Element Solutions Inc: Form 10-Q for the period ended Jun 30, 2024
Filed with the SEC on Jul 30, 2024 and accepted by EDGAR at Jul 30, 2024, 16:15 ET.
Management's discussion and analysis
As filed, 40,758 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
This Management's Discussion and Analysis of Financial Condition and Results of Operations section should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and related notes included in this Quarterly Report, and the Consolidated Financial Statements, related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations section and other disclosures contained in our 2023 Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements as a result of several factors, including, but not limited to, those discussed in "Forward-Looking Statements” of this Quarterly Report, and in Part I, Item 1A, "Risk Factors" of our 2023 Annual Report.
Overview
Our Business
Element Solutions, incorporated in Delaware in January 2014, is a leading global specialty chemicals company whose businesses supply a broad range of solutions that enhance the performance of products people use every day. Developed in multi-step technological processes, these innovative solutions enable customers' manufacturing processes in several key industries, including consumer electronics, power electronics, semiconductor fabrication, communications and data storage infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy. Our product innovation and product extensions are expected to continue to drive sales growth in both new and existing markets while expanding margins through a consistent focus on increasing customer value propositions.
We believe the majority of our businesses hold strong positions in the high-growth markets we serve. Our extensive global teams of specially trained scientists and engineers develop our products, and our expert sales and service organizations ensure our customers' needs are met every day. Our continuous focus on customer-centric innovation serves as a catalyst to drive changes to existing formulations and opportunities in adjacent markets within our industry. We believe that our customers place significant value on the consistency and quality of our brands, on which we capitalize through significant market share, customer loyalty and supply chain access. In addition, operational risks and switching costs make it difficult for our customers to change suppliers which allows us to retain customers and maintain our market positions.
Our customers use our innovation as a competitive advantage, relying on us to help them navigate through fast-paced, high-growth markets. To that end, we draw upon our broad and longstanding intellectual property portfolio and technical expertise, while working closely with both customers and original equipment manufacturers on an ongoing basis to develop proprietary solutions tailored to their manufacturing needs. We leverage these close relationships to win qualifications and specifications into their supply chains as well as to identify opportunities for new products; all of which provide potential additional revenue streams.
Our strategy is based on a balance of operational excellence and prudent capital allocation. Our operating teams focus on the strong execution of customer-led product development, superior technical sales support and continuous supply chain optimization. Our senior leadership aims to foster an environment of accountability and success for our operating teams while also evaluating and executing on high-return capital allocation opportunities that can drive improvements in long-term shareholder value.
Our Operations
Our operations are organized into two segments: Electronics and Industrial & Specialty, which are each described below:
Electronics – Our Electronics segment researches, formulates and sells specialty chemicals and 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 solder, pastes, fluxes and adhesives, join those pathways together.
Electronics provides solutions through the following businesses:
| Assembly Solutions | As a global supplier of surface mount technologies (SMT), fluxes, thermal management materials, coatings and other attachment materials, we develop high-performing innovative materials that are used to assemble consumer electronics from circuit boards, discrete electronic components, connectors and integrated circuit substrates. We believe our growth in this business will be driven by the increasing use of electronics in consumer, automotive, telecommunications, memory, medical, aerospace and other markets. |
| Circuitry Solutions | As a global supplier of chemical formulations to the electronics industry, we design and manufacture proprietary "wet" chemical processes and materials used by our customers to manufacture printed circuit boards and memory storage devices. Our product portfolio is focused on specialized consumable chemical processes and materials, such as circuit formation, primary metallization, electroplate, surface finishes and flexible/formable films. We believe our growth in this business will be driven by demand in wireless mobile devices, internet infrastructure, high performance computing, and the increasing use of electronics in automobiles. |
| Semiconductor Solutions | As a global supplier to the semiconductor industry, we provide advanced copper interconnects, die attachment, sintered silver material, adhesives, wafer bump processes and photomask technologies to our customers for integrated circuit fabrication and semiconductor packaging. We believe our growth in this business will be driven by advanced electronics packaging, necessary to meet the growing needs of high performance computing, artificial intelligence, the internet of things, next-generation wireless communications and the increasing content and complexity of electronics in automotive applications. |
Industrial & Specialty – Our Industrial & Specialty segment researches, formulates and sells specialty chemicals and process technologies that enhance surfaces or improve industrial processes in diverse industrial sectors from automotive trim to transcontinental infrastructure and from high-speed printing to high-design faucets. Its products include chemical systems that protect and decorate metal and plastic surfaces; consumable chemicals that enable printing image transfer on flexible packaging materials; and chemistries used in water-based hydraulic control fluids in offshore energy production. The segment's products are used in the aerospace, automotive, construction, consumer electronics, consumer packaged goods and oil and gas production end markets.
