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 September 30, 2022

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)

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 20, 2022: 242,085,552

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TABLE OF CONTENTS

						Page
			Glossary of Defined Terms			i
			Forward-Looking Statements			ii
			Non-GAAP Financial Measures			ii
Part I.			Financial Information
Item 1.			Condensed Consolidated Financial Statements (Unaudited)
			Condensed Consolidated Statements of Operations
			Three and Nine Months Ended September 30, 2022 and 2021			1
			Condensed Consolidated Statements of Comprehensive (Loss) Income
			Three and Nine Months Ended September 30, 2022 and 2021			2
			Condensed Consolidated Balance Sheets
			September 30, 2022 and December 31, 2021			3
			Condensed Consolidated Statements of Cash Flows
			Nine Months Ended September 30, 2022 and 2021			4
			Condensed Consolidated Statements of Changes in Stockholders' Equity
			Three and Nine Months Ended September 30, 2022 and 2021			5
			Notes to the Condensed Consolidated Financial Statements			7
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			29
Item 4.			Controls and Procedures			29
Part II.			Other Information
Item 1.			Legal Proceedings			30
Item 1A.			Risk Factors			30
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3.			Defaults Upon Senior Securities			30
Item 4.			Mine Safety Disclosures			30
Item 5.			Other Information			30
Item 6.			Exhibits			31
Signatures						32

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GLOSSARY OF DEFINED TERMS

Terms						Definitions
Element Solutions; We; Us; Our; the Company						Element Solutions Inc, a Delaware corporation, and, where the context requires, its subsidiaries or operating businesses.
Add-on Term Loans						Incremental term loans entered into on September 1, 2021, under the Credit Agreement, in an aggregate principal amount of $400 million through a corresponding increase in the Company's existing senior secured term loans B. All references to "term loans" in this Quarterly Report include the Add-on Term Loans.
Coventya						Coventya Holding SAS and its subsidiaries.
Coventya Acquisition						Acquisition of Coventya on September 1, 2021.
Credit Agreement						Credit Agreement, dated as of January 31, 2019, as amended from time to time, among, inter alia, Element Solutions and MacDermid, Incorporated, as borrowers, certain subsidiaries of Element Solutions and the lenders from time to time parties thereto.
EBITDA						Earnings before interest, taxes, depreciation and amortization.
Exchange Act						Securities Exchange Act of 1934, as amended.
GAAP						U.S. Generally Accepted Accounting Principles.
HKW						H.K. Wentworth Limited and its subsidiaries.
HKW Acquisition						Acquisition of HKW on May 5, 2021.
HSO						HSO Herbert Schmidt GmbH & Co. KG, Dipl.-Ing. W. Schmidt GmbH and HSO Hong Kong Holding Limited and its subsidiary.
HSO Acquisition						Acquisition of HSO on January 26, 2022.
Quarterly Report						This quarterly report on Form 10-Q for the three and nine months ended September 30, 2022.
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.
2021 Annual Report						Element Solutions' annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 23, 2022.
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.

i

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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," "priority" or "confident" 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 expected benefits of the Coventya Acquisition; the continuing economic impact of the coronavirus (COVID-19) and its variants on the global economy, our 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 its variants; secular trends; increasing commercial activity and opportunities in printed and in-mold electronics; capital requirements and need for and availability of financing; probability of achievement of the performance target related to certain performance-based RSUs; 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 and assessments; the impact of tax law changes; impairments, including those on goodwill and other intangible assets; price volatility and cost environment; inflation and fluctuations in foreign exchange rates; our liquidity, cash flows and capital allocation; funding sources; capital expenditures; debt and debt leverage ratio; pension plan contributions; 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.

Although we believe these forward-looking statements are based upon reasonable assumptions regarding our business and expectations about future events, financial performance and trends, there can be no assurance that our actual results will not differ materially from any results expressed or implied in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part I, Item 1A, Risk Factors, of our 2021 Annual Report. Certain of these risks may be amplified by the invasion of Ukraine by Russia, the sanctions (including their duration) and other measures being imposed in response to this conflict as well as any escalation or expansion of economic disruption or the conflict’s current scope. In addition, as we operate in a very competitive and rapidly changing environment, new risks may emerge from time to time. Any forward-looking statement included in this Quarterly Report 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.

While progress has been made to contain the COVID-19 pandemic, it remains a global challenge. The ultimate extent of the impact of COVID-19 and/or its variants on our business or our future results of operations, financial condition and/or expected cash flows remains unknown as COVID-19 and its variants continue to spread. The long-term impact of the pandemic will depend on numerous and evolving factors that are highly uncertain, vary by market and cannot be quantified at this time, such as the scope, severity and duration of the pandemic.

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, a substitute for, or superior to, performance measures calculated in accordance with GAAP. For additional information on these non-GAAP financial measures, including 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 12, Segment Information, to the unaudited Condensed Consolidated Financial Statements, both included in this Quarterly Report.

ii

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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,
			2022						2021						2022						2021
Net sales			$	618.5					$	616.2					$	1,975.6					$	1,752.9
Cost of sales			396.6						371.7						1,240.9						1,028.9
Gross profit			221.9						244.5						734.7						724.0
Operating expenses:
Selling, technical, general and administrative			131.4						163.5						431.3						447.8
Research and development			11.3						12.5						38.2						36.8
Total operating expenses			142.7						176.0						469.5						484.6
Operating profit			79.2						68.5						265.2						239.4
Other (expense) income:
Interest expense, net			(12.3)						(13.8)						(39.6)						(39.6)
Foreign exchange gain (loss)			0.9						(0.6)						2.9						22.2
Other income (expense), net			2.0						(0.9)						5.2						(8.2)
Total other expense			(9.4)						(15.3)						(31.5)						(25.6)
Income before income taxes and non-controlling interests			69.8						53.2						233.7						213.8
Income tax expense			(16.5)						(17.3)						(60.4)						(16.5)
Net income from continuing operations			53.3						35.9						173.3						197.3
Income from discontinued operations, net of tax			—						—						1.8						2.0
Net income			53.3						35.9						175.1						199.3
Net (income) loss attributable to non-controlling interests			(0.1)						0.1						(0.6)						0.1
Net income attributable to common stockholders			$	53.2					$	36.0					$	174.5					$	199.4
Earnings per share
Basic from continuing operations			$	0.22					$	0.15					$	0.70					$	0.80
Basic from discontinued operations			—						—						0.01						0.01
Basic attributable to common stockholders			$	0.22					$	0.15					$	0.71					$	0.81
Diluted from continuing operations			$	0.22					$	0.15					$	0.70					$	0.79
Diluted from discontinued operations			—						—						0.01						0.01
Diluted attributable to common stockholders			$	0.22					$	0.15					$	0.71					$	0.80
Weighted average common shares outstanding
Basic			244.7						247.6						246.4						247.5
Diluted			245.0						248.0						247.2						248.0

See accompanying notes to the Condensed Consolidated Financial Statements

1

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ELEMENT SOLUTIONS INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

(dollars in millions)

 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Net income			$	53.3					$	35.9					$	175.1					$	199.3
Other comprehensive loss
Foreign currency translation:
Other comprehensive loss before reclassifications, net of tax expense of $5.4 and $5.8 for the three months ended September 30, 2022 and 2021 and $7.8 and $9.7 for the nine months ended September 30, 2022 and 2021, respectively			(107.4)						(28.9)						(233.8)						(47.1)
Total foreign currency translation adjustments			(107.4)						(28.9)						(233.8)						(47.1)
Derivative financial instruments:
Other comprehensive income (loss) before reclassifications, net of tax expense of $4.3 and $0.8 for the three months ended September 30, 2022 and 2021 and $16.0 and $3.6 for the nine months ended September 30, 2022 and 2021, respectively			15.1						(0.8)						43.7						0.3
Reclassifications, net of tax expense of $0.0 for the three and nine months ended September 30, 2022 and 2021, respectively			(0.9)						4.8						6.9						13.7
Total unrealized gain arising on qualified hedging derivatives			14.2						4.0						50.6						14.0
Other comprehensive loss			(93.2)						(24.9)						(183.2)						(33.1)
Comprehensive (loss) income			(39.9)						11.0						(8.1)						166.2
Comprehensive loss attributable to non-controlling interests			0.1						2.4						1.6						2.4
Comprehensive (loss) income attributable to common stockholders			$	(39.8)					$	13.4					$	(6.5)					$	168.6

