Element Solutions (ESI) - 2023 Q4 - Annual Report

Glossary of Defined Terms The glossary defines key terms used throughout the 2023 Annual Report, including company identifiers, non-GAAP financial measures, and reporting standards Key Defined Terms | Terms | Definitions | | :--- | :--- | | Element Solutions; We; Us; Our; the Company | Element Solutions Inc, a Delaware corporation, and where the context requires, its subsidiaries or operating businesses | | EBITDA | Earnings before interest, taxes, depreciation and amortization | | GAAP | U.S. Generally Accepted Accounting Principles | | 2023 Annual Report | This annual report on Form 10-K for the fiscal year ended December 31, 2023 | Forward-Looking Statements / Non-GAAP Financial Measures This section outlines the nature of forward-looking statements and the use of non-GAAP financial measures, emphasizing their limitations and the need for reconciliation to GAAP - The 2023 Annual Report contains forward-looking statements identifiable by words such as "expect," "anticipate," and "project," covering topics like acquisition benefits, geopolitical impacts, economic conditions, capital requirements, and future operating results. These statements are based on reasonable assumptions but actual results may differ materially due to various factors, including those discussed in the Risk Factors section[13][14] - The report includes non-GAAP financial measures like Adjusted EBITDA and constant currency/organic operating results, which are used internally for performance evaluation. These measures are not substitutes for GAAP and should be reviewed with their definitions and reconciliations[16] Part I Item 1. Business Element Solutions Inc is a global specialty chemicals company providing innovative solutions across various industries, focusing on operational excellence, capital allocation, and customer-driven innovation, strengthened by 2023 acquisitions Business Overview Element Solutions Inc, incorporated in Delaware in 2014, is a leading global specialty chemicals company providing innovative solutions that enhance product performance in key industries - Element Solutions Inc is a leading global specialty chemicals company, incorporated in Delaware in January 2014[18] - The company's innovative solutions enhance product performance in industries including consumer electronics, power electronics, semiconductor fabrication, communications, automotive, industrial surface finishing, consumer packaging, and offshore energy[18] - The strategy balances operational excellence and prudent capital allocation, focusing on customer-led product development, technical sales support, and supply chain optimization to drive long-term shareholder value[21] Acquisitions Element Solutions pursues targeted acquisitions to strengthen existing businesses and expand product offerings, notably reacquiring ViaForm Distribution Rights for $200 million and acquiring Kuprion, Inc. for $15.9 million in 2023 - On June 1, 2023, Element Solutions reacquired ViaForm Distribution Rights for $200 million ($170 million paid at closing, $30 million deferred payment settled in Q4 2023) to directly market and distribute its electrochemical deposition products, aiming for a more efficient supply chain and improved customer outcomes for semiconductor fabricators[23] - On May 19, 2023, the company completed the Kuprion Acquisition for $15.9 million (net of cash), with potential additional payments up to $259 million through December 31, 2030, contingent on product qualification and revenue milestones, specializing in next-generation nano-copper technology[23] Business Segments Element Solutions operates through two reportable segments, Electronics and Industrial & Specialty, which contributed approximately 61% and 39% respectively to the company's $2.33 billion sales in 2023 2023 Net Sales by Segment | Segment | 2023 Sales Contribution | | :--- | :--- | | Electronics | ~61% | | Industrial & Specialty | ~39% | | Total Net Sales | $2.33 billion | - Both segments provide consumable products as part of customers' production processes, ensuring reliable and recurring revenue streams[25] - Operational responsibility for the Films business was transferred from Industrial & Specialty to Electronics in Q1 2023, and certain product lines were realigned within the Electronics segment to better reflect the current business structure[24] Electronics The Electronics segment develops and sells specialty chemicals and process technologies for electronics hardware, including printed circuit boards and semiconductor packaging, comprising Assembly Solutions, Circuitry Solutions, and Semiconductor Solutions - The Electronics segment researches, formulates, and sells specialty chemicals and process technologies for electronics hardware, including printed circuit board designs and advanced semiconductor packaging[27] - Products include wet chemistries for metallization, surface treatments, and solderable finishes, as well as assembly materials like solder, pastes, fluxes, and adhesives[27] Assembly Solutions Assembly Solutions, contributing approximately 51% of the Electronics segment's 2023 net sales, supplies high-performing materials for assembling consumer electronics, with growth anticipated from increasing electronics use Assembly Solutions 2023 Net Sales Contribution | Metric | Value | | :--- | :--- | | % of Electronics Segment Net Sales | ~51% | | % Metal Content in Net Sales | ~50% | - Growth in Assembly Solutions is expected to be driven by the increasing use of electronics in consumer, automotive, telecommunications, memory, medical, and aerospace markets[28] Circuitry Solutions Circuitry Solutions, representing approximately 30% of the Electronics segment's 2023 net sales, provides proprietary wet chemical processes and materials for manufacturing printed circuit boards and memory storage devices Circuitry Solutions 2023 Net Sales Contribution | Metric | Value | | :--- | :--- | | % of Electronics Segment Net Sales | ~30% | - Growth is driven by demand in wireless mobile devices, internet infrastructure, high-performance computing, and increasing automotive electronics content[29] Semiconductor Solutions Semiconductor Solutions, contributing approximately 19% to the Electronics segment's 2023 net sales, supplies advanced materials for integrated circuit fabrication and semiconductor packaging, with growth fueled by advanced electronics packaging needs Semiconductor Solutions 2023 Net Sales Contribution | Metric | Value | | :--- | :--- | | % of Electronics Segment Net Sales | ~19% | - Growth is driven by advanced electronics packaging, meeting the needs of high-performance computing, artificial intelligence, IoT, next-generation wireless communications, and increasing automotive electronics content and complexity[30] Industrial & Specialty The Industrial & Specialty segment formulates and sells specialty