Industrial & Specialty provides solutions through the following businesses:
| Industrial Solutions | As a global supplier of industrial metal and plastic finishing chemistries, we primarily design and manufacture chemical systems that protect and decorate surfaces. Our high-performance functional coatings improve resistance to wear and tear, such as chrome plating of shock absorbers for cars, or provide corrosion resistance for appliance parts. Our decorative performance coatings apply finishes for parts in various end-markets, such as automotive interiors or jewelry surfaces. As part of our broader sustainable solutions platform, we also provide both chemistry and equipment for turnkey wastewater treatment,recycling and reuse solutions. Our industrial customer base is highly diverse and includes customers in the following end-markets: appliances and electronics equipment; automotive parts; industrial parts; plumbing goods; construction equipment and transportation equipment. We believe our growth in this industry will be primarily driven by increased worldwide automobile production with elevated fashion elements and higher content per vehicle as well as general economic growth. |
| Graphics Solutions | As a supplier of consumable materials used to transfer images onto consumer packaging materials, our products are used to improve print quality and printing productivity. We produce and market photopolymers through an extensive line of flexographic plates that are used in the consumer packaging and printing industries. Photopolymers are molecules that change properties upon exposure to light. Flexography is a printing process that utilizes flexible printing plates made of rubber or other flexible plastics. We believe growth in this business will be driven by consumer demand and market shifts favoring the use of package imaging technologies that, like ours, offer a lower total cost of ownership to customers. |
| Energy Solutions | As a global supplier of specialized fluids to the offshore energy industry, we produce water-based hydraulic control fluids for major oil and gas companies and drilling contractors to be used in offshore deep-water production and drilling applications. We believe our growth in this business will be driven by continued capital expenditures in energy exploration and production. |
18
Recent Accounting Pronouncements
Our recent accounting pronouncements have not changed materially from the summary disclosed in Note 3, Recent Accounting Pronouncements, to the Consolidated Financial Statements included in our 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 Quarterly 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.
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 11, Segment Information, to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Results of Operations
Three and six months ended June 30, 2024 compared to three and six months ended June 30, 2023
(dollars in millions)
| Three Months Ended June 30, 2024 | 2023 | % Change Reported | June 30, Constant Currency | Organic | Six Months Ended 2024 | 2023 | % Change Reported | Constant Currency | Organic | |
|---|---|---|---|---|---|---|---|---|---|---|
| Net sales | $612.7 | $586.1 | 5% | 7% | 4% | $1,187.7 | $1,160.5 | 2% | 5% | 2% |
| Cost of sales | 345.5 | 357.6 | (3)% | (1)% | 675.5 | 704.2 | (4)% | (2)% | ||
| Gross profit | 267.2 | 228.5 | 17% | 19% | 512.2 | 456.3 | 12% | 14% | ||
| Gross margin | 43.6% | 39.0% | 460 bps | 440 bps | 43.1% | 39.3% | 380 bps | 370 bps | ||
| Operating expenses | 171.0 | 175.9 | (3)% | (1)% | 338.2 | 337.3 | 0% | 1% | ||
| Operating profit | 96.2 | 52.6 | 83% | 89% | 174.0 | 119.0 | 46% | 51% | ||
| Operating margin | 15.7% | 9.0% | 670bps | 680bps | 14.6% | 10.3% | 430bps | 460bps | ||
| Other expense, net | (22.0) | (4.6) | (nm) | (30.3) | (11.1) | (nm) | ||||
| Income tax benefit (expense) | 17.5 | (21.2) | (nm) | 4.0 | (38.1) | (nm) | ||||
| Net income from continuing operations | 91.7 | 26.8 | 241% | 147.7 | 69.8 | 112% | ||||
| Income from discontinued operations, net of tax | 1.6 | 2.9 | (46)% | 1.6 | 2.9 | (46)% | ||||
| Net income | $93.3 | $29.7 | 213% | $149.3 | $72.7 | 105% | ||||
| Net income margin | 15.2% | 5.1% | 1,010bps | 12.6% | 6.3% | 630bps | ||||
| Adjusted EBITDA | $135.1 | $116.1 | 16% | 21% | $262.1 | $228.4 | 15% | 19% | ||
| Adjusted EBITDA margin | 22.1% | 19.8% | 230bps | 250bps | 22.1% | 19.7% | 240bps | 270bps |
(nm) Calculation not meaningful.