 

See accompanying notes to the Condensed Consolidated Financial Statements

2

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ELEMENT SOLUTIONS INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in millions)

			September 30,						December 31,
			2022						2021
Assets
Cash & cash equivalents			$	234.0					$	330.1
Accounts receivable, net of allowance for doubtful accounts of $12.4 and $12.2 at September 30, 2022 and December 31, 2021, respectively			467.6						492.2
Inventories			309.9						274.4
Prepaid expenses			35.2						29.4
Other current assets			131.9						88.4
Total current assets			1,178.6						1,214.5
Property, plant and equipment, net			263.4						278.1
Goodwill			2,326.2						2,526.3
Intangible assets, net			804.1						956.7
Deferred income tax assets			50.1						81.5
Other assets			247.3						81.3
Total assets			$	4,869.7					$	5,138.4
Liabilities and stockholders' equity
Accounts payable			$	158.4					$	138.4
Current installments of long-term debt			11.9						12.7
Accrued expenses and other current liabilities			183.7						264.1
Total current liabilities			354.0						415.2
Debt			1,886.8						1,894.2
Pension and post-retirement benefits			29.7						36.1
Deferred income tax liabilities			122.9						140.0
Other liabilities			171.6						152.1
Total liabilities			2,565.0						2,637.6
Commitments and contingencies (Note 9)
Stockholders' equity
Common stock: 400.0 shares authorized (2022: 265.0 shares issued; 2021: 261.9 shares issued)			2.7						2.6
Additional paid-in capital			4,180.6						4,166.6
Treasury stock (2022: 22.2 shares; 2021: 15.2 shares)			(299.7)						(159.2)
Accumulated deficit			(1,217.1)						(1,331.9)
Accumulated other comprehensive loss			(378.4)						(197.4)
Total stockholders' equity			2,288.1						2,480.7
Non-controlling interests			16.6						20.1
Total equity			2,304.7						2,500.8
Total liabilities and stockholders' equity			$	4,869.7					$	5,138.4

See accompanying notes to the Condensed Consolidated Financial Statements

3

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ELEMENT SOLUTIONS INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in millions)

			Nine Months Ended September 30,
			2022						2021
Cash flows from operating activities:
Net income			$	175.1					$	199.3
Net income from discontinued operations, net of tax			1.8						2.0
Net income from continuing operations			173.3						197.3
Reconciliations of net income from continuing operations to net cash flows provided by operating activities:
Depreciation and amortization			122.0						120.7
Deferred income taxes			3.9						(37.4)
Foreign exchange gain			(1.0)						(13.1)
Incentive stock compensation			12.8						33.8
Other, net			10.7						11.1
Changes in assets and liabilities, net of acquisitions:
Accounts receivable			(23.3)						(59.0)
Inventories			(63.1)						(78.5)
Accounts payable			32.1						41.6
Accrued expenses			(47.9)						13.2
Prepaid expenses and other current assets			(22.0)						(15.8)
Other assets and liabilities			(2.1)						(9.2)
Net cash flows provided by operating activities			195.4						204.7
Cash flows from investing activities:
Capital expenditures			(32.8)						(27.7)
Proceeds from disposal of property, plant and equipment			3.4						—
Acquisition of business, net of cash acquired			(22.6)						(536.5)
Other, net			(9.9)						14.0
Net cash flows used in investing activities			(61.9)						(550.2)
Cash flows from financing activities:
Debt proceeds, net of discount			—						398.0
Repayments of borrowings			(11.9)						(6.7)
Repurchases of common stock			(113.5)						(1.7)
Dividends			(59.2)						(42.1)
Payment of financing fees			—						(5.1)
Other, net			(27.0)						(6.2)
Net cash flows (used in) provided by financing activities			(211.6)						336.2
Net cash flows provided by (used in) operating activities of discontinued operations			1.8						(0.4)
Effect of exchange rate changes on cash and cash equivalents			(19.8)						(2.9)
Net decrease in cash and cash equivalents			(96.1)						(12.6)
Cash and cash equivalents at beginning of period			330.1						291.9
Cash and cash equivalents at end of period			$	234.0					$	279.3

 See accompanying notes to the Condensed Consolidated Financial Statements

4

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ELEMENT SOLUTIONS INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(dollars in millions, except share amounts)

Three Months Ended September 30, 2022			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 June 30, 2022			265,013,065						$	2.7					$	4,176.4					19,221,388						$	(244.9)					$	(1,250.6)					$	(285.4)					$	2,398.2					$	17.0					$	2,415.2
Net income			—						—						—						—						—						53.2						—						53.2						0.1						53.3
Other comprehensive loss, net of taxes			—						—						—						—						—						—						(93.0)						(93.0)						(0.2)						(93.2)
Exercise/ vesting of share based compensation			851						—						—						266						—						—						—						—						—						—
Issuance of common stock under Employee Stock Purchase Plan			21,610						—						0.3						—						—						—						—						0.3						—						0.3
Repurchases of common stock			—						—						—						3,018,851						(54.8)						—						—						(54.8)						—						(54.8)
Dividends ($0.08 per share)			—						—						—						—						—						(19.7)						—						(19.7)						—						(19.7)
Equity compensation expense			—						—						4.1						—						—						—						—						4.1						—						4.1
Changes in non-controlling interests			—						—						(0.2)						—						—						—						—						(0.2)						(0.3)						(0.5)
Balance at September 30, 2022			265,035,526						$	2.7					$	4,180.6					22,240,505						$	(299.7)					$	(1,217.1)					$	(378.4)					$	2,288.1					$	16.6					$	2,304.7

Three Months Ended September 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 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
Net income (loss)			—						—						—						—						—						36.0						—						36.0						(0.1)						35.9
Other comprehensive loss, net of taxes			—						—						—						—						—						—						(22.6)						(22.6)						(2.3)						(24.9)
Exercise/ vesting of share based compensation			13,651						—						—						4,300						(0.1)						—						—						(0.1)						—						(0.1)
Issuance of common stock under Employee Stock Purchase Plan			15,621						—						0.3						—						—						—						—						0.3						—						0.3
Repurchases of common stock			—						—						—						83,992						(1.7)						—						—						(1.7)						—						(1.7)
Dividends ($0.06 per share)			—						—						—						—						—						(14.9)						—						(14.9)						—						(14.9)
Acquisition of non-controlling interest with Coventya Acquisition			—						—						—						—						—						—						—						—						39.6						39.6
Equity compensation expense			—						—						12.6						—						—						—						—						12.6						—						12.6
Balance at September 30, 2021			261,914,453						$	2.6					$	4,159.8					14,414,725						$	(141.2)					$	(1,316.0)					$	(225.6)					$	2,479.6					$	35.5					$	2,515.1

See accompanying notes to the Condensed Consolidated Financial Statements

5

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ELEMENT SOLUTIONS INC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(dollars in millions, except share amounts)

Nine Months Ended September 30, 2022			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, 2021			261,937,509						$	2.6					$	4,166.6					15,195,525						$	(159.2)					$	(1,331.9)					$	(197.4)					$	2,480.7					$	20.1					$	2,500.8
Net income			—						—						—						—						—						174.5						—						174.5						0.6						175.1
Other comprehensive loss, net of taxes			—						—						—						—						—						—						(181.0)						(181.0)						(2.2)						(183.2)
Exercise/ vesting of share based compensation			3,040,841						0.1						—						1,033,035						(24.0)						—						—						(23.9)						—						(23.9)
Issuance of common stock under Employee Stock Purchase Plan			57,176						—						1.0						—						—						—						—						1.0						—						1.0
Repurchases of common stock			—						—						—						6,011,945						(116.5)						—						—						(116.5)						—						(116.5)
Dividends ($0.24 per share)			—						—						—						—						—						(59.7)						—						(59.7)						—						(59.7)
Equity compensation expense			—						—						13.1						—						—						—						—						13.1						—						13.1
Changes in non-controlling interests			—						—						(0.1)						—						—						—						—						(0.1)						(1.9)						(2.0)
Balance at September 30, 2022			265,035,526						$	2.7					$	4,180.6					22,240,505						$	(299.7)					$	(1,217.1)					$	(378.4)					$	2,288.1					$	16.6					$	2,304.7

