UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
_______________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20202021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-36272
Element Solutions Inc
(Exact name of Registrant as specified in its charter)
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Delaware | | | 37-1744899 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
| | | | |
500 East Broward Boulevard, | Suite 1860 | | 33394 |
Fort Lauderdale, | Florida | | | (Zip Code) |
(Address of principal executive offices) | | | |
Registrant’s telephone number, including area code: (561) 207-9600
_______________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | ESI | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding at October 21, 2020: 247,213,182July 22, 2021: 247,567,929
TABLE OF CONTENTS
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Glossary
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| Three and NineSix Months Ended SeptemberJune 30, 20202021 and 20192020 | |
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| Three and NineSix Months Ended SeptemberJune 30, 20202021 and 20192020 | |
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| SeptemberJune 30, 20202021 and December 31, 20192020 | |
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| NineSix Months Ended SeptemberJune 30, 20202021 and 20192020 | |
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| Three and NineSix Months Ended SeptemberJune 30, 20202021 and 20192020 | |
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GLOSSARY OF DEFINED TERMS
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Terms | | Definitions |
Element Solutions; We; Us; Our; the Company | | Element Solutions Inc, a Delaware corporation, and, where the context requires, its subsidiaries or operating businesses. |
Arysta | | Arysta LifeScience Inc., a former subsidiary of Element Solutions, which operated the Agricultural Solutions business prior to the Arysta Sale. |
Arysta Sale | | Sale of 100% of the issued and outstanding shares of common stock of Arysta and its subsidiaries to UPL Corporation Ltd., a wholly-owned subsidiary of UPL Limited, on January 31, 2019, for an aggregate purchase price of $4.28 billion in cash, after post-closing adjustments. |
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ASU | | Accounting Standards Update. |
Board | | Element Solutions' board of directors. |
Credit Agreement | | Credit Agreement, dated as of January 31, 2019, as amended on November 26, 2019,from time to time, among, inter alia, Element Solutions and MacDermid, as borrowers, certain subsidiaries of Element Solutions and the lenders from time to time parties thereto, and Barclays Bank PLC, as administrative agent and collateral agent.thereto. |
DMP Acquisition | | Acquisition of 100% of the issued and outstanding shareson July 1, 2020 of Industrial Water Treatment Solutions Corporation a provider of turnkey wastewater treatment and recycleits two subsidiaries, DMP Corporation and reuse solutions across multiple manufacturing industries, on July 1, 2020 from IWTS, LLC.Industrial Specialty Chemicals, Inc. dba "DMP." |
EBITDA | | Earnings before interest, taxes, depreciation and amortization. |
ESPP | | Element Solutions Inc 2014 Employee Stock Purchase Plan. |
Exchange Act | | Securities Exchange Act of 1934, as amended. |
FASB | | Financial Accounting Standards Board. |
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GAAP | | U.S. Generally Accepted Accounting Principles. |
KesterHKW Acquisition | | Acquisition on May 5, 2021 of 100% of the outstanding equity interestsH.K. Wentworth Limited and certain assets of the Kester business on December 2, 2019, a global supplier of advanced technology assembly materials used in electronics assembly and semiconductor application, for $63.6 million net of cash, working capital and other closing adjustments, from Illinois Tool Works Inc.its subsidiaries. |
MacDermid | | MacDermid, Incorporated, a Connecticut corporation. |
NYSE | | New York Stock Exchange.corporation and subsidiary of Element Solutions. |
OEM | | Original Equipment Manufacturer.equipment manufacturer. |
Quarterly Report | | This quarterly report on Form 10-Q for the three and ninesix months ended SeptemberJune 30, 2020.2021. |
RSUs | | Restricted stock units issued by Element Solutions from time to time under its amended and restated 2013 Incentive Compensation Plan. |
SEC | | Securities and Exchange Commission. |
Series A Preferred Stock | | Element Solutions' 2,000,000 shares of Series A convertible preferred stock, which were converted into shares of Element Solutions' common stock on February 25, 2020, on a one-for-one basis, upon request of Mariposa Acquisition, LLC and Berggruen Holdings Ltd. and affiliates.2020. |
20192020 Annual Report | | Element Solutions' annual report on Form 10-K for the fiscal year ended December 31, 2019,2020, filed with the SEC on February 28, 2020. |
3.875% USD Notes Indenture | | The indenture, dated August 18, 2020, governing the 3.875% USD Notes due 2028.25, 2021. |
3.875% USD Notes due 2028 | | Element Solutions' $800 million aggregate principal amount of 3.875% senior notes due 2028, denominated in U.S. dollars, issued on August 18, 2020. |
5.875% USD Notes Indenture | | The indenture, dated November 24, 2017, governing the 5.875% USD Notes due 2025. |
5.875% USD Notes due 2025 | | Element Solutions' $800 million aggregate principal amount of 5.875% senior notes due 2025, denominated in U.S. dollars, issued on November 24, 2017 and fully redeemed on September 4, 2020. |
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Forward-Looking Statements
This Quarterly Report contains forward-looking statements that can be identified by words such as "expect," "anticipate," "project," "will," "should," "believe," "intend," "plan," "assume," "estimate," "predict," "seek," "continue," "outlook," "may," "might," "aim," "can have," "likely," "potential," "target," "hope," "goal" or "priority" and variations of such words and similar expressions. Many of the forward-looking statements include, but are not limited to, statements, beliefs, projections and expectations regarding the parties' ability to satisfy the closing conditions of the Coventya acquisition and to finalize and execute the definitive documentation relating to the add-on debt, including the execution of an amendment to the Credit Agreement and closing of the incremental facility for the increase of the existing term loans; the timing of the closing of the Coventya acquisition, the purchase price for the Coventya acquisition, funding of the add-on transaction and effective date of the related forward starting swaps; the use of proceeds from the add-on transaction; the continuing economic impact of the coronavirus (COVID-19) pandemicand its variants on the global economy, our business, net sales,financial results, customers, suppliers, vendors and/or stock price,price; capital requirements and governmental responsesavailability of financing; increased expectations for strong full year 2021 financial results; probable achievement of the performance target related to the pandemic; our business and management strategies; share repurchases;certain performance-based RSUs; cost containment and cost savings; the impact of new accounting standards and accounting changes; share repurchases; our dividend policy and dividend declarations; our hedging activities; timing and outcome of environmental and legal matters; tax planning strategies, assessments and adjustments; impairments, including those on goodwill and other intangible assets; impairments; price volatility and cost environment; our liquidity, cash flows and capital resources;allocation; funding sources; capital expenditures; debt and debt leverage ratio; off-balance sheet arrangements and contractual obligations; general views about future operating results; expected returns to stockholders; risk management programs; future prospects; and other events or developments that we expect or anticipate will occur in the future.
Forward-lookingThese forward-looking statements provideare based on our current expectations ofabout future events, based on certain assumptionsfinancial performance and include any statement that doestrends and do not directly relate to any historical or current fact.facts. These statements are not guaranteessubject to a number of future performancerisks, uncertainties and our actual results may differ materially from the results contemplated by these statements. A discussion of such risks and uncertainties includes, without limitation, the risks set forth in Part II, Item 1A, Risk Factors, of this Quarterly Report andassumptions, including those discussed in Part I, Item 1A, Risk Factors, of our 20192020 Annual Report. Moreover, as we operate in a very competitive and rapidly changing environment, new risks emerge from time to time. In light of these risks, uncertainty and assumptions, our actual results may differ materially from the results anticipated or implied in the forward-looking statements. Any forward-looking statement is based only on information currently available and speaks only as of the date on which it is made. We undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Please consult any further disclosures on related subjects in our SEC filings.
Non-GAAP Financial Measures
This Quarterly Report contains non-GAAP financial measures, such as Adjusted EBITDA and operating results on a constant currency and organic basis. Non-GAAP financial measures should not be considered in isolation from, as a substitute for, or superior to, performance measures calculated in accordance with GAAP. For definitions ofadditional information on these non-GAAP financial measures, and additional information on why they are presented, their respectiveincluding definitions, limitations and reconciliations to their most comparable applicable GAAP measures, see "Non-GAAP Financial Measures" in the Management's Discussion and Analysis of Financial Condition and Results of Operations section in Part I, Item 2, and Note 14,13, Segment Information, to the unaudited Condensed Consolidated Financial Statements, both included in this Quarterly Report.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in millions, except per share amounts)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
Net sales | Net sales | $ | 477.5 | | | $ | 464.7 | | | $ | 1,317.1 | | | $ | 1,381.2 | | Net sales | $ | 586.6 | | | $ | 387.0 | | | $ | 1,136.7 | | | $ | 839.6 | |
Cost of sales | Cost of sales | 274.0 | | | 259.0 | | | 753.8 | | | 784.2 | | Cost of sales | 348.1 | | | 224.5 | | | 657.2 | | | 479.8 | |
Gross profit | Gross profit | 203.5 | | | 205.7 | | | 563.3 | | | 597.0 | | Gross profit | 238.5 | | | 162.5 | | | 479.5 | | | 359.8 | |
Operating expenses: | Operating expenses: | | | | | | Operating expenses: | | | | | |
Selling, technical, general and administrative | Selling, technical, general and administrative | 134.8 | | | 128.8 | | | 373.4 | | | 397.6 | | Selling, technical, general and administrative | 154.7 | | | 113.4 | | | 284.3 | | | 238.6 | |
Research and development | Research and development | 10.1 | | | 10.0 | | | 37.2 | | | 31.9 | | Research and development | 12.8 | | | 9.6 | | | 24.3 | | | 27.1 | |
Total operating expenses | Total operating expenses | 144.9 | | | 138.8 | | | 410.6 | | | 429.5 | | Total operating expenses | 167.5 | | | 123.0 | | | 308.6 | | | 265.7 | |
Operating profit | Operating profit | 58.6 | | | 66.9 | | | 152.7 | | | 167.5 | | Operating profit | 71.0 | | | 39.5 | | | 170.9 | | | 94.1 | |
Other (expense) income: | Other (expense) income: | | | | | | | | Other (expense) income: | | | | | | | |
Interest expense, net | Interest expense, net | (17.1) | | | (17.4) | | | (50.7) | | | (73.7) | | Interest expense, net | (12.9) | | | (16.9) | | | (25.8) | | | (33.6) | |
Foreign exchange loss | (3.5) | | | (1.2) | | | (42.1) | | | (2.4) | | |
Other (expense) income, net | (49.1) | | | 2.9 | | | (50.4) | | | (46.2) | | |
Foreign exchange (loss) gain | | Foreign exchange (loss) gain | (5.2) | | | (12.8) | | | 22.8 | | | (38.6) | |
Other expense, net | | Other expense, net | (5.7) | | | (1.7) | | | (7.3) | | | (1.3) | |
Total other expense | Total other expense | (69.7) | | | (15.7) | | | (143.2) | | | (122.3) | | Total other expense | (23.8) | | | (31.4) | | | (10.3) | | | (73.5) | |
(Loss) income before income taxes and non-controlling interests | (11.1) | | | 51.2 | | | 9.5 | | | 45.2 | | |
Income before income taxes and non-controlling interests | | Income before income taxes and non-controlling interests | 47.2 | | | 8.1 | | | 160.6 | | | 20.6 | |
Income tax benefit (expense) | Income tax benefit (expense) | 47.3 | | | (57.2) | | | 37.4 | | | (40.0) | | Income tax benefit (expense) | 31.9 | | | (5.8) | | | 0.8 | | | (9.9) | |
Net income (loss) from continuing operations | 36.2 | | | (6.0) | | | 46.9 | | | 5.2 | | |
(Loss) income from discontinued operations, net of tax | (0.2) | | | (0.9) | | | (1.1) | | | 13.2 | | |
Net income (loss) | 36.0 | | | (6.9) | | | 45.8 | | | 18.4 | | |
Net income attributable to non-controlling interests | 0 | | | 0 | | | 0 | | | (0.6) | | |
Net income (loss) attributable to common stockholders | $ | 36.0 | | | $ | (6.9) | | | $ | 45.8 | | | $ | 17.8 | | |
Net income from continuing operations | | Net income from continuing operations | 79.1 | | | 2.3 | | | 161.4 | | | 10.7 | |
Income (loss) from discontinued operations, net of tax | | Income (loss) from discontinued operations, net of tax | 2.0 | | | (1.1) | | | 2.0 | | | (0.9) | |
| Earnings (loss) per share | | | | | | | | |
| Net income attributable to common stockholders | | Net income attributable to common stockholders | $ | 81.1 | | | $ | 1.2 | | | $ | 163.4 | | | $ | 9.8 | |
| Earnings per share | | Earnings per share | | | | | | | |
Basic from continuing operations | Basic from continuing operations | $ | 0.15 | | | $ | (0.02) | | | $ | 0.19 | | | $ | 0.02 | | Basic from continuing operations | $ | 0.32 | | | $ | 0.01 | | | $ | 0.65 | | | $ | 0.04 | |
Basic from discontinued operations | Basic from discontinued operations | 0 | | | (0.01) | | | 0 | | | 0.05 | | Basic from discontinued operations | 0.01 | | | 0 | | | 0.01 | | | 0 | |
Basic attributable to common stockholders | Basic attributable to common stockholders | $ | 0.15 | | | $ | (0.03) | | | $ | 0.19 | | | $ | 0.07 | | Basic attributable to common stockholders | $ | 0.33 | | | $ | 0.01 | | | $ | 0.66 | | | $ | 0.04 | |
| Diluted from continuing operations | Diluted from continuing operations | $ | 0.15 | | | $ | (0.02) | | | $ | 0.19 | | | $ | 0.02 | | Diluted from continuing operations | $ | 0.32 | | | $ | 0.01 | | | $ | 0.65 | | | $ | 0.04 | |
Diluted from discontinued operations | Diluted from discontinued operations | 0 | | | (0.01) | | | 0 | | | 0.05 | | Diluted from discontinued operations | 0.01 | | | 0 | | | 0.01 | | | 0 | |
Diluted attributable to common stockholders | Diluted attributable to common stockholders | $ | 0.15 | | | $ | (0.03) | | | $ | 0.19 | | | $ | 0.07 | | Diluted attributable to common stockholders | $ | 0.33 | | | $ | 0.01 | | | $ | 0.66 | | | $ | 0.04 | |
| Weighted average common shares outstanding | Weighted average common shares outstanding | | | | | | Weighted average common shares outstanding | | | | | |
Basic | Basic | 248.9 | | | 254.4 | | | 249.4 | | | 259.9 | | Basic | 247.5 | | | 248.8 | | | 247.4 | | | 249.6 | |
Diluted | Diluted | 249.1 | | | 254.4 | | | 250.1 | | | 262.4 | | Diluted | 247.9 | | | 249.0 | | | 248.0 | | | 250.6 | |
See accompanying notes to the Condensed Consolidated Financial Statements
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(dollars in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) | $ | 36.0 | | | $ | (6.9) | | | $ | 45.8 | | | $ | 18.4 | |
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Other comprehensive income (loss) | | | | | | | |
Foreign currency translation: | | | | | | | |
Other comprehensive income (loss) before reclassifications | 50.6 | | | (47.8) | | | 39.9 | | | 46.3 | |
Reclassifications | 0 | | | 0 | | | 0 | | | 479.8 | |
Total foreign currency translation adjustments | 50.6 | | | (47.8) | | | 39.9 | | | 526.1 | |
Pension and post-retirement plans: | | | | | | | |
Other comprehensive (loss) income before reclassifications, net of tax expense (benefit) of $0.0 for the three months ended September 30, 2020 and 2019, and $0.5 and $0.0 for the nine months ended September 30, 2020 and 2019, respectively | 0 | | | 0 | | | (0.5) | | | 0 | |
Reclassifications, net of tax expense (benefit) of $0.0 for the three and nine months ended September 30, 2020 and 2019, respectively | 0 | | | 0 | | | 0 | | | (2.1) | |
Total pension and post-retirement plans | 0 | | | 0 | | | (0.5) | | | (2.1) | |
Derivative financial instruments: | | | | | | | |
Other comprehensive (loss) income before reclassifications, net of tax expense of $0.6 and $0.0 for the three months ended September 30, 2020 and 2019, respectively and $0.6 and $0.0 expense for the nine months ended September 30, 2020 and 2019, respectively | (2.1) | | | (7.9) | | | (39.5) | | | (35.6) | |
Reclassifications, net of tax expense (benefit) of $0.0 for the three months ended September 30, 2020 and 2019, and $0.0 and $1.4 for the nine months ended September 30, 2020 and 2019, respectively | 4.3 | | | 0.6 | | | 9.6 | | | (4.8) | |
Total unrealized loss arising on qualified hedging derivatives | 2.2 | | | (7.3) | | | (29.9) | | | (40.4) | |
Other comprehensive income (loss) | 52.8 | | | (55.1) | | | 9.5 | | | 483.6 | |
Comprehensive income (loss) | 88.8 | | | (62.0) | | | 55.3 | | | 502.0 | |
Comprehensive income attributable to the non-controlling interests | 0 | | | 0 | | | 0 | | | (40.8) | |
Comprehensive income (loss) attributable to common stockholders | $ | 88.8 | | | $ | (62.0) | | | $ | 55.3 | | | $ | 461.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income | $ | 81.1 | | | $ | 1.2 | | | $ | 163.4 | | | $ | 9.8 | |
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Other comprehensive income (loss) | | | | | | | |
Foreign currency translation: | | | | | | | |
Other comprehensive income (loss) before reclassifications, net of tax benefit of $2.0 and $0.0 for the three months ended June 30, 2021 and 2020 and tax expense of $3.9 and $0.0 for the six months ended June 30, 2021 and 2020, respectively | 34.5 | | | 12.9 | | | (18.2) | | | (10.7) | |
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Total foreign currency translation adjustments | 34.5 | | | 12.9 | | | (18.2) | | | (10.7) | |
Pension and post-retirement plans: | | | | | | | |
Other comprehensive income (loss) before reclassifications, net of tax expense of $0.0 for the three months ended June 30, 2021 and 2020 and $0.0 and $0.5 for the six months ended June 30, 2021 and 2020, respectively | 0 | | | 0 | | | 0 | | | (0.5) | |
| | | | | | | |
Total pension and post-retirement plans | 0 | | | 0 | | | 0 | | | (0.5) | |
Derivative financial instruments: | | | | | | | |
Other comprehensive income (loss) before reclassifications, net of tax expense of $1.0 and $0.0 for the three months ended June 30, 2021 and 2020 and $2.8 and $0.0 for the six months ended June 30, 2021 and 2020, respectively | (1.9) | | | (5.4) | | | 1.1 | | | (37.4) | |
