QUAKER CHEMICAL CORP (KWR) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

As used in this Annual Report on Form 10-K (the “Report”), the terms “Quaker Houghton,” the “Company,” “we,” and “our” refer to Quaker Chemical Corporation (doing business as Quaker Houghton), its subsidiaries, and associated companies, unless the context otherwise requires. The “Combination” refers to the Quaker combination with Houghton International, Inc. (“Houghton”).

Executive Summary

Quaker Houghton is the global leader in industrial process fluids. With a presence around the world, including operations in over 25 countries, our customers include thousands of the world’s most advanced and specialized steel, aluminum, automotive, aerospace, offshore, container, mining, and metalworking companies. Our high-performing, innovative and sustainable solutions are backed by best-in-class technology, deep process knowledge, and customized services. Quaker Houghton is headquartered in Conshohocken, Pennsylvania, located near Philadelphia in the U.S.

Overall, 2022 was a successful year as the Company navigated through a challenging financial, economic and geopolitical backdrop, which included the direct and indirect impacts of the ongoing war in Ukraine, Zero-COVID policies in China, significant raw material cost escalation, inflationary pressures on manufacturing and generally, all other global costs, supply chain and logistics challenges, and significant foreign currency volatility. Net sales of $1,943.6 million in 2022 increased 10% compared to $1,761.2 million in 2021, primarily due to increases from selling price and product mix of approximately 22% and additional net sales from acquisitions of 1%, partially offset by a 7% decline in organic sales volumes and an unfavorable impact from foreign currency translation of 6%. The increase in selling price and product mix was primarily the result of strategic price increases implemented to offset the ongoing inflationary pressures that began at the onset of 2021 and continued throughout 2022. The decline in organic sales volumes compared to 2021 was primarily a result of softer end market conditions, particularly in Europe and Asia/Pacific, the wind-down of the tolling agreement for products previously divested related to the Combination and the direct and indirect impacts of the ongoing war in Ukraine, partially offset by higher volumes due to net new business wins.

The Company had a net loss of $15.9 million or $0.89 per diluted share in 2022, compared to net income of $121.4 million or $6.77 per diluted share in 2021. The Company’s reported net loss in 2022 primarily reflects a non-cash goodwill impairment charge of $93.0 million in the fourth quarter related to the EMEA reportable segment. Excluding this and other non-recurring or non-core items in each period, the Company’s current year non-GAAP net income and non-GAAP earnings per diluted share were $105.3 million and $5.87, respectively, compared to $122.8 million and $6.85, respectively, in 2021. The Company generated adjusted EBITDA of $257.2 million compared to $274.1 million in 2021. The lower year-over-year adjusted EBITDA was primarily a result of higher net sales which were offset by lower gross margins driven by higher raw material costs, higher manufacturing and other input costs, the impacts of disruptions in the global supply chain experienced in 2022, and higher selling, general and administrative expenses (“SG&A”), including the impact of higher sales on direct selling expenses, and additional SG&A from recent acquisitions. The lower year-over-year non-GAAP net income and non-GAAP earnings per diluted share were also impacted by higher interest expense and tax expense in 2022. See the Non-GAAP Measures section of this Item below.

The Company’s 2022 operating performance in each of its four reportable segments: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty Businesses, reflect similar drivers to that of its consolidated performance as each of the Company’s reportable segments net sales benefited from double-digit year-over-year increases in selling price and product mix, while those increases in net sales were partially offset by the significant and unfavorable impact of foreign currency translation in the EMEA, Asia/Pacific and Global Specialties Businesses. All geographic segments had lower organic sales volumes; however, organic sales volumes for the Global Specialty Businesses increased in 2022 compared to the prior year due to improved demand. Operating earnings for the Global Specialty Businesses and Americas increased due to higher net sales and an improvement in margins. Operating earnings declined slightly in Asia/Pacific due to slightly lower margins and a strong comparison in the first half of 2021. EMEA operating earnings declined compared to the prior year due to the persistent and significant inflationary pressures on raw materials and other costs and the negative impact of foreign currency translation, partially offset by price realization. Additional details of each segment’s operating performance are further discussed in the Company’s reportable segments review, in the Operations section of this Item 7, below.

The Company generated net operating cash flow of $41.8 million in 2022 compared to $48.9 million in 2021. The decrease in net operating cash flow year-over-year was primarily driven by a lower operating performance in 2022 compared to 2021 coupled with significant working capital investments in each year. The key drivers of the Company’s operating cash flow and overall liquidity are further discussed in the Company’s Liquidity and Capital Resources section of this Item 7, below.

Overall, the Company delivered solid results in 2022, primarily due to strong price realization, as a result of the Company’s ongoing value-based pricing initiatives, and positive net new business wins, in the face of extreme economic head wins. Looking ahead to 2023, we believe the business is well positioned to continue to outpace market growth rates by delivering value-added solutions and services to its customers. The Company is committed to improving its margins as we progress through 2023, through both price and cost actions, while balancing customer relationships with the value we provide and the overall raw material environment and customer relationships. Additionally, the Company expects to continue to invest in its long-term growth including advancing its customer intimate strategy, progressing with its sustainability program and positioning the Company to deliver earnings growth in 2023 and beyond.

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On-going impact of COVID-19

During 2022, the direct and indirect effects of COVID-19 continued to negatively impact the Company's business operations, as well as those of its customers and suppliers, including increased costs and decreased availability of labor and raw materials. The Company’s top priority, especially during this pandemic, has been to protect the health and safety of its employees and customers, while working to ensure business continuity and meet its customers’ needs. In response, the Company implemented additional operational, health, and safety protocols, including enabling remote work where needed and practicable, employing social distancing standards, implementing travel restrictions where necessary, enhancing onsite hygiene practices, and instituting visitation restrictions at the Company’s facilities; where necessary, these operational changes remain in place. All of the Company’s more than 30 production facilities worldwide are open and operating and are deemed as essential businesses in the jurisdictions where they are operating. Although restrictions imposed by governments around the world have largely been eliminated or loosened, management continues to monitor and respond to the impacts related to COVID-19 on the Company, the overall specialty chemical industry, and the economies and markets in which the Company and its customers and suppliers operate.

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. At this time, management does not believe that COVID-19 has had a material impact on financial reporting processes, internal controls over financial reporting, or disclosure controls and procedures.

Impact of Political Conflicts

A significant portion of the Company’s revenues and earnings are generated by non-U.S. operations. This subjects the Company to political and economic risks that could adversely affect the Company’s business, liquidity, financial position and results of operations. The existence of military conflicts, for example the ongoing war between Russia and Ukraine, bring inherent risks such as the potential for supply chain disruptions, increased costs of resources including oil, decreased trade activity and other consequences related to economic or other sanctions. The U.S. government and other nations have imposed significant restrictions on most companies’ ability to do business in Russia as a result of the war between Russia and Ukraine. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. The war between Russia and Ukraine has had a negative impact on the Company’s ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions including closures of air space. If this conflict continues or expands, it could increase the costs, risks and adverse impacts from these new challenges. The Company and its customers and suppliers may also be the subject of increased cyber-attacks.

During the second quarter of 2022, the Company decided to cease its operations in Russia. The Company’s operations in the conflict areas including Russia, Ukraine, and Belarus historically represented less than 2% of the Company’s consolidated net sales and less than 1% of the Company’s consolidated total assets. The Company’s primary exposure in the conflict areas related to outstanding customer accounts receivable. The Company is actively monitoring its outstanding Russian receivables for collections and has recorded incremental allowances for credit losses where warranted.

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, credit losses, 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:

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Accounts receivable and inventory exposures: The Company establishes allowances for credit losses for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances 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 credit losses was $13.5 million and $12.3 million as of December 31, 2022 and 2021, respectively. The Company recorded expense to increase its provision for credit losses by $4.3 million, $0.7 million and $3.6 million for the years ended December 31, 2022, 2021 and 2020, 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, $0.1 million and $0.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Tax exposures, uncertain tax positions and valuation allowances: The Company records expenses and liabilities for taxes based on estimates of amounts that will be determined as deductible or taxable 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, such as taxable income 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.

The Company also records valuation allowances when necessary to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and assesses the need for a valuation allowance, in the event Quaker Houghton were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Both determinations could have a material impact on the Company’s financial statements.