Nine Months Ended September 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 (loss)			—						—						—						—						—						199.4						—						199.4						(0.1)						199.3
Other comprehensive loss, net of taxes			—						—						—						—						—						—						(30.8)						(30.8)						(2.3)						(33.1)
Exercise/ vesting of share based compensation			528,061						—						2.0						99,753						(1.8)						—						—						0.2						—						0.2
Issuance of common stock under Employee Stock Purchase Plan			56,265						—						0.8						—						—						—						—						0.8						—						0.8
Repurchases of common stock			—						—						—						85,692						(1.7)						—						—						(1.7)						—						(1.7)
Dividends ($0.17 per share)			—						—						—						—						—						(42.2)						—						(42.2)						—						(42.2)
Acquisition of non-controlling interest with Coventya Acquisition			—						—						—						—						—						—						—						—						39.6						39.6
Equity compensation expense			—						—						34.1						—						—						—						—						34.1						—						34.1
Balance at September 30, 2021			261,914,453						$	2.6					$	4,159.8					14,414,725						$	(141.2)					$	(1,316.0)					$	(225.6)					$	2,479.6					$	35.5					$	2,515.1

See accompanying notes to the Condensed Consolidated Financial Statements

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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 New 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, these innovative solutions enable customers' manufacturing processes in several key industries, including consumer electronics, power electronics, semiconductor fabrication, communications and data storage infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy. Our businesses provide products that, in substantially all cases, are consumed by 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. 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, 2022. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the related notes included in the Company’s 2021 Annual Report.

The process of preparing the Company’s unaudited Condensed Consolidated Financial Statements requires the use of estimates that affect the reported amount of assets, liabilities, net sales and expenses. These estimates include assumptions and judgements based on historical experience, current conditions, future expectations and other factors the Company considers to be reasonable. These estimates are reviewed on an ongoing basis and revised as necessary. Actual amounts may differ materially from these estimates.

In the second quarter of 2022, the Company transferred operational responsibility of its Films business from its Industrial business within its Industrial & Specialty segment to its Circuitry business in its Electronics segment. This change was made in response to the increasing commercial activity and opportunities we anticipate in printed and in-mold electronics. Historical information has been reclassified to include the Films business in the Electronics segment for all periods presented in this Quarterly Report.

Certain other prior year amounts have been reclassified to conform to the current year’s presentation.

2. INVENTORIES

The major components of inventory, on a net basis, were as follows:

(dollars in millions)			September 30, 2022						December 31, 2021
Finished goods			$	181.7					$	153.3
Work in process			26.7						33.4
Raw materials and supplies			101.5						87.7
Total inventories			$	309.9					$	274.4

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3. PROPERTY, PLANT AND EQUIPMENT

The major components of property, plant and equipment were as follows:

(dollars in millions)			September 30, 2022						December 31, 2021
Land and leasehold improvements			$	49.8					$	54.8
Buildings and improvements			155.0						162.0
Machinery, equipment, fixtures and software			288.4						290.6
Construction in process			45.3						37.7
Total property, plant and equipment			538.5						545.1
Accumulated depreciation			(275.1)						(267.0)
Property, plant and equipment, net			$	263.4					$	278.1

For the three months ended September 30, 2022 and 2021, the Company recorded depreciation expense of $10.6 million and $9.6 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded depreciation expense of $31.5 million and $28.7 million, respectively.

4. GOODWILL AND INTANGIBLE ASSETS

HSO Acquisition

On January 26, 2022, the Company completed the HSO Acquisition for approximately $23 million, net of cash. HSO is a multi-national developer of technology and chemistry for decorative and functional surface finishing with a focus on environmentally sustainable products, especially in the field of plating on plastics. HSO is included in our Industrial Solutions business line within our Industrial & Specialty segment and was not material to our unaudited Condensed Consolidated Financial Statements. In connection with this acquisition, the Company recorded approximately $11.7 million of finite-lived intangible assets, primarily customer relationships.

Goodwill

The changes in the carrying amount of goodwill by segment were as follows:

(dollars in millions)			Electronics						Industrial & Specialty						Total
Balance at December 31, 2021			$	1,292.2					$	1,234.1		(1)			$	2,526.3
HSO Acquisition			—						7.1						7.1
Transfer of Films business (2)			80.4						(80.4)						—
Foreign currency translation and other			(111.6)						(95.6)						(207.2)
Balance at September 30, 2022			$	1,261.0					$	1,065.2					$	2,326.2

(1) Includes accumulated impairment losses of $46.6 million.

(2) Goodwill was reallocated using a relative fair value approach and assessed for impairment both before and after the allocation. See Note 1, Background and Basis of Presentation, to the unaudited Condensed Consolidated Financial Statements for further information.

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Intangible Assets

The major components of intangible assets were as follows:

			September 30, 2022																		December 31, 2021
(dollars in millions)			Gross Carrying Amount						Accumulated Amortization						Net Book Value						Gross Carrying Amount						Accumulated Amortization						Net Book Value
Customer relationships			$	933.0					$	(403.2)					$	529.8					$	1,131.3					$	(506.7)					$	624.6
Developed technology			391.4						(256.4)						135.0						429.0						(247.4)						181.6
Trade names			92.5						(21.2)						71.3						102.2						(19.7)						82.5
Indefinite-lived trade name			68.0						—						68.0						68.0						—						68.0
Total			$	1,484.9					$	(680.8)					$	804.1					$	1,730.5					$	(773.8)					$	956.7

For the three months ended September 30, 2022 and 2021, the Company recorded amortization expense on intangible assets of $29.2 million and $31.9 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded amortization expense on intangible assets of $90.5 million and $92.0 million, respectively.

5. DEBT

The Company’s debt obligations consisted of the following:

(dollars in millions)			Maturity Date						Interest Rate						September 30, 2022						December 31, 2021
Term Loans (1)			2026						LIBOR plus 2.00%						$	1,106.6					$	1,113.0
Senior Notes - $800 million (2)			2028						3.875%						790.5						789.4
Other															1.6						4.5
Total debt															1,898.7						1,906.9
Less: current installments of long-term debt															11.9						12.7
Total long-term debt															$	1,886.8					$	1,894.2

(1) Term loans, net of unamortized discounts and debt issuance costs of $10.3 million and $12.6 million at September 30, 2022 and December 31, 2021, respectively. The effective interest rate was 1.6% and 2.1% at September 30, 2022 and December 31, 2021, respectively, including the effects of interest rate swaps and net investment hedges. See Note 6, Financial Instruments, to the unaudited Condensed Consolidated Financial Statements for further information regarding the Company's interest rate swaps and net investment hedges.

(2) Senior notes, net of unamortized debt issuance costs of $9.5 million and $10.6 million at September 30, 2022 and December 31, 2021, respectively. The effective interest rate was 4.1% at September 30, 2022 and December 31, 2021, 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 $1.48 billion, consisting of a revolving credit facility in an aggregate principal amount of $330 million maturing in 2024 and term loans B in an aggregate principal amount of $1.15 billion maturing in 2026.

The Company's outstanding term loans bear interest at a per annum rate based on an adjusted one-month LIBOR (as described in the Credit Agreement) plus a spread of 2.00%. 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 step-down to 0.375% based on the Company’s first lien net leverage ratio.

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 co-borrowers, namely the Company and its subsidiary, MacDermid, Incorporated, as well as the assets of the guarantors, including mortgages on material real property, subject to certain exceptions.

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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. Subject to certain exceptions, to the extent the borrowers have total outstanding borrowings under the revolving credit facility 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.

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 September 30, 2022, the Company was in compliance with the debt covenants contained in the Credit Agreement and had full availability of its unused borrowing capacity of $324 million, net of letters of credit, under the revolving credit facility.

3.875% USD Notes due 2028

The indenture governing the 3.875% USD Notes due 2028 provides for, among other things, 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, 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), or to repurchase them by any means other than a redemption, including by tender offer, open market purchases or negotiated transactions. 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. At September 30, 2022 and December 31, 2021, respectively, there were no amounts outstanding under such facilities. The Company had letters of credit outstanding of $6.0 million and $5.9 million at September 30, 2022 and December 31, 2021, respectively, of which $6.0 million and $5.5 million at September 30, 2022 and December 31, 2021, respectively, reduced the borrowings available under the various facilities. At September 30, 2022 and December 31, 2021, the availability under these facilities totaled approximately $346 million and $354 million, respectively, net of outstanding letters of credit.

