Element Solutions Inc (ESI) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 2024 Annual Report and our audited Consolidated Financial Statements and notes thereto included elsewhere in this 2024 Annual Report. “Overview” and "2024 Highlights" briefly present our business and certain significant events addressed in this section or elsewhere in this 2024 Annual Report. This 2024 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 2024, we achieved net sales of $2.46 billion, to which our Electronics and Industrial & Specialty segments contributed approximately 64% and 36%, 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 SMT, 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.
2024 Corporate Activity
•Portfolio Optimization - On September 1, 2024, we agreed to sell our flexographic printing plate business, MacDermid Graphics Solutions, for approximately $325 million. MacDermid Graphics Solutions constitutes substantially all of our Graphics Solutions business within our Industrial & Specialty segment. The transaction is expected to close in the first quarter of 2025, subject to customary closing conditions and adjustments.
•Improved Balance Sheet through Debt and Interest Rate Reduction - In October 2024, we completed the syndication of $1.04 billion of new term loans B-3 which resulted in an interest rate reduction of 25 basis points to SOFR plus a spread 1.75% per annum. In connection with this repricing, we fully paid down our $1.14 billion term loans B-2, therefore reducing our borrowings under the Credit Agreement by $100 million. The net proceeds of the new term loans and cash on hand were used to prepay in full our term loans B-2.
•Cash Dividends - During the year ended December 31, 2024, approximately $78.2 million was returned to our stockholders in the form of cash dividends.
26
Acquisitions
We may pursue targeted and opportunistic acquisitions in our existing or adjacent end-markets that seek to strengthen our current businesses, expand and diversify our product offerings, and enhance our growth and strategic position. 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 2024, approximately 77% of our net sales originated outside of the U.S. and were denominated in numerous currencies, including the euro and Chinese yuan. 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 2024 net sales performance by approximately 2%.
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 2024 Annual Report for a detailed discussion of the application of these and other accounting policies.
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 using either a qualitative or quantitative approach. Our reporting units are determined based upon our organizational structure in place at the date of the goodwill impairment test.
We may elect to first assess qualitative factors to determine whether it is more likely than not (greater than 50%) that the fair value of a reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors, and overall financial performance of the reporting units. If we do not perform a qualitative assessment, or if the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative test.
For the quantitative test, the Company tests for impairment by comparing the fair value of a reporting unit to its carrying value. 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. The cash flow model utilized in the goodwill impairment test involves 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
27
goodwill impairment loss is calculated as the difference between these amounts, limited to the amount of goodwill allocated to the reporting unit.
In 2024, the estimated fair value of our reporting units was considered to be substantially in excess of their respective carrying value.
See Note 8, Goodwill and Intangible Assets, Net, to the Consolidated Financial Statements included in this 2024 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 2024 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
28
measures to their most comparable GAAP financial measures included in this 2024 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 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" to Adjusted EBITDA and more information about the adjustments made, see Note 22, Segment Information, to the Consolidated Financial Statements included in this 2024 Annual Report.
