Element Solutions Inc Announces 2023 Second Quarter Financial Results

Rhea-AI Summary

Element Solutions Inc (NYSE:ESI) reported a 13% decrease in net sales to $586 million for the second quarter of 2023. The company's GAAP diluted EPS was $0.11, compared to $0.25 in the same period last year. Reported net income was $27 million, down from $64 million last year. Adjusted EPS was $0.31 and adjusted EBITDA was $116 million. The company also updated its 2023 guidance, expecting adjusted EBITDA in the range of $490 million to $500 million.

Positive

• Sequential adjusted EBITDA growth despite market challenges
• Positive customer feedback on new product offerings
• Expectation of accelerating electronics market in the near future

Negative

• 13% decrease in net sales
• Lower-than-expected baseline for 2023 earnings
• Reduction in full-year 2023 adjusted EBITDA guidance

• Net sales of $586 million, a decrease of 13% from the second quarter last year on a reported basis or a decrease of 6% on an organic basis
• GAAP diluted EPS of $0.11, compared to $0.25 in the same period last year
• Reported net income of $27 million, as compared to $64 million in the same period last year
• Adjusted EPS of $0.31
• Adjusted EBITDA of $116 million
• Second quarter 2023 cash from operating activities of $81 million and free cash flow of $67 million

MIAMI--(BUSINESS WIRE)-- Element Solutions Inc (NYSE:ESI) (“Element Solutions” or the “Company”), a global and diversified specialty chemicals company, today announced its financial results for the three and six months ended June 30, 2023.

Executive Commentary

President and Chief Executive Officer Benjamin Gliklich said, "Element Solutions reported sequential adjusted EBITDA growth in what we believe is the trough of the most severe dislocation in the electronics market in recent history. Our results demonstrate outperformance relative to a market that saw double digit declines in key electronics drivers, such as smartphone units and semiconductor production. We seized the opportunity created by this backdrop to improve our capabilities in leading-edge technologies at the bottom of the cycle. Bringing our ViaForm^® product line fully in-house and adding Kuprion’s ActiveCopper™ applications to our portfolio immediately improved our offering at the leading edge. Customers' feedback has been extremely positive, and we have active commercial engagements associated with both offerings. These investments strengthen our ability to deliver technologies to the most demanding and innovative customers in the market, positioning our business to benefit disproportionately from the fastest growing and highest value segments in the electronics supply chain.”

Mr. Gliklich concluded, “We believe the second quarter was the trough and see evidence of acceleration in electronics already in July. Our semiconductor customers are increasing utilization and smartphone channel inventories are being digested based on third party sell-through and sell-in data. However, the baseline from which we are growing is lower than expected, compounded by additional currency headwinds from the Chinese renminbi, and therefore our expectations for 2023 full year earnings have moderated. We are reducing our full year 2023 adjusted EBITDA guidance to a range of $490 million to $500 million, which assumes recovering demand and the impact of certain cost actions underway. The expected exit velocity of our business together with the full year impact of our cost activity position us well for strong earnings growth in 2024. Our investments this quarter support significant longer-term outperformance.”

Second Quarter 2023 Highlights (compared with second quarter 2022)

• Net sales on a reported basis for the second quarter of 2023 were $586 million, a decrease of 13% over the second quarter of 2022. Organic net sales decreased 6%.
  • Electronics: Net sales decreased 19% to $356 million. Organic net sales decreased 9%.
  • Industrial & Specialty: Net sales decreased 2% to $230 million. Organic net sales decreased 2%.
• Second quarter of 2023 earnings per share (EPS) performance:
  • GAAP diluted EPS was $0.11 for the second quarter of 2023 as compared to $0.25 for the second quarter of 2022.
  • Adjusted EPS was $0.31, as compared to $0.38 for the same period last year.
• Reported net income was $27 million for the second quarter of 2023 as compared to $64 million for the second quarter of 2022.
• Adjusted EBITDA for the second quarter of 2023 was $116 million, a decrease of 17%. On a constant currency basis, adjusted EBITDA decreased 14%.
  • Electronics: Adjusted EBITDA was $76 million, a decrease of 25%. On a constant currency basis, adjusted EBITDA decreased 22%.
  • Industrial & Specialty: Adjusted EBITDA was $40 million, an increase of 2%. On a constant currency basis, adjusted EBITDA increased 5%.
  • Adjusted EBITDA margin decreased 90 basis points to 19.8% on a reported basis. On a constant currency basis, adjusted EBITDA margin decreased 60 basis points.

