Element Solutions Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The company is a global specialty chemicals supplier organized into Electronics and Industrial & Specialty. Unless noted, results below are from continuing operations; former Agricultural Solutions is reported as discontinued operations following its sale.
Financial performance
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Net sales | $1,835.9 million | $1,961.0 million | Down 6% reported; down 4% organic and at constant currency |
| Gross profit / margin | $788.3 million / 42.9% | $837.6 million / 42.7% | Profit down 6%; margin up 20 basis points |
| Operating profit / margin | $249.1 million / 13.6% | $248.5 million / 12.7% | Profit essentially flat; margin up 90 basis points |
| Net income (loss) from continuing operations | $79.6 million | $(77.0) million | Improved year over year |
| Net income (loss) attributable to common stockholders | $92.2 million | $(324.4) million | 2018 included substantial discontinued-operation losses |
| Adjusted EBITDA (non-GAAP) / margin | $416.7 million / 22.7% | $420.7 million / 21.5% | Down 1% reported; up 3% at constant currency; margin up 120 basis points |
| Cash from continuing operating activities | $170.9 million | $(0.8) million | Improved substantially |
| Cash and total debt at year-end | $190.1 million / $1,521.0 million | $233.6 million / $5,376.0 million | Debt fell markedly after asset sale and refinancing |
| Working capital | $562.5 million | $545.2 million | Continuing operations |
Revenue was split between Electronics, $1,085.7 million (59%), and Industrial & Specialty, $750.2 million (41%). Electronics Adjusted EBITDA rose 2% reported to $252.9 million; Industrial & Specialty fell 5% to $163.8 million. Overall, lower operating expenses and broadly stable gross margins supported higher operating and Adjusted EBITDA margins despite lower sales.
Material changes and capital allocation
- The Arysta sale closed January 31, 2019, generating $4.28 billion in net cash proceeds. The company used proceeds principally to repay approximately $4.60 billion of existing debt and redeemed its prior USD and EUR notes. The $800 million 5.875% senior notes due 2025 remained outstanding.
- At year-end, debt included $786.7 million of 5.875% notes and $733.4 million of term loans. The $330 million revolving facility had $325 million available net of letters of credit; the company reported compliance with debt covenants.
- The company repurchased approximately 44.8 million shares for about $507 million in 2019. Approximately $243 million remained under the $750 million authorization at year-end. No cash dividends had been paid on common stock.
- Cash from investing activities was $4,199.7 million, largely reflecting Arysta sale proceeds; cash used in financing was $4,438.9 million, primarily reflecting debt repayments and share repurchases. Capital expenditures were $29.7 million.
- The December 2019 Kester acquisition added electronics assembly and semiconductor materials for $63.9 million, net of cash and closing adjustments.
Outlook, risks and unusual items
- Management expected cash, operating cash generation and available credit to cover working capital, interest, capital expenditures and other needs for at least the next 12 months. Expected annual interest payments were approximately $65 million over the following three years, considering swaps. No quantified sales or earnings guidance was provided.
- Management attributed lower sales to softness in consumer and industrial electronics, mobile phones, automotive, European industrial markets and China; trade tensions also pressured demand. Strength in advanced assembly products for telecom/5G and automotive electronics partly offset weakness. Energy Solutions lost certain business, expected to weigh on organic growth through the first quarter of 2020.
- 2019 included $62.0 million of debt refinancing costs, $14.1 million of restructuring costs, a $31.9 million foreign-exchange gain on long-term debt, and a $17.4 million non-cash gain from remeasurement of MacDermid contingent consideration. Net interest expense fell to $90.7 million from $311.0 million, mainly due to debt reduction after the Arysta sale.
- The 2018 discontinued-operation loss included an approximately $450 million Arysta sale impairment. The 2019 discontinued-operation income of $13.3 million primarily reflected post-closing adjustments.
- Approximately 76% of 2019 sales were generated outside the U.S.; foreign currency translation reduced reported sales growth by about 3%. The company identified exposure to currency, raw-material costs, trade measures, economic and technology shifts, and environmental, product-liability and other legal matters.
- Energy Solutions goodwill was approximately $250 million, and its estimated fair value exceeded carrying value by less than 20%. Management said sensitivity testing did not indicate impairment under the specified 100-basis-point WACC increase or terminal-growth decrease, but further impairment could occur if cash flows weaken or valuation assumptions change.
- Environmental liabilities were $12.0 million at year-end; management could not estimate a reasonably possible loss range above recorded liabilities. The company also retained certain legal and tax liabilities from the Arysta sale. It disclosed that the potential business impact of coronavirus was uncertain at the filing date.
Important facts for investors to verify
- Whether the sales declines and demand weakness persisted, particularly in electronics, automotive, China and Energy Solutions.
- Debt balances, available revolver capacity, covenant headroom, and the effects of variable rates and refinancing terms.
- Cash generation and the ongoing impact of share repurchases on liquidity and share count.
- Drivers of 2019 continuing-operations profitability and the large fourth-quarter improvement: continuing net income was $74.4 million in Q4 versus losses in each of the first and third quarters; Q4 sales were $454.7 million versus $478.4 million in Q4 2018.
- Energy Solutions goodwill valuation assumptions, deferred-tax-asset realizability, and developments in retained Arysta, environmental and other legal contingencies.