Reclassifications, net of tax expense of $0.0 for the three months ended June 30, 2021 and 2020 and $0.0 for the six months ended June 30, 2021 and 2020, respectively | 4.5 | | | 3.7 | | | 8.9 | | | 5.3 | |
Total unrealized gain (loss) arising on qualified hedging derivatives | 2.6 | | | (1.7) | | | 10.0 | | | (32.1) | |
Other comprehensive income (loss) | 37.1 | | | 11.2 | | | (8.2) | | | (43.3) | |
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Comprehensive income (loss) attributable to common stockholders | $ | 118.2 | | | $ | 12.4 | | | $ | 155.2 | | | $ | (33.5) | |
See accompanying notes to the Condensed Consolidated Financial Statements
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in millions)
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2020 | | 2019 |
Assets | | | |
Cash and cash equivalents | $ | 248.4 | | | $ | 190.1 | |
Accounts receivable, net of allowance for doubtful accounts of $11.1 and $8.8 at September 30, 2020 and December 31, 2019, respectively | 366.0 | | | 363.9 | |
Inventories | 211.9 | | | 199.6 | |
Prepaid expenses | 24.4 | | | 18.3 | |
Other current assets | 87.6 | | | 50.3 | |
Current assets of discontinued operations | 8.3 | | | 11.2 | |
Total current assets | 946.6 | | | 833.4 | |
Property, plant and equipment, net | 234.6 | | | 264.8 | |
Goodwill | 2,189.6 | | | 2,179.6 | |
Intangible assets, net | 860.1 | | | 944.4 | |
Other assets | 88.9 | | | 95.7 | |
Non-current assets of discontinued operations | 7.0 | | | 6.5 | |
Total assets | $ | 4,326.8 | | | $ | 4,324.4 | |
Liabilities and stockholders' equity | | | |
Accounts payable | $ | 103.8 | | | $ | 96.8 | |
Current installments of long-term debt and revolving credit facilities | 7.7 | | | 7.8 | |
Accrued expenses and other current liabilities | 172.8 | | | 155.1 | |
Current liabilities of discontinued operations | 18.1 | | | 34.1 | |
Total current liabilities | 302.4 | | | 293.8 | |
Debt | 1,509.7 | | | 1,513.2 | |
Pension and post-retirement benefits | 49.2 | | | 50.8 | |
Deferred income taxes | 77.1 | | | 119.6 | |
Other liabilities | 145.4 | | | 127.7 | |
| | | |
Total liabilities | 2,083.8 | | | 2,105.1 | |
Commitments and contingencies (Note 11) | | | |
Stockholders' Equity | | | |
Preferred stock - Series A | 0 | | | 0 | |
Common stock: 400.0 shares authorized (2020: 261.2 shares issued; 2019: 258.4 shares issued) | 2.6 | | | 2.6 | |
Additional paid-in capital | 4,120.8 | | | 4,114.2 | |
Treasury stock (2020: 12.5 shares; 2019: 8.3 shares) | (117.1) | | | (78.9) | |
Accumulated deficit | (1,490.7) | | | (1,536.5) | |
Accumulated other comprehensive loss | (271.0) | | | (280.5) | |
Total stockholders' equity | 2,244.6 | | | 2,220.9 | |
Non-controlling interests | (1.6) | | | (1.6) | |
Total equity | 2,243.0 | | | 2,219.3 | |
Total liabilities and stockholders' equity | $ | 4,326.8 | | | $ | 4,324.4 | |
| | | | | | | | | | | |
| June 30, | | December 31, |
| 2021 | | 2020 |
Assets | | | |
Cash & cash equivalents | $ | 318.4 | | | $ | 291.9 | |
Accounts receivable, net of allowance for doubtful accounts of $10.1 and $9.7 at June 30, 2021 and December 31, 2020, respectively | 450.0 | | | 403.4 | |
Inventories | 280.4 | | | 203.1 | |
Prepaid expenses | 28.5 | | | 24.0 | |
Other current assets | 67.7 | | | 67.5 | |
| | | |
Total current assets | 1,145.0 | | | 989.9 | |
Property, plant and equipment, net | 242.4 | | | 240.4 | |
Goodwill | 2,267.1 | | | 2,252.7 | |
Intangible assets, net | 823.8 | | | 855.9 | |
Other assets | 162.2 | | | 141.2 | |
Non-current assets of discontinued operations | 3.3 | | | 3.3 | |
Total assets | $ | 4,643.8 | | | $ | 4,483.4 | |
Liabilities and stockholders' equity | | | |
Accounts payable | $ | 140.0 | | | $ | 95.6 | |
Current installments of long-term debt | 7.4 | | | 7.4 | |
Accrued expenses and other current liabilities | 203.0 | | | 204.2 | |
Current liabilities of discontinued operations | 5.1 | | | 7.1 | |
Total current liabilities | 355.5 | | | 314.3 | |
Debt | 1,505.8 | | | 1,508.1 | |
Pension and post-retirement benefits | 40.9 | | | 43.3 | |
Deferred income taxes | 112.6 | | | 112.9 | |
Other liabilities | 160.7 | | | 186.7 | |
| | | |
Total liabilities | 2,175.5 | | | 2,165.3 | |
Commitments and contingencies (Note 10) | 0 | | 0 |
Stockholders' equity | | | |
| | | |
Common stock: 400.0 shares authorized (2021: 261.9 shares issued; 2020: 261.3 shares issued) | 2.6 | | | 2.6 | |
Additional paid-in capital | 4,146.9 | | | 4,122.9 | |
Treasury stock (2021: 14.3 shares; 2020: 14.2 shares) | (139.4) | | | (137.7) | |
Accumulated deficit | (1,337.1) | | | (1,473.2) | |
Accumulated other comprehensive loss | (203.0) | | | (194.8) | |
Total stockholders' equity | 2,470.0 | | | 2,319.8 | |
Non-controlling interests | (1.7) | | | (1.7) | |
Total equity | 2,468.3 | | | 2,318.1 | |
Total liabilities and stockholders' equity | $ | 4,643.8 | | | $ | 4,483.4 | |
See accompanying notes to the Condensed Consolidated Financial Statements
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in millions)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Cash flows from operating activities: | | | |
Net income | $ | 45.8 | | | $ | 18.4 | |
Net (loss) income from discontinued operations, net of tax | (1.1) | | | 13.2 | |
Net income from continuing operations | 46.9 | | | 5.2 | |
Reconciliation of net income from continuing operations to net cash flows provided by operating activities: | | | |
Depreciation and amortization | 120.5 | | | 115.8 | |
Deferred income taxes | (41.2) | | | (0.1) | |
Foreign exchange loss (gain) | 40.4 | | | (17.8) | |
Other, net | 61.8 | | | 84.3 | |
Changes in assets and liabilities, net of acquisitions: | | | |
Accounts receivable | (3.6) | | | 2.7 | |
Inventories | (8.9) | | | (15.2) | |
Accounts payable | 8.2 | | | 3.9 | |
Accrued expenses | (3.0) | | | (66.0) | |
Prepaid expenses and other current assets | (25.3) | | | (7.5) | |
Other assets and liabilities | (1.5) | | | (13.2) | |
Net cash flows provided by operating activities of continuing operations | 194.3 | | | 92.1 | |
Cash flows from investing activities: | | | |
Capital expenditures | (21.7) | | | (18.2) | |
Proceeds from disposal of property, plant and equipment | 1.7 | | | 0 | |
Acquisition of business, net of cash acquired | (9.0) | | | 0 | |
Proceeds from Arysta Sale (net of cash $148.7 million) | 0 | | | 4,281.8 | |
| | | |
Other, net | (2.4) | | | 6.7 | |
Net cash flows (used in) provided by investing activities of continuing operations | (31.4) | | | 4,270.3 | |
Cash flows from financing activities: | | | |
Debt proceeds, net of discount | 800.0 | | | 749.1 | |
Repayments of borrowings | (805.9) | | | (4,605.0) | |
Change in lines of credit, net | 0 | | | (24.9) | |
Repurchases of common stock | (35.7) | | | (496.1) | |
Payment of financing fees | (44.7) | | | (39.5) | |
Other, net | (1.5) | | | (8.6) | |
Net cash flows used in financing activities of continuing operations | (87.8) | | | (4,425.0) | |
Cash flows from discontinued operations: | | | |
Net cash flows used in operating activities of discontinued operations | (14.7) | | | (154.1) | |
Net cash flows used in investing activities of discontinued operations | 0 | | | (5.0) | |
Net cash flows provided by financing activities of discontinued operations | 0 | | | 4.8 | |
Net cash flows used in discontinued operations | (14.7) | | | (154.3) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2.1) | | | 1.7 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 58.3 | | | (215.2) | |
Cash, cash equivalents and restricted cash at beginning of period (1) | 190.1 | | | 415.5 | |
Cash, cash equivalents and restricted cash at end of period | $ | 248.4 | | | $ | 200.3 | |
(1) Includes cash, cash equivalents and restricted cash of discontinued operations of $181.9 million at December 31, 2018. | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Cash flows from operating activities: | | | |
Net income | $ | 163.4 | | | $ | 9.8 | |
Net income (loss) from discontinued operations, net of tax | 2.0 | | | (0.9) | |
Net income from continuing operations | 161.4 | | | 10.7 | |
Reconciliations of net income from continuing operations to net cash flows provided by operating activities: | | | |
Depreciation and amortization | 79.2 | | | 79.3 | |
Deferred income taxes | (35.7) | | | (0.7) | |
Foreign exchange (gain) loss | (20.4) | | | 37.9 | |
Incentive stock compensation | 21.3 | | | 3.4 | |
Other, net | 0.8 | | | 10.0 | |
Changes in assets and liabilities, net of acquisitions: | | | |
Accounts receivable | (38.0) | | | 43.5 | |
Inventories | (67.9) | | | (15.9) | |
Accounts payable | 37.8 | | | (13.6) | |
Accrued expenses | (8.8) | | | (22.2) | |
Prepaid expenses and other current assets | (14.8) | | | (7.2) | |
Other assets and liabilities | (1.9) | | | (0.5) | |
Net cash flows provided by operating activities of continuing operations | 113.0 | | | 124.7 | |
Cash flows from investing activities: | | | |
Capital expenditures | (17.3) | | | (15.0) | |
Proceeds from disposal of property, plant and equipment | 0 | | | 1.5 | |
Acquisition of business, net of cash acquired | (50.9) | | | 0 | |
Other, net | 19.1 | | | (5.7) | |
Net cash flows used in investing activities of continuing operations | (49.1) | | | (19.2) | |
Cash flows from financing activities: | | | |
| | | |
Repayments of borrowings | (3.7) | | | (3.9) | |
| | | |
Repurchases of common stock | 0 | | | (33.1) | |
Dividends | (27.2) | | | 0 | |
| | | |
Other, net | (6.4) | | | (1.3) | |
Net cash flows used in financing activities of continuing operations | (37.3) | | | (38.3) | |
Cash flows from discontinued operations: | | | |
Net cash flows used in operating activities of discontinued operations | 0 | | | (14.7) | |
| | | |
| | | |
Net cash flows used in discontinued operations | 0 | | | (14.7) | |
Effect of exchange rate changes on cash and cash equivalents | (0.1) | | | (5.3) | |
Net increase in cash and cash equivalents | 26.5 | | | 47.2 | |
Cash and cash equivalents at beginning of period | 291.9 | | | 190.1 | |
Cash and cash equivalents at end of period | $ | 318.4 | | | $ | 237.3 | |
See accompanying notes to the Condensed Consolidated Financial Statements
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(dollars in millions, except share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2021 | | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity | | Non- controlling Interests | | Total Equity |
| | | | Shares | | Amount | | | Shares | | Amount | | | | | |
Balance at March 31, 2021 | | | | | 261,768,818 | | | $ | 2.6 | | | $ | 4,129.5 | | | 14,315,406 | | | $ | (139.2) | | | $ | (1,403.3) | | | $ | (240.1) | | | $ | 2,349.5 | | | $ | (1.7) | | | $ | 2,347.8 | |
Net income | | | | | — | | | — | | | — | | | — | | | — | | | 81.1 | | | — | | | 81.1 | | | — | | | 81.1 | |
Other comprehensive income, net of taxes | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 37.1 | | | 37.1 | | | — | | | 37.1 | |
Exercise/ vesting of share based compensation | | | | | 97,997 | | | — | | | 0.1 | | | 11,027 | | | (0.2) | | | — | | | — | | | (0.1) | | | — | | | (0.1) | |
Issuance of common stock under ESPP | | | | | 18,366 | | | — | | | 0.2 | | | — | | | — | | | — | | | — | | | 0.2 | | | — | | | 0.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Dividends ($0.06 per share) | | | | | — | | | — | | | — | | | — | | | — | | | (14.9) | | | — | | | (14.9) | | | — | | | (14.9) | |
Equity compensation expense | | | | | — | | | — | | | 17.1 | | | — | | | — | | | — | | | — | | | 17.1 | | | — | | | 17.1 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | | | | 261,885,181 | | | $ | 2.6 | | | $ | 4,146.9 | | | 14,326,433 | | | $ | (139.4) | | | $ | (1,337.1) | | | $ | (203.0) | | | $ | 2,470.0 | | | $ | (1.7) | | | $ | 2,468.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2020 | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity | | Non- controlling Interests | | Total Equity |
Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | | | | |
Balance at June 30, 2020 | 0 | | | $ | 0 | | | 261,044,440 | | | $ | 2.6 | | | $ | 4,118.7 | | | 12,189,913 | | | $ | (114.0) | | | $ | (1,526.7) | | | $ | (323.8) | | | $ | 2,156.8 | | | $ | (1.7) | | | $ | 2,155.1 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 36.0 | | | | | 36.0 | | | — | | | 36.0 | |
Other comprehensive income, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 52.8 | | | 52.8 | | | — | | | 52.8 | |
Exercise/ vesting of share based compensation | — | | | — | | | 110,009 | | | — | | | — | | | 43,290 | | | (0.5) | | | — | | | — | | | (0.5) | | | — | | | (0.5) | |
Issuance of common stock under ESPP | — | | | — | | | 29,565 | | | — | | | 0.3 | | | — | | | — | | | — | | | — | | | 0.3 | | | — | | | 0.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 237,629 | | | (2.6) | | | — | | | — | | | (2.6) | | | — | | | (2.6) | |
Equity compensation expense | — | | | — | | | — | | | — | | | 1.8 | | | — | | | — | | | — | | | — | | | 1.8 | | | — | | | 1.8 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2020 | 0 | | | $ | 0 | | | 261,184,014 | | | $ | 2.6 | | | $ | 4,120.8 | | | 12,470,832 | | | $ | (117.1) | | | $ | (1,490.7) | | | $ | (271.0) | | | $ | 2,244.6 | | | $ | (1.6) | | | $ | 2,243.0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2019 | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity | | Non- controlling Interests | | Total Equity |
Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | | | | |
Balance at June 30, 2019 | 2,000,000 | | | $ | 0 | | | 258,323,823 | | | $ | 2.6 | | | $ | 4,109.4 | | | 1,667,541 | | | $ | (16.8) | | | $ | (1,604.0) | | | $ | (258.4) | | | $ | 2,232.8 | | | $ | (1.6) | | | $ | 2,231.2 | |
Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6.9) | | | — | | | (6.9) | | | — | | | (6.9) | |
Other comprehensive loss, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (55.1) | | | (55.1) | | | — | | | (55.1) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Exercise/ vesting of share based compensation | — | | | — | | | 38,953 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock under ESPP | — | | | — | | | 32,078 | | | — | | | 0.2 | | | — | | | — | | | — | | | — | | | 0.2 | | | — | | | 0.2 | |
Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 5,628,000 | | | (51.1) | | | — | | | — | | | (51.1) | | | — | | | (51.1) | |
Equity compensation expense | — | | | — | | | — | | | — | | | 2.2 | | | — | | | — | | | — | | | — | | | 2.2 | | | — | | | 2.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2019 | 2,000,000 | | | $ | 0 | | | 258,394,854 | | | $ | 2.6 | | | $ | 4,111.8 | | | 7,295,541 | | | $ | (67.9) | | | $ | (1,610.9) | | | $ | (313.5) | | | $ | 2,122.1 | | | $ | (1.6) | | | $ | 2,120.5 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2020 | | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity | | Non- controlling Interests | | Total Equity |
| | | | Shares | | Amount | | | Shares | | Amount | | | | | |
Balance at March 31, 2020 | | | | | 260,933,009 | | | $ | 2.6 | | | $ | 4,117.1 | | | 12,182,019 | | | $ | (113.9) | | | $ | (1,527.9) | | | $ | (334.9) | | | $ | 2,143.0 | | | $ | (1.6) | | | $ | 2,141.4 | |
Net income | | | | | — | | | — | | | — | | | — | | | — | | | 1.2 | | | — | | | 1.2 | | | — | | | 1.2 | |
Other comprehensive income, net of taxes | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 11.1 | | | 11.1 | | | — | | | 11.1 | |
Exercise/ vesting of share based compensation | | | | | 81,554 | | | — | | | — | | | 7,894 | | | (0.1) | | | — | | | — | | | (0.1) | | | — | | | (0.1) | |
Issuance of common stock under ESPP | | | | | 29,877 | | | — | | | 0.2 | | | — | | | — | | | — | | | — | | | 0.2 | | | — | | | 0.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Equity compensation expense | | | | | — | | | — | | | 1.4 | | | — | | | — | | | — | | | — | | | 1.4 | | | — | | | 1.4 | |
Changes in non-controlling interests | | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (0.1) | | | (0.1) | |
Balance at June 30, 2020 | | | | | 261,044,440 | | | $ | 2.6 | | | $ | 4,118.7 | | | 12,189,913 | | | $ | (114.0) | | | $ | (1,526.7) | | | $ | (323.8) | | | $ | 2,156.8 | | | $ | (1.7) | | | $ | 2,155.1 | |
| | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to the Condensed Consolidated Financial Statements
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)
(Unaudited)
(dollars in millions, except share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2021 | | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity | | Non- controlling Interests | | Total Equity |
| | | | Shares | | Amount | | | Shares | | Amount | | | | | |
Balance at December 31, 2020 | | | | | 261,330,127 | | | $ | 2.6 | | | $ | 4,122.9 | | | 14,229,280 | | | $ | (137.7) | | | $ | (1,473.2) | | | $ | (194.8) | | | $ | 2,319.8 | | | $ | (1.7) | | | $ | 2,318.1 | |
Net income | | | | | — | | | — | | | — | | | — | | | — | | | 163.4 | | | — | | | 163.4 | | | — | | | 163.4 | |
Other comprehensive income, net of taxes | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (8.2) | | | (8.2) | | | — | | | (8.2) | |
Exercise/ vesting of share based compensation | | | | | 514,410 | | | — | | | 2.0 | | | 95,453 | | | (1.7) | | | — | | | — | | | 0.3 | | | — | | | 0.3 | |
Issuance of common stock under ESPP | | | | | 40,644 | | | — | | | 0.5 | | | — | | | — | | | — | | | — | | | 0.5 | | | — | | | 0.5 | |
Repurchases of common stock | | | | | — | | | — | | | — | | | 1,700 | | | — | | | — | | | — | | | — | | | — | | | — | |
Dividends ($0.11 per share) | | | | | — | | | — | | | — | | | — | | | — | | | (27.3) | | | — | | | (27.3) | | | — | | | (27.3) | |
Equity compensation expense | | | | | — | | | — | | | 21.5 | | | — | | | — | | | — | | | — | | | 21.5 | | | — | | | 21.5 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | | | | 261,885,181 | | | $ | 2.6 | | | $ | 4,146.9 | | | 14,326,433 | | | $ | (139.4) | | | $ | (1,337.1) | | | $ | (203.0) | | | $ | 2,470.0 | | | $ | (1.7) | | | $ | 2,468.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity | | Non- controlling Interests | | Total Equity | |
Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | |
Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity | | Non- controlling Interests | | Total Equity |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
Balance at December 31, 2019 | Balance at December 31, 2019 | 2,000,000 | | | $ | 0 | | | 258,428,333 | | | $ | 2.6 | | | $ | 4,114.2 | | | 8,277,198 | | | $ | (78.9) | | | $ | (1,536.5) | | | $ | (280.5) | | | $ | 2,220.9 | | | $ | (1.6) | | | $ | 2,219.3 | | Balance at December 31, 2019 | 2,000,000 | | | $ | 0 | | | 258,428,333 | | | $ | 2.6 | | | $ | 4,114.2 | | | 8,277,198 | | | $ | (78.9) | | | $ | (1,536.5) | | | $ | (280.5) | | | $ | 2,220.9 | | | $ | (1.6) | | | $ | 2,219.3 | |
Net income | Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 45.8 | | | — | | | 45.8 | | | — | | | 45.8 | | Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9.8 | | | — | | | 9.8 | | | — | | | 9.8 | |
Other comprehensive income, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 9.5 | | | 9.5 | | | — | | | 9.5 | | |
Other comprehensive loss, net of taxes | | Other comprehensive loss, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (43.3) | | | (43.3) | | | — | | | (43.3) | |
