ELEMENT SOLUTIONS INC This Management's Discussion and Analysis of Financial Condition and Results of Operations section should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and related notes included in this Quarterly Report, and the Consolidated Financial Statements, related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations section and other disclosures contained in our 2019 Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed in "Forward-Looking Statements" and Part II, Item 1A, "Risk Factors" of this Quarterly Report, and in Part I, Item 1A, "Risk Factors" of our 2019 Annual Report. Overview Our BusinessElement Solutions Inc , incorporated inDelaware inJanuary 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, the innovative solutions of our businesses enable customers' manufacturing processes in several key industries, including electronic circuitry, semiconductor, communications infrastructure, automotive systems, industrial surface finishing, consumer packaging and offshore energy. Substantially all of our businesses' products are consumed by our customers as part of their production process, providing us with reliable and recurring revenue streams as the products are replenished in order to continue production. Our customers use our innovation as competitive advantages, relying on us to help them navigate through fast-paced, high-growth markets. Our product development and product extensions are expected to continue to drive sales growth in both new and existing markets, while expanding margins, by continuing to offer high customer value propositions. We generate revenue through the formulation and sale of our businesses' chemistry solutions by our extensive global network of specially-trained scientists and engineers. While our chemistries typically represent only a small portion of our customers' costs, they are integral to our customers' manufacturing processes and overall product performance. We leverage these close relationships with our customers and OEMs to execute our growth strategy and identify opportunities for new products. These new products are developed and created by drawing upon our intellectual property portfolio and technical expertise. We believe that our customers place significant value on the consistency and quality of our brands, which we capitalize on through significant market share, customer loyalty and supply chain access. Lastly, operational risks and switching costs make it difficult for our customers to change suppliers which allows us to retain customers and maintain our market positions. Our Operations Our operations are organized into two segments: Electronics and Industrial & Specialty, which are each described below: Electronics - The Electronics segment researches, formulates and delivers specialty chemicals and materials for all types of electronics hardware, from complex printed circuit board designs to new interconnection materials. In mobile communications, computers, automobiles and aerospace equipment, Electronics' 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 physical circuitry pathways and its "assembly materials," such as solders, pastes, fluxes and adhesives, join those pathways together. 18 --------------------------------------------------------------------------------
The segment provides specialty chemical solutions through the following businesses: Assembly Solutions
As a global supplier of solder technologies, fluxes, cleaners and other
attachment materials for the electronics assembly industry, we develop
innovative materials that join electronic circuits in high volume device
manufacturing. Our high-performing interconnect materials are used to
assemble consumer electronics from circuit boards, discrete electronic
components, connectors and integrated circuit substrates.
Circuitry Solutions As a global supplier of chemical formulations to the electronics industry,
we design and manufacture proprietary liquid chemical processes ("baths")
used by our customers to manufacture printed circuit boards. Our product
portfolio is focused on specialized consumable chemical processes, such as
surface treatments, circuit formation, primary metallization, electroplate
and final finishes.
Semiconductor Solutions As a global supplier to the semiconductor industry, we provide advanced
copper interconnects, die attachment, wafer bump processes and photomask
technologies to our customers for integrated circuit fabrication and
semiconductor packaging.
Industrial & Specialty - The Industrial & Specialty segment provides customers
with Industrial Solutions, which include chemical systems that protect and
decorate metal and plastic surfaces; Graphics Solutions, which include
consumable chemicals that enable printing image transfer on flexible packaging
materials; and Energy Solutions, which include chemistries used in water-based
hydraulic control fluids in offshore energy production. Industrial & Specialty's
fully consumable products are used in the aerospace, automotive, construction,
consumer electronics, consumer packaged goods and oil and gas production end
markets.
The segment provides specialty chemical solutions through the following
businesses:
Industrial Solutions As a global supplier of industrial metal and plastic finishing chemistries, we
primarily design and manufacture chemical systems that protect and decorate
surfaces. Our high-performance functional coatings improve resistance to wear
and tear, such as hard chrome plating of shock absorbers for cars or provide
corrosion resistance for appliance parts. Our decorative performance coatings
apply finishes for parts in various end markets such as automotive interiors
or jewelry surfaces. As part of our broader sustainable solutions platform, we
also provide both chemistry and equipment for turnkey wastewater treatment and
recycle and reuse solutions.
