Business context and reporting period
Element Solutions Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company is a global specialty chemicals supplier, reporting in Electronics and Industrial & Specialty. Comparisons below are with the corresponding 2019 periods; dollars are in millions except per-share data.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $387.0 | $456.7 | $839.6 | $916.5 |
| Gross profit / margin | $162.5 / 42.0% | $193.0 / 42.3% | $359.8 / 42.9% | $391.3 / 42.7% |
| Operating profit / margin | $39.5 / 10.2% | $55.5 / 12.2% | $94.1 / 11.2% | $100.6 / 11.0% |
| Net income attributable to common stockholders | $1.2 | $1.5 | $9.8 | $24.7 |
| Adjusted EBITDA / margin | $84.8 / 21.9% | $100.5 / 22.0% | $194.9 / 23.2% | $199.1 / 21.7% |
| Diluted EPS attributable to common stockholders | $0.01 | $0.01 | $0.04 | $0.09 |
- Q2 sales fell 15% reported, 13% at constant currency and 15% organically. Six-month sales fell 8% reported, 6% at constant currency and 9% organically.
- Q2 operating expenses declined 11% reported, reflecting cost controls and reduced travel and personnel costs. Six-month operating expenses declined 9%; research and development expense rose, including a $6.3 million charge for a subsea production-control-fluid product acquired in development.
- Q2 net interest expense was $16.9 million, versus $18.2 million; foreign-exchange loss was $12.8 million, versus $28.3 million. For the first half, foreign-exchange loss was $38.6 million, versus $1.2 million, mainly from remeasurement of euro- and British pound-denominated intercompany balances.
- At June 30, cash and cash equivalents were $237.3 million, versus $190.1 million at year-end 2019. Current assets were $839.4 million and current liabilities $245.7 million.
- For the first half, operating cash flow from continuing operations was $124.7 million, compared with $5.3 million. Capital expenditures were $15.0 million. Cash used in continuing investing activities was $19.2 million and cash used in continuing financing activities was $38.3 million. The prior-year investing cash flow included $4.28 billion of Arysta sale proceeds.
- Debt totaled $1.519 billion, primarily $787.7 million of 5.875% notes due 2025 and $730.5 million of term loans due 2026. The company had no revolving-credit borrowings, reported compliance with debt covenants, and had $325 million available under its revolving facility; availability across revolving and other credit facilities was approximately $349 million, net of letters of credit.
Material changes versus the prior comparable period
- COVID-19-related demand weakness drove pronounced declines in Assembly Solutions and Industrial Solutions. Q2 sales in those businesses fell 18% and 37%, respectively, on a reported basis.
- Semiconductor Solutions grew 26% reported in Q2, supported by semiconductor, advanced-packaging, 5G infrastructure and data-center demand. Circuitry Solutions rose 1% reported. Electronics Adjusted EBITDA declined 4% reported in Q2, while Industrial & Specialty Adjusted EBITDA declined 33%.
- Q2 gross margin was down 30 basis points and operating margin down 200 basis points year over year. Adjusted EBITDA margin was nearly flat, down 10 basis points. For the first half, Adjusted EBITDA margin increased 150 basis points despite lower sales.
- Series A preferred stock converted into common stock in February 2020. The company repurchased approximately 3.7 million shares for $33.1 million in the first half, with no repurchases in Q2.
Outlook, risks and contingencies
- Management said COVID-19 demand pressure was expected to continue in the near term, particularly in Assembly Solutions and Industrial Solutions. It expected semiconductor sales growth to moderate to a more normalized level in the second half of 2020. The filing provides no specific full-year financial guidance.
- The pandemic’s duration and effects on demand, manufacturing, supply chains, customers, collections, costs and financial markets remained uncertain. Management noted that a prolonged share-price decline could trigger impairment of goodwill or intangible assets, carried at $2.13 billion and $869 million, respectively.
- Management stated that cash, operating cash generation and available credit were expected to cover working capital, interest, capital expenditures and other requirements for at least the next 12 months. Of $237 million in cash, $170 million was held by foreign subsidiaries; repatriation could result in additional taxes.
- Environmental liabilities were $11.2 million. The company did not anticipate material losses above recorded amounts but said additional information could require reassessment. It retained certain Arysta-related legal and tax liabilities; resolution may take years and could adversely affect results, although no material losses were expected.
- Other notable items included $40.9 million of first-half adjusted EBITDA add-backs for foreign-exchange losses on foreign-denominated external and internal long-term debt. These are non-GAAP adjustments; review the reconciliation and definition of Adjusted EBITDA alongside GAAP results.
Key facts for investors to verify
- Whether demand and production conditions in automotive, industrial and other COVID-affected end markets improved or worsened after June 30.
- Whether semiconductor growth and Electronics margin performance offset continued weakness in Assembly and Industrial Solutions.
- Cash-flow sustainability, foreign-held cash accessibility, debt covenant headroom and the company’s capital-allocation plans, including share repurchases.
- Potential impairment exposure for goodwill and intangibles, and developments in retained Arysta, environmental and other legal or tax matters.
- The effect of foreign-exchange movements and tax items on reported earnings, and the assumptions underlying non-GAAP Adjusted EBITDA.