chemicals and process technologies that enhance surfaces or improve industrial processes across diverse sectors, comprising Industrial Solutions, Graphics Solutions, and Energy Solutions - The Industrial & Specialty segment researches, formulates, and sells specialty chemicals and process technologies that enhance surfaces or improve industrial processes[32] - Products include chemical systems for metal and plastic surface protection/decoration, consumable chemicals for printing image transfer on flexible packaging, and chemistries for water-based hydraulic control fluids in offshore energy production[32] Industrial Solutions Industrial Solutions, accounting for approximately 76% of the Industrial & Specialty segment's 2023 net sales, is a global supplier of industrial metal and plastic finishing chemistries, with growth expected from increased worldwide automobile production Industrial Solutions 2023 Net Sales Contribution | Metric | Value | | :--- | :--- | | % of Industrial & Specialty Segment Net Sales | ~76% | - Growth in this business is primarily driven by increased worldwide automobile production with elevated fashion elements and higher content per vehicle, as well as general economic growth[33] Graphics Solutions Graphics Solutions, representing approximately 16% of the Industrial & Specialty segment's 2023 net sales, supplies consumable materials for transferring images onto consumer packaging, with growth driven by consumer demand and market shifts Graphics Solutions 2023 Net Sales Contribution | Metric | Value | | :--- | :--- | | % of Industrial & Specialty Segment Net Sales | ~16% | - Growth is driven by consumer demand and market shifts favoring package imaging technologies that offer a lower total cost of ownership to customers[34] Energy Solutions Energy Solutions, accounting for approximately 8% of the Industrial & Specialty segment's 2023 net sales, is a global supplier of specialized water-based hydraulic control fluids for the offshore energy industry, with growth expected from continued capital expenditures Energy Solutions 2023 Net Sales Contribution | Metric | Value | | :--- | :--- | | % of Industrial & Specialty Segment Net Sales | ~8% | - Growth in this business is driven by continued capital expenditures in energy exploration and production[35] Products (Electronics) The Electronics segment offers a diverse range of products across its Assembly Solutions, Circuitry Solutions, and Semiconductor Solutions businesses, including electronic assembly materials, circuit board metallization, and advanced plating chemistries Key Electronics Product Offerings | Business | Product Categories | Key Brands/Products | | :--- | :--- | :--- | | Assembly Solutions | Electronic Assembly Materials (SMT, solder pastes, adhesives, fluxes, thermal management) | Alpha, Innolot, AccuFlux, Powerbond, Kester, Electrolube, Alpha HiTech | | Circuitry Solutions | Circuit Board Metallization, Circuit Formation Products, Electronic Materials, Surface Finishes, Film and Smart Surface Solutions | Shadow, Blackhole, MacuSpec, M-System, Systek, Sterling, Entek, Affinity, Ormecon, Xtraform, Autotex, Autoflex | | Semiconductor Solutions | Semiconductor Materials & Packaging Applications (copper, nickel, precious metals plating, sintered materials, die attach pastes, thermal interface materials) | Argomax, ALPHA, ViaForm, MICROFAB, ATROX, TrueHeight, Staydry, Kester, Compugraphics | Products (Industrial & Specialty) The Industrial & Specialty segment provides products through its Industrial Solutions, Graphics Solutions, and Energy Solutions businesses, including electroless nickel, printing elements, and offshore fluids Key Industrial & Specialty Product Offerings | Business | Product Categories | Key Brands/Products | | :--- | :--- | :--- | | Industrial Solutions | Electroless Nickel, Plating Products (CuMac, evolve), Pre-treatment and Cleaning Solutions, Functional Conversion Coatings, Wastewater Solutions, Water Treatment | Fernox | | Graphics Solutions | Solid Sheet Printing Elements (digital/analog flexographic plates), Liquid Imaging Products (photopolymers, substrate, coverfilms, detergents) | LUX, LUX ITP 60, LTL photopolymer, M Clear photopolymer, M Stamp 40 photopolymer | | Energy Solutions | Offshore Fluids (water-based hydraulic control fluids for subsea control systems) | (Not specified) | Competitive Strengths Element Solutions differentiates itself through industry-leading positions in high-growth niche markets, offering innovative products and high value-added services, supported by its scale and global reach - The company maintains industry-leading positions in niche sectors of high-growth markets by offering innovative products and high value-added services[37] - Scale and global reach in product development, marketing, and formulation provide advantages over competitors, contributing to market position and profitable growth[37] Business Strategies Element Solutions aims to be a best-in-class global specialty chemical solutions company by focusing on customer-driven innovation, comprehensive product offerings, stable cash flow, experienced management, commercial excellence, sustainability, and disciplined capital allocation - Customer Driven Innovation: Collaborates with customers and OEMs to develop new products and tailored formulations, leading to long-term relationships and high customer switching costs[39] - Comprehensive Offering of Critical Products: Provides a full suite of complementary products, offering complete functional solutions and a broad dialogue with customers, especially in electronics[39] - Stable Cash Flow and Low Capital Requirements: Generates high margins and strong cash flow with low capital expenditures, focusing investments on technological innovation and sales/services[39] - Performance-Driven Culture, Experienced Management and Board with Proven Track Record: Emphasizes an expert and qualified employee base, decentralized decision-making, and accountability, guided by experienced leadership[39][47] - Commercial Excellence: Focuses on high-quality, reliable service from product development to on-time delivery, leveraging technical capabilities and industry relationships for customer success[40] - Market Leading Innovation: Prioritizes innovation through R&D, intellectual property, and collaboration with customers/OEMs to develop cutting-edge products and expand into new markets[40] - Enabling Sustainability: Develops sustainable solutions that meet environmental standards, partnering with governments, industry groups, and universities to create commercially viable, eco-friendly products[40] - Disciplined and Prudent Capital Allocation: Opportunistically deploys free cash flow into organic investments, bolt-on acquisitions, and stockholder returns (share repurchases, dividends) based on risk-adjusted returns[47] Customers Element Solutions serves a diverse global