Element Solutions Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021, compared with the three months ended March 31, 2020. Element Solutions is a global specialty chemicals company reporting through Electronics and Industrial & Specialty segments. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Net sales | $550.1 million | $452.6 million | Up 22% reported, 17% constant currency and 11% organic |
| Gross profit / margin | $241.0 million / 43.8% | $197.3 million / 43.6% | Margin up 20 basis points |
| Operating profit / margin | $99.9 million / 18.2% | $54.6 million / 12.1% | Profit up 83%; margin up 610 basis points |
| Net income attributable to common stockholders | $82.3 million | $8.6 million | Includes a major year-over-year swing in foreign exchange results |
| Diluted EPS | $0.33 | $0.03 | From continuing operations |
| Adjusted EBITDA and margin | $137.9 million / 25.1% | $110.1 million / 24.3% | Up 25% reported, 20% constant currency; margin up 80 basis points |
| Operating cash flow | $32.6 million | $61.2 million | Down $28.6 million |
| Capital expenditures | $8.5 million | $10.5 million | Operating cash flow less capital expenditures was $24.1 million, calculated |
Segments and material changes
- Electronics: Sales of $353.5 million, up 31% reported and 18% organic. Adjusted EBITDA was $92.5 million, up 39%. Growth reflected stronger Assembly demand, including automotive recovery in Asia and power electronics, and increased Circuitry and Semiconductor demand.
- Industrial & Specialty: Sales of $196.6 million, up 7% reported and 1% organic. Adjusted EBITDA was $45.4 million, up 4%. Industrial Solutions improved, while Graphics and Energy Solutions declined; Energy weakness reflected reduced global production and drilling activity.
- Reported sales growth included $22.8 million of pass-through metals pricing in Electronics and $4.7 million of acquisition impact in Industrial & Specialty. DMP contributed to Industrial Solutions growth.
- Operating expenses declined 1% reported, partly because the prior-year quarter included $6.3 million of development expense related to a subsea-fluid acquisition. Higher incentive compensation partly offset the decline.
Cash, debt and liquidity
- Cash and cash equivalents were $317.5 million at March 31, 2021, versus $291.9 million at year-end 2020; $211 million was held by foreign subsidiaries.
- Total debt was $1.514 billion, principally $788.4 million of 3.875% senior notes due 2028 and $726.0 million of term loans due 2026. Net debt was approximately $1.197 billion, calculated as debt less cash.
- Availability under the revolving credit facility and other credit lines was approximately $349 million, net of letters of credit; the revolving facility alone had $325 million available. The company reported compliance with its debt covenants.
- Operating cash flow was affected by the amount and timing of interest and incentive payments and increased working capital, including safety-inventory building amid potential supply-chain disruptions. Investing cash flow included $19.0 million received from the sale of a dormant New Jersey facility.
- The company paid $12.4 million in dividends in the quarter. It had no revolving-facility borrowings at quarter-end.
Outlook, risks and unusual items
- Management said cash, operating cash generation and available credit should be sufficient for working capital, debt service, capital expenditures and potential dividends for at least the next 12 months. The filing provides no specific numerical full-year earnings or sales guidance.
- Subject to Board approval, management expected to pay a quarterly dividend of $0.06 per share beginning in Q2 2021; declaration, amount and timing remain at the Board’s discretion.
- COVID-19’s duration, variants, vaccine effectiveness and broader economic effects remained uncertain. Management also cited potential supply-chain disruption and higher safety inventory.
- Other income included a $28.0 million foreign-exchange gain in Q1 2021, compared with a $25.8 million loss in Q1 2020, primarily from remeasurement of euro- and pound-denominated intercompany balances. This materially affected the net-income comparison.
- The company recognized a $3.9 million gain on the New Jersey facility sale. Environmental liabilities were $9.9 million; the company did not anticipate material losses beyond recorded amounts but could not estimate a range of reasonably possible excess losses. It did not expect material losses from other disclosed legal matters or retained Arysta-related proceedings, though outcomes remain uncertain.
- Foreign-currency movements and derivative valuations contributed to a $45.3 million other comprehensive loss. The company uses currency, commodity and interest-rate hedges; it expected $17.4 million of expense to be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months.
- Disclosure controls were reported effective, and the company reported no material change in internal control over financial reporting during the quarter. No material changes to the prior annual report’s risk factors were reported.
Most important facts for investors to verify
- How much of earnings growth is supported by operating performance versus the unusually favorable foreign-exchange comparison; review GAAP results alongside Adjusted EBITDA and its adjustments.
- Whether working-capital and safety-inventory investment eases and operating cash flow improves in subsequent quarters.
- Whether organic growth and margins persist, especially given Electronics strength and ongoing weakness in Graphics and Energy Solutions.
- Dividend continuation and cash accessibility, including the location of foreign-held cash and any tax costs of repatriation.
- Future supply-chain, COVID-19, foreign-exchange and commodity-price effects, as well as developments in environmental and retained legal contingencies.