Item 1A. Risk Factors
The following discussion of "risk factors" identifies the material factors that may adversely affect our business, financial condition or results of operations. Potential investors should carefully consider these risks and the other information in this 2023 Annual Report when evaluating our business. This discussion is not all inclusive and additional risks that are currently unknown to us or that we currently consider to be immaterial may also impair our business operations and cause our future results to differ from our expectations.
BUSINESS & OPERATIONAL RISKS
We may be unable to compete successfully in the competitive markets in which we operate and, as a result, we may experience pricing pressure, fewer customer orders, reduced margins and the loss of market share.
We may be unable to compete successfully in the competitive markets in which we operate. In these markets, we encounter competition from numerous and varied competitors in all areas of our businesses. Some of our competitors have longer operating histories, greater resources, greater brand recognition and a larger base of customers than we do. As a result, we may lose business, customers and market shares if we are unable to devote greater resources to the research and development, manufacturing, formulation, promotion, sale or support of our products, withstand adverse changes in economic conditions or prices of raw materials, and/or maintain competitive pricing. In addition, our competitors could enter into exclusive arrangements with our existing or potential customers or suppliers which could limit our ability to generate sales, acquire necessary raw materials and/or significantly increase costs.
In addition, the markets in which we operate are driven by consumer preferences that are rapidly changing as well as frequent new product introductions and improvements. As a result, we must develop new products and services that offer distinct value to our customers in order to compete successfully. We seek to provide products tailored to the often-unique and evolving needs of our customers which require an ongoing level of innovation. Our inability to anticipate customers’ changing needs or adapt to emerging technological and business trends accurately, control research and development costs or execute our innovation strategy could adversely affect our ability to sustain our market positions and/or penetrate new markets.
Consolidation of our competitors could also place us at a competitive disadvantage and reduce our profitability. We operate in industries which are fragmented on a global scale, but in which there has been a trend toward consolidation in recent years. Consolidations of our competitors may jeopardize the strength of our positions in one or more of our markets which could adversely affect our business, financial condition or results of operations as well as our growth potential.
If we don't successfully execute our go-to-market strategy, our business and financial performance may suffer.
Our go-to-market strategy is focused on leveraging our existing portfolio of products and services as well as introducing new products and services to meet the demands of our customers in a continually changing technological landscape. To successfully execute this strategy, we must emphasize the aspects of our core business where demand remains strong, identify and capitalize on organic growth, and innovate by developing new products and services that will enable us to expand beyond our existing technology categories. Any failure to successfully execute this strategy, including any failure to invest sufficiently in strategic growth areas and support our research and development activities, could adversely affect our business, financial condition or results of operations.
In addition, the process of developing new high-technology products or enhancing existing products is complex, costly and uncertain. After we develop a product, we must be able to manufacture appropriate volumes quickly while also managing costs and maintaining the high-quality level that our customers expect. Any delay in the development, forecast, production and/or marketing of a new product could result in us not being among the first to market which could further harm our competitive position.
Meeting customer demand depends in part on our ability to obtain timely deliveries from our suppliers and contract manufacturers. To help ensure continuity of supply to our customers, we have increased our procurement efforts to shorten lead times. These increases in materials inventory and purchase commitments have resulted, and could continue to result, in excess and/or obsolete inventory charges if the demand for our products is ultimately less than our expectations.
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Our substantial international operations subject us to risks of doing business in foreign countries which could affect our business, financial condition or results of operations.
Our products are manufactured, formulated, distributed and sold globally. In 2023, approximately 75% of our net sales were generated from non-U.S. operations. As a result, we face certain risks inherent in international trade which may reduce our sales and harm our business, including:
•political uncertainties, war, terrorism and other instability risks and their impact on the global economy, market conditions and supply chain operations, including risks caused by the ongoing war between Russia and Ukraine, the Israel-Hamas conflict and other hostilities in the Middle East and the increased tariffs and trade restrictions between China and the U.S.;
•changes in global or local economic conditions, including inflation, hyperinflation, fluctuations in interest rates and other increasing price levels in certain sectors, such as energy, impacting availability and cost of goods and services;
•fluctuations in currency values and currency exchange rates for countries in, or with which, we conduct business;
•changes or uncertainty in international, national or local legal environments, including tax, data handling, privacy, intellectual property, consumer protection, environmental and antitrust laws;
•adverse tax consequences, including as a result of changes in taxation and regulatory requirements, transfer pricing practices involving our foreign operations, and additional withholding taxes or other taxes on foreign income;
•foreign exchange controls or other currency restrictions and limitation on the movement of funds, potentially leading to the inability to readily repatriate earnings from foreign operations effectively;
•natural disasters, extreme weather events, regional or global health concerns, such as the COVID 19 pandemic;
•establishing and maintaining relationships with local distributors and OEMs;
•governmental regulations and/or sanctions affecting the import and export of products, including global trade barriers, additional taxes, tariff increases, cash repatriation restrictions, retaliations and boycotts between the U.S. and other countries, including Russia and China;
•import and export control and licensing requirements; risk of non-compliance with the Foreign Corrupt Practices Act of 1977, U.S. export control and trade sanction laws, SEC rules regarding conflict minerals sourcing and other similar anti-corruption and international trade laws or regulations in other jurisdictions;
•greater difficulty in safeguarding intellectual property than in the U.S.;
•difficulty in staffing and managing geographically diverse operations and ensuring compliance with our policies and procedures; and
•challenges in maintaining an effective internal control environment, including language and cultural differences, varying levels of GAAP expertise and internal control over financial reporting.
In addition, while progress has been made to contain the COVID-19 pandemic, it remains a global challenge. The pandemic, and the responses of business and governments to the pandemic, have at times resulted in increased border controls or closures, increased transportation costs and increased security threats to our supply chain. Countries in which we operate, such as China, may continue to close borders, impose prolonged quarantines, and further restrict travel and other activities. If we are unable to successfully manage these and/or any of the risks listed above, we could experience a loss of sales and profitability and/or an impairment or loss of assets, any of which could have a material adverse impact on our business, financial condition or results of operations.
Failure to attract and retain key personnel, including our executive officers, or effectively manage succession could have an adverse impact on our business, financial condition or results of operations.
Our business involves complex operations. As a result, our success depends to a significant degree on the skills, experience and efforts of our executive management and other key personnel as well as their ability to provide uninterrupted leadership and direction. In addition, due to the specialized and technical nature of our business, our future performance depends upon our ability to attract, develop and retain skilled employees, such as specialized research and development and sales and service personnel, in order to maintain our efficient production processes, drive innovation in our product offerings and maintain our deep customer relationships. The failure to attract and retain key personnel, or effectively manage succession, could have an adverse material impact on our business, financial condition or results of operations.
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In addition, we are highly dependent on the experience and track records of Sir Martin E. Franklin, our other Board members and our executive leadership team. If one or more of our executive officers or Board members were to cease to be employed by us or to serve as directors, or if we were unable to replace them in a timely manner, our business, financial condition, results of operations and/or stock price could be adversely affected.
Our reliance on certain key customers, contract manufacturers and suppliers could adversely affect our overall sales and profitability.
Although our business is not materially dependent upon any single customer, the loss of one or more key customers may impair our results of operations for the affected earnings periods. In addition, there is limited available manufacturing capacity that meets our quality standards and regulatory requirements. If we are unable to arrange for sufficient production capacity among our suppliers or contract manufacturers, or if our suppliers or contract manufacturers encounter production, quality, financial or other difficulties (including due to the COVID-19 pandemic, labor or geopolitical disturbances or natural disasters), we may be unable to meet our customers' demands. Finally, we rely on independent distributors to distribute our products and to assist us with the marketing and sale of certain of our products. There can be no assurance that our distributors will focus adequate resources on selling our products to end users, or will be successful in selling our products, which could materially adversely affect our business and results of operations.
We may not realize the anticipated benefits of acquisitions or divestitures which may adversely affect our existing businesses, reputation and financial condition.
We have completed several acquisitions and divestitures and may in the future pursue additional opportunistic strategic transactions. Our ability to achieve the anticipated benefits of acquisitions or divestitures depends on many factors, including our ability to negotiate favorable terms, close such transactions in a timely and cost-effective manner and successfully integrate any businesses we acquire.
With respect to acquisitions, we may be exposed to successor liability relating to actions taken before the acquisition date. The due diligence we conduct in connection with an acquisition, the controls and policies we implement and any contractual guarantees or indemnities that we receive from the sellers of acquired companies or assets may not be sufficient to protect us from, or compensate us for, actual liabilities. Acquisitions also involve compliance and reputational risks as well as risks relating to differing levels of management and internal control effectiveness, systems integration, impairment charges relating to recorded goodwill and intangible assets, significant accounting charges, completion fees and integration expenses. Sizable acquisitions may also require a material increase in funding to address capital expenditures, working capital requirements and employee retention.
In addition to unanticipated delays, costs and other issues, divestitures may also expose us to liabilities or claims for indemnification for retained liabilities or indemnification obligations associated with the assets or businesses that we sell. The magnitude of any such liability or obligation may be difficult to quantify at the time of the transaction, as it was the case for certain liabilities retained in connection with the sale of our Agricultural Solutions business in 2019. We cannot predict the ultimate resolution of these matters, and there can be no assurance that any such resolution, which may take several years, will not adversely impact our financial position or results of operations.
INDUSTRY RISKS
Industry and consumer trends may cause significant fluctuations in our results of operations and have a material adverse effect on our financial condition.
The specialty chemical industry is subject to constant and rapid technological change, product obsolescence, price erosion, evolving standards, finite product lifecycles, raw material price fluctuations, and changes in product supply and demand. For example, the mobile device market, particularly smartphones and tablets, is characterized by rapidly changing market conditions, frequent product introductions and intense competition based on features and price; all of which could impact our sale volumes and margins. In the automotive industry, demand for our products and services may be affected by technological advances, changing automotive OEM specifications and other factors beyond our control that impact production levels of our customers, such as interest rates, fuel prices, shifts in vehicle mix, consumer confidence, regulatory and legislative oversight requirements and trade agreements. In addition, technological changes in our customers’ products or processes may make certain of our specialty chemicals unnecessary or obsolete. Customers also have found, and may continue to find, alternative materials or processes, which no longer require our products. All these factors, consumer trends and industry characteristics may impact the demand for our products which may cause significant fluctuations in our results of operations and adversely affect our financial condition and cash flow.
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Fluctuations in the supply and prices of raw materials and in other costs may negatively impact our business, financial condition or results of operations.
The unavailability or increased prices of raw materials could have a material adverse impact on our business, financial condition or results of operations. We use a variety of specialty and commodity chemicals in our formulation processes, and such formulation operations depend upon obtaining adequate supplies of raw materials on a timely basis from numerous suppliers in various countries. We typically purchase our major raw materials under existing supply agreements or on an as-needed basis from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, the financial stability of our suppliers, new laws or regulations, protectionist nationalistic trade policies and practices, changes in exchange rates and worldwide price levels. In some cases, we are limited in our ability to purchase certain raw materials from other suppliers due to minimum purchase requirements contained in certain of our supply agreements. Our responsible sourcing practices could also affect the sourcing, pricing, and availability of certain conflict minerals we use in our products. If only a limited pool of our suppliers can demonstrate that they are compliant with the applicable rules, we may not be able to obtain the conflict minerals we need in sufficient quantities or at competitive prices. Further, if we are unable to price our products competitively to timely reflect volatility in prices of raw materials or if we do not accurately estimate the amount of raw materials needed for a specific geographic region, our margins could be adversely affected.