Net Sales
Net sales in the second quarter of 2024 increased 5% on a reported basis, 7% on a constant currency basis and 4% on an organic basis. Electronics' consolidated results were positively impacted by $16.3 million of pass-through metals pricing and $3.3 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and organic net sales growth:
(dollars in millions)
| Electronics: | Three Months Ended June 30, 2024 | 2023 | % Change Reported Net Sales Growth | Impact of Currency | Constant Currency | Pass-Through Metals Pricing | Acquisitions | Organic Net Sales Growth |
|---|---|---|---|---|---|---|---|---|
| Assembly Solutions | $198.1 | $184.0 | 8% | 3% | 10% | (9)% | —% | 2% |
| Circuitry Solutions | 121.7 | 103.0 | 18% | 3% | 22% | —% | —% | 22% |
| Semiconductor Solutions | 71.9 | 68.8 | 5% | 2% | 6% | —% | (5)% | 2% |
| Total | 391.7 | 355.8 | 10% | 3% | 13% | (5)% | (1)% | 7% |
| Industrial & Specialty: | ||||||||
| Industrial Solutions | 165.0 | 175.8 | (6)% | 3% | (3)% | —% | —% | (3)% |
| Graphics Solutions | 36.8 | 36.7 | 0% | 0% | 1% | —% | —% | 1% |
| Energy Solutions | 19.2 | 17.8 | 8% | 1% | 9% | —% | —% | 9% |
| Total | 221.0 | 230.3 | (4)% | 3% | (1)% | —% | —% | (1)% |
| Total | $612.7 | $586.1 | 5% | 3% | 7% | (3)% | (1)% | 4% |
NOTE: Totals may not sum due to rounding.
Electronics' net sales in the second quarter of 2024 increased 10% on a reported basis, 13% on a constant currency basis and 7% on an organic basis.
- Assembly Solutions: net sales increased 8% on a reported basis and 2% on an organic basis. Pass-through metals pricing had a positive impact of 9% on reported net sales. Foreign exchange had a negative impact of 3% on reported net sales. The increase in organic net sales was primarily due to demand improvement in consumer, mobile and computer end markets, partially offset by continued weakness in broader industrial and automotive end markets.
- Circuitry Solutions: net sales increased 18% on a reported basis and 22% on an organic basis. Foreign exchange had a negative impact of 3% on reported net sales. The increase in organic net sales was primarily due to increased demand in the mobile phone end market, electric vehicles in China, and the artificial intelligence ("AI") end market and the continued recovery in the memory disk end market globally.
- Semiconductor Solutions: net sales increased 5% on a reported basis and 2% on an organic basis. The reacquired ViaForm Distribution Rights and the Kuprion Acquisition had a positive impact of 5% on reported net sales. Foreign exchange had a negative impact of 2% on reported net sales. The increase in organic net sales was primarily due to increased demand for wafer level packaging products in Asia, partially offset by lower sales in the power electronics end market.
