerings of many of the Company’s

competitors differ from those of Quaker Houghton;

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.

As part of the Company’s

Fluidcare business, 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

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

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 the obligation 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.

The

Company transferred third-party products under arrangements

resulting in net reporting of $

42.5

million, $

48.0

million and $

47.1

million for the years ended December 31, 2020,

2019 and 2018, respectively.

A significant portion of the Company’s

revenues are realized from the sale of process fluids and services

to manufacturers of

steel, aluminum, automobiles, aircraft, industrial equipment,

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 and aluminum customers typically have

limited manufacturing locations compared to

metalworking customers and generally use higher

volumes of products at a single location.

During the year ended December 31,

2020,

the Company’s five largest

customers (each composed of multiple subsidiaries or

divisions with semiautonomous purchasing

authority) accounted for approximately

% of consolidated net sales, with its largest customer accounting

for approximately

% 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 transferr

ed to the customer.

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 that 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 obligations 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

consideration it expects to be entitled to in exchange

for fulfilling the performance obligations, including the

effects of any variable

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 providing the service to the customer.

The

Company recognizes revenue over time as the customer

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 an asset and the Company satisfies a performance

obligation by considering when the Company has a 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 CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

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 Fluidcare 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 Fluidcare or other service

work performed by the Company.

Other Considerations

The Company does not have standard payment terms for

all customers, however the Company’s

general payment terms require

customers to pay for products or services provided after

the performance obligation is satisfied.

The Company does not have

significant financing arrangements with its customers.

The Company does not have significant amounts of variable

consideration in

its contracts with customers and where applicable,

the Company’s estimates of variable

consideration are not constrained.

The

Company records certain third-party license fees in

other income (expense), net, in its Consolidated Statement

of 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.

The Company does not adjust the promised amount of consideration for

the

effects of a significant financing compon

ent 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, the Company expenses

costs to obtain a contract as incurred when the expected

period of benefit, and therefore the

amortization period, is one year or less.

In addition, the Company excludes 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 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

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 Consolidated Balance Sheets

as of December 31, 2020 and 2019.

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

Company satisfying the associated performance obligation.

The Company acquired and recorded an immaterial

amount of deferred

revenue as of the respective opening balance sheet dates

related to the Combination and Norman Hay acquisition.

Deferred revenues

are presented within other accrued liabilities in the Company’s

Consolidated Balance Sheets.

The Company had approximately $

4.0

million and $

2.2

million of deferred revenue as of December 31, 2020 and 2019,

respectively.

During the years ended December 31,

2020 and 2019,

respectively, the Company satisfied

all of the associated performance obligations and recognized

into revenue the

advance payments received and recorded as of December

31, 2020, 2019 and 2018, respectively.

Disaggregated Revenue

The Company sells its various industrial process fluids,

its specialty chemicals and its technical expertise as a global

product

portfolio.

The Company generally manages and evaluates its performance

by segment first, and then by customer industry,

rather than

by individual product lines.

Also, net sales of each of the Company’s

major product lines are generally spread throughout all three

the Company’s geographic

regions, and in most cases, approximately proportionate

to the level of total sales in each region.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The following tables present disaggregated information

regarding the Company’s net

sales, first by major product lines that

represent more than 10% of the Company’s

consolidated net sales for any of the years ended December

31, 2020, 2019 and 2018,

and

followed then by a disaggregation of the Company’s

net sales by segment, geographic region, customer industry,

and timing of

revenue recognized for the years ended December 31, 2020,

2019 and 2018.

2020

2019

2018

Metal removal fluids

23.9

19.9

15.4

Rolling lubricants

21.8

21.9

25.5

Hydraulic fluids

13.3

13.0

Net sales for the year ending December 31, 2020

Consolidated

Americas

EMEA

Asia/Pacific

Total

Customer Industries

Metals

163,135

107,880

168,096

439,111

Metalworking and other

287,026

275,307

147,203

709,536

450,161

383,187

315,299

1,148,647

Global Specialty Businesses

154,796

68,164

46,070

269,030

604,957

451,351

361,369

1,417,677

Timing of Revenue Recognized

Product sales at a point in time

580,663

434,549

352,917

1,368,129

Services transferred over time

24,294

16,802

8,452

49,548

604,957

451,351

361,369

1,417,677

Net sales for the year ending December 31, 2019

Consolidated

Americas

EMEA

Asia/Pacific

Total

Customer Industries

Metals

171,784

100,605

141,870

414,259

Metalworking and other

220,337

184,965

105,969

511,271

392,121

285,570

247,839

925,530

Global Specialty Businesses

149,428

30,115

28,430

207,973

541,549

315,685

276,269

1,133,503

Timing of Revenue Recognized

Product sales at a point in time

525,802

310,274

269,228

1,105,304

Services transferred over time

15,747

5,411

7,041

28,199

541,549

315,685

276,269

1,133,503

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Net sales for the year ending December 31, 2018

Consolidated

Americas

EMEA

Asia/Pacific

Total

Customer Industries

Metals

164,263

101,028

120,627

385,918

Metalworking and other

133,338

115,956

71,875

321,169

297,601

216,984

192,502

707,087

Global Specialty Businesses

122,165

16,613

21,655

160,433

419,766

233,597

214,157

867,520

Timing of Revenue Recognized

Product sales at a point in time

408,402

233,372

206,112

847,886

Services transferred over time

11,364

225

8,045

19,634

419,766

233,597

214,157

867,520

Note 6 – Leases

As previously disclosed in the Company’s

2019 Form 10-K, during 2019, the Company adopted, as required,

an accounting

standard update regarding the accounting and disclosure

for leases which changed the manner in which it accounts for

leases effective

January 1, 2019.

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

This determination generally depends on

whether the arrangement conveys the right to control the

use of an identified fixed asset explicitly or implicitly for a period

of time in

exchange for consideration.

Control of an underlying asset is conveyed if the Company

obtains the rights to direct the use of, and

obtains

substantially all of the economic benefits from the use of,

the underlying asset.

Lease expense for variable leases and short-

term leases is recognized when the obligation is incurred.

The Company has operating leases for certain facilities, vehicles

and machinery and equipment with remaining lease terms up

years.

In addition, the Company has certain land use leases with remaining

lease terms up to

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 Consolidated Balance Sheet.

Right of use lease assets and liabilities are recognized

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 leases, the

Company considers certain information including fully

secured borrowing rates readily available to the Company and its subsidiaries.

The Company has immaterial finance leases, which are

included in PP&E, current portion of long-term debt and long-term debt

on the

Consolidated Balance Sheet.

Operating lease expense is recognized on a straight-line

basis over the lease term.

Operating lease expense for the years ended

December 31, 2020 and 2019 was $

14.2

million and $

9.4

million, respectively.

Short-term lease expense for the years ended

December 31, 2020 and 2019 was $

1.3

million and $

1.5

million, respectively.

The Company has

material variable lease costs or

sublease income for the years ended December 31,

2020 and 2019.

Cash paid for operating leases during the years ended December

31, 2020 and 2019 was $

14.1

million and $

9.2

million,

respectively.

