Element Solutions Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The company is a global specialty chemicals supplier serving electronics, industrial and specialty markets. Amounts below are in millions of U.S. dollars, except per-share data.
Financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $586.1 | $676.9 | $1,160.5 | $1,357.1 |
| Gross profit / margin | $228.5 / 39.0% | $249.8 / 36.9% | $456.3 / 39.3% | $512.8 / 37.8% |
| Operating profit / margin | $52.6 / 9.0% | $90.5 / 13.4% | $119.0 / 10.3% | $186.0 / 13.7% |
| Net income attributable to common stockholders | $29.9 | $65.2 | $72.8 | $121.3 |
| Diluted EPS attributable to common stockholders | $0.12 | $0.26 | $0.30 | $0.49 |
| Adjusted EBITDA / margin | $116.1 / 19.8% | $140.4 / 20.7% | $228.4 / 19.7% | $285.2 / 21.0% |
Q2 sales declined 13% reported, 12% at constant currency and 6% organically. First-half sales declined 14%, 12% and 6%, respectively, on those bases. Q2 GAAP net income included $2.9 million from discontinued operations; continuing-operations net income was $26.8 million.
- Cash flow: First-half operating cash flow was $134.4, versus $68.7 in 2022. Investing cash outflow was $213.7, including the ViaForm rights payment and Kuprion acquisition; financing cash inflow was $97.3. Cash ended the period at $282.4, up from $265.6 at year-end 2022.
- Liquidity and debt: Debt was $2,040.9, including $1,249.4 of term loans and $791.5 of senior notes; cash was $282.4. The company reported $392 million of availability under its revolving credit facility and other facilities, net of letters of credit, and said it was compliant with debt covenants. The first significant term-loan principal payment, approximately $1.23 billion, is due in 2026.
- Capital returns: First-half dividends were $38.7, or $0.16 per share. No common-stock repurchases were reported in the first half of 2023.
Changes and operating drivers
- Electronics sales fell 19% reported and 9% organically in Q2. Weakness in mobile phones, memory disks and advanced packaging weighed on Circuitry and Semiconductor Solutions. Assembly Solutions grew 3% organically, supported by core markets including automotive.
- Industrial & Specialty sales declined 2% reported and organically in Q2. Energy Solutions grew 11% organically, while Industrial and Graphics Solutions declined 3% each.
- Electronics Adjusted EBITDA fell 25% reported in Q2, mainly due to lower gross profit. Industrial & Specialty Adjusted EBITDA rose 2%, supported by Energy Solutions growth and lower logistics costs.
- Gross margin improved year over year, with lower pass-through metals pricing benefiting Assembly Solutions and lower logistics costs supporting Industrial & Specialty. However, operating margin and Adjusted EBITDA margin contracted as sales and operating leverage weakened.
Outlook, transactions and risks
- The filing provides no quantified full-year earnings or revenue guidance. Management said cash, operating cash generation and available borrowing capacity should cover working capital, interest, capital expenditures and other needs for at least the next 12 months. It expects to continue quarterly dividends, subject to board approval and future results.
- On June 1, the company reacquired ViaForm distribution rights for $200 million: $170 million was paid at closing and $30 million is deferred and contingent on transition-period conditions. The rights are expected to be managed in-house after transition. A $187 million intangible asset was recognized and will be amortized over 15 years.
- On May 19, the company acquired Kuprion for $15.9 million net of cash, with potential milestone payments of up to $259 million through 2030. The acquired technology remains in development; $15.7 million was expensed as R&D in Q2. Management did not expect contingent payments to be material for the remainder of 2023.
- The ViaForm transaction was partly funded with $150 million of new term loans. The company hedged that borrowing into fixed-rate euro-denominated debt through January 2026. Some existing hedges mature in January 2024; management cautioned that their expiration could materially increase interest expense.
- Key exposures include foreign-exchange and commodity-price volatility, weaker electronics demand, and global supply-chain disruption. The company reported $11.8 million of environmental liabilities and said it did not anticipate material losses above recorded amounts, while noting that ultimate exposure cannot be estimated as a range. It believes pending legal matters are not expected to have a material adverse effect.
- Other notable item: foreign-currency translation contributed a $58.6 million loss to other comprehensive income for the first half. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether electronics demand, particularly in mobile, memory and advanced packaging, stabilizes and supports sales and margins.
- Whether ViaForm’s transition and in-house operation deliver the expected supply-chain and customer benefits, and whether the deferred payment conditions are met.
- Kuprion technology qualification, revenue milestones and any resulting contingent payments, which may reach $259 million in aggregate.
- Interest expense sensitivity when hedges mature, including the January 2024 maturities, and the company’s ability to manage debt and covenant requirements.
- Working-capital and cash-flow trends, foreign-subsidiary cash availability, and the sustainability of dividends amid acquisition and debt-funding needs.
- Potential changes in environmental remediation estimates and other contingencies beyond amounts currently accrued.