customer base directly or through intermediaries, maintaining collaborative relationships with OEMs and industry partners, with no single customer accounting for 10% or more of consolidated net sales in 2023, 2022, or 2021 - The company has diverse customer bases and sells products directly to end-users or through intermediaries[41] - No single customer represented 10% or more of consolidated net sales in 2023, 2022, or 2021, highlighting a diversified customer base[43] Selling & Marketing Element Solutions employs a customer-centric, highly-technical global sales and marketing force that monitors market trends, engages with customers, and provides feedback to guide R&D and capital allocation - The company employs a customer-centric and highly-technical global sales and marketing force with robust technical expertise and local market knowledge[45] - Local sales teams monitor market trends and customer needs, providing feedback that guides R&D initiatives and capital allocation decisions[45] Human Capital Management Element Solutions' culture is built on five core values, supporting over 5,300 global full-time employees as of December 31, 2023, with a focus on occupational health and safety, DEI, talent development, and social impact - The company's culture is based on five core values: Challenge, Commit, Collaborate, Choose, and Care, which guide employee actions and strategic objectives[47] Employee Demographics (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Total Full-time Employees | >5,300 | | % in R&D/Technical Roles | ~40% | | % Employed Outside U.S. | ~80% | - Key initiatives include comprehensive occupational health and safety programs, strengthening DEI through fair hiring practices and employee resource groups, and talent development via training and internal mobility[49][50][51] Research and Development Innovation is central to Element Solutions' success, with continuous R&D investment to develop new products, improve formulations, and optimize processes, totaling $68.1 million in expenses in 2023, including $15.7 million from the Kuprion Acquisition - Innovation is a key element of the company's culture and critical to its success, with continuous investment in R&D to stay ahead of emerging trends[53] - R&D activities focus on developing products and improving formulations/processes to respond to customer needs, drive growth, and add value to core business operations[53] Research and Development Expenses | Year | R&D Expenses (millions) | | :--- | :--- | | 2023 | $68.1 | | (Includes Kuprion Acquisition R&D costs) | $15.7 | Competitive Environment Element Solutions operates in competitive markets characterized by rapid technological change, competing on quality, technology, performance, and service, supported by extensive technical support and continuous product development - The company operates in competitive markets for specialty chemicals, subject to rapid technological changes[56] - Competition is primarily based on quality, technology, performance, reliability, brand, reputation, service, product range, and support[57] Electronics Competitive Environment In the Electronics segment, Element Solutions competes within the specialty chemicals industry, offering proprietary chemical compounds and services against major competitors like MKS Instruments and DuPont de Nemours, Inc - The Electronics segment competes in the specialty chemicals industry, with major competitors including MKS Instruments, DuPont de Nemours, Inc., Henkel Corporation, Senju Metal Industry Co., and Uyemura International[58] Industrial & Specialty Competitive Environment The Industrial & Specialty segment also competes within the specialty chemicals industry, providing proprietary chemical compounds and services against significant competitors such as MKS Instruments, DuPont de Nemours, Inc., and BP p.l.c - The Industrial & Specialty segment competes in the specialty chemicals industry, with major competitors including MKS Instruments, DuPont de Nemours, Inc., BP p.l.c., Miraclon Corp., and XSYS Global[59] Sources and Availability of Raw Materials Element Solutions' global operations rely on timely and adequate supplies of raw materials, primarily purchased as-needed from multiple global sources, with some materials like tin being recycled internally - Global operations depend on obtaining adequate and timely supplies of raw materials, primarily purchased as-needed from outside sources[60] - The majority of raw materials are obtainable from multiple conformant sources worldwide, and the company recycles certain materials (e.g., tin) in its own smelting and refining facility[60] Patents, Trademarks and Proprietary Products Element Solutions maintains an extensive intellectual property portfolio, including approximately 2,800 domestic and foreign patents, copyrights, trade secrets, and trademarks, protected through confidentiality agreements and legal enforcement - The company maintains an extensive intellectual property portfolio, including patents, copyrights, trade secrets, and trademarks[61] Patent Portfolio (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Domestic and Foreign Patents (owned, applied for, or licensed) | ~2,800 | - Protection of intellectual property also relies on confidentiality agreements, patent, trade secret, trademark, and copyright law, as well as judicial enforcement[65] Government Regulations Element Solutions is subject to extensive domestic and foreign safety, health, and environmental (SH&E) regulations, with compliance costs historically immaterial but expected to increase due to growing demands for product safety and environmental protection - Operations are subject to extensive domestic and foreign laws, regulations, rules, and ordinances related to safety, health, and environmental matters (SH&E requirements)[66] - Compliance with SH&E requirements has not had a material effect on capital expenditures, results of operations, or competitive position, but increased regulation is expected due to demands for product safety and environmental protection[67] - The company believes it is in material compliance with environmental laws and regulations, and recorded liabilities for environmental matters at December 31, 2023, are considered appropriate[69] Available Information Element Solutions makes its annual, quarterly, and current reports, along with proxy statements, available free of charge on its website and the SEC's website - Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments, and proxy statements are available free of charge on the company's website (www.elementsolutionsinc.com) and the SEC's website (www.sec.gov)[70](index=70&type=chunk) Corporate Information Element Solutions Inc's principal executive offices are located at 500 East Broward Boulevard, Suite 1860, Fort Lauderdale, Florida 33394, with a telephone number of (561) 207-9600 - Principal executive offices