☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission file number: 001-36272
Element Solutions Inc
(Exact name of Registrant as specified in its charter)
Delaware
37-1744899
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
500 East Broward Boulevard, Suite 1860
33394
Fort Lauderdale,
Florida
(Zip Code)
(Address of principal executive offices)
Registrant’s telephone number, including area code: (561) 207-9600
_______________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
ESI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding at April 20, 2023: 241,419,557
Element Solutions Inc, a Delaware corporation, and where the context requires, its subsidiaries or operating businesses.
Add-on Term Loans
Element Solutions' $400 million aggregate principal amount of incremental term loans B borrowed under the Credit Agreement on September 1, 2021. All references to "term loans" in this Annual Report include the Add-on Term Loans.
Credit Agreement
Credit Agreement, dated as of January 31, 2019, as amended from time to time, among, inter alia, Element Solutions and MacDermid, Incorporated, as borrowers, certain subsidiaries of Element Solutions and the lenders from time to time parties thereto.
EBITDA
Earnings before interest, taxes, depreciation and amortization.
Exchange Act
Securities Exchange Act of 1934, as amended.
GAAP
U.S. Generally Accepted Accounting Principles.
HSO
HSO Herbert Schmidt GmbH & Co. KG, Dipl.-Ing. W. Schmidt GmbH and HSO Hong Kong Holding Limited and its subsidiary.
HSO Acquisition
Acquisition of HSO on January 26, 2022.
Quarterly Report
This quarterly report on Form 10-Q for the three months ended March 31, 2023.
RSUs
Restricted stock units issued by Element Solutions from time to time under its Amended and Restated 2013 Incentive Compensation Plan.
SEC
Securities and Exchange Commission.
2022 Annual Report
Element Solutions' annual report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on February 22, 2023.
3.875% USD Notes due 2028
Element Solutions' $800 million aggregate principal amount of 3.875% senior notes due 2028, denominated in U.S. dollars, issued on August 18, 2020.
i
Forward-Looking Statements
This Quarterly Report contains forward-looking statements that can be identified by words such as "expect," "anticipate," "project," "will," "should," "believe," "intend," "plan," "assume," "estimate," "predict," "seek," "continue," "outlook," "may," "might," "aim," "can have," "likely," "potential," "target," "hope," "goal," "priority" or "confident" and variations of such words and similar expressions. Many of the forward-looking statements include, but are not limited to, statements, beliefs, projections and expectations regarding the continuing economic impact of the coronavirus (COVID-19) and its variants on the global economy, our business, financial results, customers, suppliers, vendors and/or stock price, including the impact of related governmental responses; the efficacy of vaccines and treatments targeting COVID-19 and its variants; secular trends and expected growth of our businesses; the ongoing conflict between Russia and Ukraine and actions in response thereto; capital requirements and need for and availability of financing; probability of achievement of the performance target related to certain performance-based RSUs; the impact of new accounting standards and accounting changes; share repurchases; our dividend policy and dividend declarations; our hedging activities; timing and outcome of environmental and legal matters; tax planning strategies and assessments; the impact of tax law changes; impairments, including those on goodwill and other intangible assets; price volatility and cost environment; inflation and fluctuations in foreign exchange rates; our liquidity, cash flows and capital allocation; funding sources; capital expenditures; debt and debt leverage ratio; pension plan contributions; contractual obligations; general views about future operating results; expected returns to stockholders; risk management programs; future prospects; and other events or developments that we expect or anticipate will occur in the future.
Although we believe these forward-looking statements are based upon reasonable assumptions regarding our business and expectations about future events, financial performance and trends, there can be no assurance that our actual results will not differ materially from any results expressed or implied in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part I, Item 1A, Risk Factors, of our 2022 Annual Report. In addition, as we operate in a very competitive and rapidly changing environment, new risks may emerge from time to time. Any forward-looking statement included in this Quarterly Report is based only on information currently available and speaks only as of the date on which it is made. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Please consult any further disclosures on related subjects in our SEC filings.
The invasion of Ukraine by Russia in early 2022 and the sanctions and other measures being imposed in response to this conflict have increased the level of economic and political uncertainty. While none of Russia, Ukraine or Belarus constitutes a material portion of our business and we do not have physical assets in these countries, a significant escalation or expansion of economic disruption or the conflict's current scope could disrupt the global supply chain and increase our costs as well as amplify certain risks discussed in Part I, Item 1A, Risk Factors, of our 2022 Annual Report.
In addition, while progress has been made to contain the COVID-19 pandemic, it remains a global challenge. The long-term impact of the pandemic will depend on numerous and evolving factors that remain highly uncertain, vary by market and cannot be quantified at this time, such as the scope, severity and duration of the pandemic.
Non-GAAP Financial Measures
This Quarterly Report contains non-GAAP financial measures, such as operating results on a constant currency and organic basis and Adjusted EBITDA. Non-GAAP financial measures should not be considered in isolation from, a substitute for, or superior to, performance measures calculated in accordance with GAAP. For additional information on these non-GAAP financial measures, including definitions, limitations and reconciliations to their most comparable applicable GAAP measures, see "Non-GAAP Financial Measures" in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in Part I, Item 2, and Note 11, Segment Information, to the unaudited Condensed Consolidated Financial Statements, both included in this Quarterly Report.
Income before income taxes and non-controlling interests
59.9
76.4
Income tax expense
(16.9)
(20.0)
Net income
43.0
56.4
Net income attributable to non-controlling interests
(0.1)
(0.3)
Net income attributable to common stockholders
$
42.9
$
56.1
Earnings per share
Basic
$
0.18
$
0.23
Diluted
$
0.18
$
0.23
Weighted average common shares outstanding
Basic
241.1
247.3
Diluted
241.8
249.2
See accompanying notes to the Condensed Consolidated Financial Statements
1
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in millions)
Three Months Ended March 31,
2023
2022
Net income
$
43.0
$
56.4
Other comprehensive income (loss)
Foreign currency translation:
Other comprehensive income (loss) before reclassifications, net of tax (benefit) of $(3.0) and $(2.1) for the three months ended March 31, 2023 and 2022, respectively
10.9
(13.9)
Total foreign currency translation adjustments
10.9
(13.9)
Derivative financial instruments:
Other comprehensive (loss) income before reclassifications, net of tax (benefit) expense of $(3.0) and $8.8 for the three months ended March 31, 2023 and 2022, respectively
(1.5)
22.5
Reclassifications, net of tax expense of $0.0 for the three months ended March 31, 2023 and 2022, respectively
(8.1)
4.8
Total unrealized (loss) gain on qualified hedging derivatives
(9.6)
27.3
Other comprehensive income
1.3
13.4
Comprehensive income
44.3
69.8
Comprehensive (income) loss attributable to non-controlling interests
(0.1)
1.4
Comprehensive income attributable to common stockholders
$
44.2
$
71.2
See accompanying notes to the Condensed Consolidated Financial Statements
2
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in millions)
