Element Solutions Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Amounts are in U.S. dollars.
Business context
Element Solutions is a global specialty chemicals company serving electronics and industrial markets. Its reportable segments are Electronics and Industrial & Specialty. In Q1 2023, the company realigned responsibility for its Films business and certain product lines; historical segment information was reclassified.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net sales | $574.4 million | $680.2 million; down 16% reported, 11% constant currency and 7% organic |
| Gross profit / margin | $227.8 million / 39.7% | $263.0 million / 38.7%; margin up 100 basis points |
| Operating profit / margin | $66.4 million / 11.6% | $95.5 million / 14.0%; profit down 31% |
| Net income attributable to common stockholders | $42.9 million; diluted EPS $0.18 | $56.1 million; diluted EPS $0.23 |
| Adjusted EBITDA / margin | $112.3 million / 19.5% | $144.8 million / 21.3%; down 22%, with margin down 180 basis points |
| Operating cash flow | $53.5 million | $(5.6) million |
| Cash and cash equivalents | $279.0 million at March 31 | $265.6 million at December 31, 2022; $218.8 million at March 31, 2022 |
| Debt | $1.89 billion | $1.90 billion at December 31, 2022 |
Cash from operations improved primarily because of lower annual incentive compensation payments and improved working-capital management, partly offset by lower cash operating profits. Investing cash use was $11.6 million, including $9.1 million of capital expenditures; financing cash use was $29.5 million, including $19.4 million of dividends. The quarterly dividend was $0.08 per share.
At quarter-end, the company had $369 million available under its revolving credit facility, net of letters of credit, and reported compliance with debt covenants. It also reported total availability of approximately $391 million across its revolving facility and other credit lines. Of its $279 million cash balance, $214 million was held by foreign subsidiaries.
Material changes and segment trends
- Electronics: Sales were $339.6 million, down 23% reported and 11% organic. Adjusted EBITDA was $72.7 million, down 28%. Lower demand affected Assembly Solutions, Circuitry Solutions and Semiconductor Solutions, particularly in Asia, mobile phones, memory disks and advanced packaging.
- Industrial & Specialty: Sales were $234.8 million, down 2% reported but up 2% organic. Adjusted EBITDA was $39.6 million, down 10%. Industrial Solutions faced weaker European construction and industrial demand and lower automotive production; Graphics Solutions and Energy Solutions grew organically.
- Electronics gross margin increased to 40.0%, helped by lower pass-through metals pricing and inflation-related pricing actions. Industrial & Specialty gross margin declined to 39.1%, amid raw-material pressures and adverse mix, partly offset by higher-margin Energy Solutions growth.
- Operating expenses declined 4% reported but were approximately flat on a constant-currency basis. Their share of sales rose to 28.1% from 24.6%, contributing to lower operating margin.
Outlook, risks and unusual items
- The filing provides no numerical earnings or sales guidance. Management said available cash, operating cash generation and credit availability should be sufficient for working capital, interest, capital expenditures and other requirements for at least the next 12 months. Continued quarterly dividends are expected, subject to Board approval and future results.
- Management warned that expiration of a portion of interest-rate and cross-currency hedges in January 2024 could materially increase interest expense. In March 2023, the company replaced $360 million of swaps, extending their initial maturity by two years. Approximately $1.08 billion of term-loan principal is not due until 2026.
- Interest-rate and cross-currency swaps covered approximately $1.11 billion of notional debt; the company reported an effective rate of approximately 2.6% for the hedged debt at quarter-end. Foreign-exchange movements, interest rates and metal prices remain relevant exposures.
- Environmental liabilities were $11.4 million. The company did not anticipate material losses beyond recorded amounts, but said it could not practicably estimate a range of reasonably possible additional environmental losses. It believes other legal matters will not materially affect consolidated results, while noting that outcomes are uncertain.
- Russia’s invasion of Ukraine and related sanctions could disrupt global supply chains and increase costs if the conflict or economic disruption escalates. The company also cited continuing uncertainty around the longer-term effects of COVID-19. It reported no material change to the risk factors in its 2022 Annual Report.
- Adjusted EBITDA and organic/constant-currency growth are non-GAAP measures; the company cautions that they should not be considered substitutes for GAAP results.
Important facts for investors to verify
- Whether demand weakness in Electronics markets, especially Asia and mobile-related end markets, persists or improves.
- How much margin and cash flow recover as volumes, product mix, raw-material costs and pass-through metals pricing change.
- The interest-cost effect as hedges mature, including the January 2024 exposures and the company’s refinancing or hedging plans.
- Cash accessibility and working-capital needs, given that $214 million of cash was held by foreign subsidiaries and inventories increased to $322.0 million from $290.7 million at year-end.
- Whether environmental remediation estimates or other contingencies change as investigations and proceedings progress.