In addition, if the costs of energy, shipping or transportation increase and we are unable to pass along those costs to our customers, our profit margins and working capital would be adversely impacted. Higher commodity and energy prices could result from volatility caused by market fluctuations, supply and demand, currency fluctuations, production and transportation disruptions, climate change and weather conditions and other world events. Passing along these costs to our customers by increasing our prices could result in long-term sales declines or loss of market share if our customers were to find alternative suppliers or choose to reformulate their consumer products to use fewer ingredients which could in turn have an adverse long-term impact on our business, financial condition or results of operations.
LEGAL & REGULATORY RISKS
Intellectual Property
If we are unable to protect our intellectual property rights, our business, financial condition or results of operations could be adversely affected.
Protection of our proprietary processes, methods, formulations and other technology is important to our business. To protect our intellectual property rights, we generally rely on patent, trade secret, trademark and copyright laws of the U.S. and certain other countries in which our products are manufactured or sold as well as nondisclosure and confidentiality agreements. The laws of other countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Failure to protect our existing intellectual property rights, domestically or internationally, may result in the loss of valuable technologies and our competitors offering similar products, potentially resulting in the loss of one or more competitive advances and decreased sales and/or market shares. Additionally, we rely in some cases upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality agreements with our employees and third-parties to protect our intellectual property, our confidentiality agreements could be breached and may not provide meaningful protection for, or adequate remedies to protect, our trade secrets or proprietary manufacturing expertise in the event of unauthorized use or disclosure of information.
Further, protecting against the unauthorized use of our products, technology and other proprietary rights is difficult, time-consuming and expensive, and we cannot be certain that the steps we are taking will prevent or minimize the risks of such unauthorized use. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could also result in substantial costs and diversion of resources, which could significantly harm our results of operations and reputation.
Additionally, we could face infringement claims from our competitors or others alleging our processes or products infringe on their rights. Any settlement or adverse judgment resulting from litigation could result in the payment of material damages and/or require us to change our processes, redesign a certain product partially or completely, stop producing it entirely, obtain a license to continue our use, or potentially be restricted in our use of certain aspects. Further, there is a risk that licensing opportunities may not be available to us on acceptable terms, if at all. Regardless of their merit, infringement claims can be time-consuming, divert the time and attention of our management and technical personnel, and result in material litigation costs.
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Finally, our exposure to risks associated with the use of intellectual property may increase as a result of acquisitions, as we would have an unavoidable lower level of visibility into the development process of any newly acquired technologies and the steps taken to safeguard against the risks of infringing the rights of third parties.
Global Regulations
Changes in our effective tax rate, tax cost and tax liabilities could adversely affect our financial condition, results of operations and liquidity.
In 2023, approximately 75% of our net sales were generated outside of the U.S. Given the global nature of our business, a number of factors may increase our effective rate and tax cost, including:
•the geographic mix of jurisdictions in which profits are earned and taxed;
•the statutory tax rates and tax laws in the jurisdictions in which we conduct business;
•the resolution of tax issues arising from tax examinations by various tax authorities; and
•the valuation of our deferred tax assets and liabilities.
Additionally, tax laws, regulations, and administrative practices in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. For example, several countries where we do business have announced plans to implement global minimum tax regimes based on the Organization for Economic Cooperation and Development's Anti-Base Erosion and Profit Shifting Project. The final form of these global minimum tax regimes is uncertain but is expected to change various aspects of the existing international legal framework under which our global tax obligations are determined. While the ultimate impact of these changes is unknown, there can be no assurance that they will not materially and adversely affect our business, financial condition, results of operations and cash flows.
Moreover, we are regularly examined by various tax authorities throughout the world. The final resolution of tax audits and any related litigation may differ from our historical provisions and accruals resulting in additional tax liabilities, which may have an adverse impact on our tax provision, net income and cash flow. Although we believe our tax estimates and accruals are reasonable, there can be no assurance that the tax authorities will agree and we may have to engage in litigation to achieve the results reflected in such estimates and accruals, which may be time-consuming and the costs incurred significant. There can be no assurance that we will be successful or that any final determination will not materially and adversely affect our business, financial condition, results of operations and cash flows.
Chemical manufacturing is inherently hazardous and may result in accidents, which may disrupt our operations or expose us to significant losses or liabilities.
The hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes are inherent in our operations as our research and development, manufacturing, formulating and packaging activities involve the use of hazardous materials and the generation of hazardous waste. We cannot eliminate the risk of accidental contamination, discharge or injury resulting from those materials. Also, our suppliers or contract manufacturers may use and/or generate hazardous materials in connection with producing our products. We may be required to indemnify our suppliers, contract manufacturers or waste disposal contractors against damages and other liabilities arising out of the production, handling or storage of our products or raw materials or the disposal of related wastes. Potential risks include explosions and fires, chemical spills and other discharges or releases of toxic or hazardous substances or gases, or pipeline and storage tank leaks and ruptures. Those hazards may result in personal injury and loss of life, damage to property and contamination of the environment, all or any of which may result in a suspension of operations and the imposition of civil or criminal fines, penalties and other sanctions, cleanup costs, and claims by governmental entities or third-parties. As we are dependent on the continued operation of our production facilities (including third-party manufacturing on a tolling basis), the loss or shutdown of operations over an extended period could have a material adverse effect on our financial condition or results of operations.
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Because our operations currently use and generate, and have historically used and generated, hazardous materials and waste, we are subject to regulatory oversight and investigation, remediation, and monitoring obligations at our current and former Superfund sites, as well as third-party disposal sites, under federal laws and their state and local analogues, including the Resource Conservation and Recovery Act (RCRA), the Clean Water Act, the Clean Air Act, and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and analogous foreign laws. We are also subject to ongoing obligations at active sites in the U.S. and are conducting closure activities pursuant to the RCRA and CERCLA at several of our sites in the U.S. The costs and liabilities associated with these obligations and activities may be substantial and, to the extent not covered by insurance, may materially impact our financial condition.
Our products are subject to numerous, complex government regulations, and compliance with these regulations could require us to incur additional costs or to reformulate or discontinue certain of our products.
Our products are subject to numerous, complex federal, state, local and foreign customs regulations, imports and international trade laws, export control, antitrust laws, environmental and chemicals manufacturing, global climate change, health and safety requirements and zoning and occupancy laws that regulate manufacturers generally or, more particularly, govern the importation, promotion and sale of our products, the operation of our production and warehouse facilities and our relationship with our customers, suppliers, employees and competitors.
Our products and manufacturing processes are also subject to numerous regulations and ongoing reviews by certain governmental authorities. Governmental, regulatory and societal demands for increasing levels of product safety, such as chemical composition, packaging and labeling, and environmental protection, such as the management, movement and disposal of hazardous substances, are resulting in increased pressure for more stringent regulatory control with respect to the chemical industry. Such regulations include the European Union's REACH (Registration, Evaluation, Authorization, and Restriction of Chemicals), which has been a continuing source of compliance obligations and restrictions on certain chemicals, REACH-like regimes, which have now been adopted in several other countries, the E.U. Poison Center Notification (PCN) and the U.S. Toxic Substances Control Act (TSCA). The TSCA, for example, was amended in June 2016 to expand the authority of the U.S. Environmental Protection Agency (EPA) to evaluate and regulate new and existing chemicals and this mandate creates uncertainty about whether existing chemicals of importance to our business may be designated for restriction and whether any new chemical approval process may become more difficult and costly. U.S. regulations related to the use in our products of certain conflict minerals, and similar laws in other jurisdictions, such as the E.U. Conflict Minerals Regulation, also apply to us. All of these regulations and these types of changes in our regulatory environment, particularly in, but not limited to, the U.S., the E.U. and China, may require us to re-design our products or supply chain to ensure compliance with the applicable standards or use different types or sources of materials, which could have an adverse impact on the efficiency of our manufacturing process, the performance of our products, add greater testing lead-times for product introductions or other similar effects. In turn, these changes could materially alter our market share and reputation, or otherwise have a material adverse effect on our business, financial condition and results of operations.
In addition, we have incurred, are incurring and will incur in the future, costs and capital expenditures to comply with environmental, health and safety laws and regulations. For example, we have several product lines that rely on lead-based solder and many others that historically did so. Legal claims have been brought alleging harmful exposures or contamination as a result of lead-based solder, and it is possible that we may face additional claims in the future. We are also currently involved in various environmental investigations due to historic operations. Liability under some environmental laws relating to contaminated sites can be joint and several and imposed retroactively, regardless of fault or the legality of the activities that gave rise to the contamination. Some of our formulating and manufacturing facilities have an extended history of chemical formulating and manufacturing operations or other industrial activities, and contaminants have been detected at some of our sites and offsite disposal locations. Ultimate environmental costs and liabilities are difficult to predict and may significantly vary from current estimates. To the extent available, we maintain what we believe to be adequate insurance coverage. However, there can be no assurance that we won’t incur losses beyond the limits or outside the terms of such coverage, or that we will be able to maintain adequate insurance at rates we consider reasonable. In addition, the discovery of additional contaminants, the inability or failure of other liable parties to satisfy their obligations, the imposition of additional cleanup obligations, or the commencement of related third-party claims could result in additional material costs and negatively impact our financial condition or results of operations.
Our offshore oil industry products are subject to the hazards inherent in the offshore oil production and drilling industry, and we may incur substantial liabilities or losses as a result of these hazards.
In the offshore oil industry, we are subject to the hazards inherent in the offshore oil production and drilling industry. Our offshore business produces water-based hydraulic control fluids for major oil companies and drilling contractors to be used for potentially hazardous offshore deepwater production and drilling applications. Offshore deepwater oil production and drilling
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are subject to hazards that include blowouts, explosions, fires, collisions, capsizing, sinking and damage or loss to pipeline, subsea or other facilities from severe weather conditions. Those hazards could result in personal injury and loss of life, severe damage to, or destruction of, property and equipment, pollution or environmental damage and suspension of operations. A catastrophic occurrence at a location where our products are used may expose us to substantial liability for personal injury, wrongful death, product liability or commercial claims. To the extent available, we maintain insurance coverage that we believe is customary in this industry. Such insurance does not, however, provide coverage for all liabilities, and there can be no assurance that our insurance coverage will be adequate to cover claims that may arise, or that we will be able to maintain adequate insurance at rates we consider reasonable. The occurrence of a significant offshore deepwater oil production or drilling event that results in liability to us that is not fully insured could have a material adverse effect on our financial condition or results of operations.
Certain of our products may be subject to various export control regulations and exports may require a license from the U.S. Department of State or the U.S. Department of Commerce.
As a global company, we are subject to various laws and regulations relating to the export of products, services and technology. In the U.S., these laws include, among others, the U.S. Export Administration Regulations (EAR), administered by the U.S. Department of Commerce’s Bureau of Industry and Security, and the International Traffic in Arms Regulations (ITAR), administered by the U.S. Department of State’s Directorate of Defense Trade Controls. Some of our products or technology may have military or strategic applications governed by the ITAR or represent so-called “dual use” items governed by the EAR. Although the majority of our relevant products are currently subject to automatic approval and do not require government licenses to be exported to certain jurisdictions or persons, this may change in the future if these laws and regulations are amended or if new laws or regulations are adopted. Any failure to comply with these laws and regulations could result in civil or criminal penalties, fines, investigations, adverse publicity and restrictions on our ability to export our products, any of which could result in a material adverse effect on our business, financial condition or results of operations.
