Element Solutions Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Element Solutions is a global specialty chemicals company operating through Electronics and Industrial & Specialty segments.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $616.2 million | $477.5 million | $1,752.9 million | $1,317.1 million |
| Gross profit / margin | $244.5 million / 39.7% | $203.5 million / 42.6% | $724.0 million / 41.3% | $563.3 million / 42.8% |
| Operating profit / margin | $68.5 million / 11.1% | $58.6 million / 12.3% | $239.4 million / 13.7% | $152.7 million / 11.6% |
| Net income attributable to common stockholders | $36.0 million | $36.0 million | $199.4 million | $45.8 million |
| Adjusted EBITDA / margin | $131.5 million / 21.3% | $101.8 million / 21.3% | $402.5 million / 23.0% | $296.7 million / 22.5% |
| Diluted EPS attributable to common stockholders | $0.15 | $0.15 | $0.80 | $0.19 |
- Q3 reported sales increased 29%; growth was 26% at constant currency and 13% organic. Nine-month sales rose 33% reported, 28% constant currency and 17% organic.
- Q3 Electronics sales were $398.6 million and Industrial & Specialty sales were $217.6 million. Organic growth was broad-based, except Energy Solutions, where sales declined 9% organically.
- Q3 gross margin fell 290 basis points year over year, chiefly from product mix, higher raw-material and logistics costs, and increased sales of metal-containing Assembly products. Operating profit rose 17%, while operating margin declined 120 basis points.
- Q3 net income was flat year over year despite higher operating profit; the prior-year period included a substantial income tax benefit. Nine-month results also reflect a significant foreign-exchange gain versus a loss in 2020.
Cash, debt and liquidity
- Nine-month operating cash flow was $204.7 million, versus $194.3 million in 2020. Investing cash outflow was $550.2 million, including the Coventya and HKW acquisitions; financing cash inflow was $336.2 million.
- Cash and equivalents were $279.3 million at September 30, 2021, down from $291.9 million at year-end 2020; $198 million was held by foreign subsidiaries. Working capital increased, including inventory of $316.4 million versus $203.1 million at year-end.
- Debt was $1.91 billion, compared with $1.52 billion at year-end, including $1.12 billion of term loans and $789 million of 3.875% notes due 2028. The company borrowed $400 million of incremental term loans to help fund Coventya; term loans mature in 2026.
- Unused revolving and other credit availability totaled approximately $352 million, including $325 million under the revolving facility, net of letters of credit. The company reported compliance with debt covenants and expected available cash, operating cash flow and credit capacity to meet needs for at least twelve months.
Material changes, outlook and risks
- Coventya was acquired September 1 for $486 million net of cash; HKW was acquired May 5 for $50.9 million net of cash. Purchase-price allocations were preliminary. The filing does not present pro forma or post-acquisition operating results.
- Management cited increased expectations for strong full-year 2021 financial results, reflected in higher incentive compensation accruals. The filing provides no specific revenue or earnings guidance.
- Management attributed margin pressure to higher raw-material and logistics costs and unfavorable mix. COVID-19 and variants, supply-chain and working-capital pressures, foreign-exchange volatility, commodity prices, and the uncertain pace of customer activity remain risks.
- Environmental liabilities were accrued at $11.5 million; the company said it could not practicably estimate reasonably possible losses above recorded amounts. It did not anticipate material losses beyond accruals. Other legal matters and retained liabilities related to the Arysta sale were not expected to cause material losses, though outcomes remain uncertain.
- The company paid a quarterly dividend of $0.06 per share and said it currently expects quarterly dividends to continue, subject to Board approval and future results and cash flows. It repurchased $1.7 million of stock in Q3; approximately $185 million remained authorized.
Key facts for investors to verify
- Whether organic growth and the acquired businesses sustain performance after acquisition contributions are fully reflected in comparable periods.
- Whether higher input and logistics costs, metal-price pass-throughs, and product mix continue to weigh on gross margins.
- Whether working-capital needs, particularly inventory and receivables, convert into operating cash flow as expected.
- Debt levels, interest-rate and foreign-exchange exposures, and continued covenant compliance.
- Any updates to Coventya and HKW purchase accounting, environmental exposures, COVID-related impacts, or the company’s full-year outlook.