# Element Solutions Inc (ESI) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Element Solutions Inc's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1590714/000159071423000027/esi-20221231.htm
Accession: 0001590714-23-000027
Filing date: 2023-02-22
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ESI/
All MD&A years: /company/ESI/mda/
Previous year: /company/ESI/mda/fy2021/ (FY 2021)
Next year: /company/ESI/mda/fy2023/ (FY 2023)

Item 7. 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 “Financial Statements and Supplementary Data” included in Part II, Item 8 of this 2022 Annual Report and our audited Consolidated Financial Statements and notes thereto included elsewhere in this 2022 Annual Report. “Overview” and "2022 Highlights" briefly present our business and certain significant events addressed in this section or elsewhere in this 2022 Annual Report. This 2022 Annual Report should be read in its entirety for a complete description of our business and discussion of these events.

Overview

Element Solutions, incorporated in Delaware in January 2014, is a leading global specialty chemicals company whose businesses supply a broad range of solutions that enhance the performance of products people use every day. Developed in multi-step technological processes, these innovative solutions enable customers' manufacturing processes in several key industries, including consumer electronics, power electronics, semiconductor fabrication, communications and data storage infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy. Our product innovation and product extensions are expected to continue to drive sales growth in both new and existing markets while expanding margins through a consistent focus on increasing customer value propositions.

Our operations are organized into two segments: Electronics and Industrial & Specialty. In 2022, we achieved net sales of $2.55 billion, to which our Electronics and Industrial & Specialty segments contributed approximately 63% and 37%, respectively.

Each of our segments is described below:

Electronics – The Electronics segment researches, formulates and sells specialty chemicals and material process technologies for all types of electronics hardware, from complex printed circuit board designs to advanced semiconductor packaging. In mobile communications, computers, automobiles and aerospace equipment, its products are an integral part of the electronics manufacturing process and the functionality of end-products. The segment's "wet chemistries" for metallization, surface treatments and solderable finishes form the physical circuitry pathways and its "assembly materials," such as solders, pastes, fluxes and adhesives, join those pathways together. The segment provides specialty chemical solutions through the following businesses: Assembly Solutions, Circuitry Solutions and Semiconductor Solutions.

Industrial & Specialty – The Industrial & Specialty segment researches, formulates and sells specialty chemicals and material process technologies that enhance surfaces or improve industrial processes in diverse industrial sectors from automotive trim to transcontinental infrastructure and from high-speed printing to high-design faucets. Its products include chemical systems that protect and decorate metal and plastic surfaces; consumable chemicals that enable printing image transfer on flexible packaging materials; and chemistries used in water-based hydraulic control fluids in offshore energy production. 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, Graphics Solutions and Energy Solutions.

2022 Highlights

•Resilient Financial Performance in a Challenging Market – During the year, the business grew its reported and organic sales by 6% and 5%, respectively, despite declines in volume in its key end-markets, including mobile phones and consumer electronics. This resilience was driven by strong commercial execution with new customers in existing and new markets and significant pricing actions. In spite of volumes in our end-market declining and meaningful inflation in our supply chains increasing our costs, we modestly grew our Adjusted EBITDA.

•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.

•Repurchases of Common Stock - During the year ended December 31, 2022, we repurchased 8.0 million shares of our common stock for $151 million. The remaining authorization under our stock repurchase program was approximately $581 million at December 31, 2022.

25

•Cash Dividends - During the year ended December 31, 2022, approximately $78.4 million was returned to our shareholders in the form of cash dividends.

Acquisitions

We may pursue acquisitions in our existing or adjacent end-markets with product offerings that complement our portfolio or geographic footprint. We expect to achieve commercial and distribution efficiencies by expanding into related categories that can be marketed through our existing distribution channels or provide us with new distribution channels for our existing products. To the extent we pursue future acquisitions, we expect that acquisition candidates would demonstrate a combination of attractive margins, strong cash flow characteristics, niche leading positions and consumable products that generate recurring revenue. We believe the diversity of the niche end-markets we serve will enable us to continue our growth and maintain strong cash flow generation throughout economic cycles and mitigate the impact of a downturn in any single market. We will only pursue a candidate when it is deemed to be fiscally prudent and meets our acquisition criteria. We anticipate that any future acquisitions would be financed through a combination of cash on hand, availability under our Credit Agreement and/or new debt or equity offerings.