29
Results of Operations
| Change - 2024 vs 2023 | Change - 2023 vs 2022 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2024 | 2023 | Reported | Constant Currency | Organic | 2022 | Reported | Constant Currency | Organic | |||||||||||||||
| Net sales | $ | 2,456.9 | $ | 2,333.2 | 5% | 7% | 4% | $ | 2,549.4 | (8)% | (7)% | (5)% | ||||||||||||
| Cost of sales | 1,421.2 | 1,414.7 | 0% | 2% | 1,596.7 | (11)% | (10)% | |||||||||||||||||
| Gross profit | 1,035.7 | 918.5 | 13% | 14% | 952.7 | (4)% | (2)% | |||||||||||||||||
| Gross margin | 42.2 | % | 39.4 | % | 280 bps | 270 bps | 37.4 | % | 200 bps | 220 bps | ||||||||||||||
| Operating expenses | 691.8 | 744.9 | (7)% | (6)% | 627.4 | 19% | 19% | |||||||||||||||||
| Operating profit | 343.9 | 173.6 | 98% | (nm) | 325.3 | (47)% | (41)% | |||||||||||||||||
| Operating margin | 14.0 | % | 7.4 | % | 660 bps | 680 bps | 12.8 | % | (540) bps | (480) bps | ||||||||||||||
| Other expense, net | (56.2) | (44.5) | 26% | (53.3) | (16)% | |||||||||||||||||||
| Income tax expense | (44.8) | (13.0) | 244% | (85.8) | (85)% | |||||||||||||||||||
| Net income from continuing operations | 242.9 | 116.1 | (nm) | 186.2 | (38)% | |||||||||||||||||||
| Income from discontinued operations, net of tax | 1.6 | 2.1 | (26)% | 1.8 | 19% | |||||||||||||||||||
| Net income | $ | 244.5 | $ | 118.2 | (nm) | $ | 188.0 | (37)% | ||||||||||||||||
| Net income margin | 10.0 | % | 5.1 | % | 490 bps | 7.4 | % | (230) bps | ||||||||||||||||
| Adjusted EBITDA | $ | 534.7 | $ | 482.3 | 11% | 13% | $ | 526.6 | (8)% | (6)% | ||||||||||||||
| Adjusted EBITDA margin | 21.8 | % | 20.7 | % | 110 bps | 120 bps | 20.7 | % | 0 bps | 20 bps |
(nm) Calculation not meaningful.
30
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
Net Sales
Net sales for 2024 increased 5% on a reported basis, 7% on a constant currency basis and 4% on an organic basis. Electronics' consolidated results were positively impacted by $59.7 million of pass-through metals pricing and $8.1 million of acquisitions and Industrial & Specialty's consolidated results were positively impacted by $0.5 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and organic net sales growth:
| Year ended December 31, | % Change | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2024 | 2023 | Reported Net Sales Growth | Impact of Currency | Constant Currency | Pass-Through Metals Pricing | Acquisitions | Organic Net Sales Growth | |||||||||||
| Electronics: | |||||||||||||||||||
| Assembly Solutions | $ | 782.8 | $ | 726.1 | 8% | 2% | 10% | (8)% | —% | 1% | |||||||||
| Circuitry Solutions | 470.7 | 424.3 | 11% | 1% | 12% | —% | —% | 12% | |||||||||||
| Semiconductor Solutions | 307.9 | 264.3 | 17% | 1% | 18% | —% | (3)% | 14% | |||||||||||
| Total | $ | 1,561.4 | $ | 1,414.7 | 10% | 1% | 12% | (4)% | (1)% | 7% | |||||||||
| Industrial & Specialty: | |||||||||||||||||||
| Industrial Solutions | $ | 666.4 | $ | 699.0 | (5)% | 2% | (2)% | —% | 0% | (2)% | |||||||||
| Graphics Solutions | 146.2 | 142.7 | 2% | 1% | 3% | —% | —% | 3% | |||||||||||
| Energy Solutions | 82.9 | 76.8 | 8% | 0% | 8% | —% | —% | 8% | |||||||||||
| Total | $ | 895.5 | $ | 918.5 | (3)% | 2% | (1)% | —% | 0% | (1)% | |||||||||
| Total | $ | 2,456.9 | $ | 2,333.2 | 5% | 2% | 7% | (3)% | 0% | 4% |
NOTE: Totals may not sum due to rounding.
Electronics' net sales for 2024 increased 10% on a reported basis, 12% on a constant currency basis and 7% on an organic basis.
•Assembly Solutions: net sales increased 8% on a reported basis and 1% on an organic basis. Pass-through metals pricing had a positive impact of 8% on reported net sales. Foreign exchange had a negative impact of 2% on reported net sales. The increase in organic net sales was primarily due to demand improvement in consumer, mobile and computer end markets, offset by weakness in broader industrial and automotive end markets.
•Circuitry Solutions: net sales increased 11% on a reported basis and 12% on an organic basis. Foreign exchange had a negative impact of 1% on reported net sales. The increase in organic net sales was primarily due to increased demand in the AI and data center end markets, electric vehicles in China and the mobile phone end market.