6. FINANCIAL INSTRUMENTS

Derivatives and Hedging

In the normal course of business, the Company is exposed to risks relating to changes in interest rates, foreign currency exchange rates and commodity prices. Derivative financial instruments, such as interest rate swaps, net investment hedges, foreign currency exchange forward contracts and commodities futures contracts 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.

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Interest Rate and Cross-Currency Swaps

The Company uses interest rate swaps and cross-currency swaps to reduce its exposure to interest rate risk and foreign currency risk. The Company has designated the interest rate swaps as cash flow hedges and the cross-currency swaps as net investment hedges. The proceeds from these contracts are reflected as "Cash flows from operating activities" in the Condensed Consolidated Statement of Cash Flows. Changes in fair value of interest rate swaps are recorded in "Accumulated other comprehensive loss" and reclassified to "Interest expense, net" in the Condensed Consolidated Statements of Operations as the underlying hedged item affects earnings. Changes in fair value of cross-currency swaps are recorded in "Foreign currency translation" in "Accumulated other comprehensive loss." These cross-currency swaps effectively convert the Company's term loans under the Credit Agreement, which are U.S. dollar denominated debt obligations, into fixed-rate euro-denominated debt through the expiration of the swaps.

In 2021, the Company entered into interest rate swaps to effectively fix the floating rate of the interest payments associated with the $400 million Add-on Term Loans through January 2025. These contracts were designated as a cash flow hedge. The Company also entered into cross-currency swaps, as amended on April 1, 2022, to effectively convert the $400 million Add-on Term Loans, which are U.S. dollar denominated debt obligations, into fixed-rate euro-denominated debt through January 2025. The Company designated these contracts as a net investment hedge of the foreign currency exposure of a portion of its net investment in certain euro functional subsidiaries.

In 2019, the Company entered into interest rate swaps to effectively fix the floating rate of the interest payments associated with the initial $750 million term loans under the Credit Agreement through January 2024. These contracts were designated as a cash flow hedge. The Company also entered into cross-currency swaps to effectively convert the $750 million term loans, which are U.S. dollar denominated debt obligations, into fixed-rate euro-denominated debt through January 2024. The Company designated these contracts as a net investment hedge of the foreign currency exposure of a portion of its net investment in certain euro functional subsidiaries.

The net result of the above hedges, which expire in January 2024 and 2025, respectively, is an interest rate of approximately 1.6% at September 30, 2022, which could vary in the future due to changes in the euro and the U.S. dollar exchange rate. The market value of the cross-currency swaps was a net asset of $151 million at September 30, 2022 and $25.2 million at December 31, 2021. The market value of the interest rate swaps was a net asset of $48.5 million at September 30, 2022 and a net liability of $18.1 million at December 31, 2021.

For the three and nine months ended September 30, 2022, the Company's interest rate swaps and cross-currency swaps were deemed highly effective. The Company expects to reclassify a $27.0 million benefit from "Accumulated other comprehensive loss" to "Interest expense, net" in the Condensed Consolidated Statements of Operations within the next twelve months.

Foreign Currency

The Company conducts a significant portion of its business in currencies other than the U.S. dollar and certain subsidiaries conduct business in currencies other than their functional currency, which is typically their local currency. As a result, the Company’s operating results are impacted by foreign currency exchange rate volatility.

At September 30, 2022, the Company held foreign currency forward contracts to purchase and sell various currencies to mitigate foreign currency exposure primarily with the U.S. dollar and British pound. 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 income (expense), net." The total notional value of foreign currency exchange forward contracts held at September 30, 2022 and December 31, 2021 was approximately $91.7 million and $64.6 million, respectively, with settlement dates generally within one year. The market value of the foreign currency forward contracts was a $1.1 million net current liability at September 30, 2022 and a $0.1 million net current liability at December 31, 2021.

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Commodities

As part of its risk management policy, the Company enters into commodity derivative 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 derivative contracts to purchase and sell various metals, primarily tin and silver, for a notional amount of $47.2 million and $56.1 million at September 30, 2022 and December 31, 2021, respectively. The market value of the metals derivative contracts was a $0.7 million net current asset at September 30, 2022 and a $1.1 million net current liability at December 31, 2021. Substantially all contracts outstanding at September 30, 2022 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 income (expense), net."

Realized gains and losses on derivative contracts are accounted for as "Operating activities" in the Condensed Consolidated Statements of Cash Flows.

Fair Value Measurements

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis:

(dollars in millions)			Balance sheet location						Classification						September 30, 2022						December 31, 2021
Asset Category
Foreign exchange contracts			Other current assets						Level 2						$	0.2					$	0.1
Metals contracts			Other current assets						Level 2						5.4						1.2
Interest rate swaps			Other current assets						Level 2						27.0						—
Cross-currency swaps			Other current assets						Level 2						28.5						22.2
Interest rate swaps			Other assets						Level 2						21.5						6.6
Cross-currency swaps			Other assets						Level 2						122.1						5.8
Available-for-sale debt securities			Other assets						Level 3						10.2						—
Total															$	214.9					$	35.9
Liability Category
Foreign exchange contracts			Accrued expenses and other current liabilities						Level 2						$	1.3					$	0.2
Metals contracts			Accrued expenses and other current liabilities						Level 2						4.7						2.3
Interest rate swaps			Accrued expenses and other current liabilities						Level 2						—						15.1
Interest rate swaps			Other liabilities						Level 2						—						9.6
Cross-currency swaps			Other liabilities						Level 2						—						2.8
Total															$	6.0					$	30.0

The fair values of derivative assets and liabilities 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.

There were no significant transfers of financial instruments between the fair value hierarchy levels for the three and nine months ended September 30, 2022.

The carrying value and estimated fair value of the Company’s long-term debt totaled $1.90 billion and $1.75 billion, respectively, at September 30, 2022. At December 31, 2021, the carrying value and estimated fair value totaled $1.90 billion and $1.93 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 for similar instruments at the reporting date

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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.

7. STOCKHOLDERS’ EQUITY

Repurchases of Common Stock

As part of its stock repurchase program, the Company repurchased approximately 3.0 million shares of its common stock for $54.8 million during the three months ended September 30, 2022, resulting in an aggregate of approximately 6.0 million shares repurchased for $116.5 million during the nine months ended September 30, 2022. The repurchases were funded from cash on hand and allocated to treasury shares. The remaining authorization under the Company's stock repurchase program was approximately $616 million at September 30, 2022.

Shares withheld by the Company to satisfy tax withholding requirements related to the vesting of RSUs are not considered share repurchases under our stock repurchase program. During the nine months ended September 30, 2022, the Company withheld approximately 1.0 million shares in connection with vesting events for a value of approximately $24.0 million, which is included in "Other, net" in the Condensed Consolidated Statements of Cash Flows as a cash outflow from financing activities.

8. EARNINGS PER SHARE

Basic and diluted earnings per share are based on the weighted average number of shares of the Company's 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 treasury stock method.

A computation of earnings per share and weighted average shares of the Company's common stock outstanding from continuing operations for the three and nine months ended September 30, 2022 and 2021 is as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in millions, except per share amounts)			2022						2021						2022						2021
Net income			$	53.3					$	35.9					$	173.3					$	197.3
Net (income) loss attributable to non-controlling interests			(0.1)						0.1						(0.6)						0.1
Net income attributable to common stockholders			$	53.2					$	36.0					$	172.7					$	197.4
Basic weighted average common shares outstanding			244.7						247.6						246.4						247.5
Denominator adjustments for diluted EPS:
Number of stock options and RSUs			0.3						0.4						0.8						0.5
Denominator adjustments for diluted EPS			0.3						0.4						0.8						0.5
Diluted weighted average common shares outstanding			245.0						248.0						247.2						248.0
Earnings per share from continuing operations attributable to common stockholders:
Basic			$	0.22					$	0.15					$	0.70					$	0.80
Diluted			$	0.22					$	0.15					$	0.70					$	0.79

For the three and nine months ended September 30, 2022 and 2021, the following securities were not included in the computation of diluted shares outstanding because either the effect would be anti-dilutive or performance targets were not yet met for awards contingent upon such measures:

			Three Months Ended September 30,												Nine Months Ended September 30,
(shares in millions)			2022						2021						2022						2021
Shares issuable upon vesting of RSUs and exercise of stock options			3.5						3.6						3.6						3.7

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9. 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. At certain of these sites, the Company engages or participates in remedial and other environmental compliance activities. At other sites, the 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. After 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 waste 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 would likely be 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 $13.9 million and $13.1 million at September 30, 2022 and December 31, 2021, 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, 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.