Graphics Solutions As a supplier of consumable materials used to transfer images on to consumer
packaging materials, our products are used to improve print quality and
printing productivity. We produce and market photopolymers through an
extensive line of flexographic plates that are used in the consumer packaging
and printing industries.
Energy Solutions As a global supplier of specialized fluids to the offshore energy industry, we
produce water-based hydraulic control fluids for major oil and gas companies
and drilling contractors to be used in offshore deep-water production and
drilling applications.
Recent Developments
Senior Notes Refinancing
During the third quarter of 2020, we completed a private offering of
$800 million aggregate principal amount of 3.875% USD Notes due 2028 and the
subsequent full redemption of our 5.875% USD Notes due 2025. The 200 basis point
reduction in interest rate reduces our annual interest payments by $16.0
million . In connection with the redemption, we expensed $45.7 million ,
consisting of a make-whole premium of $33.6 million and the write-off of debt
issuance costs and original issue discount of $12.1 million , which was recorded
in "Other (expense) income, net" in the Consolidated Statement of Operations.
Launch of MacDermid Envio Solutions
During the third quarter of 2020, we launched MacDermid Envio Solutions, a new
business within our Industrial & Specialty segment which focuses on helping
customers to reduce their environmental impact through proprietary chemistry and
equipment for turnkey wastewater treatment and the recovery of metals and other
valuable materials.
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COVID-19 Update
In December 2019 , a novel strain of coronavirus was reported in Wuhan, China
which has since spread throughout the world. In an effort to contain COVID-19 or
slow its spread, governments in multiple countries have enacted various measures
in response to the pandemic. These actions and the global health crisis caused
by COVID-19 have negatively impacted, and continue to negatively impact,
business activity across the globe. We also took certain proactive actions,
including travel restrictions and heightened sanitary and social distancing
policies at our locations around the world, to protect the health and safety of
our employees. These actions resulted in a decrease of discretionary expenses,
including travel and entertainment expenses, as health and safety protocols were
adopted worldwide. In addition, we implemented certain actions to lower our cost
structure, including temporary employee salary reductions and furloughs, and
other actions intended to mitigate the economic impact of COVID-19 and preserve
capital and liquidity.
Due to the impact of the pandemic and related actions, we experienced weaker
demand during the second quarter of 2020 as compared to the same period in 2019,
but overall market conditions improved sequentially in the third quarter of
2020, primarily in the automobile end market. The ultimate extent of the impact
of COVID-19 on our business or our future results of operations, financial
condition, expected cash flows and/or stock price is currently unknown and will
depend on numerous and evolving factors that are highly uncertain, vary by
market and cannot be accurately predicted or quantified at this time, including
the duration and spread of the pandemic, new information concerning its
transmission and severity, evolving macroeconomic factors, actions taken or that
might be taken to contain or reduce its repercussions and the general impact of
the pandemic on our customers, employees, suppliers, vendors, stakeholders and
operations, as well as the demand for our products and services.
Repurchases of Common Stock
During the three months ended September 30, 2020 , we repurchased approximately
0.2 million shares of our common stock for approximately $2.6 million , at an
average price of approximately $11.24 per share. The remaining authorization
under our previously-announced $750 million share repurchase program was
approximately $207 million at September 30, 2020 . On October 6, 2020 , we
repurchased 1.5 million shares of our common stock at $11.50 per share or an
aggregate purchase price of approximately $17.3 million .
Recent Accounting Pronouncements
A summary of recent accounting pronouncements is included in Note 2, Recent
Accounting Pronouncements, to our unaudited Condensed Consolidated Financial
Statements included in this Quarterly 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 each of 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, or 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 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
20
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measures to their most comparable GAAP financial measures included in this
Quarterly Report and not to rely on any single financial measure to evaluate our
business.