Industrial & Specialty's net sales in the second quarter of 2024 decreased 4% on a reported basis, 1% on a constant currency basis and 1% on an organic basis.
- Industrial Solutions: net sales decreased 6% on a reported basis and 3% on an organic basis. Foreign exchange had a negative impact of 3% on reported net sales. The decrease in organic net sales was primarily due to lower raw material surcharges in 2024 when compared to the same period in 2023 as well as demand softness in European automotive and construction and industrial end markets.
- Graphics Solutions: net sales remained relatively flat on a reported basis and increased 1% on an organic basis. Foreign exchange had an immaterial impact on reported net sales. The increase in organic net sales was primarily due to modest growth in flexible packaging markets, partially offset by lower newspaper net sales.
- Energy Solutions: net sales increased 8% on a reported basis and 9% on an organic basis. Foreign exchange had a negative impact of 1% on reported net sales. The increase in organic net sales was primarily due to a continued increase in drilling and energy production activity driving higher utilization rates.
Year to date, net sales increased 2% on a reported basis, 5% on a constant currency basis and 2% on an organic basis. Electronics' consolidated results were positively impacted by $16.8 million of pass-through metals pricing and $8.1 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $0.5 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and organic net sales growth:
(dollars in millions)
| Electronics: | Six Months Ended June 30, 2024 | 2023 | % Change Reported Net Sales Growth | Impact of Currency | Constant Currency | Pass-Through Metals Pricing | Acquisitions | Organic Net Sales Growth |
|---|---|---|---|---|---|---|---|---|
| Assembly Solutions | $365.6 | $357.5 | 2% | 3% | 5% | (5)% | —% | 0% |
| Circuitry Solutions | 233.5 | 209.7 | 11% | 3% | 15% | —% | —% | 15% |
| Semiconductor Solutions | 141.8 | 128.2 | 11% | 2% | 12% | —% | (6)% | 6% |
| Total | 740.9 | 695.4 | 7% | 3% | 9% | (2)% | (1)% | 6% |
| Industrial & Specialty: | ||||||||
| Industrial Solutions | 331.5 | 356.5 | (7)% | 2% | (5)% | —% | 0% | (5)% |
| Graphics Solutions | 73.8 | 71.6 | 3% | 0% | 3% | —% | —% | 3% |
| Energy Solutions | 41.5 | 37.0 | 12% | (1)% | 11% | —% | —% | 11% |
| Total | 446.8 | 465.1 | (4)% | 2% | (2)% | —% | 0% | (2)% |
| Total | $1,187.7 | $1,160.5 | 2% | 2% | 5% | (1)% | (1)% | 2% |
NOTE: Totals may not sum due to rounding.
Year to date, Electronics' net sales increased 7% on a reported basis, 9% on a constant currency basis and 6% on an organic basis.
- Assembly Solutions: net sales increased 2% on a reported basis and remained relatively flat on an organic basis. Pass-through metals pricing had a positive impact of 5% on reported net sales. Foreign exchange had a negative impact of 3% on reported net sales. Flat organic net sales were primarily due to demand improvement in consumer, mobile and computer end markets, offset by weakness in broader industrial and automotive end markets.
- Circuitry Solutions: net sales increased 11% on a reported basis and 15% on an organic basis. Foreign exchange had a negative impact of 3% on reported net sales. The increase in organic net sales was primarily due to increased demand in the mobile phone end market, electric vehicles in China, and the AI end market and the continued recovery in the memory disk end market globally.
- Semiconductor Solutions: net sales increased 11% on a reported basis and 6% on an organic basis. The reacquired ViaForm Distribution Rights and the Kuprion Acquisition had a positive impact of 6% on reported net sales. Foreign exchange had a negative impact of 2% on reported net sales. The increase in organic net sales was primarily due to increased demand for wafer level packaging products in Asia.
Year to date, Industrial & Specialty's net sales decreased 4% on a reported basis, 2% on a constant currency basis and 2% on an organic basis.
