Business context and reporting period
Element Solutions Inc. is a global specialty chemicals company serving electronics and industrial markets. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Results are reported in U.S. dollars; amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change or context |
|---|---|---|---|
| Net sales | $680.2 | $550.1 | +24% reported; +28% constant currency; +7% organic |
| Gross profit / margin | $263.0 / 38.7% | $241.0 / 43.8% | Margin down 510 basis points |
| Operating profit / margin | $95.5 / 14.0% | $99.9 / 18.2% | Profit down 4%; margin down 420 basis points |
| Net income | $56.4 | $82.3 | Net income attributable to common stockholders was $56.1 in 2022 |
| Diluted EPS | $0.23 | $0.33 | Down from prior-year quarter |
| Adjusted EBITDA and margin | $144.8 / 21.3% | $137.8 / 25.0% | EBITDA +5% reported, +9% constant currency; margin down 370 basis points |
| Operating cash flow | $(5.6) | $32.6 | Lower primarily due to working-capital needs and higher incentive payments |
| Cash and cash equivalents | $218.8 | $330.1 at Dec. 31, 2021 | Quarterly cash decrease of $111.3 |
| Total debt | $1,905.8 | $1,906.9 at Dec. 31, 2021 | Includes $1,110.8 of term loans and $789.7 of 3.875% senior notes due 2028 |
Capital expenditures were $9.5. Investing cash outflow was $37.1, including $22.6 paid for the HSO acquisition, net of cash acquired. Financing cash outflow was $67.1, including dividends of $19.9, share repurchases of $18.3, and $25.8 of other net outflows, primarily RSU tax-withholding payments. Cash dividends were $0.08 per share. At March 31, 2022, the company had $323 available under its revolving credit facility, net of letters of credit, and approximately $349 available under its revolving credit facility and other credit lines combined. It was in compliance with debt covenants.
Material changes versus the prior comparable period
- Sales growth was partly acquisition- and pricing-driven: pass-through metals pricing contributed $44.0 to Electronics sales; acquisitions contributed $10.2 to Electronics and $64.3 to Industrial & Specialty sales. Organic sales growth was 7% overall, 8% in Electronics and 4% in Industrial & Specialty.
- Electronics sales were $426.9, up 21% reported and 8% organic; Industrial & Specialty sales were $253.3, up 29% reported and 4% organic. Weaker automotive production affected Industrial Solutions.
- Gross margin and Adjusted EBITDA margin declined despite higher sales and Adjusted EBITDA. Management cited higher raw-material and logistics costs, pass-through metals mix, and unfavorable product mix.
- Net income fell partly because the prior-year quarter included a $28.0 foreign-exchange gain, primarily related to intercompany debt, which did not recur. Q1 2022 also included $4.6 of losses associated with metals derivative contracts.
- Cash generation weakened as receivables and inventories increased; management cited safety-stock building, higher raw-material costs, and higher annual incentive compensation payments.
Outlook, commentary, risks and contingencies
The filing provides no specific revenue, earnings, or EPS guidance. Management said cash, operating cash generation, and available credit were expected to meet working-capital, interest, capital-expenditure, potential dividend, and other business needs for at least the next 12 months. It expected quarterly dividends to continue, subject to Board approval and future earnings and cash flows.
Management identified uncertainty from COVID-19 and the Russia-Ukraine conflict; a significant escalation could disrupt supply chains and increase costs. Other cited pressures include raw-material prices, logistics costs, foreign-exchange volatility, and working-capital requirements. The company had $13.2 of recorded environmental liabilities and said it could not practicably estimate reasonably possible losses above recorded amounts; it did not anticipate material losses in excess of accruals. Management said routine legal matters were not expected to have a material adverse effect. The filing reported no material changes to the risk factors in the 2021 Annual Report.
Q1 acquisitions included HSO, completed January 26, 2022 for approximately $23 net of cash; it was not material to the consolidated financial statements. Coventya and HKW acquisitions completed in 2021 also contributed to reported year-over-year sales comparisons. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much reported sales growth reflects organic demand versus acquisitions, foreign exchange, and pass-through metals pricing.
- Whether input-cost, logistics, and product-mix pressures continue to weigh on gross and Adjusted EBITDA margins.
- Whether working-capital investment reverses and operating cash flow improves after the quarter’s cash use.
- Cash accessibility and funding needs: $199 of quarter-end cash was held by foreign subsidiaries, and repurchases or acquisitions could require additional funding.
- Debt service and exposure to floating rates, including the effectiveness and duration of interest-rate and cross-currency hedges.
- Developments in environmental matters and any changes to the recorded $13.2 liability or potential exposure beyond accruals.