• Net sales of $586 million, a decrease of 13% from the second quarter last year on a reported basis or a decrease of 6% on an organic basis
• GAAP diluted EPS of $0.11, compared to $0.25 in the same period last year
• Reported net income of $27 million, as compared to $64 million in the same period last year
• Adjusted EPS of $0.31
• Adjusted EBITDA of $116 million
• Second quarter 2023 cash from operating activities of $81 million and free cash flow of $67 million

Element Solutions Inc (NYSE:ESI) (“Element Solutions” or the “Company”), a global and diversified specialty chemicals company, today announced its financial results for the three and six months ended June 30, 2023.

Executive Commentary

President and Chief Executive Officer Benjamin Gliklich said, "Element Solutions reported sequential adjusted EBITDA growth in what we believe is the trough of the most severe dislocation in the electronics market in recent history. Our results demonstrate outperformance relative to a market that saw double digit declines in key electronics drivers, such as smartphone units and semiconductor production. We seized the opportunity created by this backdrop to improve our capabilities in leading-edge technologies at the bottom of the cycle. Bringing our ViaForm^® product line fully in-house and adding Kuprion’s ActiveCopper™ applications to our portfolio immediately improved our offering at the leading edge. Customers' feedback has been extremely positive, and we have active commercial engagements associated with both offerings. These investments strengthen our ability to deliver technologies to the most demanding and innovative customers in the market, positioning our business to benefit disproportionately from the fastest growing and highest value segments in the electronics supply chain.”

Mr. Gliklich concluded, “We believe the second quarter was the trough and see evidence of acceleration in electronics already in July. Our semiconductor customers are increasing utilization and smartphone channel inventories are being digested based on third party sell-through and sell-in data. However, the baseline from which we are growing is lower than expected, compounded by additional currency headwinds from the Chinese renminbi, and therefore our expectations for 2023 full year earnings have moderated. We are reducing our full year 2023 adjusted EBITDA guidance to a range of $490 million to $500 million, which assumes recovering demand and the impact of certain cost actions underway. The expected exit velocity of our business together with the full year impact of our cost activity position us well for strong earnings growth in 2024. Our investments this quarter support significant longer-term outperformance.”

Second Quarter 2023 Highlights (compared with second quarter 2022)

• Net sales on a reported basis for the second quarter of 2023 were $586 million, a decrease of 13% over the second quarter of 2022. Organic net sales decreased 6%.
  • Electronics: Net sales decreased 19% to $356 million. Organic net sales decreased 9%.
  • Industrial & Specialty: Net sales decreased 2% to $230 million. Organic net sales decreased 2%.
• Second quarter of 2023 earnings per share (EPS) performance:
  • GAAP diluted EPS was $0.11 for the second quarter of 2023 as compared to $0.25 for the second quarter of 2022.
  • Adjusted EPS was $0.31, as compared to $0.38 for the same period last year.
• Reported net income was $27 million for the second quarter of 2023 as compared to $64 million for the second quarter of 2022.
• Adjusted EBITDA for the second quarter of 2023 was $116 million, a decrease of 17%. On a constant currency basis, adjusted EBITDA decreased 14%.
  • Electronics: Adjusted EBITDA was $76 million, a decrease of 25%. On a constant currency basis, adjusted EBITDA decreased 22%.
  • Industrial & Specialty: Adjusted EBITDA was $40 million, an increase of 2%. On a constant currency basis, adjusted EBITDA increased 5%.
  • Adjusted EBITDA margin decreased 90 basis points to 19.8% on a reported basis. On a constant currency basis, adjusted EBITDA margin decreased 60 basis points.

Updated 2023 Guidance

The Company expects third quarter 2023 adjusted EBITDA of approximately $125 million. For the full-year 2023, the Company now expects adjusted EBITDA to be in the range of $490 million to $500 million. For 2023, the Company expects adjusted EPS of approximately $1.30 and free cash flow of approximately $265 million.

Recent Developments

ViaForm Distribution Rights - On June 1, 2023, the Company terminated its long-standing distribution agreement related to its ViaForm^® electrochemical deposition products for $200 million, including $170 million paid at closing and a deferred payment of $30.0 million which remains contingent upon satisfaction of certain conditions during the applicable transition period. Following the transition period, the Company expects to manage all aspects of the ViaForm® product line in-house, which it believes will result in a more efficient supply chain and improved customer outcomes for leading semiconductor fabricators. Based on the run rate of adjusted EBITDA from the ViaForm^® product line as of the closing date and at current demand levels, the Company expects the ViaForm^® business to contribute a baseline of approximately $15 million to annual adjusted EBITDA, with significant growth potential from expected synergies and market opportunities.

The transaction was funded with $150 million of term loans A under the Company's senior credit facility and cash on hand. The Company also entered into interest rate swaps and cross-currency swaps to effectively convert the term loans A from U.S. dollar denominated debt obligations into fixed-rate euro-denominated debt through January 2026.