are located at 500 East Broward Boulevard, Suite 1860, Fort Lauderdale, Florida 33394. The telephone number is (561) 207-9600[72] Item 1A. Risk Factors Element Solutions faces various risks that could adversely affect its business, financial condition, or results of operations, including intense competition, international operational complexities, dependence on key personnel and suppliers, and acquisition integration challenges Business & Operational Risks Element Solutions faces significant business and operational risks, including intense competition, challenges in executing its go-to-market strategy, and complexities of substantial international operations, which generated 75% of 2023 net sales from non-U.S. sources - Inability to compete successfully in competitive markets may lead to pricing pressure, fewer customer orders, reduced margins, and loss of market share[74] - Failure to successfully execute the go-to-market strategy, including insufficient investment in strategic growth areas and R&D, could adversely affect business and financial performance[77] - Substantial international operations (approximately 75% of 2023 net sales from non-U.S.) expose the company to risks such as political uncertainties, economic conditions, currency fluctuations, and changes in legal/regulatory environments[80] - Failure to attract and retain key personnel, including executive officers and specialized R&D/sales staff, or effectively manage succession, could adversely impact business[82] - Reliance on key customers, contract manufacturers, and suppliers, despite diversification, could adversely affect sales and profitability if relationships are lost or supply is disrupted[84] - Acquisitions and divestitures may not realize anticipated benefits, exposing the company to integration challenges, successor liabilities, compliance risks, and potential impairment charges[85][86][87] Industry Risks The specialty chemical industry is subject to rapid technological change, product obsolescence, and price erosion, alongside volatility in raw material supply and prices, and increased energy costs, all impacting Element Solutions' operating results - The specialty chemical industry is characterized by rapid technological change, product obsolescence, price erosion, and evolving standards, which can lead to significant fluctuations in operating results[88] - Fluctuations in the supply and prices of raw materials (specialty and commodity chemicals) and other costs (energy, shipping) can negatively impact business and financial condition if not managed effectively or passed through to customers[89][90] Legal & Regulatory Risks Element Solutions faces legal and regulatory risks related to protecting intellectual property, changes in global tax laws, inherent hazards of chemical manufacturing, complex product regulations, offshore oil industry hazards, and compliance with export control and anti-corruption laws - Inability to protect intellectual property rights (patents, trade secrets, trademarks) domestically and internationally could lead to loss of valuable technologies and competitive advantages[92] - Changes in effective tax rates, tax costs, and liabilities, particularly due to global minimum tax regimes and tax audits, could adversely affect financial condition[97][98] - Chemical manufacturing is inherently hazardous, posing risks of accidents, spills, and environmental contamination, leading to potential operational disruptions, significant losses, and liabilities under environmental laws (e.g., RCRA, CERCLA)[99][100] - Products are subject to numerous, complex government regulations (e.g., REACH, TSCA, conflict minerals laws), requiring potential product redesigns, supply chain changes, and increased costs[101][102] - Offshore oil industry products are exposed to inherent hazards of deep-water oil production and drilling, potentially leading to substantial liabilities not fully covered by insurance[104][105] - Failure to comply with export control regulations (EAR, ITAR), anti-corruption laws (FCPA, UK Bribery Act), and international trade restrictions/economic sanctions could result in penalties, investigations, and reputational damage[106][107][108] Financial Risks Element Solutions faces financial risks including significant fluctuations in net sales and gross profit, unfavorable currency exchange rates (with 75% of 2023 net sales non-U.S. denominated), restrictive debt covenants, increased indebtedness, and potential impairment of long-lived assets, such as the $80.0 million goodwill impairment in 2023 - Net sales and gross profit vary significantly based on product, customer, and geographic mix, making future operating results difficult to forecast[110] - Unfavorable currency exchange rate fluctuations, especially given approximately 75% of 2023 net sales were non-U.S. denominated, can adversely affect results of operations and financial condition[111] - The Credit Agreement and other debt agreements contain restrictive covenants (e.g., limitations on dividends, investments, mergers) and financial ratios (e.g., first lien net leverage ratio) that limit operational flexibility; failure to comply could lead to debt acceleration[112][113] - Incurring significant additional indebtedness in the future could dedicate a substantial portion of cash flows to debt payments, increase interest rate exposure, and place the company at a competitive disadvantage[116][117] - Changes in interest rates and exchange rates would increase the cost of servicing debt, impacting profitability and cash flows, especially if hedging strategies are not renewed or effective[118] - Future impairment of tangible or intangible long-lived assets (e.g., $3.22 billion as of Dec 31, 2023), such as the $80.0 million goodwill impairment for Graphics Solutions in 2023, could materially affect results of operations and financial position[119][120] General Risks Element Solutions faces general risks including IT system disruptions, cybersecurity threats, increasing ESG compliance costs, potential dilution from equity instruments, stock price volatility, and dependence on subsidiary cash flows, with Delaware law potentially deterring hostile takeovers - Significant disruptions in information technology systems or failure to implement new systems successfully could adversely affect business operations and financial condition[121] - Material cybersecurity-related events, including breaches and cyber-attacks, may disrupt operations, compromise confidential information, and harm reputation and results of operations[122] - Increasing focus on ESG matters may impose additional costs for tracking and reporting, and expose the company to reputational risk if ESG strategies or disclosures do not meet expectations[123][124] - Numerous outstanding equity instruments (RSUs, stock options) could require future issuance of additional common stock, resulting in