# Element Solutions Inc (ESI) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Element Solutions Inc's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1590714/000159071424000054/esi-20231231.htm
Accession: 0001590714-24-000054
Filing date: 2024-02-21
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ESI/
All MD&A years: /company/ESI/mda/
Previous year: /company/ESI/mda/fy2022/ (FY 2022)
Next year: /company/ESI/mda/fy2024/ (FY 2024)

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

[[GREPCENT_TABLE]]
[["","","","","Change - 2023 vs 2022","","","","Change - 2022 vs 2021"],["(dollars in millions)","","2023","","2022","","Reported","","Constant Currency","","Organic","","2021","","Reported","","Constant Currency","","Organic"],["Net sales","","$","2,333.2","","","$","2,549.4","","","(8)%","","(7)%","","(5)%","","$","2,399.8","","","6%","","13%","","5%"],["Cost of sales","","1,414.7","","","1,596.7","","","(11)%","","(10)%","","","","1,439.0","","","11%","","19%"],["Gross profit","","918.5","","","952.7","","","(4)%","","(2)%","","","","960.8","","","(1)%","","5%"],["Gross margin","","39.4","%","","37.4","%","","200 bps","","220 bps","","","","40.0","%","","(260) bps","","(300) bps"],["Operating expenses","","744.9","","","627.4","","","19%","","19%","","","","660.9","","","(5)%","","(1)%"],["Operating profit","","173.6","","","325.3","","","(47)%","","(41)%","","","","299.9","","","8%","","17%"],["Operating margin","","7.4","%","","12.8","%","","(540) bps","","(480) bps","","","","12.5","%","","30 bps","","40 bps"],["Other expense, net","","(44.5)","","","(53.3)","","","(16)%","","","","","","(48.2)","","","11%"],["Income tax expense","","(13.0)","","","(85.8)","","","(85)%","","","","","","(48.3)","","","78%"],["Net income from continuing operations","","116.1","","","186.2","","","(38)%","","","","","","203.4","","","(8)%"],["Income from discontinued operations, net of tax","","2.1","","","1.8","","","19%","","","","","","0.3","","","(nm)"],["Net income","","$","118.2","","","$","188.0","","","(37)%","","","","","","$","203.7","","","(8)%"],["Net income margin","","5.1","%","","7.4","%","","(230) bps","","","","","","8.5","%","","(110) bps"],["Adjusted EBITDA","","$","482.3","","","$","526.6","","","(8)%","","(6)%","","","","$","524.8","","","0%","","8%"],["Adjusted EBITDA margin","","20.7","%","","20.7","%","","0 bps","","20 bps","","","","21.9","%","","(120) bps","","(110) bps"]]
[[/GREPCENT_TABLE]]

(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:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","% Change"],["(dollars in millions)","2023","","2022","","Reported Net Sales Growth","","Impact of Currency","","Constant Currency","","Pass-Through Metals Pricing","","Acquisitions","","Organic Net Sales Growth"],["Electronics:"],["Assembly Solutions","$","726.1","","","$","819.5","","","(11)%","","2%","","(9)%","","8%","","\u2014%","","(2)%"],["Circuitry Solutions","424.3","","","503.5","","","(16)%","","2%","","(14)%","","\u2014%","","\u2014%","","(14)%"],["Semiconductor Solutions","264.3","","","288.2","","","(8)%","","1%","","(8)%","","\u2014%","","(3)%","","(11)%"],["Total","$","1,414.7","","","$","1,611.2","","","(12)%","","2%","","(10)%","","4%","","(1)%","","(7)%"],["Industrial & Specialty:"],["Industrial Solutions","$","699.0","","","$","728.3","","","(4)%","","1%","","(3)%","","\u2014%","","(1)%","","(4)%"],["Graphics Solutions","142.7","","","143.0","","","0%","","(1)%","","(1)%","","\u2014%","","\u2014%","","(1)%"],["Energy Solutions","76.8","","","66.9","","","15%","","(1)%","","14%","","\u2014%","","\u2014%","","14%"],["Total","$","918.5","","","$","938.2","","","(2)%","","1%","","(2)%","","\u2014%","","0%","","(2)%"],["Total","$","2,333.2","","","$","2,549.4","","","(8)%","","1%","","(7)%","","2%","","(1)%","","(5)%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(dollars in millions)","2023","","2022","","Reported","","Constant Currency"],["Gross profit:"],["Electronics","$","558.2","","","$","593.9","","","(6)%","","(4)%"],["Industrial & Specialty","360.3","","","358.8","","","0%","","2%"],["Total","$","918.5","","","$","952.7","","","(4)%","","(2)%"],["Gross profit margin:"],["Electronics","39.5","%","","36.9","%","","260 bps","","270 bps"],["Industrial & Specialty","39.2","%","","38.2","%","","100 bps","","130 bps"],["Total","39.4","%","","37.4","%","","200 bps","","220 bps"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Change"],["(dollars in millions)","2023","","2022","","Reported","","Constant Currency"],["Selling, technical, general and administrative","$","596.8","","","$","578.6","","","3%","","4%"],["Research and development","68.1","","","48.8","","","40%","","40%"],["Goodwill impairment","80.0","","","\u2014","","","(nm)","","(nm)"],["Total","$","744.9","","","$","627.4","","","19%","","19%"],["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","%","","\u2014","%","","(nm)","","(nm)"],["Total","31.9","%","","24.6","%","","730 bps","","700 bps"]]
[[/GREPCENT_TABLE]]

(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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(dollars in millions)","2023","","2022"],["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)"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(dollars in millions)","2023","","2022","","Reported","","Constant Currency"],["Net income:"],["Total","$","118.2","","","$","188.0","","","(37)%"],["Adjusted EBITDA:"],["Electronics","$","317.7","","","$","360.7","","","(12)%","","(9)%"],["Industrial & Specialty","164.6","","","165.9","","","(1)%","","1%"],["Total","$","482.3","","","$","526.6","","","(8)%","","(6)%"],["Net income margin:"],["Total","5.1","%","","7.4","%","","(230) bps"],["Adjusted EBITDA margin:"],["Electronics","22.5","%","","22.4","%","","10 bps","","30 bps"],["Industrial & Specialty","17.9","%","","17.7","%","","20 bps","","50 bps"],["Total","20.7","%","","20.7","%","","0 bps","","20 bps"]]
[[/GREPCENT_TABLE]]

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 ViaForm Distribution 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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in millions)","","2023","","2022","","2021"],["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"]]
[[/GREPCENT_TABLE]]

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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