The Company recorded new right of use lease assets and associated lease liabilities

of $

6.9

million during the year

ended December 31, 2020.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Supplemental balance sheet information related to the Company’s

leases is as follows:

December 31,

2020

2019

Right of use lease assets

38,507

42,905

Other accrued liabilities

10,901

11,177

Long-term lease liabilities

27,070

31,273

Total operating

lease liabilities

37,971

42,450

Weighted average

remaining lease term (years)

6.0

6.2

Weighted average

discount rate

4.20%

4.21%

Maturities of operating lease liabilities as of December

31, 2020 were as follows:

December 31,

2020

For the year ended December 31, 2021

12,342

For the year ended December 31, 2022

8,395

For the year ended December 31, 2023

6,220

For the year ended December 31, 2024

4,610

For the year ended December 31, 2025

3,836

For the year ended December 31, 2026 and beyond

8,141

Total lease payments

43,544

Less: imputed interest

(5,573)

Present value of lease liabilities

37,971

Note 7 – Restructuring and Related Activities

The Company’s management

approved a global restructuring plan (the “QH Program”)

as part of its plan to realize certain cost

synergies associated with the Combination

in the third quarter of 2019.

The QH Program includes restructuring and associated

severance costs to reduce total headcount by approximately

350

people globally, as well as plans

for the closure of certain

manufacturing and non-manufacturing facilities.

The exact timing and total costs associated with the QH Program

will depend on a

number of factors and is subject to change; however,

the Company currently expects reduction in headcount and

site closures to

continue to occur into 2021 under the QH Program

and estimates that anticipated cost synergies realized from

the QH Program will

approximate one-times the restructuring costs incurred.

Employee separation benefits will vary depending on local

regulations within

certain foreign countries and will include severance

and other benefits.

All costs incurred to date relate to severance costs to reduce

headcount as well as costs to close certain facilities and are

recorded

in restructuring and related charges in the

Company’s Consolidated Statements of

Income.

As described in Note 4 of Notes to

Consolidated Financial Statements, restructuring and

related charges are not included in the Company’s

calculation of reportable

segments’ measure of operating earnings and therefore

these costs are not reviewed by or recorded to reportable segments.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Activity in the Company’s

accrual for restructuring under the QH Program for the years ended

December 31, 2020 and 2019 is as

follows:

QH Program

Accrued restructuring as of December 31, 2018

Restructuring and related charges

26,678

Cash payments

(8,899)

Currency translation adjustments

264

Accrued restructuring as of December 31, 2019

18,043

Restructuring and related charges

5,541

Cash payments

(15,745)

Currency translation adjustments

409

Accrued restructuring as of December 31, 2020

8,248

In connection with the plans for closure of certain

manufacturing and non-manufacturing facilities, the Company

made a decision

to make available for sale certain facilities.

During the fourth quarter of 2020, certain of these facilities were

sold and the Company

recognized a loss on disposal of approximately $

0.6

million included within other expense, net on the Consolidated

Statement of

Income.

Additionally, certain

buildings and land with an aggregate book value of

approximately $

10.0

million continues to be held-

for-sale as of December 31, 2020 and are

recorded in other current assets on the Company’s

Consolidated Balance Sheet.

Note 8 – Share-Based Compensation

The Company recognized the following share-based compensation

expense in its Consolidated Statements

of Income for the years

ended December 31, 2020, 2019 and 2018:

2020

2019

2018

Stock options

1,491

1,448

1,053

Non-vested stock awards and restricted stock units

5,012

3,206

2,459

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

stock

3,112

Employee stock purchase plan

Director stock ownership plan

541

123

Performance stock units

840

Annual incentive plan (1)

Total share-based

compensation expense

10,996

4,861

3,724

(1) Refer to the section entitled

Annual Incentive Plan

below for additional information.

Share-based compensation expense is recorded in SG&A,

except for $

1.5

million, $

0.9

million and $

0.1

million during the years

ended December 31, 2020,

2019 and 2018,

respectively, recorded

within Combination,

integration and other acquisition-related

expenses.

The increase in total share-based compensation expense for

the year ended December 31, 2020 includes performance stock

units and non-elective and elective 401(k) matching

contributions in stock as components of share-based compensation

beginning in

2020, described further below.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Stock Options

Stock option activity under all plans is as follows:

Weighted

Average

Exercise

Remaining

Aggregate

Number of

Price

Contractual

Intrinsic

Options

(per option)

Term

(years)

Value

Options outstanding as of January 1, 2020

144,412

137.15

Options granted

49,115

136.64

Options exercised

(83,191)

128.42

Options outstanding as of December 31, 2020

110,336

143.51

5.2

12,015

Options expected to vest after December 31, 2020

92,890

144.86

5.6

9,990

Options exercisable as of December 31, 2020

17,446

136.32

3.4

2,025

The total intrinsic value of options exercised during the years ended

December 31, 2020, 2019 and 2018 was approximately

$6.5

million,

$2.5

million and

$2.0

million, respectively.

Intrinsic value is calculated as the difference between

the current market price of

the underlying security and the strike price of a related

option.

A summary of the Company’s

outstanding stock options as of December 31, 2020 is as follows:

Weighted

Average

Weighted

Number

Remaining

Average

Number

Average

Range of

of Options

Contractual

Exercise Price

of Options

Exercise Price

Exercise Prices

Outstanding

Term

(years)

(per option)

Exercisable

(per option)

70.01

80.00

2,133

1.0

72.12

2,133

72.12

80.01

90.00

1,309

1.0

87.30

1,309

87.30

90.01

130.00

—

130.01

140.00

51,732

6.0

136.54

2,617

134.60

140.01

150.00

—

150.01

160.00

55,162

4.8

154.14

11,387

154.37

110,336

5.2

143.51

17,446

136.32

As of December 31, 2020, unrecognized compensation expense

related to options granted in 2020, 2019 and 2018 was

$1.2

million,

$0.3

million and less than

$0.1

million, respectively, to be

recognized over a weighted average period of

1.9

years.

The Company granted stock options under its LTIP

plan that are subject only to time vesting generally over a

three-year period

during 2020,

2019,

2018 and 2017.

For the purposes of determining the fair value of stock option

awards, the Company uses the

Black-Scholes option pricing model and the assumptions

set forth in the table below:

2020

2019

2018

2017

Number of stock options granted

49,115

51,610

35,842

42,477

Dividend yield

0.99

1.12

1.37

1.49

Expected volatility

31.57

26.29

24.73

25.52

Risk-free interest rate

0.36

1.52

2.54

1.67

Expected term (years)

4.0

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The fair value of these options is being amortized on a

straight-line basis over the respective vesting period of each award.

The

compensation expense recorded on each award during

the years ended December 31, 2020, 2019 and 2018, respectively,

is as follows:

2020

2019

2018

2020 Stock option awards

385

2019 Stock option awards

698

665

2018 Stock option awards

357

364

310

2017 Stock option awards

369

367

Restricted Stock Awards

Activity of non-vested restricted stock awards granted

under the Company’s LTIP

plan is shown below:

Number of

Weighted Average

Grant

Date Fair Value

(per share)

Nonvested awards, December 31, 2019

64,500

152.67

Granted

28,244

145.63

Vested

(19,195)

148.15

Forfeited

(1,781)

150.27

Nonvested awards, December 31, 2020

71,768

151.17

The fair value of the non-vested stock is based on the trading

price of the Company’s

common stock on the date of grant.

The

Company adjusts the grant date fair value for expected

forfeitures based on historical experience for similar

awards.

As of December

31, 2020, unrecognized compensation expense related to

these awards was

$4.7

million, to be recognized over a weighted average

remaining period of

1.6

years.