Pursuant to the Tax Cuts and Jobs Act (“U.S. Tax Reform”), the Company recorded a $15.5 million transition tax liability for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries. As of December 31, 2022, $6.9 million in installments have been paid with the remaining $8.6 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 certain undistributed earnings are ultimately remitted to the U.S. As of December 31, 2022, the Company has a deferred tax liability of $6.8 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, 2022 was approximately $424.7 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.

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Goodwill and other intangible assets: The Company accounts for business combinations under the acquisition method of accounting. This method requires the recording of acquired assets, including separately identifiable intangible assets, at their acquisition date fair values. Any excess of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill. The determination of the estimated fair value of assets acquired requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, the weighted average cost of capital (“WACC”), royalty rates, asset lives and market multiples, among other items. When necessary, the Company consults with external advisors to help determine fair value. For non-observable market values, the Company may determine fair value using acceptable valuation principles, including the excess earnings, relief from royalty, lost profit or cost methods.

The Company amortizes definite-lived intangible assets on a straight-line basis over their useful lives. Goodwill and intangible assets that have indefinite lives are not amortized and are required to be assessed at least annually for impairment. The Company completes its annual goodwill and indefinite-lived intangible asset impairment test during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment. The Company’s consolidated goodwill at December 31, 2022 and 2021 was $515.0 million and $631.2 million, respectively. The Company has four indefinite-lived intangible assets totaling $189.1 million as of December 31, 2022, including $188.0 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 $196.9 million as of December 31, 2021.

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 as of October 1, 2022 and concluded no impairment charge was warranted. The Company continually evaluates financial performance, economic conditions and other recent developments in assessing if a triggering event indicates that the carrying values of goodwill, indefinite-lived, or long-lived assets are impaired.

During the fourth quarter of 2022, subsequent to the Company completing its annual impairment test as of October 1, 2022, the Company concluded that the continued negative impacts of the aforementioned events, most notably the continued rise in interest rates which led to an increase in the Company’s cost of capital, as well as lower than expected financial performance driven by the ongoing lag in margin recovery represented an additional triggering event for the Company’s EMEA reporting unit and the associated goodwill, as well as the related asset group. As a result of this conclusion, the Company completed an interim impairment assessment as of December 31, 2022 for its EMEA reporting unit and the related asset group. The Company concluded that the undiscounted cash flows exceeded the carrying value of the long-lived assets, and it was not more likely than not that an impairment exists. In completing a quantitative goodwill impairment test, the Company compares the reporting unit’s fair value, primarily based on future discounted cash flows, to its carrying value in order to determine if an impairment charge is warranted. The estimates of future discounted cash flows involve considerable judgment and are based upon certain significant assumptions including the WACC as well as projected EBITDA, which includes assumptions related to revenue growth rates, gross margin levels and operating expenses. As a result of the impact of financial, economic, and geopolitical conditions driving a decrease in EMEA earnings in the current year, the impact of the current year decline on projected future earnings, as well as an increase in the WACC assumption utilized in this fourth quarter interim quantitative impairment assessment, the Company concluded that the estimated fair value of the EMEA reporting unit was less than its carrying value. As a result, a non-cash impairment charge of $93.0 million to write down the carrying value of the EMEA reporting unit Goodwill to its estimated fair values was recorded in the fourth quarter of 2022. After this impairment charge, as of December 31, 2022, goodwill for the EMEA reporting unit was $34.6 million.

In completing the interim quantitative impairment assessment, the Company used a WACC assumption of approximately 12.0% and holding all other assumptions constant, the WACC would have to increase by approximately 0.8 percentage points before the Company’s EMEA reporting unit’s remaining goodwill would be fully impaired. In addition, holding EBITDA margins and all other assumptions constant, the Company’s compound annual revenue growth rate during the entire projection period would need to decline by approximately 1.6 percentage points before the Company’s EMEA reporting unit’s remaining goodwill would be fully impaired. Similarly, holding revenue growth rates and all other assumptions constant, the Company’s average EBITDA margins throughout the discreet projection period would need to decline by approximately 2.3 percentage points before the Company’s EMEA reporting unit’s remaining goodwill would be fully impaired.

Notwithstanding the results of the Company’s annual and trigger based interim impairment assessments during 2022 and the goodwill impairment charge taken in the fourth quarter of 2022, if the Company is unable to successfully implement actions aimed at more than offsetting raw material costs and ongoing inflationary pressures and the financial performance of the EMEA reporting unit declines further, or interest rates continue to rise and this leads to an increase in the cost of capital, then it is possible these financial, economic and geopolitical conditions could result in another triggering event for the EMEA reporting unit in the future and could potentially lead to an additional impairment of the EMEA reporting unit’s remaining goodwill or other indefinite-lived or long-lived assets. See Note 16 of Notes to Consolidated Financial Statements in Item 8 of this Report.

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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.

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, 2022, the Company had cash, cash equivalents and restricted cash of $181.0 million. Total cash, cash equivalents and restricted cash was $165.2 million at December 31, 2021. The $15.8 million increase in cash and cash equivalents was the net result of $41.8 million of cash provided by operating activities and $24.7 million of cash provided by financing activities partially offset by $40.2 million of cash used in investing activities and approximately $10.5 million of negative impacts due to the effect of foreign currency translation on cash.

Net cash flows provided by operating activities were $41.8 million in 2022 compared to $48.9 million in 2021. The Company’s slightly lower current year net operating cash flow was primarily driven by lower earnings in 2022 as compared to 2021, partially offset by a lower working capital investment year-over-year. While the Company experienced ongoing working capital investment in 2022, the amount decelerated as compared to 2021. The year-over-year increase in net sales was larger in 2021 than in 2022, resulting in a smaller increase in accounts receivable in the current year. In addition, during 2022, the Company utilized certain non-income tax credits which were recognized during 2021, resulting in a decrease in working capital during the current year. Lastly, during 2021 there was a larger increase in inventory as a result of higher costs and, to a lesser extent, a build in certain inventory in response to global supply chain and logistics challenges, however, this larger prior year increase in inventory was partially offset by higher levels of accounts payable in the prior year as well, due to timing of purchases.

Net cash flows used in investing activities were $40.2 million in 2022 compared to $49.1 million in 2021. This $8.9 million decrease in cash outflows used in investing activities was due to lower cash payments related to acquisitions as a result of the level of acquisition activity in each year, partially offset by lower cash proceeds from the disposition of assets which includes the sale of certain held-for-sale real property assets related to the Combination, and higher capital expenditures in the current year largely related to certain infrastructure and sustainability-related spending.

Net cash flows provided by financing activities were $24.7 million in 2022 compared to net cash flows used in financing activities of $13.5 million in 2021. The $38.1 million increase in net cash inflows from financing activities was primarily driven by an increase in borrowings in the current year under the Company’s primary credit facility (described below), including the impact of new borrowings, net of repayments of old borrowings and current year debt issuance costs, related to the June 2022 credit facility amendment. In addition, the Company paid $30.1 million of cash dividends during 2022, a $1.5 million or 5.3% increase in cash dividends compared to the prior year due to cash dividend per share increases.

The Company, its wholly owned subsidiary, Quaker Chemical B.V., as borrowers, Bank of America, N.A., as administrative agent, U.S. Dollar swing line lender and letter of credit issuer, and the other lenders party thereto, entered into a credit agreement on August 1, 2019, as amended (the “Original Credit Facility”). The Original Credit Facility was comprised of a $400.0 million multicurrency revolver (the “Original Revolver”), a $600.0 million term loan (the “Original 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 “Original EURO Term Loan”), with Quaker Chemical B.V., a Dutch subsidiary of the Company as borrower, each with a five-year term, maturing in August 2024.