Foreign Currency Exposure

In 2022, approximately 75% of our net sales originated outside of the U.S. and were denominated in numerous currencies, including the euro, Chinese yuan, British pound, and Taiwan dollar. Therefore, fluctuations in foreign exchange rates in any given reporting period may positively or negatively impact our financial performance. Foreign exchange translation negatively impacted our 2022 net sales performance by approximately 7%.

In addition, our foreign subsidiaries are subject to foreign currency risk relating to receipts from customers, payments to suppliers and intercompany transactions that are not in their functional currency, which is typically their local currency. As a result, our foreign subsidiaries may enter, and have entered, into foreign exchange hedges designed to protect against transaction exposures. We actively assess our hedging programs in order to mitigate foreign exchange risk exposures. This includes programs to hedge our foreign currency denominated balance sheet exposures as well as foreign currency anticipated cash flows.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates that may significantly impact our reported financial results and accompanying disclosures. We base our estimates, assumptions and judgments on historical experience, current conditions as well as other factors that we consider reasonable. Estimates relate to matters that are inherently uncertain and actual results may differ from these estimates and such differences could be material to our financial statements.

We consider the accounting estimates discussed below to be critical to the understanding of our financial statements and involve difficult, subjective or complex judgments that could potentially affect our reported results. See Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in this 2022 Annual Report for a detailed discussion of the application of these and other accounting policies.

Revenue Recognition

We recognize revenue when a customer obtains control of the products it purchased, which occurs upon shipment or delivery, when title or the risks and rewards of ownership have been passed on to the customer, our performance obligations have been fulfilled and collectability is probable. Estimates for sales rebates, incentives and discounts as well as sales returns and allowances are accounted for as reductions of revenue when the earnings process is complete. Differences between estimated expense and actual costs are typically immaterial and are recognized in earnings in the period such differences are determined.

Most performance obligations relate to contracts with a duration of less than one year, in which we have the right to invoice the customer at the time the performance obligation is satisfied for the amount of revenue recognized at that time. Accordingly, we have elected the practical expedient available under ASC Topic 606, Revenue from Contracts with Customers, not to disclose remaining performance obligations under our contracts. We have also elected the practical expedient to expense incremental costs for obtaining contracts with terms of less than one year.

26

Goodwill

Goodwill is tested for impairment at the reporting unit level annually in the fourth quarter, or when events or changes in circumstances indicate that goodwill might be impaired. Our reporting units are determined based upon our organizational structure in place at the date of the goodwill impairment test. The fair value of a reporting unit is based equally on market multiples and the present value of discounted future cash flows. The discounted cash flows are prepared based upon cash flows at the reporting unit level and involve significant judgments related to future growth rates, gross profit, operating expenses and discount rates, among other considerations, from the vantage point of a market participant.  

If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is required. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, the goodwill impairment loss is calculated as the difference between these amounts, limited to the amount of goodwill allocated to the reporting unit. 

As part of our goodwill impairment test in the fourth quarter of 2022, we determined that the excess of the fair values of the Graphics Solutions and Energy Solutions reporting units within our Industrial & Specialty segment exceeded their carrying values by approximately 20%. Goodwill assigned to the Graphics Solutions and Energy Solutions reporting units was approximately $212 million and $233 million, respectively, as of the assessment date. The estimated fair values of these reporting units are highly sensitive to changes in these estimates and assumptions; therefore, in some instances, changes in these assumptions may impact whether the fair value of a reporting unit is greater than its carrying value. We performed a sensitivity analysis around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values. Based on the sensitivity analysis performed for the Graphics Solutions and Energy Solutions reporting units, a 50 basis point increase in the WACC or 50 basis point decrease in the terminal growth rate, without any other changes to the valuations, would not result in the carrying value of either reporting unit being greater than the fair value. Future impairments of these reporting units may occur if the businesses do not achieve their expected cash flows or macroeconomic conditions result in an increase in the WACC used to estimate fair value. See Note 7, Goodwill and Intangible Assets, to the Consolidated Financial Statements included in this 2022 Annual Report for additional information.