Exercise/ vesting of share based compensation | Exercise/ vesting of share based compensation | — | | | — | | | 667,550 | | | — | | | 0.2 | | | 213,517 | | | (2.5) | | | — | | | — | | | (2.3) | | | — | | | (2.3) | | Exercise/ vesting of share based compensation | — | | | — | | | 557,541 | | | — | | | 0.2 | | | 170,227 | | | (2.0) | | | — | | | — | | | (1.8) | | | — | | | (1.8) | |
Issuance of common stock under ESPP | Issuance of common stock under ESPP | — | | | — | | | 88,131 | | | — | | | 0.8 | | | — | | | — | | | — | | | — | | | 0.8 | | | — | | | 0.8 | | Issuance of common stock under ESPP | — | | | — | | | 58,566 | | | — | | | 0.5 | | | — | | | — | | | — | | | — | | | 0.5 | | | — | | | 0.5 | |
Preferred stock conversion | Preferred stock conversion | (2,000,000) | | | — | | | 2,000,000 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Preferred stock conversion | (2,000,000) | | | — | | | 2,000,000 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Repurchases of common stock | Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 3,980,117 | | | (35.7) | | | — | | | — | | | (35.7) | | | — | | | (35.7) | | Repurchases of common stock | — | | | — | | | — | | | — | | | — | | | 3,742,488 | | | (33.1) | | | — | | | — | | | (33.1) | | | — | | | (33.1) | |
Equity compensation expense | Equity compensation expense | — | | | — | | | — | | | — | | | 5.6 | | | — | | | — | | | — | | | — | | | 5.6 | | | — | | | 5.6 | | Equity compensation expense | — | | | — | | | — | | | — | | | 3.8 | | | — | | | — | | | — | | | — | | | 3.8 | | | — | | | 3.8 | |
Changes in non-controlling interests | Changes in non-controlling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Changes in non-controlling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (0.1) | | | (0.1) | |
Balance at September 30, 2020 | 0 | | | $ | 0 | | | 261,184,014 | | | $ | 2.6 | | | $ | 4,120.8 | | | 12,470,832 | | | $ | (117.1) | | | $ | (1,490.7) | | | $ | (271.0) | | | $ | 2,244.6 | | | $ | (1.6) | | | $ | 2,243.0 | | |
Balance at June 30, 2020 | | Balance at June 30, 2020 | 0 | | | $ | 0 | | | 261,044,440 | | | $ | 2.6 | | | $ | 4,118.7 | | | 12,189,913 | | | $ | (114.0) | | | $ | (1,526.7) | | | $ | (323.8) | | | $ | 2,156.8 | | | $ | (1.7) | | | $ | 2,155.1 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2019 | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity | | Non- controlling Interests | | Total Equity |
Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | | | | |
Balance at December 31, 2018 | 2,000,000 | | | $ | 0 | | | 289,316,170 | | | $ | 2.9 | | | $ | 4,062.1 | | | 341,967 | | | $ | (3.5) | | | $ | (1,195.4) | | | $ | (756.9) | | | $ | 2,109.2 | | | $ | 71.9 | | | $ | 2,181.1 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17.8 | | | — | | | 17.8 | | | 0.6 | | | 18.4 | |
Other comprehensive loss, net of taxes | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6.0) | | | (6.0) | | | — | | | (6.0) | |
Arysta Sale | — | | | — | | | — | | | — | | | (5.7) | | | — | | | — | | | — | | | 463.3 | | | 457.6 | | | (46.6) | | | 411.0 | |
Exercise/ vesting of share based compensation | — | | | — | | | 1,968,471 | | | — | | | 1.9 | | | 170,989 | | | (1.9) | | | — | | | — | | | — | | | — | | | — | |
Conversion of shares of common stock of Platform Delaware Holdings, Inc. into common stock | — | | | — | | | 4,019,710 | | | 0.1 | | | 41.1 | | | — | | | — | | | — | | | (13.9) | | | 27.3 | | | (27.3) | | | — | |
Issuance of common stock under ESPP | — | | | — | | | 90,503 | | | — | | | 0.8 | | | — | | | — | | | — | | | — | | | 0.8 | | | — | | | 0.8 | |
Repurchases of common stock | — | | | — | | | (37,000,000) | | | (0.4) | | | — | | | 6,782,585 | | | (62.5) | | | (433.3) | | | — | | | (496.2) | | | — | | | (496.2) | |
Equity compensation expense | — | | | — | | | — | | | — | | | 11.6 | | | — | | | — | | | — | | | — | | | 11.6 | | | — | | | 11.6 | |
Changes in non-controlling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (0.2) | | | (0.2) | |
Balance at September 30, 2019 | 2,000,000 | | | $ | 0 | | | 258,394,854 | | | $ | 2.6 | | | $ | 4,111.8 | | | 7,295,541 | | | $ | (67.9) | | | $ | (1,610.9) | | | $ | (313.5) | | | $ | 2,122.1 | | | $ | (1.6) | | | $ | 2,120.5 | |
| | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to the Condensed Consolidated Financial Statements
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
Element Solutions was incorporated in Delaware in January 2014 and its shares of common stock, par value $0.01 per share, trade on the NYSENew York Stock Exchange under the ticker symbol “ESI.”
Element Solutions 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, thethese innovative solutions of the Company's businesses enable customers' manufacturing processes in several key industries, including electronic circuitry,consumer electronics, power electronics, semiconductor fabrication, communications and data storage infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy. Element Solutions delivers its products to customers through its sales and service workforce, regional distributors and manufacturing representatives.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. In the opinion of management, these unaudited Condensed Consolidated Financial Statements reflect all adjustments that are normal, recurring and necessary for a fair statement of the Company's financial position, results of operations and cash flows for interim periods, but are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.2021. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included in the Company’s 20192020 Annual Report.
The process of preparing the Company’s unaudited Condensed Consolidated Financial Statements requires the use of estimates and judgments that affect the reported amount of assets, liabilities, net sales and expenses. These estimates include assumptions and judgments arejudgements based on historical experience, current conditions, future expectations and other factors as well as assumptions the Company believes to be reasonable under the circumstances.consider reasonable. These estimates and judgments are reviewed on an ongoing basis and revised as necessary; however, the business and economic uncertainty resulting from the COVID-19 pandemic has made such estimates and judgments more difficult to determine.necessary. Actual amounts may differ materially from these estimates.
Certain other prior year amounts have been reclassified to conform to the current year’s presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTSACQUISITION
Recently Issued Accounting Pronouncements Not Yet AdoptedHKW Acquisition
Income Taxes (Topic 740) - In December 2019,On May 5, 2021, the FASB issued ASU No. 2019-12, "SimplifyingCompany completed the AccountingHKW Acquisition for Income Taxes," which removes certain exceptions related$50.9 million, net of cash, subject to the approach for intraperiod tax allocation, the recognition of deferred tax liabilities for outside basis differencespost-closing adjustments. The H.K. Wentworth business specializes in conformal coatings, encapsulation resins, thermal interface materials, contact lubricants and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.cleaning chemistry and complements our broader electronics portfolio with many applications overlapping with semiconductor technologies. The guidance is effective as of January 1, 2021, with early adoption permitted. The Company is evaluating the impactoperations of the guidance on the Condensed Consolidated Financial Statements.H.K. Wentworth business are included in our Electronics business segment.
3. DISCONTINUED OPERATIONS
The Arysta Sale was completed on January 31, 2019. In connection with the Arysta Sale, the Company agreed to retain certain liabilities associated with legal and tax proceedings, primarily related to an Arysta subsidiary in Brazil. The Company does not expect to incur any material losses as a result of these proceedings. However, the resolutions of these matters may take several years and, to the extent not covered by insurance, may adversely impact the Company's financial position or results of operations. The Company may record an additional gain or loss in the future as it settles certain remaining tax assets and liabilities associated with the Arysta Sale.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The following table detailssummarizes the components comprising net (loss) income from the Company's discontinued operations attributable to common stockholders:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | | | | | | | |
(dollars in millions) | 2020 | | 2019 | | 2020 | | 2019 (1) | | | | | | | | |
Net sales | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 65.3 | | | | | | | | | |
Cost of sales | 0 | | | 0 | | | 0 | | | (45.5) | | | | | | | | | |
Selling, technical, general and administrative | 0 | | | (0.4) | | | 0 | | | (37.8) | | | | | | | | | |
Research and development | 0 | | | 0 | | | 0 | | | (4.6) | | | | | | | | | |
(Loss) gain on Arysta Sale | 0 | | | (0.1) | | | 0 | | | 2.4 | | | | | | | | | |
Operating loss | 0 | | | (0.5) | | | 0 | | | (20.2) | | | | | | | | | |
Other, net | (0.2) | | | 0.7 | | | (1.7) | | | 9.4 | | | | | | | | | |
(Loss) income from discontinued operations, before income taxes | (0.2) | | | 0.2 | | | (1.7) | | | (10.8) | | | | | | | | | |
Income tax (expense) benefit | 0 | | | (1.1) | | | 0.6 | | | 24.0 | | | | | | | | | |
Net (loss) income from discontinued operations attributable to common stockholders | $ | (0.2) | | | $ | (0.9) | | | $ | (1.1) | | | $ | 13.2 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(1) Includes activity through January 31, 2019, when the Arysta Sale was completed, and certain post-closing adjustments relating to, among
other things, cash, indebtedness and working capital asallocation of the
purchase price to the identified assets acquired and liabilities assumed at the acquisition date: | | | | | | | | |
(dollars in millions) | | |
Identifiable assets acquired and liabilities assumed | | |
Accounts receivable | | $ | 10.3 | |
Inventories | | 13.9 | |
Other current assets | | 3.0 | |
Property, plant and equipment | | 6.4 | |
Identifiable intangible assets | | 28.7 | |
Other assets | | 2.5 | |
Current liabilities | | (21.3) | |
Long-term liabilities | | (10.6) | |
Total identifiable net assets | | 32.9 | |
Goodwill | | 18.0 | |
Total purchase price | | $ | 50.9 | |
The excess of the cost of the HKW Acquisition over the net amounts assigned to the fair value of the assets acquired and the liabilities assumed was recorded as goodwill and represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The majority of the goodwill recorded in connection with the HKW Acquisition is not expected to be deductible for tax purposes.
The fair value of the identifiable intangible assets recorded in conjunction with the HKW Acquisition was as follows: | | | | | | | | | | | | | | |
(dollars in millions) | | Fair Value | | Weighted Average Useful Life (years) |
Customer relationships | | $ | 20.8 | | | 12 |
Trade name | | 1.0 | | | 5 |
Developed technology | | 6.9 | | | 5 |
Total | | $ | 28.7 | | | 10.1 |
The fair value of the identifiable intangible assets was determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows either through the use of the multi-period excess earnings method or the relief-from-royalty method. Some of the more significant assumptions inherent in the development of intangible asset values include: the amount and timing of projected future cash flows, the attrition rate and the discount rate selected to measure the risks inherent in the future cash flows.
As of June 30, 2021, the purchase price allocation for the HKW Acquisition is preliminary, and we expect to complete the purchase price allocation within the one year measurement period.
The HKW Acquisition was not significant to our Condensed Consolidated Financial Statements, therefore, pro forma and post acquisition results of operations have not been presented.
Proposed Coventya Acquisition
On June 11, 2021, the Company announced its planned acquisition of Coventya Holdings SAS, a global provider of specialty chemicals for the surface finishing industry, for a purchase price expected to be approximately €420 million, subject to adjustments. The Company expects to fund this acquisition with $400 million of add-on debt to its existing term loans and cash on hand. This acquisition is expected to close in September 2021, subject to customary closing date.conditions.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
3. INVENTORIES
The major components of inventory, on a net basis, were as follows:
| | | | | | | | | | | |
(dollars in millions) | September 30, 2020 | | December 31, 2019 |
Finished goods | $ | 122.1 | | | $ | 118.5 | |
Work in process | 26.5 | | | 22.6 | |
Raw materials and supplies | 63.3 | | | 58.5 | |
Total inventories | $ | 211.9 | | | $ | 199.6 | |
| | | | | | | | | | | |
(dollars in millions) | June 30, 2021 | | December 31, 2020 |
Finished goods | $ | 163.3 | | | $ | 119.7 | |
Work in process | 35.0 | | | 23.0 | |
Raw materials and supplies | 82.1 | | | 60.4 | |
Total inventories | $ | 280.4 | | | $ | 203.1 | |
5.4. PROPERTY, PLANT AND EQUIPMENT
The major components of property, plant and equipment were as follows:
| | | | | | | | | | | |
(dollars in millions) | September 30, 2020 | | December 31, 2019 |
Land and leasehold improvements | $ | 51.3 | | | $ | 68.6 | |
Buildings and improvements | 133.9 | | | 113.5 | |
Machinery, equipment, fixtures and software | 240.9 | | | 220.0 | |
Construction in process | 20.7 | | | 16.0 | |
Total property, plant and equipment | 446.8 | | | 418.1 | |
Accumulated depreciation | (212.2) | | | (153.3) | |
Property, plant and equipment, net | $ | 234.6 | | | $ | 264.8 | |
| | | | | | | | | | | |
(dollars in millions) | June 30, 2021 | | December 31, 2020 |
Land and leasehold improvements | $ | 53.1 | | | $ | 53.2 | |
Buildings and improvements | 144.4 | | | 139.5 | |
Machinery, equipment, fixtures and software | 267.7 | | | 245.8 | |
Construction in process | 24.8 | | | 22.3 | |
Total property, plant and equipment | 490.0 | | | 460.8 | |
Accumulated depreciation | (247.6) | | | (220.4) | |
Property, plant and equipment, net | $ | 242.4 | | | $ | 240.4 | |
For the three months ended SeptemberJune 30, 20202021 and 2019,2020, the Company recorded depreciation expense of $10.7$9.7 million and $10.1$10.5 million, respectively. For the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, the Company recorded depreciation expense of $31.7$19.1 million and $30.8$21.0 million, respectively.
During the third quarter of 2020, the Company met the requirements to classify a dormant facility in New Jersey, included in its Electronics business segment, as held for sale. The current assets held for sale represent the net book value of the land of $17.2 millionfacility was completed in January 2021 and the buildingCompany recognized a gain of $2.7$3.9 million as of September 30, 2020. No impairment was identified. The Company received an initial
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes toin "Selling, technical, general and administrative" in the Condensed Consolidated Financial Statements
(Unaudited)
deposit of $3.6Operations. The Company had received initial deposits of $4.6 million which isin the second half of 2020 and received the remaining cash of $19.0 million associated with the sale during the first quarter of 2021. Cash flows associated with the sale of this facility are included in "Other, net" in the Condensed Consolidated Statements of Cash Flows as a cash inflow from investing activities.
6.5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill were as follows:
| | | | | | | | | | | | | | | | | |
(dollars in millions) | Electronics | | Industrial & Specialty | | Total |
Balance at December 31, 2019 | $ | 1,223.4 | | | $ | 956.2 | | (1) | $ | 2,179.6 | |
Acquisition (2) | 0 | | | 6.8 | | | 6.8 | |
Purchase accounting adjustments (3) | (1.6) | | | 0 | | | (1.6) | |
Foreign currency translation | 17.7 | | | (12.9) | | | 4.8 | |
Balance at September 30, 2020 | $ | 1,239.5 | | | $ | 950.1 | | | $ | 2,189.6 | |
| | | | | | | | | | | | | | | | | |
(dollars in millions) | Electronics | | Industrial & Specialty | | Total |
Balance at December 31, 2020 | $ | 1,274.0 | | | $ | 978.7 | | (1) | $ | 2,252.7 | |
Acquisition (2) | 18.0 | | | 0 | | | 18.0 | |
| | | | | |
Foreign currency translation | 0.8 | | | (4.4) | | | (3.6) | |
Balance at June 30, 2021 | $ | 1,292.8 | | | $ | 974.3 | | | $ | 2,267.1 | |
(1) Includes accumulated impairment losses of $46.6 million.
(2) On July 1, 2020,In May 2021, the Company completed the DMP Acquisition. which was not material to our Condensed Consolidated Financial Statements, and therefore, the purchase price allocation, pro forma and post-acquisition results of operations have not been presented.
(3) During the second quarter of 2020, the Company recorded a step-up of fixed assets of $1.4 million for the KesterHKW Acquisition. The impact of this acquisition on the Company's results of operations was not material.
Indefinite-Lived Intangible Assets
The carrying value of indefinite-lived intangible assets other than goodwill, which consisted solely of tradenames, was $68.0 million and $104 million at September 30, 2020 and December 31, 2019, respectively.
During the first quarter of 2020, the Company determined that the useful life of one of its tradenames no longer met the criteria of an indefinite-lived asset and concluded no indication of impairment. Subsequently, the Company started amortizing this tradename over 15 years, consistent with other similar finite-lived assets.
Finite-Lived Intangible Assets
Intangible assets subject to amortization were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
(dollars in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Customer relationships | $ | 957.0 | | | $ | (404.8) | | | $ | 552.2 | | | $ | 959.1 | | | $ | (351.4) | | | $ | 607.7 | |
Developed technology | 384.4 | | | (225.3) | | | 159.1 | | | 380.5 | | | (194.8) | | | 185.7 | |
Tradenames | 89.4 | | | (9.4) | | | 80.0 | | | 51.5 | | | (4.9) | | | 46.6 | |
Other | 1.6 | | | (0.8) | | | 0.8 | | | 1.6 | | | (1.6) | | | 0 | |
Total | $ | 1,432.4 | | | $ | (640.3) | | | $ | 792.1 | | | $ | 1,392.7 | | | $ | (552.7) | | | $ | 840.0 | |
For the three months ended September 30, 2020 and 2019, the Company recorded amortization expense on intangible assets of $30.5 million and $28.1 million, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded amortization expense on intangible assets of $88.8 million and $84.9 million, respectively.
On March 9, 2020, the Company acquired a new subsea production control fluid designed to complement its Energy Solutions business for a purchase price of $6.3 million in cash. The Company may pay an additional $4.5 million upon the achievement of certain milestones associated with the potential certification and marketing of this product. As the acquisition did not meet the accounting definition of a business and this product is still in development with no alternative future use, the amount paid was expensed to research and development in the Condensed Consolidated Statements of Operations.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Indefinite-Lived Intangible Asset
7.The carrying value of the indefinite-lived intangible asset other than goodwill, which consisted of a trade name, was $68.0 million at June 30, 2021 and December 31, 2020, respectively.