- Industrial Solutions: net sales decreased 7% on a reported basis and 5% on an organic basis. Acquisitions had an immaterial impact 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 raw material surcharges in 2024 when compared to the same period in 2023 as well as demand softness in European automotive and construction and industrial markets.
- Graphics Solutions: net sales increased 3% on a reported basis and 3% on an organic basis. Foreign exchange had an immaterial impact on reported net sales. The increase in organic net sales was primarily due to increased demand for flexographic plates and new customer wins, partially offset by lower newspaper net sales.
- Energy Solutions: net sales increased 12% on a reported basis and 11% 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 a continued increase in drilling and energy production activity driving higher utilization rates.
Gross Profit
(dollars in millions)
| Gross profit | Three Months Ended June 30, 2024 | 2023 | % Change Reported | June 30, Constant Currency | Six Months Ended 2024 | 2023 | % Change Reported | Constant Currency |
|---|---|---|---|---|---|---|---|---|
| Electronics | $172.5 | $140.1 | 23% | 25% | $320.2 | $276.0 | 16% | 18% |
| Industrial & Specialty | 94.7 | 88.4 | 7% | 10% | 192.0 | 180.3 | 6% | 8% |
| Total | $267.2 | $228.5 | 17% | 19% | $512.2 | $456.3 | 12% | 14% |
| Gross margin | ||||||||
| Electronics | 44.0% | 39.4% | 460 bps | 440 bps | 43.2% | 39.7% | 350 bps | 340 bps |
| Industrial & Specialty | 42.9% | 38.4% | 450 bps | 440 bps | 43.0% | 38.8% | 420 bps | 410 bps |
| Total | 43.6% | 39.0% | 460 bps | 440 bps | 43.1% | 39.3% | 380 bps | 370 bps |
Electronics' gross profit in the second quarter of 2024 increased by 23% on a reported basis and 25% on a constant currency basis. The constant currency increase in gross profit and gross margin was primarily driven by volume improvement in our higher margin Circuitry Solutions business.
Industrial & Specialty's gross profit in the second quarter of 2024 increased by 7% on a reported basis and 10% on a constant currency basis. The constant currency increase in gross profit was primarily driven by lower raw materials costs in our Industrial Solutions business combined with higher net sales in the Energy Solutions business. The increase in gross margin was primarily due to favorable product mix and lower commodity surcharge-based sales in our Industrial Solutions business and growth in our higher margin Energy Solutions business.
Year to date, Electronics' gross profit increased by 16% on a reported basis and 18% on a constant currency basis. The constant currency increase in gross profit was primarily driven by lower raw material costs and increased demand for higher margin product groups, particularly in Asia. The increase in gross margin was primarily due to the recaptured margin on ViaForm Distributions Rights, easing raw material cost pressures and favorable product mix from growth in higher margin products.
Year to date, Industrial & Specialty's gross profit increased by 6% on a reported basis and 8% 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 combined with higher net sales in the Graphics Solutions and Energy Solutions businesses. The increase in gross margin was primarily due to growth in our higher margin Energy Solutions business, favorable product mix and lower commodity surcharge-based revenue in our Industrial Solutions business.
Operating Expenses
(dollars in millions)
| Three Months Ended June 30, 2024 | 2023 | % Change Reported | June 30, Constant Currency | Six Months Ended 2024 | 2023 | % Change Reported | Constant Currency | |
|---|---|---|---|---|---|---|---|---|
| Selling, technical, general and administrative | $155.4 | $147.0 | 6% | 7% | $304.5 | $295.9 | 3% | 4% |
| Research and development | 15.6 | 28.9 | (46)% | (45)% | 33.7 | 41.4 | (18)% | (18)% |
| Total | $171.0 | $175.9 | (3)% | (1)% | $338.2 | $337.3 | 0% | 1% |
| Operating expenses as % of net sales | ||||||||
| Selling, technical, general and administrative | 25.4% | 25.1% | 30 bps | 0 bps | 25.6% | 25.5% | 10 bps | (10) bps |
| Research and development | 2.6% | 4.9% | (230) bps | (240) bps | 2.8% | 3.6% | (80) bps | (80) bps |
| Total | 27.9% | 30.0% | (210) bps | (240) bps | 28.5% | 29.1% | (60) bps | (100) bps |
Operating expenses in the second quarter of 2024 decreased 3% on a reported basis and 1% on a constant currency basis. The constant currency decrease was primarily driven by $15.7 million of research and development costs associated with the purchase accounting related to the Kuprion Acquisition in the second quarter of 2023, partially offset by $7.9 million of higher incentive compensation costs, primarily due to higher accruals associated with increased expectations for strong full year financial results.