Failure to comply with anti-corruption laws could subject us to penalties and damage our reputation.
Our international operations are subject to the U.S. Foreign Corrupt Practices Act of 1977, the United Kingdom Bribery Act 2010 and similar anti-bribery laws in other jurisdictions which generally prohibit companies and their intermediaries from making improper payments for the purpose of obtaining or retaining business. Under these laws, companies may also be held liable for actions taken by third-parties acting on their behalf, such as strategic or local partners or representatives. Our policies mandate compliance with these anti-bribery laws, including the requirements to maintain accurate information and internal controls. However, in certain of the jurisdictions where we conduct business, we face a heightened risk for corruption, extortion, bribery, pay-offs, theft and other improper practices. There can be no assurance that our internal control policies and procedures will protect us from acts committed by our employees or agents. Failure by us or our intermediaries to comply with applicable anti-corruption laws may result in civil and/or criminal penalties or other sanctions, including disgorgement of profits and contract suspensions or cancellations, any of which could damage our reputation and have a material adverse effect on our business, financial condition or results of operations.
Failure to comply with international trade restrictions and economic sanctions laws and regulations could adversely affect our business, financial condition or results of operations.
We have operations, assets and/or generate sales in countries all over the world, including countries that are or may become the target of trade and economic restrictions from the U.S. and/or other countries, which we refer to collectively as “Economic Sanctions Laws.” Economic Sanctions Laws are complex and change with time as international relationships and confrontations between and among nations evolve. For example, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the U.S. State Department monitors trade restrictions and economic sanctions and impose penalties upon U.S. persons and entities and, in some instances, non-U.S. entities, for conducting activities or transacting business with certain countries, such as recently Russia and Belarus in the context of the Russia-Ukraine conflict as well as governments, entities, or individuals subject to Economic Sanctions Laws. We have established policies and procedures to assist with our compliance with Economic Sanctions Laws, and we believe we do not unlawfully conduct business in any sanctioned countries. However, given the breadth of our international operations and the scope of our sales globally, including via third-party distributors over whom we may have limited or no control, coupled with the complexity and ever-changing nature of Economic Sanctions Laws driven by geopolitical events, there can be no assurance that our controls and procedures have prevented in the past or will prevent at all times in the future a violation of these laws. Failure to comply with Economic Sanctions Laws, or allegations of such failure, could lead to investigations and/or actions being taken against us which could materially and adversely affect our reputation and have a material adverse effect on our business, financial condition or results of operations.
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Changes in data privacy and data protection laws and regulations, or any failure to comply with such laws and regulations, could adversely impact our business.
Our global business is subject to a wide variety of domestic and foreign laws and regulations designed to protect the privacy of customers, employees and other third parties, including, without limitation, the General Data Protection Regulation (GDPR) in the E.U. and the California Consumer Protection Act (CCPA) in the U.S. Additional states, as well as foreign jurisdictions, have enacted or are proposing similar data protection regimes, resulting in a rapidly evolving and uncertain governing landscape. Complying with these various laws and regulations is difficult and could require us to incur substantial costs or change our business practices in a manner adverse to our business. In addition, there can be no assurance that our controls and procedures enable us to be fully compliant. Any failure, or perceived failure, by us to comply with the GDPR, the CCPA or any other applicable regulatory requirements or orders, within the E.U., the U.S. or elsewhere, could result in proceedings or actions against us by governmental entities or individuals; subject us to significant fines, penalties, and/or judgments; require us to change our business practices; limit the offering of our products and services in certain countries; or otherwise adversely affect our business, as we would be at risk to lose both customers and sales, and incur substantial costs.
FINANCIAL RISKS
Our net sales and gross profit vary depending on our product, customer and geographic mix for any given period which makes it difficult to forecast future operating results.
Our net sales and gross profit vary among our products, customers and markets, and therefore may be different in future periods from historic or current periods. Overall gross profit margins in any given period are dependent in large part on the product, customer and geographic mix reflected in that period’s net sales. Market trends, competitive pressures, commoditization of products, increased component or shipping costs, regulatory conditions and other factors may also result in reductions in revenue or pressure on the gross profit margins in a given period. The varying nature of our product, customer and geographic mix between periods has historically materially impacted our net sales and gross profit between periods during certain recessionary times and may lead to difficulties in measuring the potential impact of market conditions, regulatory changes and/or other factors on our business. As a result, we may be challenged in our ability to forecast our future operating results.
Unfavorable currency exchange rate fluctuations could adversely affect our results of operations.
The reporting currency for our financial statements is the U.S. dollar. However, a large portion of our net sales (approximately 75% in 2023) are generated from our non-U.S. operations, which means that we have net sales, substantial assets, liabilities and costs denominated in currencies other than the U.S. dollar. To prepare our Consolidated Financial Statements, we must translate those sales, assets, liabilities and expenses into U.S. dollars at then-applicable exchange rates. Consequently, increases and decreases in the value of the U.S. dollar versus other currencies will affect the amount of these items in our Consolidated Financial Statements, even if their value has not changed in their original currency. These translations could result in significant changes to our results of operations from period to period. Additionally, volatility in currency exchange rates may adversely impact our financial condition, cash flows and liquidity. There can be no assurance that the techniques we employ to mitigate the impact of exchange rate fluctuations, including foreign currency hedging activities, will be effective risk management strategies, and our financial condition or results of operations could be adversely impacted.
Our Credit Agreement and other debt agreements contain restrictions that limit our flexibility in operating our business.
Our Credit Agreement, the indenture governing our 3.875% USD Notes due 2028 and other debt agreements governing our outstanding debt contain restrictive clauses, which may limit our operational and financial flexibility, including, among other things, our ability to grant liens, pay cash dividends, enter new lines of business, repurchase our shares of common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. In addition, our Credit Agreement contains customary remedies, including the right of the lenders to take action with respect to the collateral securing outstanding loans, that would apply should we default or otherwise be unable to satisfy our debt obligations. To the extent an event of default occurs, we may not be able to borrow under the Credit Agreement and therefore, may not be able to pursue certain business initiatives or certain transactions that might otherwise be advantageous, meet extraordinary capital needs, finance future operations, plan for or react to market conditions, or otherwise take actions that we believe are in the best interest of our businesses. As a result, our business prospects, financial condition or results of operations may be adversely impacted.
In addition, our Credit Agreement requires that we meet certain financial ratios, including a first lien net leverage ratio based on net debt to EBITDA. EBITDA is a non-GAAP measure of liquidity defined in the Credit Agreement. Our ability to meet these financial covenants depends upon the future successful operating performance of our businesses. If we fail to comply with the Credit Agreement covenants, we would be in default under our term loan and revolving credit facilities and, unless we were to
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obtain waivers from our lenders, the maturity of our outstanding debt could be accelerated, which could adversely impact our results of operations, financial position and cash flows.
We and our subsidiaries may incur significant additional indebtedness in the future, which would result in additional restrictions upon our business and impact our financial condition.
Our Credit Agreement provides for senior secured credit facilities in an initial aggregate principal amount of $1.53 billion, consisting of term loans B-2 of $1.15 billion maturing in 2030 and a revolving facility of $375 million maturing in 2027. At December 31, 2023, we had $1.15 billion outstanding under the term loans and full availability of our unused borrowing capacity of $369 million, net of letters of credit, under the revolving facility. We and our subsidiaries may incur significant additional indebtedness in the future. Although our Credit Agreement and the indenture governing our 3.875% USD Notes due 2028 contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and indebtedness incurred in compliance with these restrictions could be substantial. In addition, subject to specified conditions, without the consent of the then-existing lenders, we may add certain incremental term loans or revolving credit facilities, or increase commitments under our revolving credit facility, by up to the sum of (x) the greater of (i) $460 million and (ii) 100% of our consolidated EBITDA, less certain amounts of indebtedness, and (y) an unlimited amount of secured or unsecured incremental debt if, on a pro forma basis, our total first lien net leverage ratio does not exceed certain levels (as described in the Credit Agreement).
Any significant indebtedness incurred by us or our subsidiaries could have the following material consequences:
•require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund acquisitions, working capital, capital expenditures, dividends, research and development efforts and other general corporate purposes;
•expose us to the risk of increased interest rates as certain of our borrowings include instruments with variable rates of interest;
•increase our cost of borrowing;
•increase our vulnerability to general adverse economic and industry conditions;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
•place us at a competitive disadvantage compared to less-leveraged competitors or competitors with comparable debt governed by more favorable terms.
We may also enter into additional debt transactions or credit facilities, including equipment loans, working capital lines of credit, senior notes and other long-term debt, which may increase our indebtedness and result in additional restrictions upon our businesses. In addition, major debt rating agencies regularly evaluate our debt based on a number of factors, including our degree of leverage. There can be no assurance that we will be able to maintain our existing debt ratings, and failure to do so could adversely affect our cost of funds, liquidity and access to capital markets.
Changes in interest rates and exchange rates would increase the cost of servicing our debt and impact our results of operations and financial condition.
In order to mitigate our exposure to interest rate and foreign currency risks, we entered into interest rate and cross-currency swaps covering 100% of our outstanding term loans, effectively converting them from U.S. dollar denominated debt obligations into fixed-rate euro-denominated debt through the term of the swap agreements. As of December 31, 2023, swaps relating to approximately $390 million in notional value mature in January 2025 and approximately $760 million in December 2028. If we are unable to renew or elect not to replace these swaps, the cost of servicing our term loans may increase due to fluctuations in interest rates, currency values and/or currency exchange rates, which could reduce our profitability and cash flows and have a material adverse effect on our financial condition.
Any future impairment of our tangible or intangible long-lived assets may materially affect our results of operations.
As a result of our historical acquisitions, as of December 31, 2023, we had approximately $3.22 billion of intangible assets and goodwill. Under GAAP, we review our intangible assets and long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For example, considering Graphics Solutions' lower than expected results, we conducted an interim impairment test on this reporting unit in the third quarter of 2023 which resulted in an impairment charge of $80.0 million. Other indicators that may signal that an asset has become impaired include changes in our strategy for our overall business or use of acquired assets, unexpected negative industry or economic trends, decreased market
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capitalization relative to net book values, prolonged decline in the value of our stock price, unanticipated competitive activities, change in consumer demand, loss of key personnel and/or acts by governments and judicial courts. To the extent any of our acquired assets do not perform as anticipated, the value of such assets may be negatively affected. As a result, we may be required to record impairment charges, which could be substantial and negatively impact our results of operations and financial position.
GENERAL RISKS
If we experience a significant disruption in our information technology systems or if we fail to implement new systems and software successfully, our business operations and financial condition could be adversely affected.