Constant Currency
We disclose operating results, from net sales through operating profit and
Adjusted EBITDA, on a constant currency basis by adjusting 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 reported 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 (earnings before interest, provision for
income taxes, depreciation and amortization), 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 (loss) attributable to common stockholders"
to Adjusted EBITDA, and more information about the adjustments made, see Note
14, Segment Information, to the unaudited Condensed Consolidated Financial
Statements included in this Quarterly Report.
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Results of Operations
Three and nine months ended September 30, 2020 as compared to the three and nine
months ended September 30, 2019
Three Months Ended September
30, % Change Nine Months Ended September 30 , % Change
(dollars in millions) 2020 2019 Reported Constant Currency Organic 2020 2019 Reported Constant Currency Organic
Net sales $ 477.5 $ 464.7 3% 2% (2)% $ 1,317.1 $ 1,381.2 (5)% (3)% (7)%
Cost of sales 274.0 259.0 6% 5% 753.8 784.2 (4)% (3)%
Gross profit 203.5 205.7 (1)% (1)% 563.3 597.0 (6)% (5)%
Gross margin 42.6 % 44.3 % (170) bps (160) bps 42.8 % 43.2 % (40) bps (50) bps
Operating expenses 144.9 138.8 4% 4% 410.6 429.5 (4)% (4)%
Operating profit 58.6 66.9 (12)% (12)% 152.7 167.5 (9)% (7)%
Operating margin 12.3 % 14.4 % (210)bps (200)bps 11.6 % 12.1 % (50)bps (40)bps
Other expense, net (69.7) (15.7) (nm) (143.2) (122.3) 17%
Income tax benefit (expense) 47.3 (57.2) (nm) 37.4 (40.0) (nm)
Net income (loss) from
continuing operations 36.2 (6.0) (nm) 46.9 5.2 (nm)
(Loss) income from
discontinued operations, net
of tax (0.2) (0.9) (78)% (1.1) 13.2 (nm)
Net income (loss) $ 36.0 $ (6.9) (nm) $ 45.8 $ 18.4 (nm)
Adjusted EBITDA $ 101.8 $ 115.4 (12)% (11)% $ 296.7 $ 314.5 (6)% (4)%
Adjusted EBITDA margin 21.3 % 24.8 % (350)bps (330)bps 22.5 % 22.8 % (30)bps (10)bps
(nm) Calculation not meaningful.
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Net Sales
Net sales in the third quarter of 2020 increased by 3% on a reported basis, 2%
on a constant currency basis and decreased 2% on an organic basis. Electronics'
consolidated results were positively impacted by $13.6 million of acquisitions
and $4.3 million of pass-through metals pricing, and Industrial & Specialty's
consolidated results were positively impacted by $3.9 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and
organic net sales growth:
Three Months Ended September
30, % Change
Reported Net Impact of
(dollars in millions) 2020 2019 Sales Growth Currency Constant Currency Pass-Through Metals Pricing Acquisitions Organic Net Sales Growth
Electronics:
Assembly Solutions $ 155.0 $ 137.3 13% 0% 13% (3)% (8)% 1%
Circuitry Solutions 101.0 102.4 (1)% (1)% (3)% -% -% (3)%
Semiconductor Solutions 50.8 40.3 26% (1)% 25% -% (6)% 19%
Total $ 306.8 $ 280.0 10% (1)% 9% (2)% (5)% 2%
Industrial & Specialty:
Industrial Solutions $ 121.0 $ 125.5 (4)% 0% (4)% -% (3)% (7)%
Graphics Solutions 33.6 40.1 (16)% 1% (16)% -% -% (16)%
Energy Solutions 16.1 19.1 (16)% 2% (14)% -% -% (14)%
Total $ 170.7 $ 184.7 (8)% 0% (7)% -% (2)% (10)%
Total $ 477.5 $ 464.7 3% 0% 2% (1)% (4)% (2)%
NOTE: Totals may not sum due to rounding.
Electronics' net sales in the third quarter of 2020 increased 10% on a reported
basis and 2% on an organic basis.
•Assembly Solutions: net sales increased 13% on a reported basis and 1% on an
organic basis. The Kester Acquisition and pass through metals pricing had a
positive impact on reported revenue of 8% and 3% respectively. Foreign exchange
did not have a material impact on reported revenue. The increase in organic net
sales was primarily due to recovery in the automotive end market from COVID-19
weakness, which included increased global customer activity.