Income Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement basis and the tax basis of assets, liabilities, net operating losses and tax carryforwards. A valuation allowance is required to be recognized to reduce the recorded deferred tax asset to the amount that will more likely than not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income by jurisdiction during the periods in which those temporary differences become deductible or when carryforwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in this assessment. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against our deferred tax assets resulting in additional income tax expense. We evaluate our valuation allowance conclusions on a quarterly basis based on available evidence and realization of deferred tax assets ultimately depends on the existence of sufficient taxable income in the applicable carryback or carryforward periods. Changes in our estimates of and reliance on such evidence may affect the estimate of the realization of the benefits of tax attribute carryforwards.

Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.

Tax benefits are recognized for an uncertain tax position when we consider it is more likely than not that the position will be sustained upon examination by a taxing authority or upon completion of the litigation process. For a tax position that meets the more-likely-than-not recognition threshold, the tax benefit is measured as the largest amount that is judged to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances and when new information becomes available. Such adjustments are recognized in the period in which they are identified.

Recent Accounting Pronouncements

A summary of recent accounting pronouncements is included in Note 3, Recent Accounting Pronouncements, to the Consolidated Financial Statements included in this 2022 Annual Report.

27

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 2022 Annual Report and not to rely on any single financial measure to evaluate our business.

Constant Currency

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

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

Organic Net Sales Growth

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

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

Adjusted EBITDA

We define Adjusted EBITDA as EBITDA, excluding the impact of additional items included in GAAP earnings which we believe are not representative or indicative of our ongoing business, 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 22, Segment Information, to the Consolidated Financial Statements included in this 2022 Annual Report.

28

Results of Operations

[[GREPCENT_TABLE]]
[["","","","","Change - 2022 vs 2021","","","","Change - 2021 vs 2020"],["(dollars in millions)","","2022","","2021","","Reported","","Constant Currency","","Organic","","2020","","Reported","","Constant Currency","","Organic"],["Net sales","","$","2,549.4","","","$","2,399.8","","","6%","","13%","","5%","","$","1,853.7","","","29%","","26%","","13%"],["Cost of sales","","1,596.7","","","1,439.0","","","11%","","19%","","","","1,067.7","","","35%","","32%"],["Gross profit","","952.7","","","960.8","","","(1)%","","5%","","","","786.0","","","22%","","19%"],["Gross margin","","37.4","%","","40.0","%","","(260) bps","","(300) bps","","","","42.4","%","","(240) bps","","(250) bps"],["Operating expenses","","627.4","","","660.9","","","(5)%","","(1)%","","","","553.3","","","19%","","17%"],["Operating profit","","325.3","","","299.9","","","8%","","17%","","","","232.7","","","29%","","23%"],["Operating margin","","12.8","%","","12.5","%","","30 bps","","40 bps","","","","12.6","%","","(10) bps","","(40) bps"],["Other expense, net","","(53.3)","","","(48.2)","","","11%","","","","","","(151.6)","","","(nm)"],["Income tax expense","","(85.8)","","","(48.3)","","","78%","","","","","","(4.3)","","","(nm)"],["Net income from continuing operations","","186.2","","","203.4","","","(8)%","","","","","","76.8","","","(nm)"],["Income (loss) from discontinued operations, net","","1.8","","","0.3","","","(nm)","","","","","","(1.1)","","","(nm)"],["Net income","","$","188.0","","","$","203.7","","","(8)%","","","","","","$","75.7","","","169%"],["Adjusted EBITDA","","$","526.6","","","$","524.8","","","0%","","8%","","","","$","423.3","","","24%","","20%"],["Adjusted EBITDA margin","","20.7","%","","21.9","%","","(120) bps","","(110) bps","","","","22.8","%","","(90) bps","","(120) bps"]]
[[/GREPCENT_TABLE]]

(nm) Calculation not meaningful.

29

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Net Sales

Net sales for 2022 increased 6% on a reported basis, 13% on a constant currency basis and 5% on an organic basis. Electronics' consolidated results were positively impacted by $9.7 million of pass-through metals pricing and $13.5 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $176 million of acquisitions.