Finite-Lived Intangible Assets
Intangible assets subject to amortization were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
(dollars in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Customer relationships | $ | 1,003.6 | | | $ | (472.1) | | | $ | 531.5 | | | $ | 984.3 | | | $ | (435.4) | | | $ | 548.9 | |
Developed technology | 373.7 | | | (227.5) | | | 146.2 | | | 400.0 | | | (241.5) | | | 158.5 | |
Trade names | 92.2 | | | (14.1) | | | 78.1 | | | 91.8 | | | (11.3) | | | 80.5 | |
Other | 0 | | | 0 | | | 0 | | | 1.7 | | | (1.7) | | | 0 | |
Total | $ | 1,469.5 | | | $ | (713.7) | | | $ | 755.8 | | | $ | 1,477.8 | | | $ | (689.9) | | | $ | 787.9 | |
For the three months ended June 30, 2021 and 2020, the Company recorded amortization expense on intangible assets of $30.4 million and $28.9 million, respectively. For the six months ended June 30, 2021 and 2020, the Company recorded amortization expense on intangible assets of $60.1 million and $58.3 million, respectively.
6. DEBT
The Company’s debt obligations consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Maturity Date | | Interest Rate | | September 30, 2020 | | December 31, 2019 |
USD Term Loans (1) | 2026 | | LIBOR plus 2.00% | | $ | 729.0 | | | $ | 733.4 | |
Senior Notes - USD 800 million (2) | 2028 | | 3.875% | | 787.7 | | | 0 | |
Senior Notes - USD 800 million (3) | 2025 | | 5.875% | | 0 | | | 786.7 | |
Borrowings under the Revolving Credit Facility | 2024 | | LIBOR plus 2.25% | | 0 | | | 0 | |
| | | | | | | |
Other | | | | | 0.7 | | | 0.9 | |
Total debt | | 1,517.4 | | | 1,521.0 | |
Less: current installments of long-term debt and revolving credit facilities | | 7.7 | | | 7.8 | |
Total long-term debt | | $ | 1,509.7 | | | $ | 1,513.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Maturity Date | | Interest Rate | | June 30, 2021 | | December 31, 2020 |
Term Loans (1) | 2026 | | LIBOR plus 2.00% | | $ | 724.5 | | | $ | 727.5 | |
Senior Notes - $800 million (2) | 2028 | | 3.875% | | 788.7 | | | 788.0 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total debt | | 1,513.2 | | | 1,515.5 | |
Less: current installments of long-term debt | | 7.4 | | | 7.4 | |
Total long-term debt | | $ | 1,505.8 | | | $ | 1,508.1 | |
(1) Term loans, net of unamortized discounts and debt issuance costs of $8.0$6.8 million and $9.1$7.6 million at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. Weighted averageThe effective interest rate of 2.3% and 2.2%was 2.4% at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively, including the effects of interest rate swaps and net investment hedges. See Note 8,7, Financial Instruments, for further information regarding the Company's interest rate swaps and net investment hedges.
(2) Senior notes, net of unamortized debt issuance costs of $12.3$11.3 million and $12.0 million at SeptemberJune 30, 2020. Weighted average2021 and December 31, 2020, respectively. The effective interest rate ofwas 4.1% at SeptemberJune 30, 2020.
(3) Senior notes, net of unamortized discount2021 and debt issuance costs of $13.3 million at December 31, 2019. Weighted average effective interest rate of 6.2% at December 31, 2019.2020, respectively.
Credit Agreement
The Company is a party to the Credit Agreement, which provides for senior secured credit facilities in an aggregate initial principal amount of $1.08 billion, consisting of a revolving credit facility in an aggregate initial principal amount of $330 million maturing in 2024 and a term loan in an aggregate initial principal amount of $750 million maturing in 2026.
Borrowings under the Credit Agreement bear interest at a rate per annum rate equal to a Base Rate, as defined in the Credit Agreement, plus, in each case, an applicable interest rate equal to a spread of 1.00% with respect to Base Rate Loans and a spread of 2.00% with respect to Eurocurrency Rate Loans. The Company is required to pay a commitment fee in respect of any undrawn portion of the revolving credit facility of 0.50% per annum, subject to a stepdownstep-down to 0.375% based on the Company’s first lien net leverage ratio.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The Company's obligations under the Credit Agreement are guaranteed, jointly and severally, by certain of the Company’s domestic subsidiaries and secured by a first-priority security interest in substantially all of the assets of the Company and MacDermid, as borrowers, andas well as the assets of the guarantors, including mortgages on material real property, subject to certain exceptions.
Covenants, Events of Default and Provisions
The Credit Agreement contains customary representations and warranties, and affirmative and negative covenants, including limitations on additional indebtedness, dividends, and other distributions, entry into new lines of business, use of loan proceeds, capital expenditures, restricted payments, restrictions on liens on the assets of the borrowers or any guarantor, transactions with affiliates, amendments to organizational documents, accounting changes, sale and leaseback transactions and dispositions. To the extent the borrowers have total outstanding borrowings under the revolving credit facility (subject to certain exceptions) greater than 30% of the commitment amount under the revolving credit facility, the Company's first lien net leverage ratio should not exceed 5.0 to 1.0, subject to a right to cure.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The Credit Agreement requires the borrowers to make mandatory prepayments of borrowings, subject to certain exceptions, as described in the Credit Agreement. In addition, the Credit Agreement contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, failure to make payment on, or defaults with respect to, certain other material indebtedness, bankruptcy and insolvency events, material judgments and change of control provisions. Upon the occurrence of an event of default, and after the expiration of any applicable grace period, payment of any outstanding loans under the Credit Agreement may be accelerated and the lenders could foreclose on their security interests in the assets of the borrowers and the guarantors.
At SeptemberJune 30, 2020,2021, the Company was in compliance with the debt covenants contained in the Credit Agreement and had full availability of its unused borrowing capacity of $325 million, net of letters of credit, under the revolving credit facility.
3.875% USD Notes due 2028
On August 18, 2020, the Company completed a private offering of $800 million aggregate principal amount of 3.875% senior notes due 2028. The net proceeds from this offering and cash on hand were used to pay for the full redemption of the Company's $800 million aggregate amount of 5.875% USD Notes due 2025 on September 4, 2020. In connection with the redemption, the Company expensed $45.7 million in "Other (expense) income, net" in the Consolidated Statement of Operations, consisting of a make-whole premium of $33.6 million, which is a cash outflow from financing activities in the Condensed Consolidated Statements of Cash Flows, and the write-off of debt issuance costs and original issue discount of $12.1 million.
The 3.875% USD Notes due 2028 are governed by the 3.875% USD Notes Indenture,an indenture which provides, among other things, for customary affirmative and negative covenants, events of default and other customary provisions. The notes accrue interest at a rate of 3.875% per annum, payable semi-annually in arrears, on March 1 and September 1 of each year, beginning on March 1, 2021, and will mature on September 1, 2028, unless earlier repurchased or redeemed. Pursuant to the indenture, the Company has the option to redeem the 3.875% USD Notes due 2028 prior to their maturity, subject to, in certain cases, the payment of an applicable make-whole premium. The 3.875% USD Notes due 2028 are fully and unconditionally guaranteed on a senior unsecured basis by generally all of the Company’s domestic subsidiaries that guarantee the obligations of the borrowers under the Credit Agreement.
Lines of Credit and Other Debt Facilities
The Company has access to various revolving lines of credit, short-term debt facilities and overdraft facilities worldwide which are used to fund short-term cash needs. There were 0 amounts outstanding under such facilities at SeptemberJune 30, 20202021 or December 31, 2019.2020. The Company had letters of credit outstanding of $5.9 million and $6.2 million and $5.7 million at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively, of which $5.5 million and $5.3 million at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively, reduced the borrowings available under the various facilities. At SeptemberJune 30, 20202021 and December 31, 2019,2020, the availability under these facilities totaled approximately $349 million, and $351 million, respectively, net of outstanding letters of credit.
8.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
7. FINANCIAL INSTRUMENTS
Derivatives and Hedging
In the normal course of business, the Company is exposed to risks relating to changes in foreign currency exchange rates, commodity prices and interest rates. Derivative financial instruments, such as foreign currency exchange forward contracts, commodities futures contracts, interest rate swaps and net investment hedges are used to manage the risks associated with changes in the conditions of those markets. All derivatives are recognized in the Condensed Consolidated Balance Sheets at fair value. The counterparties to the Company’s derivative agreements are primarily major international financial institutions. The Company continually monitors its derivative positions and the credit ratings of its counterparties and does not anticipate nonperformance on their part.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Foreign Currency
The Company conducts a significant portion of its business in currencies other than the U.S. dollar and a portion of its business in currencies other than the functional currencies of its subsidiaries. As a result, the Company’s operating results are impacted by foreign currency exchange rate volatility.
At SeptemberJune 30, 2020,2021, the Company held foreign currency forward contracts to purchase and sell various currencies in order to mitigate such foreign currency exposure with the U.S. dollar and British pound.dollar. The Company has not designated any foreign currency exchange forward contracts as eligible for hedge accounting and, as a result, changes in the fair value of foreign currency forward contracts are recorded in the Condensed Consolidated Statements of Operations as "Other (expense) income,expense, net." The total notional value of foreign currency exchange forward contracts held at SeptemberJune 30, 20202021 and December 31, 20192020 was approximately $213.3$73.8 million and $74.2$78.5 million, respectively, with settlement dates generally within one year. The market value of the foreign currency forward contracts was a $0.9$0.7 million net current liability at SeptemberJune 30, 20202021 and a $0.7$0.5 million net current assetliability at December 31, 2019.2020.
Commodities
As part of its risk management policy, the Company enters into commoditiescommodity futures contracts for the purpose of mitigating its exposure to fluctuations in prices of certain metals used in the production of its finished goods. The Company held futures contracts to purchase and sell various metals, primarily tin and silver, withfor a notional valueamount of $35.4$45.2 million and $28.6$25.0 million at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively. The market value of the metals forward contracts was $0.7a $0.4 million net current asset at SeptemberJune 30, 20202021 and $0.4a $1.2 million net current liability at December 31, 2019.2020. Substantially all contracts outstanding at SeptemberJune 30, 20202021 had delivery dates within one year. The Company has not designated these derivatives as hedging instruments and, accordingly, records changes in their fair values in the Condensed Consolidated Statements of Operations as "Other (expense) income,expense, net."
Realized gains and losses on derivative contracts are accounted for as "Operating activities" in the Condensed Consolidated Statements of Cash Flows.
Interest Rates and Cross-Currency Swaps
The Company entered into interest rate swaps to mitigate its exposure to fluctuations in interest rates on its term loans through January 2024. The interest rate swaps effectively fix the floating rate of the interest payments associated with its $750 millionthe term loanloans under the Credit Agreement through January 2024. TheseAgreement. The Company designated these contracts were designated as a cash flow hedge. Allhedges and changes in the fair value are recorded in "Accumulated other comprehensive loss" and reclassified into earnings as the underlying hedged item affects earnings. Amounts reclassified into earnings related to interest payments to be paid duringrate swaps are included in the last two years preceding the maturity dateCondensed Consolidated Statements of this term loan (February 2024 to January 2026) will revert back to a floating rate of interest.Operations as "Interest expense, net."
The Company also entered into cross-currency swaps to effectively convert the initial $750 million term loanloans under the Credit Agreement, a U.S. dollar denominated debt obligation, into fixed-rate euro-denominated debt. Under these contracts, which expire indebt through January 2024, the2024. The Company is obligated to make periodic euro-denominated coupon payments to the hedge counterparties on an aggregate initial notional amount of €662 million, in exchange for periodic U.S. dollar-denominated coupon payments from these hedge
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
counterparties on an aggregate initial notional amount of $750 million. The Company has also designated these contracts as a net investment hedge of the foreign currency exposure of a portion of its net investment in its European operations. Changes in the fair value are recorded in "Foreign currency translation" in "Accumulated other comprehensive loss."
All interest payments to be paid during the last two years preceding the maturity date of the term loan will revert back to a floating rate of interest for both the interest rate swaps and cross-currency swaps. The proceeds from these contracts are reflected as "Cash flows from operating activities" in the Consolidated Statement of Cash Flows.
The net result of the above hedges, which expire in January 2024, is an interest rate of approximately 2.3%2.4%, which could vary due to changes in the euro and the U.S. dollar exchange rate.
Changes in the fair value of a derivative instrument that is designated as, and meets all the required criteria of, a cash flow hedge are recorded in "Other comprehensive (loss) income" and reclassified from "Accumulated other comprehensive loss" into earnings as the underlying hedged item affects earnings. Amounts reclassified into earnings related to interest rate swaps are included in the Condensed Consolidated Statements of Operations as "Interest expense, net." Changes in the fair value of a derivative instrument that is designated as, and meets all the required criteria of, a net investment hedge are recorded in "Foreign currency translation" in "Accumulated other comprehensive loss" offsetting the translation adjustment attributable to the hedged portion of the Company’s net investment in its European operations.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
For the three and ninesix months ended SeptemberJune 30, 2020,2021, the Company's interest rate swaps and cross-currency swaps were deemed highly effective. The Company expects to reclassify $17.5 million of expense associated with its interest rate swaps from "Accumulated other comprehensive loss" to "Interest expense, net" in the Condensed Consolidated Statements of Operations within the next twelve months.
In June 2021, the Company entered into forward starting swaps to effectively convert the $400 million of anticipated add-on debt into fixed-rate euro-denominated debt through their maturity in January 2025. The add-on transaction, which was priced and allocated on June 23, 2021, is expected to close concurrently with the acquisition of Coventya Holding SAS in September 2021, at which time the forward starting swaps are expected to become effective. The Company has not yet designated the forward starting swap contracts as eligible for hedge accounting and, as a result, changes in the fair value of the forward starting swap contracts are recorded in the Condensed Consolidated Statements of Operations as "Other expense, net."
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Fair Value Measurements
The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis:
| (dollars in millions) | (dollars in millions) | Balance sheet location | | Classification | | September 30, 2020 | | December 31, 2019 | (dollars in millions) | Balance sheet location | | Classification | | June 30, 2021 | | December 31, 2020 |
Asset Category | Asset Category | | | | | | | | Asset Category | | | | | | | |
Foreign exchange not designated as hedging instruments | Other current assets | | Level 2 | | $ | 3.1 | | | $ | 0.9 | | |
Foreign exchange contracts not designated as hedging instruments | | Foreign exchange contracts not designated as hedging instruments | Other current assets | | Level 2 | | $ | 0 | | | $ | 0.2 | |
Metals contracts not designated as hedging instruments | Metals contracts not designated as hedging instruments | Other current assets | | Level 2 | | 1.9 | | | 0.3 | | Metals contracts not designated as hedging instruments | Other current assets | | Level 2 | | 1.5 | | | 0.4 | |
| Cross currency swaps designated as net investment hedge | Cross currency swaps designated as net investment hedge | Other current assets | | Level 2 | | 17.5 | | | 18.4 | | Cross currency swaps designated as net investment hedge | Other current assets | | Level 2 | | 17.0 | | | 16.3 | |
Forward starting swaps not designated as hedging instruments | | Forward starting swaps not designated as hedging instruments | Other current assets | | Level 2 | | 2.6 | | | 0 | |
| Available for sale equity securities | Other assets | | Level 1 | | 0 | | | 0.3 | | |
Forward starting swaps not designated as hedging instruments | | Forward starting swaps not designated as hedging instruments | Other assets | | Level 2 | | 1.1 | | | 0 | |
| Total | Total | | $ | 22.5 | | | $ | 19.9 | | Total | | $ | 22.2 | | | $ | 16.9 | |
| Liability Category | Liability Category | | Liability Category | |
Foreign exchange not designated as hedging instruments | Accrued expenses and other current liabilities | | Level 2 | | $ | 4.0 | | | $ | 0.2 | | |
Foreign exchange contracts not designated as hedging instruments | | Foreign exchange contracts not designated as hedging instruments | Accrued expenses and other current liabilities | | Level 2 | | $ | 0.7 | | | $ | 0.7 | |
Metals contracts not designated as hedging instruments | Metals contracts not designated as hedging instruments | Accrued expenses and other current liabilities | | Level 2 | | 1.2 | | | 0.7 | | Metals contracts not designated as hedging instruments | Accrued expenses and other current liabilities | | Level 2 | | 1.1 | | | 1.6 | |
Interest rate swaps designated as cash flow hedging instruments | Interest rate swaps designated as cash flow hedging instruments | Accrued expenses and other current liabilities | | Level 2 | | 17.5 | | | 6.9 | | Interest rate swaps designated as cash flow hedging instruments | Accrued expenses and other current liabilities | | Level 2 | | 17.5 | | | 17.6 | |
| Forward starting swaps not designated as hedging instruments | | Forward starting swaps not designated as hedging instruments | Accrued expenses and other current liabilities | | Level 2 | | 1.2 | | | 0 | |
Interest rate swaps designated as cash flow hedging instruments | Interest rate swaps designated as cash flow hedging instruments | Other liabilities | | Level 2 | | 38.3 | | | 19.7 | | Interest rate swaps designated as cash flow hedging instruments | Other liabilities | | Level 2 | | 20.9 | | | 33.5 | |
Cross currency swaps designated as net investment hedge | Cross currency swaps designated as net investment hedge | Other liabilities | | Level 2 | | 6.8 | | | 0.3 | | Cross currency swaps designated as net investment hedge | Other liabilities | | Level 2 | | 25.5 | | | 43.3 | |
Forward starting swaps not designated as hedging instruments | | Forward starting swaps not designated as hedging instruments | Other liabilities | | Level 2 | | 4.3 | | | 0 | |
Total | Total | | $ | 67.8 | | | $ | 27.8 | | Total | | $ | 71.2 | | | $ | 96.7 | |
The following methods and assumptions were used to estimate the fair value of each class of the Company’s financial assets and liabilities:
Derivatives -Derivative assets and liabilities include foreign currency, metals, forward starting swaps, interest rate swaps and cross currency swaps. The fair values are determined using pricing models based upon observable market inputs, such as market spot and futures prices on over-the-counter derivative instruments, market interest rates and consideration of counterparty credit risk.
Available for sale equity securities - Available for sale equity securities classified as Level 1 assets are measured using quoted market prices at the reporting date multiplied by the quantity held.
There were no significant transfers of financial instruments between the fair value hierarchy levels for the three and ninesix months ended SeptemberJune 30, 2020.2021.
The carrying value and estimated fair value of the Company’s long-term debt totaled $1.52$1.51 billion and $1.51$1.55 billion, respectively, at SeptemberJune 30, 2020.2021. At December 31, 2019,2020, the carrying value and estimated fair value totaled $1.52 billion and $1.58$1.55 billion, respectively. The carrying values noted above include unamortized discounts and debt issuance costs. The estimated fair value of long-term debt is measured using quoted market prices at the reporting date multiplied by the gross carrying amount of the related debt, which excludes unamortized discounts and debt issuance costs. Such instruments are valued using Level 2 inputs.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
9.8. STOCKHOLDERS’ EQUITY
Preferred StockPerformance-based RSUs
The vesting of certain performance-based RSUs previously granted to key executives is subject to the achievement by the Company is authorizedof a certain performance target in any fiscal year ending on or before December 31, 2022, and continuous service. Prior to issue 5 million sharesthe second quarter of preferred stock. The Board had designated 22021, the Company did not recognize compensation expense for these awards as the achievement of the performance target was not deemed probable. During the second quarter of 2021, the achievement of the performance target became probable and the Company recorded $13.6 million of those shares as "Series A Preferred Stock." At December 31, 2019, a totalexpense for these awards in "Selling, technical, general and administrative" in the Condensed Consolidated Statements of 2 million shares of Series A Preferred Stock were issued and outstanding. All outstanding shares of Series A Preferred Stock were converted into shares of common stock of the Company during the first quarter of 2020.
