Element Solutions Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless stated otherwise, financial amounts are in U.S. dollars and millions. The filing presents the former Agricultural Solutions business, Arysta, as discontinued operations; continuing-operations comparisons therefore exclude it from both periods.
Business context and material developments
Element Solutions is a global specialty chemicals company, with continuing operations in Electronics and Industrial & Specialty. On January 31, 2019, it completed the sale of Arysta to UPL for approximately $4.2 billion in cash, subject to post-closing adjustments. Proceeds were primarily used to repay debt. The company also refinanced its credit facilities and redeemed its prior 2022 and 2023 senior notes. On February 8, it repurchased and retired 37 million shares for approximately $434 million, about 13% of shares then outstanding.
Financial performance
- Revenue and margins: Continuing net sales were $459.8, down 7% reported, 2% at constant currency and 3% organically. Gross profit was $198.3, down 6%; gross margin increased 20 basis points to 43.1%. Operating profit was $45.1, down 23%, and operating margin fell 220 basis points to 9.8%.
- Segment sales: Electronics sales were $265.9, down 8% reported and 5% organically; Industrial & Specialty sales were $193.9, down 5% reported and flat organically. Weak mobile-phone-related demand weighed on Electronics, particularly Circuitry Solutions. Industrial & Specialty had mixed performance across businesses.
- Adjusted EBITDA: $98.6, down 5% reported but up 1% at constant currency; margin was 21.4%, compared with 21.1%. Electronics contributed $56.4 and Industrial & Specialty $42.2. This is a non-GAAP measure; reported results include significant adjustments, including $60.7 of debt refinancing costs.
- Profit: Continuing operations recorded a net loss of $3.5, compared with a loss of $8.9 a year earlier. Including discontinued operations, net income was $23.9, down from $38.0; diluted earnings per share were $0.09 versus $0.13. Discontinued-operations income was $27.4, including a $21.3 gain recorded on the Arysta sale during the quarter. The filing says the sale resulted in a total loss of $429 over the transaction process, primarily from reclassification of accumulated foreign-currency translation losses.
- Interest, tax and unusual items: Net interest expense fell to $38.1 from $77.2, mainly following debt repayment. Other expense was $48.0 and included $60.7 of refinancing costs, partly offset by derivative gains. The company recorded a $10.4 income tax benefit, versus $9.9 expense in Q1 2018.
- Cash flow: Continuing operating activities used $32.0, compared with $49.4 used in Q1 2018. Continuing investing activities provided $4,194.1, principally from the Arysta sale; continuing financing activities used $4,240.5, principally for debt repayment and the share repurchase. Cash and cash equivalents were $230.4 at March 31, versus $233.6 at year-end; $215 was held by foreign subsidiaries.
- Debt and liquidity: Total debt and capital lease obligations were $1,644.5, down from $5,376.0 at December 31, 2018. The balance included $785.3 of 5.875% notes due 2025 and $738.0 of term loans due 2026. The new credit agreement provides a $330 revolving facility and a $750 term loan; reported available revolving and other line capacity totaled approximately $232, net of letters of credit. The company reported covenant compliance. Management estimated annual interest payments of approximately $70 over the next three years, considering hedges.
Outlook, risks and contingencies
- Management said lower interest expense from deleveraging is expected to continue and believes cash, operating cash generation and available credit will cover needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management noted that the loss of certain Energy Solutions business in March is expected to weigh on organic sales growth for the remainder of 2019. It also cited mobile-phone market weakness and mixed regional and product demand.
- The company retained certain Arysta-related legal and tax liabilities, primarily involving a Brazilian subsidiary. It does not expect material losses from those proceedings, but resolution may take years; post-closing adjustments and tax matters could result in a further gain or loss.
- Environmental liabilities were $16.9 at quarter-end. The company did not anticipate material losses beyond amounts recorded, but said it could not estimate the range of reasonably possible excess losses. It reported no material change in risk factors from its 2018 Form 10-K.
- Other notable items include a $40.0 contingent-consideration payment, the adoption of lease accounting that added $67.3 of right-of-use assets and $68.4 of lease liabilities, and a $1.0 increase in the annual advisory fee to an affiliate, effective February 1.
Most important facts for investors to verify
- Final Arysta sale adjustments, retained Brazilian proceedings and any subsequent transaction-related gain or loss.
- Underlying sales and margin trends after separating currency, discontinued operations and market-specific demand weakness.
- Cash generation, foreign cash accessibility, debt service and continued compliance with credit-agreement covenants.
- Whether the company uses the remaining $316 of its authorized share-repurchase program and how further repurchases affect liquidity.
- The composition and persistence of non-GAAP adjustments, particularly refinancing costs and foreign-exchange effects.