Restricted Stock Units

Activity of non-vested restricted stock units granted under

the Company’s LTIP

plan is shown below:

Number of

Weighted Average

Grant

Units

Date Fair Value

(per unit)

Nonvested awards, December 31, 2019

8,655

152.09

Granted

6,030

141.65

Vested

(1,791)

141.92

Forfeited

(2,049)

153.50

Nonvested awards, December 31, 2020

10,845

147.70

The fair value of the non-vested restricted stock units is based

on the trading price of the Company’s

common stock on the date of

grant.

The Company adjusts the grant date fair value for expected forfeitures

based on historical experience for similar awards.

As of

December 31, 2020, unrecognized compensation expense

related to these awards was

$0.8

million, to be recognized over a weighted

average remaining period of

2.0

years.

Performance Stock Units

In March 2020, the Company included performance

-dependent stock awards (“PSUs”) as a component of its LTIP,

which will be

settled in a certain number of shares subject to market

-based and time-based vesting conditions.

The number of fully vested shares

that may ultimately be issued as settlement for each

award may range from

% up to

200

% of the target award, subject to the

achievement of the Company’s

total shareholder return (“TSR”) relative to the performance

of the Company’s peer

group, the S&P

Midcap 400 Materials group.

The service period required for the PSUs is three years and

the TSR measurement period for the PSUs is

from January 1, 2020 through December 31, 2022.

Compensation expense for PSUs is measured based on

their grant date fair value and is recognized on a straight-line basis over

the three-year vesting period.

The grant-date fair value of the PSUs was estimated using a

Monte Carlo simulation on the grant date

and using the following assumptions: (i) a risk-free

rate of

0.28

%; (ii) an expected term of

3.0

years; and (iii) a three-year daily

historical volatility for each of the companies in the

peer group, including Quaker Houghton.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

As of December 31, 2020, the Company estimates that it will issue

approximately

20,000

fully vested shares as of the settlement

date of the award based on the conditions of the

PSUs and Company’s closing

stock price on December 31, 2020.

As of December

31, 2020, there was approximately $

2.5

million of total unrecognized compensation cost related to PSUs which

the Company expects

to recognize over a weighted-average period of

2.2

years.

Annual Incentive Plan

The Company maintains an Annual Incentive Plan

(“AIP”), which may be settled in cash or a certain number of

shares subject to

performance-based and time-based vesting conditions.

As previously disclosed within the Company’s

Form 10-Q for the first three

quarters of 2020, it was the Company’s

intention at that time to settle the 2020 AIP in shares, and

therefore, expense associated with

the AIP in 2020 was recorded as a component of share

-based compensation expense during the first nine months of 2020.

In the fourth quarter of 2020, the Company determined

that it would settle the current year AIP in cash.

Therefore, the share-

based compensation associated with the AIP during

the year ended December 31, 2020 was reclassified from a

component of share-

based compensation expense to incentive compensation.

This determination and conclusion had no impact on

the classification of

AIP expense within the Company’s

Consolidated Statement of Income for the year ended December

31, 2020 as both are a component

of SG&A.

As a result of the change, there was an immaterial impact

on the Company’s calculation

of diluted earnings per share for the year

ended December 31, 2020 as the Company no longer considers

the estimated number of shares related to a hypothetical

AIP

settlement in shares as a component of its diluted earnings

per share calculation.

In addition, there was no impact on the Company’s

Consolidated Balance Sheet as of December 31, 2020, as the

AIP was and

continues to be classified as a liability and included within

accrued compensation.

Similarly, there was a

reclassification on the

Company’s Consolidated

Statement of Cash Flow between lines within Net cash provided by

operating activities in the fourth quarter

of 2020.

The expected cash flow impact of the AIP settled in cash is presented

as a component of accounts payable and accrued

liabilities for the year ended December 31, 2020.

Defined Contribution Plan

The Company has a 401(k) plan with an employer

match covering a majority of its U.S. employees.

The Company matches

of the first

% of compensation that is contributed to the plan, with a maximum

matching contribution of

% of compensation.

Additionally, the

plan provides for non-elective nondiscretionary contributions

on behalf of participants who have completed one year

of service equal to

% of the eligible participant's compensation.

The Company’s matching contributions

and non-elective

contributions may be made in cash or in fully vested shares

of the Company’s common

stock.

Beginning in April 2020,

the Company

began matching both non-elective and elective 401(k)

contributions in fully vested shares of its common stock rather than

cash.

For

the year ended December 31, 2020, total contributions

were $

3.1

million.

Employee Stock Purchase Plan

In 2000, the Board adopted an Employee Stock Purchase

Plan (“ESPP”) whereby employees may purchase Company stock

through a payroll deduction plan.

Purchases were made from the plan and credited to each

participant’s account on

the last day of

each calendar month in which the organized

securities trading markets in the U.S. were open for business (the

“Investment Date”).

The purchase price of the stock was

% of the fair market value on the Investment Date.

The plan was compensatory,

and the

discount was expensed on the Investment Date.

All employees, including officers, were eligible to participate

in this plan.

participant could withdraw all uninvested payment

balances credited to a participant’s

account at any time.

An employee whose stock

ownership of the Company exceeds five percent of

the outstanding common stock was not eligible to participate in this plan.

Effective January 1, 2020, the Company

discontinued the ESPP.

2013 Director Stock Ownership Plan

In 2013, the Company adopted the 2013 Director Stock

Ownership Plan (the “Plan”), to encourage the Directors to increase their

investment in the Company,

which was approved at the Company’s

May 2013 shareholders’ meeting.

The Plan authorizes the

issuance of up to

75,000

shares of Quaker common stock in accordance with

the terms of the Plan in payment of all or a portion of the

annual cash retainer payable to each of the Company’s

non-employee directors in 2013 and subsequent years during

the term of the

Plan.

Under the Plan, each director who, on May 1

of the applicable calendar year, owns less than

400

% of the annual cash retainer

for the applicable calendar year,

divided by the average of the closing price of a share of

Quaker Common Stock as reported by the

composite tape of the New York

Stock Exchange for the previous calendar year (the “Threshold Amount”),

is required to receive

of the annual cash retainer in Quaker common stock and

% of the retainer in cash, unless the director elects to receive a

greater

percentage of Quaker common stock, up to

100

% of the annual cash retainer for the applicable year.

Each director who owns more

than the Threshold Amount may elect to receive

common stock in payment of a percentage (up to

100

%) of the annual cash retainer.

The annual retainer is $

0.1

million and the retainer payment date is June 1.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Note 9 – Other Expense, net

Other expense, net, for the years ended December 31, 2020,

2019 and 2018 are as follows:

2020

2019

2018

Income from third party license fees

999

1,035

862

Foreign exchange (losses) gains, net

(6,082)

223

(807)

(Loss) gain on fixed asset disposals, net

(871)

657

Non-income

tax refunds and other related credits

3,345

1,118

668

Pension and postretirement benefit costs, non-service components

(21,592)

(2,805)

(2,285)

Gain on changes in insurance settlement restrictions of an

inactive

subsidiary and related insurance insolvency recovery

18,144

Other

non-operating income, net

439

173

Total other

expense, net

(5,618)

(254)

(642)

Pension and postretirement benefit costs, non-service components

during the year ended December 31, 2020 include a

1.6

million refund in premium and a $

22.7

million non-cash settlement charge related to the

Legacy Quaker U.S. Pension Plan, as

described in Note 21 of Notes to Consolidated Financial Statements.