Repurchases of Common Stock
During the three months ended September 30, 2020, as part of its previously-announced $750 million share repurchase program, the Company repurchased approximately 0.2 million shares of its common stock for approximately $2.6 million, at an average price of approximately $11.24 per share. During the nine months ended September 30, 2020, the Company repurchased approximately 4.0 million shares of its common stock for approximately $35.7 million, at an average price of approximately $8.96 per share. The repurchases were funded from cash on hand and the shares were allocated to treasury shares. The remaining authorization under the Company's share repurchase program was approximately $207 million at September 30, 2020.
On October 6, 2020, the Company repurchased 1.5 million shares of its common stock at $11.50 per share or an aggregate purchase price of approximately $17.3 million. The repurchase was funded from cash on hand and the shares were allocated to treasury shares.Operations.
10.9. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings per share are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for purposes of determining diluted earnings per share, assumes the issuance of all potentially dilutive share equivalents using the if-converted or treasury stock method.
A computation of earnings (loss) per share from continuing operations and weighted average shares of the Company's common stock outstanding for the three and ninesix months ended SeptemberJune 30, 20202021 and 20192020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions, except per share amounts) | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) from continuing operations | $ | 36.2 | | | $ | (6.0) | | | $ | 46.9 | | | $ | 5.2 | |
Net income attributable to the non-controlling interests | 0 | | | 0 | | | 0 | | | (0.6) | |
Net income (loss) from continuing operations attributable to common stockholders | $ | 36.2 | | | $ | (6.0) | | | $ | 46.9 | | | $ | 4.6 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Basic weighted average common shares outstanding | 248.9 | | | 254.4 | | | 249.4 | | | 259.9 | |
Denominator adjustments for diluted EPS: | | | | | | | |
Number of shares issuable upon conversion of Series A Preferred Stock | 0 | | | 0 | | | 0.4 | | | 2.0 | |
| | | | | | | |
| | | | | | | |
Number of stock options and RSUs | 0.2 | | | 0 | | | 0.3 | | | 0.5 | |
Denominator adjustments for diluted EPS | 0.2 | | | 0 | | | 0.7 | | | 2.5 | |
Diluted weighted average common shares outstanding | 249.1 | | | 254.4 | | | 250.1 | | | 262.4 | |
| | | | | | | |
Earnings (loss) per share from continuing operations attributable to common stockholders: | | | | | | | |
Basic | $ | 0.15 | | | $ | (0.02) | | | $ | 0.19 | | | $ | 0.02 | |
Diluted | $ | 0.15 | | | $ | (0.02) | | | $ | 0.19 | | | $ | 0.02 | |
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in millions, except per share amounts) | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| | | | | | | |
Net income from continuing operations attributable to common stockholders | $ | 79.1 | | | $ | 2.3 | | | $ | 161.4 | | | $ | 10.7 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Basic weighted average common shares outstanding | 247.5 | | | 248.8 | | | 247.4 | | | 249.6 | |
Denominator adjustments for diluted EPS: | | | | | | | |
Number of shares issuable upon conversion of Series A Preferred Stock | 0 | | | 0 | | | 0 | | | 0.6 | |
| | | | | | | |
| | | | | | | |
Number of stock options and RSUs | 0.4 | | | 0.2 | | | 0.6 | | | 0.4 | |
Denominator adjustments for diluted EPS | 0.4 | | | 0.2 | | | 0.6 | | | 1.0 | |
Diluted weighted average common shares outstanding | 247.9 | | | 249.0 | | | 248.0 | | | 250.6 | |
| | | | | | | |
Earnings per share from continuing operations attributable to common stockholders: | | | | | | | |
Basic | $ | 0.32 | | | $ | 0.01 | | | $ | 0.65 | | | $ | 0.04 | |
Diluted | $ | 0.32 | | | $ | 0.01 | | | $ | 0.65 | | | $ | 0.04 | |
For the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, the following securities were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive or because performance targets and/or market conditions were not yet achievedmet for RSUsawards contingent upon performance:such measures:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(shares in millions) | 2020 | | 2019 | | 2020 | | 2019 |
Shares issuable for the contingent consideration | 0 | | | 4.9 | | | 0 | | | 4.9 | |
Shares issuable upon conversion of Series A Preferred Stock | 0 | | | 2.0 | | | 0 | | | 0 | |
Shares issuable upon vesting of RSUs and exercise of stock options | 4.5 | | | 5.0 | | | 4.7 | | | 4.3 | |
Total | 4.5 | | | 11.9 | | | 4.7 | | | 9.2 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(shares in millions) | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| | | | | | | |
Shares issuable upon vesting of RSUs and exercise of stock options | 3.7 | | | 4.1 | | | 4.0 | | | 4.2 | |
| | | | | | | |
11.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
10. CONTINGENCIES, ENVIRONMENTAL AND LEGAL MATTERS
Environmental Matters
The Company is involved in various claims relating to environmental matters at current and former plants and waste management sites. TheAt certain of these sites, the Company engages or participates in remedial and other environmental compliance activities at certain of these sites.activities. At other sites, itthe Company has been named as a potential responsible party pursuant to the federal Superfund Act and/or state Superfund laws comparable to the federal law for site remediation. The Company analyzesAfter analyzing each individual site, considering the number of parties involved, the level of its potential liability or contribution relating to the other parties, the nature and magnitude of the hazardous wasteswaste involved, the method and extent of remediation, the potential insurance coverage, the estimated legal and consulting expense with respect to each site and the time period over which any costs arewould likely to be incurred. Based on this analysis,incurred, the Company estimates the clean-up costs and related claims for each site. The estimates are based in part on discussions with other potential responsible parties, governmental agencies and engineering firms.
The Company accrues for environmental matters when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current laws and existing technologies. The accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. The Company's environmental liabilities, which are included in the Condensed Consolidated Balance Sheets as "Accrued expenses and other current liabilities" and "Other liabilities," totaled $11.0$11.6 million and $12.0$10.1 million at SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively, primarily driven by environmental remediation, clean-up costs and monitoring of sites that were either closed or disposed of in prior years. While uncertainty exists with respect to the amount and timing of its ultimate environmental liabilities, the Company does not currently anticipate any material losses in excess of the amount recorded. However, it is possible that new information about the sites, such as results of investigations, could make it necessary for the Company to reassess its potential exposure related to these environmental matters.
TheAs of the date hereof, the Company believes it is not possiblepracticable to developprovide an estimate of theestimated range of reasonably possible environmental losslosses in excess of the Company'sits recorded liabilities, and, as a result, the Company is unable to ascertain the ultimate aggregate amount of monetary liabilitiesliability or financial impactsimpact that may be associated with respect to these matters.
Legal Matters
From time to time, the Company is involved in various legal proceedings, investigations and/or claims in the normal course of its business. Although it cannot predict with certainty the ultimate resolution of these matters, which involve judgments that are inherently subjective, the Company believes that their resolutions, to the extent not covered by insurance, will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Arysta Sale
12.In connection with the Arysta Sale, which closed on January 31, 2019, the Company agreed to retain certain liabilities associated with legal and tax proceedings, primarily related to an Arysta subsidiary in Brazil. The Company does not expect to incur a material loss as a result of these proceedings. However, the resolutions of these matters may take several years and, to the extent not covered by insurance, may adversely impact the Company's financial position or results of operations.
11. INCOME TAXES
The Company's quarterly income tax provision is measured using an estimate of its consolidated annual effective tax rate, adjusted in the current period for discrete income tax items, within the periods presented. The comparison of the Company's income tax provision between periods can be significantly impacted by the level and mix of earnings and losses by tax jurisdiction and discrete items.
For the three months ended June 30, 2021 and 2020, the Company recognized an income tax benefit of $31.9 million and income tax expense of $5.8 million, respectively. For the six months ended June 30, 2021 and 2020, the Company recognized an income tax benefit of $0.8 million and income tax expense of $9.9 million, respectively.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The income tax provision between periods is significantly impacted by tax law changes,benefit for the levelthree and six months ended June 30, 2021 includes a $51.4 million benefit associated with the release of valuation allowances, the impact of higher pre-tax income and country mix of earningsearnings. The benefit was associated with the release of valuation allowances previously recorded against certain U.S. tax attribute carryforwards, primarily consisting of net operating loss carryforwards in certain states and losses by tax jurisdiction, foreigninterest carryforwards.The valuation allowances are being released as the Company expects improved profitability in its domestic business and a shift to a three-year cumulative income position. These expectations are based on actual and forecasted results.
The income tax rate differentialsexpense for the three and discrete items.
On July 23,six months ended June 30, 2020 includes the U.S. Treasury Department released regulations relating to the treatmentnegative impact of income that is subject to a high rate of foreign tax under the U.S. global intangible low-taxed income ("GILTI") and subpart F income regimes, and on July 28, 2020, it released new regulations relating to Internal Revenue Code section 163(j) and the related interest expense limitations. The Company has evaluated the impact of these new regulations on its Condensed Consolidated Financial Statements and calculated an estimated $42 million tax benefit from these regulations related to the 2018 and 2019 tax years producing an increase to the Company's net operating loss carryforwards. The Company recorded these impacts in the third quarter of 2020.
For the three months ended September 30, 2020, the Company recognized an income tax benefit of $47.3 million, as compared to income tax expense of $57.2 million in the prior year. The tax benefit for the three months ended September 30, 2020 was driven by the benefit from the new regulations noted above, and to a lesser extent, the impacts from the GILTI provisions related to the 2020 tax year, a valuation allowance on tax attribute carryforwards and a tax on unremitted earnings related to non-U.S. jurisdictions. The tax expense for the three months ended September 30, 2019 represented tax on the Company's pre-tax income based on its estimated full year annual effective tax rate, which included the negative impact of U.S. GILTI provisions and an accrual of a valuation allowance on interest limitation carryforwards.
For the nine months ended September 30, 2020, the Company recognized an income tax benefit of $37.4 million, as compared to income tax expense of $40.0 million in the prior year. The tax benefit for the nine months ended September 30, 2020 was driven by the tax benefit from the new regulations noted above, and to a lesser extent, the negative impact of the GILTI provisions related to the 2020 tax year, an accrual of a valuation allowance on tax attribute carryforwards, and tax on unremitted earnings related to non-U.S. jurisdictions, partially offset by the recognition of a benefit associated with the expiration of a statute of limitations. The tax expense for the nine months ended September 30, 2019 represented tax on the Company's pre-tax income based on its estimated full year annual effective tax rate, which included the negative impact of U.S. GILTI provisions, an accrual of a valuation allowance on interest limitation carryforwards and a benefit from the release of a valuation allowance.
13.12. RELATED PARTY TRANSACTIONS
The Company is a party to an Advisory Services Agreement with Mariposa Capital, LLC, an affiliate of one of its founder directors, whereby Mariposa Capital, LLC is entitled to receive an annual fee of $3 million and reimbursement for expenses. This agreement is automatically renewed for successive one year terms unless either party notifies the other in writing of its intention not to renew no later than 90 days prior to the expiration of the applicable term. The fee is recorded in the Condensed Consolidated Statements of Operations as "Selling, technical, general and administrative" expense.
14.13. SEGMENT INFORMATION
The Company's operations are organized into 2 reportable segments: Electronics and Industrial & Specialty. These segments represent businesses for which separate financial information is utilized by the chief operating decision maker or CODM,(or CODM) for purposes of allocating resources and evaluating performance.
The Company allocates resources and evaluates the performance of its operating segments based primarily on net sales and Adjusted EBITDA. Adjusted EBITDA for each segment is defined as earnings before interest, taxes, depreciation and amortization,EBITDA, as further adjusted for additional items included in GAAP earnings which the Company believes are not representative or indicative of each of its segments' ongoing business or are considered to be associated with its capital structure. Adjusted EBITDA for each segment also includes an allocation of corporate costs, such as compensation expense and professional fees.
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Results of Operations
The following table summarizes financial information regarding each reportable segment’s results of operations, including disaggregated external net sales by product category:
ELEMENT SOLUTIONS INC AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2021 | | 2020 | | 2021 | | 2020 |
Net sales: | | | | | | | |
Electronics | | | | | | | |
Assembly Solutions | $ | 205.1 | | | $ | 112.2 | | | $ | 394.1 | | | $ | 238.2 | |
Circuitry Solutions | 111.5 | | | 92.8 | | | 219.8 | | | 185.7 | |
Semiconductor Solutions | 65.3 | | | 48.2 | | | 121.5 | | | 98.2 | |
Total Electronics | 381.9 | | | 253.2 | | | 735.4 | | | 522.1 | |
Industrial & Specialty | | | | | | | |
Industrial Solutions | 148.2 | | | 83.6 | | | 294.5 | | | 209.5 | |
Graphics Solutions | 40.0 | | | 34.6 | | | 74.7 | | | 73.2 | |
Energy Solutions | 16.5 | | | 15.6 | | | 32.1 | | | 34.8 | |
Total Industrial & Specialty | 204.7 | | | 133.8 | | | 401.3 | | | 317.5 | |
Total net sales | $ | 586.6 | | | $ | 387.0 | | | $ | 1,136.7 | | | $ | 839.6 | |
| | | | | | | |
Adjusted EBITDA: | | | | | | | |
Electronics | $ | 90.7 | | | $ | 58.0 | | | $ | 183.2 | | | $ | 124.5 | |
Industrial & Specialty | 42.4 | | | 26.8 | | | 87.8 | | | 70.4 | |
Total Adjusted EBITDA | $ | 133.1 | | | $ | 84.8 | | | $ | 271.0 | | | $ | 194.9 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions) | 2020 | | 2019 | | 2020 | | 2019 |
Net sales: | | | | | | | |
Electronics | | | | | | | |
Assembly Solutions | $ | 155.0 | | | $ | 137.3 | | | $ | 393.2 | | | $ | 407.7 | |
Circuitry Solutions | 101.0 | | | 102.4 | | | 286.7 | | | 285.4 | |
Semiconductor Solutions | 50.8 | | | 40.3 | | | 149.0 | | | 120.7 | |
Total Electronics | 306.8 | | | 280.0 | | | 828.9 | | | 813.8 | |
Industrial & Specialty | | | | | | | |
Industrial Solutions | 121.0 | | | 125.5 | | | 330.5 | | | 396.0 | |
Graphics Solutions | 33.6 | | | 40.1 | | | 106.8 | | | 113.1 | |
Energy Solutions | 16.1 | | | 19.1 | | | 50.9 | | | 58.3 | |
Total Industrial & Specialty | 170.7 | | | 184.7 | | | 488.2 | | | 567.4 | |
Total net sales | $ | 477.5 | | | $ | 464.7 | | | $ | 1,317.1 | | | $ | 1,381.2 | |
| | | | | | | |
Adjusted EBITDA: | | | | | | | |
Electronics | $ | 72.0 | | | $ | 73.6 | | | $ | 196.5 | | | $ | 190.4 | |
Industrial & Specialty | 29.8 | | | 41.8 | | | 100.2 | | | 124.1 | |
Total Adjusted EBITDA | $ | 101.8 | | | $ | 115.4 | | | $ | 296.7 | | | $ | 314.5 | |
The following table reconciles "Net income (loss) attributable to common stockholders" to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions) | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) attributable to common stockholders | $ | 36.0 | | | $ | (6.9) | | | $ | 45.8 | | | $ | 17.8 | |
Add (subtract): | | | | | | | |
Net income attributable to the non-controlling interests | 0 | | | 0 | | | 0 | | | 0.6 | |
Loss (income) from discontinued operations, net of tax | 0.2 | | | 0.9 | | | 1.1 | | | (13.2) | |
Income tax (benefit) expense | (47.3) | | | 57.2 | | | (37.4) | | | 40.0 | |
Interest expense, net | 17.1 | | | 17.4 | | | 50.7 | | | 73.7 | |
Depreciation expense | 10.7 | | | 10.1 | | | 31.7 | | | 30.8 | |
Amortization expense | 30.5 | | | 28.1 | | | 88.8 | | | 84.9 | |
EBITDA | 47.2 | | | 106.8 | | | 180.7 | | | 234.6 | |
Adjustments to reconcile to Adjusted EBITDA: | | | | | | | |
Amortization of inventory step-up | 1.0 | | | 0 | | | 2.4 | | | 0 | |
Restructuring expense | 1.3 | | | 6.8 | | | 5.6 | | | 12.6 | |
Acquisition and integration costs | 0.4 | | | 0.8 | | | 8.3 | | | 2.5 | |
Foreign exchange loss on foreign denominated external and internal long-term debt | 2.3 | | | 1.1 | | | 43.2 | | | 1.5 | |
Debt refinancing costs | 45.7 | | | 0 | | | 45.7 | | | 61.0 | |
Change in fair value of contingent consideration | 0 | | | 0.5 | | | 0 | | | 3.4 | |
Other, net | 3.9 | | | (0.6) | | | 10.8 | | | (1.1) | |
Adjusted EBITDA | $ | 101.8 | | | $ | 115.4 | | | $ | 296.7 | | | $ | 314.5 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2021 | | 2020 | | 2021 | | 2020 |
Net income attributable to common stockholders | $ | 81.1 | | | $ | 1.2 | | | $ | 163.4 | | | $ | 9.8 | |
Add (subtract): | | | | | | | |
| | | | | | | |
(Income) loss from discontinued operations, net of tax | (2.0) | | | 1.1 | | | (2.0) | | | 0.9 | |
Income tax (benefit) expense | (31.9) | | | 5.8 | | | (0.8) | | | 9.9 | |
Interest expense, net | 12.9 | | | 16.9 | | | 25.8 | | | 33.6 | |
Depreciation expense | 9.7 | | | 10.5 | | | 19.1 | | | 21.0 | |
Amortization expense | 30.4 | | | 28.9 | | | 60.1 | | | 58.3 | |
EBITDA | 100.2 | | | 64.4 | | | 265.6 | | | 133.5 | |
Adjustments to reconcile to Adjusted EBITDA: | | | | | | | |
Amortization of inventory step-up | 2.2 | | | 0 | | | 2.2 | | | 1.4 | |
Restructuring expense | 1.6 | | | 3.3 | | | 3.9 | | | 4.3 | |
Acquisition and integration expense | 5.9 | | | 1.3 | | | 3.2 | | | 7.9 | |
Foreign exchange loss (gain) on internal debt | 4.6 | | | 11.8 | | | (23.4) | | | 40.9 | |
| | | | | | | |
Adjustment of stock compensation previously not probable (Note 8) | 13.6 | | | 0 | | | 13.6 | | | 0 | |
Other, net | 5.0 | | | 4.0 | | | 5.9 | | | 6.9 | |
Adjusted EBITDA | $ | 133.1 | | | $ | 84.8 | | | $ | 271.0 | | | $ | 194.9 | |
Item 2. 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 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 20192020 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. Factors that might cause a difference include, but are not limited to, those discussed in "Forward-Looking Statements” and Part II, Item 1A, "Risk Factors" of this Quarterly Report, and in Part I, Item 1A, "Risk Factors" of our 20192020 Annual Report.