We depend on information technology systems throughout the Company to, among other functions, control our manufacturing processes, process orders and bill, collect and make payments, interact with customers and suppliers, manage inventory and otherwise conduct business. We also depend on these systems to respond to customer inquiries, implement our overall internal control processes and maintain records of our property, plant and equipment. The failure of our information technology systems to perform as we anticipate, including as a result of significant network or power outages, could disrupt our business and result in transaction errors, processing inefficiencies and the loss of sales and customers. As we upgrade or change systems, we may also experience interruptions in service, loss of data or reduced functionality and other unforeseen material issues, which could adversely impact our ability to provide quotes, receive and fulfill customer orders and otherwise run our business in a timely manner. As a result, our results of operations could be adversely affected.
Material cybersecurity-related events may materially disrupt our operations and harm our reputation and results of operations.
Information technology security threats, including security breaches, computer malware, cyber-attacks and other unauthorized access attempts are increasing, in both frequency and sophistication. Any such disruption, if successful, could result in data leaks or otherwise compromise confidential, proprietary and/or business critical information, cause a disruption in our operations or harm our reputation and results of operations. As previously announced, we have in the past experienced a cyber intrusion and may in the future be subject to additional intrusion events. There can be no assurance that the controls and procedures that we put in place will be sufficient or adequate to protect us. Further, as cyber threats are continually evolving, we may be required to devote additional resources to modify or enhance our systems in the future. Any breaches or compromises of data, and/or misappropriation of information resulting from such disruptions could result in violation of privacy and other laws, litigation, fines, negative publicity, loss of investor confidence, lost sales, business delays, indemnity obligations and/or material costs not covered by insurance, any of which could have a material adverse effect on our business, financial condition or results of operations.
Corporate responsibility, specifically related to ESG matters, may impose additional costs and expose us to new risks.
Increasing focus on ESG matters requires that we devote significant time and resources on ESG tracking and reporting, including the continuous monitoring of various and evolving standards and progress toward our published sustainability goals. Certain organizations, which provide corporate governance and other risk information to stockholders, have developed, and others may in the future develop, scores and ratings to evaluate companies based upon their ESG metrics and disclosures. Certain investors, particularly institutional investors, use these scores to benchmark companies and make investment and/or voting decisions. In this rapidly evolving ESG disclosure context, we may face reputational risk in the event we don't successfully execute our ESG strategy and/or if our ESG disclosures do not meet the expected standards or requirements set by our constituencies.
Further, as climate change and other global environmental concerns increase, changes in environmental and climate laws or regulations, in the U.S. and throughout the world, could lead to multiple disparate standards, in the U.S. and in foreign countries in which we operate, that may change over time, which could result in significant revisions to our methodologies for reporting ESG data, previously reported ESG metrics, our current goals, reported progress in achieving such goals, or our ability to achieve such goals in the future. Evolving environmental and climate laws or regulations could also lead to new or additional investment in product designs, incremental operating expenses and increased environmental expenditures in order to ensure compliance. We expect these ESG disclosure and regulatory trends to continue, and the ultimate cost related to reporting and, where required, compliance could be material.
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We have numerous equity instruments outstanding that could require the future issuance of additional shares of common stock, which issuance could result in significant dilution of ownership interests and have an adverse effect on our stock price.
Under our 2013 Plan, 15,500,000 shares of our common stock were initially reserved for issuance in connection with the vesting of equity-based awards to be granted to our officers, other employees and directors. The issuance of additional shares upon satisfaction of the applicable vesting conditions of these grants could result in a stockholder's percentage ownership being diluted. Specifically, at December 31, 2023, the following equity-based awards were outstanding:
•3,872,289 RSUs with each RSU representing a contingent right to receive one share of our common stock or, for performance-based RSUs, multiple shares depending upon the underlying performance metrics and our performance during the applicable performance period; and
•384,685 options which, once vested, are exercisable to purchase shares of our common stock, on a one-for-one basis, at any time at the option of the holder.
We may also issue additional shares of our common stock, or other securities that are convertible into or exercisable for our common stock, in connection with future acquisitions, for capital raising purposes or for other business purposes; which issuances could also result in significant dilution of ownership interest.
Volatility of our stock price could adversely affect us and our stockholders.
Our stock price may experience substantial price volatility as a result of many factors, including, without limitation, coverage or sentiment in the media or the investment community; speculation; announcement of acquisitions or divestitures; quarterly financial results and comparisons to estimates by the investment community or financial outlook provided by us; issuance of additional debt or equity; changes in key personnel or business strategy; material litigation or governmental investigations; and expectations regarding capital allocation, including any future shares repurchases and/or any future dividend payments, or any determination to cease repurchasing stock or paying dividends. General or industry specific market conditions, stock market performance or macroeconomic and geopolitical factors unrelated to our performance may also affect the price of our stock. Further, in the past, market fluctuations and price declines in a company's stock have led to securities class action litigation, which could have a substantial cost and divert management time and resources regardless of their outcome.
Future issuances or sales of our common stock may depress the price of our common stock.
We cannot predict the size of future issuances of our shares of common stock or the effect, if any, that future issuances or sales of our shares will have on the market price of our common stock. Sales of substantial amounts of our shares, including sales by our executive officers, directors or significant stockholders, and shares issued in connection with any acquisition, or the perception that such sales or issuance could occur, may adversely affect prevailing market prices for our common stock. Decline in the stock price of our common stock may also make it more difficult for us to finance acquisitions with shares of common stock and/or sell additional equity or equity-related securities in future offerings at a time and price we deem necessary or appropriate.
We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of our common stock.
Our Board of Directors is authorized to create and issue one or more series of preferred stock, and to determine the number of shares constituting the series as well as the designations, powers, preferences, rights, qualifications, limitations and restrictions of each series, including dividend rights, conversion or exchange rights, voting rights, redemption rights and terms and liquidation preferences, without stockholder approval. The creation and issuance of one or more series of preferred stock could affect the rights of our common stockholders or reduce the value of our common stock they hold. For example, our Board could, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power of our common stockholders or have certain anti-takeover effects.
There can be no assurance that we will continue to declare dividends.
Future dividends are subject to declaration by our Board of Directors in its sole discretion. To the extent the Board determines to pay dividends on our common stock in the future, we will pay dividends at the times and in the amounts as the Board determines appropriate. The Board may, however, reduce or discontinue entirely the payment of such dividends at any time. Paying dividends will depend upon many factors, including our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements and access to capital markets, covenants associated with our Credit Agreement, the indenture governing our 3.875% USD Notes due 2028 and/or other debt obligations, contractual, legal, tax and
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regulatory restrictions and other factors that the Board may deem relevant. Therefore, there can be no assurance that we will have the ability and/or sufficient funds to pay dividends or as to the amounts of these dividends, if any.
If we fail to establish and maintain adequate internal controls over financial reporting, we may not be able to report our financial results in a timely and reliable manner, which could harm our business and adversely impact our stock price.
We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with GAAP. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any material changes and material weaknesses in those internal controls. We have in the past experienced, and in the future may experience again, material weaknesses and potential problems in implementing and maintaining adequate internal controls as required by the SEC. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. If we cannot provide financial reports in a timely and reliable manner, or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and our stock price could drop significantly.
We are dependent on cash flows from our operating subsidiaries to fund our debt obligations, capital expenditures and ongoing operations.
We do not have any material assets or operations other than ownership of equity interests of our operating subsidiaries. Our operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends, if any, is highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans, in particular from MacDermid, Incorporated. As a result, we are dependent on the income generated by our subsidiaries, and to some degree on our ability to repatriate earnings from our foreign operations effectively, to meet our debt service obligations, expenses and operating cash requirements or to pay dividends or repurchase shares of our common stock. For example, the amount of dividends, if any, which may be paid to us by our subsidiaries depends on many factors, including our subsidiaries' results of operations and financial condition, limits on dividends or otherwise under applicable law and their constitutional documents, documents governing their indebtedness, and other factors which may be outside our control. If our subsidiaries are unable to generate sufficient cash flows or if we are unable to repatriate earnings effectively, or if we are unable to do so without incurring substantial costs, we may be unable to service our debt obligations, pay our expenses and/or meet our operating cash requirements or to make future dividend payments or shares repurchases, if any.
Supply Chain and business disruptions, including those related to climate change, could have a material impact on our future sales and financial condition, and may not be covered by insurance.
We believe our customers rely on our ability to timely deliver products of constant quality which are integral to their manufacturing processes and overall product performance. Our ability to meet these expectations relies on continuous access to multiple sources of raw materials and working closely with our suppliers and contract manufacturers to help ensure continuity of supply while maintaining high quality.
Natural or human-induced disasters, such as earthquakes, tsunamis, floods, hurricanes, cyclones or typhoons, fires, power or water shortages, telecommunications failures, terrorist acts, civil unrest, conflicts or wars, and epidemics, pandemics or other health crises, such as the COVID 19 pandemic, could seriously harm our operations as well as the operations of our customers and suppliers. The negative impacts of any such events on our business operations and demand for our offerings will depend on future developments and actions taken in response to such events which may be outside our control, highly uncertain, and cannot be predicted at this time. Among other impacts, such events could limit our ability to access the quantity and quality of raw materials we need and/or increase the price of these materials as worldwide supply and demand may be seriously impacted. In addition, extreme weather, natural disasters or other unexpected events could result in physical damage to, and closure of, one or more of our manufacturing or sale facilities, temporary or long-term disruption in our supply chain and/or disruption of our ability to deliver products and services to our customers and/or increase the risk of chemical spills, other discharges or releases of toxic or hazardous substances or pipeline ruptures, all of which could in turn adversely affect our operations, financial condition, reputation and/or stock price. Current or future insurance arrangements may not provide protection for costs that may arise from such events, particularly if these are catastrophic in nature or occur in combination. In addition, as climate change, low carbon and other ESG-related treaties, initiatives and programs are adopted and implemented throughout the world, there can be no assurance that future material capital expenditures or incremental operating expenses will not be required in order to ensure compliance. We believe climate change serves as a risk multiplier increasing both the frequency and severity of natural disasters that may affect our worldwide business operations. Further, the long-term effects of climate change on general economic conditions are unclear, and changes in the supply or demand of our products, or available sources of the raw materials we use in our manufacturing processes, may affect the availability or cost of our products.
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Any long-term disruption in our ability to timely deliver our products and services to our customers could have a material adverse effect on our business, results of operations and financial condition.
We are governed by Delaware law, which has anti-takeover implications.
We are governed by Delaware law, the application of which may have the effect of deterring hostile takeover attempts or a change in control. In particular, Section 203 of the Delaware General Corporation Law imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15% or more of our common stock. A Delaware corporation may opt out of that provision either with an express provision in its original certificate of incorporation or in an amendment to its certificate of incorporation or by-laws approved by its stockholders. We have not opted out of this provision. Section 203 could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us, which may negatively affect our stock price.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Cybersecurity is a part of our risk management framework, and we have established policies and processes designed to manage cybersecurity defenses, controls and programs, including ISO 27001 compliant security procedures. Our processes are evaluated by expert cybersecurity firms through various security assessments and audits, which help us identify and mitigate cyber-related risks to our businesses. We also engage with providers of information systems as part of our continuing efforts to enhance the effectiveness of our security measures. Our vendor risk management (VRM) program, through which we screen external providers, helps us identify and evaluate known risks associated with these third parties.
Our information security program is led by our Chief Information Security Officer (CISO) who manages a global information security team responsible for assessing and mitigating cyber-related threats. The cybersecurity expertise of our CISO and his team includes information security management roles, hands-on cyber incident response experience, forensic and network intrusion investigations and security risk assessments.