During June 2022, the Company, and its wholly owned subsidiary, Quaker Houghton B.V., as borrowers, Bank of America, N.A., as administrative agent, U.S. Dollar swing line lender and letter of credit issuer, Bank of America Europe Designated Active Company, as Euro Swing Line Lender, certain guarantors and other lenders entered into an amendment to the Original Credit Facility (the “Amended Credit Facility”). The Amended Credit Facility established (A) a new $150.0 million Euro equivalent senior secured term loan (the “Amended Euro Term Loan”), (B) a new $600.0 million senior secured term loan (the “Amended U.S. Term Loan”), and (C) a new $500.0 million senior secured revolving credit facility (the “Amended Revolver”). The Company has the right to increase the amount of the Amended Credit Facility by an aggregate amount not to exceed the greater of $300.0 million or 100% of Consolidated EBITDA, subject to certain conditions. In addition, the Amended Credit Facility also:

(i) eliminated the requirement that material foreign subsidiaries must guaranty the Original Euro Term Loan;

(ii) replaced the U.S. Dollar borrowings reference rate from LIBOR to Term SOFR;

(iii) extended the maturity date of the Original Credit Facility from August 2024 to June 2027; and

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(iv) effected certain other changes to the Original Credit Facility as set forth in the Amended Credit Facility.

The Company used the proceeds of the Amended Credit Facility to repay all outstanding loans under the Original Credit Facility, unpaid accrued interest and fees on the closing date under the Original Credit Facility and certain expenses and fees. U.S. Dollar-denominated borrowings under the Amended Credit Facility bear interest, at the Company’s election, at the base rate or term SOFR plus an applicable rate ranging from 1.00% to 1.75% for Term SOFR loans and from 0.00% to 0.75% for base rate loans, depending upon the Company’s consolidated net leverage ratio. Loans based on term SOFR also include a spread adjustment equal to 0.10% per annum. Borrowings under the Amended Credit Facility denominated in currencies other than U.S. Dollars bear interest at the alternative currency term rate plus the applicable rate ranging from 1.00% to 1.75%

The Amended Credit Facility contains affirmative and negative covenants, financial covenants and events of default, including without limitation 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 share purchases; and (d) dispositions of assets. Dividends and share repurchases are permitted in annual amounts not exceeding the greater of $75 million annually and 25% of consolidated EBITDA if there is no default. If the consolidated net leverage ratio is less than 2.50 to 1.00, then the Company is no longer subject to restricted payments.

Financial covenants contained in the Amended Credit Facility include a consolidated interest coverage ratio test and a consolidated net leverage ratio test. The consolidated net leverage ratio at the end of a quarter may not be greater than 4.00 to 1.00, subject to a permitted increase during a four-quarter period after certain acquisitions. The Company has the option of replacing the consolidated net leverage ratio test with a consolidated senior net leverage ratio test if the Company issues certain types of unsecured notes, subject to certain limitations. Events of default in the Amended Credit Facility include without limitation defaults for non-payment, breach of representations and warranties, non-performance of covenants, cross-defaults, insolvency, and a change of control in certain circumstances. The occurrence of an event of default under the Amended Credit Facility could result in all loans and other obligations becoming immediately due and payable and the Amended Credit Facility being terminated. As of December 31, 2022 and December 31, 2021, the Company was in compliance with all of the Amended and Original Credit Facility covenants.

The weighted average variable interest rate incurred on the outstanding borrowings under the Original Credit Facility and the Amended Credit Facility during the twelve months ended December 31, 2022 was approximately 3.0%. As of December 31, 2022, the interest rate on the outstanding borrowings under the Amended Credit Facility was approximately 4.9%. In addition to paying interest on outstanding principal under the Original Credit Facility, the Company was required to pay a commitment fee ranging from 0.2% to 0.3% depending on the Company’s consolidated net leverage ratio under the Original Revolver in respect of the unutilized commitments thereunder. As part of the Amended Credit Facility, the Company is required to pay a commitment fee ranging from 0.150% to 0.275% related to unutilized commitments under the Amended Revolver, depending on the Company’s consolidated net leverage ratio.

The Company previously capitalized $23.7 million of certain third-party debt issuance costs in connection with executing the Original Credit Facility. Approximately $15.5 million of the capitalized costs were attributed to the Original 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 Original 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 Original Credit Facility. Prior to executing the Amended Credit Facility, as of December 31, 2021, the Company had $8.0 million of debt issuance costs recorded as a reduction of Long-term debt attributable to the Original Credit Facility and $4.3 million of debt issuance costs recorded within Other assets attributable to the Original Credit Facility.

In connection with executing the Amended Credit Facility, the Company recorded a loss on extinguishment of debt of approximately $6.8 million which includes the write-off of certain previously unamortized deferred financing costs as well as a portion of the third-party and creditor debt issuance costs incurred to execute the Amended Credit Facility. Also, in connection with executing the Amended Credit Facility, during the second quarter of 2022, the Company capitalized $2.2 million of certain third-party and creditor debt issuance costs. Approximately $0.7 million of the capitalized costs were attributed to the Amended Euro Term Loan and Amended U.S. Term Loan. These costs were recorded as a direct reduction of Long-term debt on the Consolidated Balance Sheet. Approximately $1.5 million of the capitalized costs were attributed to the Amended Revolver and recorded within Other assets on the Consolidated Balance Sheet. These capitalized costs, as well as the previously capitalized costs that were not written off will collectively be amortized into Interest expense over the five year term of the Amended Credit Facility. As of December 31, 2022, the Company had $2.0 million of debt issuance costs recorded as a reduction of Long-term debt on the Consolidated Balance Sheet and $4.3 million of debt issuance costs recorded within Other assets on the Consolidated Balance Sheet.

The Original 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 Original 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 Original Credit Facility, based on the Company’s consolidated net leverage ratio. In October 2022, the Company’s interest rate swap contracts expired. Upon expiration, the Company received a cash payment from the counterparties of $0.2 million. See Note 25 of Notes to Consolidated Financial Statements.

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As of December 31, 2022, the Company had Amended Credit Facility borrowings outstanding of $943.5 million. The Company had unused capacity under the Amended Revolver of approximately $301 million, which is net of bank letters of credit of approximately $3 million, as of December 31, 2022. The Company’s other debt obligations are primarily industrial development bonds, bank lines of credit and municipality-related loans, which totaled $11.3 million as of December 31, 2022. Total unused capacity under these arrangements as of December 31, 2022 was approximately $35 million. The Company’s total net debt as of December 31, 2022 was $773.8 million.

The Company incurred $11.0 million of total Combination, integration and other acquisition-related expenses in 2022, which includes $2.4 million of other expense related to an indemnification asset and is net of a $0.2 million gain on the sale of certain held-for-sale real property assets, described in the Non-GAAP Measures section of this Item below. The Company had aggregate net cash outflows of approximately $13.3 million related to Combination, integration and other acquisition-related expenses during 2022. Comparatively, in 2021, the Company incurred $18.6 million of total Combination, integration and other acquisition-related expenses, including $0.7 million of accelerated depreciation and is net of a $5.4 million gain on the sale of certain held-for-sale real property assets, as well as a $0.6 million of other income related to an indemnification asset. Net cash outflows related to these costs were approximately $20.6 million during 2021.

During 2022, the Company incurred $14.4 million of strategic planning expenses. The Company expects that these additional operating costs and associated cash flows, as well as higher capital expenditures related to strategic planning, process optimization and the next phase of the Company’s long-term integration to further optimize its footprint, processes and other functions will continue in 2023 and extend into the next several years.

Quaker Houghton’s management approved, and the Company initiated, a global restructuring plan (the “QH Program”) in 2019 as part of its planned cost synergies associated with the Combination. The QH Program included restructuring and associated severance costs to reduce total headcount by approximately 400 people globally and plans for the closure of certain manufacturing and non-manufacturing facilities. As of December 31, 2022, the Company has substantially completed all of the initiatives under the QH Program with only an immaterial amount of remaining severance still to be paid, which is expected to be completed during 2023.

In response to current macroeconomic headwinds and softer operating conditions in 2022, the Company’s Management initiated a global cost and optimization program to improve its cost structure and drive a more profitable and productive organization. This program has and will include certain restructuring activities as part of the plan to further optimize and strengthen the Company’s footprint, optimize the go-to-market strategy, simplify the portfolio and organization, and enable the Company to deliver on its strategic plan. During the fourth quarter of 2022, initial actions under this program included restructuring and associated severance costs to reduce headcount by approximately 40 positions globally. These headcount reductions began in the fourth quarter of 2022 and are expected to be completed in 2023. The Company is continuing to evaluate and expects to implement further actions under this program, and as a result, additional headcount reductions and restructuring costs may be incurred in the future. Under the Company’s restructuring programs, employee separation benefits varied depending on local regulations within certain foreign countries and included severance and other benefits. The exact timing to complete all actions and final costs associated will depend on a number of factors and are subject to change.