Gain on changes in insurance restrictions of an inactive

subsidiary and related insurance insolvency recovery relate

to the termination of restrictions over certain cash that was previously

designated solely to be used for settlement of asbestos

claims at an inactive subsidiary of the Company and

cash proceeds from an

insolvent insurance carrier with respect to previously

filed recovery claims.

See Note 12, Note 19 and Note 26 of Notes to

Consolidated Financial Statements.

Foreign exchange (losses) gains, net, during the years

ended December 31, 2020,

2019 and 2018,

include foreign currency transaction losses of approximately

0.4

million, $

1.0

million and $

0.4

million, respectively,

related to

hyper-inflationary accounting for the Company’s

Argentine subsidiaries, and specific to 2018,

a foreign currency transaction gain of

approximately $

0.4

million related to the liquidation of an inactive legal entity.

See Note 1 of Notes to Consolidated Financial

Statements.

(Loss) gain on fixed asset disposals, net, during the year

ended December 31, 2020 and 2018, included $

0.6

million loss

and a $

0.6

million gain, respectively,

on the sale of held-for-sale assets related to the Combination.

Note 10 – Taxes

on Income

On December 22, 2017, the U.S. government enacted

comprehensive tax legislation commonly referred to as U.S. Tax

Reform.

U.S. Tax Reform

implemented a new system of taxation for non-U.S. earnings which

eliminated U.S. federal income taxes on

dividends from certain foreign subsidiaries and imposed

a one-time transition tax on the deemed repatriation of undistributed

earnings

of certain foreign subsidiaries that is payable over eight

years.

Following numerous regulations, notices, and other formal

guidance published by the Internal Revenue Service (“I.R.S.”),

U.S.

Department of Treasury,

and various state taxing authorities, the Company has completed

its accounting for the transition tax and has

elected to pay its $

15.5

million transition tax in installments over eight years as permitted

under U.S. Tax

Reform.

As of December

31, 2020, $

7.0

million in installments have been paid with the remaining

8.5

million to be paid through installments in future years.

As of December 31, 2020, the Company has a deferred

tax liability of $

5.9

million on certain undistributed foreign earnings,

which primarily represents the Company’s

estimate of the non-U.S. income taxes the Company will incur

to ultimately remit certain

earnings to the U.S.

The Company’s reinvestment

assertions are further explained below.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Taxes on income

before equity in net income of associated companies for the

years ended December 31, 2020, 2019 and 2018 are

as follows:

2020

2019

2018

Current:

Federal

(1,359)

(239)

6,583

State

1,171

352

(1,844)

Foreign

33,173

26,213

12,114

32,985

26,326

16,853

Deferred:

Federal

(28,437)

(9,267)

7,859

State

(3,087)

(396)

(173)

Foreign

(6,757)

(14,579)

511

Total

(5,296)

2,084

25,050

The components of earnings before income taxes for the

years ended December 31, 2020, 2019 and 2018 are as follows:

2020

2019

2018

U.S.

(66,585)

(46,697)

27,387

Foreign

93,724

75,601

55,711

Total

27,139

28,904

83,098

Total deferred

tax assets and liabilities are composed of the following

as of December 31, 2020 and 2019:

2020

2019

Retirement benefits

15,237

15,142

Allowance for doubtful accounts

2,316

2,253

Insurance and litigation reserves

842

1,002

Performance incentives

5,914

7,213

Equity-based compensation

1,282

1,050

Prepaid expense

756

2,976

Insurance settlement

3,895

Operating loss carryforward

16,693

16,044

Foreign tax credit and other credits

24,873

34,384

Interest

16,812

11,479

Restructuring reserves

1,121

2,167

Right of use lease assets

9,346

10,015

Royalties and license fees

2,156

Inventory reserves

2,225

2,163

Research and development

7,974

2,580

Other

3,005

1,317

108,396

115,836

Valuation

allowance

(21,511)

(13,834)

Total deferred

tax assets, net

86,885

102,002

Depreciation

15,473

17,754

Foreign pension and other

1,807

1,269

Amortization and other

222,794

254,359

Lease liabilities

9,151

9,965

Outside basis in equity investment

7,938

6,776

Unremitted Earnings

5,919

8,228

Total deferred

tax liabilities

263,082

298,351

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The Company has $

11.3

million of deferred tax assets related to state net operating

losses.

A partial valuation allowance of $

8.0

million has been established against this amount resulting

in a net $

3.3

million expected future benefit.

Management analyzed the

expected impact of the reversal of existing taxable temporary

differences, considered expiration dates, analyzed

current state tax laws,

and determined that $

3.3

million of state net operating loss carryforwards will be

realized based on the reversal of deferred tax

liabilities.

These state net operating losses are subject to various

carryforward periods of

years to

years or an indefinite

carryforward period.

An additional $

1.0

million of valuation allowance was established for other net

state deferred tax assets.

The Company has $

5.4

million of deferred tax assets related to foreign net operating

loss carryforwards.

A partial valuation

allowance of $

1.7

million has been established against the $

5.4

million due to the expected expiration of these losses before

they are

able to be utilized.

These foreign net operating losses are subject to various carryforward

periods with the majority having an

indefinite carryforward period.

An additional partial valuation allowance of $

0.6

million has been established against certain other

foreign deferred tax assets.

In conjunction with the Combination, the Company

acquired foreign tax credit deferred tax assets of $

41.8

million expiring

between 2019 and 2028.

Foreign tax credits may be carried forward for

years.

As of December 31, 2019, the foreign tax credit

carry forward was $

33.7

million with an $

8.2

million valuation allowance recorded against the deferred

tax asset.

Management

analyzed the expected impact of the utilization of foreign

tax credits based on certain assumptions such as projected

U.S. taxable

income, overall domestic loss recapture, and annual limitations due

to the ownership change under the Internal Revenue

Code.

Consequently, as of

December 31, 2020, the foreign tax credit carry forward

was $

24.9

million with a $

10.2

million valuation

allowance reflecting the amount of credits that are not

expected to be utilized before expiration.

The Company also acquired disallowed interest deferred

tax assets of $

14.0

million as part of the Combination.

Disallowed

interest may be carried forward indefinitely.

Management analyzed the expected impact of the utilization

of disallowed interest

carryforwards based on projected US taxable income

and determined that the Company will utilize all expected future

benefits by

2022.

As of December 31, 2020, the Company had a net realizable disallowed

interest carryforward of $

15.7

million on its balance

sheet.

As of December 31, 2020, the Company had deferred tax

liabilities of $

222.8

million primarily related to the step-up in

intangibles resulting from the Combination and Norman

Hay acquisition.

As part of the Combination, the Company acquired a

% interest in the Korea Houghton Corporation joint venture and

has

recorded a $

7.9

million deferred tax liability for its outside basis difference.