Our CISO regularly reports to senior management on cybersecurity risks and incidents, including the nature of threats, the state of our defense and detection capabilities, incident response plans and employee training activities, as applicable. In addition, as part of the Board’s oversight of the Company’s risk management program, our CISO provides periodic updates to the Board on the state of our cybersecurity management program in addition to, when needed, ad hoc information about any significant cybersecurity matters and/or strategic risk management decisions.
Item 2. Properties
At December 31, 2023, our physical presence included 53 manufacturing sites, of which 12 included research facilities, and 10 stand-alone research centers. Of our manufacturing facilities, 8 were located in the U.S. with the remaining international facilities located primarily in Asia and Europe. We owned 25 of our manufacturing facilities, of which 6 included research facilities, and 4 stand-alone research centers. In addition to the remaining manufacturing and research facilities, we leased the majority of our office, warehouse and other physical locations. Among our two segments, Electronics and Industrial & Specialty utilize 21 and 19 of our manufacturing facilities, respectively, with the remaining 13 manufacturing facilities being shared between the two segments.
We believe that all of our significant facilities and equipment are in good condition, well-maintained, adequate for our present operations and utilized for their intended purposes. See Note 6, Property, Plant and Equipment, Net, to the Consolidated Financial Statements included in this 2023 Annual Report for amounts invested in land, buildings, machinery, and equipment, and Note 16, Leases, to the Consolidated Financial Statements included in this 2023 Annual Report for information about our operating lease commitments.
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Item 3. Legal Proceedings
In the ordinary course of business, we are involved in various legal disputes, investigations, claims and other legal proceedings, including, but not limited to, product liability claims, contractual disputes, premises claims, tax examinations as well as employment, environmental and health and safety matters. Where appropriate, we may establish loss contingencies for such proceedings based on an assessment of whether the risk of loss is remote, reasonably possible or probable. We also maintain insurance to mitigate certain of such risks. Although we cannot predict with certainty the ultimate resolution of the various legal proceedings, investigations and/or claims asserted against us, we believe that the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. Due to their inherent uncertainty, however, there can be no assurance as to the ultimate outcome of current or future legal proceedings, investigations or claims and it is possible that a resolution of one or more such matters could result in fines and penalties that could adversely affect our business, financial condition or results of operations.
In addition, we are involved in various claims relating to environmental matters at current and former plant sites and waste management sites. We engage or participate in remedial and other environmental compliance activities at certain of these sites. At other sites, we have 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. Based on currently available information, we do not anticipate any material losses in excess of the liabilities recorded. However, it is possible that, as additional information becomes available, the impact of an adverse determination could have a different effect. For additional information regarding environmental matters and liabilities, see Note 17, Contingencies, Environmental and Legal Matters, to the Consolidated Financial Statements included in this 2023 Annual Report.
Item 4. Mine Safety Disclosure
Not applicable.
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Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for our Common Stock
Our common stock is traded on the New York Stock Exchange under the symbol “ESI.” On February 16, 2024, there were approximately 172 registered holders of record of our common stock, par value $0.01 per share, and the closing price of our common stock was $23.86.
Dividends
We declared and paid cash dividends on our common stock of $77.4 million, $78.4 million and $61.9 million during the years ended December 31, 2023, 2022 and 2021, respectively.
On February 13, 2024, our Board declared a cash dividend of $0.08 per outstanding share of our common stock. The dividend is expected to be paid on March 15, 2024 to stockholders of record at the close of business on March 1, 2024.
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.
Performance Graph
The following graph shows a comparison of cumulative total stockholder returns for our common stock, the Standard and Poor's 500 Index and the S&P 500 Specialty Chemicals Index from December 31, 2018 through December 31, 2023, assuming a $100 investment in our common stock on December 31, 2018 and the reinvestment of all dividends thereafter.
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The stock performance shown on this graph is based on historical data and is not indicative of, or intended to forecast, possible future performance of our common stock. This performance graph and related information is not deemed to be "soliciting material" or "filed" with the SEC and should not be deemed incorporated by reference into any of our prior or future SEC filings under the Securities Act or the Exchange Act.
Equity Compensation Plan Information
The information regarding our equity compensation plans will be included in the 2024 Proxy Statement under the heading "Executive Compensation Tables - Equity Compensation Plan Information," and is incorporated by reference into this 2023 Annual Report.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
Item 6. [Reserved]
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Item 7. 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 “Financial Statements and Supplementary Data” included in Part II, Item 8 of this 2023 Annual Report and our audited Consolidated Financial Statements and notes thereto included elsewhere in this 2023 Annual Report. “Overview” and "2023 Highlights" briefly present our business and certain significant events addressed in this section or elsewhere in this 2023 Annual Report. This 2023 Annual Report should be read in its entirety for a complete description of our business and discussion of these events.
Overview
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.
Our operations are organized into two segments: Electronics and Industrial & Specialty. In 2023, we achieved net sales of $2.33 billion, to which our Electronics and Industrial & Specialty segments contributed approximately 61% and 39%, respectively.
Each of our segments is described below:
Electronics – The 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 SMT, pastes, fluxes and adhesives, join those pathways together. The segment provides specialty chemical solutions through the following businesses: Assembly Solutions, Circuitry Solutions and Semiconductor Solutions.
Industrial & Specialty – The Industrial & Specialty segment researches, formulates and sells specialty chemicals and material 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. The segment provides specialty chemical solutions through the following businesses: Industrial Solutions, Graphics Solutions and Energy Solutions.
2023 Highlights
•ViaForm Distribution Rights - On June 1, 2023, we reacquired the right to market and distribute directly (rather than through our exclusive distributor) our ViaForm® electrochemical deposition products by terminating a long-standing distribution agreement for $200 million, including $170 million paid at closing and a deferred payment of $30.0 million which was paid in the fourth quarter of 2023. Following the completion of the transaction, we now manage all aspects of the ViaForm® product line in-house, which we believe will result in a more efficient supply chain and improved customer outcomes for leading semiconductor fabricators.
•Kuprion Acquisition - On May 19, 2023, we completed the Kuprion Acquisition for $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, Inc. is a developer of next-generation nano-copper technology for the semiconductor, circuit board and electronics assembly markets.
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•Syndication of $1.15 Billion Term Loans and Debt Reduction - In December 2023, we successfully completed the syndication of $1.15 billion of new term loans B-2, which mature in December 2030. The proceeds of this transaction, together with cash on hand, were used to prepay our then existing $1.11 billion term loans B-1 and $150 million term loans A, reducing our gross debt by approximately $105 million. As a result of the swap agreements associated with the new term loans B-2, the Company's effective interest rate was approximately 3.3% at December 31, 2023 with approximately 80% of its capital structure fixed through 2028.
•Cash Dividends - During the year ended December 31, 2023, approximately $77.4 million was returned to our stockholders in the form of cash dividends.
Acquisitions
We may pursue targeted and opportunistic acquisitions in our existing or adjacent end-markets that seek to strengthen our current businesses, expand and diversify our product offerings, and enhance our growth and strategic position. We expect to achieve commercial and distribution efficiencies by expanding into related categories that can be marketed through our existing distribution channels or provide us with new distribution channels for our existing products. To the extent we pursue future acquisitions, we expect that acquisition candidates would demonstrate a combination of attractive margins, strong cash flow characteristics, niche leading positions and consumable products that generate recurring revenue. We believe the diversity of the niche end-markets we serve will enable us to continue our growth and maintain strong cash flow generation throughout economic cycles and mitigate the impact of a downturn in any single market. We will only pursue a candidate when it is deemed to be fiscally prudent and meets our acquisition criteria. We anticipate that any future acquisitions would be financed through a combination of cash on hand, availability under our Credit Agreement and/or new debt or equity offerings.
Foreign Currency Exposure
In 2023, approximately 75% of our net sales originated outside of the U.S. and were denominated in numerous currencies, including the euro, Chinese yuan and British pound. Therefore, fluctuations in foreign exchange rates in any given reporting period may positively or negatively impact our financial performance. Foreign exchange translation negatively impacted our 2023 net sales performance by approximately 1%.
In addition, our foreign subsidiaries are subject to foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions that are not in their functional currency, which is typically their local currency. As a result, our foreign subsidiaries may enter, and have entered, into foreign exchange hedges designed to protect against transaction exposures. We actively assess our hedging programs in order to mitigate foreign exchange risk exposures. This includes programs to hedge our foreign currency denominated balance sheet exposures as well as foreign currency anticipated cash flows.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates that may significantly impact our reported financial results and accompanying disclosures. We base our estimates, assumptions and judgments on historical experience, current conditions as well as other factors that we consider reasonable. Estimates relate to matters that are inherently uncertain and actual results may differ from these estimates and such differences could be material to our financial statements.
We consider the accounting estimates discussed below to be critical to the understanding of our financial statements and involve difficult, subjective or complex judgments that could potentially affect our reported results. See Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in this 2023 Annual Report for a detailed discussion of the application of these and other accounting policies.
Revenue Recognition
We recognize revenue when a customer obtains control of the products it purchased, which occurs upon shipment or delivery, when title or the risks and rewards of ownership have been passed on to the customer, our performance obligations have been fulfilled and collectability is probable. Estimates for sales rebates, incentives and discounts as well as sales returns and allowances are accounted for as reductions of revenue when the earnings process is complete. Differences between estimated expense and actual costs are typically immaterial and are recognized in earnings in the period such differences are determined.
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Most performance obligations relate to contracts with a duration of less than one year, in which we have the right to invoice the customer at the time the performance obligation is satisfied for the amount of revenue recognized at that time. Accordingly, we have elected the practical expedient available under ASC Topic 606, Revenue from Contracts with Customers, not to disclose remaining performance obligations under our contracts. We have also elected the practical expedient to expense incremental costs for obtaining contracts with terms of less than one year.
Goodwill
Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter, or when events or changes in circumstances indicate that goodwill might be impaired. Our reporting units are determined based upon our organizational structure in place at the date of the goodwill impairment test. The fair value of a reporting unit is based equally on market multiples and the present value of discounted future cash flows. The discounted cash flows are prepared based upon cash flows at the reporting unit level and involve significant judgments related to future growth rates, gross profit, operating expenses and discount rates, among other considerations, from the vantage point of a market participant.
If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, the goodwill impairment loss is calculated as the difference between these amounts, limited to the amount of goodwill allocated to the reporting unit.
During the third quarter of 2023, given the lower-than-expected results of the Graphics Solutions reporting unit, we determined that it was more likely than not that the fair value of this reporting unit was less than its carrying value. As a result, we conducted an interim goodwill impairment test which confirmed that goodwill was impaired and recorded an $80.0 million impairment charge in the Consolidated Statement of Operations to reduce the carrying value of this reporting unit to its estimated fair value. This impairment charge was primarily driven by the reduction of the expected long-term cash flows for the business due to profit margin pressures from raw material inflation across the packaging supply chain, the loss of a significant newspaper customer, and a higher WACC as compared to the assumptions used for the 2022 annual goodwill impairment test.
After recording the impairment, the carrying value of the Graphics Solutions reporting unit was equal to its estimated fair value and there have been no events or changes in circumstances that indicated that goodwill was further impaired. As of December 31, 2023, the goodwill assigned to the Graphics Solutions reporting unit was approximately $130 million. Future impairment of this reporting unit may occur if it does not achieve its expected cash flows or macroeconomic conditions result in an increase in the WACC used to estimate fair value.
