Element Solutions Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Element Solutions is a global specialty chemicals company serving electronics, industrial finishing, graphics and offshore energy markets. The statements are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $676.9 million | $586.6 million | $1,357.1 million | $1,136.7 million |
| Gross profit / margin | $249.8 million / 36.9% | $238.5 million / 40.7% | $512.8 million / 37.8% | $479.5 million / 42.2% |
| Operating profit / margin | $90.5 million / 13.4% | $71.0 million / 12.1% | $186.0 million / 13.7% | $170.9 million / 15.0% |
| Net income attributable to common stockholders | $65.2 million | $81.1 million | $121.3 million | $163.4 million |
| Diluted EPS attributable to common stockholders | $0.26 | $0.33 | $0.49 | $0.66 |
| Adjusted EBITDA (non-GAAP) / margin | $140.4 million / 20.7% | $131.8 million / 22.5% | $285.2 million / 21.0% | $269.6 million / 23.7% |
| Operating cash flow | Not provided quarterly | $68.7 million | $113.0 million |
Q2 reported sales grew 15%, with 23% growth at constant currency and 6% organic growth. For the first half, growth was 19% reported, 25% constant currency and 6% organic. Acquisitions and pass-through metals pricing materially contributed to reported growth. Gross margin contracted 380 basis points in Q2 and 440 basis points for the first half, reflecting pass-through metal sales, higher raw-material and logistics costs, and—in Industrial & Specialty—unfavorable mix from weaker automotive production. Adjusted EBITDA increased, but its margin fell.
Q2 net income declined 19% year over year despite higher operating profit. The comparison was affected by a $31.9 million tax benefit in Q2 2021 versus $23.9 million of tax expense in Q2 2022. The 2021 benefit included a non-recurring $51.4 million release of valuation allowances; it did not recur in 2022. First-half net income fell 25%.
Liquidity, debt and capital allocation
- At June 30, 2022, cash and cash equivalents were $215.6 million, down from $330.1 million at year-end 2021. Current assets were $1,237.8 million and current liabilities $395.0 million.
- Debt was $1.903 billion gross, comprising $1.109 billion of term loans and $790.1 million of 3.875% notes due 2028; balance-sheet debt, net of current installments, was $1.890 billion. The term loans mature in 2026. The company reported $346 million of availability across its revolving credit facility and other facilities, net of letters of credit; $324 million was available under the revolver.
- Debt covenants were reported in compliance. Management said cash, operating cash flow and available borrowing capacity should meet requirements for at least the next 12 months. The first significant term-loan principal payment, approximately $1.08 billion, is due in 2026.
- First-half operating cash flow was $68.7 million, down $44.3 million year over year, mainly due to working-capital increases, safety inventory, higher raw-material costs and incentive compensation payments. Investing cash outflow was $46.0 million and financing cash outflow was $129.4 million. Cash declined by $114.5 million during the period.
- The company repurchased $61.7 million of shares and paid $39.6 million in dividends during the first half. It had approximately $670 million remaining under its repurchase authorization. Q2 dividend was $0.08 per share; management expected quarterly dividends to continue, subject to board approval and future results.
- $180 million of the $215.6 million cash balance was held by foreign subsidiaries; repatriation could result in additional taxes.
Changes, outlook and risks
- Electronics Q2 organic sales grew 8%; Industrial & Specialty organic sales grew 2%. Electronics Adjusted EBITDA rose 8% reported, while Industrial & Specialty rose 2% reported; both segments faced margin pressure.
- The HSO acquisition closed January 26, 2022, for approximately $23 million net of cash and was described as not material to the financial statements. Coventya and HSO acquisition contributions boosted Industrial Solutions reported sales; the filing does not provide formal earnings guidance.
- In Q2, operational responsibility for Films moved from Industrial & Specialty to Electronics to reflect anticipated opportunities in printed and in-mold electronics. Historical segment information was reclassified.
- Management cited COVID-19-related lockdowns and weaker demand in China, lower automotive production, inflation in raw materials and logistics, and foreign-exchange volatility. Russia’s invasion of Ukraine and related sanctions could further disrupt supply chains and raise costs; Russia and Ukraine were not material markets or asset locations for the company.
- Environmental liabilities were accrued at $14.2 million. The company said it did not anticipate material losses beyond recorded amounts, but could not estimate a reasonably possible excess-loss range. It stated that other legal matters were not expected to have a material adverse effect.
- Foreign-currency translation contributed to a $112.5 million Q2 foreign-currency translation loss in other comprehensive income. Goodwill declined to $2.425 billion from $2.526 billion, primarily reflecting currency translation.
Most important facts for investors to verify
- Whether organic growth and acquisition synergies persist as China lockdowns, automotive weakness and customer demand evolve.
- Whether pricing and cost actions recover the substantial gross-margin and Adjusted EBITDA margin declines.
- Working-capital conversion and cash generation, given lower first-half operating cash flow and higher inventory and receivables.
- Debt and interest-rate exposure, including the floating-rate term loans, hedge terms, covenant compliance and available revolver capacity.
- Potential additional environmental, legal or tax exposures, and the effects of foreign-cash repatriation and currency movements.
- Capital allocation and dividend decisions, which remain subject to board discretion and future earnings and cash flow.