March 31,
December 31,
2023
2022
Assets
Cash & cash equivalents
$
279.0
$
265.6
Accounts receivable, net of allowance for doubtful accounts of $15.1 and $14.4 at March 31, 2023 and December 31, 2022, respectively
See accompanying notes to the Condensed Consolidated Financial Statements
3
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in millions)
Three Months Ended March 31,
2023
2022
Cash flows from operating activities:
Net income
$
43.0
$
56.4
Reconciliations of net income to net cash flows provided by (used in) operating activities:
Depreciation and amortization
39.1
41.6
Deferred income taxes
(0.4)
2.5
Foreign exchange gain
(7.3)
(0.1)
Incentive stock compensation
4.4
5.2
Other, net
2.2
4.3
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
(2.6)
(49.6)
Inventories
(29.1)
(47.5)
Accounts payable
18.6
41.2
Accrued expenses
(22.3)
(49.6)
Prepaid expenses and other current assets
2.7
(10.5)
Other assets and liabilities
5.2
0.5
Net cash flows provided by (used in) operating activities
53.5
(5.6)
Cash flows from investing activities:
Capital expenditures
(9.1)
(9.5)
Proceeds from disposal of property, plant and equipment
0.5
—
Acquisition of business, net of cash acquired
—
(22.6)
Other, net
(3.0)
(5.0)
Net cash flows used in investing activities
(11.6)
(37.1)
Cash flows from financing activities:
Repayments of borrowings
(2.9)
(3.1)
Repurchases of common stock
—
(18.3)
Dividends
(19.4)
(19.9)
Other, net
(7.2)
(25.8)
Net cash flows used in financing activities
(29.5)
(67.1)
Effect of exchange rate changes on cash and cash equivalents
1.0
(1.5)
Net increase (decrease) in cash and cash equivalents
13.4
(111.3)
Cash and cash equivalents at beginning of period
265.6
330.1
Cash and cash equivalents at end of period
$
279.0
$
218.8
See accompanying notes to the Condensed Consolidated Financial Statements
4
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(dollars in millions, except share amounts)
Three Months Ended March 31, 2023
Common Stock
Additional Paid-in Capital
Treasury Stock
Accumulated Deficit
Accumulated Other Comprehensive (Loss) Income
Total Stockholders' Equity
Non- controlling Interests
Total Equity
Shares
Amount
Shares
Amount
Balance at December 31, 2022
265,062,533
$
2.7
$
4,185.9
24,272,748
$
(334.2)
$
(1,223.8)
$
(298.1)
$
2,332.5
$
16.6
$
2,349.1
Net income
—
—
—
—
—
42.9
—
42.9
0.1
43.0
Other comprehensive income, net of taxes
—
—
—
—
—
—
1.3
1.3
—
1.3
Exercise/ vesting of share based compensation
947,755
—
—
352,586
(7.3)
—
—
(7.3)
—
(7.3)
Issuance of common stock under Employee Stock Purchase Plan
19,191
—
0.4
—
—
—
0.4
—
0.4
Dividends ($0.08 per share)
—
—
—
—
—
(19.5)
—
(19.5)
—
(19.5)
Equity compensation expense
—
—
4.4
—
—
—
—
4.4
—
4.4
Changes in non-controlling interests
—
—
—
—
—
—
—
—
(0.1)
(0.1)
Balance at March 31, 2023
266,029,479
$
2.7
$
4,190.7
24,625,334
$
(341.5)
$
(1,200.4)
$
(296.8)
$
2,354.7
$
16.6
$
2,371.3
Three Months Ended March 31, 2022
Common Stock
Additional Paid-in Capital
Treasury Stock
Accumulated Deficit
Accumulated Other Comprehensive (Loss) Income
Total Stockholders' Equity
Non- controlling Interests
Total Equity
Shares
Amount
Shares
Amount
Balance at December 31, 2021
261,937,509
$
2.6
$
4,166.6
15,195,525
$
(159.2)
$
(1,331.9)
$
(197.4)
$
2,480.7
$
20.1
$
2,500.8
Net income
—
—
—
—
—
56.1
—
56.1
0.3
56.4
Other comprehensive income (loss), net of taxes
—
—
—
—
—
—
15.1
15.1
(1.7)
13.4
Exercise/ vesting of share based compensation
2,990,132
—
—
1,025,371
(23.8)
—
—
(23.8)
—
(23.8)
Issuance of common stock under Employee Stock Purchase Plan
16,918
—
0.4
—
—
—
—
0.4
—
0.4
Repurchases of common stock
—
—
—
830,448
(18.8)
—
—
(18.8)
—
(18.8)
Dividends ($0.08 per share)
—
—
—
—
—
(20.1)
—
(20.1)
—
(20.1)
Equity compensation expense
—
—
5.3
—
—
—
—
5.3
—
5.3
Changes in non-controlling interests
—
—
—
—
—
—
—
—
(0.1)
(0.1)
Balance at March 31, 2022
264,944,559
$
2.6
$
4,172.3
17,051,344
$
(201.8)
$
(1,295.9)
$
(182.3)
$
2,494.9
$
18.6
$
2,513.5
See accompanying notes to the Condensed Consolidated Financial Statements
5
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
Element Solutions was incorporated in Delaware in January 2014 and its shares of common stock, par value $0.01 per share, trade on the New York Stock Exchange under the ticker symbol “ESI.”
Element Solutions is a leading global specialty chemicals company whose businesses supply a broad range of solutions that enhance the performance of products people use every day. Developed in multi-step technological processes, these innovative solutions enable customers' manufacturing processes in several key industries, including consumer electronics, power electronics, semiconductor fabrication, communications and data storage infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy. Element Solutions businesses provide products that, in substantially all cases, are consumed by customers as part of their production process, providing the Company with reliable and recurring revenue streams as the products are replenished in order to continue production. Element Solutions delivers its products to customers through its sales and service workforce, regional distributors and manufacturing representatives.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP and include the accounts of Element Solutions and all of its controlled subsidiaries. The Company consolidates the income, expenses, assets, liabilities and cash flows of its subsidiaries from the date it acquires control or becomes the primary beneficiary. All intercompany accounts and transactions have been eliminated upon consolidation.
In preparing the unaudited Condensed Consolidated Financial Statements in conformity with GAAP, management uses estimates and assumptions that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Management applies judgment based on its understanding and analysis of the relevant circumstances, including historical experience and future expectations. These judgments, by their nature, are subject to an inherent degree of uncertainty and, accordingly, actual results could differ significantly from these estimates and assumptions.
These unaudited Condensed Consolidated Financial Statements reflect all adjustments that are normal, recurring and necessary for a fair statement of the Company's financial position, results of operations and cash flows for interim periods, but are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company's Consolidated Financial Statements and related notes included in its 2022 Annual Report.
In the first quarter of 2023, the Company transferred operational responsibility of its Films business from its Graphics Solutions business within its Industrial & Specialty segment to its Circuitry Solutions business in its Electronics segment. The financial results of this business are not material to the Company's Consolidated Financial Statements. In addition, the Company transferred certain product lines between its Assembly Solutions business and its Semiconductor Solutions business, both of which are part of its Electronics segment, to align more closely with its current business structure. Historical information has been reclassified to reflect these changes for all periods presented in the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Certain prior year amounts have also been reclassified to conform to the current year’s presentation.
6
2. INVENTORIES
The major components of inventory, on a net basis, were as follows:
(dollars in millions)
March 31, 2023
December 31, 2022
Finished goods
$
188.3
$
164.4
Work in process
29.5
25.9
Raw materials and supplies
104.2
100.4
Total inventories
$
322.0
$
290.7
3. PROPERTY, PLANT AND EQUIPMENT
The major components of property, plant and equipment were as follows:
(dollars in millions)
March 31, 2023
December 31, 2022
Land and leasehold improvements
$
52.1
$
52.0
Buildings and improvements
165.0
163.9
Machinery, equipment, fixtures and software
306.8
299.8
Construction in process
53.6
50.3
Total property, plant and equipment
577.5
566.0
Accumulated depreciation
(299.9)
(288.8)
Property, plant and equipment, net
$
277.6
$
277.2
For the three months ended March 31, 2023 and 2022, the Company recorded depreciation expense of $9.5 million and $10.6 million, respectively.
4. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill by segment were as follows:
(dollars in millions)
Electronics
Industrial & Specialty
Total
Balance at December 31, 2022
$
1,304.0
$
1,108.8
(1)
$
2,412.8
Transfer of Films business (2)
7.9
(7.9)
—
Foreign currency translation and other
1.4
11.1
12.5
Balance at March 31, 2023
$
1,313.3
$
1,112.0
$
2,425.3
(1) Includes accumulated impairment losses of $46.6 million.
(2) Goodwill was reallocated using a relative fair value approach and assessed for impairment both before and after the allocation. See Note 1, Background and Basis of Presentation, to the unaudited Condensed Consolidated Financial Statements for further information.
7
Intangible Assets
The major components of intangible assets were as follows:
March 31, 2023
December 31, 2022
(dollars in millions)
Gross Carrying Amount
Accumulated Amortization
Net Book Value
Gross Carrying Amount
Accumulated Amortization
Net Book Value
Customer relationships
$
973.8
$
(454.0)
$
519.8
$
967.5
$
(434.1)
$
533.4
Developed technology
409.6
(287.3)
122.3
408.9
(277.0)
131.9
Trade names
96.5
(25.7)
70.8
96.0
(23.8)
72.2
Indefinite-lived trade name
68.0
—
68.0
68.0
—
68.0
Total
$
1,547.9
$
(767.0)
$
780.9
$
1,540.4
$
(734.9)
$
805.5
For the three months ended March 31, 2023 and 2022, the Company recorded amortization expense on intangible assets of $29.6 million and $31.0 million, respectively.
5. DEBT
The Company’s debt obligations consisted of the following:
(dollars in millions)
Maturity Date
Interest Rate
March 31, 2023
December 31, 2022
Term Loans (1)
2026
SOFR plus 2.00%
$
1,102.4
$
1,104.5
Senior Notes - $800 million (2)
2028
3.875%
791.2
790.8
Total debt
1,893.6
1,895.3
Less: current installments of long-term debt
11.5
11.5
Total long-term debt
$
1,882.1
$
1,883.8
(1) Term loans, net of unamortized discounts and debt issuance costs of $8.8 million and $9.5 million at March 31, 2023 and December 31, 2022, respectively. The effective interest rate was 2.6% and 1.6% at March 31, 2023 and December 31, 2022, respectively, including the effects of interest rate swaps and net investment hedges. See Note 6, Financial Instruments, to the unaudited Condensed Consolidated Financial Statements for further information regarding the Company's interest rate swaps and net investment hedges.
(2) Senior notes, net of unamortized debt issuance costs of $8.8 million and $9.2 million at March 31, 2023 and December 31, 2022, respectively. The effective interest rate was 4.1% at March 31, 2023 and December 31, 2022, respectively.
Credit Agreement
The Company is a party to the Credit Agreement, which provides for senior secured credit facilities in an initial aggregate principal amount of $1.53 billion, consisting of term loans B of $1.15 billion maturing in 2026 and an amended revolving credit facility of $375 million maturing in 2027.
The Company's outstanding term loans bear interest at a per annum rate based on an adjusted one-month SOFR (as described in the Credit Agreement) plus a spread of 2.00%. The Company is required to pay a commitment fee on any undrawn portion of the revolving credit facility which is not material.
The obligations of the borrowers (the Company and its subsidiary, MacDermid, Incorporated) under the Credit Agreement are guaranteed, jointly and severally, by certain of their domestic subsidiaries and secured by a first-priority security interest in substantially all of their assets and the assets of the guarantors, including mortgages on material real property, subject to certain exceptions.
Covenants, Events of Default and Provisions
The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including limitations on additional indebtedness, dividends, and other distributions, entry into new lines of business, use of loan proceeds,
8
capital expenditures, restricted payments, restrictions on liens on the assets of the borrowers or any guarantor, transactions with affiliates, amendments to organizational documents, accounting changes, sale and leaseback transactions and dispositions. Subject to certain exceptions, to the extent the borrowers have total outstanding borrowings under the revolving credit facility greater than 30% of the commitment amount under the revolving credit facility, the Company's first lien net leverage ratio should not exceed 5.0 to 1.0, subject to a right to cure.
The Credit Agreement requires the borrowers to make mandatory prepayments of borrowings, subject to certain exceptions, as described in the Credit Agreement. In addition, the Credit Agreement contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, failure to make payment on, or defaults with respect to, certain other material indebtedness, bankruptcy and insolvency events, material judgments and change of control provisions. Upon the occurrence of an event of default, and after the expiration of any applicable grace period, payment of any outstanding loans under the Credit Agreement may be accelerated and the lenders could foreclose on their security interests in the assets of the borrowers and the guarantors.
At March 31, 2023, the Company was in compliance with the debt covenants contained in the Credit Agreement and had full availability of its unused borrowing capacity of $369 million, net of letters of credit, under the revolving credit facility.
Senior Notes
3.875% USD Notes due 2028
The indenture governing the 3.875% USD Notes due 2028 provides for, among other things, customary affirmative and negative covenants, events of default and other customary provisions. The notes accrue interest at a rate of 3.875% per annum, payable semi-annually in arrears, on March 1 and September 1 of each year, and will mature on September 1, 2028, unless earlier repurchased or redeemed. Pursuant to the indenture, the Company has the option to redeem the 3.875% USD Notes due 2028 prior to their maturity, subject to, in certain cases, the payment of an applicable make-whole premium, or to repurchase them by any means other than a redemption, including by tender offer, open market purchases or negotiated transactions. The 3.875% USD Notes due 2028 are fully and unconditionally guaranteed on a senior unsecured basis by generally all of the Company’s domestic subsidiaries that guarantee the obligations of the borrowers under the Credit Agreement.
Lines of Credit and Other Debt Facilities
The Company has access to various revolving lines of credit, short-term debt facilities and overdraft facilities worldwide which are used to fund short-term cash needs. There were no amounts outstanding under such facilities at March 31, 2023 and December 31, 2022. The Company had letters of credit outstanding of $5.9 million and $6.0 million at March 31, 2023 and December 31, 2022, respectively, of which $5.9 million and $6.0 million at March 31, 2023 and December 31, 2022, respectively, reduced the borrowings available under the various facilities. At March 31, 2023 and December 31, 2022, the availability under these facilities totaled approximately $391 million, respectively, net of outstanding letters of credit.
6. FINANCIAL INSTRUMENTS
Derivatives and Hedging
In the normal course of business, the Company is exposed to risks relating to changes in interest rates, foreign currency exchange rates and commodity prices. Derivative financial instruments, such as interest rate swaps, net investment hedges, foreign currency exchange forward contracts and commodities derivative contracts are used to manage the risks associated with changes in the conditions of those markets. All derivatives are recognized in the Condensed Consolidated Balance Sheets at fair value. The counterparties to the Company’s derivative agreements are primarily major international financial institutions. The Company continually monitors its derivative positions and the credit ratings of its counterparties and does not anticipate nonperformance on their part.
9
Interest Rate and Cross-Currency Swaps
The Company uses interest rate swaps and cross-currency swaps to reduce its exposure to interest rate risk and foreign currency risk. The Company has designated its interest rate swaps as cash flow hedges and its cross-currency swaps as net investment hedges of the foreign currency exposure of a portion of its net investment in certain euro functional subsidiaries. These swaps, as amended from time to time, effectively convert the Company's term loans under the Credit Agreement, which are U.S. dollar denominated debt obligations, into fixed-rate euro-denominated debt through their respective expiration dates. The total notional value of the interest rate swaps and cross-currency swaps held at March 31, 2023 and December 31, 2022 was approximately $1.11 billion, respectively. As of March 31, 2023, $359 million in notional value matures in January 2024, $393 million in January 2025 and $359 million in January 2026.