Overview
Our Business
Element Solutions, Inc, 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, thethese innovative solutions of our businesses enable customers' manufacturing processes in several key industries, including electronic circuitry,consumer electronics, power electronics, semiconductor fabrication, communications and data storage infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy. SubstantiallyOur businesses provide products that, in substantially all of our businesses' productscases, are consumed by our customers as part of their production process, providing us with reliable and recurring revenue streams as the products are replenished in order to continue production. Our customers use our innovation as competitive advantages, relying on us to help them navigate through fast-paced, high-growth markets. Our product development and product extensions are expected to continue to drive sales growth in both new and existing markets, while expanding margins, by continuing to offer highthrough a consistent focus on increasing customer value propositions.
We generate revenue throughfrom the development, formulation and sale of our businesses' chemistry solutions by ourglobally. Our extensive global networkteams of specially-trainedspecially trained scientists and engineers. Whileengineers develop our chemistries typically represent only a small portion ofproducts and our customers’ costs, they are integral toexpert sales and service organizations ensure our customers' manufacturing processes and overall product performance.needs are met every day. We leverage these close relationships with our customers and OEMs to execute our growth strategy and identify opportunities for new products. These new products are developed and created by drawing upon our broad and longstanding intellectual property portfolio and technical expertise. Our specialty chemicals and processes are seen as integral to customer product performance. We believe that our customers place significant value on the consistency and quality of our brands, which we capitalize on through significant market share, customer loyalty and supply chain access. Lastly, 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 Operations
Our operations are organized into two segments: Electronics and Industrial & Specialty, which are each described below:
Electronics – The Electronics segment researches, formulates and deliverssells specialty chemicals and materials for all types of electronics hardware from complex printed circuit board designs to new interconnection materials.advanced semiconductor packaging. In mobile communications, computers, automobiles and aerospace equipment, Electronics'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 solders, pastes, fluxes and adhesives, join those pathways together.
The segment provides specialty chemical solutions through the following businesses:
| | | | | | | | |
Assembly Solutions | | As a global supplier of solder technologies, fluxes, cleaners and other attachment materials for the electronics assembly industry, we develop innovative materials that join electronic circuits in high volume device manufacturing. Our high-performing interconnect materials are used to assemble consumer electronics from circuit boards, discrete electronic components, connectors and integrated circuit substrates. |
Circuitry Solutions | | As a global supplier of chemical formulations to the electronics industry, we design and manufacture proprietary liquid chemical processes ("baths") used by our customers to manufacture printed circuit boards. Our product portfolio is focused on specialized consumable chemical processes, such as surface treatments, circuit formation, primary metallization, electroplate and final finishes. |
Semiconductor Solutions | | As a global supplier to the semiconductor industry, we provide advanced copper interconnects, die attachment, wafer bump processes and photomask technologies to our customers for integrated circuit fabrication and semiconductor packaging. |
Industrial & Specialty – The Industrial & Specialty segment provides customers with Industrial Solutions, whichresearches, formulates and sells specialty chemicals 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; Graphics Solutions, which include consumable chemicals that enable printing image transfer on flexible packaging materials; and Energy Solutions, which include chemistries used in water-based hydraulic control fluids in offshore energy production. Industrial & Specialty'sThese 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 | | 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 hard 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 and recycle 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. |
Graphics Solutions | | As a supplier of consumable materials used to transfer images on to 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. |
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. |
Recent Developments
Senior Notes RefinancingHKW Acquisition
During the third quarter of 2020,On May 5, 2021, we completed a private offeringthe HKW Acquisition for $50.9 million, net of $800 million aggregate principal amount of 3.875% USD Notes due 2028cash, subject to post-closing adjustments. The H.K. Wentworth business specializes in conformal coatings, encapsulation resins, thermal interface materials, contact lubricants and the subsequent full redemption of our 5.875% USD Notes due 2025. The 200 basis point reduction in interest rate reduces our annual interest payments by $16.0 million. In connection with the redemption, we expensed $45.7 million, consisting of a make-whole premium of $33.6 million and the write-off of debt issuance costs and original issue discount of $12.1 million, which was recorded in "Other (expense) income, net" in the Consolidated Statement of Operations.
Launch of MacDermid Envio Solutions
During the third quarter of 2020, we launched MacDermid Envio Solutions, a new business within our Industrial & Specialty segment which focuses on helping customers to reduce their environmental impact through proprietarycleaning chemistry and equipment for turnkey wastewater treatment andcomplements our broader electronics portfolio with many applications overlapping with semiconductor technologies. The operations of the recovery of metals and other valuable materials.H.K. Wentworth business are included in our Electronics business segment.
Proposed Coventya Acquisition
On June 11, 2021, we announced our planned acquisition of Coventya Holdings SAS, a global provider of specialty chemicals for the surface finishing industry, for a purchase price expected to be approximately €420 million, subject to adjustments. This acquisition is expected to close in September 2021, subject to customary closing conditions. We expect to fund this acquisition with $400 million of add-on debt to our existing term loans and cash on hand. The add-on transaction, which was priced and allocated on June 23, 2021, is expected to close concurrently with the Coventya acquisition, subject to the finalization and execution of its definitive documentation. On June 29, 2021, we also entered into forward starting swaps to effectively convert the $400 million of anticipated add-on debt into fixed-rate euro-denominated debt through their maturity in January 2025. The forward starting swaps are expected to become effective when the add-on transaction closes.
COVID-19 Update
In December 2019,The 2020 COVID-19 pandemic caused a novel strain of coronavirus was reported in Wuhan, China which has since spread throughout the world.global economic slowdown, significant end-market volatility and business uncertainty. In an effort to contain COVID-19 or slow its spread, governments and businesses around the world undertook significant countermeasures, including business closures, mandated “shelter in multiple countries have enacted various measures in response to the pandemic. These actionsplace” orders, travel restrictions and the global health crisis caused by COVID-19other edicts, which have negatively impacted, and continue to negatively impact, business activity acrossaround the globe.
In the context of the COVID-19 pandemic, our highest priority is protecting our employees, customers and other stakeholders. We also took certain proactive actions, including travel restrictionsproactively developed and heightened sanitary and social distancing policies at our locations around the world,continue to protect theimplement Company-wide COVID-19 health and safety policies and procedures based on guidance from global health organizations, relevant governments and pandemic response best practices. As the administration of our employees. These actions resulted in a decrease of discretionary expenses, including travel and entertainment expenses, as health and safety protocols were adopted worldwide. In addition,vaccine programs ramps up, we implemented certain actionscontinue to lower our cost structure, including temporary employee salary reductions and furloughs, and other actions intended to mitigatemonitor the economic impact of COVID-19 and preserve capital and liquidity.
Due to the impactimplications of the pandemic on our business as well as our customers' and related actions, we experienced weaker demand during the second quarter of 2020 as compared to the same period in 2019, but overall market conditions improved sequentially in the third quarter of 2020, primarily in the automobile end market. suppliers' businesses.
The ultimate extent of the impact of COVID-19 on our business or our future results of operations, financial condition, expected cash flows and/or stock price is currentlyremains unknown andas COVID-19, including its variants, continue to spread. The long-term impact of this pandemic will depend on numerous and evolving factors that are highly uncertain, vary by market and cannot be accurately predicted or quantified at this time, includingtime. These factors include the duration and spread of the pandemic, new information concerningthe efficacy, availability and/or public acceptance of vaccines targeting COVID-19, the impact of variants of COVID-19 that may affect its transmissionspread or virulence or the effectiveness of vaccines on the virus and/or its variants, and severity, evolving macroeconomic factors actions taken or that might be taken to contain or reduce its repercussionsdriven by the virus's overall spread and the general impact of the pandemic on our customers, employees, suppliers, vendors, stakeholders and operations, as well as the demand for our products and services.
Repurchases of Common Stock
During the three months ended September 30, 2020, we repurchased approximately 0.2 million shares of our common stock for approximately $2.6 million, at an average price of approximately $11.24 per share. The remaining authorization under our previously-announced $750 million share repurchase program was approximately $207 million at September 30, 2020. On October 6, 2020, we repurchased 1.5 million shares of our common stock at $11.50 per share or an aggregate purchase price of approximately $17.3 million.impact.
Recent Accounting Pronouncements
A summary ofOur recent accounting pronouncements is includedhave not changed materially from the summary disclosed in Note 2,3, Recent Accounting Pronouncements, to our unaudited Condensedthe Consolidated Financial Statements included in this Quarterlyour 2020 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 each of 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, or 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 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 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 reportedGAAP 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, (earnings before interest, provision for income taxes, depreciation and amortization), 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 (loss) attributable to common stockholders" to Adjusted EBITDA, and more information about the adjustments made, see Note 14,13, Segment Information, to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Results of Operations
Three and ninesix months ended SeptemberJune 30, 20202021 as compared to the three and ninesix months ended SeptemberJune 30, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | % Change | | Nine Months Ended September 30, | | % Change |
(dollars in millions) | 2020 | | 2019 | | Reported | | Constant Currency | | Organic | | 2020 | | 2019 | | Reported | | Constant Currency | | Organic |
Net sales | $ | 477.5 | | | $ | 464.7 | | | 3% | | 2% | | (2)% | | $ | 1,317.1 | | | $ | 1,381.2 | | | (5)% | | (3)% | | (7)% |
Cost of sales | 274.0 | | | 259.0 | | | 6% | | 5% | | | | 753.8 | | | 784.2 | | | (4)% | | (3)% | | |
Gross profit | 203.5 | | | 205.7 | | | (1)% | | (1)% | | | | 563.3 | | | 597.0 | | | (6)% | | (5)% | | |
Gross margin | 42.6 | % | | 44.3 | % | | (170) bps | | (160) bps | | | | 42.8 | % | | 43.2 | % | | (40) bps | | (50) bps | | |
Operating expenses | 144.9 | | | 138.8 | | | 4% | | 4% | | | | 410.6 | | | 429.5 | | | (4)% | | (4)% | | |
Operating profit | 58.6 | | | 66.9 | | | (12)% | | (12)% | | | | 152.7 | | | 167.5 | | | (9)% | | (7)% | | |
Operating margin | 12.3 | % | | 14.4 | % | | (210)bps | | (200)bps | | | | 11.6 | % | | 12.1 | % | | (50)bps | | (40)bps | | |
Other expense, net | (69.7) | | | (15.7) | | | (nm) | | | | | | (143.2) | | | (122.3) | | | 17% | | | | |
Income tax benefit (expense) | 47.3 | | | (57.2) | | | (nm) | | | | | | 37.4 | | | (40.0) | | | (nm) | | | | |
Net income (loss) from continuing operations | 36.2 | | | (6.0) | | | (nm) | | | | | | 46.9 | | | 5.2 | | | (nm) | | | | |
(Loss) income from discontinued operations, net of tax | (0.2) | | | (0.9) | | | (78)% | | | | | | (1.1) | | | 13.2 | | | (nm) | | | | |
Net income (loss) | $ | 36.0 | | | $ | (6.9) | | | (nm) | | | | | | $ | 45.8 | | | $ | 18.4 | | | (nm) | | | | |
| | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 101.8 | | | $ | 115.4 | | | (12)% | | (11)% | | | | $ | 296.7 | | | $ | 314.5 | | | (6)% | | (4)% | | |
Adjusted EBITDA margin | 21.3 | % | | 24.8 | % | | (350)bps | | (330)bps | | | | 22.5 | % | | 22.8 | % | | (30)bps | | (10)bps | | |
2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | % Change | | Six Months Ended June 30, | | % Change |
(dollars in millions) | 2021 | | 2020 | | Reported | | Constant Currency | | Organic | | 2021 | | 2020 | | Reported | | Constant Currency | | Organic |
Net sales | $ | 586.6 | | | $ | 387.0 | | | 52% | | 44% | | 30% | | $ | 1,136.7 | | | $ | 839.6 | | | 35% | | 30% | | 20% |
Cost of sales | 348.1 | | | 224.5 | | | 55% | | 46% | | | | 657.2 | | | 479.8 | | | 37% | | 31% | | |
Gross profit | 238.5 | | | 162.5 | | | 47% | | 41% | | | | 479.5 | | | 359.8 | | | 33% | | 28% | | |
Gross margin | 40.7 | % | | 42.0 | % | | (130) bps | | (100) bps | | | | 42.2 | % | | 42.9 | % | | (70) bps | | (50) bps | | |
Operating expenses | 167.5 | | | 123.0 | | | 36% | | 31% | | | | 308.6 | | | 265.7 | | | 16% | | 12% | | |
Operating profit | 71.0 | | | 39.5 | | | 80% | | 70% | | | | 170.9 | | | 94.1 | | | 82% | | 73% | | |
Operating margin | 12.1 | % | | 10.2 | % | | 190bps | | 180bps | | | | 15.0 | % | | 11.2 | % | | 380bps | | 370bps | | |
Other expense, net | (23.8) | | | (31.4) | | | (24)% | | | | | | (10.3) | | | (73.5) | | | (86)% | | | | |
Income tax benefit (expense) | 31.9 | | | (5.8) | | | (nm) | | | | | | 0.8 | | | (9.9) | | | (nm) | | | | |
Net income from continuing operations | 79.1 | | | 2.3 | | | (nm) | | | | | | 161.4 | | | 10.7 | | | (nm) | | | | |
Income (loss) from discontinued operations, net of tax | 2.0 | | | (1.1) | | | (nm) | | | | | | 2.0 | | | (0.9) | | | (nm) | | | | |
Net income | $ | 81.1 | | | $ | 1.2 | | | (nm) | | | | | | $ | 163.4 | | | $ | 9.8 | | | (nm) | | | | |
| | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA | $ | 133.1 | | | $ | 84.8 | | | 57% | | 47% | | | | $ | 271.0 | | | $ | 194.9 | | | 39% | | 32% | | |
Adjusted EBITDA margin | 22.7 | % | | 21.9 | % | | 80bps | | 50bps | | | | 23.8 | % | | 23.2 | % | | 60bps | | 40bps | | |
(nm) Calculation not meaningful.
Net Sales
Net sales in the thirdsecond quarter of 20202021 increased by 3%52% on a reported basis, 2%44% on a constant currency basis and decreased 2%30% on an organic basis. Electronics' consolidated results were positively impacted by $13.6 million of acquisitions and $4.3$41.6 million of pass-through metals pricing and $6.1 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $3.9$5.0 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and organic net sales growth:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | % Change |
(dollars in millions) | 2020 | | 2019 | | Reported Net Sales Growth | | Impact of Currency | | Constant Currency | | Pass-Through Metals Pricing | | Acquisitions | | Organic Net Sales Growth |
Electronics: | | | | | | | | | | | | | | | |
Assembly Solutions | $ | 155.0 | | | $ | 137.3 | | | 13% | | 0% | | 13% | | (3)% | | (8)% | | 1% |
Circuitry Solutions | 101.0 | | | 102.4 | | | (1)% | | (1)% | | (3)% | | —% | | —% | | (3)% |
Semiconductor Solutions | 50.8 | | | 40.3 | | | 26% | | (1)% | | 25% | | —% | | (6)% | | 19% |
Total | $ | 306.8 | | | $ | 280.0 | | | 10% | | (1)% | | 9% | | (2)% | | (5)% | | 2% |
| | | | | | | | | | | | | | | |
Industrial & Specialty: | | | | | | | | | | | | | | | |
Industrial Solutions | $ | 121.0 | | | $ | 125.5 | | | (4)% | | 0% | | (4)% | | —% | | (3)% | | (7)% |
Graphics Solutions | 33.6 | | | 40.1 | | | (16)% | | 1% | | (16)% | | —% | | —% | | (16)% |
Energy Solutions | 16.1 | | | 19.1 | | | (16)% | | 2% | | (14)% | | —% | | —% | | (14)% |
Total | $ | 170.7 | | | $ | 184.7 | | | (8)% | | 0% | | (7)% | | —% | | (2)% | | (10)% |
| | | | | | | | | | | | | | | |
Total | $ | 477.5 | | | $ | 464.7 | | | 3% | | 0% | | 2% | | (1)% | | (4)% | | (2)% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | % Change |
(dollars in millions) | 2021 | | 2020 | | Reported Net Sales Growth | | Impact of Currency | | Constant Currency | | Pass-Through Metals Pricing | | Acquisitions | | Organic Net Sales Growth |
Electronics: | | | | | | | | | | | | | | | |
Assembly Solutions | $ | 205.1 | | | $ | 112.2 | | | 83% | | (9)% | | 74% | | (37)% | | —% | | 37% |
Circuitry Solutions | 111.5 | | | 92.8 | | | 20% | | (7)% | | 13% | | —% | | —% | | 13% |
Semiconductor Solutions | 65.3 | | | 48.2 | | | 35% | | (4)% | | 31% | | —% | | (13)% | | 18% |
Total | 381.9 | | | 253.2 | | | 51% | | (7)% | | 44% | | (16)% | | (2)% | | 25% |
| | | | | | | | | | | | | | | |
Industrial & Specialty: | | | | | | | | | | | | | | | |
Industrial Solutions | 148.2 | | | 83.6 | | | 77% | | (10)% | | 67% | | —% | | (6)% | | 61% |
Graphics Solutions | 40.0 | | | 34.6 | | | 16% | | (5)% | | 11% | | —% | | —% | | 11% |
Energy Solutions | 16.5 | | | 15.6 | | | 6% | | (6)% | | 0% | | —% | | —% | | 0% |
Total | 204.7 | | | 133.8 | | | 53% | | (8)% | | 45% | | —% | | (4)% | | 41% |
| | | | | | | | | | | | | | | |
Total | $ | 586.6 | | | $ | 387.0 | | | 52% | | (8)% | | 44% | | (11)% | | (3)% | | 30% |
NOTE: Totals may not sum due to rounding.
Electronics' net sales in the thirdsecond quarter of 20202021 increased 10%51% on a reported basis and 2%25% on an organic basis.
•Assembly Solutions: net sales increased 13%83% on a reported basis and 1%37% on an organic basis. The Kester Acquisition and pass throughPass-through metals pricing had a positive impact of 37% on reported revenue of 8% and 3% respectively.net sales. Foreign exchange did not havehad a materialpositive impact of 9% on reported revenue.net sales. The increase in organic net sales was primarily due to continued recovery compared to COVID-19-related production slowdowns in the automotive end marketsame period in 2020 as well as stronger demand from COVID-19 weakness, which included increased global customer activity.power electronics customers.
•Circuitry Solutions: net sales declined 1%increased 20% on a reported basis and 3%13% on an organic basis. Foreign exchange had a positive impact of 1%7% on reported revenue.net sales. The decreaseincrease in organic net sales was primarily due to prior-year strengthhigher automotive demand in high-end mobile markets in Korea, partially offset by share gainsAsia and recoverystronger demand from COVID-19 weakness in China and continued demand for memory disk products.customers.
•Semiconductor Solutions: net sales increased 26%35% on a reported basis and 19%18% on an organic basis. Foreign exchange and the KesterThe HKW Acquisition had a positive impact of 13% on reported revenuenet sales. Foreign exchange had a positive impact of 1% and 6%, respectively.4% on reported net sales. The increase in organic net sales was primarily due to higher net sales of advanced plating chemistries containing precious metals and continued strengthstrong demand for wafer plating chemistries in products used forthe 5G telecom infrastructure.telecommunications infrastructure and automotive end markets.