Updated 2023 Guidance

The Company expects third quarter 2023 adjusted EBITDA of approximately $125 million. For the full-year 2023, the Company now expects adjusted EBITDA to be in the range of $490 million to $500 million. For 2023, the Company expects adjusted EPS of approximately $1.30 and free cash flow of approximately $265 million.

Recent Developments

ViaForm Distribution Rights - On June 1, 2023, the Company terminated its long-standing distribution agreement related to its ViaForm^® electrochemical deposition products for $200 million, including $170 million paid at closing and a deferred payment of $30.0 million which remains contingent upon satisfaction of certain conditions during the applicable transition period. Following the transition period, the Company expects to manage all aspects of the ViaForm® product line in-house, which it believes will result in a more efficient supply chain and improved customer outcomes for leading semiconductor fabricators. Based on the run rate of adjusted EBITDA from the ViaForm^® product line as of the closing date and at current demand levels, the Company expects the ViaForm^® business to contribute a baseline of approximately $15 million to annual adjusted EBITDA, with significant growth potential from expected synergies and market opportunities.

The transaction was funded with $150 million of term loans A under the Company's senior credit facility and cash on hand. The Company also entered into interest rate swaps and cross-currency swaps to effectively convert the term loans A from U.S. dollar denominated debt obligations into fixed-rate euro-denominated debt through January 2026.

Kuprion Acquisition - On May 19, 2023, the Company completed the acquisition of Kuprion, Inc. for approximately $15.9 million, net of cash with potential additional payments in various installments to be made upon the achievement of certain milestones associated with product qualification and revenue through December 31, 2030. Kuprion is a developer of next-generation nano-copper technology to the semiconductor, circuit board and electronics assembly markets.

Conference Call

Element Solutions will host a webcast/dial-in conference call to discuss its 2023 second quarter financial results at 8:30 a.m. (Eastern Time) on Thursday, July 27, 2023. Participants on the call will include President and Chief Executive Officer Benjamin Gliklich, Chief Financial Officer Carey J. Dorman and Executive Chairman Sir Martin E. Franklin.

To listen to the call by telephone, please dial 888-510-2346 (domestic) or 646-960-0111 (international) and provide the Conference ID: 3799230. The call will be simultaneously webcast at www.elementsolutionsinc.com. A replay of the call will be available after completion of the live call at www.elementsolutionsinc.com.

About Element Solutions

Element Solutions Inc 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.

More information about the Company is available at www.elementsolutionsinc.com.

Forward-Looking Statements

This release is intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 as it contains "forward-looking statements" within the meaning of the federal securities laws. These statements will often contain 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," "guidance" or "confident" and variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs, projections and expectations regarding the expected benefits of the ViaForm® and Kuprion investments, including improved capabilities and offerings in leading edge technologies and market position to benefit disproportionately from market trends; commercial engagements and deferred payments related to these investments; expected contribution of the ViaForm® transaction to the Company's adjusted EBITDA and revenue and significant growth potential; evidence of acceleration in electronics in July 2023; increased utilization from semiconductor customers; smartphone channel inventories trends; recovering demand and impact of certain cost activity in 2023; strong earnings growth in 2024; longer-term outperformance; third quarter 2023 adjusted EBITDA guidance; and full-year 2023 guidance for adjusted EBITDA, adjusted EPS and free cash flow. These projections and statements are based on management's estimates, assumptions or expectations with respect to future events and financial performance, and are believed to be reasonable, though are inherently uncertain and difficult to predict. Such projections and statements are based on the assessment of information available as of the current date, and the Company does not undertake any obligations to provide any further updates. Actual results could differ materially from those expressed or implied in these forward-looking statements if one or more of the underlying estimates, assumptions or expectations prove to be inaccurate or are unrealized. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the continuing economic impact of the coronavirus (COVID-19) and its variants on the global economy, the Company's 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/or its variants; the general impact of the ongoing conflict between Russia and Ukraine on economic activity, including financial market instability and disruption of global supply chains, and on the Company's customers, employees, suppliers, vendors and other stakeholders; inflation and fluctuations in foreign exchange rates; business and management strategies; outstanding debt and debt leverage ratio; shares repurchases; debt and/or equity issuance or retirement; returns to stockholders; and the impact of acquisitions, divestitures, restructurings, refinancings, impairments and other unusual items, including the Company's ability to integrate and obtain the anticipated benefits, results and synergies from these items or other related strategic initiatives. Additional information concerning these and other factors that could cause actual results to vary is, or will be, included in the Company's periodic and other reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Certain information contained in this release is based on historical results and forecasts provided in connection with the ViaForm® and Kuprion transactions. Use of different methods for preparing, calculating or presenting such information may lead to different results and such differences may be material. While the Company believes this information is reliable and appropriate, investors are cautioned not to place undue reliance on this information.

