Element Solutions Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2019. Element Solutions is a global specialty chemicals company operating in Electronics and Industrial & Specialty. The former Agricultural Solutions business, Arysta, is classified as discontinued operations following its sale to UPL on January 31, 2019 for approximately $4.28 billion net proceeds; continuing-operations results exclude it.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $464.7 million | $488.5 million | $1,381.2 million | $1,482.6 million |
| Gross profit / margin | $205.7 million / 44.3% | $209.6 million / 42.9% | $597.0 million / 43.2% | $635.4 million / 42.9% |
| Operating profit / margin | $66.9 million / 14.4% | $59.6 million / 12.2% | $167.5 million / 12.1% | $177.7 million / 12.0% |
| Adjusted EBITDA / margin (non-GAAP) | $115.4 million / 24.8% | $108.3 million / 22.2% | $314.5 million / 22.8% | $321.8 million / 21.7% |
| Net income (loss) attributable to common stockholders | $(6.9) million | $(408.9) million | $17.8 million | $(359.6) million |
| Continuing-operations income (loss) | $(6.0) million | $(4.3) million | $5.2 million | $(62.8) million |
- Q3 reported sales fell 5% year over year (3% at constant currency; 2% organic). Nine-month reported sales fell 7% (3% constant currency; 4% organic).
- Continuing-operations operating cash flow was $92.1 million for the first nine months, versus cash use of $26.4 million a year earlier. Capital expenditures were $18.2 million. Total cash, cash equivalents and restricted cash ended at $200.3 million.
- At September 30, cash was $200.3 million, current assets $850.3 million and current liabilities $289.8 million. Debt was $1.522 billion net of issuance costs and discounts; $7.8 million was current. The company reported approximately $352 million of availability under revolving and other credit facilities, net of letters of credit.
Material changes versus the prior comparable period
- Q3 sales softness was broad-based: Electronics declined 4% reported and 1% organically; Industrial & Specialty declined 6% reported and 4% organically. Electronics Adjusted EBITDA rose 14% reported, while Industrial & Specialty Adjusted EBITDA fell 4%.
- Despite lower Q3 sales, gross margin improved 140 basis points and operating margin improved 220 basis points. Management attributed margin and Adjusted EBITDA improvement to favorable Electronics product mix, lower operating expenses and cost containment.
- Nine-month interest expense fell to $73.7 million from $233.4 million, primarily reflecting debt repayment after the Arysta sale. The company repaid approximately $4.60 billion of debt, refinanced its facilities, and redeemed its prior 2022 and 2023 senior notes; $786 million of 5.875% notes due 2025 remained outstanding.
- The company repurchased approximately 43.8 million shares for about $496 million during the first nine months, including a 37 million-share repurchase in February. Approximately $254 million remained under the $750 million authorization at quarter end.
- Balance-sheet comparisons reflect the Arysta divestiture and discontinued-operations presentation. Nine-month 2019 discontinued-operations income was $13.2 million, versus a $293.3 million loss in 2018, which included the sale-related impairment.
Outlook, commentary, risks and unusual items
- Management said cash, operating cash generation and available credit should be sufficient for working capital, interest, capital expenditures and other needs for at least the next 12 months. Expected annual interest payments were approximately $70 million for the next three years, subject to borrowing and hedge assumptions.
- Management cited trade tensions and weakness in mobile-phone, semiconductor, automotive and industrial markets. The loss of certain Energy Solutions business was expected to weigh on organic sales growth for the remainder of 2019. The filing provides no specific consolidated revenue or earnings guidance.
- Q3 income tax expense was $57.2 million despite pretax income of $51.2 million, contributing to the continuing-operations loss. The provision reflected the estimated annual tax rate, including U.S. global intangible low-taxed income and an accrued valuation allowance on interest-limitation carryforwards.
- Nine-month other expense included $61.0 million of debt-refinancing costs. The Arysta divestiture may result in further gain or loss as certain related tax assets and liabilities are settled. The company retained certain Arysta legal and tax liabilities, primarily involving a Brazilian subsidiary; management did not expect material losses, but resolution could take several years.
- Environmental liabilities were $14.7 million. The company said it could not estimate the range of reasonably possible environmental losses beyond recorded liabilities. It also disclosed foreign-exchange, commodity-price and interest-rate exposures managed partly through derivatives.
- The company was in compliance with debt covenants. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether sales weakness in mobile, semiconductor, automotive and industrial end markets persists, and whether the Energy Solutions business loss continues to affect growth.
- Whether margin gains and operating-cost reductions can offset softer sales, particularly in Industrial & Specialty.
- Cash generation, debt levels, covenant headroom and the company’s use of remaining share-repurchase authorization.
- The drivers and sustainability of the unusually high Q3 tax expense, and any future tax or other adjustments related to the Arysta sale.
- Potential outcomes and financial exposure from retained Arysta proceedings, environmental matters and other contingencies.