The following are the changes in the Company’s

deferred tax asset valuation allowance for the years ended

December 31, 2020,

2019 and 2018:

Effect of

Balance at

Purchase

Additional

Allowance

Exchange

Balance

Beginning

Accounting

Valuation

Utilization

Rate

at End

of Period

Adjustments

Allowance

and Other

Changes

of Period

Valuation

Allowance

Year

ended December 31, 2020

13,834

7,148

2,738

(2,153)

(56)

21,511

Year

ended December 31, 2019

7,520

13,752

832

(8,227)

(43)

13,834

Year

ended December 31, 2018

7,401

650

(471)

(60)

7,520

The Company’s net deferred

tax assets and liabilities are classified in the Consolidated Balance

Sheets

as of December 31, 2020

and 2019 as follows:

2020

2019

Non-current deferred tax assets

16,566

14,745

Non-current deferred tax liabilities

192,763

211,094

Net deferred tax liability

(176,197)

(196,349)

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The following is a reconciliation of income taxes at the Federal

statutory rate with income taxes recorded by the Company

for the

years ended December 31, 2020, 2019 and 2018:

2020

2019

2018

Income tax provision at the Federal statutory tax rate

5,699

6,070

17,458

Unremitted earnings

(2,308)

(4,383)

7,857

Tax law changes

/ reform

(1,059)

(416)

(3,118)

Sub part F / Global intangible low taxed income

5,140

574

2,095

Pension settlement

(2,247)

Foreign derived intangible income

(7,339)

(1,699)

(1,034)

Non-deductible acquisition expenses

131

1,743

1,019

Withholding taxes

7,809

8,621

1,161

Foreign tax credits

(4,699)

(3,787)

(1,911)

Share-based compensation

335

(540)

259

Foreign tax rate differential

596

920

1,081

Research and development credit

(475)

(306)

(230)

Uncertain tax positions

1,990

899

(79)

State income tax provisions, net

(2,245)

(117)

196

Non-deductible meals and entertainment

290

318

415

Intercompany transfer of intangible assets

(4,384)

(5,318)

Miscellaneous items, net

(2,530)

(495)

(119)

Taxes on income

before equity in net income of associated companies

(5,296)

2,084

25,050

Pursuant to U.S. Tax

Reform, the Company recorded a $

15.5

million transition tax liability for U.S. income taxes on the

undistributed earnings of non-U.S. subsidiaries.

However, the Company may also

be subject to other taxes, such as withholding taxes

and dividend distribution taxes, if these undistributed

earnings are ultimately remitted to the U.S.

As a result of the Combination,

additional third-party debt was incurred resulting in

the Company re-evaluating its global cash strategy in order

to meet its goal of

reducing leverage in upcoming years.

As of December 31, 2020, the Company has a deferred tax

liability $

5.9

million, which

primarily represents the estimate of the non-U.S.

taxes the Company will incur to ultimately remit these earnings to

the U.S.

It is the

Company’s current inten

tion to reinvest its additional undistributed earnings of non-U.S.

subsidiaries to support working capital needs

and certain other growth initiatives outside of the U.S.

The amount of such undistributed earnings at December 31, 2020 was

approximately $

322.6

million.

Any tax liability which might result from ultimate remittance

of these earnings is expected to be

substantially offset by foreign tax credits (subject

to certain limitations).

It is currently impractical to estimate any such incremental

tax expense.

As of December 31, 2020, the Company’s

cumulative liability for gross unrecognized tax benefits was $

22.2

million. The

Company had accrued approximately $

3.9

million for cumulative penalties and $

3.0

million for cumulative interest as of December

31, 2020.

As of December 31, 2019, the Company’s

cumulative liability for gross unrecognized tax benefits was $

19.1

million. The

Company had accrued approximately $

3.1

million for cumulative penalties and $

2.3

million for cumulative interest as of December

31, 2019.

The Company continues to recognize interest and penalties

associated with uncertain tax positions as a component of

tax expense

on income before equity in net income of associated companies

in its Consolidated Statements of Income.

The Company recognized

an expense of less than $

0.1

million for penalties and $

0.6

million for interest (net of expirations and settlements) in its Consolidated

Statement of Income for the year ended December 31,

2020, a credit of $

0.2

million for penalties and an expense of $

0.2

million for

interest (net of expirations and settlements) in its Consolidated

Statement of Income for the year ended December 31, 2019, and

credit of $

0.2

million for penalties and a credit of $

0.1

million for interest (net of expirations and settlements)

in its Consolidated

Statement of Income for the year ended December 31,

2018.

The Company estimates that during the year ending December

31, 2021, it will reduce its cumulative liability for gross

unrecognized tax benefits by approximately $

1.5

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, 2021.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

A reconciliation of the beginning and ending amounts

of unrecognized tax benefits for the years ended December

31, 2020, 2019

and 2018, respectively,

is as follows:

2020

2019

2018

Unrecognized tax benefits as of January 1

19,097

7,050

6,761

Increase (decrease) in unrecognized tax benefits taken

in prior periods

2,025

(28)

(183)

Increase in unrecognized tax benefits taken in current period

3,095

1,935

2,023

Decrease in unrecognized tax benefits due to lapse of statute of

limitations

(3,659)

(1,029)

(1,292)

Increase in unrecognized tax benefits due to acquisition

597

11,301

Increase (decrease) due to foreign exchange rates

997

(132)

(259)

Unrecognized tax benefits as of December

22,152

19,097

7,050

The amount of net unrecognized tax benefits above that, if

recognized, would impact the Company’s

tax expense and effective tax

rate is $

14.7

million, $

13.3

million and $

2.2

million for the years ended December 31, 2020, 2019

and 2018, respectively.

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 Italy

from

2006

, Brazil from

2011

Mexico, the Netherlands and China from

2015

, Spain, Germany and the United Kingdom from

2016

, Canada and the U.S. from

2017

India from fiscal year beginning April 1,

2018

and ending March 31, 2019, and various U.S. state tax jurisdictions

from

2011

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 2015. The Company 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.

In 2020, the respective tax authorities in Italy,

Spain, and Netherland reached agreement with respect to the

MAP proceedings, which

the Company has accepted. As a result, the Company has

recorded an estimated tax liability of $

0.9

million to finalize these

proceedings, net of refunds expected to be received from

the Spanish and Dutch tax authorities.

As of December 31, 2020, the

Company believes it has adequate reserves for uncertain

tax positions with respect to these and all other audits.

Houghton Italia, S.r.l

is also currently involved in a corporate income tax audit with the

Italian tax authorities covering tax years

2014 through 2018.

As of December 31, 2020, the Company has a $

5.8

million reserve for uncertain tax positions relating to matters

related to this audit.

Since this reserve relates to the tax periods prior to August 1,

2019, the tax liability was established through

purchase accounting related to the Combination.

The Company has also submitted an indemnification claim

against funds held in

escrow by Houghton’s former

owners and as a result, a corresponding $

5.8

million indemnification receivable has also been

established through purchase accounting.

Houghton Deutschland GmbH is also under audit by

the German tax authorities for tax years 2015-2017.

Based on preliminary

audit findings, primarily related to transfer pricing, the

Company has recorded a reserve for $

0.9

million as of December 31, 2020.

this amount, $

0.8

million relates to tax periods prior to the Combination and

therefore the Company has submitted an indemnification

claim with Houghton’s

former owners for any tax liabilities arising pre-Combination.