ELEMENT SOLUTIONS INC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
		Three Months Ended June 30,								Six Months Ended June 30,
(dollars in millions, except per share amounts)		2023				2022				2023				2022
Net sales		$	586.1			$	676.9			$	1,160.5			$	1,357.1
Cost of sales			357.6				427.1				704.2				844.3
Gross profit			228.5				249.8				456.3				512.8
Operating expenses:
Selling, technical, general and administrative			147.0				146.5				295.9				299.9
Research and development			28.9				12.8				41.4				26.9
Total operating expenses			175.9				159.3				337.3				326.8
Operating profit			52.6				90.5				119.0				186.0
Other (expense) income:
Interest expense, net			(12.0	)			(13.2	)			(23.7	)			(27.3	)
Foreign exchange gain			9.0				2.7				13.9				2.0
Other (expense) income, net			(1.6	)			7.5				(1.3	)			3.2
Total other expense			(4.6	)			(3.0	)			(11.1	)			(22.1	)
Income before income taxes and non-controlling interests			48.0				87.5				107.9				163.9
Income tax expense			(21.2	)			(23.9	)			(38.1	)			(43.9	)
Net income from continuing operations			26.8				63.6				69.8				120.0
Income from discontinued operations, net of tax			2.9				1.8				2.9				1.8
Net income			29.7				65.4				72.7				121.8
Net loss (income) attributable to non-controlling interests			0.2				(0.2	)			0.1				(0.5	)
Net income attributable to common stockholders		$	29.9			$	65.2			$	72.8			$	121.3
Earnings per share
Basic from continuing operations		$	0.11			$	0.25			$	0.29			$	0.48
Basic from discontinued operations			0.01				0.01				0.01				0.01
Basic attributable to common stockholders		$	0.12			$	0.26			$	0.30			$	0.49
Diluted from continuing operations		$	0.11			$	0.25			$	0.29			$	0.48
Diluted from discontinued operations			0.01				0.01				0.01				0.01
Diluted attributable to common stockholders		$	0.12			$	0.26			$	0.30			$	0.49
Weighted average common shares outstanding
Basic			241.4				247.1				241.1				247.2
Diluted			241.7				247.5				241.6				248.3

ELEMENT SOLUTIONS INC CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
		June 30,				December 31,
(dollars in millions)		2023				2022
Assets
Cash & cash equivalents		$	282.4			$	265.6
Accounts receivable, net of allowance for doubtful accounts of $13.9 and $14.4 at June 30, 2023 and December 31, 2022, respectively			452.2				455.8
Inventories			332.8				290.7
Prepaid expenses			34.1				38.5
Other current assets			155.0				138.1
Total current assets			1,256.5				1,188.7
Property, plant and equipment, net			282.5				277.2
Goodwill			2,394.9				2,412.8
Intangible assets, net			933.2				805.5
Deferred income tax assets			48.5				51.5
Other assets			145.4				168.0
Total assets		$	5,061.0			$	4,903.7
Liabilities and stockholders' equity
Accounts payable		$	144.1			$	132.2
Current installments of long-term debt			11.5				11.5
Accrued expenses and other current liabilities			222.5				200.7
Total current liabilities			378.1				344.4
Debt			2,029.4				1,883.8
Pension and post-retirement benefits			35.7				36.7
Deferred income tax liabilities			115.3				121.2
Other liabilities			182.8				168.5
Total liabilities			2,741.3				2,554.6
Stockholders' equity
Common stock: 400.0 shares authorized (2023: 266.1 shares issued; 2022: 265.1 shares issued)			2.7				2.7
Additional paid-in capital			4,194.4				4,185.9
Treasury stock (2023: 24.6 shares; 2022: 24.3 shares)			(341.8	)			(334.2	)
Accumulated deficit			(1,189.9	)			(1,223.8	)
Accumulated other comprehensive loss			(361.9	)			(298.1	)
Total stockholders' equity			2,303.5				2,332.5
Non-controlling interests			16.2				16.6
Total equity			2,319.7				2,349.1
Total liabilities and stockholders' equity		$	5,061.0			$	4,903.7