In 2023, the estimated fair value of our remaining reporting units was considered to be substantially in excess of their respective carrying value.
See Note 7, Goodwill and Intangible Assets, to the Consolidated Financial Statements included in this 2023 Annual Report for additional information.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement basis and the tax basis of assets, liabilities, net operating losses and tax carryforwards. A valuation allowance is required to be recognized to reduce the recorded deferred tax asset to the amount that will more likely than not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income by jurisdiction during the periods in which those temporary differences become deductible or when carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in this assessment. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against our deferred tax assets resulting in additional income tax expense. We evaluate our valuation allowance conclusions on a quarterly basis based on available evidence and realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. Changes in our estimates of and reliance on such evidence may affect the estimate of the realization of the benefits of tax attribute carryforwards.
Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.
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Tax benefits are recognized for an uncertain tax position when we consider it is more likely than not that the position will be sustained upon examination by a taxing authority or upon completion of the litigation process. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized in the period in which they are identified.
Recent Accounting Pronouncements
A summary of recent accounting pronouncements is included in Note 3, Recent Accounting Pronouncements, to the Consolidated Financial Statements included in this 2023 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, which are each further described below, 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 2023 Annual Report and not to rely on any single financial measure to evaluate our business.
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.
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.
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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" to Adjusted EBITDA and more information about the adjustments made, see Note 22, Segment Information, to the Consolidated Financial Statements included in this 2023 Annual Report.
Results of Operations
Income from discontinued operations, net of tax 2.1 1.8 19% 0.3 (nm)
(nm) Calculation not meaningful.
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Net Sales
Net sales for 2023 decreased 8% on a reported basis, 7% on a constant currency basis and 5% on an organic basis. Electronics' consolidated results were negatively impacted by $61.5 million of pass-through metals pricing and positively impacted by $9.8 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $3.9 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and organic net sales growth:
Year ended December 31, % Change
Electronics:
Industrial & Specialty:
NOTE: Totals may not sum due to rounding.
Electronics' net sales for 2023 decreased 12% on a reported basis, 10% on a constant currency basis and 7% on an organic basis.
•Assembly Solutions: net sales decreased 11% on a reported basis and 2% on an organic basis.Pass-through metals pricing had a negative impact of 8% on reported net sales. Foreign exchange had a negative impact of 2% 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 16% on a reported basis and 14% 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 from mobile phone market customers, primarily in Asia, and a decline in the memory disk end market globally which had a negative 4% impact on organic net sales.
•Semiconductor Solutions: net sales decreased 8% on a reported basis and 11% on an organic basis.The reacquired ViaForm Distribution Rights and the Kuprion Acquisition had a positive impact of 3% on reported net sales. Foreign exchange had a negative impact of 1% 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 and precious metal based products partially offset by strong demand from power electronics customers.
Industrial & Specialty's net sales for 2023 decreased 2% on a reported basis, 2% on a constant currency basis and 2% on an organic basis.
•Industrial Solutions: net sales decreased 4% on a reported basis and 4% on an organic basis.Acquisitions had a positive impact of 1% on reported net sales. Foreign exchange had a negative impact of 1% on reported net sales. The decrease in organic net sales was primarily due to lower demand from European construction and industrial manufacturing markets partially offset by a significant equipment sale for a new production line under a multi-year
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chemistry sales agreement with an automotive customer in the third quarter of 2023 which contributed approximately 1% to organic sales.
•Graphics Solutions: net sales remained approximately flat on a reported basis and decreased 1% on an organic basis.Foreign exchange had a positive impact of 1% on reported net sales. The decrease in organic net sales was primarily due to the rationalization of lower-margin packaging customers and the loss of a large newsprint customer, partially offset by new customer wins and cost inflation driving pricing actions.
•Energy Solutions: net sales increased 15% on a reported basis and 14% on an organic basis.Foreign exchange had a positive impact of 1% on reported net sales. The increase in organic net sales was primarily due to increased global production and drilling activity and cost inflation driven pricing actions.
Gross Profit
Year Ended December 31, Change
(dollars in millions) 2023 2022 Reported Constant Currency
Gross profit:
Gross profit margin:
Electronics' gross profit for 2023 decreased 6% on a reported basis and 4% on a constant currency basis. The constant currency decrease in gross profit reflects lower net sales in most business lines, partially offset by lower raw material and logistics costs. The increase in gross margin was primarily due to recaptured margin on ViaForm Distribution Rights, lower net sales of products containing pass-through metals in our Assembly business, lower raw material prices and logistics costs.
Industrial & Specialty's gross profit for 2023 remained approximately flat on a reported basis and increased 2% on a constant currency basis. The constant currency increase in gross profit was primarily driven by lower raw material costs in the Industrial Solutions business and growth in the Energy Solutions business, partially offset by declines in the Graphics Solutions business. The increase in gross margin was primarily due to lower logistics costs and growth in our higher margin Energy Solutions business.
Operating Expenses
Year ended December 31, Change
(dollars in millions) 2023 2022 Reported Constant Currency
Selling, technical, general and administrative $ 596.8 $ 578.6 3% 4%
Goodwill impairment 80.0 — (nm) (nm)
Operating expenses as % of net sales
Selling, technical, general and administrative 25.6 % 22.7 % 290 bps 270 bps
Research and development 2.9 % 1.9 % 100 bps 100 bps
Goodwill impairment 3.4 % — % (nm) (nm)
(nm) Calculation not meaningful.
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During the third quarter of 2023, we recorded an impairment charge in our Industrial & Specialty segment of $80.0 million related to our Graphics Solutions reporting unit. See Note 7, Goodwill and Intangible Assets, to the Consolidated Financial Statements for further information.
Operating expenses for 2023 increased 19% on a reported basis and 19% on a constant currency basis. Excluding the goodwill impairment charge discussed above, operating expenses for 2023 increased 6% on a reported basis and 7% on a constant currency basis. The constant currency increase was primarily driven by $15.7 million of research and development costs associated with the purchase accounting related to the Kuprion Acquisition, higher personnel costs, $5.5 million of extinguishment costs related to the new term loans and a $5.0 million increase in travel expenses partially offset by $8.4 million of lower stock compensation expense. See Note 4, Acquisitions, to the Consolidated Financial Statements for further discussion of the research and development costs associated with the Kuprion Acquisition.
Other (Expense) Income, net
Year Ended December 31,
Interest expense, net $ (49.3) $ (51.2)
Foreign exchange gain (loss) 7.9 (5.0)
Other (expense) income, net (3.1) 2.9
Interest expense, net
Interest expense, net decreased $1.9 million driven primarily by higher interest income partially offset by the applicable interest related to the $150 million incremental term loans A, which were outstanding from June 2023 through December 18, 2023 when the term loans A were fully prepaid. See Note 11,Debt, to the Consolidated Financial Statements for further discussion of this prepayment.
Foreign exchange gain (loss)
For the year ended December 31, 2023, the fluctuations in foreign exchange gain (loss) were primarily driven by the remeasurement of intercompany loans.
Other (expense) income, net
Other expense, net for 2023 included $7.0 million of charges due to highly inflationary accounting for our operations in Turkey, $2.3 million of debt refinancing costs related to the prepayment of our then existing term loans B-1 and term loans A and $0.1 million of net losses associated with metals derivative contracts ($1.3 million of realized losses and $1.2 million of unrealized gains). Other income, net for 2022 included $2.9 million of charges due to highly inflationary accounting for our operations in Turkey and $0.3 million of net gains associated with metals derivative contracts ($1.6 million of realized gains and $1.3 million of unrealized losses). See Note 20,Other (Expense) Income, Net, to the Consolidated Financial Statements for further discussion of the highly inflationary accounting impacts and see Note 11,Debt, to the Consolidated Financial Statements for further discussion of the debt refinancing costs. The metal derivative contracts primarily relate to inventory associated with pass-through metals pricing in our Assembly Solutions business. See Note 12, Financial Instruments, to the Consolidated Financial Statements for further discussion of these derivative instruments.
Income Tax
The income tax expense for 2023 totaled $13.0 million, as compared to $85.8 million in 2022. Our tax expense for 2023 was lower than the U.S. statutory tax rate, mainly due to a one-time benefit of $34.2 million related to changing an election to credit foreign taxes from our previous position which was to deduct foreign taxes. This is comprised of a $37.3 million one-time impact of our intention to amend prior U.S. tax returns offset by $3.1 million from the net increase to valuation allowances on foreign tax credit carryforwards. In addition, the election to credit foreign taxes for the 2023 fiscal year resulted in an incremental $8.2 million of tax expense reduction. Other activity in 2023 tax expense includes a benefit from a U.S. tax deduction related to Foreign Derived Intangible Income ("FDII"), offset by current and deferred taxes based on jurisdictional mix of earnings and withholding taxes. The geographic mix of income earned by our international subsidiaries being taxed at rates different than the U.S. statutory tax rate was constant between the periods with an approximate blended rate outside the U.S. of 21%.
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The income tax expense for 2022 included current and deferred taxes based on jurisdictional earnings, withholding taxes, and the impact of U.S. global intangible low-taxed income ("GILTI") and subpart F income regimes.
For additional information see Note 10, Income Taxes, to the Consolidated Financial Statements included in this 2023 Annual Report.
Segment Adjusted EBITDA Performance
Year Ended December 31, Change
(dollars in millions) 2023 2022 Reported Constant Currency
Net income:
Adjusted EBITDA:
Net income margin:
Adjusted EBITDA margin:
Electronics' Adjusted EBITDA for 2023 decreased 12% on a reported basis and 9% on a constant currency basis. The constant currency decrease was primarily driven by lower gross profits.
Industrial & Specialty's Adjusted EBITDA for 2023 decreased 1% on a reported basis and increased 1% on a constant currency basis. The constant currency increase was primarily driven by growth in the Energy Solutions business and easing cost pressures partially offset by declines in the Graphics Solutions business.
See Note 22, Segment Information, to the Consolidated Financial Statements for the reconciliation of "Net income" to Adjusted EBITDA.
Comparison of Fiscal Years 2022 and 2021
For the comparison of fiscal years 2022 and 2021, see "Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021" in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2022 Annual Report on Form 10-K and incorporated by reference into this 2023 Annual Report.
Liquidity and Capital Resources
Our primary sources of liquidity during 2023 were the proceeds from the syndication of our new term loans B of approximately $1.15 billion, the monetization of certain interest rate swaps and cross-currency swaps as well as available cash generated from operations. Our primary uses of cash and cash equivalents were to pay approximately $1.26 billion of debt outstanding, fund the reacquired ViaFormDistribution Rights and the Kuprion Acquisition, pay dividends, pay capital expenditures and fund operations, including working capital. A portion of our interest rate swaps and cross-currency swaps associated with our term loans mature in January 2025. Expiration of these hedges could result in a material increase to interest expense. Our first significant debt principal payment of approximately $800 million is related to the maturity of our 3.875% USD Notes due 2028. In the fourth 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
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be subject to the final determination of our Board of Directors based on factors including our future earnings and cash flow generation.
For the full year 2024, we expect our capital expenditures to be between $50.0 million and $60.0 million. 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.