•Circuitry Solutions: net sales declined 1% on a reported basis and 3% on an
organic basis. Foreign exchange had a positive impact of 1% on reported revenue.
The decrease in organic net sales was primarily due to prior-year strength in
high-end mobile markets in Korea , partially offset by share gains and recovery
from COVID-19 weakness in China and continued demand for memory disk products.
•Semiconductor Solutions: net sales increased 26% on a reported basis and 19% on
an organic basis. Foreign exchange and the Kester Acquisition had a positive
impact on reported revenue of 1% and 6%, respectively. The increase in organic
net sales was primarily due to higher net sales of advanced plating chemistries
containing precious metals and continued strength in products used for 5G
telecom infrastructure.
Industrial & Specialty's net sales in the third quarter of 2020 declined 8% on a
reported basis and 10% on an organic basis.
•Industrial Solutions: net sales declined 4% on a reported basis and 7% on an
organic basis. The DMP Acquisition had a positive 3% impact on reported revenue.
Foreign exchange did not have a material impact on reported revenue. The
decrease in organic net sales was primarily due to COVID-19-related demand
weakness in European automotive, global consumer durables, aerospace and oil &
gas end markets. Overall, market conditions improved in the later part of the
quarter, primarily in Asia and the Americas automotive end markets.
•Graphics Solutions: net sales declined 16% on a reported and organic basis.
Foreign exchange had a negative impact of 1% on reported revenue. The decrease
in organic net sales was primarily due to lower volumes of ancillary products,
such as screen printing and newspaper plates as well as reductions of product
offerings and delayed marketing campaigns by CPG companies.
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•Energy Solutions: net sales declined 16% on a reported basis and 14% on an
organic basis. Foreign exchange had a negative impact of 2% on reported revenue.
The decrease in organic net sales was primarily due to oil demand weakness
leading to decreased production volumes in Europe and Asia .
Year to date, net sales decreased by 5% on a reported basis, 3% on a constant
currency basis and 7% on an organic basis. Electronics' consolidated results
were positively impacted by $42.5 million of acquisitions and negatively
impacted by $3.8 million of pass-through metals pricing, and Industrial &
Specialty's consolidated results were positively impacted by $3.9 million of
acquisitions.
The following table reconciles GAAP net sales growth to constant currency and
organic net sales growth:
Nine Months Ended September 30, % Change
Reported Net Impact of
(dollars in millions) 2020 2019 Sales Growth Currency Constant Currency Pass-Through Metals Pricing Acquisitions Organic Net Sales Growth
Electronics:
Assembly Solutions $ 393.2 $ 407.7 (4)% 1% (2)% 1% (9)% (10)%
Circuitry Solutions 286.7 285.4 0% 1% 1% -% -% 1%
Semiconductor Solutions 149.0 120.7 23% 0% 23% -% (6)% 17%
Total $ 828.9 $ 813.8 2% 1% 3% 0% (5)% (2)%
Industrial & Specialty:
Industrial Solutions $ 330.5 $ 396.0 (17)% 1% (15)% -% (1)% (16)%
Graphics Solutions 106.8 113.1 (6)% 2% (4)% -% -% (4)%
Energy Solutions 50.9 58.3 (13)% 3% (9)% -% -% (9)%
Total $ 488.2 $ 567.4 (14)% 2% (12)% -% (1)% (13)%
Total $ 1,317.1 $ 1,381.2 (5)% 1% (3)% 0% (3)% (7)%
NOTE: Totals may not sum due to rounding.
Year to date, Electronics' net sales increased 2% on a reported basis and
declined 2% on an organic basis.
•Assembly Solutions: net sales declined 4% on a reported basis and 10% on an
organic basis. The Kester Acquisition had a positive impact on reported revenue
of 9%. Pass through metals pricing and foreign exchange had a negative impact on
reported revenue of 1%. The decrease in organic net sales was primarily due to
weak demand related to COVID-19 production slowdowns in all regions we serve,
which impacted key end-markets such as automotive and consumer electronics, and
the partial closure of our India manufacturing facility in the second quarter of
2020.