The proceeds from these contracts are reflected as "Cash flows from operating activities" in the Condensed Consolidated Statement of Cash Flows. Changes in the fair value of interest rate swaps are recorded in "Accumulated other comprehensive loss" and reclassified to "Interest expense, net" in the Condensed Consolidated Statements of Operations as the underlying hedged item affects earnings. Changes in the fair value of cross-currency swaps are recorded in "Foreign currency translation" in "Accumulated other comprehensive loss."
In March 2023, the Company terminated and replaced $360 million of its interest rate swaps and cross-currency swaps with swaps that extended the initial maturity by two years. The fair value of the interest rate swaps on the date of termination was $6.8 million and the amount recorded in "Accumulated other comprehensive loss" is being amortized as a reduction to "Interest expense, net" in the Condensed Consolidated Statements of Operations from March 2023 through January 2024. The fair value in "Accumulated other comprehensive loss" for the terminated cross-currency swaps will remain until the hedged net investment is sold or liquidated.
The net result of these hedges with a total notional value of approximately $1.11 billion, excluding the reduction to interest expense from the terminated interest rate swaps discussed above, is an interest rate of approximately 2.6% at March 31, 2023, which could vary in the future due to changes in the euro and the U.S. dollar exchange rate. The fair value of the interest rate swaps was a net asset of $34.9 million and $47.3 million at March 31, 2023 and December 31, 2022, respectively. The fair value of the cross-currency swaps was a net asset of $57.8 million and $70.4 million at March 31, 2023 and December 31, 2022, respectively.
For the three months ended March 31, 2023, these interest rate swaps and cross-currency swaps were deemed highly effective. The Company expects to reclassify a $26.9 million benefit from "Accumulated other comprehensive loss" to "Interest expense, net" in the Condensed Consolidated Statements of Operations within the next twelve months.
Foreign Currency
The Company conducts a significant portion of its business in currencies other than the U.S. dollar and certain subsidiaries conduct business in currencies other than their functional currency, which is typically their local currency. As a result, the Company’s operating results are impacted by foreign currency exchange rate volatility.
At March 31, 2023, the Company held foreign currency forward contracts to purchase and sell various currencies to mitigate foreign currency exposure primarily with the U.S. dollar and British pound. The Company has not designated any foreign currency exchange forward contracts as eligible for hedge accounting and, as a result, changes in the fair value of foreign currency forward contracts are recorded in the Condensed Consolidated Statements of Operations as "Other income (expense), net." The total notional value of foreign currency exchange forward contracts held at March 31, 2023 and December 31, 2022 was approximately $89.1 million and $105 million, respectively, with settlement dates generally within one year. The fair value of the foreign currency forward contracts was a net current liability of $0.2 million and $0.3 million at March 31, 2023 and December 31, 2022, respectively.
10
Commodities
As part of its risk management policy, the Company enters into commodity derivative contracts for the purpose of mitigating its exposure to fluctuations in prices of certain metals used in the production of its finished goods. The Company held derivative contracts to purchase and sell various metals, primarily tin and silver, for a notional amount of $51.4 million and $45.7 million at March 31, 2023 and December 31, 2022, respectively. The fair value of the metals derivative contracts was a net current liability of $2.1 million and $2.5 million at March 31, 2023 and December 31, 2022, respectively. Substantially all contracts outstanding at March 31, 2023 have delivery dates within one year. The Company has not designated these derivatives as hedging instruments and, accordingly, records changes in their fair values in the Condensed Consolidated Statements of Operations as "Other income (expense), net."
Realized gains and losses on derivative contracts are accounted for in the Condensed Consolidated Statements of Cash Flows as "Operating activities".
Fair Value Measurements
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis:
(dollars in millions)
Balance sheet location
Classification
March 31, 2023
December 31, 2022
Asset Category
Foreign exchange contracts
Other current assets
Level 2
$
0.2
$
0.2
Metals contracts
Other current assets
Level 2
1.2
2.5
Interest rate swaps
Other current assets
Level 2
26.9
32.7
Cross-currency swaps
Other current assets
Level 2
29.3
26.1
Interest rate swaps
Other assets
Level 2
9.0
14.6
Cross-currency swaps
Other assets
Level 2
28.5
44.3
Available-for-sale debt securities
Other assets
Level 3
14.7
11.5
Total
$
109.8
$
131.9
Liability Category
Foreign exchange contracts
Accrued expenses and other current liabilities
Level 2
$
0.4
$
0.5
Metals contracts
Accrued expenses and other current liabilities
Level 2
3.3
5.0
Interest rate swaps
Other liabilities
Level 2
1.0
—
Total
$
4.7
$
5.5
The fair values of Level 1 and Level 2 derivative assets and liabilities are determined using pricing models based upon observable market inputs, such as market spot and futures prices on over-the-counter derivative instruments, market interest rates and consideration of counterparty credit risk. Level 3 investments are valued using a probability weighted methodology based on possible outcomes of potential liquidity events. Significant assumptions include the enterprise valuation, the timing and type of liquidation events and the risk-free interest rate.
There were no significant transfers of financial instruments between the fair value hierarchy levels for the three months ended March 31, 2023.
The carrying value and estimated fair value of the Company’s long-term debt totaled $1.89 billion and $1.81 billion, respectively, at March 31, 2023. At December 31, 2022, the carrying value and estimated fair value totaled $1.90 billion and $1.80 billion, respectively. The carrying values noted above include unamortized discounts and debt issuance costs. The estimated fair value of long-term debt is measured using quoted market prices for similar instruments at the reporting date multiplied by the gross carrying amount of the related debt, which excludes unamortized discounts and debt issuance costs. Such instruments are valued using Level 2 inputs.
11
7. EARNINGS PER SHARE
Basic and diluted earnings per share are based on the weighted average number of shares of the Company's common stock and potential common stock outstanding during the period. Potential common stock, for purposes of determining diluted earnings per share, assumes the issuance of all potentially dilutive share equivalents using the treasury stock method.
A computation of earnings per share and weighted average shares of the Company's common stock outstanding for the three months ended March 31, 2023 and 2022 is as follows:
Three Months Ended March 31,
(dollars in millions, except per share amounts)
2023
2022
Net income
$
43.0
$
56.4
Net income attributable to non-controlling interests
(0.1)
(0.3)
Net income attributable to common stockholders
$
42.9
$
56.1
Basic weighted average common shares outstanding
241.1
247.3
Denominator adjustments for diluted EPS:
Number of stock options and RSUs
0.7
1.9
Denominator adjustments for diluted EPS
0.7
1.9
Diluted weighted average common shares outstanding
241.8
249.2
Earnings per share attributable to common stockholders:
Basic
$
0.18
$
0.23
Diluted
$
0.18
$
0.23
For the three months ended March 31, 2023 and 2022, the following securities were not included in the computation of diluted shares outstanding because either the effect would be anti-dilutive or the applicable performance targets were not yet met for awards contingent upon such measures:
Three Months Ended March 31,
(shares in millions)
2023
2022
Shares issuable upon vesting of RSUs and exercise of stock options
3.7
3.6
8. CONTINGENCIES, ENVIRONMENTAL AND LEGAL MATTERS
Environmental Matters
The Company is involved in various claims relating to environmental matters at current and former plants and waste management sites. At certain of these sites, the Company engages or participates in remedial and other environmental compliance activities. At other sites, the Company has been named as a potential responsible party pursuant to the federal Superfund Act and/or state Superfund laws comparable to the federal law for site remediation. After analyzing each individual site, considering the number of parties involved, the level of its potential liability or contribution relating to the other parties, the nature and magnitude of the hazardous waste involved, the method and extent of remediation, the potential insurance coverage, the estimated legal and consulting expense with respect to each site and the time period over which any costs would likely be incurred, the Company estimates the clean-up costs and related claims for each site. The estimates are based in part on discussions with other potential responsible parties, governmental agencies and engineering firms.