During 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 with available funds generated by the many subsidiaries through which we conduct business and cost-efficient access to those funds. 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 $289 million of cash and cash equivalents at December 31, 2023, $232 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:
Year Ended December 31,
Cash provided by operating activities $ 333.6 $ 295.9 $ 326.0
Cash used in investing activities $ (250.2) $ (75.2) $ (568.9)
Cash (used in) provided by financing activities $ (58.7) $ (275.6) $ 290.0
Year Ended December 31, 2023 compared to Year Ended December 31, 2022
Operating Activities
The increase in net cash flows provided by operating activities of $37.7 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
In 2023, we paid approximately $193 million in connection with the reacquired ViaForm Distribution Rights and $15.9 million in connection with the Kuprion Acquisition. In 2022, we paid we paid approximately $23 million in connection with the HSO Acquisition.
Financing Activities
In the second quarter of 2023, we borrowed $150 million of incremental term loans A under our senior credit facility to finance the reacquired ViaForm Distribution Rights. In December 2023 we received proceeds of approximately $1.15 billion from the syndication of our new term loans B-2 which were used to prepay the $1.11 billion term loans B-1 and $150 million term loans A reducing gross debt by $105 million. We paid $77.4 million of cash dividends on shares of our common stock and $7.7 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 2022, we paid $151 million in aggregate for the repurchase of shares of our common stock under our stock repurchase program, $78.4 million of cash dividends on shares of our common stock and $24.0 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."
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Pension Plans
We maintain "Domestic Pension Plans," which consist of a non-contributory domestic defined benefit pension plan and Supplemental Executive Retirement Plans (SERPs). These plans are closed to new participants and plan benefits associated with all current participants have been frozen. We also maintain "Foreign Pension Plans" in countries such as Germany and Taiwan, which include a mixture of retirement, death benefit and longevity plans, among others, all of which are deemed immaterial, individually and in the aggregate.
The expected long-term rate of return on assets assumption is developed with reference to historical returns, forward-looking return expectations, the Domestic and Foreign Pension Plans' investment allocations, and peer comparisons. We used a long-term rate of return on plan assets of 7.0% and 3.6% for our Domestic and Foreign Pension Plans, respectively, to determine our net periodic pension expense for 2023. The discount rate used to value the pension obligation was developed with reference to a number of factors, including the current interest rate environment, benchmark fixed-income yields and expected future pension benefit payments. Discount rates of 5.0% and 3.1% were established for the Domestic Pension Plan and Foreign Pension Plans, respectively, at December 31, 2023, compared to rates of 5.2% and 3.5% established for those respective plans at December 31, 2022. We evaluate the Pension Plans' actuarial assumptions on an annual basis, including the expected long-term rate of return on assets and discount rates. A one percent increase in the discount rate would increase the pension plan expense by approximately $0.8 million and decrease the pension benefit obligation by approximately $16.4 million, whereas a one percent decrease in the discount rate would decrease the pension plan expense by approximately $0.7 million and increase the pension benefit obligation by approximately $19.4 million.
Our Domestic Pension Plans' investment policies incorporate an asset allocation strategy that emphasizes long-term growth of capital and acceptable asset volatility as long as such volatility remains consistent with the volatility of the indexes of relevant markets. Our investment policies attempt to achieve a mix of approximately 93% of plan investments for liability-matching, 6% for long-term growth, and 1% for near-term benefit payments. The weighted average asset allocation of the Domestic Pension Plan was 89% fixed income holdings, 10% equity securities and derivatives and 1% cash at December 31, 2023.
The Domestic Pension Plans were underfunded by $8.2 million at December 31, 2023 compared to $16.5 million at December 31, 2022. The increase in the funding position was primarily driven by a $20.8 million return on plan assets partially offset by $8.7 million of interest costs and $4.3 million of actuarial losses due to changes in plan assumptions and experience.
The Foreign Pension Plans were underfunded by $14.8 million at December 31, 2023 compared to $14.5 million at December 31, 2022.
We are not required to make any material plan contributions in 2024. While we do not currently anticipate any, additional future material contributions may be required in order to maintain appropriate funding levels within our plans.
Financial Borrowings
Credit Facilities and Senior Notes
At December 31, 2023, we had $1.93 billion of indebtedness, net of unamortized discounts and debt issuance costs of $17.5 million, which primarily included:
•$1.15 billion of term debt arrangements outstanding under our term loans; and
•$800 million of 3.875% USD Notes due 2028.
Availability under our revolving credit facility and various lines of credit and overdraft facilities totaled $392 million at December 31, 2023 (net of $6.2 million of stand-by letters of credit which reduce our borrowing capacity).
Covenants
At December 31, 2023, we were in compliance with the debt covenants contained in the Credit Agreement and the indenture governing our 3.875% USD Notes due 2028.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to interest rate risk associated with our long-term debt and other financing commitments. At December 31, 2023, we had total debt of $1.93 billion, net of unamortized discounts and debt issuance costs of $17.5 million, including approximately $1.15 billion of variable interest rate debt based on the one-month Secured Overnight Financing Rate (SOFR).
We use interest rate swaps and cross-currency swaps designed to reduce our exposure to interest rate risk and foreign currency risk. We designated the interest rate swaps as cash flow hedges and the cross-currency swaps as net investment hedges. These swaps effectively convert our outstanding term loans under the Credit Agreement, which are U.S. dollar denominated debt obligations, into fixed-rate euro-denominated debt through the expiration of the swaps. The net result of these hedges was an interest rate of approximately 3.3% at December 31, 2023 on the term loans B-2, which could vary in the future due to changes in the euro and the U.S. dollar exchange rate. See Note 12, Financial Instruments, to the Consolidated Financial Statements included in this 2023 Annual Report for additional information.
Counterparty Risk
Outstanding financial derivative instruments expose us to credit loss in the event of non-performance by our counterparties. The credit exposure related to these financial instruments is considered in the fair values of such contracts. We review the credit ratings of our counterparties and adjust our exposure as deemed appropriate on a periodic basis. At December 31, 2023, we believe that our exposure to counterparty risk was immaterial.
Foreign Currency Risk
We conduct a significant portion of our business in currencies other than the U.S. dollar, our financial reporting currency. In 2023, approximately 75% of our net sales were generated outside of the U.S. Generally, our foreign subsidiaries use their local currency as their functional currency; the currency in which they incur operating expenses and collect accounts receivable. Our business is exposed to foreign currency risk from changes in the exchange rate primarily between the U.S. dollar and the following currencies: euro, Chinese yuan and British pound. As a result, our operating results could be affected by foreign currency exchange rate volatility relative to the U.S. dollar. We are not able to project, in any meaningful way, the possible effect of these foreign currency fluctuations on translated amounts or future earnings.
We actively assess our foreign exchange risk exposure and may enter into foreign exchange hedges designed to mitigate such risk and protect ourselves against transaction exposures. Our hedging programs include strategies to mitigate our foreign currency denominated balance sheet exposures as well as foreign currency anticipated cash flows. At December 31, 2023, the aggregate U.S. dollar notional amount of foreign currency forward contracts totaled $93.9 million. None of these foreign currency forward contracts were designated as hedges for accounting purposes. Their fair value at December 31, 2023 was a $0.7 million net current liability, and the net realized and unrealized gains on such contracts for 2023 totaled $0.5 million.
Our policies prohibit us from speculating in financial instruments for profit on exchange rate price fluctuations, from trading in currencies for which there are no underlying exposures and from entering into trades for any currency to intentionally increase the underlying exposure.
Commodity Price Risk
Some raw materials and supplies are subject to price and supply fluctuations caused by market dynamics. Our strategic sourcing initiatives are focused on mitigating the impact of commodity price risk. Although some of our commercial agreements allow us to pass on certain unusual increases in component and raw material costs to our customers in limited situations, we may not be fully compensated for such increased costs. To a lesser extent, we are also exposed to fluctuations in the prices of certain utilities and services, such as electricity, natural gas and freight.
Periodically, we employ forward metals contracts or other financial instruments to hedge commodity price or other price risks. Such contracts are generally designated as normal purchases and accounted for similar to other inventory purchases. We continue to review a full range of business options focused on strategic risk management for all raw material commodities. Any failure by our suppliers to provide acceptable raw materials or supplies could adversely affect our production schedules and contract profitability. We assess qualification of suppliers and continually monitor them to control risk associated with such supply base reliance. At December 31, 2023, the aggregate U.S. dollar notional amount of metals futures contracts, none of which were designated as hedges for accounting purposes, totaled $63.8 million. The fair value of the metals forward
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contracts at December 31, 2023 was a $1.2 million net current liability and net realized and unrealized losses on such contracts for 2023 totaled $0.1 million.
Item 8. Financial Statements and Supplementary Data
See “Index to Consolidated Financial Statements” in this 2023 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our CEO and CFO, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective at December 31, 2023.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
However, all internal control systems have inherent limitations and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate over time due to changes in conditions or the degree of compliance with our policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting at December 31, 2023, using the criteria set forth in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management believes that at December 31, 2023 our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting at December 31, 2023 has been audited by PricewaterhouseCoopers LLP, as stated in their report, which appears in this 2023 Annual Report.
Changes to Internal Control Over Financial Reporting
Based on management's evaluation (with the participation of our CEO and CFO), as required by Rule 13a-15(d) under the Exchange Act, there have been no changes in our internal control over financial reporting during the fourth quarter of the year ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Director and Officer 10b5-1 Trading Arrangements
None.
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Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
(e) In connection with his previously-announced retirement as Executive Vice President, Head of Industrial & Specialty of the Company, effective December 31, 2023 (the "Effective Date"), Michael Goralski and the Company entered into a letter agreement and release (the "Letter Agreement") pursuant to which Mr. Goralski agreed to a customary release and restrictive covenants, including non-competition and non-solicitation obligations as well as confidentiality provisions.
Pursuant to the Letter Agreement, Mr. Goralski received or will be entitled to receive, among other things: (i) regular payroll payments over a period of 12 months at his base salary in effect on the Effective Date, less applicable withholdings, deductions and offsets, if any; (ii) an annual incentive cash bonus for 2023 equal to 65% of his target bonus opportunity pursuant to the Company's annual bonus plan when such bonuses are paid to active employees of the Company; (iii) continuation of coverage under the Company’s medical and/or dental insurance plans at rates applicable to active employees until the earlier of (x) 12 months after the Effective Date, (y) the date on which he becomes eligible for Medicare, or (z) the date on which he becomes eligible for coverage of a new employer; and (iv) subject to their performance and time vesting criteria set forth therein, (x) the vesting of performance-based restricted stock units ("PRSU") awards granted in 2021 and 2022 according to their original performance targets within the performance period set forth therein; provided that with respect to the 2022 PRSUs, Mr. Goralski is entitled to receive the number of shares that would vest at the 50% level, and (y) the vesting of the tranches of the time-based restricted stock units awards granted in 2021, 2022 and 2023 that otherwise vested in February 2024 for active employees. All other equity grants to Mr. Goralski that remained unvested on the Effective Date were forfeited on the Effective Date.