•Circuitry Solutions: net sales remained relatively flat on a reported basis and
increased 1% on an organic basis. Foreign exchange had a negative impact of 1%
on reported revenue. The increase in organic net sales was primarily due to
strong demand from memory disk customers and continued strength in 5G-related
products. The first quarter of 2020 was impacted by COVID-19-related demand
weakness in China .
•Semiconductor Solutions: net sales increased 23% on a reported basis and 17% on
an organic basis. The Kester Acquisition had a positive impact on reported
revenue of 6%. Foreign exchange did not have a material impact on reported
revenue. The increase in organic net sales was primarily due to growth in
advanced packaging and increased demand for advanced assembly products, driven
by 5G telecom infrastructure and data center markets.
Year to date, Industrial & Specialty's net sales declined 14% on a reported
basis and 13% on an organic basis.
•Industrial Solutions: net sales declined 17% on a reported basis and 16% on an
organic basis. The DMP Acquisition had a positive impact of 1% on reported
revenue. Foreign exchange had a negative impact of 1% on reported revenue. The
decrease in organic net sales was primarily due to automotive production
slowdowns due to COVID-19 in key regions and demand weakness in construction and
general industrial manufacturing markets.
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•Graphics Solutions: net sales declined 6% on a reported basis and 4% on an
organic basis. Foreign exchange had a negative impact of 2% on reported revenue.
The decrease in organic net sales was primarily due to lower volumes of
ancillary products, such as screen printing and newspaper plates, as well as
reductions of product offerings and delayed marketing campaigns by CPG
customers.
•Energy Solutions: net sales declined 13% on a reported basis and 9% on an
organic basis. Foreign exchange had a negative impact of 3% on reported revenue.
The decrease in organic net sales was primarily due to demand weakness in the
Americas and Europe due to volatility in the price of oil and the impact of the
loss of certain business in the first quarter of 2019, which had a negative
impact of approximately 2% on organic net sales growth.
Gross Profit
Three Months Ended September Nine Months Ended September
30, % Change 30, % Change
(dollars in millions) 2020 2019 Reported Constant Currency 2020 2019 Reported Constant Currency
Gross profit
Electronics $ 130.4 $ 120.9 8% 7% $ 344.7 $ 338.6 2% 2%
Industrial & Specialty 73.1 84.8 (14)% (13)% 218.6 258.4 (15)% (14)%
Total $ 203.5 $ 205.7 (1)% (1)% $ 563.3 $ 597.0 (6)% (5)%
Gross margin
Electronics 42.5 % 43.2 % (70) bps (70) bps 41.6 % 41.6 % 0 bps (10) bps
Industrial & Specialty 42.8 % 45.9 % (310) bps (290) bps 44.8 % 45.5 % (70) bps (70) bps
Total 42.6 % 44.3 % (170) bps (160) bps 42.8 % 43.2 % (40) bps (50) bps
Electronics' gross profit in the third quarter of 2020 increased by 8% on a
reported basis and 7% on a constant currency basis. The constant currency
increase in gross profit was primarily driven by the Assembly business,
including the Kester Acquisition. The decrease in gross margin was primarily due
to unfavorable product mix in Assembly and Circuitry Solutions, as a result of
prior year strength in high-end mobile markets in Korea , and the impact of
higher net sales of products containing precious metals.
Industrial & Specialty's gross profit in the third quarter of 2020 decreased by
14% on a reported basis and 13% on a constant currency basis. The constant
currency decrease in gross profit was primarily driven by lower net sales
volumes in Industrial Solutions due to weak automotive markets related to
COVID-19. The decrease in gross margin was primarily due to lower net sales in
Energy Solutions and Graphics Solutions whose products have higher gross
margins.
Year to date, Electronics' gross profit increased by 2% on a reported and
constant currency basis. The constant currency increase in gross profit for the
period was driven by growth in telecom and data storage markets and was
partially offset by lower demand in automotive and mobile phone markets. Gross
margin remained relatively flat as strength in 5G-related products offset higher
raw materials prices.
