Element Solutions Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Element Solutions is a global specialty chemicals company operating in Electronics and Industrial & Specialty. Comparisons below are against the corresponding 2020 periods.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $586.6 million | $387.0 million | $1,136.7 million | $839.6 million |
| Gross profit / margin | $238.5 million / 40.7% | $162.5 million / 42.0% | $479.5 million / 42.2% | $359.8 million / 42.9% |
| Operating profit / margin | $71.0 million / 12.1% | $39.5 million / 10.2% | $170.9 million / 15.0% | $94.1 million / 11.2% |
| Net income attributable to common stockholders | $81.1 million | $1.2 million | $163.4 million | $9.8 million |
| Adjusted EBITDA / margin | $133.1 million / 22.7% | $84.8 million / 21.9% | $271.0 million / 23.8% | $194.9 million / 23.2% |
| Operating cash flow from continuing operations | Not presented for quarter | Not presented for quarter | $113.0 million | $124.7 million |
Performance and changes versus prior periods
- Q2 sales increased 52% as reported, 44% at constant currency and 30% organically. First-half increases were 35%, 30% and 20%, respectively. Growth reflected broad demand recovery from COVID-related slowdowns, with contributions from acquisitions, foreign exchange and higher pass-through metals pricing.
- Q2 organic sales growth was 25% in Electronics and 41% in Industrial & Specialty. Assembly Solutions and Industrial Solutions were notable contributors; Energy Solutions was approximately flat organically in Q2 and down 10% organically for the first half.
- Gross margin fell 130 basis points in Q2 and 70 basis points for the first half. Management cited metals mix in Assembly, higher raw-material and logistics costs, and unfavorable product mix in Industrial & Specialty. Operating margin and Adjusted EBITDA margin nevertheless increased, reflecting higher volumes and operating leverage.
- Q2 operating expenses rose 36% reported, including a $13.6 million charge after performance-based RSU targets became probable, higher incentive compensation and acquisition-related costs. The $13.6 million charge was also excluded in the company’s Adjusted EBITDA reconciliation.
- Q2 net income included a $31.9 million income-tax benefit. The first-half tax benefit was $0.8 million; the company disclosed a $51.4 million benefit associated with releasing valuation allowances, alongside the impact of higher pretax income and earnings mix. These tax effects materially affect comparisons of reported net income.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $318.4 million, versus $291.9 million at year-end 2020. Total debt was approximately $1.51 billion, principally $724.5 million of term loans and $788.7 million of 3.875% senior notes due 2028. The term loans mature in 2026.
- The company reported $325 million of unused revolving-credit availability, net of letters of credit, and approximately $349 million of total availability under its revolving facility and other lines. It was in compliance with debt covenants.
- First-half operating cash flow was $113.0 million, down from $124.7 million. Higher working capital, including safety inventory and raw-material costs, incentive payments and cash taxes more than offset higher cash operating profits and lower interest payments. Investing cash outflow was $49.1 million, including the HKW acquisition; financing cash outflow was $37.3 million, including $27.2 million of dividends.
- Cash and cash equivalents included $186 million held by foreign subsidiaries. Management stated that cash, operating cash generation and available credit were expected to cover requirements for at least the next 12 months.
Outlook, transactions and risks
- Management cited increased expectations for strong full-year 2021 financial results, but this filing provides no numerical full-year revenue or earnings guidance.
- The company completed its acquisition of H.K. Wentworth on May 5 for $50.9 million net of cash; the business joined Electronics. The purchase-price allocation remained preliminary.
- The planned Coventya acquisition was expected to cost approximately €420 million, subject to adjustments, and to close in September 2021 subject to customary conditions. The company expected to fund it with $400 million of add-on debt and cash on hand; related forward-starting swaps were intended to convert the anticipated debt to fixed-rate euro-denominated debt.
- COVID-19 and its variants, supply-chain and raw-material cost pressures, foreign-exchange and metals-price movements, and the timing and completion and financing of Coventya remain relevant uncertainties. The company also disclosed environmental liabilities of $11.6 million and ongoing legal and environmental matters; it could not estimate a range of reasonably possible environmental losses beyond recorded liabilities.
- The company expected to continue quarterly dividends of $0.06 per share, subject to board approval. It reported no material change in risk factors from its 2020 Annual Report.
Important facts for investors to verify
- How much of sales growth and margin performance reflects durable organic demand versus metals pass-through pricing, currency, acquisitions and the prior-year COVID comparison.
- Whether raw-material and logistics cost inflation continues to pressure gross margins, and whether pricing or mix offsets those costs.
- The normalized earnings and tax rate after the $51.4 million valuation-allowance release and the $13.6 million performance-based compensation charge.
- Coventya’s closing, final purchase price, debt documentation, financing terms and effect on leverage and liquidity.
- Working-capital conversion, particularly inventory and receivables, and the availability of cash held outside the United States.