As a result, a corresponding $

0.8

million

indemnification receivable has also been established

to offset the $

0.8

million tax liability.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Note 11 – Earnings Per Share

The following table summarizes earnings per share calculations

for the years ended December 31, 2020, 2019 and 2018:

2020

2019

2018

Basic earnings per common share

Net income attributable to Quaker Chemical Corporation

39,658

31,622

59,473

Less: income allocated to participating securities

(148)

(90)

(253)

Net income available to common shareholders

39,510

31,532

59,220

Basic weighted average common shares outstanding

17,719,792

15,126,928

13,268,047

Basic earnings per common share

2.23

2.08

4.46

Diluted earnings per common share

Net income attributable to Quaker Chemical Corporation

39,658

31,622

59,473

Less: income allocated to participating securities

(148)

(90)

(252)

Net income available to common shareholders

39,510

31,532

59,221

Basic weighted average common shares outstanding

17,719,792

15,126,928

13,268,047

Effect of dilutive securities

31,087

36,243

36,685

Diluted weighted

average common shares outstanding

17,750,879

15,163,171

13,304,732

Diluted earnings per common share

2.22

2.08

4.45

The Company’s calculation

of earnings per diluted share attributable to Quaker Chemical Corporation

common shareholders for

the year ended December 31, 2019 was impacted by the

variability of its reported earnings during the year and the approximately

4.3

million shares issued as a component of the consideration transferred

in the Combination, comprising

24.5

% of the common stock of

the Company immediately after the closing.

Certain stock options and restricted stock units are not included

in the diluted earnings

per share calculation because the effect would

have been anti-dilutive.

The calculated amount of anti-diluted shares not included were

945

in 2020,

108

in 2019 and

1,808

in 2018.

Note 12 – Restricted Cash

Prior to December 2020, the Company had 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 were restricted and could

only be used to pay claims and costs

of defense associated with the subsidiary’s

asbestos litigation.

The proceeds of the settlement and release agreements

were deposited

into interest bearing accounts which earned less then $

0.1

million and $

0.2

million in the years ended December 31, 2020 and 2019,

respectively, offset

by $

1.0

million and $

0.8

million of net payments during 2020 and 2019, 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.

During December 2020, the restrictions ended on these

previously received insurance settlements and the

Company transferred

the cash into an operating account.

In connection with the termination in restrictions, the Company

recognized an $

18.1

million gain

on its Consolidated Statement of Income in Other expense,

net, for the amount of previously restricted cash, net of the

estimated

liability to pay claims and associated with the inactive

subsidiary’s asbestos litigation as of

December 31, 2020.

See Notes 18, 22 and

26 of Notes to Consolidated Financial Statements.

The following table provides a reconciliation of cash,

cash equivalents and restricted cash as December 31, 2020, 2019,

2018 and

2017:

2020

2019

2018

2017

Cash and cash equivalents

181,833

123,524

104,147

89,879

Restricted cash included in other current assets

353

Restricted cash included in other assets

19,678

20,278

21,171

Cash, cash equivalents and restricted cash

181,895

143,555

124,425

111,050

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Note 13 – Accounts Receivable and Allowance for Doubtful Accounts

As of December 31, 2020 and 2019, the Company

had gross trade accounts receivable totaling

$386.1

million and

$387.7

million,

respectively.

The Company recognizes an allowance for credit losses, which

represents the portion of the receivable that the Company does

not

expect to collect over its contractual life, considering

past events and reasonable and supportable forecasts of

future economic

conditions.

The Company estimates credit losses for trade receivables by

aggregating similar customer types, because they tend to

share similar credit risk characteristics.

The Company’s allowance

for credit losses on its trade accounts receivable is based on

specific collectability facts and circumstances for each

outstanding receivable and customer, the

aging of outstanding receivables, and

the associated collection risk the Company estimates for certain

past due aging categories, and also, the general risk to all outstanding

accounts receivable based on historical amounts determined to

be uncollectible.

Trade and other receivables are written off

when

there is no reasonable expectation of recovery.

The following are changes in the allowance for doubtful

accounts during the years ended December 31, 2020, 2019 and 2018:

Exchange Rate

Balance at

Changes

Write-Offs

Changes

Balance

Beginning

to Costs and

Charged to

and Other

at End

of Period

Expenses

Allowance

Adjustments

of Period

Allowance for Doubtful Accounts

Year

ended December 31, 2020

11,716

3,582

(2,187)

13,145

Year

ended December 31, 2019

5,187

1,925

(322)

4,926

11,716

Year

ended December 31, 2018

5,457

493

(295)

(468)

5,187

Included in exchange rate changes and other adjustments for

the year ended December 31, 2019 are the allowance for

doubtful

accounts of $

5.0

million related to the acquired receivables in connection with

the Combination and Norman Hay acquisition.

See

Note 2 of Notes to Consolidated Financial Statements.

Included in exchange rate changes and other adjustments for

the year ended

December 31, 2018 is a reclassification of $

0.3

million to other assets related to certain customer receivables due

greater than a year.

Note 14 – Inventories

Inventories, net, as of December 31, 2020 and 2019 were

as follows:

2020

2019

Raw materials and supplies

86,148

82,058

Work in

process, finished goods and reserves

101,616

92,892

Total inventories,

net

187,764

174,950

Note 15 – Property,

Plant and Equipment

Property, plant and

equipment as of December 31, 2020 and 2019 were as follows:

2020

2019

Land

33,009

34,686

Building and improvements

135,595

130,462

Machinery and equipment

246,242

225,636

Construction in progress

8,407

8,050

Property, plant and

equipment, at cost

423,253

398,834

Less: accumulated depreciation

(219,370)

(185,365)

Total property,

plant and equipment, net

203,883

213,469

As of December 31, 2020, PP&E includes $

0.4

million of finance lease assets and future minimum lease payments.

In connection

with the plans for closure of certain facilities, certain buildings and land with an aggregate book value of approximately $10.0 million

continue to be held-for-sale as of December 31, 2020 and are recorded in other current assets on the Company’s Consolidated Balance

Sheet.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Note 16 – Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the

years ended December 31, 2020 and 2019 were as follows:

Global

Specialty

Americas

EMEA

Asia/Pacific

Businesses

Total

Balance as of December 31, 2018

28,464

17,423

13,149

24,297

83,333

Goodwill additions

188,494

114,167

130,091

91,545

524,297

Currency translation adjustments

(573)

1,428

(1,513)

233

(425)

Balance as of December 31, 2019

216,385

133,018

141,727

116,075

607,205

Goodwill additions

1,485

531

1,329

3,345

Currency translation and other

adjustments

(4,628)

6,613

16,363

2,314

20,662

Balance as of December 31, 2020

213,242

140,162

158,090

119,718

631,212

Other adjustments in the table above includes updates to

the Company’s allocation

of the Houghton purchase price and associated

goodwill to each of the Company’s

reportable segments during the year ended December 31, 2020,

including a $

2.6

million decrease

in the Americas, a $

1.4

million decrease in EMEA, a $

8.0

million increase in Asia/Pacific and a $

0.5

million increase in Global

Specialty Businesses.

Gross carrying amounts and accumulated amortization

for definite-lived intangible assets as of December 31, 2020 and

2019 were

as follows:

Gross Carrying

Accumulated

Amount

Amortization

2020

2019

2020

2019

Customer lists and rights to sell

839,551

792,362

99,806

49,932

Trademarks, formulations and product

technology

166,448

157,049

30,483

21,299

Other

6,372

6,261

5,824

5,776

Total definite

-lived intangible assets

1,012,371

955,672

136,113

77,007

The Company recorded $

55.9

million, $

26.7

million and $

7.3

million of amortization expense during the years ended December

31, 2020, 2019 and 2018, respectively.

Amortization is recorded within SG&A in the Company’s

Consolidated Statements of Income.