The following table reconciles GAAP net sales growth to constant currency and organic net sales growth:

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","% 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","$","839.4","","","$","824.2","","","2%","","6%","","8%","","(1)%","","\u2014%","","7%"],["Circuitry Solutions","496.5","","","503.7","","","(1)%","","5%","","4%","","\u2014%","","\u2014%","","4%"],["Semiconductor Solutions","268.2","","","254.6","","","5%","","3%","","9%","","\u2014%","","(5)%","","3%"],["Total","$","1,604.1","","","$","1,582.5","","","1%","","5%","","7%","","(1)%","","(1)%","","5%"],["Industrial & Specialty:"],["Industrial Solutions","$","728.3","","","$","599.7","","","21%","","13%","","35%","","\u2014%","","(29)%","","5%"],["Graphics Solutions","150.1","","","155.5","","","(3)%","","4%","","0%","","\u2014%","","\u2014%","","0%"],["Energy Solutions","66.9","","","62.1","","","8%","","5%","","12%","","\u2014%","","\u2014%","","12%"],["Total","$","945.3","","","$","817.3","","","16%","","11%","","26%","","\u2014%","","(22)%","","5%"],["Total","$","2,549.4","","","$","2,399.8","","","6%","","7%","","13%","","0%","","(8)%","","5%"]]
[[/GREPCENT_TABLE]]

NOTE: Totals may not sum due to rounding.

Electronics' net sales for 2022 increased 1% on a reported basis, 7% on a constant currency basis and 5% on an organic basis.

•Assembly Solutions: net sales increased 2% on a reported basis and 7% on an organic basis. Pass-through metals pricing had a positive impact of 1% 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 decreased 1% on a reported basis and increased 4% on an organic basis. Foreign exchange had a negative impact of 5% 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 2022, new customer wins and pricing actions.

•Semiconductor Solutions: net sales increased 5% on a reported basis and 3% on an organic basis. The HKW Acquisition had a positive impact of 5% 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 end-market demand in the first half of 2022 and new customer wins in advanced packaging chemistries for high-end electronics end-markets.

Industrial & Specialty's net sales for 2022 increased 16% on a reported basis, 26% on a constant currency basis and 5% on an organic basis.

•Industrial Solutions: net sales increased 21% on a reported basis and 5% on an organic basis. The Coventya and HSO Acquisitions had a positive impact of 29% on reported net sales. Foreign exchange had a negative impact of 13% on reported net sales. The increase in organic net sales was primarily due to growth in automotive, construction and industrial manufacturing markets, partially offset by reduced activity in Asia in the second half of 2022.

•Graphics Solutions: net sales decreased 3% on a reported basis and was approximately flat on an organic basis. Foreign exchange had a negative impact of 4% 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.

30

•Energy Solutions: net sales increased 8% on a reported basis and 12% on an organic basis. Foreign exchange had a negative impact of 5% on reported net sales. The increase in organic net sales was primarily due to increased global production and drilling activity and cost inflation driven pricing actions which accelerated in the second half of 2022.

Gross Profit

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(dollars in millions)","2022","","2021","","Reported","","Constant Currency"],["Gross profit:"],["Electronics","$","594.1","","","$","617.5","","","(4)%","","0%"],["Industrial & Specialty","358.6","","","343.3","","","4%","","14%"],["Total","$","952.7","","","$","960.8","","","(1)%","","5%"],["Gross profit margin:"],["Electronics","37.0","%","","39.0","%","","(200) bps","","(240) bps"],["Industrial & Specialty","37.9","%","","42.0","%","","(410) bps","","(430) bps"],["Total","37.4","%","","40.0","%","","(260) bps","","(300) bps"]]
[[/GREPCENT_TABLE]]

Electronics' gross profit for 2022 decreased 4% on a reported basis and remained approximately flat on a constant currency basis. The constant currency gross profit reflects increased net sales in most business lines, partially offset by higher raw material and 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.

Industrial & Specialty's gross profit for 2022 increased 4% on a reported basis and 14% 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.