•Semiconductor Solutions: net sales increased 17% on a reported basis and 14% on an organic basis. The reacquired ViaForm Distribution Rights and the Kuprion Acquisition had a positive impact of 3% on reported net sales. Foreign exchange had a negative impact of 1% on reported net sales. The increase in organic net sales was primarily due to increased demand for wafer level packaging products in Asia and growth from new customers in power electronics. The prior year was negatively impacted by lower ViaForm sales as we transitioned from our prior distributor.
Industrial & Specialty's net sales for 2024 decreased 3% on a reported basis, 1% on a constant currency basis and 1% on an organic basis.
•Industrial Solutions: net sales decreased 5% on a reported basis and 2% on an organic basis. Acquisitions had an immaterial impact on reported net sales. Foreign exchange had a negative impact of 2% on reported net sales. The decrease in organic net sales was primarily due to continued lower demand in the automotive end market, lower commodity surcharges in 2024 when compared to 2023 as well as demand softness in construction and industrial end markets. Both periods included an equipment sale for a new production line under a multi-year chemistry sales agreement with an automotive customer.
31
•Graphics Solutions: net sales increased 2% on a reported basis and 3% on an organic basis. Foreign exchange had a negative impact of 1% on reported net sales. The increase in organic net sales was primarily due to increased demand for flexographic plates and new business in Latin America partially offset by lower newspaper net sales.
•Energy Solutions: net sales increased 8% on a reported basis and 8% on an organic basis. Foreign exchange had an immaterial impact on reported net sales. The increase in organic net sales was primarily due to price improvement and a continued increase in drilling and energy production activity from higher utilization rates.
Gross Profit
| Year Ended December 31, | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2024 | 2023 | Reported | Constant Currency | |||||||
| Gross profit: | |||||||||||
| Electronics | $ | 652.5 | $ | 558.2 | 17% | 18% | |||||
| Industrial & Specialty | 383.2 | 360.3 | 6% | 8% | |||||||
| Total | $ | 1,035.7 | $ | 918.5 | 13% | 14% | |||||
| Gross profit margin: | |||||||||||
| Electronics | 41.8 | % | 39.5 | % | 230 bps | 220 bps | |||||
| Industrial & Specialty | 42.8 | % | 39.2 | % | 360 bps | 360 bps | |||||
| Total | 42.2 | % | 39.4 | % | 280 bps | 270 bps |
Electronics' gross profit for 2024 increased 17% on a reported basis and 18% on a constant currency basis. The constant currency increase in gross profit was primarily driven by higher net sales, favorable product mix from growth in higher margin products, particularly in Asia, and lower raw material costs. The increase in gross margin was primarily due to favorable product mix from growth in higher margin products, the recaptured margin on ViaForm Distributions Rights and lower raw material costs.
Industrial & Specialty's gross profit for 2024 increased 6% on a reported basis and 8% on a constant currency basis. The constant currency increase in gross profit was primarily driven by lower raw material costs in the Industrial Solutions business combined with higher net sales in the Graphics Solutions and Energy Solutions businesses. The increase in gross margin was primarily due to growth in our higher margin Energy Solutions business, favorable product mix and lower commodity surcharge-based revenue in our Industrial Solutions business.
Operating Expenses
| Year ended December 31, | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2024 | 2023 | Reported | Constant Currency | |||||||
| Selling, technical, general and administrative | $ | 628.8 | $ | 596.8 | 5% | 6% | |||||
| Research and development | 63.0 | 68.1 | (8)% | (7)% | |||||||
| Goodwill impairment | — | 80.0 | (nm) | (nm) | |||||||
| Total | $ | 691.8 | $ | 744.9 | (7)% | (6)% | |||||
| Operating expenses as % of net sales | |||||||||||
| Selling, technical, general and administrative | 25.6 | % | 25.6 | % | 0 bps | (20) bps | |||||
| Research and development | 2.6 | % | 2.9 | % | (30) bps | (40) bps | |||||
| Goodwill impairment | — | % | 3.4 | % | (nm) | (nm) | |||||
| Total | 28.2 | % | 31.9 | % | (370) bps | (400) bps |
(nm) Calculation not meaningful.