Year to date, Industrial & Specialty's gross profit decreased by 15% on a
reported basis and 14% on a constant currency basis. The constant currency
decrease in gross profit was primarily driven by lower net sales in Industrial
Solutions. The decrease in gross margin was primarily due to unfavorable product
mix and higher raw material prices.
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Operating Expenses
Three Months Ended September Nine Months Ended September
30, % Change 30, % Change
(dollars in millions) 2020 2019 Reported Constant Currency 2020 2019 Reported Constant Currency
Selling, technical, general and
administrative $ 134.8 $ 128.8 5% 4% $ 373.4 $ 397.6 (6)% (5)%
Research and development 10.1 10.0 1% 0% 37.2 31.9 17% 17%
Total $ 144.9 $ 138.8 4% 4% $ 410.6 $ 429.5 (4)% (4)%
Operating expenses as % of Net
sales
Selling, technical, general and
administrative 28.2 % 27.7 % 50 bps 50 bps 28.4 % 28.8 % (40) bps (50) bps
Research and development 2.1 % 2.2 % (10) bps (10) bps 2.8 % 2.3 % 50 bps 50 bps
Total 30.3 % 29.9 % 40 bps 40 bps 31.2 % 31.1 % 10 bps 0 bps
Operating expenses in the third quarter of 2020 increased 4% on a reported and
constant currency basis. The increase was driven primarily by higher incentive
compensation accruals of $11.4 million on a constant currency basis as the
increased pace of recovery in the business required an updated assessment of our
expected annual incentive compensation accruals, partially offset by cost
containment initiatives across our businesses to mitigate the impact of
COVID-19-related slowdowns, including lower travel expenses, which decreased
$3.4 million on a constant currency basis, and lower personnel expenses,
including temporary employee salary reductions and furloughs.
Year to date, operating expenses decreased 4% on a reported and constant
currency basis. The decrease was driven primarily by cost containment
initiatives across the business to mitigate the impact of COVID-19-related
slowdowns, including lower travel expenses, which decreased $12.6 million on a
constant currency basis, and lower personnel expenses, including the impact of
temporary employee salary reductions and furloughs. This was partially offset by
higher incentive compensation accruals of $12.6 million on a constant currency
basis as well as an increase in research and development related to the
acquisition of a new subsea production control fluid designed to complement our
Energy Solutions business for $6.3 million . See Note 6, Goodwill and Intangible
Assets, for additional information.
Other (Expense) Income
Three Months Ended September Nine Months Ended September
30, 30,
(dollars in millions) 2020 2019 2020 2019
Other (expense) income
Interest expense, net $ (17.1) $ (17.4) $ (50.7) $ (73.7)
Foreign exchange loss (3.5) (1.2) (42.1) (2.4)
Other (expense) income, net (49.1) 2.9 (50.4) (46.2)
Total $ (69.7) $ (15.7) $ (143.2) $ (122.3)
Interest Expense, Net
For the nine months ended September 30, 2020 , net interest expense decreased
$23.0 million primarily due to the pay down of our then existing credit
facilities on January 31, 2019 in connection with the Arysta Sale. The private
offering of $800 million aggregate principal amount of 3.875% USD Notes due 2028
and the subsequent full redemption of our 5.875% USD Notes due 2025 during the
third quarter of 2020 will lower our annual interest payments by $16.0 million .
Foreign Exchange Loss
For the three months ended September 30, 2020 , foreign exchange loss increased
$2.3 million primarily due to the remeasurement of euro- and Taiwan
dollar-denominated intercompany balances.