Kuprion Acquisition - On May 19, 2023, the Company completed the acquisition of Kuprion, Inc. for approximately $15.9 million, net of cash with potential additional payments in various installments to be made upon the achievement of certain milestones associated with product qualification and revenue through December 31, 2030. Kuprion is a developer of next-generation nano-copper technology to the semiconductor, circuit board and electronics assembly markets.

Conference Call

Element Solutions will host a webcast/dial-in conference call to discuss its 2023 second quarter financial results at 8:30 a.m. (Eastern Time) on Thursday, July 27, 2023. Participants on the call will include President and Chief Executive Officer Benjamin Gliklich, Chief Financial Officer Carey J. Dorman and Executive Chairman Sir Martin E. Franklin.

To listen to the call by telephone, please dial 888-510-2346 (domestic) or 646-960-0111 (international) and provide the Conference ID: 3799230. The call will be simultaneously webcast at www.elementsolutionsinc.com. A replay of the call will be available after completion of the live call at www.elementsolutionsinc.com.

About Element Solutions

Element Solutions Inc is a leading global specialty chemicals company whose businesses supply a broad range of solutions that enhance the performance of products people use every day. Developed in multi-step technological processes, these innovative solutions enable customers' manufacturing processes in several key industries, including consumer electronics, power electronics, semiconductor fabrication, communications and data storage infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy.

More information about the Company is available at www.elementsolutionsinc.com.

Forward-Looking Statements

This release is intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 as it contains "forward-looking statements" within the meaning of the federal securities laws. These statements will often contain 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," "priority," "guidance" or "confident" and variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs, projections and expectations regarding the expected benefits of the ViaForm® and Kuprion investments, including improved capabilities and offerings in leading edge technologies and market position to benefit disproportionately from market trends; commercial engagements and deferred payments related to these investments; expected contribution of the ViaForm® transaction to the Company's adjusted EBITDA and revenue and significant growth potential; evidence of acceleration in electronics in July 2023; increased utilization from semiconductor customers; smartphone channel inventories trends; recovering demand and impact of certain cost activity in 2023; strong earnings growth in 2024; longer-term outperformance; third quarter 2023 adjusted EBITDA guidance; and full-year 2023 guidance for adjusted EBITDA, adjusted EPS and free cash flow. These projections and statements are based on management's estimates, assumptions or expectations with respect to future events and financial performance, and are believed to be reasonable, though are inherently uncertain and difficult to predict. Such projections and statements are based on the assessment of information available as of the current date, and the Company does not undertake any obligations to provide any further updates. Actual results could differ materially from those expressed or implied in these forward-looking statements if one or more of the underlying estimates, assumptions or expectations prove to be inaccurate or are unrealized. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the continuing economic impact of the coronavirus (COVID-19) and its variants on the global economy, the Company's business, financial results, customers, suppliers, vendors and/or stock price, including the impact of related governmental responses, the efficacy of vaccines and treatments targeting COVID-19 and/or its variants; the general impact of the ongoing conflict between Russia and Ukraine on economic activity, including financial market instability and disruption of global supply chains, and on the Company's customers, employees, suppliers, vendors and other stakeholders; inflation and fluctuations in foreign exchange rates; business and management strategies; outstanding debt and debt leverage ratio; shares repurchases; debt and/or equity issuance or retirement; returns to stockholders; and the impact of acquisitions, divestitures, restructurings, refinancings, impairments and other unusual items, including the Company's ability to integrate and obtain the anticipated benefits, results and synergies from these items or other related strategic initiatives. Additional information concerning these and other factors that could cause actual results to vary is, or will be, included in the Company's periodic and other reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Certain information contained in this release is based on historical results and forecasts provided in connection with the ViaForm® and Kuprion transactions. Use of different methods for preparing, calculating or presenting such information may lead to different results and such differences may be material. While the Company believes this information is reliable and appropriate, investors are cautioned not to place undue reliance on this information.

Non-GAAP Measures

To supplement its financial measures prepared in accordance with GAAP, Element Solutions presents in this release the following non-GAAP financial measures: EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted EPS, adjusted common shares outstanding, free cash flow, net debt to adjusted EBITDA ratio (including with the estimated annual benefit from the ViaForm® transaction), organic net sales growth, third quarter 2023 guidance for adjusted EBITDA and full year 2023 guidance for adjusted EBITDA, adjusted EPS and free cash flow. The Company also evaluates and presents its results of operations on a constant currency basis.

Management internally reviews these non-GAAP measures to evaluate performance on a comparative period-to-period basis in terms of absolute performance, trends and expected future performance with respect to the Company’s business and believes that these non-GAAP measures provide investors with an additional perspective on trends and underlying operating results on a period-to-period comparable basis. The Company also believes that investors find this information helpful in understanding the ongoing performance of its operations separate from items that may have a disproportionate positive or negative impact on its financial results in any particular period or are considered to be associated with its capital structure. These non-GAAP financial measures, however, have limitations as analytical tools, and should not be considered in isolation from, a substitute for, or superior to, the related financial information that Element Solutions reports 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 the Company’s financial statements and may not be completely comparable to similarly titled measures of other companies due to potential differences in calculation methods. In addition, these measures are subject to inherent limitations as they reflect the exercise of judgment by management about which items are excluded or included in determining these non-GAAP financial measures. Investors are encouraged to review the definitions and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures included in this press release, and not to rely on any single financial measure to evaluate the Company's businesses.