The Company recognized $3.2 million, $1.4 million and $5.5 million of restructuring and related charges for the years ended December 31, 2022, 2021 and 2020, respectively, as a result of these programs. The Company made cash payments related to the settlement of restructuring liabilities for these programs of $1.5 million and $5.3 million during the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2022, the Company’s gross liability for uncertain tax positions, including interest and penalties, was $20.3 million. The Company cannot determine a reliable estimate of the timing of cash flows by period related to its uncertain tax position liability. However, should the entire liability be paid, the amount of the payment may be reduced by up to $6.1 million as a result of offsetting benefits in other tax jurisdictions. During 2021, the Company recorded $13.1 million of non-income tax credits for certain of its Brazilian subsidiaries. The Company utilized these credits to offset certain Brazilian federal tax payments during 2022. See Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report.

During 2021, two of the Company’s locations suffered property damage as a result of flooding and electrical fire, respectively. The Company maintains property insurance for all of its locations globally. The Company, its insurance adjuster, and insurance carrier are actively managing the remediation and restoration activities associated with each of these events. Based on all available information and discussions with its insurance adjuster and insurance carrier, that the losses incurred during 2021 are expected to be covered under the Company’s property insurance coverage, net of an aggregate deductible of $2.0 million. To date, the Company has received payments from its insurers of $4.6 million and has recorded an insurance receivable associated with these events of $0.2 million as of December 31, 2022. The Company and its insurance carrier continue to review the impact of the electrical fire on the production facility’s operations as it relates to a potential business interruption insurance claim; however, as of the date of this Report, the Company cannot reasonably estimate any probable amount of business interruption insurance claim recoverable. Therefore, the Company has not recorded a gain contingency for a possible business interruption insurance claim as of December 31, 2022. See Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report.

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The Company believes that its existing cash, anticipated cash flows from operations and available additional liquidity will be sufficient to support its operating requirements and fund its business objectives for at least the next twelve months and beyond, including but not limited to, payments of dividends to shareholders, payments for restructuring activities including further strategic and optimization initiatives, pension plan contributions, capital expenditures, other business opportunities (including potential acquisitions), implementing actions to achieve the Company’s sustainability goals and other potential contingencies. The Company’s liquidity is affected by many factors, some based on normal operations of our business and others related to the impact of the pandemic and other events on our business and on global economic conditions as well as industry uncertainties, which we cannot predict. We also cannot predict economic conditions and industry downturns or the timing, strength or duration of recoveries. We may seek, as we believe appropriate, additional debt or equity financing 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, 2022, and the effect such obligations are expected to have on its liquidity and cash flows in future periods. Pension and postretirement plan contributions beyond 2022 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, 2022.

Non-GAAP Measures

The information in this Form 10-K filing includes non-GAAP (unaudited) financial information that includes EBITDA, adjusted EBITDA, adjusted EBITDA margin, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP earnings per diluted share. The Company believes these non-GAAP financial measures provide meaningful supplemental information as they enhance a reader’s understanding of the financial performance of the Company, are indicative of future operating performance of the Company, and facilitate a comparison among fiscal periods, as the non-GAAP financial measures exclude items that are not indicative of future operating performance or not considered core to the Company’s operations. Non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP.

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The Company presents EBITDA which is calculated as net income attributable to the Company before depreciation and amortization, interest expense, net, and taxes on income before equity in net income of associated companies. The Company also presents adjusted EBITDA which is calculated as EBITDA plus or minus certain items that are not indicative of future operating performance or not considered core to the Company’s operations. In addition, the Company presents non-GAAP operating income which is calculated as operating income plus or minus certain items that are not indicative of future operating performance or not considered core to the Company’s operations. Adjusted EBITDA margin and non-GAAP operating margin are calculated as the percentage of adjusted EBITDA and non-GAAP operating income to consolidated net sales, respectively. The Company believes these non-GAAP measures provide transparent and useful information and are widely used by analysts, investors, and competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.

Additionally, the Company presents non-GAAP net income and non-GAAP earnings per diluted share as additional performance measures. Non-GAAP net income is calculated as adjusted EBITDA, defined above, less depreciation and amortization, interest expense, net, and taxes on income before equity in net income of associated companies, in each case adjusted, as applicable, for any depreciation, amortization, interest or tax impacts resulting from the non-core items identified in the reconciliation of net income attributable to the Company to adjusted EBITDA. Non-GAAP earnings per diluted share is calculated as non-GAAP net income per diluted share as accounted for under the “two-class share method.” The Company believes that non-GAAP net income and non-GAAP earnings per diluted share provide transparent and useful information and are widely used by analysts, investors, and competitors in our industry as well as by management in assessing the operating performance of the Company on a consistent basis.

Certain of the prior period non-GAAP financial measures presented in the following tables have been adjusted to conform with current period presentation. The following tables reconcile the Company’s non-GAAP financial measures (unaudited) to their most directly comparable GAAP financial measures (dollars in thousands, unless otherwise noted, except per share amounts):

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(a)Combination, restructuring and other acquisition-related expenses include certain legal, financial, and other advisory and consultant costs incurred in connection with the Combination integration activities including internal control readiness and remediation. These amounts also include expense associated with the Company's other recent acquisitions, including certain legal, financial, and other advisory and consultant costs incurred in connection with due diligence as well as costs associated with selling inventory from acquired businesses which was adjusted to fair value as part of purchase accounting. These costs are not indicative of the future operating performance of the Company. Approximately $0.2 million, $0.6 million and $1.5 million for the years ended December 31, 2022, 2021 and 2020, respectively, of these pre-tax costs were considered non-deductible for the purpose of determining the Company’s effective tax rate, and, therefore, taxes on income before equity in net income of associated companies - adjusted reflects the impact of these items. During 2021 and 2020, the Company recorded $0.7 million and $0.8 million, respectively, of accelerated depreciation related to certain of the Company’s facilities, which is included in the caption “Combination, restructuring 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 2022, 2021 and 2020, the Company recorded $2.4 million of other expense and, $0.6 million and $0.8 million, respectively, of other income related to an indemnification asset. During 2022, 2021 and 2020, the Company recorded restructuring and related charges of $3.2 million, $1.4 million and $5.5 million, respectively. During 2021 and 2020, the Company recorded $0.8 million and $0.2 million, respectively, related to the sale of inventory from acquired businesses which was adjusted to fair value. During 2022, 2021 and 2020, the Company recorded a gain of $0.2 million, a gain of $5.4 million and a loss of $0.6 million, respectively, on the sale of certain held-for-sale real property assets related to the Combination. Each of these items are included in the caption “Combination, restructuring and other acquisition-related expenses” in the reconciliation of GAAP earnings per diluted share attributable to Quaker Chemical Corporation common shareholders to Non-GAAP earnings per diluted share as well as the reconciliation of Net Income attributable to Quaker Chemical Corporation to Adjusted EBITDA and Non-GAAP net income. See Notes 2, 7, 9 and 10 of Notes to Consolidated Financial Statements, which appears in Item 8 of this Report.

(b)Strategic planning expenses include certain consultant and advisory expenses for the Company's long-term strategic planning, as well as process optimization and the next phase of the Company's long-term integration to further optimize its footprint, processes and other functions. These costs are not indicative of the future operating performance of the Company.

(c)Executive transition costs represent the costs related to the Company’s search, hiring and transition to a new CEO in connection with the executive transition that occurred in 2021 as well as the, hiring and transition for other officers during 2022. These expenses are one-time in nature and are not indicative of the future operating performance of the Company.

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(d)Facility remediation (recovery) costs, net, presents the gross costs associated with remediation, cleaning and subsequent restoration costs associated with the property damage to certain of the Company’s facilities, net of insurance recoveries received. These charges are non-recurring and are not indicative of the future operating performance of the Company. See Note 26 of Notes to Consolidated Financial Statements, which appears in Item 8 of this Report.

(e)Impairment charges represents the non-cash charges taken to write down the value of goodwill and indefinite-lived intangible assets. These charges are 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.

(f)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. See Note 17 of Notes to Consolidated Financial Statements, which appears in Item 8 of this Report.