A copy of the Letter Agreement is filed as Exhibit 10.19 to this 2023 Annual Report and is incorporated herein by reference. The foregoing summary of the Letter Agreement is not intended to be complete and is qualified in its entirety by reference to the text of the Letter Agreement.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
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Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item regarding the Company's executive officers, directors and Audit Committee of the Board will be included in the 2024 Proxy Statement under the headings "Executive Officers of the Company," "Proposal 1 - Election of Directors" and "Corporate Governance," and is incorporated by reference into this 2023 Annual Report.
The Company has adopted a Business Conduct and Ethics Policy applicable to all directors and employees of Element Solutions, including our CEO, CFO and Chief Accounting Officer. The Company has also adopted a Code of Ethics for Senior Financial Officers applicable, more specifically, to our CEO, CFO and Chief Accounting Officer. The Policy and the Code of Ethics are posted on the Company's website at www.elementsolutionsinc.com under “Investors – Corporate Governance – Governance Documents.” We intend to provide disclosure of any amendment to or waiver of the Policy and/or Code of Ethics on our website within four business days following the date of such amendment or waiver.
Item 11. Executive Compensation
The information required by this item will be included in the 2024 Proxy Statement under the headings "Director Compensation," "Compensation Discussion and Analysis," "Report of the Compensation Committee," "Executive Compensation Tables" and "Corporate Governance - Compensation Committee interlocks and Insider Participation," and is incorporated by reference into this 2023 Annual Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in the 2024 Proxy Statement under the headings "Security Ownership" and "Executive Compensation Tables - Equity Compensation Plan Information," and is incorporated by reference into this 2023 Annual Report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in the 2024 Proxy Statement under the headings "Corporate Governance - Certain Relationships and Related Transactions" and "Corporate Governance - Director Independence," and is incorporated by reference into this 2023 Annual Report.
Item 14. Principal Accounting Fees and Services
The information required by this item will be included in the 2024 Proxy Statement under the headings "Report of the Audit Committee" and "Proposal 4 - Ratification of Independent Registered Public Accounting Firm for 2024," and is incorporated by reference into this 2023 Annual Report.
40
Part IV
Item 15. Exhibits, Financial Statement Schedules
(A)Exhibits
Incorporated by Reference Included in this 2023 Annual Report
ExhibitNb. Exhibit Description Form File Nb. ExhibitNb. Filing Date
41
Incorporated by Reference Included in this 2023 Annual Report
ExhibitNb. Exhibit Description Form File Nb. ExhibitNb. Filing Date
42
Incorporated by Reference Included in this 2023 Annual Report
ExhibitNb. Exhibit Description Form File Nb. ExhibitNb. Filing Date
21.1 List of Subsidiaries X
23.1 Consent of PricewaterhouseCoopers LLP X
24.1 Power of Attorney X
97.1 Element Solutions Inc Executive Officer Clawback Policy X
101.SCH* Inline XBRL Taxonomy Extension Schema Document X
101.CAL* Inline XBRL Extension Calculation Linkbase Document X
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document X
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document X
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document X
* Furnished herewith.
† Management contract or compensatory plan or arrangement.
(B) Financial Statement Schedule
Schedule II — Valuation and Qualifying Accounts and Reserves
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ELEMENT SOLUTIONS INC
By: /s/ Michael Russnok
Michael Russnok
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
Benjamin Gliklich (Principal Executive Officer)
Carey J. Dorman (Principal Financial Officer)
/s/ Michael Russnok Chief Accounting Officer February 21, 2024
Michael Russnok (Principal Accounting Officer)
/s/ Sir Martin E. Franklin Executive Chairman of the Board February 21, 2024
Sir Martin E. Franklin
/s/ Ian G.H. Ashken Director February 21, 2024
Ian G.H. Ashken
/s/ Elyse Napoli Filon Director February 21, 2024
Elyse Napoli Filon
/s/ Christopher T. Fraser Director February 21, 2024
Christopher T. Fraser
/s/ Michael F. Goss Director February 21, 2024
Michael F. Goss
/s/ Nichelle Maynard-Elliott Director February 21, 2024
Nichelle Maynard-Elliott
/s/ E. Stanley O’Neal Director February 21, 2024
E. Stanley O’Neal
44
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) F-1
Consolidated Financial Statements:
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements F-11
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts and Reserves
45
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Element Solutions Inc
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Element Solutions Inc and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, of comprehensive income, of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2023, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-1
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Interim Goodwill Impairment Assessment – Graphics Solutions Reporting Unit
As described in Notes 2 and 7 to the consolidated financial statements, the Company’s consolidated goodwill balance was $2.34 billion as of December 31, 2023 and goodwill associated with the Graphics Solutions reporting unit was approximately $130 million. Goodwill is tested for impairment by management at the reporting unit level annually in the fourth quarter, or when events or changes in circumstances indicate that goodwill might be impaired using either a qualitative or quantitative approach. During the third quarter of 2023, given the lower-than-expected results of the Graphics Solutions reporting unit, the Company determined that it was more likely than not that the fair value of this reporting unit was less than its carrying value. As a result, the Company conducted an interim goodwill impairment test which confirmed that goodwill was impaired and recorded an $80.0 million impairment charge in the Consolidated Statement of Operations to reduce the carrying value of this reporting unit to its estimated fair value. The fair value of the reporting unit is based equally on market multiples and the present value of discounted future cash flows. The cash flow model utilized by management in the goodwill impairment test involves significant judgments related to future growth rates, gross profit, operating expenses and discount rates, among other considerations, from the vantage point of a market participant. The estimated fair value of the reporting unit is analyzed in relation to numerous market and historical factors, including current economic and market conditions, company-specific growth opportunities and guideline company information.
The principal considerations for our determination that performing procedures relating to the interim goodwill impairment assessment of the Graphics Solutions reporting unit is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to future growth rates, gross profit, operating expenses, discount rate, and guideline company information; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Graphics Solutions reporting unit. These procedures also included, among others, (i) testing management’s process for developing the fair value estimate; (ii) evaluating the appropriateness of the valuation methods; (iii) testing the completeness and accuracy of underlying data used by management in the methods; and (iv) evaluating the significant assumptions used by management related to future growth rates, gross profit, operating expenses, discount rate and guideline company information. Evaluating management’s assumptions related to future growth rates, gross profit, operating expenses and guideline company information involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the Company’s valuation methods and (ii) the reasonableness of the discount rate and guideline company information assumptions.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 21, 2024
We have served as the Company’s auditor since 2013.
F-2
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except per share amounts)
Year Ended December 31,
Operating expenses:
Selling, technical, general and administrative 596.8 578.6 611.2
Goodwill impairment 80.0 — —
Other (expense) income:
Foreign exchange gain (loss) 7.9 (5.0) 15.8
Other (expense) income, net (3.1) 2.9 (9.8)
Income before income taxes and non-controlling interests 129.1 272.0 251.7
Income from discontinued operations, net of tax 2.1 1.8 0.3
Net income attributable to the non-controlling interests (0.1) (0.8) (0.4)
Net income attributable to common stockholders $ 118.1 $ 187.2 $ 203.3
Earnings per share
Basic from continuing operations $ 0.48 $ 0.75 $ 0.82
Basic from discontinued operations 0.01 0.01 —
Basic attributable to common stockholders $ 0.49 $ 0.76 $ 0.82
Diluted from continuing operations $ 0.48 $ 0.75 $ 0.82
Diluted from discontinued operations 0.01 0.01 —
Diluted attributable to common stockholders $ 0.49 $ 0.76 $ 0.82
Weighted average common shares outstanding
See accompanying notes to consolidated financial statements.
F-3
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
Year Ended December 31,
Other comprehensive (loss) income
Foreign currency translation:
Total foreign currency translation adjustments (26.1) (148.5) (43.2)
Pension and post-retirement plans:
Total pension and post-retirement plans 3.4 (5.2) 2.9
Available-for-sale debt securities:
Total unrealized (loss) gain on available-for-sale debt securities (1.1) 1.1 —
Derivative financial instruments:
Total unrealized (loss) gain on qualified hedging derivatives (24.6) 49.7 25.1
Comprehensive loss attributable to the non-controlling interests 0.5 1.4 12.2
Comprehensive income attributable to stockholders $ 70.3 $ 86.5 $ 200.7
See accompanying notes to consolidated financial statements.
F-4
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
December 31,
Assets
Property, plant and equipment, net 296.9 277.2
Deferred income tax assets 120.5 51.5
Liabilities and stockholders' equity
Current installments of long-term debt 11.5 11.5
Accrued expenses and other current liabilities 217.3 200.7
Pension and post-retirement benefits 28.1 36.7
Deferred income tax liabilities 108.9 121.2
Commitments and contingencies (Note 17)
Stockholders' equity
Accumulated other comprehensive loss (345.9) (298.1)
Non-controlling interests 15.8 16.6
Total liabilities and stockholders' equity $ 4,974.1 $ 4,903.7
See accompanying notes to consolidated financial statements.
F-5
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Year Ended December 31,
Cash flows from operating activities:
Income from discontinued operations, net of tax 2.1 1.8 0.3
Foreign exchange (gain) loss (10.6) 3.4 (6.9)
Incentive stock compensation 9.4 17.7 40.1
Goodwill impairment 80.0 — —
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (6.8) 6.4 (48.7)
Prepaid expenses and other current assets 1.9 (26.6) (25.1)
Other assets and liabilities 3.9 (14.7) 15.1
Net cash flows provided by operating activities 333.6 295.9 326.0
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment 1.4 4.8 —
Acquisitions, net of cash acquired (214.8) (22.6) (536.5)
Net cash flows used in investing activities (250.2) (75.2) (568.9)
Cash flows from financing activities:
Debt proceeds, net of discount 1,297.1 — 398.0
Repurchases of common stock — (151.0) (19.6)
Payment of financing fees (6.3) (1.9) (5.1)
Net cash flows (used in) provided by financing activities (58.7) (275.6) 290.0
Effect of exchange rate changes on cash and cash equivalents (3.2) (11.4) (5.4)
Net increase (decrease) in cash and cash equivalents 23.7 (64.5) 38.2
Cash and cash equivalents at beginning of period 265.6 330.1 291.9
Cash and cash equivalents at end of period $ 289.3 $ 265.6 $ 330.1
Supplemental disclosure information of continuing operations:
Cash paid for income taxes $ 73.7 $ 66.5 $ 71.2
Supplemental disclosure information of discontinued operations:
Cash paid for income taxes $ — $ — $ 3.1
See accompanying notes to consolidated financial statements.
F-6
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in millions, except share and per share amounts)
Shares Amount Shares Amount
Other comprehensive loss, net of taxes — — — — — — (47.8) (47.8) (0.6) (48.4)
Equity compensation expense — — 9.7 — — — — 9.7 — 9.7
Changes in non-controlling interests — — — — — — — — (0.3) (0.3)
See accompanying notes to consolidated financial statements.
F-7
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(dollars in millions, except share and per share amounts)
Shares Amount Shares Amount
Other comprehensive loss, net of taxes — — — — — — (100.7) (100.7) (2.2) (102.9)
Dividends ($0.32 per share) — — — — — (79.1) — (79.1) — (79.1)
Equity compensation expense — — 18.1 — — — — 18.1 — 18.1
Changes in non-controlling interests — — (0.1) — — — — (0.1) (2.1) (2.2)
See accompanying notes to consolidated financial statements.
F-8
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)
(dollars in millions, except share and per share amounts)
Shares Amount Shares Amount