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For the nine months ended
Other (Expense) Income, Net For the three and nine months endedSeptember 30, 2020 , other expense, net included$45.7 million related to the redemption of our 5.875% USD Notes due 2025. For the nine months endedSeptember 30, 2019 , other expense, net of$46.2 million included$61.0 million of debt refinancing costs related to the pay down of our then existing credit facilities in connection with the Arysta Sale, partially offset by a$11.7 million gain on derivative contracts associated with the refinancing of our non-U.S. dollar-denominated third-party debt. Income Tax The comparison of the Company's income tax provision between periods is significantly impacted by the level and mix of earnings and losses by tax jurisdiction, foreign income tax rate differentials and discrete items. See Note 12, Income Taxes, for further information. Other Comprehensive Income (Loss) Other comprehensive income for the three months endedSeptember 30, 2020 totaled$52.8 million , as compared to a loss of$55.1 million in the prior year. The change was driven primarily by foreign currency translation gains associated with the Chinese yuan and euro, partially offset by foreign currency translation losses associated with the British pound. Other comprehensive income for the nine months endedSeptember 30, 2020 totaled$9.5 million , as compared to income of$484 million in the prior year. The change was driven primarily by realized foreign currency translation losses resulting from the Arysta Sale of$480 million in 2019, as well as foreign currency translation gains associated with the Chinese yuan and euro, partially offset by foreign currency translation losses associated with the Brazilian real. Segment Adjusted EBITDA Performance Three Months Ended September Nine Months Ended September 30, % Change 30, % Change (dollars in millions) 2020 2019
Reported Constant Currency 2020 2019 Reported Constant Currency Adjusted EBITDA: Electronics$ 72.0 $ 73.6 (3)% (3)%$ 196.5 $ 190.4 3% 5% Industrial & Specialty 29.8 41.8 (28)% (26)% 100.2 124.1 (19)% (17)% Total$ 101.8 $ 115.4 (12)% (11)%$ 296.7 $ 314.5 (6)% (4)% Adjusted EBITDA margin: Electronics 23.4 % 26.3 % (290) bps (290) bps 23.7 % 23.4 % 30 bps 40 bps Industrial & Specialty 17.6 % 22.6 % (500) bps (460) bps 20.5 % 21.9 % (140) bps (110) bps Total 21.3 % 24.8 % (350) bps (330) bps 22.5 % 22.8 % (30) bps (10) bps For the three months endedSeptember 30, 2020 , Electronics' Adjusted EBITDA decreased 3% on a reported and constant currency basis. The constant currency decrease was driven primarily by higher general and administrative expenses related to increased incentive compensation, partially offset by higher gross profits. Industrial & Specialty's Adjusted EBITDA decreased 28% on a reported basis and 26% on a constant currency basis. The constant currency decrease was driven primarily by lower gross profit. For the nine months endedSeptember 30, 2020 , Electronics' Adjusted EBITDA increased 3% on a reported basis and 5% on a constant currency basis. The constant currency increase was driven primarily by higher gross profit, as well as lower general and administrative expenses. Industrial & Specialty's Adjusted EBITDA decreased 19% on a reported basis and 17% on a constant currency basis. The constant currency decrease was driven primarily by lower gross profit. 27 -------------------------------------------------------------------------------- Liquidity and Capital Resources Our primary source of liquidity during the nine months endedSeptember 30, 2020 was available cash generated from operations. Our primary uses of cash and cash equivalents were to fund operations, debt service obligations, capital expenditures, working capital, and to fund$35.7 million of repurchases of our common stock. Following the full redemption of our 5.875% USD Notes due 2025 onSeptember 4, 2020 , our first significant debt principal payment totaling$800 million is not due until 2028 and relates to our 3.875% USD Notes due 2028. We expect to pay a5 cents per share dividend on a quarterly basis which equates to approximately 20% of our expected annual free cash flow (net cash flows provided by operating activities less net capital expenditures). However, the actual declaration of any cash dividends, as well as their amounts and timing, will be subject to final determination by the Board. We believe that our cash and cash equivalents and cash generated from operations, supplemented by our availability under our lines of credit, including our revolving credit facility under the Credit Agreement, will be sufficient to meet our working capital needs, interest payments, capital expenditures, potential dividend payments and other business requirements for at least the next twelve months. However, working capital cycles and/or future repurchases of our common stock and/or acquisitions may require additional funding, which may include future debt and/or equity offerings. Our long-term liquidity may be influenced by our ability to borrow additional funds, renegotiate existing debt and raise equity under terms that are favorable to us. We may from time to time seek to repurchase our equity and/or to retire or repurchase our outstanding debt through cash purchases and/or exchanges for equity, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, applicable restrictions under our various financing arrangements and other factors. During the nine