ELEMENT SOLUTIONS INC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
		Three Months Ended									Six Months Ended June 30,
(dollars in millions)		June 30, 2023				March 31, 2023					2023				2022
Cash flows from operating activities:
Net income		$	29.7			$	43.0				$	72.7			$	121.8
Net income from discontinued operations, net of tax			2.9				—					2.9				1.8
Net income from continuing operations			26.8				43.0					69.8				120.0
Reconciliation of net income to net cash flows provided by operating activities:
Depreciation and amortization			41.1				39.1					80.2				82.2
Deferred income taxes			2.9				(0.4	)				2.5				7.9
Foreign exchange (gain) loss			(8.8	)			(7.3	)				(16.1	)			0.1
Incentive stock compensation			3.3				4.4					7.7				8.8
Other, net			21.3				2.2					23.5				7.7
Changes in assets and liabilities, net of acquisitions:
Accounts receivable			2.2				(2.6	)				(0.4	)			(59.8	)
Inventories			(10.5	)			(29.1	)				(39.6	)			(75.9	)
Accounts payable			(8.1	)			18.6					10.5				43.2
Accrued expenses			10.4				(22.3	)				(11.9	)			(43.2	)
Prepaid expenses and other current assets			(0.7	)			2.7					2.0				(15.3	)
Other assets and liabilities			1.0				5.2					6.2				(7.0	)
Net cash flows provided by operating activities			80.9				53.5					134.4				68.7
Cash flows from investing activities:
Capital expenditures			(13.8	)			(9.1	)				(22.9	)			(21.7	)
Proceeds from disposal of property, plant and equipment			—				0.5					0.5				3.4
Acquisitions, net of cash acquired			(188.3	)			—					(188.3	)			(22.6	)
Other, net			—				(3.0	)				(3.0	)			(5.1	)
Net cash flows used in investing activities			(202.1	)			(11.6	)				(213.7	)			(46.0	)
Cash flows from financing activities:
Debt proceeds			150.0				—					150.0				—
Repayments of borrowings			(2.9	)			(2.9	)				(5.8	)			(6.3	)
Repurchases of common stock			—				—					—				(59.7	)
Dividends			(19.3	)			(19.4	)				(38.7	)			(39.6	)
Payment of financing fees			(0.7	)			—					(0.7	)			—
Other, net			(0.3	)			(7.2	)				(7.5	)			(23.8	)
Net cash flows provided by (used in) financing activities			126.8				(29.5	)				97.3				(129.4	)
Net cash flows provided by operating activities of discontinued operations			2.9				—					2.9				1.8
Effect of exchange rate changes on cash and cash equivalents			(5.1	)			1.0					(4.1	)			(9.6	)
Net increase (decrease) in cash and cash equivalents			3.4				13.4					16.8				(114.5	)
Cash and cash equivalents at beginning of period			279.0				265.6					265.6				330.1
Cash and cash equivalents at end of period		$	282.4			$	279.0				$	282.4			$	215.6

ELEMENT SOLUTIONS INC ADDITIONAL FINANCIAL INFORMATION (Unaudited)
I. SEGMENT RESULTS (1)
		Three Months Ended June 30,												Six Months Ended June 30,
(dollars in millions)		2023			2022			Reported		Constant Currency		Organic		2023			2022			Reported		Constant Currency		Organic
Net sales
Electronics		$	355.8		$	440.8		(19)%		(17)%		(9)%		$	695.4		$	882.4		(21)%		(18)%		(10)%
Industrial & Specialty			230.3			236.1		(2)%		(1)%		(2)%			465.1			474.7		(2)%		1%		0%
Total		$	586.1		$	676.9		(13)%		(12)%		(6)%		$	1,160.5		$	1,357.1		(14)%		(12)%		(6)%
Adjusted EBITDA
Electronics		$	76.3		$	101.2		(25)%		(22)%				$	149.0		$	202.1		(26)%		(22)%
Industrial & Specialty			39.8			39.2		2%		5%					79.4			83.1		(4)%		0%
Total		$	116.1		$	140.4		(17)%		(14)%				$	228.4		$	285.2		(20)%		(16)%

		Three Months Ended June 30,						Constant Currency				Six Months Ended June 30,						Constant Currency
		2023		2022		Change		2023		Change		2023		2022		Change		2023		Change
Adjusted EBITDA Margin
Electronics		21.5%		23.0%		(150)bps		21.8%		(120)bps		21.4%		22.9%		(150)bps		21.7%		(120)bps
Industrial & Specialty		17.3%		16.6%		70bps		17.6%		100bps		17.1%		17.5%		(40)bps		17.3%		(20)bps
Total		19.8%		20.7%		(90)bps		20.1%		(60)bps		19.7%		21.0%		(130)bps		20.0%		(100)bps

(1)		Reflects the transfer in the first quarter of 2023 of the operational responsibility of the Company's Films business from its Graphics Solutions business in its Industrial & Specialty segment to its Circuitry Solutions business in its Electronics segment and the transfer of certain product lines between its Assembly Solutions business and its Semiconductor Solutions business, both of which are part of its Electronics segment. Historical information has been reclassified to reflect these changes for all periods presented.