The Company accrues for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current laws and existing technologies. The accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. The Company's environmental liabilities, which are included in the Condensed Consolidated Balance Sheets as "Accrued expenses and other current liabilities" and "Other liabilities," totaled $11.4 million and $11.6 million at March 31, 2023 and December 31, 2022,
12
respectively, primarily driven by environmental remediation, clean-up costs and monitoring of sites that were either closed or disposed of in prior years. While uncertainty exists with respect to the amount and timing of its ultimate environmental liabilities, the Company does not currently anticipate any material losses in excess of the amount recorded. However, new information about the sites, such as results of investigations, could make it necessary for the Company to reassess its potential exposure related to these environmental matters.
As of the date hereof, the Company believes it is not practicable to provide an estimated range of reasonably possible environmental losses in excess of its recorded liabilities, and, as a result, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact that may be associated with these matters.
Legal Matters
From time to time, the Company is involved in various legal proceedings, investigations and/or claims in the normal course of its business. Although it cannot predict with certainty the ultimate resolution of these matters, which involve judgments that are inherently subjective, the Company believes that their resolutions, to the extent not covered by insurance, will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows.
9. INCOME TAXES
The Company's quarterly income tax provision is measured using an estimate of its consolidated annual effective tax rate, which includes the impact of foreign withholding tax accruals and uncertain tax positions, adjusted for discrete items, within the periods presented. The comparison of the Company's income tax provision between periods can be significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items.
For the three months ended March 31, 2023, the Company recognized income tax expense of $16.9 million resulting in an effective tax rate of 28%, as compared to $20.0 million and an effective tax rate of 26%, in the same period for 2022. Income tax expense included a U.S. tax benefit provided with respect to foreign earnings, offset by an increase in foreign withholding tax accruals for the three months ended March 31, 2023.
10. RELATED PARTY TRANSACTIONS
The Company is party to an Advisory Services Agreement with Mariposa Capital, LLC, an affiliate of one of its founder directors, whereby Mariposa Capital, LLC is entitled to receive an annual fee of $3.0 million and reimbursement for expenses. This agreement is automatically renewed for successive one-year terms unless either party notifies the other in writing of its intention not to renew no later than 90 days prior to the expiration of the applicable term. Amounts paid under this agreement are recorded in the Condensed Consolidated Statements of Operations as "Selling, technical, general and administrative" expense.
11. SEGMENT INFORMATION
The Company's operations are organized into two reportable segments: Electronics and Industrial & Specialty. These segments represent businesses for which separate financial information is utilized by the chief operating decision maker (or CODM) for purposes of allocating resources and evaluating performance. See Note 1, Background and Basis of Presentation, to the unaudited Condensed Consolidated Financial Statements for information about the transfer of the Company's Films business and other transfers of product lines that occurred in the first quarter of 2023.
The Company allocates resources and evaluates the performance of its operating segments based primarily on net sales and Adjusted EBITDA. Adjusted EBITDA for each segment is defined as EBITDA, as further adjusted for additional items included in earnings which the Company believes are not representative or indicative of each of its segments' ongoing business or are considered to be associated with the Company's capital structure. Adjusted EBITDA for each segment also includes an allocation of corporate costs, such as compensation expense and professional fees.
13
Results of Operations
The following table summarizes financial information regarding each reportable segment’s results of operations, including disaggregated external net sales by product category:
Three Months Ended March 31,
(dollars in millions)
2023
2022
Net sales:
Electronics
Assembly Solutions
$
173.5
$
230.6
Circuitry Solutions
106.7
135.3
Semiconductor Solutions
59.4
75.7
Total Electronics
339.6
441.6
Industrial & Specialty
Industrial Solutions
180.7
190.1
Graphics Solutions
34.9
32.6
Energy Solutions
19.2
15.9
Total Industrial & Specialty
234.8
238.6
Total net sales
$
574.4
$
680.2
Adjusted EBITDA:
Electronics
$
72.7
$
100.9
Industrial & Specialty
39.6
43.9
Total Adjusted EBITDA
$
112.3
$
144.8
The following table reconciles "Net income attributable to common stockholders" to Adjusted EBITDA:
Three Months Ended March 31,
(dollars in millions)
2023
2022
Net income attributable to common stockholders
$
42.9
$
56.1
Add (subtract):
Net income attributable to non-controlling interests
0.1
0.3
Income tax expense
16.9
20.0
Interest expense, net
11.7
14.1
Depreciation expense
9.5
10.6
Amortization expense
29.6
31.0
EBITDA
110.7
132.1
Adjustments to reconcile to Adjusted EBITDA:
Inventory step-up
—
0.5
Restructuring expense
2.3
1.9
Acquisition and integration expense
3.9
2.9
Foreign exchange (gain) loss on intercompany loans
(5.6)
1.6
Adjustment of stock compensation previously not probable
—
1.3
Other, net
1.0
4.5
Adjusted EBITDA
$
112.3
$
144.8
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations section should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and related notes included in this Quarterly Report, and the Consolidated Financial Statements, related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations section and other disclosures contained in our 2022 Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements as a result of several factors, including, but not limited to, those discussed in "Forward-Looking Statements” of this Quarterly Report, and in Part I, Item 1A, "Risk Factors" of our 2022 Annual Report.
Overview
Our Business
Element Solutions, incorporated in Delaware in January 2014, is a leading global specialty chemicals company whose businesses supply a broad range of solutions that enhance the performance of products people use every day. Developed in multi-step technological processes, these innovative solutions enable customers' manufacturing processes in several key industries, including consumer electronics, power electronics, semiconductor fabrication, communications and data storage infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy. Our product innovation and product extensions are expected to continue to drive sales growth in both new and existing markets while expanding margins through a consistent focus on increasing customer value propositions.
We believe the majority of our businesses hold strong positions in the high-growth markets we serve. Our extensive global teams of specially trained scientists and engineers develop our products, and our expert sales and service organizations ensure our customers' needs are met every day. Our continuous focus on customer-centric innovation serves as a catalyst to drive changes to existing formulations and opportunities in adjacent markets within our industry. We believe that our customers place significant value on the consistency and quality of our brands, on which we capitalize through significant market share, customer loyalty and supply chain access. In addition, operational risks and switching costs make it difficult for our customers to change suppliers which allows us to retain customers and maintain our market positions.
Our customers use our innovation as a competitive advantage, relying on us to help them navigate through fast-paced, high-growth markets. To that end, we draw upon our broad and longstanding intellectual property portfolio and technical expertise, while working closely with both customers and original equipment manufacturers on an ongoing basis to develop proprietary solutions tailored to their manufacturing needs. We leverage these close relationships to win qualifications and specifications into their supply chains as well as to identify opportunities for new products; all of which provide potential additional revenue streams.
Our strategy is based on a balance of operational excellence and prudent capital allocation. Our operating teams focus on the strong execution of customer-led product development, superior technical sales support and continuous supply chain optimization. Our senior leadership aims to foster an environment of accountability and success for our operating teams while also evaluating and executing on high-return capital allocation opportunities that can drive improvements in long-term shareholder value.
Our Operations
Our operations are organized into two segments: Electronics and Industrial & Specialty, which are each described below:
Electronics – Our Electronics segment researches, formulates and sells specialty chemicals and material process technologies for all types of electronics hardware, from complex printed circuit board designs to advanced semiconductor packaging. In mobile communications, computers, automobiles and aerospace equipment, its products are an integral part of the electronics manufacturing process and the functionality of end-products. The segment's "wet chemistries" for metallization, surface treatments and solderable finishes form the physical circuitry pathways and its "assembly materials," such as solders, pastes, fluxes and adhesives, join those pathways together.