32
During the third quarter of 2023, we recorded an impairment charge in our Industrial & Specialty segment of $80.0 million related to our Graphics Solutions reporting unit. See Note 8, Goodwill and Intangible Assets, Net, to the Consolidated Financial Statements for further information.
Operating expenses for 2024 decreased 7% on a reported basis and 6% on a constant currency basis. Excluding the goodwill impairment charge discussed above, operating expenses for 2024 increased 4% on a reported basis and 5% on a constant currency basis. The constant currency increase was primarily driven by $19.8 million of higher incentive compensation costs, primarily due to higher accruals associated with increased expectations for strong full year financial results, $12.2 million of costs related to the MGS Transaction, higher personnel costs and $3.9 million of research and development costs associated with contingent consideration for the Kuprion Acquisition in the first quarter of 2024. This was partially offset by a 2023 expense of $15.7 million for research and development costs associated with the purchase accounting related to the Kuprion Acquisition. See Note 4, Acquisitions, to the Consolidated Financial Statements for further information regarding the Kuprion Acquisition research and development costs.
Other (Expense) Income, net
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (dollars in millions) | 2024 | 2023 | ||||
| Interest expense, net | $ | (56.3) | $ | (49.3) | ||
| Foreign exchange gains | 25.1 | 7.9 | ||||
| Other expense, net | (25.0) | (3.1) | ||||
| Total | $ | (56.2) | $ | (44.5) |
Interest expense, net
Interest expense, net increased $7.0 million primarily due to a higher effective interest rate on our term loans B-2 (which were outstanding from December 18, 2023 through October 15, 2024 when the term loans B-2 were fully prepaid) when considering the impact of our interest rate swaps and cross currency swaps, partially offset by higher interest income.
Foreign exchange gains
For the year ended December 31, 2024, the fluctuations in foreign exchange gains were primarily driven by the remeasurement of intercompany loans.
Other expense, net
Other expense, net for 2024 included an $11.4 million impairment of an available-for-sale debt security, $11.0 million of net losses associated with metals derivative contracts ($15.4 million of realized losses and $4.4 million of unrealized gains) and $2.6 million of charges due to highly inflationary accounting for our operations in Turkey, partially offset by $0.2 million of debt refinancing gains related to the prepayment of our then existing term loans B-2. See Note 12, Debt, to the Consolidated Financial Statements for further discussion of the debt refinancing costs.
Other expense, net for 2023 included $7.0 million of charges due to highly inflationary accounting for our operations in Turkey, $2.3 million of debt refinancing costs related to the prepayment of our then existing term loans B-1 and term loans A and $0.1 million of net losses associated with metals derivative contracts ($1.3 million of realized losses and $1.2 million of unrealized gains).
The metal derivative contracts primarily relate to inventory associated with pass-through metals pricing in our Assembly Solutions business and are intended to mitigate the impact associated with fixed price agreements with our customers or commodity price movement after inventory is purchased on Gross Profit. See Note 13, Financial Instruments, to the Consolidated Financial Statements for further discussion of these derivative instruments.
Income Tax
The income tax expense for 2024 totaled $44.8 million, as compared to $13.0 million in 2023. Our tax expense for 2024 was lower than the U.S. statutory tax rate primarily driven by a continued U.S. benefit related to claiming foreign tax credits consistent with our election in the fourth quarter of 2023, release of valuation allowances and deductions for FDII, with offsets from withholding taxes, tax attribute expirations and the impact of changes to the geographical mix of earnings.
33
The rate for 2024 includes a benefit associated with the release of valuation allowances of $40.8 million previously recorded against certain U.K. tax attribute carryforwards, primarily consisting of net operating loss carryforwards and interest carryforwards. The valuation allowances were released as the Company expects improved profitability in its U.K. business and a shift to a three-year cumulative income position. The Company determined there was sufficient positive, objectively verifiable evidence to conclude that it is more likely than not that, as of December 31, 2024, select U.K. net deferred tax assets will be realized. These expectations are based on actual results, management's assessment of projected future taxable income, and expected utilization of net operating losses and tax carryforwards.