II. CAPITAL STRUCTURE
(dollars in millions)				Maturity		Interest Rate		June 30, 2023
Instrument
Term Loans A		(1)		1/31/2026		SOFR plus 1.75%		$	150.0
Term Loans B		(1)		1/31/2026		SOFR plus 2.00%			1,108.3
Total First Lien Debt									1,258.3
Senior Notes due 2028				9/1/2028		3.875%			800.0
Total Debt									2,058.3
Cash Balance									282.4
Net Debt								$	1,775.9
Adjusted Shares Outstanding		(2)							243.9
Market Capitalization		(3)						$	4,682.9
Total Capitalization								$	6,458.8

(1)		Element Solutions swapped its floating term loan rate to a fixed rate for all of its outstanding term loans through the use of interest rate swaps and cross-currency swaps which mature in January 2024, January 2025 or January 2026, as applicable. At June 30, 2023, approximately 100% of the Company's debt was fixed.
(2)		See "Adjusted Common Shares Outstanding at June 30, 2023 and 2022" following the footnotes under the "Adjusted Earnings Per Share (EPS)" reconciliation table below.
(3)		Based on the closing price of the shares of Element Solutions of $19.20 at June 30, 2023.

III. SELECTED FINANCIAL DATA
		Three Months Ended June 30,						Six Months Ended June 30,
(dollars in millions)		2023			2022			2023			2022
Interest expense		$	14.5		$	13.5		$	27.8		$	28.0
Interest paid			4.5			4.0			25.8			24.5
Income tax expense			21.2			23.9			38.1			43.9
Income taxes paid			18.8			21.0			31.5			31.6
Capital expenditures			13.8			12.2			22.9			21.7
Proceeds from disposal of property, plant and equipment			—			3.4			0.5			3.4

Non-GAAP Measures

To supplement its financial measures prepared in accordance with GAAP, Element Solutions presents in this release the following non-GAAP financial measures: EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted EPS, adjusted common shares outstanding, free cash flow, net debt to adjusted EBITDA ratio (including with the estimated annual benefit from the ViaForm® transaction), organic net sales growth, third quarter 2023 guidance for adjusted EBITDA and full year 2023 guidance for adjusted EBITDA, adjusted EPS and free cash flow. The Company also evaluates and presents its results of operations on a constant currency basis.

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 the Company’s business and believes that these non-GAAP measures provide investors with an additional perspective on trends and underlying operating results on a period-to-period comparable basis. The Company also believes that investors find this information helpful in understanding the ongoing performance of its operations separate from items that may have a disproportionate positive or negative impact on its financial results in any particular period or are considered to be associated with its 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 Element Solutions reports 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 the Company’s 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 press release, and not to rely on any single financial measure to evaluate the Company's businesses.

The Company only provides the expected contribution of the ViaForm® transaction to annual adjusted EBITDA, the third quarter 2023 guidance for adjusted EBITDA and full year 2023 guidance for adjusted EBITDA, adjusted EPS and free cash flow on a non-GAAP basis. Reconciliations of such forward-looking non-GAAP measures to GAAP are excluded in reliance upon the exception provided by Item 10(e)(1)(i)(B) of Regulation S-K due to the inherent difficulty in forecasting and quantifying, without unreasonable efforts, certain amounts that are necessary for such reconciliations, including adjustments that could be made for restructurings, refinancings, impairments, divestitures, integration and acquisition-related expenses, share-based compensation amounts, non-recurring, unusual or unanticipated charges, expenses or gains, adjustments to inventory and other charges reflected in reconciliations of historic numbers, the amount of which, based on historical experience, could be significant.

Constant Currency:

The Company discloses net sales 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 its international locations into U.S. dollar. 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 its results of operations, consistent with how the Company internally evaluates its financial results.

The impact of foreign currency translation is calculated by converting the Company's current-period local currency financial results into U.S. dollar using the prior period's exchange rates and comparing these adjusted amounts to its 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.