Year to date, operating expenses remained relatively flat on a reported basis and increased 1% on a constant currency basis. The constant currency increase was primarily driven by $8.8 million of higher incentive compensation costs, primarily due to higher accruals associated with increased expectations for strong full year financial results, $3.9 million of research and development costs associated with contingent consideration for the Kuprion Acquisition in the first quarter of 2024 and higher personnel costs. Partially offset by $15.7 million of research and development costs associated with the purchase accounting related to the Kuprion Acquisition in the second quarter of 2023. See Note 4, Goodwill and Intangible Assets, Net, to the unaudited Condensed Consolidated Financial Statements for further information regarding the Kuprion contingent consideration.
Other (Expense) Income
(dollars in millions)
| Other (expense) income | Three Months Ended June 30, 2024 | 2023 | Six Months Ended June 30, 2024 | 2023 |
|---|---|---|---|---|
| Interest expense, net | $(14.3) | $(12.0) | $(28.2) | $(23.7) |
| Foreign exchange gains | 5.0 | 9.0 | 12.9 | 13.9 |
| Other expense, net | (12.7) | (1.6) | (15.0) | (1.3) |
| Total | $(22.0) | $(4.6) | $(30.3) | $(11.1) |
Interest expense, net
For the three and six months ended June 30, 2024, interest expense, net increased $2.3 million and $4.5 million, respectively, primarily due to a higher effective interest rate on our outstanding term loan balances due to the syndication of the new term loans B-2 in the fourth quarter of 2023, partially offset by higher interest income.
Foreign exchange gains
For the three and six months ended June 30, 2024, the fluctuations in foreign exchange gains were primarily driven by the remeasurement of intercompany loans.
Other expense, net
For the three months ended June 30, 2024, other expense, net included $12.0 million of net losses associated with metals derivative contracts ($11.2 million of realized and $0.8 million of unrealized losses). For the three months ended June 30, 2023, other expense, net included $5.0 million of charges due to highly inflationary accounting for our operations in Turkey and $0.7 million of net losses associated with metals derivative contracts ($2.6 million of realized losses and $1.9 million of unrealized gains).
For the six months ended June 30, 2024, other expense, net included $15.4 million of net losses associated with metals derivative contracts ($14.0 million of realized and $1.4 million of unrealized losses) and $1.4 million of charges due to highly inflationary accounting for our operations in Turkey. For the six months ended June 30, 2023, other expense, net included $5.4 million of charges due to highly inflationary accounting for our operations in Turkey and $1.4 million of net losses associated with metals derivative contracts ($3.6 million of realized losses and $2.2 million of unrealized gains).
The metal derivative contracts primarily relate to inventory associated with pass-through metals pricing in our Assembly Solutions business. See Note 6, Financial Instruments, to the unaudited Condensed Consolidated Financial Statements for further discussion of these derivative instruments.
Income Tax
Income tax benefit for the three and six months ended June 30, 2024 totaled $17.5 million and $4.0 million, respectively as compared to income tax expense of $21.2 million and $38.1 million, respectively for the three and six months ended June 30, 2023. The Company recorded an income tax benefit for the three and six months ended June 30, 2024 of $35.9 million and $37.1 million, respectively, from releasing valuation allowances in the U.K. related to net operating loss and interest carryforwards, as well as a continued U.S. benefit related to claiming foreign tax credits consistent with our election in the fourth quarter of 2023, and the impact of changes to the level and mix of earnings.