As of the date hereof, the Company believes it is not practicable to provide an estimated range of reasonably possible environmental losses in excess of its recorded liabilities, and, as a result, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact that may be associated with 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.

10. INCOME TAXES

The Company's quarterly income tax provision is measured using an estimate of its consolidated annual effective tax rate, which includes the impact of foreign withholding tax accruals and uncertain tax positions, adjusted for discrete 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 September 30, 2022, the Company recognized income tax expense of $16.5 million, as compared to $17.3 million in the same period for 2021. For the nine months ended September 30, 2022, the Company recognized income tax expense of $60.4 million, as compared to $16.5 million in the same period for 2021.

The three and nine months ended September 30, 2021 included a non-recurring $3.8 million and $55.2 million benefit, respectively, associated with the release of valuation allowances. This benefit did not repeat in the three and nine months ended September 30, 2022 and 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 interest deduction carryforwards.

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11. RELATED PARTY TRANSACTIONS

The Company is 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 $3.0 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. Amounts paid under this agreement are recorded in the Condensed Consolidated Statements of Operations as "Selling, technical, general and administrative" expense.

12. SEGMENT INFORMATION

The Company's operations are organized into two 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) for purposes of allocating resources and evaluating performance. See Note 1, Background and Basis of Presentation, to the unaudited Condensed Consolidated Financial Statements for information about the segment change that occurred in the second quarter of 2022.

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 EBITDA, as further adjusted for additional items included in earnings which the Company believes are not representative or indicative of each of its segments' ongoing business, including unrealized gains/losses on metals derivative contracts, or are considered to be associated with the Company's capital structure. Adjusted EBITDA for each segment also includes an allocation of corporate costs, such as compensation expense and professional fees.

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:

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in millions)			2022						2021						2022						2021
Net sales:
Electronics
Assembly Solutions			$	197.1					$	212.6					$	659.4					$	606.7
Circuitry Solutions			124.7						131.9						394.4						377.6
Semiconductor Solutions			65.9						67.1						212.7						188.6
Total Electronics			387.7						411.6						1,266.5						1,172.9
Industrial & Specialty
Industrial Solutions			176.8						148.5						549.2						417.1
Graphics Solutions			37.8						41.0						111.6						115.7
Energy Solutions			16.2						15.1						48.3						47.2
Total Industrial & Specialty			230.8						204.6						709.1						580.0
Total net sales			$	618.5					$	616.2					$	1,975.6					$	1,752.9
Adjusted EBITDA:
Electronics			$	91.2					$	95.9					$	293.8					$	287.1
Industrial & Specialty			42.3						34.7						124.9						113.1
Total Adjusted EBITDA			$	133.5					$	130.6					$	418.7					$	400.2

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The following table reconciles "Net income attributable to common stockholders" to Adjusted EBITDA:

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in millions)			2022						2021						2022						2021
Net income attributable to common stockholders			$	53.2					$	36.0					$	174.5					$	199.4
Add (subtract):
Net income (loss) attributable to non-controlling interests			0.1						(0.1)						0.6						(0.1)
Income from discontinued operations, net of tax			—						—						(1.8)						(2.0)
Income tax expense			16.5						17.3						60.4						16.5
Interest expense, net			12.3						13.8						39.6						39.6
Depreciation expense			10.6						9.6						31.5						28.7
Amortization expense			29.2						31.9						90.5						92.0
EBITDA			121.9						108.5						395.3						374.1
Adjustments to reconcile to Adjusted EBITDA:
Inventory step-up			—						4.3						0.5						6.5
Restructuring expense			2.9						1.3						6.1						5.2
Acquisition and integration expense			2.2						7.1						6.2						10.3
Foreign exchange loss (gain) on internal debt			2.5						0.6						3.2						(22.8)
Adjustment of stock compensation previously not probable			—						7.6						1.3						21.2
Unrealized loss (gain) on metals derivative contracts			2.3						(0.9)						(2.0)						(2.3)
Other, net			1.7						2.1						8.1						8.0
Adjusted EBITDA			$	133.5					$	130.6					$	418.7					$	400.2

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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 2021 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” of this Quarterly Report, and in Part I, Item 1A, "Risk Factors" of our 2021 Annual Report.

Overview

Our Business

Element Solutions, incorporated in Delaware in January 2014, is a leading global specialty chemicals company whose businesses supply a broad range of solutions that enhance the performance of products people use every day. Developed in multi-step technological processes, these innovative solutions enable customers' manufacturing processes in several key industries, including consumer electronics, power electronics, semiconductor fabrication, communications and data storage infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy. Our businesses provide products that, in substantially all cases, are consumed by 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, through a consistent focus on increasing customer value propositions.

We generate revenue from the development, formulation and sale of our chemistry solutions globally. Our extensive global teams of specially trained scientists and engineers develop our products and our expert sales and service organizations ensure our customers' needs are met every day. We draw upon our broad and longstanding intellectual property portfolio and technical expertise while working closely with both customers and original equipment manufacturers on an ongoing basis to develop proprietary solutions tailored to their manufacturing needs. We also leverage these close relationships to execute our growth strategy and identify opportunities for new products. 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, on which we capitalize 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 sells specialty chemicals and materials for all types of electronics hardware, from complex printed circuit board designs to advanced semiconductor packaging. In mobile communications, computers, automobiles and aerospace equipment, its products are an integral part of the electronics manufacturing process and the functionality of end-products. The segment's "wet chemistries" for metallization, surface treatments and solderable finishes form the physical circuitry pathways and its "assembly materials," such as solders, pastes, fluxes and adhesives, join those pathways together.

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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") and materials used by our customers to manufacture printed circuit boards and memory storage devices. Our product portfolio is focused on specialized consumable chemical processes and materials, such as surface treatments, circuit formation, primary metallization, electroplate, surface finishes and flexible/formable films.
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 researches, 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; consumable chemicals that enable printing image transfer on flexible packaging materials; and chemistries used in water-based hydraulic control fluids in offshore energy production. These fully consumable products are used in the aerospace, automotive, construction, consumer electronics, consumer packaged goods and oil and gas production end markets.

The segment provides specialty chemical solutions through the following businesses:

Industrial Solutions						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

HSO Acquisition

On January 26, 2022, we completed the HSO Acquisition for approximately $23 million, net of cash. HSO is a multi-national developer of technology and chemistry for decorative and functional surface finishing with a focus on environmentally sustainable products, especially in the field of plating on plastics. HSO is included in our Industrial Solutions business line within our Industrial & Specialty segment.

Russia and Ukraine Conflict

The invasion of Ukraine by Russia in early 2022 and the sanctions and other measures being imposed in response to this conflict have increased the level of economic and political uncertainty. While neither Russia nor Ukraine constitutes a material

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portion of our business and we do not have physical assets in these countries, a significant escalation or expansion of economic disruption or the conflict's current scope could disrupt the global supply chain and increase our costs.

Recent Accounting Pronouncements

Our recent accounting pronouncements have not changed materially from the summary disclosed in Note 3, Recent Accounting Pronouncements, to the Consolidated Financial Statements included in our 2021 Annual Report.

Non-GAAP Financial Measures

To supplement our financial results presented in accordance with GAAP in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section, we present certain non-GAAP financial measures, such as operating results on a constant currency and organic basis and Adjusted EBITDA. Management internally reviews these non-GAAP measures to evaluate performance on a comparative period-to-period basis in terms of absolute performance, trends and expected future performance with respect to our business. We believe these non-GAAP financial measures, which are each further described below, provide investors with an additional perspective on trends and underlying operating results on a period-to-period comparable basis. We also believe that investors find this information helpful in understanding the ongoing performance of our operations separate from items that may have a disproportionate positive or negative impact on our financial results in any particular period or are considered to be associated with our capital structure.

These non-GAAP financial measures, however, have limitations as analytical tools and should not be considered in isolation from, a substitute for, or superior to, the related financial information that we report in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and may not be completely comparable to similarly titled measures of other companies due to potential differences in calculation methods. In addition, these measures are subject to inherent limitations as they reflect the exercise of judgment by management about which items are excluded or included in determining these non-GAAP financial measures. Investors are encouraged to review the definitions and reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures included in this Quarterly Report and not to rely on any single financial measure to evaluate our business.

