Element Solutions Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company makes specialty chemicals for electronics and industrial markets. Its Arysta agricultural business was sold on January 31, 2019; results for that business are reported as discontinued operations for all periods.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $456.7 million | $501.6 million | $916.5 million | $994.1 million |
| Operating profit | $55.5 million | $59.2 million | $100.6 million | $118.1 million |
| Net income from continuing operations | $14.7 million | $(49.6) million | $11.2 million | $(58.5) million |
| Net income attributable to common stockholders, including discontinued operations | $1.5 million | $12.0 million | $24.7 million | $49.3 million |
| Adjusted EBITDA, non-GAAP | $100.5 million | $109.4 million | $199.1 million | $213.5 million |
- Q2 sales declined 9% reported and 6% organically; first-half sales fell 8% reported and 4% organically. Foreign currency translation partly offset the reported declines.
- Q2 gross margin was 42.3%, down 0.5 percentage point; operating margin was 12.2%, up 0.4 point. Adjusted EBITDA margin increased 0.2 point to 22.0%. For the first half, gross margin was 42.7% and operating margin 11.0%.
- Q2 diluted EPS was $0.01, including a $0.06 contribution from continuing operations and a $(0.05) loss from discontinued operations. First-half diluted EPS was $0.09.
- Q2 net interest expense fell to $18.2 million from $78.3 million, principally following debt repayment after the Arysta sale. Q2 included a $28.3 million foreign-exchange loss, mainly from remeasurement of euro- and pound-denominated intercompany balances.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $247.6 million; total debt and finance lease obligations were $1.573 billion, compared with $5.376 billion at year-end 2018.
- Continuing-operations operating cash flow was $5.3 million for the first half, versus an outflow of $12.7 million a year earlier. Capital expenditures were $11.4 million.
- The Arysta sale generated $4.282 billion of net cash proceeds. Financing activities used $4.322 billion, including approximately $4.60 billion of debt repayments and $445 million of share repurchases.
- The company reported $275 million of unused capacity under its new revolving facility, net of letters of credit; availability across that facility and other credit lines was approximately $303 million. It was compliant with debt covenants.
- Management said cash, operating cash generation and available credit should be sufficient for working capital, interest, capital expenditures and other requirements for at least the next 12 months. Expected annual interest payments were approximately $70 million over the next three years, factoring in hedges.
Material changes and management commentary
- After the Arysta divestiture, the company used proceeds and a new $750 million term loan to repay existing facilities and redeem its 6.00% euro notes and 6.50% dollar notes. The $800 million 5.875% dollar notes due 2025 remained outstanding.
- Q2 organic sales declined across both segments. Electronics was affected by weakness in Asian mobile-phone markets, memory-disk demand and the semiconductor market. Industrial & Specialty faced softer European industrial and automotive markets, weaker graphics demand and lower Energy Solutions sales.
- A customer loss in Energy Solutions negatively affected organic sales growth; management expected the impact to continue through the remainder of 2019. Lower volumes also pressured gross profit, especially in higher-margin Energy Solutions products.
- Lower corporate costs, incentive compensation and cost-containment measures helped support margins. Management cited ongoing benefits from its corporate reorganization.
- No quantified revenue, earnings or other formal full-year guidance is provided in the filing. Management stated that lower interest expense should continue following deleveraging.
Unusual items, risks and contingencies
- Q2 discontinued operations recorded a $13.3 million after-tax loss, including an $18.8 million loss on Arysta sale adjustments. The company reported a $2.5 million year-to-date gain on the sale, but the overall transaction was described as a $448 million loss, including a $450 million impairment recorded in 2018. Further tax-related sale adjustments could produce a future gain or loss.
- First-half other expense included $61.0 million of debt-refinancing costs. The company also expensed $44.0 million of premiums and unamortized costs to redeem the prior senior notes.
- Environmental liabilities were $16.5 million. The company did not anticipate material losses beyond recorded amounts, but said it could not estimate a reasonably possible range of additional environmental losses. It also retained certain Arysta legal and tax liabilities, primarily involving Brazil; resolution may take years.
- Foreign-exchange movements, global demand, customer concentration in certain product lines, commodity prices and tax outcomes are relevant uncertainties. The filing reported no material change to the risk factors in the 2018 annual report.
- The company repurchased approximately 38.2 million shares for $445 million in the first half and had about $305 million remaining under its authorization. A universal shelf registration statement was filed on August 2, 2019, allowing potential future securities offerings.
Important facts for investors to verify
- Whether sales weakness in electronics and the Energy Solutions customer loss persist, and how they affect organic growth and margins.
- Cash conversion and working-capital performance, given first-half continuing-operations cash flow of only $5.3 million.
- Debt reduction, interest costs, covenant compliance and the company’s intended use of remaining cash and repurchase authorization.
- Final tax and other post-closing adjustments related to the Arysta sale, along with retained Brazilian proceedings and environmental exposures.
- How much reported earnings and Adjusted EBITDA depend on non-GAAP adjustments and unusual refinancing, foreign-exchange and divestiture items.