Income tax expense for the three and six months ended June 30, 2023, included current and deferred taxes based on jurisdictional earnings, withholding taxes, a U.S. tax deduction related to FDII and the impact of U.S. GILTI and subpart F income regimes.
See Note 9, Income Taxes, to the unaudited Condensed Consolidated Financial Statements for further information.
Segment Adjusted EBITDA Performance
(dollars in millions)
| Net income: | Three Months Ended June 30, 2024 | 2023 | % Change Reported | June 30, Constant Currency | Six Months Ended 2024 | 2023 | % Change Reported | Constant Currency |
|---|---|---|---|---|---|---|---|---|
| Total | $93.3 | $29.7 | 213% | $149.3 | $72.7 | 105% | ||
| Adjusted EBITDA: | ||||||||
| Electronics | $92.2 | $76.3 | 21% | 26% | $176.1 | $149.0 | 18% | 23% |
| Industrial & Specialty | 42.9 | 39.8 | 7% | 12% | 86.0 | 79.4 | 8% | 12% |
| Total | $135.1 | $116.1 | 16% | 21% | $262.1 | $228.4 | 15% | 19% |
| Net income margin: | ||||||||
| Total | 15.2% | 5.1% | 1,010 bps | 12.6% | 6.3% | 630 bps | ||
| Adjusted EBITDA margin: | ||||||||
| Electronics | 23.6% | 21.5% | 210 bps | 250 bps | 23.8% | 21.4% | 240 bps | 270 bps |
| Industrial & Specialty | 19.4% | 17.3% | 210 bps | 240 bps | 19.2% | 17.1% | 210 bps | 240 bps |
| Total | 22.1% | 19.8% | 230 bps | 250 bps | 22.1% | 19.7% | 240 bps | 270 bps |
For the three months ended June 30, 2024, Electronics' Adjusted EBITDA increased 21% on a reported basis and 26% on a constant currency basis. The constant currency increase was primarily driven by higher gross profits related to favorable product mix and growth in the Circuitry Solutions business. Industrial & Specialty's Adjusted EBITDA increased 7% on a reported basis and 12% on a constant currency basis. The constant currency increase was primarily driven by higher gross profits related to lower raw material costs and growth in our higher margin Energy Solutions business.
For the six months ended June 30, 2024, Electronics' Adjusted EBITDA increased 18% on a reported basis and 23% on a constant currency basis. The constant currency increase was primarily driven by higher gross profits related to favorable product mix and growth in the Circuitry Solutions business. Industrial & Specialty's Adjusted EBITDA increased 8% on a reported basis and 12% on a constant currency basis. The constant currency increase was primarily driven by higher gross profits related to lower raw material costs and growth in our higher margin Energy Solutions business.
Liquidity and Capital Resources
Our primary source of liquidity during the six months ended June 30, 2024 was available cash generated from operations. Our primary uses of cash and cash equivalents were to pay cash dividends and fund operations including working capital and capital expenditures. 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 second quarter of 2024, we paid a cash dividend of 8 cents per share. We currently expect to continue to pay a cash dividend on a quarterly basis; however, the actual declaration of any cash dividends as well as their amounts and timing, will be subject to the final determination of our Board of Directors based on factors including our future earnings and cash flow generation.
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 the six months ended June 30, 2024, approximately 77% 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 $309 million of cash and cash equivalents at June 30, 2024, $219 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:
(dollars in millions)
| Six Months Ended June 30, 2024 | 2023 | |
|---|---|---|
| Cash provided by operating activities | $124.8 | $134.4 |
| Cash used in investing activities | $(43.8) | $(213.7) |
| Cash (used in) provided by financing activities | $(54.1) | $97.3 |
Operating Activities
The decrease in net cash flows provided by operating activities of $9.6 million was primarily driven by higher levels of working capital partially offset by higher cash operating profits (net income adjusted for non-cash items).
