• Net sales of $599 million, a decrease of 3% from the third quarter last year on a reported basis and organic basis
• GAAP diluted loss per share of $0.13, inclusive of a $0.33 negative impact from Graphics Solutions' goodwill impairment
• Reported net loss of $32 million, as compared to net income of $53 million in the same period last year
• Adjusted EPS of $0.36
• Adjusted EBITDA of $134 million, an increase of 2% from the third quarter of last year on a constant currency basis
• Third quarter 2023 cash from operating activities of $87 million and free cash flow of $75 million

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

Executive Commentary

President and Chief Executive Officer Benjamin Gliklich said, “Element Solutions reported strong sequential adjusted EBITDA growth this quarter driven by a recovery in electronics and increasing margins, in line with our expectation for meaningful improvement against the first half of 2023. With our ongoing focus on operational excellence and accelerated customer activity for next-generation handset production, we experienced a stronger than expected third quarter. Our industrial performance was consistent with the first half despite changing demand dynamics across regions and end-markets. Cash flow generation remains strong, and we are on track to deliver leverage below 3.5 times by year end.”

Mr. Gliklich continued, “Heading into the fourth quarter, we expect to see a typical seasonal slowdown in electronics. An incremental foreign exchange headwind since our prior guidance and a shift in order patterns from our semiconductor customers due to our ViaForm transaction earlier in the year account for a modest reduction in our full year 2023 outlook. We see an uncertain macro environment given ongoing industrial weakness in Europe and China and the UAW strike, but solid execution around cost recovery and durable secular growth in key portions of our business, such as electric vehicles and advanced packaging applications, should deliver year-over-year growth in the fourth quarter. This should not change as we enter 2024, and, with the electronics market recovering, we are optimistic about our trajectory."

Third Quarter 2023 Highlights (compared with third quarter 2022)

• Net sales on a reported basis for the third quarter of 2023 were $599 million, a decrease of 3% over the third quarter of 2022. Organic net sales decreased 3%.
  • Electronics: Net sales decreased 6% to $367 million. Organic net sales decreased 5%.
  • Industrial & Specialty: Net sales increased 1% to $232 million. Organic net sales decreased 1%.
• Third quarter of 2023 earnings per share (EPS) performance:
  • GAAP diluted loss per share was $0.13 for the third quarter of 2023 as compared to earnings per share of $0.22 for the third quarter of 2022.
  • Adjusted EPS was $0.36 for the third quarter of 2023 and 2022, respectively.
• Reported net loss was $32 million for the third quarter of 2023 as compared to net income of $53 million for the third quarter of 2022.
• Adjusted EBITDA for the third quarter of 2023 was $134 million, relatively flat when compared to the third quarter of 2022. On a constant currency basis, adjusted EBITDA increased 2%.
  • Electronics: Adjusted EBITDA was $90 million, a decrease of 1%. On a constant currency basis, adjusted EBITDA increased 1%.
  • Industrial & Specialty: Adjusted EBITDA was $44 million, an increase of 3%. On a constant currency basis, adjusted EBITDA increased 2%.
  • Adjusted EBITDA margin increased 80 basis points to 22.4% on a reported basis. On a constant currency basis, adjusted EBITDA margin increased 110 basis points.

Updated 2023 Guidance

The Company expects full year 2023 adjusted EBITDA of approximately $485 million, adjusted EPS of approximately $1.30 and free cash flow of approximately $265 million.

Graphics Solutions Goodwill Impairment

During the third quarter of 2023, the Company conducted an interim goodwill impairment test on its Graphics Solutions reporting unit which resulted in an $80.0 million impairment charge to reduce the carrying value of this reporting unit to its estimated fair value. This impairment charge was primarily driven by the reduction of the expected future cash flows for the business due to profit margin pressures from raw material inflation across the packaging supply chain, the recent loss of a significant newspaper customer and a higher weighted average cost of capital (WACC) as compared to the assumptions used by the Company for its 2022 annual goodwill impairment test. This charge is a non-cash expense and is not tax deductible.

Conference Call

Element Solutions will host a webcast/dial-in conference call to discuss its 2023 third quarter financial results at 8:30 a.m. (Eastern Time) on Thursday, October 26, 2023. Participants on the call will include President and Chief Executive Officer Benjamin Gliklich, Chief Financial Officer Carey J. Dorman and Executive Chairman Sir Martin E. Franklin.