Industrial & Specialty's net sales in the thirdsecond quarter of 2020 declined 8%2021 increased 53% on a reported basis and 10%41% on an organic basis.
•Industrial Solutions: net sales declined 4%increased 77% on a reported basis and 7%61% on an organic basis. The DMP Acquisition had a positive 3% impact of 6% on reported revenue.net sales. Foreign exchange did not havehad a materialpositive impact of 10% on reported revenue.net sales. The decreaseincrease in organic net sales was primarily due to strong global recovery compared to COVID-19-related demand weakness in European automotive, global consumer durables, aerospace and oil & gas end markets. Overall, market conditions improvedproduction slowdowns in the later part of the quarter,same period in 2020, primarily in Asiathe automotive markets, and the Americas automotive end markets.improved demand in construction and industrial manufacturing markets in Europe.
•Graphics Solutions: net sales declinedincreased 16% on a reported basis and 11% on an organic basis. Foreign exchange had a negativepositive impact of 1%5% on reported revenue.net sales. The decreaseincrease in organic net sales was primarily due to lower volumes of ancillary products, such as screen printingpackaging growth in the Americas and newspaper plates as well as reductions of product offerings and delayed marketing campaigns by CPG companies.Europe.
•Energy Solutions: net sales declined 16%increased 6% on a reported basis and 14%remained relatively flat on an organic basis. Foreign exchange had a negativepositive impact of 2%6% on reported revenue. The decreasenet sales. Organic results reflect muted new drilling activity in organic net sales was primarily due to oil demand weakness leading to decreased production volumes in Europeboth the current and Asia.prior year periods.
Year to date, net sales decreasedincreased by 5%35% on a reported basis, 3%30% on a constant currency basis and 7%20% on an organic basis. Electronics' consolidated results were positively impacted by $42.5 million of acquisitions and negatively impacted by $3.8$64.3 million of pass-through metals pricing and $6.1 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $3.9$9.7 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and organic net sales growth:
| | | Nine Months Ended September 30, | | % Change | | Six Months Ended June 30, | | % Change |
(dollars in millions) | (dollars in millions) | 2020 | | 2019 | | Reported Net Sales Growth | | Impact of Currency | | Constant Currency | | Pass-Through Metals Pricing | | Acquisitions | | Organic Net Sales Growth | (dollars in millions) | 2021 | | 2020 | | Reported Net Sales Growth | | Impact of Currency | | Constant Currency | | Pass-Through Metals Pricing | | Acquisitions | | Organic Net Sales Growth |
Electronics: | Electronics: | | | | | | | | | | | | | | | | Electronics: | | | | | | | | | | | | | | | |
Assembly Solutions | Assembly Solutions | $ | 393.2 | | | $ | 407.7 | | | (4)% | | 1% | | (2)% | | 1% | | (9)% | | (10)% | Assembly Solutions | $ | 394.1 | | | $ | 238.2 | | | 65% | | (7)% | | 58% | | (27)% | | —% | | 31% |
Circuitry Solutions | Circuitry Solutions | 286.7 | | | 285.4 | | | 0% | | 1% | | 1% | | —% | | —% | | 1% | Circuitry Solutions | 219.8 | | | 185.7 | | | 18% | | (6)% | | 12% | | —% | | —% | | 12% |
Semiconductor Solutions | Semiconductor Solutions | 149.0 | | | 120.7 | | | 23% | | 0% | | 23% | | —% | | (6)% | | 17% | Semiconductor Solutions | 121.5 | | | 98.2 | | | 24% | | (3)% | | 21% | | —% | | (6)% | | 15% |
Total | Total | $ | 828.9 | | | $ | 813.8 | | | 2% | | 1% | | 3% | | 0% | | (5)% | | (2)% | Total | 735.4 | | | 522.1 | | | 41% | | (6)% | | 35% | | (12)% | | (1)% | | 21% |
| Industrial & Specialty: | Industrial & Specialty: | | | | | | | Industrial & Specialty: | | | | | | |
Industrial Solutions | Industrial Solutions | $ | 330.5 | | | $ | 396.0 | | | (17)% | | 1% | | (15)% | | —% | | (1)% | | (16)% | Industrial Solutions | 294.5 | | | 209.5 | | | 41% | | (7)% | | 34% | | —% | | (5)% | | 29% |
Graphics Solutions | Graphics Solutions | 106.8 | | | 113.1 | | | (6)% | | 2% | | (4)% | | —% | | —% | | (4)% | Graphics Solutions | 74.7 | | | 73.2 | | | 2% | | (3)% | | (1)% | | —% | | —% | | (1)% |
Energy Solutions | Energy Solutions | 50.9 | | | 58.3 | | | (13)% | | 3% | | (9)% | | —% | | —% | | (9)% | Energy Solutions | 32.1 | | | 34.8 | | | (8)% | | (3)% | | (10)% | | —% | | —% | | (10)% |
Total | Total | $ | 488.2 | | | $ | 567.4 | | | (14)% | | 2% | | (12)% | | —% | | (1)% | | (13)% | Total | 401.3 | | | 317.5 | | | 26% | | (5)% | | 21% | | —% | | (3)% | | 18% |
| Total | Total | $ | 1,317.1 | | | $ | 1,381.2 | | | (5)% | | 1% | | (3)% | | 0% | | (3)% | | (7)% | Total | $ | 1,136.7 | | | $ | 839.6 | | | 35% | | (6)% | | 30% | | (8)% | | (2)% | | 20% |
NOTE: Totals may not sum due to rounding.
Year to date, Electronics' net sales increased 2%41% on a reported basis and declined 2%21% on an organic basis.
•Assembly Solutions: net sales declined 4%increased 65% on a reported basis and 10%31% on an organic basis. The Kester AcquisitionPass-through metals pricing had a positive impact of 27% on reported revenue of 9%. Pass through metals pricing and foreign exchange had a negative impact on reported revenue of 1%. The decrease in organic net sales was primarily due to weak demand related to COVID-19 production slowdowns in all regions we serve, which impacted key end-markets such as automotive and consumer electronics, and the partial closure of our India manufacturing facility in the second quarter of 2020.
•Circuitry Solutions: net sales remained relatively flat on a reported basis and increased 1% on an organic basis.sales. Foreign exchange had a negativepositive impact of 1%7% on reported revenue.net sales. The increase in organic net sales was primarily due to strongautomotive recovery compared to COVID-19-related production slowdowns in the first half of 2020 as well as stronger demand from memory disk customers and continued strength in 5G-related products. The first quarter of 2020 was impacted by COVID-19-related demand weakness in China.power electronics customers.
•SemiconductorCircuitry Solutions: net sales increased 23%18% on a reported basis and 17%12% on an organic basis. The Kester AcquisitionForeign exchange had a positive impact of 6% on reported revenue of 6%. Foreign exchange did not have a material impact on reported revenue.net sales. The increase in organic net sales was primarily due to growthrobust demand in mobile applications and automotive compared to COVID-19-related production slowdowns in the first half of 2020.
•Semiconductor Solutions: net sales increased 24% on a reported basis and 15% on an organic basis. The HKW Acquisition had a positive impact of 6% on reported net sales. Foreign exchange had a positive impact of 3% on reported net sales. The increase in organic net sales was primarily due to higher net sales of advanced packagingplating chemistries containing precious metals and increasedstrong demand for advanced assembly products, driven bywafer plating chemistries in the 5G telecomtelecommunications infrastructure and data centerautomotive end markets.
Year to date, Industrial & Specialty's net sales declined 14%increased 26% on a reported basis and 13%18% on an organic basis.
•Industrial Solutions: net sales declined 17%increased 41% on a reported basis and 16%29% on an organic basis. The DMP Acquisition had a positive impact of 1%5% on reported revenue.net sales. Foreign exchange had a negativepositive impact of 7% on reported net sales. The increase in organic net sales was primarily due to strong global recovery compared to COVID-19-related production slowdowns in the first half of 2020, and improved demand in construction and industrial manufacturing markets in Europe.
•Graphics Solutions: net sales increased 2% on a reported basis and decreased 1% on an organic basis. Foreign exchange had a positive impact of 3% on reported revenue.net sales. The decrease in organic net sales was primarily due to automotive production slowdowns due to COVID-19stronger COVID-19-related demand in key regionsEurope and demand weaknessthe Americas for consumer packaged goods in construction and general industrial manufacturing markets.the first quarter of 2020 that did not recur.
•GraphicsEnergy Solutions: net sales declined 6%decreased 8% on a reported basis and 4%10% on an organic basis. Foreign exchange had a negativepositive impact of 2%3% on reported revenue.net sales. The decrease in organic net sales was primarily due to lower volumes of ancillary products, such as screen printingvolatile energy prices, which significantly curtailed production and newspaper plates, as well as reductions of product offerings and delayed marketing campaigns by CPG customers.
•Energy Solutions: net sales declined 13% on a reported basis and 9% on an organic basis. Foreign exchange had a negative impact of 3% on reported revenue. The decrease in organic net sales wasdrilling activity globally, primarily due to demand weakness in the Americas and Europe due to volatility in the price of oil and the impact of the loss of certain business in the first quarter of 2019, which had a negative impact of approximately 2% on organic net sales growth.2021.
Gross Profit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | % Change | | Nine Months Ended September 30, | | % Change |
(dollars in millions) | 2020 | | 2019 | | Reported | | Constant Currency | | 2020 | | 2019 | | Reported | | Constant Currency |
Gross profit | | | | | | | | | | | | | | | |
Electronics | $ | 130.4 | | | $ | 120.9 | | | 8% | | 7% | | $ | 344.7 | | | $ | 338.6 | | | 2% | | 2% |
Industrial & Specialty | 73.1 | | | 84.8 | | | (14)% | | (13)% | | 218.6 | | | 258.4 | | | (15)% | | (14)% |
Total | $ | 203.5 | | | $ | 205.7 | | | (1)% | | (1)% | | $ | 563.3 | | | $ | 597.0 | | | (6)% | | (5)% |
| | | | | | | | | | | | | | | |
Gross margin | | | | | | | | | | | | | | | |
Electronics | 42.5 | % | | 43.2 | % | | (70) bps | | (70) bps | | 41.6 | % | | 41.6 | % | | 0 bps | | (10) bps |
Industrial & Specialty | 42.8 | % | | 45.9 | % | | (310) bps | | (290) bps | | 44.8 | % | | 45.5 | % | | (70) bps | | (70) bps |
Total | 42.6 | % | | 44.3 | % | | (170) bps | | (160) bps | | 42.8 | % | | 43.2 | % | | (40) bps | | (50) bps |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | % Change | | Six Months Ended June 30, | | % Change |
(dollars in millions) | 2021 | | 2020 | | Reported | | Constant Currency | | 2021 | | 2020 | | Reported | | Constant Currency |
Gross profit | | | | | | | | | | | | | | | |
Electronics | $ | 149.3 | | | $ | 101.9 | | | 47% | | 41% | | $ | 299.0 | | | $ | 214.3 | | | 40% | | 34% |
Industrial & Specialty | 89.2 | | | 60.6 | | | 47% | | 41% | | 180.5 | | | 145.5 | | | 24% | | 20% |
Total | $ | 238.5 | | | $ | 162.5 | | | 47% | | 41% | | $ | 479.5 | | | $ | 359.8 | | | 33% | | 28% |
| | | | | | | | | | | | | | | |
Gross margin | | | | | | | | | | | | | | | |
Electronics | 39.1 | % | | 40.3 | % | | (120) bps | | (90) bps | | 40.7 | % | | 41.1 | % | | (40) bps | | (30) bps |
Industrial & Specialty | 43.6 | % | | 45.3 | % | | (170) bps | | (130) bps | | 45.0 | % | | 45.8 | % | | (80) bps | | (50) bps |
Total | 40.7 | % | | 42.0 | % | | (130) bps | | (100) bps | | 42.2 | % | | 42.9 | % | | (70) bps | | (50) bps |
Electronics' gross profit in the thirdsecond quarter of 20202021 increased by 8%47% on a reported basis and 7%41% on a constant currency basis. The constant currency increase in gross profit was primarily driven by increased net sales in all business lines. The decrease in gross margin was primarily due to increased net sales of products containing metals in our Assembly business, higher logistics costs and raw material prices.
Industrial & Specialty's gross profit in the second quarter of 2021 increased by 47% on a reported basis and 41% on a constant currency basis. The constant currency increase in gross profit was primarily driven by the Assembly business, including the Kester Acquisition. The decrease in gross margin was primarily due to unfavorable product mix in Assembly and Circuitry Solutions, as a result of prior year strength in high-end mobile markets in Korea, and the impact of higher net sales of products containing precious metals.
Industrial & Specialty's gross profit in the third quarter of 2020 decreased by 14% on a reported basis and 13% on a constant currency basis. The constant currency decrease in gross profit was primarily driven by lower net sales volumes in Industrial Solutions due to weak automotive, markets related to COVID-19. The decrease in gross margin was primarily due to lower net sales in Energy Solutionsconstruction and Graphics Solutions whose products have higher gross margins.
Year to date, Electronics' gross profit increased by 2% on a reported and constant currency basis. The constant currency increase in gross profit for the period was driven by growth in telecom and data storage markets and was partially offset by lower demand in automotive and mobile phone markets. Gross margin remained relatively flat as strength in 5G-related products offset higher raw materials prices.
Year to date, Industrial & Specialty's gross profit decreased by 15% on a reported basis and 14% on a constant currency basis. The constant currency decrease in gross profit was primarily driven by lower net sales in Industrial Solutions.industrial manufacturing. The decrease in gross margin was primarily due to unfavorable product mix and higher raw material prices.
Year to date, Electronics' gross profit increased by 40% on a reported basis and 34% on a constant currency basis. The constant currency increase in gross profit was primarily driven by increased net sales in all business lines. The decrease in gross margin was primarily due to increased net sales of products containing metals in our Assembly business, higher raw material prices and logistics costs, primarily in the second quarter of 2021.
Year to date, Industrial & Specialty's gross profit increased by 24% on a reported basis and 20% on a constant currency basis. The constant currency increase in gross profit was primarily driven by the impact of higher volumes in automotive, construction and industrial manufacturing. The decrease in gross margin was primarily due to higher raw material prices and logistics costs, primarily in the second quarter of 2021.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | % Change | | Nine Months Ended September 30, | | % Change |
(dollars in millions) | 2020 | | 2019 | | Reported | | Constant Currency | | 2020 | | 2019 | | Reported | | Constant Currency |
Selling, technical, general and administrative | $ | 134.8 | | | $ | 128.8 | | | 5% | | 4% | | $ | 373.4 | | | $ | 397.6 | | | (6)% | | (5)% |
Research and development | 10.1 | | | 10.0 | | | 1% | | 0% | | 37.2 | | | 31.9 | | | 17% | | 17% |
Total | $ | 144.9 | | | $ | 138.8 | | | 4% | | 4% | | $ | 410.6 | | | $ | 429.5 | | | (4)% | | (4)% |
| | | | | | | | | | | | | | | |
Operating expenses as % of Net sales | | | | | | | | | | | | | | | |
Selling, technical, general and administrative | 28.2 | % | | 27.7 | % | | 50 bps | | 50 bps | | 28.4 | % | | 28.8 | % | | (40) bps | | (50) bps |
Research and development | 2.1 | % | | 2.2 | % | | (10) bps | | (10) bps | | 2.8 | % | | 2.3 | % | | 50 bps | | 50 bps |
Total | 30.3 | % | | 29.9 | % | | 40 bps | | 40 bps | | 31.2 | % | | 31.1 | % | | 10 bps | | 0 bps |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | % Change | | Six Months Ended June 30, | | % Change |
(dollars in millions) | 2021 | | 2020 | | Reported | | Constant Currency | | 2021 | | 2020 | | Reported | | Constant Currency |
Selling, technical, general and administrative | $ | 154.7 | | | $ | 113.4 | | | 36% | | 31% | | $ | 284.3 | | | $ | 238.6 | | | 19% | | 15% |
Research and development | 12.8 | | | 9.6 | | | 34% | | 32% | | 24.3 | | | 27.1 | | | (10)% | | (12)% |
Total | $ | 167.5 | | | $ | 123.0 | | | 36% | | 31% | | $ | 308.6 | | | $ | 265.7 | | | 16% | | 12% |
| | | | | | | | | | | | | | | |
Operating expenses as % of Net sales | | | | | | | | | | | | | | | |
Selling, technical, general and administrative | 26.4 | % | | 29.3 | % | | (290) bps | | (260) bps | | 25.0 | % | | 28.4 | % | | (340) bps | | (310) bps |
Research and development | 2.2 | % | | 2.5 | % | | (30) bps | | (20) bps | | 2.1 | % | | 3.2 | % | | (110) bps | | (100) bps |
Total | 28.6 | % | | 31.8 | % | | (320) bps | | (280) bps | | 27.2 | % | | 31.6 | % | | (440) bps | | (420) bps |
Operating expenses in the thirdsecond quarter of 20202021 increased 4%36% on a reported basis and 31% on a constant currency basis. The increase was primarily driven primarily by a stock compensation adjustment of $13.6 million for performance-based RSUs previously considered not probable and $6.9 million of higher incentive compensation costs, primarily due to higher accruals of $11.4 million on a constant currency basis as theassociated with increased pace of recovery in the business required an updated assessment of our expected annual incentive compensation accruals, partially offset by cost containment initiatives across our businesses to mitigate the impact of COVID-19-related slowdowns, including lower travel expenses, which decreased $3.4 million on a constant currency basis, and lowerexpectations for strong full year 2021 financial results. In addition, higher personnel expenses, including temporary employee salary reductions and furloughs.
Year to date, operating expenses decreased 4% on a reported and constant currency basis. The decrease was driven primarily by cost containment initiatives across the business to mitigate the impact of COVID-19-related slowdowns, including lower travel expenses, which decreased $12.6 million on a constant currency basis, and lower personnel expenses,costs, including the impact of temporary employee salary reductions and furloughs. This was partially offset byfurloughs in the prior year period, $4.7 million of operating expenses related to the recently acquired H.K. Wentworth and the DMP businesses that were not in the prior year period and $4.6 million of higher incentive compensation accruals of $12.6 millionacquisition and integration expenses, including the proposed Coventya acquisition.
Year to date, operating expenses increased 16% on a reported basis and 12% on a constant currency basis as well as anbasis. The increase was primarily driven by a stock compensation adjustment of $13.6 million for performance-based RSUs previously considered not probable and $13.5 million of higher incentive compensation costs, primarily due to higher accruals associated with increased expectations for strong full year 2021 financial results. In addition, higher personnel costs, including the impact of temporary employee salary reductions and furloughs in the prior year period and $6.8 million of operating expenses related to the recently acquired H.K. Wentworth and the DMP businesses that did not impact the prior year period contributed to the increase. These increases were partially offset by $6.3 million of research and development expense incurred in the first quarter of 2020 related to the acquisition of a new subsea production control fluid designed to complement our Energy Solutions business for $6.3 million. See Note 6, business.
Goodwill and Intangible Assets, for additional information.