(g)Pension and postretirement benefit (income) costs, non-service components represent the pre-tax, non-service components of the Company’s pension and postretirement net periodic benefit cost in each period. These costs are not indicative of the future operating performance of the Company. The year ended December 31, 2020 includes a $22.7 million settlement charge for the Company’s termination of a noncontributory U.S. pension plan. See Note 21 of Notes to Consolidated Financial Statements, which appears in Item 8 of this Report.

(h)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.

(i)Brazilian non-income tax credits represent indirect tax credits related to certain of the Company’s Brazilian subsidiaries prevailing in a legal claim as well as the Brazil Supreme Court ruling on these non -income tax matters. The non-income tax credit is non-recurring and not indicative of the future operating performance of the Company. See Note 26 of Note to Consolidated Financial Statements, which appears in Item 8 of this Report.

(j)Other charges include charges incurred by an inactive subsidiary of the Company as a result of the termination of restrictions on insurance settlement reserves, the foreign currency remeasurement impacts associated with the Company’s affiliates whose local economies are designated as hyper-inflationary under U.S. GAAP and costs associated with specific reserves for trade accounts receivable related to a customer who filed for bankruptcy during 2020. These expenses are not indicative of the future operating performance of the Company. See Notes 1 and 13 of Notes to Consolidated Financial Statements, which appear in Item 8 of this Report.

(k)Russia-Ukraine conflict related expenses represent the direct costs associated with the Company's exit of operations in Russia during 2022, primarily employee separation benefits, as well as costs associated with establishing specific reserves or changes to existing reserves for trade accounts receivable within the Company's EMEA reportable segment due to the economic instability associated with certain customer accounts receivables which have been directly impacted by the current economic conflict between Russia and Ukraine or the Company's decision to end operations in Russia. These expenses are not indicative of the future operating performance of the Company. See Note 13 of Notes to Consolidated Financial Statements, which appear in Item 8 of this Report.

(l)In connection with executing the Amended Credit Facility, the Company recorded a loss on extinguishment of debt of approximately $6.8 million which includes the write-off of certain previously unamortized deferred financing costs as well as a portion of the third-party and creditor debt issuance costs incurred to execute the Amended Credit Facility. These expenses are not indicative of the future operating performance of the Company. See Note 20 of Notes to Consolidated Financial Statements, which appear in Item 8 of this Report.

(m)The impacts of certain discrete tax items includes the impact of changes in valuation allowances recorded on certain of the Company’s foreign tax credits, tax law changes in foreign jurisdictions, changes in withholding tax rates, the tax impacts of non-income tax credits associated with certain of the Company’s Brazilian subsidiaries and the associated impact on previously accrued for distributions at certain of the Company’s Asia/Pacific subsidiaries, deferred tax benefits recorded on the transfer of intangible assets between the Company’s subsidiaries as well as the offsetting impact and amortization of a deferred tax benefit the Company recorded during 2020 related to similar intercompany intangible asset transfers. See Note 10 of Notes to Consolidated Financial Statements, which appears in Item 8 of this Report.

(n)Depreciation and amortization for the years ended December 31, 2022, 2021 and 2020 includes $1.0 million, $1.2 million and $1.2 million, respectively, of amortization expense recorded within equity in net income of associated companies in the Company’s Consolidated Statements of Operations, which is attributable to the amortization of the fair value step up for the Company’s 50% interest Korea Houghton Corporation as a result of required purchase accounting.

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(o)Taxes on income before equity in net income of associated companies – adjusted presents the impact of any current and deferred income tax expense (benefit), as applicable, of the reconciling items presented in the reconciliation of net income attributable to Quaker Chemical Corporation to adjusted EBITDA, and was determined utilizing the applicable rates in the taxing jurisdictions in which these adjustments occurred, subject to deductibility. Combination, restructuring and other acquisition-related expenses described in (a) resulted in incremental taxes of $2.8 million for 2022, $4.7 million for 2021, and $8.3 million for 2020. Strategic planning expenses described in (b) resulted in incremental taxes of $3.3 million for 2022. Executive transition costs described in (c) resulted in incremental taxes of $0.6 million and $0.7 million for the years 2022 and 2021, respectively. Facility remediation costs, net described in (d) results in a tax benefit of $0.4 million for 2022 and incremental taxes of $0.5 million for 2021. Impairment charges described in (e) resulted in incremental taxes of $8.7 million for 2020. Pension and postretirement benefit (income) costs, non-service components described in (g) resulted in a reduction of taxes of $0.3 million and $0.1 million for 2022 and 2021, respectively, and incremental taxes of $7.5 million for 2020. Gain on changes in insurance settlement restrictions of an inactive subsidiary and related insurance insolvency recovery described in (h) resulted in a reduction of taxes of $4.2 million in 2020. Brazilian non-income tax credits described in (i) resulted in a reduction of taxes of $4.8 million for 2021. Other charges described in (j) resulted in incremental taxes of $0.2 million, $0.2 million and $0.1 million during 2022, 2021 and 2020, respectively. Russia-Ukraine conflict related expenses described in (k) resulted in incremental taxes of $0.5 million for 2022. Loss on extinguishment of debt described in (l) resulted in incremental taxes of $1.6 million for 2022. The impact of certain discrete tax items described in (m) resulted in incremental taxes of $4.4 million for 2022, a tax benefit of $5.8 million for 2021, and incremental taxes of $11.2 million for 2020.

(p)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.

(q)The Company calculates non-GAAP earnings per diluted share as non-GAAP net income attributable to the Company per weighted average diluted shares outstanding using the “two-class share method” to calculate such in each given period.

Off-Balance Sheet Arrangements

The Company had no material off-balance sheet commitments or obligations as of December 31, 2022. The Company’s only off-balance sheet commitments or obligations outstanding as of December 31, 2022 represented approximately $5 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 2022 with 2021

Net sales were a record $1,943.6 million in 2022 compared to $1,761.2 million in 2021. The increase in net sales of approximately $182.4 million or 10% year-over-year was primarily due to an increase in selling price and product mix of approximately 22% and additional net sales from acquisitions of 1%, partially offset by a decline in organic sales volumes of approximately 7% and the unfavorable impact from foreign currency translation of approximately 6%. The increase in selling price and product mix was primarily driven by price increases implemented to offset the significant increases in raw material and other input costs that began during 2021 and continued throughout 2022. The decline in organic sales volumes was primarily attributable to softer end market demand, particularly in the EMEA and Asia/Pacific segments, the wind-down of the tolling agreement for products previously divested related to the Combination and the impact of the ongoing war in Ukraine, partially offset by net new business wins, including the impact of the Company’s ongoing value-based pricing initiatives. The impact from foreign currency translation is primarily the result of the year-over-year strengthening of the U.S. Dollar compared to major world currencies including the Euro and the Chinese renminbi.

COGS were $1,330.9 million in 2022 compared to $1,166.5 million in 2021. The increase in COGS of 14% was driven by the continued increases in the Company’s global raw material, manufacturing and supply chain and logistics costs compared to the prior year.

Gross profit in 2022 of $612.7 million increased $18.0 million or approximately 3% from 2021. The Company’s reported gross margin in 2022 was 31.5% compared to 33.8% in 2021. The Company’s current year gross margin reflects a significant increase in raw material and other input costs and the impacts of constraints on the global supply chain, partially offset by the Company’s ongoing value-based pricing initiatives.

SG&A in 2022 increased $36.6 million compared to 2021 due primarily to the impact of sales increases on direct selling costs, higher operating costs due to inflationary pressures, costs associated with strategic planning initiatives (see the Non-GAAP Measures section of this Item, above), and additional SG&A from recent acquisitions, partially offset by lower SG&A due to foreign currency translation compared to the prior year. In addition, SG&A was lower in the prior year period as a result of continued temporary cost saving measures the Company implemented in response to the onset of COVID-19.

During 2022 and 2021, the Company incurred $8.8 million and $23.9 million, respectively, of Combination, integration and other acquisition-related expenses. See the Non-GAAP Measures section of this Item, above.

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The Company incurred restructuring expenses of $3.2 million and $1.4 million during 2022 and 2021, respectively, related to the Company’s restructuring programs. See the Non-GAAP Measures section of this Item, above.