During the third quarter of 2024, an internal restructuring of the Graphics business was completed which resulted in the recognition of a capital gain of $208 million. This gain was offset by capital losses generated in 2024 totaling $10.1 million and capital loss carryforwards of $198 million. The capital gain provided income of the appropriate character to support the release of a valuation allowance on the amount of the capital loss carryforward utilized. The remaining unused capital loss carryforward with a full valuation allowance expired at the close of 2024. The capital gain also resulted in a higher interest expense deduction and consequentially a lower deduction for FDII and lower utilization of certain foreign tax credits before expiration. In addition, the gain on the internal restructuring resulted in a step-up in tax basis and the Company recorded a deferred tax asset of $22.5 million on the excess of stock tax basis over book basis due to subsequent held for sale classification. As of the balance sheet date there is no objectively verifiable evidence supporting income of appropriate character to realize this tax benefit, therefore a valuation allowance has been recorded against this deferred tax asset. Due to the status of the MGS Transaction it is reasonably possible the status of this deferred tax assets and related valuation allowance are subject to change due to one or more future confirming events.
During 2024, the Company finalized the 2023 consolidated U.S. federal income tax return along with prior years amended federal corporate income tax returns related to crediting foreign taxes including the return-to-provision true-up of foreign tax credits, valuation allowances and prior year one-time benefit.
The income tax expense for 2023 was lower than the U.S. statutory rate mainly due to a benefit of $34.2 million related to changing an election to credit foreign taxes from our previous position of deducting foreign taxes. This is comprised of a $37.3 million impact of amending prior U.S. tax returns offset by $3.1 million from the increase to the valuation allowances on foreign tax credit carryforwards. In addition, the election to credit foreign taxes for the fiscal 2023 year resulted in an incremental $8.2 million of tax expense reduction.
For additional information see Note 11, Income Taxes, to the Consolidated Financial Statements included in this 2024 Annual Report.
34
Segment Adjusted EBITDA Performance
| Year Ended December 31, | Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2024 | 2023 | Reported | Constant Currency | |||||||
| Net income: | |||||||||||
| Total | $ | 244.5 | $ | 118.2 | 107% | ||||||
| Adjusted EBITDA: | |||||||||||
| Electronics | $ | 361.5 | $ | 317.7 | 14% | 16% | |||||
| Industrial & Specialty | 173.2 | 164.6 | 5% | 8% | |||||||
| Total | $ | 534.7 | $ | 482.3 | 11% | 13% | |||||
| Net income margin: | |||||||||||
| Total | 10.0 | % | 5.1 | % | 490 bps | ||||||
| Adjusted EBITDA margin: | |||||||||||
| Electronics | 23.1 | % | 22.5 | % | 60 bps | 80 bps | |||||
| Industrial & Specialty | 19.3 | % | 17.9 | % | 140 bps | 160 bps | |||||
| Total | 21.8 | % | 20.7 | % | 110 bps | 120 bps |
Electronics' Adjusted EBITDA for 2024 increased 14% on a reported basis and 16% on a constant currency basis. The constant currency increase was primarily driven by higher gross profits related to favorable product mix and growth in the Circuitry and Semiconductor Solutions businesses.
Industrial & Specialty's Adjusted EBITDA for 2024 increased 5% on a reported basis and 8% on a constant currency basis. The constant currency increase was primarily driven by higher gross profits related to lower raw material costs and growth in our higher margin Energy Solutions business.
See Note 22, Segment Information, to the Consolidated Financial Statements for the reconciliation of "Net income" to Adjusted EBITDA.
Comparison of Fiscal Years 2023 and 2022
For the comparison of fiscal years 2023 and 2022, see "Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022" in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2023 Annual Report on Form 10-K and incorporated by reference into this 2024 Annual Report.