Other (Expense) Income
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in millions) | 2020 | | 2019 | | 2020 | | 2019 |
Other (expense) income | | | | | | | |
Interest expense, net | $ | (17.1) | | | $ | (17.4) | | | $ | (50.7) | | | $ | (73.7) | |
Foreign exchange loss | (3.5) | | | (1.2) | | | (42.1) | | | (2.4) | |
Other (expense) income, net | (49.1) | | | 2.9 | | | (50.4) | | | (46.2) | |
Total | $ | (69.7) | | | $ | (15.7) | | | $ | (143.2) | | | $ | (122.3) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in millions) | 2021 | | 2020 | | 2021 | | 2020 |
Other (expense) income | | | | | | | |
Interest expense, net | $ | (12.9) | | | $ | (16.9) | | | $ | (25.8) | | | $ | (33.6) | |
Foreign exchange (loss) gain | (5.2) | | | (12.8) | | | 22.8 | | | (38.6) | |
Other expense, net | (5.7) | | | (1.7) | | | (7.3) | | | (1.3) | |
Total | $ | (23.8) | | | $ | (31.4) | | | $ | (10.3) | | | $ | (73.5) | |
Interest Expense, Net
For the ninethree and six months ended SeptemberJune 30, 2020,2021, net interest expense decreased $23.0$4.0 million and $7.8 million, respectively, primarily due to the pay down of our then existing credit facilities on January 31, 2019 in connection with the Arysta Sale. The private offering of $800 million aggregate principal amount of 3.875% USD Notes due 2028 and the subsequent full redemption of our 5.875% USD Notes due 2025 during the third quarter of 2020 will lower our annual interest payments by $16.0 million.2020.
Foreign Exchange Loss(Loss) Gain
For the three months ended SeptemberJune 30, 2020,2021, foreign exchange loss increased $2.3decreased $7.6 million primarily due to the remeasurement of euro- and Taiwan dollar-denominatedeuro-denominated intercompany balances.
For the ninesix months ended SeptemberJune 30, 2020,2021, foreign exchange lossgain increased $39.7$61.4 million primarily due to the remeasurement of euro- and British pound-denominated intercompany balances.
Other (Expense) Income,Expense, Net
For the three and ninesix months ended SeptemberJune 30, 2020,2021, other expense, net included $45.7 million related to the redemption of our 5.875% USD Notes due 2025. For the nine months ended September 30, 2019, other expense, net of $46.2 million included $61.0$1.8 million of debt refinancing costs related to the pay down of our then existing credit facilities in connection with the Arysta Sale, partially offset by a $11.7 million gain on derivative contractsexpense associated with the refinancing of our non-U.S. dollar-denominated third-party debt.forward starting swaps discussed in Note 7, Financial Instruments. Losses associated with metals forward contracts were $3.4 million and $6.8 million for the three and six months ended June 30, 2021, respectively, and $1.6 million and $1.7 million for the three and six months ended June 30, 2020, respectively.
Income Tax
The comparison of the Company's income tax provision between periods iscan be significantly impacted by the level and mix of earnings and losses by tax jurisdiction foreign income tax rate differentials and discrete items. See Note 12,11, Income Taxes, for further information.
Other Comprehensive Income (Loss)
Other comprehensive income for the three months ended SeptemberJune 30, 20202021 totaled $52.8$37.1 million, as compared to a loss of $55.1$11.2 million for the same period in the prior year. The change was primarily driven primarily by foreign currency translation gains associated with the Brazilian real and Chinese yuan.
Other comprehensive loss for the six months ended June 30, 2021 totaled $8.2 million, as compared to $43.3 million for the same period in the prior year. The change was primarily driven by the revaluation of the Company's interest rate swaps and foreign currency translation gains associated with the Brazilian real and Chinese yuan and euro, partially offset by foreign currency translation losses associated with the euro and British pound.
Other comprehensive income for the nine months ended September 30, 2020 totaled $9.5 million, as compared to income of $484 million in the prior year. The change was driven primarily by realized foreign currency translation losses resulting from the Arysta Sale of $480 million in 2019, as well as foreign currency translation gains associated with the Chinese yuan and euro, partially offset by foreign currency translation losses associated with the Brazilian real.
Segment Adjusted EBITDA Performance
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| Three Months Ended September 30, | | % Change | | Nine Months Ended September 30, | | % Change |
(dollars in millions) | 2020 | | 2019 | | Reported | | Constant Currency | | 2020 | | 2019 | | Reported | | Constant Currency |
Adjusted EBITDA: | | | | | | | | | | | | | | | |
Electronics | $ | 72.0 | | | $ | 73.6 | | | (3)% | | (3)% | | $ | 196.5 | | | $ | 190.4 | | | 3% | | 5% |
Industrial & Specialty | 29.8 | | | 41.8 | | | (28)% | | (26)% | | 100.2 | | | 124.1 | | | (19)% | | (17)% |
Total | $ | 101.8 | | | $ | 115.4 | | | (12)% | | (11)% | | $ | 296.7 | | | $ | 314.5 | | | (6)% | | (4)% |
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Adjusted EBITDA margin: | | | | | | | | | | | | | | | |
Electronics | 23.4 | % | | 26.3 | % | | (290) bps | | (290) bps | | 23.7 | % | | 23.4 | % | | 30 bps | | 40 bps |
Industrial & Specialty | 17.6 | % | | 22.6 | % | | (500) bps | | (460) bps | | 20.5 | % | | 21.9 | % | | (140) bps | | (110) bps |
Total | 21.3 | % | | 24.8 | % | | (350) bps | | (330) bps | | 22.5 | % | | 22.8 | % | | (30) bps | | (10) bps |
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| Three Months Ended June 30, | | % Change | | Six Months Ended June 30, | | % Change |
(dollars in millions) | 2021 | | 2020 | | Reported | | Constant Currency | | 2021 | | 2020 | | Reported | | Constant Currency |
Adjusted EBITDA: | | | | | | | | | | | | | | | |
Electronics | $ | 90.7 | | | $ | 58.0 | | | 56% | | 46% | | $ | 183.2 | | | $ | 124.5 | | | 47% | | 39% |
Industrial & Specialty | 42.4 | | | 26.8 | | | 58% | | 50% | | 87.8 | | | 70.4 | | | 25% | | 19% |
Total | $ | 133.1 | | | $ | 84.8 | | | 57% | | 47% | | $ | 271.0 | | | $ | 194.9 | | | 39% | | 32% |
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Adjusted EBITDA margin: | | | | | | | | | | | | | | | |
Electronics | 23.7 | % | | 22.9 | % | | 80 bps | | 50 bps | | 24.9 | % | | 23.9 | % | | 100 bps | | 70 bps |
Industrial & Specialty | 20.7 | % | | 20.0 | % | | 70 bps | | 70 bps | | 21.9 | % | | 22.2 | % | | (30) bps | | (30) bps |
Total | 22.7 | % | | 21.9 | % | | 80 bps | | 50 bps | | 23.8 | % | | 23.2 | % | | 60 bps | | 40 bps |
For the three months ended SeptemberJune 30, 2020,2021, Electronics' Adjusted EBITDA decreased 3%increased 56% on a reported basis and 46% on a constant currency basis. The constant currency decrease was driven primarily by higher general and administrative expenses related to increased incentive compensation, partially offset by higher gross profits. Industrial & Specialty's Adjusted EBITDA decreased 28%increased 58% on a reported basis and 26%50% on a constant currency basis. The constant currency decreaseincrease in both segments was primarily driven primarily by lowerhigher gross profit.profit and leverage on disciplined operating expense growth compared to COVID-19-related production slowdowns in the second quarter of 2020.
For the ninesix months ended SeptemberJune 30, 2020,2021, Electronics' Adjusted EBITDA increased 3%47% on a reported basis and 5%39% on a constant currency basis. The constant currency increase was primarily driven primarily by higher gross profit as well as lower general and administrative expenses.leverage on disciplined operating expense recovery. Industrial & Specialty's Adjusted EBITDA decreased 19%increased 25% on a reported basis and 17%19% on a constant currency basis. The constant currency decreaseincrease was primarily driven by higher gross profit modestly offset by increased incentive compensation costs, primarily by lower gross profit.due to increased expectations for strong full year 2021 financial results compared to COVID-19-related production slowdowns in the first half of 2020.
Liquidity and Capital Resources
Our primary source of liquidity during the ninesix months ended SeptemberJune 30, 20202021 was available cash generated from operations. Our primary uses of cash and cash equivalents were to fund operations, debt service obligations, capital expenditures, working capital, dividend payments and to fund $35.7 million of repurchases of our common stock. Following the full redemption of our 5.875% USD Notes due 2025 on September 4, 2020, ourHKW Acquisition. Our first significant debt principal payment totaling $800of approximately $700 million, related to the maturity of our outstanding term loans under the Credit Agreement, is not due until 2028 and relates to our 3.875% USD Notes due 2028.2026.
We currently expect to pay a 56 cents per share dividend on a quarterly basis which equates to approximately 20% of our expected annual free cash flow (net cash flows provided by operating activities less net capital expenditures).basis. However, the actual declaration of any cash dividends, as well as their amounts and timing, will be subject to the final determination byof our Board of Directors based on factors including our future earnings and cash flow generation.
On June 11, 2021, we announced our planned acquisition of Coventya Holdings SAS, a global provider of specialty chemicals for the Board.surface finishing industry, for a purchase price expected to be approximately €420 million, subject to adjustments. This acquisition is expected to close in September 2021, subject to customary closing conditions. We expect to fund this acquisition with $400 million of add-on debt to our existing term loans and cash on hand. The add-on transaction, which was priced and allocated on June 23, 2021, is expected to close concurrently with the Coventya acquisition, subject to the finalization and execution of its definitive documentation, including entering into an amendment to the Credit Agreement and closing of the incremental facility for the increase of the existing term loans. On June 29, 2021, we also entered into forward starting swaps to effectively convert the $400 million of anticipated add-on debt into fixed-rate euro-denominated debt through their maturity in January 2025. The forward starting swaps are expected to become effective when the add-on transaction closes.
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, renegotiate existing debt and raise equity 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 ninesix months ended SeptemberJune 30, 2020,2021, approximately 73%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 hold a substantial portion of our cash. We expect to manage our worldwide cash requirements based on available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. 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.
We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities, which support our current designation of a portion of these funds as being indefinitely reinvested, and reassess whether there are demonstrated needs to repatriate a portion of these funds being held internationally. If, as a result of our review, we determine that all or a portion of the funds require repatriation, we may be required to accrue additional taxes. Of our $248$318 million of cash and cash equivalents at SeptemberJune 30, 2020, $2082021, $186 million was held by our foreign subsidiaries. During the ninesix months ended SeptemberJune 30, 2020,2021, domestic cash was primarily used for debt service obligations and to fund repurchases of our common stock.dividend payments.
The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities of continuing operations during the periods indicated:
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| Nine Months Ended September 30, |
(dollars in millions) | 2020 | | 2019 |
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Cash provided by operating activities | $ | 194.3 | | | $ | 92.1 | |
Cash (used in) provided by investing activities | $ | (31.4) | | | $ | 4,270.3 | |
Cash used in financing activities | $ | (87.8) | | | $ | (4,425.0) | |
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| Six Months Ended June 30, |
(dollars in millions) | 2021 | | 2020 |
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Cash provided by operating activities | $ | 113.0 | | | $ | 124.7 | |
Cash used in investing activities | $ | (49.1) | | | $ | (19.2) | |
Cash used in financing activities | $ | (37.3) | | | $ | (38.3) | |
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Operating Activities
The increase in netNet cash flows provided by operating activities of $102.2 million was driven primarily by higherdecreased $11.7 million. Higher cash operating profits (net income adjusted for non-cash items), including $50.1 and $6.5 million of lower interest payments were more than offset by higher levels of working capital, including a build of safety inventory and higher raw materials costs, higher annual incentive compensation payments, primarily in the paymentfirst quarter that were associated with our 2020 performance, and $5.6 million of contingent consideration liability of $30.9 million during 2019.
Investing Activities
The decreaseincrease in net cash flows provided byused in investing activities was primarily driven by the Arysta Sale$50.9 million payment for the HKW Acquisition in 2019, which generated $4.28 billion.the second quarter of 2021 partially offset by $19.0 million of cash received for the sale of a dormant facility in New Jersey during the first quarter of 2021.
Financing Activities
During the ninesix months ended SeptemberJune 30, 2021, we paid dividends of $27.2 million. During the six months ended June 30, 2020, we used cash on-hand to fund repurchasesrepurchased shares of our common stock for an aggregate purchase price of $35.7 million and to fund $44.7 million of financing fees. The financing fees consisted of a make-whole premium of $33.6 million associated with the full redemption of the 5.875% USD Notes due 2025 and $11.1 million in debt issuance costs associated with the 3.875% USD Notes due 2028. During the nine months ended September 30, 2019, cash flows used in financing activities were primarily driven by the pay down of approximately $4.60 billion of debt from a combination of proceeds of the Arysta Sale and a $750 million term loan under the Credit Agreement. These cash inflows were also used to fund the repurchases of our common stock for an aggregate purchase price of $496$33.1 million. In addition, $39.5 million was used to fund the repurchase and extinguishment fees related to our debt pay down and to fund the debt issuance costs associated with the Credit Agreement. Cash inflows from borrowings under our revolving credit facility were $24.9 million in 2019.
Financial Borrowings
Credit Facilities & Senior Notes
At SeptemberJune 30, 2020,2021, we had $1.52$1.51 billion of indebtedness, net of unamortized discounts and debt issuance costs, which primarily included:
•$788789 million of 3.875% USD Notes due 2028; and
•$729725 million of term debt arrangements outstanding under our term loans.
Availability under the revolving credit facility of the Credit Agreement and various lines of credit and overdraft facilities totaled $349 million at SeptemberJune 30, 2020, net2021 (net of outstanding$5.5 million of stand-by letters of credit.credit which reduce our borrowing capacity).
Covenants
At SeptemberJune 30, 2020,2021, we were in compliance with the customary affirmative and negative covenants, events of default and other customary provisions of the Credit Agreement, as well as with the covenants included in the indenture governing the 3.875% USD Notes Indenture.Notes.
Off-Balance Sheet Transactions
We use customary off-balance sheet arrangements, such as letters of credit. For additional information regarding letters of credit, see Note 7, Debt, to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The quantitative and qualitative disclosures about market risk required by this item have not changed materially from those disclosed in our 20192020 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 20192020 Annual Report.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15 (e) and 15d-15(e) under the Exchange Act. As required by Rule 13a-15(b) of the Exchange Act, management, including our
CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.
(b) Changes to Internal Control Over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and CFO, has evaluated the Company’s internal control over financial reporting to determine whether any changes occurred during the quarter covered by this Quarterly Report have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There have been no changes in our internal control over financial reporting that occurred 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in legal proceedings, investigations and/or claims that are incidental to the operation of our businesses. In particular, we are involved in various claims relating to environmental matters at a number of current and former plant sites and waste management sites. See Note 11,10, Contingencies, Environmental and Legal Matters, to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report for more information and updates.
Item 1A. Risk Factors
Other than the risk factor set forth below, thereThere have been no material changes fromin the risk factors disclosed under the heading “Risk Factors”from those set forth in our 2019 Annual Report.
The extent of the impact of the COVID-19 pandemic on our results of operations and overall financial performance remains uncertain and subject to change.
Part I, Item 1A, The outbreak of COVID-19 has evolved into a global pandemic that negatively impacts the global economy, disrupts global supply chains and creates significant volatility in commercial and financial markets. The extent to which the coronavirus pandemic will continue to impact our business or our future results of operations, financial condition, expected cash flows and/or stock price is currently unknown and will depend on numerous and evolving factors that are highly uncertain, vary by market and cannot be accurately predicted or quantified at this time, including the duration and spread of the pandemic; new information concerning its transmission and severity; actions taken or that might be taken by governments, businesses or individuals to contain or reduce its repercussions and mitigate its economic implications; evolving macroeconomic factors, including general economic uncertainty, unemployment rates, and recessionary pressures; decreased consumer spending levels; reduction or changes in customer demand for our products and services; our ability to manufacture, sell and provide our products and services, including as a result of travel restrictions, closed borders, operating restrictions imposed on our facilities or reduced abilityRisk Factors of our employees to continue to work efficiently; increased operating costs (whether as a results of changes to our supply chain or increases in employee costs or otherwise); collectability of customer accounts; additional and prolonged devaluation of other countries' currencies relative to the dollar; and the general impact of the pandemic on our customers, employees, suppliers, vendors and other stakeholders. Additionally, customers might defer decision making, delay orders or seek to renegotiate or terminate existing agreements. Further, our management is focused on mitigating the impact of the pandemic, which has required and will continue to require a substantial investment of time and resources across our Company and could delay other value-added initiatives. These factors could materially adversely affect our future business and our future results of operations, financial condition, expected cash flows and/or stock price, and the actual results that we will experience may differ materially from our estimates. In addition, a prolonged decline in the value of our stock price could result in an impairment of goodwill or intangible assets, which at September 30, 2020 had a carrying value ofAnnual Report.
$2.19 billion and $860 million, respectively.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Purchases of Equity Securities by the Issuer and Affiliated PurchasesNone
The following table provides information about purchases by the Company during the three months ended September 30, 2020 of equity securities of the Company:
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| Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Program | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Repurchase Program(1) (in millions) |
Period | | | | | | | |
July 1 - July 31 | — | | | $ | — | | | — | | | $ | 210 | |
August 1 - August 31 | — | | | $ | — | | | — | | | $ | 210 | |
September 1 - September 30 | 237,629 | | | $ | 11.24 | | | 237,629 | | | $ | 207 | |
Total | 237,629 | | | $ | 11.24 | | | 237,629 | | | $ | 207 | |
(1) In July 2018, the Board authorized a program to repurchase up to $750 million of the Company’s common stock, of which $543 million had been utilized as of September 30, 2020. The Company’s share repurchase program does not require the repurchase of any specific number of shares, and shares repurchases are made opportunistically at the discretion of the Company. This program does not have an expiration date but may be suspended or terminated by the Board at any time.
The table above excludes shares purchased by the Company in connection with tax withholdings associated with the vesting of RSUs as these shares were not issued or considered share repurchases under our share repurchase program.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
Item 6. Exhibits
The following exhibits are filed or furnished as part of this Quarterly Report:
| | | | | |
Exhibit Number | Description |
3.1(a) | |
3.1(b) | |
3.1(c) | |
3.2 | Amended and Restated By-laws (filed as Exhibit 3.2 of the Current Report on Form 8-K filed on February 5, 2019, and incorporated herein by reference) |
4.1 | |
4.2 | Form of 3.875% USD Notes due 2028 (included as Exhibit A to Exhibit 4.1 hereto, filed as Exhibit 4.1 of the Current Report on Form 8-K filed on August 18, 2020, and incorporated herein by reference) |
31.1* | |
31.2* | |
32.1** | |
101.SCH** | Inline XBRL Taxonomy Extension Schema Document |
101.CAL** | Inline XBRL Extension Calculation Linkbase Document |
101.DEF** | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB** | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE** | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
101. INS** | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL documents |
104** | Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibits 101) |
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this October 28, 2020.July 29, 2021.
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| ELEMENT SOLUTIONS INC |
| | |
| By: | /s/ Michael Russnok |
| | Michael Russnok |
| | Chief Accounting Officer |
| | (Principal Accounting Officer) |