Constant Currency

We disclose operating results, from net sales through operating profit and Adjusted EBITDA, on a constant currency basis by adjusting results to exclude the impact of changes due to the translation of foreign currencies of our international locations into U.S. dollars. Management believes this non-GAAP financial information facilitates period-to-period comparison in the analysis of trends in business performance, thereby providing valuable supplemental information regarding our results of operations, consistent with how we internally evaluate our financial results.

The impact of foreign currency translation is calculated by converting our current-period local currency financial results into U.S. dollars using the prior period's exchange rates and comparing these adjusted amounts to our prior-period reported results. The difference between actual growth rates and constant currency growth rates represents the estimated impact of foreign currency translation.

Organic Net Sales Growth

Organic net sales growth is defined as net sales excluding the impact of foreign currency translation, changes due to the pass-through pricing of certain metals and acquisitions and/or divestitures, as applicable. Management believes this non-GAAP financial measure provides investors with a more complete understanding of the underlying net sales trends by providing comparable net sales over differing periods on a consistent basis.

For a reconciliation of GAAP net sales growth to organic net sales growth, see "Net Sales" within the "Results of Operations" section below.

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Adjusted EBITDA

We define Adjusted EBITDA as EBITDA, excluding the impact of additional items included in GAAP earnings which we believe are not representative or indicative of our ongoing business, including unrealized gains/losses on metals derivative contracts, 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 attributable to common stockholders" to Adjusted EBITDA, and more information about the adjustments made, see Note 12, Segment Information, to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.

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Results of Operations

Three and nine months ended September 30, 2022 compared to three and nine months ended September 30, 2021

			Three Months Ended September 30,												% Change																		Nine Months Ended September 30,												% Change
(dollars in millions)			2022						2021						Reported						Constant Currency						Organic						2022						2021						Reported						Constant Currency						Organic
Net sales			$	618.5					$	616.2					0%						9%						5%						$	1,975.6					$	1,752.9					13%						20%						6%
Cost of sales			396.6						371.7						7%						17%												1,240.9						1,028.9						21%						29%
Gross profit			221.9						244.5						(9)%						(2)%												734.7						724.0						1%						7%
Gross margin			35.9		%				39.7		%				(380) bps						(410) bps												37.2		%				41.3		%				(410) bps						(440) bps
Operating expenses			142.7						176.0						(19)%						(13)%												469.5						484.6						(3)%						1%
Operating profit			79.2						68.5						16%						27%												265.2						239.4						11%						18%
Operating margin			12.8		%				11.1		%				170bps						180bps												13.4		%				13.7		%				(30)bps						(20)bps
Other expense, net			(9.4)						(15.3)						(39)%																		(31.5)						(25.6)						23%
Income tax expense			(16.5)						(17.3)						(5)%																		(60.4)						(16.5)						(nm)
Net income from continuing operations			53.3						35.9						48%																		173.3						197.3						(12)%
Income from discontinued operations, net of tax			—						—						(nm)																		1.8						2.0						(10)%
Net income			$	53.3					$	35.9					48%																		$	175.1					$	199.3					(12)%
Adjusted EBITDA			$	133.5					$	130.6					2%						11%												$	418.7					$	400.2					5%						11%
Adjusted EBITDA margin			21.6		%				21.2		%				40bps						40bps												21.2		%				22.8		%				(160)bps						(160)bps

(nm) Calculation not meaningful.

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Net Sales

Net sales in the third quarter of 2022 remained flat on a reported basis and increased 9% on a constant currency basis and 5% on an organic basis. Electronics' consolidated results were negatively impacted by $18.3 million of pass-through metals pricing and Industrial & Specialty's consolidated results were positively impacted by $41.9 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)			2022						2021						Reported Net Sales Growth						Impact of Currency						Constant Currency						Pass-Through Metals Pricing						Acquisitions						Organic Net Sales Growth
Electronics:
Assembly Solutions			$	197.1					$	212.6					(7)%						7%						0%						9%						—%						9%
Circuitry Solutions			124.7						131.9						(5)%						6%						1%						—%						—%						1%
Semiconductor Solutions			65.9						67.1						(2)%						4%						3%						—%						—%						3%
Total			387.7						411.6						(6)%						7%						1%						4%						—%						5%
Industrial & Specialty:
Industrial Solutions			176.8						148.5						19%						16%						35%						—%						(28)%						7%
Graphics Solutions			37.8						41.0						(8)%						5%						(3)%						—%						—%						(3)%
Energy Solutions			16.2						15.1						8%						7%						15%						—%						—%						15%
Total			230.8						204.6						13%						13%						26%						—%						(21)%						6%
Total			$	618.5					$	616.2					0%						9%						9%						3%						(7)%						5%

NOTE: Totals may not sum due to rounding.

Electronics' net sales in the third quarter of 2022 decreased 6% on a reported basis and increased 5% on an organic basis.

•Assembly Solutions: net sales decreased 7% on a reported basis and increased 9% on an organic basis. Pass-through metals pricing had a negative impact of 9% on reported net sales. Foreign exchange had a negative impact of 7% on reported net sales. The increase in organic net sales was primarily due to continued growth in power electronics.

•Circuitry Solutions: net sales decreased 5% on a reported basis and increased 1% on an organic basis. Foreign exchange had a negative impact of 6% on reported net sales. The increase in organic net sales was primarily due to cost inflation driven pricing actions and new business wins, partially offset by demand weakness in China and Korea and softness in the memory disk end market, which is expected to continue through the end of the year.

•Semiconductor Solutions: net sales decreased 2% on a reported basis and increased 3% on an organic basis. Foreign exchange had a negative impact of 4% on reported net sales. The increase in organic net sales was primarily due to growth in advanced packaging and wafer-plating chemistries partially offset by demand weakness in China.

Industrial & Specialty's net sales in the third quarter of 2022 increased 13% on a reported basis and 6% on an organic basis.

•Industrial Solutions: net sales increased 19% on a reported basis and 7% on an organic basis. The Coventya and HSO Acquisitions had a positive impact of 28% on reported net sales. Foreign exchange had a negative impact of 16% on reported net sales. The increase in organic net sales was primarily due to cost inflation driven pricing actions, partially offset by softness in construction and industrial manufacturing markets and lower automotive production.

•Graphics Solutions: net sales decreased 8% on a reported basis and 3% on an organic basis. Foreign exchange had a negative impact of 5% on reported net sales. Organic net sales declines reflect softening demand in North America and Europe which resulted in our customers extending the replacement cycle for flexographic plates.

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•Energy Solutions: net sales increased 8% on a reported basis and 15% on an organic basis. Foreign exchange had a negative impact of 7% on reported net sales. The increase in organic net sales was primarily due to increased global drilling activity and cost inflation driven pricing actions.

Year to date, net sales increased by 13% on a reported basis, 20% on a constant currency basis and 6% on an organic basis. Electronics' consolidated results were positively impacted by $54.7 million of pass-through metals pricing and $13.5 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $170.5 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
(dollars in millions)			2022						2021						Reported Net Sales Growth						Impact of Currency						Constant Currency						Pass-Through Metals Pricing						Acquisitions						Organic Net Sales Growth
Electronics:
Assembly Solutions			$	659.4					$	606.7					9%						6%						15%						(9)%						—%						6%
Circuitry Solutions			394.4						377.6						4%						4%						9%						—%						—%						9%
Semiconductor Solutions			212.7						188.6						13%						3%						16%						—%						(7)%						9%
Total			1,266.5						1,172.9						8%						5%						13%						(5)%						(1)%						7%
Industrial & Specialty:
Industrial Solutions			549.2						417.1						32%						14%						46%						—%						(41)%						5%
Graphics Solutions			111.6						115.7						(4)%						3%						0%						—%						—%						0%
Energy Solutions			48.3						47.2						2%						4%						6%						—%						—%						6%
Total			709.1						580.0						22%						11%						33%						—%						(29)%						4%
Total			$	1,975.6					$	1,752.9					13%						7%						20%						(3)%						(10)%						6%

NOTE: Totals may not sum due to rounding.

Year to date, Electronics' net sales increased 8% on a reported basis and 7% on an organic basis.