significant dilution of ownership interests and adverse effects on stock price[125] - Volatility of the stock price can be caused by various factors, including financial results, acquisitions, personnel changes, and macroeconomic conditions, potentially leading to securities class action litigation[126] - Future issuances or sales of common stock, including by executive officers or in connection with acquisitions, may depress the stock price[127] - The Board of Directors' ability to issue preferred stock in the future without stockholder approval could reduce the value of common stock or have anti-takeover effects[128] - There is no assurance that the company will continue to declare dividends, as future payments depend on financial condition, cash flow, capital requirements, and debt covenants[129][130] - Failure to establish and maintain adequate internal controls over financial reporting could impair timely and reliable financial reporting and adversely impact stock price[131] - Dependence on cash flows from operating subsidiaries to fund debt obligations, capital expenditures, and operations means that insufficient earnings or repatriation challenges could hinder financial commitments[132] - Supply chain and business disruptions, including natural disasters, health crises, or climate change impacts, could materially affect future sales and financial condition, potentially without full insurance coverage[133][134][135] - Governance by Delaware law, specifically Section 203 of the Delaware General Corporation Law, may deter hostile takeover attempts or changes in control[136] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[137] Item 1C. Cybersecurity Element Solutions integrates cybersecurity into its risk management framework with ISO 27001 compliant procedures, led by a CISO who reports regularly to senior management and the Board of Directors - Cybersecurity is part of the company's risk management framework, with established policies and ISO 27001 compliant security procedures[138] - The Chief Information Security Officer (CISO) leads a global information security team responsible for assessing and mitigating cyber-related threats, with regular reporting to senior management and the Board[139][140] Item 2. Properties As of December 31, 2023, Element Solutions operated 53 manufacturing sites and 10 stand-alone research centers globally, with facilities believed to be well-maintained and adequate for current operations Company Facilities (as of Dec 31, 2023) | Facility Type | Total | Owned | Leased | | :--- | :--- | :--- | :--- | | Manufacturing Sites | 53 | 25 | 28 | | Manufacturing Sites with Research | 12 | 6 | 6 | | Stand-alone Research Centers | 10 | 4 | 6 | | Total Manufacturing Facilities (U.S.) | 8 | N/A | N/A | | Total Manufacturing Facilities (International) | 45 | N/A | N/A | - All significant facilities and equipment are believed to be in good condition, well-maintained, and adequate for present operations[142] Item 3. Legal Proceedings Element Solutions is involved in various legal disputes and claims in the ordinary course of business, which are not expected to have a material adverse effect on its financial condition or results of operations - The company is involved in various legal disputes, investigations, claims, and other legal proceedings in the ordinary course of business[143] - The company believes the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on its business, financial condition, or results of operations[143] - Environmental liabilities are accrued when probable and reasonably estimable, with current estimates not anticipating material losses in excess of recorded liabilities[144] Item 4. Mine Safety Disclosures This item is not applicable to Element Solutions Inc - Not applicable[145] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Element Solutions' common stock trades on the NYSE under "ESI," with 241,993,444 shares outstanding as of February 16, 2024, and the company paid $77.4 million in cash dividends in 2023 Market for our Common Stock Element Solutions' common stock is traded on the New York Stock Exchange under the symbol "ESI," with 241,993,444 shares outstanding as of February 16, 2024, and a market value of approximately $4.28 billion held by non-affiliates as of June 30, 2023 - Common stock is traded on the New York Stock Exchange under the symbol "ESI"[3] Common Stock Data | Metric | Value | | :--- | :--- | | Shares Outstanding (Feb 16, 2024) | 241,993,444 | | Market Value (Non-affiliates, June 30, 2023) | ~$4.28 billion | | Closing Price (Feb 16, 2024) | $23.86 | Dividends Element Solutions declared and paid cash dividends of $77.4 million in 2023, $78.4 million in 2022, and $61.9 million in 2021, with future quarterly dividends subject to Board discretion Cash Dividends Paid | Year Ended Dec 31 | Cash Dividends (millions) | | :--- | :--- | | 2023 | $77.4 | | 2022 | $78.4 | | 2021 | $61.9 | - A cash dividend of $0.08 per outstanding share was declared on February 13, 2024, payable on March 15, 2024, to stockholders of record on March 1, 2024[148] - The company expects to continue paying quarterly cash dividends, subject to the Board of Directors' final determination based on future earnings, cash flow, capital needs, and debt covenants[149] Performance Graph The report includes a performance graph comparing Element Solutions' cumulative total stockholder returns against the S&P 500 Index and the S&P 500 Specialty Chemicals Index from December 31, 2018, through December 31, 2023 - A performance graph compares cumulative total stockholder returns for the company's common stock against the S&P 500 Index and the S&P 500 Specialty Chemicals Index from December 31, 2018, through December 31, 2023[150] - The stock performance shown is based on historical data and is not indicative of, or intended to forecast, possible future performance[152] Equity Compensation Plan Information Information regarding Element Solutions' equity compensation plans is incorporated by reference from the 2024 Proxy Statement - Equity compensation plan information is incorporated by reference from the 2024 Proxy Statement[153] Recent Sales of Unregistered Securities There were no recent sales of unregistered securities to report - No recent sales of unregistered securities[154] Issuer Purchases of Equity Securities There were no issuer purchases of equity securities to report - No issuer purchases of equity securities[155] Item 6. [Reserved] This item is reserved and contains no information - Item 6 is reserved[156] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis provides an overview of Element Solutions' financial condition and results of operations for 2023, detailing strategic acquisitions, debt reduction, dividend payments, critical accounting estimates, non-GAAP measures, and segment performance Overview Element Solutions Inc is a leading global specialty chemicals