Element Solutions Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Element Solutions is a global specialty chemicals company serving electronics, industrial finishing, packaging, and offshore energy markets. Results are compared with Q1 2019; financial amounts are in millions of U.S. dollars unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net sales | $452.6 | $459.8 | Down 2% reported; flat constant currency; down 3% organic |
| Gross profit / margin | $197.3 / 43.6% | $198.3 / 43.1% | Profit down 1%; margin up 50 bps |
| Operating profit / margin | $54.6 / 12.1% | $45.1 / 9.8% | Profit up 21%; margin up 230 bps |
| Net income from continuing operations | $8.4 | $(3.5) | Returned to profitability |
| Net income attributable to common stockholders | $8.6 | $23.2 | Down from prior-year income that included discontinued operations |
| Diluted EPS attributable to common stockholders | $0.03 | $0.09 | Prior year included Arysta-related discontinued operations |
| Adjusted EBITDA | $110.1 | $98.6 | Up 12% reported; up 14% constant currency |
| Adjusted EBITDA margin | 24.3% | 21.4% | Up 290 bps reported |
Segment sales were $268.9 for Electronics, up 1% reported but down 2% organic, and $183.7 for Industrial & Specialty, down 5% reported and 3% organic. Segment Adjusted EBITDA was $66.5 for Electronics, up 18%, and $43.6 for Industrial & Specialty, up 3%.
Cash flow, liquidity, and debt
- Cash from continuing operations was $61.2, versus cash used of $32.0 in Q1 2019. Capital expenditures were $10.5. The company cited lower interest payments and the absence of prior-year contingent-consideration payments as drivers of the cash-flow improvement; safety-inventory purchases partly offset it.
- Cash and cash equivalents were $497.4 at March 31, 2020, up from $190.1 at December 31, 2019; $146 million was held by foreign subsidiaries. Cash flow included $320 million borrowed on the revolver as a precautionary draw.
- Total debt was $1,839.9, including $787.2 of 5.875% notes due 2025, $731.9 of term loans due 2026, and $320.0 drawn on the revolving facility. Reported long-term debt was $1,512.2. The filing reports $29 million availability across revolving and other facilities at quarter-end; Credit Agreement revolver availability was only $4.7 million, net of letters of credit.
- The $320 million revolver draw was repaid in full on April 20, 2020. The company was in compliance with debt covenants at March 31 and said cash, operating cash generation, and available borrowing capacity should meet needs for at least the next 12 months.
Material changes and notable items
- Operating expenses fell 7% to $142.7, principally reflecting cost containment and prior-year nonrecurring Arysta-sale-related expenses. Research and development rose to $17.5 from $10.8, including a $6.3 expense for a subsea production-control-fluid product acquired while in development.
- Net interest expense declined to $16.7 from $38.1, largely reflecting debt reduction after the 2019 Arysta sale. This was partly offset by a $25.8 foreign-exchange loss, primarily from remeasurement of euro- and British-pound-denominated intercompany balances.
- Q1 2019 included $27.4 of net income from discontinued operations, including a $21.3 Arysta-sale gain. Arysta was sold in January 2019; the company retained certain legal and tax liabilities related to the former business.
- Cash used in financing was replaced by $283.4 of cash provided in Q1 2020, mainly reflecting the $320 million precautionary revolver draw. Q1 2019 financing included substantial debt repayments and $433.6 of share repurchases.
- The company repurchased 3.7 million shares for $33.1, averaging $8.82 per share. Approximately $210 million remained under the repurchase authorization at quarter-end. The 2 million Series A preferred shares converted one-for-one into common shares on February 25, 2020.
Outlook, risks, and contingencies
- Management said COVID-19’s ultimate impact was unknown and difficult to quantify. It anticipated near-term demand declines in many end markets, especially Automotive & Industrial, and expected weaker Industrial Solutions demand for the remainder of 2020. No numerical earnings or sales guidance was provided.
- COVID-19 risks cited include weaker demand, delayed or renegotiated customer orders, supply-chain and operating disruptions, currency devaluation, and effects on employees and facilities. A prolonged share-price decline could trigger goodwill or intangible-asset impairment; quarter-end carrying values were $2.13 billion and $895 million, respectively.
- Q1 trends varied: Semiconductor Solutions organic sales rose 13%, supported by advanced packaging, 5G infrastructure, and data centers; Assembly Solutions organic sales fell 11%, partly due to COVID-related production weakness in Asia. Graphics Solutions organic sales rose 10%, supported by packaging demand.
- Environmental liabilities were $11.3 at quarter-end. The company did not anticipate material losses beyond recorded amounts, but said the range of possible additional losses could not be estimated. It also stated it did not expect material losses from retained Arysta legal and tax matters, though resolution may take years.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. The President and COO announced plans to retire from that role effective June 15, 2020, while remaining on the Board.
Key facts for investors to verify
- Whether COVID-19-driven weakness, especially in automotive and industrial markets, materially affects subsequent-quarter sales, margins, and cash generation.
- Post-quarter liquidity after the April 20 repayment of the $320 million revolver draw, including actual facility availability and cash needs.
- Underlying profitability versus reported GAAP results, including the non-GAAP Adjusted EBITDA adjustments and the impact of foreign-exchange movements.
- Progress on share repurchases and whether capital returns remain appropriate given pandemic uncertainty and debt levels.
- Developments in retained Arysta matters, environmental remediation, and potential goodwill or intangible-asset impairment indicators.