Operating Expenses

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Change"],["(dollars in millions)","2022","","2021","","Reported","","Constant Currency"],["Selling, technical, general and administrative (STG&A)","$","578.6","","","$","611.2","","","(5)%","","(1)%"],["Research and development (R&D)","48.8","","","49.7","","","(2)%","","0%"],["Total","$","627.4","","","$","660.9","","","(5)%","","(1)%"],["Operating Expenses as % of Net Sales"],["STG&A","22.7","%","","25.5","%","","(280) bps","","(320) bps"],["R&D","1.9","%","","2.1","%","","(20) bps","","(30) bps"],["Total","24.6","%","","27.5","%","","(290) bps","","(340) bps"]]
[[/GREPCENT_TABLE]]

Operating expenses for 2022 decreased 5% on a reported basis and 1% on a constant currency basis. The constant currency decrease was primarily driven by $30.3 million of lower incentive compensation costs (a combination of a lower 2022 accrual reflecting actual business performance and 2021 reflecting above target performance), $22.6 million of lower stock compensation expense for performance-based RSUs as compared to the 2021 period when the vesting of certain significant awards became probable and synergies, primarily as a result of the Coventya Acquisition. These decreases were partially offset by $52.0 million of incremental operating expenses related to the Coventya and HSO Acquisitions (which include the impact of purchase accounting and restructuring costs of $18.2 million).

31

Other (Expense) Income, net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["(dollars in millions)","2022","","2021"],["Interest expense, net","$","(51.2)","","","$","(54.2)"],["Foreign exchange (loss) gain","(5.0)","","","15.8"],["Other income (expense), net","2.9","","","(9.8)"],["Total","$","(53.3)","","","$","(48.2)"]]
[[/GREPCENT_TABLE]]

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 and increased interest income of $1.6 million. See Note 12, Financial Instruments, for further discussion of these derivative instruments.

Foreign exchange (loss) gain

Foreign exchange loss increased $20.8 million, primarily due to the remeasurement of euro-denominated intercompany balances.

Other income (expense), net

Other income, net for 2022 included $0.3 million of net gains associated with metals derivative contracts ($1.6 million of realized gains and $1.3 million of unrealized losses). Other expense, net for 2021 included $11.9 million of net losses associated with metals derivative contracts ($12.0 million of realized losses and $0.1 million of unrealized gains). These metal derivative contracts primarily represented hedges on our inventory associated with pass-through metals pricing in our Assembly business. See Note 12, Financial Instruments, for further discussion of these derivative instruments.

Income Tax

The income tax expense for 2022 totaled $85.8 million, as compared to $48.3 million in 2021. For additional information see Note 10, Income Taxes, to the Consolidated Financial Statements included in this 2022 Annual Report.

Segment Adjusted EBITDA Performance

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Change"],["(dollars in millions)","2022","","2021","","Reported","","Constant Currency"],["Adjusted EBITDA:"],["Electronics","$","362.1","","","$","372.0","","","(3)%","","3%"],["Industrial & Specialty","164.5","","","152.8","","","8%","","21%"],["Total","$","526.6","","","$","524.8","","","0%","","8%"],["Adjusted EBITDA margin:"],["Electronics","22.6","%","","23.5","%","","(90) bps","","(90) bps"],["Industrial & Specialty","17.4","%","","18.7","%","","(130) bps","","(90) bps"],["Total","20.7","%","","21.9","%","","(120) bps","","(110) bps"]]
[[/GREPCENT_TABLE]]

Electronics' Adjusted EBITDA for 2022 decreased 3% on a reported basis and increased 3% on a constant currency basis. The constant currency increase was primarily driven by lower operating expenses.

Industrial & Specialty's Adjusted EBITDA for 2022 increased 8% on a reported basis and 21% 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.

32

Comparison of Fiscal Years 2021 and 2020

For the comparison of fiscal years 2021 and 2020, see "Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020" in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2021 Annual Report on Form 10-K and incorporated by reference into this 2022 Annual Report.

Liquidity and Capital Resources

Our primary sources of liquidity during 2022 were 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, pay cash dividends, capital expenditures, fund operations including working capital, 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 debt service obligations. Our interest rate swaps and cross-currency swaps associated with the initial $750 million term loans expire on January 2024. Expiration of these hedges could result in a material increase to interest expense. 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 fourth 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, manage interest rates, renegotiate existing debt and/or raise new equity or debt under terms that are favorable to us.

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

During 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 generate 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. Of our $266 million of cash and cash equivalents at December 31, 2022, $174 million was held by our foreign subsidiaries.