In 2022, the Company recorded a $93.0 million non-cash impairment charge to write down the value of goodwill associated with the Company’s EMEA reportable segment. This non-cash impairment charge is the result of the Company’s trigger based fourth quarter of 2022 impairment assessment. There were no similar impairment charges in 2022 and no charges in 2021. See the Critical Accounting Policies and Estimates section as well as the Non-GAAP Measures section, of this Item, above.

Operating income in 2022 was $52.3 million compared to $150.5 million in 2021. Excluding the non-cash impairment charge, as well as other non-core items that are not indicative of future operating performance, the Company’s current year non-GAAP operating income was $177.9 million compared to $182.6 million in the prior year. The decline in non-GAAP operating income was primarily due to the higher SG&A, as described above.

Other expense in 2022 includes $6.8 million of loss on extinguishment of debt related to the Company’s refinancing the Original Credit Facility, partially offset by $1.8 million of facility remediation insurance recoveries and $2.4 million of other income related to an indemnification asset. Other income in 2021 includes $13.1 million of non-income tax credits recorded by the Company’s Brazilian subsidiaries as well as a $4.8 million gain on the sale of certain held-for-sale real property assets. See the Non-GAAP Measures section of this Item, above. In addition, foreign exchange losses, net, were higher in 2022 as compared to 2021.

Interest expense, net, increased $10.3 million compared to 2021, primarily driven by increases in the average borrowings outstanding coupled with an increase in interest rates year-over-year as the weighted average interest rate incurred on borrowings under the Company’s primary credit facility was approximately 3.0% during 2022 compared to approximately 1.6% during 2021. This was partially offset by lower amortization of debt issuance costs in 2022 as compared to 2021 due to the June 2022 credit facility amendment and write off of certain previously capitalized debt issuance costs.

The Company’s effective tax rates for 2022 and 2021 were an expense of 350.2% and an expense of 23.8%, respectively. The Company’s current year effective tax rate was largely driven by the non-cash impairment charge described above and to a lesser extent a decline in profits, earnings mix, foreign tax inclusions and withholding taxes, partially offset by a reduction in reserves for uncertain tax positions and changes in the valuation allowance for foreign tax credits. The Company’s 2021 effective tax rate was driven by a higher level of pre-tax earnings and mix of earnings, as well as a deferred tax expense related to the planned repatriation of non-U.S. earnings. In addition, the rate was impacted by certain one-time charges and benefits related to an intercompany intangible asset transfer and related royalty income recognition offset by changes in the valuation allowance for foreign tax credits. 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 the 2022 and 2021 effective tax rates would have been approximately 27% and 26%, respectively. The higher estimated current year tax rate was primarily driven by a lower level of pre-tax earnings and the impact of changes in mix of earnings. The Company may experience continued volatility in its effective tax rates due to several factors, including the timing of tax audits and the expiration of applicable statutes of limitations as they relate to uncertain tax positions, the unpredictability of the timing and amount of certain incentives in various tax jurisdictions, the treatment of certain acquisition-related costs and the timing and amount of certain share-based compensation-related tax benefits, among other factors. In addition, the foreign tax credit valuation allowance, or absence thereof, is based on a number of variables, including forecasted earnings, which may vary.

Equity in net income of associated companies decreased $7.4 million in 2022 compared to 2021, primarily due to lower current year income from the Company’s interest in a captive insurance company (see the Non-GAAP Measures section of this Item, above) due to lower market performance on equity investments and from the Company’s 50% interest in a joint venture in Korea due to overall market challenges.

Net income attributable to noncontrolling interest was less than $0.1 million for both 2022 and 2021.

Foreign exchange negatively impacted the Company’s yearly results by approximately 8% driven by the negative impact from foreign currency translation on earnings as well as higher foreign exchange transaction losses in the current year as compared to the prior year.

Consolidated Operations Review – Comparison of 2021 with 2020

Net sales were $1,761.2 million in 2021 compared to $1,417.7 million in 2020. The net sales increase of approximately $343.5 million or 24% year-over-year was primarily due to higher sales volumes of 13%, which includes additional net sales from recent acquisitions of 4%, increases from selling price and product mix of 8% and the positive impact of foreign currency translation of 3%. The increase in organic sales volumes compared to 2020 was primarily the result of the continued year-over-year improvement in end market conditions from the prior year impacts of COVID-19 and continued market share gains. Sales from acquisitions are primarily driven by the Company’s acquisition of Coral Chemical Company (“Coral”) in December 2020 and the tin-plating solutions business acquired in February 2021. The increase from selling price and product mix includes the impact of current year selling price increases implemented in response to the increases in raw material costs experienced in 2021. The positive impact from foreign currency translation is primarily the result of the strengthening of the Chinese renminbi, euro, Mexican peso, the Canadian dollar and the British pound against the U.S. dollar year-over-year.

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COGS were $1,166.5 million in 2021 compared to $904.2 million in 2020. The increase in COGS of 29% was driven by the associated COGS on the increase in net sales described above, and continued increases in the Company’s global raw material costs compared to the prior year and the impacts of supply constraints in the current year.

Gross profit in 2021 of $594.6 million increased $81.2 million or approximately 16% from 2020, due primarily to the increase in net sales noted above. The Company’s reported gross margin in 2021 was 33.8% compared to 36.2% in 2020. The lower current year gross margin is primarily attributable to increased raw materials and other costs that began in the fourth quarter of 2020 and have continued throughout 2021 and the impacts of constraints on the world’s global supply chain partially offset by the Company’s ongoing pricing initiatives.

SG&A in 2021 increased $38.1 million compared to 2020 due primarily to the impact of sales increases on direct selling costs, year-over-year inflation increases, additional SG&A from recent acquisitions and higher SG&A due to foreign currency translation, partially offset by lower incentive compensation year-over-year as well as the benefits of additional realized cost synergies associated with the Combination year-over-year. In addition, SG&A was lower in the prior year period as a result of temporary cost saving measures the Company implemented in response to COVID-19. While the Company continues to manage costs during the ongoing pandemic, it has incurred higher SG&A year-over-year as the global economy continues to gradually rebound.

During 2021 and 2020, the Company incurred $23.9 million and $29.8 million, respectively, of Combination, integration and other acquisition-related expenses primarily for professional fees related to Houghton integration and other acquisition-related activities. See the Non-GAAP Measures section of this Item, above.

The Company initiated a restructuring program during 2019 as part of its global plan to realize cost synergies associated with the Combination. The Company incurred restructuring and related charges for reductions in headcount and site closures under this program, net of adjustments to initial estimates for severance, of an expense of $1.4 million and $5.5 million during 2021 and 2020, respectively. See the Non-GAAP Measures section of this Item, above.

Operating income in 2021 was $150.5 million compared to $59.4 million in 2020. Excluding Combination, integration and other acquisition-related expenses, restructuring and related charges and other non-core items, the Company’s current year non-GAAP operating income of $182.6 million increased compared to $134.0 million in the prior year, primarily due to the increase in net sales described above and the benefits from cost savings related to the Combination offset by an increase in SG&A as well as the significant increases in raw material costs year-over-year. The Company estimates that it realized cost synergies associated with the Combination of approximately $75 million during 2021 compared to approximately $58 million during 2020.

The Company had other (expense) income, net, of $18.9 million in 2021 compared to other expense, net, of $5.6 million in 2020. The year-over-year change was primarily a result of other income related to certain non-income tax credits recorded by the Company’s Brazilian subsidiaries, the gain on the sale of certain held-for-sale real property assets and lower foreign currency transaction losses in 2021 as compared to the prior year. The Company had non-service components of pension and postretirement benefit income in the current year compared to an expense in the prior year as a result of the $22.7 million pension settlement charge directly related to the termination of a noncontributory U.S. pension plan partially offset by a $18.1 million gain related to the lapse of restrictions over certain cash that was previously designated solely for the settlement of asbestos claims at an inactive subsidiary, all of which are described in the Non-GAAP Measures section of this Item, above.

Interest expense, net, decreased $4.3 million compared to 2020 driven by lower current year average borrowings outstanding as a result of the additional revolver borrowings drawn during part of 2020 at the onset of the pandemic to add additional liquidity, coupled with a decline in overall interest rates year-over-year, as the weighted average interest rate incurred on borrowings under the Company’s credit facility was approximately 1.6% during 2021 compared to approximately 2.2% during 2020.