The following table reconciles GAAP net sales growth to organic net sales growth for the three and six months ended June 30, 2023:

		Three Months Ended June 30, 2023
		Reported Net Sales Growth		Impact of Currency		Constant Currency		Change in Pass-Through Metals Pricing		Acquisitions		Organic Net Sales Growth
Electronics		(19)%		2%		(17)%		9%		0%		(9)%
Industrial & Specialty		(2)%		1%		(1)%		—%		0%		(2)%
Total		(13)%		2%		(12)%		6%		0%		(6)%
		Six Months Ended June 30, 2023
		Reported Net Sales Growth		Impact of Currency		Constant Currency		Change in Pass-Through Metals Pricing		Acquisitions		Organic Net Sales Growth
Electronics		(21)%		3%		(18)%		8%		0%		(10)%
Industrial & Specialty		(2)%		3%		1%		—%		(1)%		0%
Total		(14)%		3%		(12)%		6%		0%		(6)%
NOTE: Totals may not sum due to rounding.

For the three months ended June 30, 2023, Electronics' consolidated results were negatively impacted by $39.7 million of pass-through metals pricing and positively impacted by $1.5 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $1.1 million of acquisitions. For the six months ended June 30, 2023, Electronics' consolidated results were negatively impacted by $74.9 million of pass-through metals pricing and positively impacted by $1.5 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $2.7 million of acquisitions.

Adjusted Earnings Per Share (EPS):

Adjusted EPS is a key metric used by management to measure operating performance and trends as management believes the exclusion of certain expenses in calculating adjusted EPS facilitates operating performance comparisons on a period-to-period basis. Adjusted EPS is defined as net income attributable to common stockholders adjusted to reflect adjustments consistent with the Company's definition of adjusted EBITDA. Additionally, the Company eliminates amortization expense associated with intangible assets, incremental depreciation associated with the step-up of fixed assets and incremental cost of sales associated with the step-up of inventories recognized in purchase accounting for acquisitions. Further, the Company adjusts its effective tax rate to 20% for the three and six months ended June 30, 2023 and 2022, respectively, as described in footnote (8) under the reconciliation table below.

The resulting adjusted net income is then divided by the Company's adjusted common shares outstanding. Adjusted common shares outstanding represent the shares outstanding as of the balance sheet date for the quarter-to-date period and an average of each quarter for the year-to-date period plus shares issuable upon exercise or vesting of all outstanding equity awards (assuming a performance achievement target level for equity awards with targets considered probable).

The following table reconciles GAAP "Net income attributable to common stockholders" to "Adjusted net income attributable to common stockholders" and presents the number of adjusted common shares outstanding used in calculating adjusted EPS for each period presented below:

				Three Months Ended June 30,								Six Months Ended June 30,
(dollars in millions, except per share amounts)				2023				2022				2023				2022
Net income attributable to common stockholders				$	29.9			$	65.2			$	72.8			$	121.3
Net income from discontinued operations attributable to common stockholders					2.9				1.8				2.9				1.8
Net income from continuing operations attributable to common stockholders					27.0				63.4				69.9				119.5
Reversal of amortization expense		(1)			31.0				30.3				60.6				61.3
Adjustment to reverse incremental depreciation expense from acquisitions		(1)			0.4				0.6				0.8				1.2
Inventory step-up		(1)			—				—				—				0.5
Restructuring expense		(2)			1.9				1.3				4.2				3.2
Acquisition and integration expense		(3)			4.4				1.1				8.3				4.0
Foreign exchange (gain) loss on intercompany loans		(4)			(8.5	)			(0.9	)			(14.1	)			0.7
Kuprion Acquisition research and development charge		(5)			15.7				—				15.7				—
Adjustment of stock compensation previously not probable		(6)			—				—				—				1.3
Other, net		(7)			1.5				(2.4	)			2.5				2.1
Tax effect of pre-tax non-GAAP adjustments		(8)			(9.3	)			(6.0	)			(15.6	)			(14.9	)
Adjustment to estimated effective tax rate		(8)			11.6				6.4				16.5				11.2
Adjusted net income attributable to common stockholders				$	75.7			$	93.8			$	148.8			$	190.1
Adjusted earnings per share		(9)		$	0.31			$	0.38			$	0.61			$	0.76
Adjusted common shares outstanding		(9)			243.9				248.2				243.9				249.2