company, incorporated in Delaware in 2014, with two segments, Electronics and Industrial & Specialty, generating $2.33 billion in total net sales in 2023 - Element Solutions is a leading global specialty chemicals company, providing innovative solutions across key industries like consumer electronics, automotive, and offshore energy[158] 2023 Net Sales by Segment | Segment | 2023 Net Sales Contribution | | :--- | :--- | | Electronics | ~61% | | Industrial & Specialty | ~39% | | Total Net Sales | $2.33 billion | 2023 Highlights In 2023, Element Solutions reacquired ViaForm Distribution Rights for $200 million and acquired Kuprion for $15.9 million, while also syndicating $1.15 billion in new term loans to reduce gross debt by approximately $105 million and returning $77.4 million to stockholders through dividends - Reacquired ViaForm Distribution Rights on June 1, 2023, for $200 million, enabling direct marketing and distribution of electrochemical deposition products for semiconductor fabricators[163] - Completed the Kuprion Acquisition on May 19, 2023, for $15.9 million, acquiring next-generation nano-copper technology for semiconductor, circuit board, and electronics assembly markets[163] - Successfully syndicated $1.15 billion of new term loans B-2 in December 2023, using proceeds to prepay existing term loans and reduce gross debt by approximately $105 million[169] - Returned approximately $77.4 million to stockholders in the form of cash dividends during the year ended December 31, 2023[169] Acquisitions Element Solutions pursues targeted and opportunistic acquisitions to strengthen existing businesses and expand product offerings, seeking candidates with attractive margins, strong cash flow, niche leading positions, and consumable products - The company pursues targeted and opportunistic acquisitions to strengthen current businesses, expand product offerings, and enhance growth and strategic position[164] - Acquisition candidates are expected to demonstrate attractive margins, strong cash flow, niche leading positions, and consumable products that generate recurring revenue[164] Foreign Currency Exposure Approximately 75% of Element Solutions' 2023 net sales originated outside the U.S. in various currencies, with foreign exchange translation negatively impacting 2023 net sales by approximately 1%, leading the company to use hedging programs to mitigate risk - Approximately 75% of 2023 net sales originated outside the U.S. and were denominated in various foreign currencies[165] - Foreign exchange translation negatively impacted 2023 net sales performance by approximately 1%[165] - The company actively assesses and mitigates foreign exchange risk through hedging programs designed to protect against transaction exposures and hedge foreign currency denominated balance sheet exposures and anticipated cash flows[166] Critical Accounting Estimates The preparation of Element Solutions' financial statements requires significant estimates and judgments in conformity with GAAP, particularly for revenue recognition, goodwill impairment testing, and income taxes - Preparation of financial statements requires significant estimates and assumptions that may impact reported financial results and disclosures[167] - Critical accounting estimates include revenue recognition, goodwill impairment, and income taxes, which involve difficult, subjective, or complex judgments[168] Revenue Recognition Element Solutions recognizes revenue when customers obtain control of purchased products, typically upon shipment or delivery, with estimates for sales rebates, incentives, discounts, and returns accounted for as revenue reductions - Revenue is recognized when a customer obtains control of products, typically upon shipment or delivery, after performance obligations are fulfilled and collectability is probable[169] - Estimates for sales rebates, incentives, discounts, and returns are accounted for as reductions of revenue[169] Goodwill Goodwill is tested for impairment annually, with fair value based on market multiples and discounted future cash flows, leading to an $80.0 million impairment charge for Graphics Solutions in Q3 2023 due to lower-than-expected results and a higher WACC - Goodwill is tested for impairment annually in the fourth quarter, or when events or changes in circumstances indicate impairment, at the reporting unit level[171] - The fair value of a reporting unit is based equally on market multiples and the present value of discounted future cash flows, involving significant judgments[171] - In Q3 2023, an $80.0 million goodwill impairment charge was recorded for the Graphics Solutions reporting unit due to reduced expected long-term cash flows, profit margin pressures, loss of a significant newspaper customer, and a higher WACC[173] Income Taxes Deferred tax assets and liabilities are recognized based on temporary differences, with a valuation allowance if realization is not probable, and tax benefits for uncertain positions are recognized when more likely than not to be sustained - Deferred tax assets and liabilities are recognized based on differences between financial statement and tax bases, with a valuation allowance reducing recorded deferred tax assets to the amount more likely than not to be realized[176] - Tax benefits for uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, measured as the largest amount with a greater than 50% likelihood of realization[178] Non-GAAP Financial Measures Element Solutions uses non-GAAP financial measures like constant currency, organic net sales growth, and Adjusted EBITDA to supplement GAAP results, providing additional perspective on performance trends and underlying operating results - Non-GAAP financial measures, including constant currency, organic net sales growth, and Adjusted EBITDA, are used to supplement GAAP results and provide additional perspective on performance trends[180] - These measures have limitations as analytical tools, exclude significant GAAP expenses/income, and may not be comparable to other companies' similarly titled measures[181] Constant Currency Constant currency operating results exclude the impact of foreign currency translation, facilitating period-to-period comparison of business performance by converting current-period local currency results using prior period exchange rates - Operating results on a constant currency basis exclude the impact of changes due to the translation of foreign currencies into U.S. dollars[182] - This non-GAAP measure facilitates period-to-period comparison in the analysis of business performance trends[182] Organic Net Sales Growth Organic net sales growth excludes the impact of foreign currency translation, pass-through pricing of certain metals, and acquisitions/divestitures, providing a clearer understanding of underlying net sales trends on a consistent basis - Organic net sales growth