The Company only provides the expected contribution of the ViaForm® transaction to annual adjusted EBITDA, the third quarter 2023 guidance for adjusted EBITDA and full year 2023 guidance for adjusted EBITDA, adjusted EPS and free cash flow on a non-GAAP basis. Reconciliations of such forward-looking non-GAAP measures to GAAP are excluded in reliance upon the exception provided by Item 10(e)(1)(i)(B) of Regulation S-K due to the inherent difficulty in forecasting and quantifying, without unreasonable efforts, certain amounts that are necessary for such reconciliations, including adjustments that could be made for restructurings, refinancings, impairments, divestitures, integration and acquisition-related expenses, share-based compensation amounts, non-recurring, unusual or unanticipated charges, expenses or gains, adjustments to inventory and other charges reflected in reconciliations of historic numbers, the amount of which, based on historical experience, could be significant.

Constant Currency:

The Company discloses net sales and adjusted EBITDA on a constant currency basis by adjusting results to exclude the impact of changes due to the translation of foreign currencies of its international locations into U.S. dollar. 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 its results of operations, consistent with how the Company internally evaluates its financial results.

The impact of foreign currency translation is calculated by converting the Company's current-period local currency financial results into U.S. dollar using the prior period's exchange rates and comparing these adjusted amounts to its 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.

The following table reconciles GAAP net sales growth to organic net sales growth for the three and six months ended June 30, 2023:

For the three months ended June 30, 2023, Electronics' consolidated results were negatively impacted by $39.7 million of pass-through metals pricing and positively impacted by $1.5 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $1.1 million of acquisitions. For the six months ended June 30, 2023, Electronics' consolidated results were negatively impacted by $74.9 million of pass-through metals pricing and positively impacted by $1.5 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $2.7 million of acquisitions.

Adjusted Earnings Per Share (EPS):

Adjusted EPS is a key metric used by management to measure operating performance and trends as management believes the exclusion of certain expenses in calculating adjusted EPS facilitates operating performance comparisons on a period-to-period basis. Adjusted EPS is defined as net income attributable to common stockholders adjusted to reflect adjustments consistent with the Company's definition of adjusted EBITDA. Additionally, the Company eliminates amortization expense associated with intangible assets, incremental depreciation associated with the step-up of fixed assets and incremental cost of sales associated with the step-up of inventories recognized in purchase accounting for acquisitions. Further, the Company adjusts its effective tax rate to 20% for the three and six months ended June 30, 2023 and 2022, respectively, as described in footnote (8) under the reconciliation table below.

The resulting adjusted net income is then divided by the Company's adjusted common shares outstanding. Adjusted common shares outstanding represent the shares outstanding as of the balance sheet date for the quarter-to-date period and an average of each quarter for the year-to-date period plus shares issuable upon exercise or vesting of all outstanding equity awards (assuming a performance achievement target level for equity awards with targets considered probable).

The following table reconciles GAAP "Net income attributable to common stockholders" to "Adjusted net income attributable to common stockholders" and presents the number of adjusted common shares outstanding used in calculating adjusted EPS for each period presented below:

Adjusted Common Shares Outstanding at June 30, 2023 and 2022

The following table shows the Company's adjusted common shares outstanding at each period presented:

EBITDA and Adjusted EBITDA:

EBITDA represents earnings before interest, provision for income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA, excluding the impact of additional items included in GAAP earnings which the Company believes are not representative or indicative of its ongoing business or are considered to be associated with its capital structure, as described in the footnotes located under the "Adjusted Earnings Per Share (EPS)" reconciliation table above. Adjusted EBITDA for each segment also includes an allocation of corporate costs, such as compensation expense and professional fees. Management believes adjusted EBITDA and adjusted EBITDA margin provide investors with a more complete understanding of the long-term profitability trends of Element Solutions' business and facilitate comparisons of its profitability to prior and future periods.

The following table reconciles GAAP "Net income attributable to common stockholders" to "Adjusted EBITDA" for each of the periods presented:

Net Debt to Adjusted EBITDA Ratio:

Net debt to adjusted EBITDA ratio is defined as total debt (current installments of long-term debt, revolving credit facilities and long-term debt), excluding unamortized discounts and debt issuance costs, which totaled $17.4 million at June 30, 2023, less cash divided by adjusted EBITDA.

The following table presents the Company's net debt to adjusted EBITDA ratio of 3.8x on a trailing twelve month basis:

Free Cash Flow:

Free cash flow is defined as net cash flows from operating activities less net capital expenditures. Net capital expenditures include capital expenditures less proceeds from the disposal of property, plant and equipment. Management believes that free cash flow, which measures the Company’s ability to generate cash from its business operations, is an important financial measure for evaluating the Company's financial performance. However, free cash flow should be considered in addition to, rather than as a substitute for, net cash provided by operating activities as a measure of the Company’s liquidity.

The following table reconciles "Cash flows from operating activities" to "Free cash flow:"

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