(1)		The Company eliminates the amortization expense associated with intangible assets, incremental depreciation associated with the step-up of fixed assets and incremental cost of sales associated with the step-up of inventories recognized in purchase accounting for acquisitions. The Company believes these adjustments provide insight with respect to the cash flows necessary to maintain and enhance its product portfolio.
(2)		The Company adjusts for costs of restructuring its operations, including those related to its acquired businesses. The Company adjusts these costs because it believes they are not reflective of ongoing operations.
(3)		The Company adjusts for costs associated with acquisition and integration activity, including costs of obtaining related financing, legal and accounting fees and transfer taxes. The Company adjusts these costs because it believes they are not reflective of ongoing operations.
(4)		The Company adjusts for foreign exchange gains and losses on intercompany loans because it expects the period-to-period movement of the applicable currencies to offset on a long-term basis and because these gains and losses are not fully realized due to their long-term nature. The Company does not exclude foreign exchange gains and losses on short-term intercompany and third-party payables and receivables.
(5)		The Company adjusts for research and development costs associated with the purchase accounting related to the acquisition of Kuprion, Inc. The Company adjusts these costs because it believes they are not reflective of ongoing operations.
(6)		The Company adjusts for costs relating to certain stretch target performance-based restricted stock units granted to certain key executives as the achievement of the performance target for these awards was not deemed probable prior to the second quarter of 2021 and, therefore, compensation expense for these awards did not begin to be recognized until the second quarter of 2021 when achievement of the performance target became probable. The Company adjusts these costs to provide a meaningful comparison of its performance between periods.
(7)		The Company's adjustments are primarily comprised of certain professional consulting fees and unrealized gains/losses on metals derivative contracts. The Company adjusts for professional consulting fees because it believes they are not reflective of ongoing operations. The Company adjusts for unrealized gains/losses on metals derivative contracts to provide a meaningful comparison of its performance between periods.
(8)		The Company adjusts its effective tax rate to 20% for the three and six months ended June 30, 2023 and 2022, respectively. This adjustment does not reflect the Company’s current or near-term tax structure, including limitations on its ability to utilize net operating losses and foreign tax credits in certain jurisdictions. The Company also applies an effective tax rate of 20% to pre-tax non-GAAP adjustments for the three and six months ended June 30, 2023 and 2022, respectively. These effective tax rate adjustments are made because they provide a meaningful comparison of its performance between periods.
(9)		The Company defines "Adjusted common shares outstanding" as the number of shares of its common stock outstanding as of the balance sheet date for the quarter-to-date period and an average of each quarter for the year-to-date period, plus the shares issuable upon exercise or vesting of all outstanding equity awards (assuming a performance achievement target level for equity awards with targets considered probable). The Company adjusts the number of its outstanding common shares for this calculation to provide an understanding of its results of operations on a per share basis. See the table below for further information.

Adjusted Common Shares Outstanding at June 30, 2023 and 2022

The following table shows the Company's adjusted common shares outstanding at each period presented:

		June 30,				Year-to-Date Average June 30,
(amounts in millions)		2023		2022		2023		2022
Basic common shares outstanding		241.5		245.8		241.5		246.8
Number of shares issuable upon vesting of granted Equity Awards		2.4		2.4		2.4		2.4
Adjusted common shares outstanding		243.9		248.2		243.9		249.2

EBITDA and Adjusted EBITDA:

EBITDA represents earnings before interest, provision for income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA, excluding the impact of additional items included in GAAP earnings which the Company believes are not representative or indicative of its ongoing business or are considered to be associated with its capital structure, as described in the footnotes located under the "Adjusted Earnings Per Share (EPS)" reconciliation table above. Adjusted EBITDA for each segment also includes an allocation of corporate costs, such as compensation expense and professional fees. Management believes adjusted EBITDA and adjusted EBITDA margin provide investors with a more complete understanding of the long-term profitability trends of Element Solutions' business and facilitate comparisons of its profitability to prior and future periods.

The following table reconciles GAAP "Net income attributable to common stockholders" to "Adjusted EBITDA" for each of the periods presented:

				Three Months Ended June 30,								Six Months Ended June 30,
(dollars in millions)				2023				2022				2023				2022
Net income attributable to common stockholders				$	29.9			$	65.2			$	72.8			$	121.3
Add (subtract):
Net (loss) income attributable to non-controlling interests					(0.2	)			0.2				(0.1	)			0.5
Income from discontinued operations, net of tax					(2.9	)			(1.8	)			(2.9	)			(1.8	)
Income tax expense					21.2				23.9				38.1				43.9
Interest expense, net					12.0				13.2				23.7				27.3
Depreciation expense					10.1				10.3				19.6				20.9
Amortization expense					31.0				30.3				60.6				61.3
EBITDA					101.1				141.3				211.8				273.4
Adjustments to reconcile to Adjusted EBITDA:
Inventory step-up		(1)			—				—				—				0.5
Restructuring expense		(2)			1.9				1.3				4.2				3.2
Acquisition and integration expense		(3)			4.4				1.1				8.3				4.0
Foreign exchange (gain) loss on intercompany loans		(4)			(8.5	)			(0.9	)			(14.1	)			0.7
Kuprion Acquisition research and development charge		(5)			15.7				—				15.7				—
Adjustment of stock compensation previously not probable		(6)			—				—				—				1.3
Other, net		(7)			1.5				(2.4	)			2.5				2.1
Adjusted EBITDA				$	116.1			$	140.4			$	228.4			$	285.2
NOTE: For the footnote descriptions, please refer to the footnotes located under the "Net income attributable to common stockholders" reconciliation table above.

Net Debt to Adjusted EBITDA Ratio:

Net debt to adjusted EBITDA ratio is defined as total debt (current installments of long-term debt, revolving credit facilities and long-term debt), excluding unamortized discounts and debt issuance costs, which totaled $17.4 million at June 30, 2023, less cash divided by adjusted EBITDA.

The following table presents the Company's net debt to adjusted EBITDA ratio of 3.8x on a trailing twelve month basis:

		2023				2022						Trailing Twelve Months
(dollars in millions)		YTD				Q3			Q4
Net income attributable to common stockholders		$	72.8			$	53.2		$	12.7		$	138.7
Add (subtract):
Net (loss) income attributable to non-controlling interests			(0.1	)			0.1			0.2			0.2
Income from discontinued operations, net of tax			(2.9	)			—			—			(2.9	)
Income tax expense			38.1				16.5			25.4			80.0
Interest expense, net			23.7				12.3			11.6			47.6
Depreciation expense			19.6				10.6			10.1			40.3
Amortization expense			60.6				29.2			29.2			119.0
EBITDA			211.8				121.9			89.2			422.9
Adjustments to reconcile to Adjusted EBITDA:
Restructuring expense			4.2				2.9			3.4			10.5
Acquisition and integration expense			8.3				2.2			4.4			14.9
Foreign exchange (gain) loss on intercompany loans			(14.1	)			2.5			4.6			(7.0	)
Kuprion Acquisition research and development charge			15.7				—			—			15.7
Other, net			2.5				4.0			6.3			12.8
Adjusted EBITDA		$	228.4			$	133.5		$	107.9		$	469.8
Net debt												$	1,775.9
Net debt to adjusted EBITDA ratio												3.8x
Reacquired ViaForm distribution rights adjusted EBITDA (11 months)													13.9
Adjusted EBITDA including ViaForm® transaction													483.7
Net debt to adjusted EBITDA ratio including ViaForm® transaction												3.7x

Free Cash Flow:

Free cash flow is defined as net cash flows from operating activities less net capital expenditures. Net capital expenditures include capital expenditures less proceeds from the disposal of property, plant and equipment. Management believes that free cash flow, which measures the Company’s ability to generate cash from its business operations, is an important financial measure for evaluating the Company's financial performance. However, free cash flow should be considered in addition to, rather than as a substitute for, net cash provided by operating activities as a measure of the Company’s liquidity.

The following table reconciles "Cash flows from operating activities" to "Free cash flow:"

		Three Months Ended June 30,								Six Months Ended June 30,
(dollars in millions)		2023				2022				2023				2022
Cash flows from operating activities		$	80.9			$	74.3			$	134.4			$	68.7
Capital expenditures			(13.8	)			(12.2	)			(22.9	)			(21.7	)
Proceeds from disposal of property, plant and equipment			—				3.4				0.5				3.4
Free cash flow		$	67.1			$	65.5			$	112.0			$	50.4

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20230725216039/en/

Investor Relations:

Varun Gokarn

Senior Director, Strategy and Finance

Element Solutions Inc

1-203-952-0369

Media:

Liz Cohen

Managing Director

Kekst CNC

1-212-521-4845

Source: Element Solutions Inc

FAQ

What were Element Solutions Inc's net sales for the second quarter of 2023?

Element Solutions Inc reported net sales of $586 million for the second quarter of 2023.

What is the company's updated 2023 guidance for adjusted EBITDA?

The company expects adjusted EBITDA in the range of $490 million to $500 million for 2023.

What recent acquisitions has Element Solutions Inc made?

The company acquired Kuprion, Inc. for approximately $15.9 million and terminated its distribution agreement related to its ViaForm® electrochemical deposition products for $200 million.