•Assembly Solutions: net sales increased 9% on a reported basis and 6% on an organic basis. Pass-through metals pricing had a positive impact of 9% on reported net sales. Foreign exchange had a negative impact of 6% on reported net sales. The increase in organic net sales was primarily due to strong demand from power electronics customers and continued growth across most core assembly end markets.

•Circuitry Solutions: net sales increased 4% on a reported basis and 9% on an organic basis. Foreign exchange had a negative impact of 4% on reported net sales. The increase in organic net sales was primarily due to growth in the memory disk business in the first half of the year and pricing actions.

•Semiconductor Solutions: net sales increased 13% on a reported basis and 9% on an organic basis. The HKW Acquisition had a positive impact of 7% on reported net sales. Foreign exchange had a negative impact of 3% on reported net sales. The increase in organic net sales was primarily due to strong demand and new customer wins in advanced packaging chemistries for high-end electronics end markets.

Year to date, Industrial & Specialty's net sales increased 22% on a reported basis and 4% on an organic basis.

•Industrial Solutions: net sales increased 32% on a reported basis and 5% on an organic basis. The Coventya and HSO Acquisitions had a positive impact of 41% on reported net sales. Foreign exchange had a negative impact of 14% on reported net sales. The increase in organic net sales was primarily due to growth in construction and industrial manufacturing markets in Europe and the Americas; partially offset by lower automotive production and reduced activity in China.

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•Graphics Solutions: net sales decreased 4% on a reported basis and remained flat on an organic basis. Foreign exchange had a negative impact of 3% on reported net sales. Organic net sales reflect new customer wins partially offset by softening demand, which resulted in our customers extending the replacement cycle for flexographic plates.

•Energy Solutions: net sales increased 2% on a reported basis and 6% on an organic basis. Foreign exchange had a negative impact of 4% on reported net sales. The increase in organic net sales was primarily due to increased global production and drilling activity.

Gross Profit

			Three Months Ended September 30,												% Change												Nine Months Ended September 30,												% Change
(dollars in millions)			2022						2021						Reported						Constant Currency						2022						2021						Reported						Constant Currency
Gross profit
Electronics			$	134.0					$	159.4					(16)%						(11)%						$	459.7					$	470.3					(2)%						1%
Industrial & Specialty			87.9						85.1						3%						15%						275.0						253.7						8%						18%
Total			$	221.9					$	244.5					(9)%						(2)%						$	734.7					$	724.0					1%						7%
Gross margin
Electronics			34.6		%				38.7		%				(410) bps						(460) bps						36.3		%				40.1		%				(380) bps						(420) bps
Industrial & Specialty			38.1		%				41.6		%				(350) bps						(370) bps						38.8		%				43.7		%				(490) bps						(510) bps
Total			35.9		%				39.7		%				(380) bps						(410) bps						37.2		%				41.3		%				(410) bps						(440) bps

Electronics' gross profit in the third quarter of 2022 decreased by 16% on a reported basis and 11% on a constant currency basis. The constant currency decrease in gross profit and gross margin was primarily driven by the pass-through metals pricing in our Assembly business as a decline in metal prices meant we sold at a metals price that was lower than our cost of inventory, higher logistics costs and negative product mix due to lower volumes from high-margin circuitry customers in China and Korea. Higher raw material prices also contributed to the decrease in gross margin. The majority of the lower gross profit from the pass-through of declining metals prices was offset by gains associated with our metals derivative contracts recorded as "Other income (expense), net" in the Condensed Consolidated Statements of Operations.

Industrial & Specialty's gross profit in the third quarter of 2022 increased by 3% on a reported basis and 15% on a constant currency basis. The constant currency increase in gross profit was primarily driven by the contribution of $12.9 million from the Coventya Acquisition, partially offset by higher logistics costs. The decrease in gross margin was primarily due to higher raw material prices and logistics costs.

Year to date, Electronics' gross profit decreased by 2% on a reported basis and increased 1% on a constant currency basis. The constant currency increase in gross profit was primarily driven by the increased net sales in most business lines partially offset by higher logistics costs. The decrease in gross margin was primarily due to increased net sales of products containing pass-through metals in our Assembly business, higher raw material prices and logistics costs.

Year to date, Industrial & Specialty's gross profit increased by 8% on a reported basis and 18% on a constant currency basis. The constant currency increase in gross profit was primarily driven by the contribution of $59.0 million from the Coventya Acquisition. The decrease in gross margin was primarily due to higher raw material prices, particularly attributable to our Graphics business, and logistics costs, as well as unfavorable product mix from weaker automotive production.

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Operating Expenses

			Three Months Ended September 30,												% Change												Nine Months Ended September 30,												% Change
(dollars in millions)			2022						2021						Reported						Constant Currency						2022						2021						Reported						Constant Currency
Selling, technical, general and administrative			$	131.4					$	163.5					(20)%						(14)%						$	431.3					$	447.8					(4)%						1%
Research and development			11.3						12.5						(10)%						(6)%						38.2						36.8						4%						6%
Total			$	142.7					$	176.0					(19)%						(13)%						$	469.5					$	484.6					(3)%						1%
Operating expenses as % of net sales
Selling, technical, general and administrative			21.2		%				26.5		%				(530) bps						(560) bps						21.8		%				25.5		%				(370) bps						(400) bps
Research and development			1.8		%				2.0		%				(20) bps						(30) bps						1.9		%				2.1		%				(20) bps						(20) bps
Total			23.1		%				28.6		%				(550) bps						(590) bps						23.8		%				27.6		%				(380) bps						(420) bps

Operating expenses in the third quarter of 2022 decreased 19% on a reported basis and 13% on a constant currency basis. The constant currency decrease was primarily driven by $19.0 million of lower incentive compensation costs, a combination of the current year accrual reflecting recent business performance and the prior year reflecting above target performance, and a $7.6 million stock compensation adjustment for certain significant performance-based RSUs recorded in the third quarter of 2021, partially offset by $13.2 million of operating expenses related to the Coventya and HSO Acquisitions (which include the impact of amortization from purchase accounting and restructuring costs of $5.1 million) and $1.7 million of higher travel expenses.

Year to date, operating expenses decreased 3% on a reported basis and increased 1% on a constant currency basis. The constant currency increase was primarily driven by $50.3 million of operating expenses related to the Coventya and HSO Acquisitions (which include the impact of amortization from purchase accounting and restructuring costs of $17.7 million) and $6.6 million of higher travel expenses. These increases were partially offset by $29.2 million of lower incentive compensation costs, a combination of the current year accrual reflecting recent business performance and the prior year reflecting above target performance, and $19.9 million of lower stock compensation expense for certain significant performance-based RSUs as compared to the 2021 period when the vesting of such awards became probable.

Other (Expense) Income

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in millions)			2022						2021						2022						2021
Other (expense) income
Interest expense, net			$	(12.3)					$	(13.8)					$	(39.6)					$	(39.6)
Foreign exchange gain (loss)			0.9						(0.6)						2.9						22.2
Other income (expense), net			2.0						(0.9)						5.2						(8.2)
Total			$	(9.4)					$	(15.3)					$	(31.5)					$	(25.6)

Interest Expense, Net

Interest expense, net reflects increased interest costs associated with the $400 million Add-on Term Loan, which was borrowed on September 1, 2021, offset by the impact of the weakening of the Euro, as compared to the U.S. dollar, as our interest rate and cross-currency swaps have effectively converted our U.S. dollar denominated Term Loans into fixed-rate euro-denominated debt. See Note 6, Financial Instruments, for further discussion of these derivative instruments.

Foreign Exchange Gain (Loss)

For the nine months ended September 30, 2022, foreign exchange gain decreased primarily due to the remeasurement of euro-denominated intercompany balances.

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Other Income (Expense), Net

For the three and nine months ended September 30, 2022, other income, net included $3.1 million ($5.4 million of realized gains and $2.3 million of unrealized losses) and $7.0 million ($5.0 million of realized gains and $2.0 million of unrealized gains) of net gains associated with metals derivative contracts, respectively. For the three and nine months ended September 30, 2021, other expense, net included $0.9 million ($1.8 million of realized losses and $0.9 million of unrealized gains) and $7.7 million ($10.0 million of realized losses and $2.3 million of unrealized gains) of net losses associated with metals forward contracts, respectively. These metal derivative contracts primarily represent hedges on our inventory associated with pass-through metals pricing in our Assembly business. See Note 6, Financial Instruments, for further discussion of these derivative instruments.