15
Electronics provides solutions through the following businesses:
Assembly Solutions
As a global supplier of surface mount technologies ("SMT"), fluxes, thermal management materials, coatings, resins, cleaners and other attachment materials for the electronics assembly industry, we develop innovative materials that join electronic circuits in high volume device manufacturing. Our high-performing interconnect materials are used to assemble consumer electronics from circuit boards, discrete electronic components, connectors and integrated circuit substrates. We believe our growth in this business will be driven by the increasing use of electronics in consumer, automotive, telecommunications, memory, medical, aerospace and other markets.
Circuitry Solutions
As a global supplier of chemical formulations to the electronics industry, we design and manufacture proprietary liquid chemical processes and materials used by our customers to manufacture printed circuit boards and memory storage devices. Our product portfolio is focused on specialized consumable chemical processes and materials, such as surface treatments, circuit formation, primary metallization, electroplate, surface finishes and flexible/formable films. We believe our growth in this business will be driven by demand in wireless mobile devices, internet infrastructure computers, and the increasing use of electronics in automobiles.
Semiconductor Solutions
As a global supplier to the semiconductor industry, we provide advanced copper interconnects, die attachment, sintered silver material, adhesives, wafer bump processes and photomask technologies to our customers for integrated circuit fabrication and semiconductor packaging. We believe our growth in this business will be driven by advanced electronics packaging, necessary to meet the growing needs of high performance computing, the internet of things, 5G communications and the increasing content and complexity of electronics in automotive applications.
Industrial & Specialty – Our Industrial & Specialty segment researches, formulates and sells specialty chemicals and process technologies that enhance surfaces or improve industrial processes in diverse industrial sectors from automotive trim to transcontinental infrastructure and from high-speed printing to high-design faucets. Its products include chemical systems that protect and decorate metal and plastic surfaces; consumable chemicals that enable printing image transfer on flexible packaging materials; and chemistries used in water-based hydraulic control fluids in offshore energy production. These fully consumable products are used in the aerospace, automotive, construction, consumer electronics, consumer packaged goods and oil and gas production end-markets.
Industrial & Specialty provides solutions through the following businesses:
Industrial Solutions
As a global supplier of industrial metal and plastic finishing chemistries, we primarily design and manufacture chemical systems that protect and decorate surfaces. Our high-performance functional coatings improve resistance to wear and tear, such as hard chrome plating of shock absorbers for cars, or provide corrosion resistance for appliance parts. Our decorative performance coatings apply finishes for parts in various end-markets, such as automotive interiors or jewelry surfaces. As part of our broader sustainable solutions platform, we also provide both chemistry and equipment for turnkey wastewater treatment and recycle and reuse solutions. Our industrial customer base is highly diverse and includes customers in the following end-markets: appliances and electronics equipment; automotive parts; industrial parts; plumbing goods; construction equipment and transportation equipment. We believe our growth in this industry will be primarily driven by increased worldwide automobile production with elevated fashion elements and higher content per vehicle as well as general economic growth.
Graphics Solutions
As a supplier of consumable materials used to transfer images on to consumer packaging materials, our products are used to improve print quality and printing productivity. We produce and market photopolymers through an extensive line of flexographic plates that are used in the consumer packaging and printing industries. Photopolymers are molecules that change properties upon exposure to light. Flexography is a printing process that utilizes flexible printing plates made of rubber or other flexible plastics. We believe growth in this business will be driven by consumer demand and market shifts favoring the use of package imaging technologies that, like ours, offer a lower total cost of ownership to customers.
Energy Solutions
As a global supplier of specialized fluids to the offshore energy industry, we produce water-based hydraulic control fluids for major oil and gas companies and drilling contractors to be used in offshore deep-water production and drilling applications. We believe our growth in this business will be driven by continued capital expenditures in energy exploration and production.
16
Quarterly Highlights
Films Business and Product Line Realignment
In the first quarter of 2023, we transferred operational responsibility of our Films business from our Graphics Solutions business within our Industrial & Specialty segment to our Circuitry Solutions business in our Electronics segment. In addition, we transferred certain product lines between our Assembly Solutions business and our Semiconductor Solutions business, both of which are part of our Electronics segment, to align more closely with our current business structure. Historical information has been reclassified to reflect these changes for all periods presented in the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Interest Rate Swaps and Cross-Currency Swaps
In March 2023, we terminated and replaced $360 million of our interest rate swaps and cross-currency swaps with swaps that extended the initial maturity by two years, helping to mitigate future interest rate risk.
Recent Accounting Pronouncements
Our recent accounting pronouncements have not changed materially from the summary disclosed in Note 3, Recent Accounting Pronouncements, to the Consolidated Financial Statements included in our 2022 Annual Report.
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with GAAP in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section, we present certain non-GAAP financial measures, such as operating results on a constant currency and organic basis and Adjusted EBITDA. Management internally reviews these non-GAAP measures to evaluate performance on a comparative period-to-period basis in terms of absolute performance, trends and expected future performance with respect to our business. We believe these non-GAAP financial measures provide investors with an additional perspective on trends and underlying operating results on a period-to-period comparable basis. We also believe that investors find this information helpful in understanding the ongoing performance of our operations separate from items that may have a disproportionate positive or negative impact on our financial results in any particular period or are considered to be associated with our capital structure.
These non-GAAP financial measures, however, have limitations as analytical tools and should not be considered in isolation from, a substitute for, or superior to, the related financial information that we report in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and may not be completely comparable to similarly titled measures of other companies due to potential differences in calculation methods. In addition, these measures are subject to inherent limitations as they reflect the exercise of judgment by management about which items are excluded or included in determining these non-GAAP financial measures. Investors are encouraged to review the definitions and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures included in this Quarterly Report and not to rely on any single financial measure to evaluate our business. Below is a more detailed description of these non-GAAP measures.
Constant Currency
We disclose operating results, from net sales through operating profit and Adjusted EBITDA, on a constant currency basis by adjusting results to exclude the impact of changes due to the translation of foreign currencies of our international locations into U.S. dollars. Management believes this non-GAAP financial information facilitates period-to-period comparison in the analysis of trends in business performance, thereby providing valuable supplemental information regarding our results of operations, consistent with how we internally evaluate our financial results.
17
The impact of foreign currency translation is calculated by converting our current-period local currency financial results into U.S. dollars using the prior period's exchange rates and comparing these adjusted amounts to our prior period reported results. The difference between actual growth rates and constant currency growth rates represents the estimated impact of foreign currency translation.
Organic Net Sales Growth
Organic net sales growth is defined as net sales excluding the impact of foreign currency translation, changes due to the pass-through pricing of certain metals and acquisitions and/or divestitures, as applicable. Management believes this non-GAAP financial measure provides investors with a more complete understanding of the underlying net sales trends by providing comparable net sales over differing periods on a consistent basis.
For a reconciliation of GAAP net sales growth to organic net sales growth, see "Net Sales" within the "Results of Operations" section below.
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA, excluding the impact of additional items included in GAAP earnings which we believe are not representative or indicative of our ongoing business or are considered to be associated with our capital structure. Management believes Adjusted EBITDA provides investors with a more complete understanding of the long-term profitability trends of our business and facilitates comparisons of our profitability to prior and future periods.