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in millions)","","2022","","2021","","2020"],["Cash provided by operating activities","","$","295.9","","","$","326.0","","","$","276.0"],["Cash used in investing activities","","$","(75.2)","","","$","(568.9)","","","$","(39.9)"],["Cash (used in) provided by financing activities","","$","(275.6)","","","$","290.0","","","$","(123.6)"]]
[[/GREPCENT_TABLE]]

Year Ended December 31, 2022 compared to Year Ended December 31, 2021

Operating Activities

The decrease in net cash flows provided by operating activities of $30.1 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 management of working capital and higher cash operating profits (net income adjusted for non-cash items).

33

Investing Activities

During 2022, we paid approximately $23 million in connection with the HSO Acquisition. During 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 2022, we paid $151 million in aggregate for the repurchase of shares of our common stock under our stock repurchase program, $78.4 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 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 $61.9 million of cash dividends on shares of our common stock and $19.6 million in aggregate for the repurchase of shares of our common stock under our stock repurchase program.

Pension Plans

We maintain "Domestic Pension Plans," which consist of a non-contributory domestic defined benefit pension plan and Supplemental Executive Retirement Plans (SERPs). These plans are closed to new participants and plan benefits associated with all current participants have been frozen. We also maintain "Foreign Pension Plans" in countries such as Germany and Taiwan, which include a mixture of retirement, death benefit and longevity plans, among others, all of which are deemed immaterial, individually and in the aggregate.

The expected long-term rate of return on assets assumption is developed with reference to historical returns, forward-looking return expectations, the Domestic and Foreign Pension Plans' investment allocations, and peer comparisons. We used a long-term rate of return on plan assets of 4.8% and 3.1% for our Domestic and Foreign Pension Plans, respectively, to determine our net periodic pension expense for 2022. The discount rate used to value the pension obligation was developed with reference to a number of factors, including the current interest rate environment, benchmark fixed-income yields and expected future pension benefit payments. Discount rates of 5.2% and 3.5% were established for the Domestic Pension Plan and Foreign Pension Plans, respectively, at December 31, 2022, compared to rates of 2.8% and 1.2% established for those respective plans at December 31, 2021. We evaluate the Pension Plans' actuarial assumptions on an annual basis, including the expected long-term rate of return on assets and discount rates. A one percent increase in the discount rate would increase the pension plan expense by approximately $0.9 million and decrease the pension benefit obligation by approximately $16.5 million, whereas a one percent decrease in the discount rate would decrease the pension plan expense by approximately $1.9 million and increase the pension benefit obligation by approximately $19.2 million.

Our Domestic Pension Plans' investment policies incorporate an asset allocation strategy that emphasizes long-term growth of capital and acceptable asset volatility as long as such volatility remains consistent with the volatility of the indexes of relevant markets. Our investment policies attempt to achieve a mix of approximately 92% of plan investments for liability-matching, 6% for long-term growth, and 2% for near-term benefit payments. The weighted average asset allocation of the Domestic Pension Plan was 92% fixed income holdings, 6% equity securities and derivatives and 2% cash at December 31, 2022.

The Domestic Pension Plans were underfunded by $16.5 million at December 31, 2022 compared to $8.1 million at December 31, 2021. The decrease in the funding position was primarily driven by a $49.1 million loss on plan assets and $6.3 million of interest costs partially offset by $46.6 million of actuarial gains due to changes in plan assumptions and experience.

The Foreign Pension Plans were underfunded by $14.5 million at December 31, 2022 compared to $21.0 million at December 31, 2021.

We are not required to make any material plan contributions in 2023. While we do not currently anticipate any, additional future material contributions may be required in order to maintain appropriate funding levels within our plans.

Financial Borrowings

Credit Facilities and Senior Notes

At December 31, 2022, we had $1.90 billion of indebtedness, net of unamortized discounts and debt issuance costs of $18.7 million, which primarily included:

34

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

•$800 million of 3.875% USD Notes due 2028.

Availability under our revolving credit facility and various lines of credit and overdraft facilities totaled $391 million at December 31, 2022 (net of $6.0 million of stand-by letters of credit, which reduce our borrowing capacity).

Covenants

At December 31, 2022, we were in compliance with the debt covenants contained in the Credit Agreement and the indenture governing our 3.875% USD Notes due 2028.