Income Tax

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. See Note 10, Income Taxes, to the unaudited Condensed Consolidated Financial Statements for further information.

Segment Adjusted EBITDA Performance

			Three Months Ended September 30,												% Change												Nine Months Ended September 30,												% Change
(dollars in millions)			2022						2021						Reported						Constant Currency						2022						2021						Reported						Constant Currency
Adjusted EBITDA:
Electronics			$	91.2					$	95.9					(5)%						2%						$	293.8					$	287.1					2%						7%
Industrial & Specialty			42.3						34.7						22%						38%						124.9						113.1						10%						22%
Total			$	133.5					$	130.6					2%						11%						$	418.7					$	400.2					5%						11%
Adjusted EBITDA margin:
Electronics			23.5		%				23.3		%				20 bps						20 bps						23.2		%				24.5		%				(130) bps						(130) bps
Industrial & Specialty			18.4		%				16.9		%				150 bps						160 bps						17.6		%				19.5		%				(190) bps						(170) bps
Total			21.6		%				21.2		%				40 bps						40 bps						21.2		%				22.8		%				(160) bps						(160) bps

For the three months ended September 30, 2022, Electronics' Adjusted EBITDA decreased 5% on a reported basis and increased 2% on a constant currency basis. The constant currency increase was primarily driven by lower operating expenses that more than offset the reduction in gross profit. Industrial & Specialty's Adjusted EBITDA increased 22% on a reported basis and 38% on a constant currency basis. The Coventya Acquisition had a positive impact on Industrial & Specialty's Adjusted EBITDA including synergies, which was partially offset by higher logistics costs and raw material prices and unfavorable product mix.

For the nine months ended September 30, 2022, Electronics' Adjusted EBITDA increased 2% on a reported basis and 7% on a constant currency basis. The constant currency increase was primarily driven by higher gross profits. Industrial & Specialty's Adjusted EBITDA increased 10% on a reported basis and 22% on a constant currency basis. The Coventya Acquisition had a positive impact on Industrial & Specialty's Adjusted EBITDA including synergies, which was partially offset by higher logistics costs and raw material prices and unfavorable product mix.

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Liquidity and Capital Resources 

Our primary source of liquidity during the nine months ended September 30, 2022 was available cash generated from operations and cash on hand. Our primary uses of cash and cash equivalents were to repurchase shares of our common stock under our stock repurchase program, fund operations including working capital, pay cash dividends, purchase shares of our common stock withheld by us to satisfy the tax withholding requirements related to the vesting of RSUs and to fund the HSO Acquisition as well as capital expenditures and debt service obligations. Our first significant debt principal payment of approximately $1.08 billion, related to the maturity of our outstanding term loans under the Credit Agreement, is not due until 2026.

In the third quarter of 2022, we paid a cash dividend of 8 cents per share. We currently expect to continue to pay a cash dividend on a quarterly basis; however, the actual declaration of any cash dividends as well as their amounts and timing, will be subject to the final determination of our Board of Directors based on factors including our future earnings and cash flow generation.

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/or raise new equity or debt under terms that are favorable to us.

We may from time to time seek to repurchase our equity and/or to retire or repurchase our outstanding debt through cash purchases and/or exchanges for equity, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, applicable restrictions under our various financing arrangements and other factors.

During the nine months ended September 30, 2022, approximately 75% of our net sales were generated from non-U.S. operations, and we expect a large portion of our net sales to continue to be generated outside of the U.S. As a result, our foreign subsidiaries will likely continue to 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 $234 million of cash and cash equivalents at September 30, 2022, $206 million was held by our foreign subsidiaries. During the nine months ended September 30, 2022, domestic cash was primarily used for repurchases of shares of our common stock under our stock repurchase program, payment of cash dividends, the purchase of shares of our common stock withheld by us to satisfy the tax withholding requirements related to the vesting of RSUs, funding of the HSO Acquisition and satisfaction of our debt service obligations.

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The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities during the periods indicated:

			Nine Months Ended September 30,
(dollars in millions)			2022						2021
Cash provided by operating activities			$	195.4					$	204.7
Cash used in investing activities			$	(61.9)					$	(550.2)
Cash (used in) provided by financing activities			$	(211.6)					$	336.2

Operating Activities

The decrease in net cash flows provided by operating activities of $9.3 million was primarily driven by higher annual incentive compensation payments primarily in the first quarter of 2022 that were associated with our 2021 performance, partially offset by improved levels of working capital and higher cash operating profits (net income adjusted for non-cash items).

Investing Activities

During the nine months ended September 30, 2022, we paid approximately $23 million in connection with the HSO Acquisition. During the nine months ended September 30, 2021, we paid $486 million in connection with the Coventya Acquisition, $50.9 million in connection with the HKW Acquisition and received $19.0 million for the sale of a dormant facility in New Jersey.

Financing Activities

During the nine months ended September 30, 2022, we paid approximately $114 million in aggregate for the repurchase of shares of our common stock under our stock repurchase program, $59.2 million of cash dividends on shares of our common stock and $24.0 million for shares of our common stock withheld by the Company to satisfy the tax withholding requirements related to the vesting of RSUs included in "Other, net." During the nine months ended September 30, 2021, we borrowed $400 million of Add-on Term Loans to finance the Coventya Acquisition and received net proceeds of $393 million after considering discounts and fees and paid $42.1 million of cash dividends on shares of our common stock.

Financial Borrowings

Credit Facilities and Senior Notes

At September 30, 2022, we had $1.90 billion of indebtedness, net of unamortized discounts and debt issuance costs, which primarily included:

•$1.11 billion of term debt arrangements outstanding under our term loans; and

•$791 million of 3.875% USD Notes due 2028.

Availability under our revolving credit facility and various lines of credit and overdraft facilities totaled $346 million at September 30, 2022 (net of $6.0 million of stand-by letters of credit which reduce our borrowing capacity).

Covenants

At September 30, 2022, 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 our 3.875% USD Notes due 2028.

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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 2021 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 2021 Annual Report.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Based on management's evaluation (with the participation of our CEO and CFO), as of the end of the period covered by this Quarterly Report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes to Internal Control Over Financial Reporting

Based on management's evaluation (with the participation of our CEO and CFO), there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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 9, 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

There have been no material changes in the risk factors from those set forth in Part I, Item 1A, Risk Factors of our 2021 Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Purchases of Equity Securities by the Issuer and Affiliated Purchases

The following table provides information about purchases by the Company during the three months ended September 30, 2022 of equity securities of the Company:

Period			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)
July 1 - July 31			910,292						$	17.92					910,292						$	654
August 1 - August 31			625,059						$	19.45					625,059						$	642
September 1 - September 30			1,483,500						$	17.71					1,483,500						$	616
Total			3,018,851						$	18.13					3,018,851

(1) In November 2021, our Board of Directors increased the authorization under the Company's stock repurchase program to $750 million. The program does not require the repurchase of any specific number of shares and shares repurchases are made opportunistically at the discretion of the Company. The program does not have an expiration date but may be suspended or terminated by the Board at any time.

Shares withheld by the Company to satisfy tax withholding requirements related to the vesting of RSUs are not considered share repurchases under our stock repurchase program and, therefore, are excluded from the table above.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

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Item 6.    Exhibits                             

The following exhibits are filed or furnished as part of this Quarterly Report:

Exhibit Number			Description
3.1(a)			Certificate of Incorporation dated January 22, 2014 (filed as Exhibit 3.1 of Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 (File No. 333-192778) filed on January 24, 2014, and incorporated herein by reference)
3.1(b)			Certificate of Amendment of Certificate of Incorporation dated June 12, 2014 (filed as Exhibit 3.1 of the Current Report on Form 8-K filed on June 13, 2014, and incorporated herein by reference)
3.1(c)			Certificate of Amendment of Certificate of Incorporation dated January 31, 2019 (filed as Exhibit 3.1 of the Current Report on Form 8-K filed on February 5, 2019, and incorporated herein by reference)
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)
31.1*			Principal Executive Officer Certification Pursuant to Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002
31.2*			Principal Financial Officer Certification Pursuant to Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002
32.1**			Principal Executive Officer and Principal Financial Officer Certifications Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.

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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 27, 2022.

 

			ELEMENT SOLUTIONS INC
			By:			/s/ Michael Russnok
						Michael Russnok
						Chief Accounting Officer
						(Principal Accounting Officer)

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