For a reconciliation of "Net income attributable to common stockholders" to Adjusted EBITDA and more information about the adjustments made, see Note 11, Segment Information, to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
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Results of Operations
Three months ended March 31, 2023 compared to three months ended March 31, 2022
Three Months Ended March 31,
% Change
(dollars in millions)
2023
2022
Reported
Constant Currency
Organic
Net sales
$
574.4
$
680.2
(16)%
(11)%
(7)%
Cost of sales
346.6
417.2
(17)%
(13)%
Gross profit
227.8
263.0
(13)%
(9)%
Gross margin
39.7
%
38.7
%
100 bps
80 bps
Operating expenses
161.4
167.5
(4)%
0%
Operating profit
66.4
95.5
(31)%
(25)%
Operating margin
11.6
%
14.0
%
(240)bps
(220)bps
Other expense, net
(6.5)
(19.1)
(66)%
Income tax expense
(16.9)
(20.0)
(16)%
Net income
$
43.0
$
56.4
(24)%
Adjusted EBITDA
$
112.3
$
144.8
(22)%
(18)%
Adjusted EBITDA margin
19.5
%
21.3
%
(180)bps
(150)bps
19
Net Sales
Net sales in the first quarter of 2023 decreased 16% on a reported basis, 11% on a constant currency basis and 7% on an organic basis. Electronics' consolidated results were negatively impacted by $35.2 million of pass-through metals pricing and Industrial & Specialty's consolidated results were positively impacted by $1.6 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and organic net sales growth:
Three Months Ended March 31,
% Change
(dollars in millions)
2023
2022
Reported Net Sales Growth
Impact of Currency
Constant Currency
Pass-Through Metals Pricing
Acquisitions
Organic Net Sales Growth
Electronics:
Assembly Solutions
$
173.5
$
230.6
(25)%
4%
(21)%
15%
—%
(5)%
Circuitry Solutions
106.7
135.3
(21)%
4%
(17)%
—%
—%
(17)%
Semiconductor Solutions
59.4
75.7
(22)%
2%
(19)%
—%
—%
(19)%
Total
339.6
441.6
(23)%
4%
(19)%
8%
—%
(11)%
Industrial & Specialty:
Industrial Solutions
180.7
190.1
(5)%
5%
0%
—%
(1)%
(1)%
Graphics Solutions
34.9
32.6
7%
2%
9%
—%
—%
9%
Energy Solutions
19.2
15.9
21%
4%
25%
—%
—%
25%
Total
234.8
238.6
(2)%
5%
3%
—%
(1)%
2%
Total
$
574.4
$
680.2
(16)%
4%
(11)%
5%
0%
(7)%
NOTE: Totals may not sum due to rounding.
Electronics' net sales in the first quarter of 2023 decreased 23% on a reported basis and 11% on an organic basis.
•Assembly Solutions: net sales decreased 25% on a reported basis and 5% on an organic basis. Pass-through metals pricing had a negative impact of 15% on reported net sales. Foreign exchange had a negative impact of 4% on reported net sales. The decrease in organic net sales was primarily due to lower SMT volumes due to demand weakness in Asia, primarily China.
•Circuitry Solutions: net sales decreased 21% on a reported basis and 17% on an organic basis. Foreign exchange had a negative impact of 4% on reported net sales. The decrease in organic net sales was primarily due to lower demand from mobile phone market customers, primarily in Asia, and the memory disk end market globally.
•Semiconductor Solutions: net sales decreased 22% on a reported basis and 19% on an organic basis. Foreign exchange had a negative impact of 2% on reported net sales. The decrease in organic net sales was primarily due to lower demand for advanced packaging chemistries in the mobile phone and high-end electronics end markets.
Industrial & Specialty's net sales in the first quarter of 2023 decreased 2% on a reported basis and increased 2% on an organic basis.
•Industrial Solutions: net sales decreased 5% on a reported basis and 1% on an organic basis. The HSO Acquisition had a positive impact of 1% on reported net sales. Foreign exchange had a negative impact of 5% on reported net sales. The decrease in organic net sales was primarily due to lower demand from European construction and industrial manufacturing markets as well as lower automotive production in China and India when compared to the same period in 2022.
•Graphics Solutions: net sales increased 7% on a reported basis and 9% on an organic basis. Foreign exchange had a negative impact of 2% on reported net sales. The increase in organic net sales was primarily due to the contribution of new customer wins and cost inflation driven pricing actions.
20
•Energy Solutions: net sales increased 21% on a reported basis and 25% on an organic basis. Foreign exchange had a negative impact of 4% on reported net sales. The increase in organic net sales was primarily due to increased energy production activity.
Gross Profit
Three Months Ended March 31,
% Change
(dollars in millions)
2023
2022
Reported
Constant Currency
Gross profit
Electronics
$
135.9
$
163.9
(17)%
(13)%
Industrial & Specialty
91.9
99.1
(7)%
(3)%
Total
$
227.8
$
263.0
(13)%
(9)%
Gross margin
Electronics
40.0
%
37.1
%
290 bps
280 bps
Industrial & Specialty
39.1
%
41.5
%
(240) bps
(240) bps
Total
39.7
%
38.7
%
100 bps
80 bps
Electronics' gross profit in the first quarter of 2023 decreased by 17% on a reported basis and 13% on a constant currency basis. The constant currency decrease in gross profit was primarily driven by lower net sales across all businesses. The increase in gross margin was primarily due to lower pass-through metals pricing in the Assembly Solutions business and the impact of inflationary price increases.
Industrial & Specialty's gross profit in the first quarter of 2023 decreased by 7% on a reported basis and 3% on a constant currency basis. The constant currency decrease in gross profit was primarily driven by lower net sales mainly due to automotive production softness. The decrease in gross margin was primarily due to raw material cost pressures in the Graphics Solutions business and mix impacts from lower automotive production, primarily in China and India, partially offset by growth in our higher margin Energy Solutions business.
Operating Expenses
Three Months Ended March 31,
% Change
(dollars in millions)
2023
2022
Reported
Constant Currency
Selling, technical, general and administrative
$
148.9
$
153.4
(3)%
1%
Research and development
12.5
14.1
(11)%
(10)%
Total
$
161.4
$
167.5
(4)%
0%
Operating expenses as % of net sales
Selling, technical, general and administrative
25.9
%
22.5
%
340 bps
310 bps
Research and development
2.2
%
2.1
%
10 bps
0 bps
Total
28.1
%
24.6
%
350 bps
310 bps
Operating expenses in the first quarter of 2023 decreased 4% on a reported basis and remained approximately flat on a constant currency basis. The constant currency change was primarily driven by lower acquisition and integration costs partially offset by higher travel expenses.
21
Other (Expense) Income
Three Months Ended March 31,
(dollars in millions)
2023
2022
Other (expense) income
Interest expense, net
$
(11.7)
$
(14.1)
Foreign exchange gain (loss)
4.9
(0.7)
Other income (expense), net
0.3
(4.3)
Total
$
(6.5)
$
(19.1)
Interest Expense, Net
Interest expense, net reflects higher interest income and the impact of the weakening of the euro, as compared to the U.S. dollar, as our interest rate and cross-currency swaps have effectively converted our U.S. dollar denominated Term Loans into fixed-rate euro-denominated debt. See Note 6, Financial Instruments, to the unaudited Condensed Consolidated Financial Statements for further discussion of these derivative instruments.
Foreign Exchange Gain (Loss)
For the three months ended March 31, 2023, foreign exchange gain increased primarily due to the remeasurement of intercompany loans.
