Element Solutions Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Element Solutions is a global specialty chemicals company organized into Electronics and Industrial & Specialty segments. Unless otherwise stated, amounts are in U.S. dollars.
Financial results and liquidity
- Third-quarter revenue: $477.5 million, up 3% reported and 2% at constant currency year over year, but down 2% organically. Gross profit was $203.5 million; gross margin was 42.6%, down 170 basis points. Operating profit was $58.6 million and operating margin was 12.3%, down 210 basis points.
- Third-quarter earnings: Net income attributable to common stockholders was $36.0 million, or $0.15 per diluted share, versus a $6.9 million loss, or $0.03 loss per share, in Q3 2019. Adjusted EBITDA, a non-GAAP measure, was $101.8 million, down 12%; its margin was 21.3%, down 350 basis points.
- Nine-month results: Revenue was $1.317 billion, down 5% reported and 7% organically. Operating profit was $152.7 million, down 9%; net income attributable to common stockholders was $45.8 million, or $0.19 per diluted share. Adjusted EBITDA was $296.7 million, down 6%.
- Segment performance in Q3: Electronics revenue rose 10% reported and 2% organically to $306.8 million; segment Adjusted EBITDA was $72.0 million, down 3%. Industrial & Specialty revenue declined 8% reported and 10% organically to $170.7 million; Adjusted EBITDA declined 28% to $29.8 million.
- Cash flow: Continuing-operations operating cash flow for the first nine months was $194.3 million, versus $92.1 million a year earlier. Capital expenditures were $21.7 million. Cash and cash equivalents were $248.4 million at September 30, 2020, including $208 million held by foreign subsidiaries.
- Debt and liquidity: Debt totaled $1.517 billion, compared with $1.521 billion at year-end 2019. The company had $325 million available under its revolving credit facility, net of letters of credit, and reported compliance with debt covenants. Current liabilities were $302.4 million and current assets were $946.6 million.
Material changes and unusual items
- In August, the company issued $800 million of 3.875% senior notes due 2028 and used proceeds plus cash to redeem its $800 million 5.875% notes due 2025. Management expects the 200-basis-point rate reduction to lower annual interest payments by $16 million. The redemption generated a $45.7 million expense: a $33.6 million make-whole premium and $12.1 million write-off of debt costs and discount.
- Q3 included a $47.3 million income tax benefit, principally reflecting approximately $42 million of benefits from U.S. Treasury regulations concerning GILTI and interest limitations, related to 2018 and 2019 tax years. This benefit materially affected reported quarterly net income.
- Nine-month foreign exchange losses were $42.1 million, primarily associated with remeasurement of euro- and British pound-denominated intercompany balances.
- The company acquired Industrial Water Treatment Solutions Corporation (DMP) on July 1; the acquisition was not material to the reported financial statements. It also launched MacDermid Envio Solutions, focused on wastewater treatment and recovery/reuse solutions.
- Cash repurchases of common stock totaled $35.7 million in the first nine months. The remaining authorization was approximately $207 million at September 30; an additional $17.3 million repurchase occurred on October 6.
Management commentary, outlook and risks
- Management said market conditions improved sequentially in Q3, particularly in automotive markets. Electronics benefited from recovery in automotive, semiconductor growth, 5G infrastructure and data-center demand. Industrial & Specialty remained pressured by COVID-related weakness in automotive, consumer durables, aerospace and oil and gas; Graphics also faced lower volumes and delayed customer marketing campaigns.
- The company expects to pay a quarterly dividend of $0.05 per share, approximately 20% of expected annual free cash flow, subject to Board approval. Management believes cash, operating cash generation and available credit should meet requirements for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- COVID-19’s continuing effects are uncertain and could affect customer demand, supply chains, operations, collections, costs and financial markets. Management noted the pandemic makes estimates and judgments more difficult; actual results may differ materially.
- Environmental liabilities recorded were $11.0 million. The company did not anticipate material losses beyond recorded amounts, but said the range of reasonably possible additional environmental losses could not be estimated. It also retained certain legal and tax liabilities related to the 2019 Arysta sale.
- Management identified potential goodwill or intangible-asset impairment if a prolonged stock-price decline occurs; those assets were carried at $2.19 billion and $860 million, respectively. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Q3 improvement in end-market conditions persists, and whether organic sales weakness in Industrial & Specialty reverses.
- How much reported earnings depended on the one-time tax benefit and refinancing expense, versus recurring operating performance.
- Whether expected $16 million annual interest savings are realized and how refinancing affects future interest expense and debt maturities.
- Cash accessibility and potential tax costs associated with the $208 million held by foreign subsidiaries, alongside planned dividends and share repurchases.
- Future COVID-19 effects, environmental and Arysta-related contingencies, and the risk of impairment to goodwill and intangible assets.