The Company’s effective tax rates for 2021 and 2020 were an expense of 23.8% and benefit of 19.5%, respectively. The Company’s higher current year effective tax rate is driven by a higher level of pre-tax earnings and mix of earnings, as well as deferred tax expense related to the planned repatriation of non-U.S. earnings. In addition, the rate was impacted by certain one-time charges and benefits related to an intercompany intangible asset transfer and related royalty income recognition offset by changes in the valuation allowance for foreign tax credits. Comparatively, the prior year effective tax rate was impacted by the tax effect of certain one-time tax charges and benefits related to a 2020 intercompany intangible asset transfer, additional charges for uncertain tax positions relating to certain foreign tax audits, and the tax impact of the Company’s termination of a noncontributory U.S. pension plan. Excluding the impact of these items as well as all other non-core items in each year, described in the Non-GAAP Measures section of this Item, above, the Company estimates that the 2021 and 2020 effective tax rates would have been approximately 26% and 25%, respectively. The higher estimated current year tax rate was primarily driven by a higher level of pre-tax earnings and the impact of changes in mix of earnings, deferred taxes related to the planned repatriation of non-U.S. earnings, and provision to return adjustments in the prior period. The Company may experience continued volatility in its effective tax rates due to several factors, including the timing of tax audits and the expiration of applicable statutes of limitations as they relate to uncertain tax positions, the unpredictability of the timing and amount of certain incentives in various tax jurisdictions, the treatment of certain acquisition-related costs and the timing and amount of certain share-based compensation-related tax benefits, among other factors. In addition, the foreign tax credit valuation allowance, or absence thereof, is based on a number of variables, including forecasted earnings, which may vary.

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Equity in net income of associated companies increased $2.0 million in 2021 compared to 2020, primarily due to higher current year income from the Company’s interest in a captive insurance company partially offset by lower earnings from the Company’s 50% interest in a joint venture in Korea compared to the prior year. See the Non-GAAP Measures section of this Item, above.

Net income attributable to noncontrolling interest was less than $0.1 million in 2021 compared to $0.1 million in 2020 primarily a result of the first quarter of 2020 acquisition of the remaining ownership interest in one of the Company’s South African affiliates.

Foreign exchange positively impacted the Company’s yearly results by approximately 6% driven by the positive impact from foreign currency translation on earnings as well as lower foreign exchange transaction losses in the current year as compared to the prior year.

Reportable Segments Review - Comparison of 2022 with 2021

As of December 31, 2022, and 2021, the Company’s reportable segments reflect the structure of the Company’s internal organization, the method by which the Company’s resources are allocated and the manner by which the chief operating decision maker of the Company assesses its performance. The Company has four reportable segments: (i) Americas; (ii) EMEA; (iii) Asia/Pacific; and (iv) Global Specialty Businesses. The three geographic segments are composed of the net sales and operations in each respective region, excluding net sales and operations managed globally by the Global Specialty Businesses segment, which includes the Company’s container, metal finishing, mining, offshore, specialty coatings, specialty grease and Norman Hay businesses.

Segment operating earnings for the Company’s reportable segments are comprised of net sales less COGS and SG&A directly related to the respective segment’s sales of products and services. Operating expenses not directly attributable to the net sales of each respective segment, such as certain corporate and administrative costs, Combination, integration and other acquisition-related expenses, Restructuring and related charges, and COGS related to acquired inventory sold, which is adjusted to fair value as part of purchase accounting, are not included in segment operating earnings. Other items not specifically identified with the Company’s reportable segments include interest expense, net, and other income (expense), net.

Americas

Americas represented approximately 36% of the Company’s consolidated net sales in 2022. The segment’s net sales were $696.1 million, an increase of $123.5 million or 22% compared to 2021. The increase in net sales was due to higher selling price and product mix of 28% and additional net sales from acquisition of 1%, partially offset by a decrease in organic sales volumes of approximately 7%. The increase in selling price and product mix is primarily driven by price increases implemented to offset the significant increases in raw material, manufacturing and other input costs that began during 2021 and continued through 2022. The current year decline in organic sales volumes was primarily driven by softer end market conditions, primarily in the automotive industry, due to the semiconductor supply constraints and to a lesser extent the primary metals markets, the wind-down of the tolling agreement for products previously divested related to the Combination, the Company’s ongoing value-based pricing initiatives, partially offset by net new business wins. This segment’s operating earnings were $148.2 million, an increase of $23.3 million or 19% compared to 2021 primarily driven by higher margins as the Company’s ongoing value-based pricing initiatives offset the ongoing inflationary pressures on the business.

EMEA

EMEA represented approximately 24% of the Company’s consolidated net sales in 2022. The segment’s net sales were $474.6 million, a decrease of $5.5 million or 1% compared to 2021. The decrease in net sales was a result of a 20% increase in selling price and product mix and additional net sales from acquisition of 2% which was more than offset by an unfavorable impact of foreign currency translation of 14% and a decrease in sales volumes of 9%. The increase in selling price and product mix was primarily driven by price increases implemented to offset the significant increases in raw material, manufacturing and other input costs that began during 2021 and continued through 2022. The decline in sales volumes was primarily driven by current geopolitical and macroeconomic pressures including the direct and indirect impacts of the ongoing war in Ukraine and the impact of the economic and other sanctions by other nations on Russia in response to the war, as well as the wind-down of the tolling agreement for products previously divested related to the Combination and softer economic conditions in the region. The significant and unfavorable foreign currency translation impact was primarily due to the strengthening of the U.S. dollar against the euro as this exchange rate averaged 1.05 in 2022 compared to 1.18 in 2021. This segment’s operating earnings were $50.7 million, a decrease of $34.5 million or 40% compared to 2021. The decrease in segment operating earnings was primarily a result of lower net sales, lower gross margins, and inflationary pressures on other costs, including SG&A.

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Asia/Pacific

Asia/Pacific represented approximately 20% of the Company’s consolidated net sales in 2022. The segment’s net sales were $386.5 million, a decrease of less than 1% or approximately $1.7 million compared to 2021. The decrease in net sales was a result of a 16% increase in selling price and product mix offset by lower sales volumes of 11% and an unfavorable impact from foreign currency translation of 5%. The increase in selling price and product mix was primarily driven by price increases implemented to offset the significant increases in raw material, manufacturing and other input costs that began during 2021 and continued through 2022. The decline in organic sales volumes was primarily driven by softer market conditions, primarily in China, in part as a result of the government imposed COVID-19 quarantine and related production disruptions implemented at the end of March 2022 and continued throughout 2022, partially offset by net new business wins. The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the Chinese renminbi as this exchange rate averaged 6.71 Chinese renminbi per USD in 2022 compared to 6.45 Chinese renminbi per USD in 2021. This segment’s operating earnings were $93.0 million, a decrease of $3.3 million or 3% compared to 2021 as a result of lower net sales, lower gross margins, and inflationary pressures on other costs, including SG&A.

Global Specialty Businesses

Global Specialty Businesses represented approximately 20% of the Company’s consolidated net sales in 2022. The segment’s net sales were $386.4 million, an increase of $66.2 million or 21% compared to 2021. The increase in net sales was driven by higher selling price and product mix of 17%, an increase in organic sales volumes of 5% and additional net sales from acquisitions of 3%, partially offset by an unfavorable impact from foreign currency translation of 4%. The increase in selling price and product mix was primarily driven by price increases implemented to help offset the significant increases in raw material, manufacturing and other input costs that began during 2021 and continued through 2022. The increase in organic sales volumes was primarily attributable to a continued favorable demand environment for this segment’s products. The unfavorable foreign exchange impact was primarily due to the strengthening of the U.S. dollar against the euro as described in the EMEA section above. This segment’s operating earnings were $113.9 million, an increase of $23.3 million or 26% compared to 2021. The increase in segment operating earnings reflects the higher net sales and gross margins in the current year as the Company’s value-based pricing initiatives offset higher raw materials, manufacturing and other costs resulting from continued inflationary pressures.