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

About Element Solutions

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

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

Forward-Looking Statements

This release is intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 as it contains "forward-looking statements" within the meaning of the federal securities laws. These statements will often contain words such as "expect," "anticipate," "project," "will," "should," "believe," "intend," "plan," "assume," "estimate," "predict," "seek," "continue," "outlook," "may," "might," "aim," "can have," "likely," "potential," "target," "hope," "goal," "priority," "guidance" or "confident" and variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs, projections and expectations regarding meaningful improvements against the first half of 2023; focus on commercial excellence; accelerated customer activity for next-generation handset production; changing demand dynamics across regions and end-markets impacting the Company's industrial performance; cash flow generation; delivering leverage below 3.5 times by year end; seasonal slowdown in the fourth quarter in electronics; impacts of incremental foreign exchange headwind and order patterns from the Company's semiconductor customers; overall macro environment; execution and secular growth in key portions of the Company's business delivering growth in the fourth quarter and into 2024; electronics market recovery; the Company's trajectory; and full-year 2023 guidance for adjusted EBITDA, adjusted EPS and free cash flow. These projections and statements are based on management's estimates, assumptions or expectations with respect to future events and financial performance, and are believed to be reasonable, though are inherently uncertain and difficult to predict. Such projections and statements are based on the assessment of information available as of the current date, and the Company does not undertake any obligations to provide any further updates. Actual results could differ materially from those expressed or implied in these forward-looking statements if one or more of the underlying estimates, assumptions or expectations prove to be inaccurate or are unrealized. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the continuing economic impact of the coronavirus (COVID-19) and its variants on the global economy, the Company's business, financial results, customers, suppliers, vendors and/or stock price, including the impact of related governmental responses, the efficacy of vaccines and treatments targeting COVID-19 and/or its variants; the general impact of the ongoing conflict between Russia and Ukraine and the evolving nature of the conflicts in the Middle East on economic activity, including financial market instability and disruption of global supply chains, and on the Company's customers, employees, suppliers, vendors and other stakeholders; inflation and fluctuations in foreign exchange rates; business and management strategies; outstanding debt and debt leverage ratio; shares repurchases; debt and/or equity issuance or retirement; returns to stockholders; and the impact of acquisitions, divestitures, restructurings, refinancings, impairments and other unusual items, including the Company's ability to integrate and obtain the anticipated benefits, results and synergies from these items or other related strategic initiatives. Additional information concerning these and other factors that could cause actual results to vary is, or will be, included in the Company's periodic and other reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Non-GAAP Measures

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

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

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

Constant Currency:

The Company discloses net sales and adjusted EBITDA on a constant currency basis by adjusting results to exclude the impact of changes due to the translation of foreign currencies of its international locations into U.S. dollar. Management believes this non-GAAP financial information facilitates period-to-period comparison in the analysis of trends in business performance, thereby providing valuable supplemental information regarding its results of operations, consistent with how the Company internally evaluates its financial results.

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

Organic Net Sales Growth:

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

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

For the three months ended September 30, 2023, Electronics' consolidated results were positively impacted by $1.4 million of pass-through metals pricing and negatively impacted by $0.3 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $1.1 million of acquisitions. For the nine months ended September 30, 2023, Electronics' consolidated results were negatively impacted by $73.5 million of pass-through metals pricing and positively impacted by $1.1 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $3.8 million of acquisitions.

Adjusted Earnings Per Share (EPS):

Adjusted EPS is a key metric used by management to measure operating performance and trends as management believes the exclusion of certain expenses in calculating adjusted EPS facilitates operating performance comparisons on a period-to-period basis. Adjusted EPS is defined as net income attributable to common stockholders adjusted to reflect adjustments consistent with the Company's definition of adjusted EBITDA. Additionally, the Company eliminates amortization expense associated with intangible assets, incremental depreciation associated with the step-up of fixed assets and incremental cost of sales associated with the step-up of inventories recognized in purchase accounting for acquisitions. Further, the Company adjusts its effective tax rate to 20% for the three and nine months ended September 30, 2023 and 2022, respectively, as described in footnote (9) under the reconciliation table below.

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

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

Adjusted Common Shares Outstanding at September 30, 2023 and 2022

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

EBITDA and Adjusted EBITDA:

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

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

Net Debt to Adjusted EBITDA Ratio:

Net debt to adjusted EBITDA ratio is defined as total debt (current installments of long-term debt, revolving credit facilities and long-term debt), excluding unamortized discounts and debt issuance costs, which totaled $16.1 million at September 30, 2023, less cash divided by adjusted EBITDA.

The following table presents the Company's net debt to adjusted EBITDA ratio of 3.7x on a trailing twelve month basis:

Free Cash Flow:

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

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