months endedSeptember 30, 2020 , approximately 73% 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 theU.S. As a result, our foreign subsidiaries will likely continue to hold a substantial portion of our cash. We expect to manage our worldwide cash requirements based on available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We may transfer cash from certain international subsidiaries to theU.S. and/or other international subsidiaries when we believe it is cost effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities, which support our current designation of a portion of these funds as being indefinitely reinvested, and reassess whether there are demonstrated needs to repatriate a portion of these funds being held internationally. If, as a result of our review, we determine that all or a portion of the funds require repatriation, we may be required to accrue additional taxes. Of our$248 million of cash and cash equivalents atSeptember 30, 2020 ,$208 million was held by our foreign subsidiaries. During the nine months endedSeptember 30, 2020 , domestic cash was primarily used for debt service obligations and to fund repurchases of our common stock. The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities of continuing operations during the periods indicated: Nine Months Ended September 30, (dollars in millions) 2020 2019 Cash provided by operating activities$ 194.3 $ 92.1 Cash (used in) provided by investing activities$ (31.4) $ 4,270.3 Cash used in financing activities $
(87.8)
Operating Activities The increase in net cash flows provided by operating activities of$102.2 million was driven primarily by higher cash operating profits (net income adjusted for non-cash items), including$50.1 million of lower interest payments and the payment of contingent consideration liability of$30.9 million during 2019. 28 -------------------------------------------------------------------------------- Investing Activities The decrease in net cash flows provided by investing activities was primarily driven by the Arysta Sale in 2019, which generated$4.28 billion . Financing Activities During the nine months endedSeptember 30, 2020 , we used cash on-hand to fund repurchases of our common stock for an aggregate purchase price of$35.7 million and to fund$44.7 million of financing fees. The financing fees consisted of a make-whole premium of$33.6 million associated with the full redemption of the 5.875% USD Notes due 2025 and$11.1 million in debt issuance costs associated with the 3.875% USD Notes due 2028. During the nine months endedSeptember 30, 2019 , cash flows used in financing activities were primarily driven by the pay down of approximately$4.60 billion of debt from a combination of proceeds of the Arysta Sale and a$750 million term loan under the Credit Agreement. These cash inflows were also used to fund the repurchases of our common stock for an aggregate purchase price of$496 million . In addition,$39.5 million was used to fund the repurchase and extinguishment fees related to our debt pay down and to fund the debt issuance costs associated with the Credit Agreement. Cash inflows from borrowings under our revolving credit facility were$24.9 million in 2019. Financial Borrowings Credit Facilities & Senior Notes AtSeptember 30, 2020 , we had$1.52 billion of indebtedness, net of unamortized discounts and debt issuance costs, which primarily included: •$788 million of 3.875% USD Notes due 2028; and •$729 million of term debt arrangements outstanding under our term loans. Availability under the revolving credit facility of the Credit Agreement and various lines of credit and overdraft facilities totaled$349 million atSeptember 30, 2020 , net of outstanding letters of credit. Covenants AtSeptember 30, 2020 , we were in compliance with the customary affirmative and negative covenants, events of default and other customary provisions of the Credit Agreement, as well as with the covenants included in the 3.875% USD Notes Indenture. Off-Balance Sheet Transactions We use customary off-balance sheet arrangements, such as letters of credit. For additional information regarding letters of credit, see Note 7, Debt, to our unaudited Condensed Consolidated Financial Statements included in this Quarterly Report. Item 3. Quantitative and Qualitative Disclosures about Market Risk The quantitative and qualitative disclosures about market risk required by this item have not changed materially from those disclosed in our 2019 Annual Report. For a discussion of our exposure to market risk, refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in our 2019 Annual Report. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Our management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15 (e) and 15d-15(e) under the Exchange Act. As required by Rule 13a-15(b) of the Exchange Act, management, including our 29 -------------------------------------------------------------------------------- CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our CEO and CFO have concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report. (b) Changes to Internal Control Over Financial Reporting As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and CFO, has evaluated the Company's internal control over financial reporting to determine whether any changes occurred during the quarter covered by this Quarterly Report have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 30
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