Estimated annual aggregate amortization expense for

the subsequent five years is as follows:

For the year ended December 31, 2021

58,752

For the year ended December 31, 2022

58,590

For the year ended December 31, 2023

58,361

For the year ended December 31, 2024

57,935

For the year ended December 31, 2025

57,263

The Company has four indefinite-lived intangible

assets totaling $

205.1

million as of December 31, 2020, including $

204.0

million of indefinite-lived intangible assets for trademarks and

tradename associated with the Combination.

Comparatively, the

Company had four indefinite-lived intangible assets for trademarks

and tradename totaling $

243.1

million as of December 31, 2019.

The Company completes its annual goodwill and indefinite

-lived intangible asset impairment test during the fourth

quarter of

each year, or more frequently if triggering

events indicate a possible impairment in one or more of its reporting

units.

The Company

completed its annual impairment assessment during the

fourth quarter of 2020 and concluded no impairment charge

was warranted.

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.

As of March 31, 2020, the Company evaluated the initial impact

of COVID-19 on the Company’s

operations, and the volatility

and uncertainty in the economic outlook as a result of

COVID-19 to determine if they indicated it was more likely

than not that the

carrying value of any of the Company’s

reporting units or indefinite-lived or long-lived assets was not recoverable.

The Company

concluded that the impact of COVID-19 did not represent

a triggering event as of March 31, 2020 with regards to the Company’s

reporting units or indefinite-lived and long-lived assets, except

for the Company’s Houghton

and Fluidcare trademarks

and tradename

indefinite-lived intangible assets.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

The determination of estimated fair value of the Houghton

and Fluidcare trademarks and tradename indefinite-lived

assets was

based on a relief from royalty valuation method which

requires management’s

judgment and often involves the use of significant

estimates and assumptions, including assumptions with respect

to the weighted average cost of capital (“WACC”)

and royalty rates, as

well as revenue growth rates and terminal growth rates.

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

COVID-19 driving a

decrease in projected legacy Houghton net sales in the

current year and the impact of the current year decline on projected

future

legacy Houghton net sales as well as an increase in the WACC

assumption utilized in the quantitative impairment

assessment, the

Company concluded that the estimated fair values of

the Houghton and Fluidcare trademarks and tradename intangible

assets were

less than their carrying values.

As a result, an impairment charge of $

38.0

million, primarily related to the Houghton trademarks and

tradename, to write down the carrying values of these intangible

assets to their estimated fair values was recorded in the

first quarter

of 2020.

As of December 31, 2020, the Company continued to

evaluate the on-going impact of COVID-19 on the Company’s

operations,

and the volatility and uncertainty in the economic outlook

as a result of COVID-19, to determine if this indicated it was more

likely

than not that the carrying value of any of the Company’s

reporting units or indefinite-lived or long-lived intangible

assets were not

recoverable.

The Company concluded that the impact of COVID-19 did not represent

a triggering event as of December 31, 2020

with regards to any of the Company’s

reporting units or indefinite-lived and long-lived intangible

assets.

While the Company concluded that the impact of COVID-19

did not represent a triggering event as of December 31,

2020 for any

of its other long-lived or indefinite-lived assets or reporting

units, the Company will continue to evaluate the impact

of COVID-19 on

the Company’s current

and projected results.

If the current economic conditions worsen or projections of the

timeline for recovery are

significantly extended, then the Company may conclude

in the future that the impact from COVID-19 requires the need

to perform

further interim quantitative impairment tests, which could

result in additional impairment charges in the future.

Note 17 – Investments in Associated Companies

As of December 31, 2020, the Company held a

% investment in and had significant influence over Nippon

Quaker Chemical,

Ltd. (“Nippon Japan”), Kelko Quaker Chemical, S.A.

(“Kelko Panama”) and Houghton Korea acquired in 2019 in

connection with the

Combination, and held a

% investment in and had significant influence over Primex,

Ltd. (“Primex”).

See Note 2 of Notes to

Consolidated Financial Statements.

The carrying amount of the Company’s

equity investments as of December 31, 2020 was $

95.8

million, which includes

investments of $

68.3

million in Houghton Korea; $

19.4

million in Primex; $

7.8

million in Nippon Japan; and $

0.3

million in Kelko

Panama.

The Company also has a

% equity interest in Kelko Venezuela.

Due to heightened foreign exchange controls, deteriorating

economic circumstances and other restrictions in Venezuela,

during 2018 the Company concluded that it no longer

had significant

influence over this affiliate.

Prior to this determination, the Company historically accounted for

this affiliate under the equity method.

As of December 31, 2020 and 2019, the Company

had

remaining carrying value for its investment in Kelko Venezuela.

The following table is a summary of equity income in associated

companies by investment for the years ending December 31,

2020, 2019 and 2018:

Year

Ended December 31,

2020

2019

2018

Houghton Korea

5,241

2,337

Nippon Japan

853

850

713

Kelko Panama

107

222

Kelko Venezuela

(138)

Primex

1,151

1,822

966

Total equity

in net income of associated companies

7,352

5,064

1,763

As the Combination closed on August 1, 2019, the Company

included five months of equity income from Houghton

Korea in its

December 31, 2019 Consolidated Statement of Income.

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Note 18 – Other Non-Current Assets

Other non-current assets as of December 31, 2020

and 2019 were as follows:

2020

2019

Uncertain tax positions

7,209

4,993

Pension assets

6,748

Debt issuance costs

5,919

7,571

Indemnification assets

7,615

4,006

Supplemental retirement income program

1,961

1,782

Restricted insurance settlement

19,678

Other

2,344

2,403

Total other

assets

31,796

40,433

During December 2020, the restrictions lapsed over certain

cash that was previously only designated to be used for settlement

asbestos claims at an inactive subsidiary of the Company.

As of December 31, 2020 and 2019, indemnification assets relates to

certain Houghton foreign subsidiaries for which the Company

expects it will incur additional tax amounts which are subject to

indemnification under the terms of the Combination

share and purchase agreement.

These indemnification assets have a

corresponding uncertain tax position recorded in

other non-current liabilities.

As of December 31, 2020, one of the Company’s

foreign pension plan’s

fair value of plan assets exceeded its gross benefit obligation

and was therefore over-funded, which is

represented by the line Pension assets in the table above.

See Notes 10, 12, 21 and 22 of Notes to Consolidated Financial

Statements.

Note 19 – Other Accrued Liabilities

Other accrued liabilities as of December 31, 2020 and

2019 were as follows:

2020

2019

Non-income taxes

26,080

21,176

Current income taxes payable

13,124

7,503

Professional fees, legal, and acquisition-related accruals

11,437

17,103

Short-term lease liabilities

10,901

11,177

Selling expenses and freight accruals

10,475

11,350

Customer advances and sales return reserves

6,380

5,554

Other

13,710

9,742

Total other

accrued liabilities

92,107

83,605

Note 20 – Debt

Debt as of December 31, 2020 and 2019 includes the

following:

As of December 31, 2020

As of December 31, 2019

Interest

Outstanding

Interest

Outstanding

Rate

Balance

Rate

Balance

Credit Facilities:

Revolver

1.65%

160,000

3.20%

171,169

U.S. Term Loan

1.65%

570,000

3.20%

600,000

EURO Term Loan

1.50%

157,062

1.50%

151,188

Industrial development bonds

5.26%

10,000

5.26%

10,000

Bank lines of credit and other debt obligations

Various

2,072

Various

2,608

Total debt

899,134

934,965

Less: debt issuance costs

(11,099)

(14,196)

Less: short-term and current portion of long-term debts

(38,967)

(38,332)

Total long

-term debt

849,068

882,437

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Credit facilities

The Company’s primary

credit facility (as amended, the “Credit Facility”) is comprised

of a $

400.0

million multicurrency

revolver (the “Revolver”), a $

600.0

million term loan (the “U.S. Term

Loan”), each with the Company as borrower,

and a $

150.0

million (as of August 1, 2019) Euro equivalent term loan (the

“EURO Term Loan”

and together with the “U.S. Term

Loan”, the

“Term Loans”

)

with Quaker Chemical B.V.,

a Dutch subsidiary of the Company as borrower,

each with a five-year term maturing in

August 2024.