Investing Activities
During the six months ended June 30, 2024, we paid approximately $10.6 million of higher capital expenditures compared to the same period in 2023. During the six months ended June 30, 2023, we paid approximately $170 million in connection with the reacquired ViaForm Distribution Rights and $15.9 million in connection with the Kuprion Acquisition.
Financing Activities
During the six months ended June 30, 2024, we paid $39.4 million of cash dividends on shares of our common stock and $7.5 million for shares of our common stock withheld by the Company to satisfy the tax withholding requirements related to the vesting of RSUs included in "Other, net." During the six months ended June 30, 2023, we borrowed $150 million of incremental term loans A under the Credit Agreement to finance the reacquired ViaForm Distribution Rights. We paid $38.7 million of cash dividends on shares of our common stock and $7.6 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."
Financial Borrowings
Credit Facilities and Senior Notes
At June 30, 2024, we had $1.93 billion of indebtedness, net of unamortized discounts and debt issuance costs of $16.0 million, which was comprised of:
- $1.14 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 $391 million at June 30, 2024 (net of $6.2 million of stand-by letters of credit which reduce our borrowing capacity).
Covenants
At June 30, 2024, we were in compliance with the debt covenants contained in the Credit Agreement and the indenture governing our 3.875% USD Notes due 2028.
Market risk
As filed, 335 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
The quantitative and qualitative disclosures about market risk required by this item have not changed materially from those disclosed in our 2023 Annual Report. For a discussion of our exposure to market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in our 2023 Annual Report.
Controls and procedures
As filed, 1,213 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
(a) Evaluation of Disclosure Controls and Procedures
Based on management's evaluation (with the participation of our CEO and CFO), as of the end of the period covered by this Quarterly Report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes to Internal Control Over Financial Reporting
Based on management's evaluation (with the participation of our CEO and CFO), there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Risk factors
As filed, 138 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
There have been no material changes in the risk factors from those set forth in Part I, Item 1A, Risk Factors of our 2023 Annual Report.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2024-06-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2024-04-01 to 2024-06-30 | $612.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months2024-01-01 to 2024-06-30 | $1.19bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months2024-04-01 to 2024-06-30 | $345.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months2024-01-01 to 2024-06-30 | $675.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months2024-04-01 to 2024-06-30 | $267.2m | us-gaap:GrossProfit |
| Gross profit | 6 months2024-01-01 to 2024-06-30 | $512.2m | us-gaap:GrossProfit |
| Research and development | 3 months2024-04-01 to 2024-06-30 | $15.6m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months2024-01-01 to 2024-06-30 | $33.7m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months2024-04-01 to 2024-06-30 | $155.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months2024-01-01 to 2024-06-30 | $304.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months2024-04-01 to 2024-06-30 | $96.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months2024-01-01 to 2024-06-30 | $174.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months2024-04-01 to 2024-06-30 | −$17.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months2024-01-01 to 2024-06-30 | −$4.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-04-01 to 2024-06-30 | $93.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months2024-01-01 to 2024-06-30 | $149.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2024-04-01 to 2024-06-30 | $0.39 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months2024-01-01 to 2024-06-30 | $0.62 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2024-04-01 to 2024-06-30 | $0.39 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months2024-01-01 to 2024-06-30 | $0.62 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2024-04-01 to 2024-06-30 | 242,500,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months2024-01-01 to 2024-06-30 | 242,500,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months2024-01-01 to 2024-06-30 | $124.8m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months2024-01-01 to 2024-06-30 | $33.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months2024-01-01 to 2024-06-30 | $39.4m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | At period end2024-06-30 | $309.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2024-06-30 | $1.30bn | us-gaap:AssetsCurrent |
| Total assets | At period end2024-06-30 | $4.98bn | us-gaap:Assets |
| Current liabilities | At period end2024-06-30 | $372.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2024-06-30 | $2.59bn | us-gaap:Liabilities |
| Shareholders' equity | At period end2024-06-30 | $2.37bn | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001590714-24-000135. Last ingested by Listed: Nov 10, 2026, 23:30 ET. Listed shows no prices and gives no investment advice.