Liquidity and Capital Resources
Our primary sources of liquidity during 2024 were the proceeds from the syndication of our new term loans B-3 of approximately $1.04 billion as well as available cash generated from operations. Our primary uses of cash and cash equivalents were to prepay approximately $1.14 billion of debt outstanding, pay cash dividends and fund operations including working capital and capital expenditures. Our first significant debt principal payment of approximately $800 million is related to the maturity of our 3.875% USD Notes due 2028. In the fourth quarter of 2024, 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.
For the full year 2025, we expect our capital expenditures to be approximately $65.0 million. 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.
35
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 2024, approximately 77% 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 with available funds generated by the many subsidiaries through which we conduct business and cost-efficient access to those funds. 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 $359 million of cash and cash equivalents at December 31, 2024, $224 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:
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2024 | 2023 | 2022 | ||||||||
| Cash provided by operating activities | $ | 362.0 | $ | 333.6 | $ | 295.9 | |||||
| Cash used in investing activities | $ | (73.8) | $ | (250.2) | $ | (75.2) | |||||
| Cash used in financing activities | $ | (206.6) | $ | (58.7) | $ | (275.6) |
Year Ended December 31, 2024 compared to Year Ended December 31, 2023
Operating Activities
The increase in net cash flows provided by operating activities of $28.4 million was primarily driven by higher cash operating profits (net income adjusted for non-cash items) partially offset by higher levels of working capital.
Investing Activities
In 2024, we paid approximately $15.7 million of higher capital expenditures compared to 2023 due to increased activity on several multi-year growth projects in 2024 as these projects neared completion. In 2023, we paid approximately $193 million in connection with the reacquired ViaForm Distribution Rights and $15.9 million in connection with the Kuprion Acquisition.
Financing Activities
In October 2024, we received proceeds of approximately $1.04 billion from the syndication of our new term loans B-3 which were used to prepay our then outstanding $1.14 billion term loans B-2 reducing gross debt by $100 million. During 2024, we also paid $78.2 million of cash dividends on shares of our common stock and $7.6 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."
In the second quarter of 2023, we borrowed $150 million of incremental term loans A under our senior credit facility to finance the reacquired ViaForm Distribution Rights. In December 2023, we received proceeds of approximately $1.15 billion from the syndication of our term loans B-2 which were used to prepay our then outstanding $1.11 billion term loans B-1 and $150 million term loans A reducing gross debt by $105 million. During 2023, we also paid $77.4 million of cash dividends on shares of our common stock and $7.7 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."
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 7.0% and 3.1% for our Domestic and Foreign Pension Plans, respectively, to determine our
36
net periodic pension expense for 2024. 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 5.6% and 3.1% were established for the Domestic Pension Plan and Foreign Pension Plans, respectively, at December 31, 2024, compared to rates of 5.0% and 3.1% established for those respective plans at December 31, 2023. 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 $0.7 million and decrease the pension benefit obligation by approximately $14.0 million, whereas a one percent decrease in the discount rate would decrease the pension plan expense by approximately $0.9 million and increase the pension benefit obligation by approximately $16.7 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 95% of plan investments for liability-matching, 3% for long-term growth, and 2% for near-term benefit payments. The weighted average asset allocation of the Domestic Pension Plan was 95% fixed income holdings, 3% equity securities and derivatives and 2% cash at December 31, 2024.
The Domestic Pension Plans were overfunded by $2.3 million at December 31, 2024 compared to underfunded by $8.2 million at December 31, 2023. The increase in the funding position was primarily driven by $11.0 million of actuarial gains due to changes in plan assumptions and experience and a $7.1 million return on plan assets partially offset by $8.4 million of interest costs.
The Foreign Pension Plans were underfunded by $12.9 million at December 31, 2024 compared to $14.8 million at December 31, 2023.
We are not required to make any material plan contributions in 2025. 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, 2024, we had $1.82 billion of indebtedness, net of unamortized discounts and debt issuance costs of $14.8 million, which primarily included:
•$1.04 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 $390 million at December 31, 2024 (net of $7.0 million of stand-by letters of credit which reduce our borrowing capacity).
Covenants
At December 31, 2024, we were in compliance with the debt covenants contained in the Credit Agreement and the indenture governing our 3.875% USD Notes due 2028.