Reportable Segments Review – Comparison of 2021 with 2020

Americas

Americas represented approximately 33% of the Company’s consolidated net sales in 2021. The segment’s net sales were $572.6 million, an increase of $122.5 million or 27% compared to 2020. The increase in net sales was driven by a benefit in selling price and product mix of 11%, increases in organic volumes of approximately 10%, additional net sales from acquisitions of 5%, and the positive impact of foreign currency translation of 1%. The current year organic volume increase was driven by the continued improvement in end market conditions compared to the prior year which was impacted by COVID-19. The increase in selling price and product mix is primarily driven by price increases implemented to help offset the significant increases in raw material and other input costs incurred during 2021. The foreign exchange impact was primarily driven by the strengthening of the Mexican peso against the U.S. dollar, as this exchange rate averaged 20.27 in 2021 compared to 21.34 during 2020. This segment’s operating earnings were $124.9 million, an increase of $28.5 million or 30% compared to 2020. The increase in segment operating earnings reflects the higher net sales, described above, partially offset by lower gross margins driven by the continued raw material cost increases and global supply chain and logistics pressures coupled with higher SG&A including an increase in direct selling costs associated with higher net sales, SG&A from acquisitions and an increase in SG&A as the prior year included temporary cost savings measures implemented in response to the onset of the COVID-19 pandemic.

EMEA

EMEA represented approximately 27% of the Company’s consolidated net sales in 2021. The segment’s net sales were $480.1 million, an increase of $96.9 million or 25% compared to 2020. The increase in net sales was driven by a benefit from selling price and product mix of 10%, increases in organic volumes of approximately 9%, the positive impact of foreign currency translation of 4%, and additional net sales from acquisitions of 2%. The increase in selling price and product mix is primarily driven by price increases implemented to offset the significant increase in raw material and other input costs incurred during 2021. The current year volume increase was driven by the continued improvement in end market conditions compared to the prior year which was heavily impacted by COVID-19. The foreign exchange impact was primarily driven by the strengthening of the euro against the U.S. dollar as this exchange rate averaged 1.18 in 2021 compared to 1.14 in 2020. This segment’s operating earnings were $85.2 million, an increase of $16.0 million or 23% compared to 2020. The increase in segment operating earnings reflects the higher net sales described above, partially offset by lower current year gross margins driven by the continued raw material cost increases and global supply chain and logistics pressures as well as higher SG&A including increases in direct selling costs associated with higher net sales as well as increases as the prior year included temporary cost savings measures implemented in response to the onset of the COVID-19 pandemic.

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Asia/Pacific

Asia/Pacific represented approximately 22% of the Company’s consolidated net sales in 2021. The segment’s net sales were $388.2 million, an increase of approximately $72.9 million or 23% compared to 2020. The increase in net sales year-over-year was driven by increases in volumes of approximately 15%, the positive impact of foreign currency translation of 5%, increases from selling price and product mix of 2% and additional net sales from acquisitions of 1%. The current year volume increase was driven by the continued improvement in end market conditions compared to the prior year which was impacted by COVID-19. The foreign exchange impact was primarily due to the strengthening of the Chinese renminbi against the U.S. dollar as this exchange rate averaged 6.45 in 2021 compared to 6.90 in 2020. This segment’s operating earnings were $96.3 million, an increase of $8.0 million or 9% compared to 2020. The increase in segment operating earnings was driven by the higher net sales described above, partially offset by lower gross margins driven by the continued raw material cost increases and global supply chain and logistics pressures as well as higher direct selling costs associated with higher net sales and an increase in SG&A as the prior year included temporary cost savings measures implemented in response to the onset of the COVID-19 pandemic.

Global Specialty Businesses

Global Specialty Businesses represented approximately 18% of the Company’s consolidated net sales in 2021. The segment’s net sales were $320.2 million, an increase of $51.2 million or 19% compared to 2020. The increase in net sales was driven by increases in selling price and product mix, including Norman Hay, of 14%, additional net sales from acquisitions of 8%, and the positive impact of foreign currency translation of 2% partially offset by volume declines of approximately 5%. Both the changes in selling price and product mix and sales volumes were primarily driven by higher amounts of shipments of a lower priced product in the Company’s mining business in the prior year. The foreign exchange impact was a result of similar strengthening of certain currencies in EMEA and Americas as described above. This segment’s operating earnings were $90.6 million, an increase of $10.9 million or 14% compared to 2020. The increase in segment operating earnings reflects the higher net sales, described above, partially offset by lower gross margins in the current year coupled with higher SG&A, including an increase in direct selling costs associated with higher net sales, SG&A from acquisitions and an increase in SG&A as the prior year included temporary cost savings measures implemented in response to the onset of the COVID-19 pandemic.

Environmental Clean-up Activities

The Company is involved in environmental clean-up activities in connection with an existing plant location and former waste disposal sites. This includes certain soil and groundwater contamination the Company identified in 1992 at AC Products, Inc. (“ACP”), a wholly owned subsidiary. In voluntary coordination with the Santa Ana California Regional Water Quality Board, ACP has been remediating the contamination. In 2007, ACP agreed to operate two groundwater treatment systems, so as to hydraulically contain groundwater contamination emanating from ACP’s site until such time as the concentrations of contaminants are below the current Federal maximum contaminant level for four consecutive quarterly sampling events. In 2014, ACP ceased operation at one of its two groundwater treatment systems, as it had met the above condition for closure. In 2020, the Santa Ana Regional Water Quality Control Board asked that ACP conduct some additional indoor and outdoor soil vapor testing on and near the ACP site to confirm that ACP continues to meet the applicable local standards and ACP has begun the testing program. Such testing began in 2020 and continued into 2021. As of December 31, 2022, 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, 2022, the Company believes that the range of potential-known liabilities associated with the balance of ACP water remediation program is approximately $0.1 million to $1.0 million. The low and high ends of the range are based on the length of operation of the treatment system as determined by groundwater modeling. Costs of operation include the operation and maintenance of the extraction well, groundwater monitoring, program management, and soil vapor testing.

The Company is also party to environmental matters related to certain domestic and foreign properties. These environmental matters primarily require the Company to perform long-term monitoring as well as operating and maintenance at each of the applicable sites. During the year ended December 31, 2022, there have been no significant changes to the facts or circumstances of these matters, aside from ongoing monitoring and maintenance activities and routine payments associated with each of these 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 26 years, has estimated the present value range of costs for all of these environmental matters, on a discounted basis, to be between approximately $5.0 million and $6.0 million as of December 31, 2022, for which $5.3 million is accrued within other accrued liabilities and other non-current liabilities on the Company’s Consolidated Balance Sheet as of December 31, 2022. Comparatively, as of December 31, 2021, the Company had $5.6 million accrued for with respect to these matters.

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The Company’s Sao Paulo, Brazil site was required under Brazilian environmental, health and safety regulations to perform an environmental assessment as part of a permit renewal process. Initial investigations identified soil and ground water contamination in select areas of the site. The site has conducted a multi-year soil and groundwater investigation and corresponding risk assessments based on the result of the investigations. In 2017, the site had to submit a new 5-year permit renewal request and was asked to complete additional investigations to further delineate the site based on review of the technical data by the local regulatory agency, Companhia Ambiental do Estado de São Paulo (“CETESB”). Based on review of the updated investigation data, CETESB issued a Technical Opinion regarding the investigation and remedial actions taken to date. The site developed an action plan and submitted it to CETESB in 2018 based on CETESB requirements. The site intervention plan primarily requires the site, among other actions, to conduct periodic monitoring for methane in soil vapors, source zone delineation, groundwater plume delineation, bedrock aquifer assessment, update the human health risk assessment, develop a current site conceptual model and conduct a remedial feasibility study and provide a revised intervention plan. In 2019, the site submitted a report on the activities completed including the revised site conceptual model and results of the remedial feasibility study and recommended remedial strategy for the site. Other environmental matters include participation in certain payments in connection with four currently active environmental consent orders related to certain hazardous waste cleanup activities under the U.S. Federal Superfund statute. The Company has been designated a potentially responsible party (“PRP”) by the Environmental Protection Agency along with other PRPs depending on the site, and has other obligations to perform cleanup activities at certain other foreign subsidiaries. These environmental matters primarily require the Company to perform long-term monitoring as well as operating and maintenance at each of the applicable sites.

The Company 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 $0.3 million and $0.4 million were accrued as of December 31, 2022 and 2021, 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.