Element Solutions Inc. — 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it is not a standalone fourth-quarter report. The filing text does not provide a clear set of fourth-quarter-only financial results. Element Solutions supplies specialty chemicals and process technologies through its Electronics and Industrial & Specialty segments. The company reported $2.55 billion of 2022 net sales, approximately 63% from Electronics and 37% from Industrial & Specialty.
Key financial results
| Metric | 2022 | 2021 | Change or context |
|---|---|---|---|
| Net sales | $2,549.4 million | $2,399.8 million | +6% reported; +13% constant currency; +5% organic |
| Gross profit / margin | $952.7 million / 37.4% | $960.8 million / 40.0% | Gross profit down 1%; margin down 260 bps |
| Operating profit / margin | $325.3 million / 12.8% | $299.9 million / 12.5% | Operating profit up 8% |
| Net income attributable to common stockholders | $187.2 million; $0.76 diluted EPS | $203.3 million; $0.82 diluted EPS | Down 8% in net income |
| Adjusted EBITDA / margin | $526.6 million / 20.7% | $524.8 million / 21.9% | Flat reported; margin down 120 bps |
| Cash from operating activities | $295.9 million | $326.0 million | Down $30.1 million |
| Cash and cash equivalents | $265.6 million | $330.1 million | $174 million held by foreign subsidiaries |
| Debt | $1.90 billion | $1.91 billion | Primarily term loans and 3.875% notes due 2028 |
Liquidity and capital allocation. The company reported $369 million of unused revolving-credit availability, net of letters of credit, and said cash, operating cash flow and available credit should fund expected requirements for at least the next 12 months. Debt covenants were met at year-end. It repurchased 8.0 million shares for $151 million and paid $78.4 million in dividends during 2022. The first large scheduled term-loan principal payment, approximately $1.08 billion, is due in 2026.
Material changes versus 2021
- Reported sales rose, but the stronger constant-currency growth rate reflects a 7% adverse foreign-exchange translation impact on sales. Organic growth was 5%.
- Cost of sales increased 11%, and gross margin declined amid raw-material and logistics inflation, product mix and pass-through metal sales. Management said pricing actions and commercial execution helped offset these pressures.
- Operating expenses fell 5% reported, partly due to lower incentive compensation and stock-based compensation; acquisition-related operating costs partially offset the reductions.
- Net income declined as income-tax expense rose to $85.8 million from $48.3 million; the effective tax rate increased to 32% from 19%.
- Operating cash flow declined, primarily due to higher incentive-compensation payments, partly offset by working-capital management and higher cash operating profits.
- HSO was acquired for approximately $23 million, net of cash. The Films business was moved from Industrial & Specialty to Electronics, and prior-period segment information was reclassified.
Management outlook, risks and unusual items
- Outlook: Management described expectations for continued product innovation, growth in existing and adjacent markets, and margin expansion through customer value and execution. The filing provides no specific quantitative 2023 earnings or sales guidance.
- End markets and operations: Management cited declines in mobile-phone and consumer-electronics volumes, reduced activity in Asia in the second half, and softening demand in flexographic plates. It reported organic sales growth despite these conditions.
- Debt and hedging: Swaps had effectively converted term loans to fixed-rate euro debt at an approximately 1.6% rate at year-end. Hedges covering the initial $750 million term loans expire in January 2024 and those for the $400 million add-on loans expire in January 2025; management warned that expiration without replacement could raise interest expense.
- Goodwill: No goodwill impairment was recorded. Management estimated that fair value exceeded carrying value by about 20% for the Graphics Solutions and Energy Solutions reporting units; future impairment remains possible if cash flows weaken or valuation assumptions change. The auditor identified this assessment as a critical audit matter.
- Environmental and legal matters: Recorded environmental liabilities were $11.6 million. The company did not anticipate material losses beyond recorded liabilities but said the ultimate exposure cannot be estimated clearly; ordinary-course legal matters were also disclosed.
- Other principal risks: Raw-material availability and cost, inflation, supply-chain disruption, foreign-exchange volatility, international operations, changing customer demand and technology, chemical and environmental regulation, cyber threats, and acquisition integration. Russia, Ukraine and Belarus were not a material portion of the business and the company reported no physical assets there, but wider conflict-related disruption could affect costs and supply chains.
Important facts for investors to verify
- Review the full financial statements and non-GAAP reconciliations, particularly the drivers of lower gross margin and the gap between reported, constant-currency and organic sales growth.
- Assess debt repayment capacity, covenant headroom and the interest-cost effect when swaps expire in 2024 and 2025.
- Monitor cash generation and working capital alongside planned dividends, repurchases and any future acquisitions.
- Track performance and valuation assumptions for Graphics Solutions and Energy Solutions, given their limited goodwill valuation cushion and the auditor’s critical audit matter.
- Follow environmental claims, remediation developments, tax examinations and changes in applicable chemical and climate-related regulation.
- Note that the financial statements received an unqualified audit opinion and management and the auditor concluded internal control over financial reporting was effective at December 31, 2022.