Subject to the consent of the administrative agent and certain

other conditions, the Company may designate additional

borrowers.

The maximum amount available under the Credit Facility can be

increased by up to $

300.0

million at the Company’s

request if there are lenders who agree to accept additional

commitments and the Company has satisfied certain other

conditions.

Borrowings under the Credit Facility bear interest at a base

rate or LIBOR plus an applicable margin based upon

the Company’s

consolidated net leverage ratio.

There are LIBOR replacement provisions that contemplate a further

amendment if and when LIBOR

ceases to be reported.

The variable interest rate incurred on the outstanding borrowings under

the Credit Facility during the year

ended December 31, 2020 was approximately

2.2

As of December 31, 2020, the variable interest rate on the outstanding

borrowings under the Credit Facility was approximately

1.6

In addition to paying interest on outstanding principal under

the Credit

Facility, the Company

is required to pay a commitment fee ranging from

0.2

% to

0.3

% depending on the Company’s

consolidated net

leverage ratio to the lenders under the Revolver in

respect of the unutilized commitments thereunder.

The Company has unused

capacity under the Revolver of approximately $

234

million, net of bank letters of credit of approximately $

million, as of December

31, 2020.

Until closing of the Combination, the Company incurred ticking

fees to maintain the bank commitment, which began to

accrue on September 29, 2017.

Concurrent with the closing of the Combination and executing the

Credit Facility on August 1, 2019,

the Company paid approximately $

6.3

million of ticking fees.

The Credit Facility is subject to certain financial and

other covenants.

The Company’s initial consolidated net debt to

consolidated adjusted EBITDA ratio could not exceed 4.25 to 1, with step downs in the permitted ratio over the term of the Credit

Facility. As of December 31, 2020, the consolidated net debt to adjusted EBITDA may not exceed 4.00 to 1. The Company’s

consolidated adjusted EBITDA to interest expense ratio cannot be less than 3.0 to 1 over the term of the agreement. The Credit

Facility also prohibits the payment of cash dividends if the Company is in default or if the amount of the dividend paid annually

exceeds the greater of $50.0 million and 20% of consolidated adjusted EBITDA unless the ratio of consolidated net debt to

consolidated adjusted EBITDA is less than 2.0 to 1, in which case there is no such limitation on amount.

As of December 31, 2020

and December 31, 2019, the Company was in compliance with all of the Credit Facility covenants.

The Term Loans have

quarterly

principal amortization during their five-year terms,

with

5.0

% amortization of the principal balance due in years

1 and 2,

7.5

% in year

3, and

10.0

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

maturity.

During the year ended December 31, 2020, the

Company made four quarterly amortization payments

related to the Term Loans

totaling $

37.6

million.

The Credit Facility is

guaranteed by certain of the Company’s

domestic subsidiaries and is secured by first priority liens on substantially

all of the assets of

the Company and the domestic subsidiary guarantors,

subject to certain customary exclusions.

The obligations of the Dutch borrower

are guaranteed only by certain foreign subsidiaries on

an unsecured basis.

The Credit Facility required the Company to fix its variable

interest rates on at least 20% of its total Term

Loans.

In order to

satisfy this requirement as well as to manage the

Company’s exposure to variable

interest rate risk associated with the Credit Facility,

in November 2019, the Company entered into $

170.0

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

rate of

1.64

% plus an applicable margin as provided in the Credit

Facility, based on the Company’s

consolidated net leverage ratio.

At the

time the Company entered into the swaps, and as

of December 31, 2020,

the aggregate interest rate on the swaps, including the fixed

base rate plus an applicable margin, was

3.1

See Note 25 of Notes to Consolidated Financial Statements.

The Company capitalized $

23.7

million of certain third-party debt issuance costs in connection

with executing the Credit Facility.

Approximately $

15.5

million of the capitalized costs were attributed to the Term

Loans and recorded as a direct reduction of long-

term debt on the Company’s

Consolidated Balance Sheet.

Approximately $

8.3

million of the capitalized costs were attributed to the

Revolver and recorded within other assets on the Company’s

Consolidated Balance Sheet.

These capitalized costs are being

amortized into interest expense over the five-year term

of the Credit Facility.

As of December 31, 2020 and 2019,

the Company had

11.1

million and $

14.2

million, respectively,

of debt issuance costs recorded as a reduction of long-term

debt.

As of December 31,

2020 and 2019, the Company had $

5.9

million and $

7.6

million, respectively,

of debt issuance costs recorded within other assets.

Industrial development bonds

As of December 31, 2020 and 2019, the Company

had fixed rate, industrial development authority bonds totaling $

10.0

million in

principal amount due in

2028

These bonds have similar covenants to the Credit Facility noted

above.

The Company also had a $

5.0

million industrial development authority bond bearing

interest at a rate of

5.60

%, which matured

and was paid off during the fourth quarter of

2018

QUAKER CHEMICAL CORPORATION

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

- Continued

(

Dollars in thousands, except share and per share amounts,

unless otherwise stated

)

Bank lines of credit and other

debt obligations

The Company has certain unsecured bank lines of credit

and discounting facilities in certain foreign subsidiaries, which are

not

collateralized.

The Company’s other debt

obligations primarily consist of certain domestic and foreign

low interest rate or interest-

free municipality-related loans, local credit facilities of

certain foreign subsidiaries and capital lease obligations.

Total unused

capacity under these arrangements as of December

31, 2020 was approximately $

million.

In addition to the bank letters of credit described in

the “Credit facilities” subsection above, the Company’s

only other off-balance

sheet arrangements include certain financial and other

guarantees.

The Company’s total bank

letters of credit and guarantees

outstanding as of December 31, 2020 were approximately

million.

The Company incurred the following debt related expenses

included within Interest expense, net, in the Consolidated

Statements

of Income:

Year

Ended December 31,

2020

2019

2018

Interest expense

23,552

16,788

6,158

Amortization of debt issuance costs

4,749

1,979

Total

28,301

18,767

6,228

Based on the variable interest rates associated with the Credit

Facility, as of December

31, 2020 and 2019, the amounts at which

the Company’s total debt

were recorded are not materially different from

their fair market value.

At December 31, 2020, annual maturities on long-term

borrowings maturing in the next five fiscal years (excluding

the reduction

to long-term debt attributed to capitalized and unamortized

debt issuance costs) are as follows:

2021

38,795

2022

57,850

2023

76,943

2024

715,227

2025

231

Note 21 – Pension and Other Postretirement

Benefits

The following table shows the funded status of the Company’s

plans’ reconciled

with amounts reported in the Consolidated

Balance Sheets as of December 31, 2020 and 2019:

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	6th grade Good

Quaker Chemical (KWR) 10-K2020 FY Annual report

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