Business context and reporting period
Element Solutions Inc. filed this Form 10-K for the fiscal year ended December 31, 2021. It is a global specialty chemicals company operating through Electronics and Industrial & Specialty, serving electronics, semiconductor, industrial surface-finishing, packaging and offshore-energy markets. Its products are largely consumables used in customers’ manufacturing processes.
2021 included the acquisitions of HKW (May; $50.9 million net of cash) and Coventya (September; $486 million net of cash). The HSO acquisition closed in January 2022 for $20.3 million net of cash.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Net sales | $2,399.8 million | $1,853.7 million |
| Gross profit / margin | $960.8 million / 40.0% | $786.0 million / 42.4% |
| Operating profit / margin | $299.9 million / 12.5% | $232.7 million / 12.6% |
| Net income attributable to common stockholders | $203.3 million | $75.7 million |
| Diluted EPS attributable to common stockholders | $0.82 | $0.30 |
| Adjusted EBITDA / margin | $524.9 million / 21.9% | $422.6 million / 22.8% |
| Cash provided by operating activities | $326.0 million | $276.0 million |
Sales rose 29% as reported, 26% at constant currency and 13% organically. Acquisitions and pass-through metals pricing contributed materially to reported growth. Electronics sales were $1,533.8 million and Industrial & Specialty sales were $866.0 million. Gross margin and Adjusted EBITDA margin declined, with management citing higher raw-material and logistics costs, metals mix and acquisition-related inventory step-up costs.
Capital expenditures were $46.3 million; investing cash outflow was $568.9 million, primarily reflecting acquisitions. Cash and cash equivalents were $330.1 million, including $183 million held by foreign subsidiaries. Current assets were $1,214.5 million and current liabilities were $415.2 million.
Total debt was $1,906.9 million at year-end, including $1,113.0 million of term loans and $789.4 million of 3.875% senior notes due 2028. The company reported $325 million of unused revolving-facility capacity, net of letters of credit, and compliance with debt covenants. The first significant term-loan principal payment, approximately $1.08 billion, is due in 2026. The company states its cash, operating cash flow and available credit are expected to meet requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Sales grew across most businesses; organic growth was 13%. Energy Solutions organic sales fell 6%, reflecting curtailed and delayed offshore activity.
- Net income increased substantially, while reported operating profit rose 29%. Prior-year results included a $45.7 million debt-extinguishment loss and larger foreign-exchange losses.
- Interest expense declined to $54.2 million from $63.4 million, partly reflecting refinancing in 2020; the 2021 $400 million add-on term loan partly offset the reduction.
- Operating cash flow increased by $50.0 million, but inventories and accounts receivable rose, reflecting safety-stock buildup, higher raw-material costs and business growth.
- Debt increased with acquisition financing. Dividends paid rose to $61.9 million from $12.4 million; the company repurchased $19.6 million of shares in 2021.
Outlook, management commentary, risks and unusual items
Management describes growth opportunities in electronics, advanced semiconductor packaging, automotive electronics and industrial markets, and intends to pursue innovation, operational improvements and selective acquisitions. The filing provides no specific quantitative earnings or revenue guidance.
Key risks include inflation and availability of raw materials, freight and supply-chain disruptions, foreign-exchange and interest-rate exposure, competition and changing technology, COVID-19 uncertainty, environmental and product regulation, litigation, and integration and valuation risks from acquisitions. A cyber intrusion affecting certain IT systems was disclosed in January 2022.
Goodwill was $2.53 billion. The Energy Solutions reporting unit’s fair value exceeded its carrying value by less than 10%, making its valuation sensitive to performance and assumptions. Environmental liabilities were $13.1 million; the company could not estimate a reasonably possible loss range beyond recorded liabilities. It also reported $106.6 million of unrecognized tax benefits. 2021 tax expense included a $63.6 million benefit from releasing valuation allowances and a $29.4 million increase in the provision for uncertain tax positions. Other notable adjustments included $23.9 million of performance-based stock compensation and acquisition-related inventory step-up costs.
The company reported an unqualified audit opinion and effective internal control over financial reporting at year-end.
Important facts for investors to verify
- How much of future growth is organic, versus acquisition contributions, foreign exchange and metals pass-through pricing.
- Whether raw-material, freight and labor cost pressures ease and margins recover.
- Debt leverage, variable-rate exposure, hedging effectiveness and the company’s capacity to fund acquisitions, dividends and repurchases.
- Energy Solutions performance and goodwill impairment headroom, particularly given the business’s exposure to offshore activity.
- Developments in the cyber incident, environmental matters and uncertain tax positions, and any resulting financial impact.