Other Income (Expense), Net
For the three months ended March 31, 2023, other income, net included $0.7 million ($1.0 million of realized losses and $0.3 million of unrealized gains) of net losses associated with metals derivative contracts. For the three months ended March 31, 2022, other expense, net included $4.6 million ($2.8 million of realized losses and $1.8 million of unrealized losses) of net losses associated with metals derivative contracts. These metal derivative contracts primarily relate to inventory associated with pass-through metals pricing in our Assembly Solutions business. See Note 6, Financial Instruments, to the unaudited Condensed Consolidated Financial Statements for further discussion of these derivative instruments.
Income Tax
The comparison of the Company's income tax provision between periods can be significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items. See Note 9, Income Taxes, to the unaudited Condensed Consolidated Financial Statements for further information.
22
Segment Adjusted EBITDA Performance
Three Months Ended March 31,
% Change
(dollars in millions)
2023
2022
Reported
Constant Currency
Adjusted EBITDA:
Electronics
$
72.7
$
100.9
(28)%
(23)%
Industrial & Specialty
39.6
43.9
(10)%
(5)%
Total
$
112.3
$
144.8
(22)%
(18)%
Adjusted EBITDA margin:
Electronics
21.4
%
22.8
%
(140) bps
(110) bps
Industrial & Specialty
16.9
%
18.4
%
(150) bps
(130) bps
Total
19.5
%
21.3
%
(180) bps
(150) bps
For the three months ended March 31, 2023, Electronics' Adjusted EBITDA decreased 28% on a reported basis and 23% on a constant currency basis. The constant currency decrease was primarily driven by lower gross profits. Industrial & Specialty's Adjusted EBITDA decreased 10% on a reported basis and 5% on a constant currency basis. The constant currency decrease was primarily driven by lower volumes and continued raw material cost pressures.
Liquidity and Capital Resources
Our primary sources of liquidity during the three months ended March 31, 2023 were available cash generated from operations and cash on hand. Our primary uses of cash and cash equivalents were to pay cash dividends, fund operations including working capital, as well as capital expenditures and debt service obligations. A portion of our interest rate swaps and cross-currency swaps associated with our term loans mature in January 2024. Expiration of these hedges could result in a material increase to interest expense. Our first significant debt principal payment of approximately $1.08 billion, related to the maturity of our outstanding term loans under the Credit Agreement, is not due until 2026.
In the first quarter of 2023, we paid a cash dividend of 8 cents per share. We currently expect to continue to pay a cash dividend on a quarterly basis; however, the actual declaration of any cash dividends as well as their amounts and timing, will be subject to the final determination of our Board of Directors based on factors including our future earnings and cash flow generation.
We believe that our cash and cash equivalents and cash generated from operations, supplemented by our availability under our lines of credit, including our revolving credit facility under the Credit Agreement, will be sufficient to meet our working capital needs, interest payments, capital expenditures, potential dividend payments and other business requirements for at least the next twelve months. However, working capital cycles and/or future repurchases of our common stock and/or acquisitions may require additional funding, which may include future debt and/or equity offerings. Our long-term liquidity may be influenced by our ability to borrow additional funds, manage interest rates, renegotiate existing debt and/or raise new equity or debt under terms that are favorable to us.
We may from time to time seek to repurchase our equity and/or to retire or repurchase our outstanding debt through cash purchases and/or exchanges for equity, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, applicable restrictions under our various financing arrangements and other factors.
23
During the three months ended March 31, 2023, approximately 75% of our net sales were generated from non-U.S. operations, and we expect a large portion of our net sales to continue to be generated outside of the U.S. As a result, our foreign subsidiaries will likely continue to generate a substantial portion of our cash. We expect to manage our worldwide cash requirements based on available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to the U.S. and/or other international subsidiaries when we believe it is cost effective to do so. Of our $279 million of cash and cash equivalents at March 31, 2023, $214 million was held by our foreign subsidiaries.
The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities during the periods indicated:
Three Months Ended March 31,
(dollars in millions)
2023
2022
Cash provided by (used in) operating activities
$
53.5
$
(5.6)
Cash used in investing activities
$
(11.6)
$
(37.1)
Cash used in financing activities
$
(29.5)
$
(67.1)
Operating Activities
The increase in net cash flows provided by operating activities of $59.1 million was primarily driven by lower annual incentive compensation payments and improved management of working capital, partially offset by lower cash operating profits (net income adjusted for non-cash items).
Investing Activities
During the three months ended March 31, 2022, we paid approximately $23 million in connection with the HSO Acquisition.
Financing Activities
During the three months ended March 31, 2023, we paid $19.4 million of cash dividends on shares of our common stock and $7.3 million for shares of our common stock withheld by the Company to satisfy the tax withholding requirements related to the vesting of RSUs included in "Other, net." During the three months ended March 31, 2022, we paid $23.8 million for shares of our common stock withheld by the Company to satisfy the tax withholding requirements related to the vesting of RSUs included in "Other, net," $19.9 million of cash dividends on shares of our common stock and approximately $18.3 million in aggregate for the repurchase of shares of our common stock under our stock repurchase program.
Financial Borrowings
Credit Facilities and Senior Notes
At March 31, 2023, we had $1.89 billion of indebtedness, net of unamortized discounts and debt issuance costs, which primarily included:
•$1.10 billion of term debt arrangements outstanding under our term loans; and
•$791 million of 3.875% USD Notes due 2028.
Availability under our revolving credit facility and various lines of credit and overdraft facilities totaled $391 million at March 31, 2023 (net of $5.9 million of stand-by letters of credit which reduce our borrowing capacity).
Covenants
At March 31, 2023, we were in compliance with the customary affirmative and negative covenants, events of default and other customary provisions of the Credit Agreement as well as with the covenants included in the indenture governing our 3.875% USD Notes due 2028.
24
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The quantitative and qualitative disclosures about market risk required by this item have not changed materially from those disclosed in our 2022 Annual Report. For a discussion of our exposure to market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in our 2022 Annual Report.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Based on management's evaluation (with the participation of our CEO and CFO), as of the end of the period covered by this Quarterly Report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes to Internal Control Over Financial Reporting
Based on management's evaluation (with the participation of our CEO and CFO), there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in legal proceedings, investigations and/or claims that are incidental to the operation of our businesses. In particular, we are involved in various claims relating to environmental matters at a number of current and former plant sites and waste management sites. See Note 8, Contingencies, Environmental and Legal Matters, to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report for more information and updates.
Item 1A. Risk Factors
There have been no material changes in the risk factors from those set forth in Part I, Item 1A, Risk Factors of our 2022 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year
On April 25, 2023, the Board of Directors of the Company approved amendments to the Company’s By-laws, effective on April 25, 2023, to reflect the SEC’s universal proxy rules contained in Rule 14a-19 under the Exchange Act and certain 2022 amendments to the General Corporation Law of the State of Delaware (the "DGCL"). The main amendments to the By-laws include additions to Sections 1.7, 1.12 and 1.13 to implement the procedures and information requirements of Rule 14a-19 regarding the nomination and solicitation of proxies for director nominees. The amendments to the By-laws also updated Sections 1.4 and 1.9 to conform with the 2022 DGCL amendments relating to the adjournments of virtual annual meetings of stockholders and the availability of stockholder lists. The foregoing description of the amendments to the By-laws does not purport to be complete and is qualified in its entirety by reference to the full text of the By-laws, as further amended and restated, a copy of which is attached as Exhibit 3.2 to this Quarterly Report and incorporated herein by reference.
26
Item 6. Exhibits
The following exhibits are filed or furnished as part of this Quarterly Report:
Exhibit Number
Description
3.1(a)
Certificate of Incorporation dated January 22, 2014 (filed as Exhibit 3.1 of Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 (File No. 333-192778) filed on January 24, 2014, and incorporated herein by reference)
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL documents
104**
Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibits 101)
* Filed herewith.
** Furnished herewith.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this April 27, 2023.