excludes the impact of foreign currency translation, changes due to pass-through pricing of certain metals, and acquisitions/divestitures[184] - This measure provides a more complete understanding of underlying net sales trends by offering comparable net sales over differing periods on a consistent basis[184] Adjusted EBITDA Adjusted EBITDA is defined as EBITDA, further adjusted to exclude items not representative of ongoing business or associated with the capital structure, used by management to understand long-term profitability trends and facilitate comparisons - Adjusted EBITDA is defined as EBITDA, excluding the impact of additional items not representative of ongoing business or associated with the capital structure[186] - Management believes Adjusted EBITDA provides a more complete understanding of long-term profitability trends and facilitates comparisons across periods[186] Results of Operations Element Solutions' 2023 results showed decreases in net sales, net income, gross profit, and Adjusted EBITDA, driven by demand weakness in Electronics and offset by growth in Energy Solutions, with operating expenses increasing due to a goodwill impairment charge and R&D costs Net Sales In 2023, Element Solutions' net sales decreased by 8% reported, 7% constant currency, and 5% organic, primarily due to lower SMT volumes and mobile phone demand in Asia for Electronics, and reduced demand in European construction for Industrial & Specialty Net Sales Growth (2023 vs 2022) | Metric | Reported | Constant Currency | Organic | | :--- | :--- | :--- | :--- | | Total Net Sales Growth | (8)% | (7)% | (5)% | | Electronics Net Sales Growth | (12)% | (10)% | (7)% | | Industrial & Specialty Net Sales Growth | (2)% | (2)% | (2)% | - Electronics' organic net sales decrease was primarily due to lower SMT volumes from demand weakness in Asia (primarily China), lower demand from mobile phone market customers (primarily in Asia), and a decline in the memory disk end market globally[193] - Industrial & Specialty's organic net sales decrease was primarily due to lower demand from European construction and industrial manufacturing markets, partially offset by a significant equipment sale and growth in Energy Solutions due to increased global production and drilling activity[193][194] Gross Profit In 2023, Element Solutions' gross profit decreased by 4% reported and 2% constant currency, with Electronics' gross margin increasing due to recaptured ViaForm margin and lower costs, while Industrial & Specialty's gross profit remained flat reported and increased 2% constant currency Gross Profit and Margin (2023 vs 2022) | Metric | 2023 (millions) | 2022 (millions) | Reported Change | Constant Currency Change | | :--- | :--- | :--- | :--- | :--- | | Total Gross Profit | $918.5 | $952.7 | (4)% | (2)% | | Electronics Gross Profit | $558.2 | $593.9 | (6)% | (4)% | | Industrial & Specialty Gross Profit | $360.3 | $358.8 | 0% | 2% | | Total Gross Margin | 39.4% | 37.4% | 200 bps | 220 bps | | Electronics Gross Margin | 39.5% | 36.9% | 260 bps | 270 bps | | Industrial & Specialty Gross Margin | 39.2% | 38.2% | 100 bps | 130 bps | - Electronics' gross margin increase was primarily due to recaptured margin on ViaForm Distribution Rights, lower net sales of products with pass-through metals, and reduced raw material and logistics costs[196] - Industrial & Specialty's constant currency gross profit increase was driven by lower raw material costs in Industrial Solutions and growth in Energy Solutions, partially offset by declines in Graphics Solutions[197] Operating Expenses Element Solutions' operating expenses increased by 19% in 2023, primarily due to an $80.0 million goodwill impairment charge for Graphics Solutions, and also by $15.7 million in R&D costs from the Kuprion Acquisition, higher personnel costs, debt extinguishment costs, and increased travel expenses Operating Expenses (2023 vs 2022) | Expense Category | 2023 (millions) | 2022 (millions) | Reported Change | Constant Currency Change | | :--- | :--- | :--- | :--- | :--- | | Selling, technical, general and administrative | $596.8 | $578.6 | 3% | 4% | | Research and development | $68.1 | $48.8 | 40% | 40% | | Goodwill impairment | $80.0 | $0.0 | (nm) | (nm) | | Total Operating Expenses | $744.9 | $627.4 | 19% | 19% | - The 19% increase in operating expenses was primarily driven by an $80.0 million goodwill impairment charge related to the Graphics Solutions reporting unit[199] - Excluding the impairment, the constant currency increase was due to $15.7 million in R&D costs from the Kuprion Acquisition, higher personnel costs, $5.5 million in debt extinguishment costs, and increased travel expenses, partially offset by lower stock compensation expense[200] Other (Expense) Income, net Total other expense, net, decreased from $53.3 million in 2022 to $44.5 million in 2023, driven by a foreign exchange gain of $7.9 million and partially offset by $7.0 million in charges from highly inflationary accounting in Turkey Other (Expense) Income, net (2023 vs 2022) | Category | 2023 (millions) | 2022 (millions) | | :--- | :--- | | Interest expense, net | $(49.3) | $(51.2) | | Foreign exchange gain (loss) | $7.9 | $(5.0) | | Other (expense) income, net | $(3.1) | $2.9 | | Total | $(44.5) | $(53.3) | - Interest expense, net, decreased by $1.9 million, primarily due to higher interest income[202] - Other expense, net, for 2023 included $7.0 million of charges due to highly inflationary accounting for operations in Turkey and $2.3 million of debt refinancing costs[204] Income Tax Income tax expense significantly decreased from $85.8 million in 2022 to $13.0 million in 2023, primarily due to a one-time $34.2 million benefit from changing foreign tax credit elections and a benefit from the U.S. FDII deduction Income Tax Expense | Year | Income Tax Expense (millions) | | :--- | :--- | | 2023 | $13.0 | | 2022 | $85.8 | - The 2023 income tax expense includes a one-time benefit of $34.2 million from changing an election to credit foreign taxes, comprising a $37.3 million impact from amending prior U.S. tax returns offset by a $3.1 million net increase to valuation allowances[205] - The 2023 tax rate also included an incremental $8.2 million tax expense reduction from the foreign tax credit election and a benefit from the U.S. Foreign Derived Intangible Income (FDII) deduction, offset by non-deductible goodwill impairment and Kuprion Acquisition R&D charges[205][206] Segment Adjusted EBITDA Performance Total Adjusted EBITDA for Element Solutions decreased by 8% reported and 6% constant currency in 2023, with Electronics' Adjusted EBITDA decreasing due to lower gross profits, while Industrial & Specialty's increased by 1% constant currency driven by Energy Solutions growth Adjusted EBITDA Performance (2023 vs 2022) | Metric | 2023 (millions) | 2022 (millions) | Reported Change | Constant Currency Change | | :--- | :--- | :--- | :--- | :--- | | Total Adjusted EBITDA | $482.3 | $526.6 | (8)% | (6)% | | Electronics Adjusted EBITDA | $317.7 | $360.7 | (12)% | (9)% | | Industrial & Specialty Adjusted EBITDA | $164.6 | $165.9 | (1)% | 1% | | Total Adjusted EBITDA Margin | 20.7% | 20.7% | 0 bps | 20 bps | | Electronics Adjusted EBITDA Margin | 22.5% | 22.4% | 10 bps | 30 bps | | Industrial & Specialty Adjusted EBITDA Margin | 17.9% | 17.7% | 20 bps | 50 bps | - Electronics' constant currency Adjusted EBITDA decrease was primarily driven by lower gross profits[208] - Industrial & Specialty's constant currency Adjusted EBITDA increase was primarily driven by growth in the Energy Solutions business and easing cost pressures, partially offset by declines in the Graphics Solutions business[209] Comparison of Fiscal Years 2022 and 2021 For a comparison of Element Solutions' fiscal years 2022 and 2021, readers are directed to the relevant section in the company's 2022 Annual Report on Form 10-K, incorporated by reference - Comparison of fiscal years 2022 and 2021 is incorporated by reference from the 2022 Annual Report on Form 10-K[210] Liquidity and Capital Resources Element Solutions' primary liquidity sources in 2023 included new term loans B, swap monetization, and cash from operations, with major uses for debt payments, acquisitions, dividends, and capital expenditures, and 75% of 2023 net sales from non-U.S. operations - Primary liquidity sources in 2023 were proceeds from new term loans B, monetization of interest rate and cross-currency swaps, and cash from operations[211] - Primary uses of cash included $1.26 billion of debt payments, funding ViaForm Distribution Rights and Kuprion Acquisition, dividends, and capital expenditures[211] Capital Expenditures and Cash Holdings | Metric | Value | | :--- | :--- | | Expected 2024 Capital Expenditures | $50.0 million - $60.0 million | | 2023 Net Sales from Non-U.S. Operations | ~75% | | Cash & Cash Equivalents (Dec 31, 2023) | $289 million | | Cash Held by Foreign Subsidiaries (Dec 31, 2023) | $232 million | Pension Plans Element Solutions maintains Domestic and Foreign Pension Plans, all closed and with frozen benefits, which were underfunded by $8.2 million and $14.8 million respectively at December 31, 2023, with no material contributions required in 2024 - The company maintains Domestic Pension Plans (non-contributory defined benefit and Supplemental Executive Retirement Plans) and Foreign Pension Plans, all closed to new participants with frozen benefits[220] Pension Plan Underfunding (as of Dec 31) | Plan Type | 2023 (millions) | 2022 (millions) | | :--- | :--- | :--- | | Domestic Pension Plans | $(8.2) | $(16.5) | | Foreign Pension Plans | $(14.8) | $(14.5) | - The increase in Domestic Pension Plan funding position was primarily driven by a $20.8 million return on plan assets[223] - The company is not required to make any material plan contributions in 2024[224] Financial Borrowings As of December 31, 2023, Element Solutions had $1.93 billion in indebtedness, primarily consisting of $1.15 billion in term loans and $800 million in 3.875% USD Notes due 2028, with $392 million available under its revolving credit facility, and was in compliance with all debt covenants Debt Obligations (as of Dec 31, 2023) | Debt Type | Amount (millions) | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | | Term Loans | $1,140.2 | SOFR + 2.00% | 2030 | | Senior Notes | $792.3 | 3.875% | 2028 | | Total Debt | $1,932.5 | N/A | N/A | - Availability under revolving credit facility and various lines of credit totaled $392 million at December 31, 2023[225] Credit Facilities and Senior Notes Element Solutions' Credit Agreement provides for $1.53 billion in senior secured credit facilities, including $1.15 billion in new term loans B-2 and a $375 million revolving credit facility, with $800 million in 3.875% USD Notes due 2028 also outstanding - The Credit Agreement provides for $1.53 billion in senior secured credit facilities, including $1.15 billion in new term loans B-2 (maturing 2030) and a $375 million revolving credit facility (maturing 2027)[226] - Proceeds from new term loans B-2 were used to fully prepay prior term loans, resulting in $5.5 million in operating expenses and $2.3 million in other expense for debt refinancing costs[217] - The $800 million 3.875% USD Notes due 2028 are fully and unconditionally guaranteed on a senior unsecured basis by generally all domestic subsidiaries that guarantee the Credit Agreement obligations[226] Covenants Element Solutions was in compliance with all debt covenants under its Credit Agreement and the indenture governing its 3.875% USD Notes due 2028 as of December 31, 2023, which include customary representations, warranties, and affirmative/negative covenants - As of December 31, 2023, the company was in compliance with the debt covenants contained in the Credit Agreement and the indenture governing its 3.875% USD Notes due 2028[226] - The Credit Agreement contains customary representations, warranties, and affirmative/negative covenants, including limitations on additional indebtedness, dividends, and liens[226] Item 7A. Quantitative and Qualitative Disclosures about Market Risk Element Solutions is exposed to market risks from interest rates, foreign currency exchange rates, and commodity prices, which it mitigates using interest rate and cross-currency swaps, foreign currency forward contracts, and commodity derivative contracts Interest Rate Risk Element Solutions is exposed to interest rate risk on its $1.15 billion variable interest rate debt, which it mitigates using interest rate and cross-currency swaps to achieve an effective fixed interest rate of approximately 3.3% on term loans B-2 - The company is exposed to interest rate risk associated with its long-term debt, including approximately $1.15 billion of variable interest rate debt at December 31, 2023[227] - Interest rate swaps and cross-currency swaps are used to reduce exposure, effectively converting U.S. dollar denominated term loans into fixed-rate euro-denominated debt[228] - The net result of these hedges was an effective interest rate of approximately 3.3% on the term loans B-2 at December 31, 2023[228] Counterparty Risk Element Solutions' financial derivative instruments expose it to credit loss from non-performance by counterparties, but the company reviews credit ratings and considers its exposure immaterial as of December 31, 2023 - Outstanding financial derivative instruments expose the company to credit loss in the event of non-performance by counterparties[229] - The company reviews counterparty credit ratings and believes its exposure to counterparty risk was immaterial at December 31, 2023[229] Foreign Currency Risk Element Solutions conducts 75% of its 2023 net sales in non-U.S. currencies, exposing it to foreign currency exchange rate volatility,