Log in
E-mail
Password
Show password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

ELEMENT SOLUTIONS INC

(ESI)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector news

ELEMENT : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/29/2021 | 04:21pm EDT
This Management's Discussion and Analysis of Financial Condition and Results of
Operations section should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and related notes included in this Quarterly
Report, and the Consolidated Financial Statements, related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations section and other disclosures contained in our 2020 Annual Report.
This discussion contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those discussed in
these forward-looking statements. Factors that might cause a difference include,
but are not limited to, those discussed in "Forward-Looking Statements" of this
Quarterly Report, and in Part I, Item 1A, "Risk Factors" of our 2020 Annual
Report.
Overview
Our Business
Element Solutions, incorporated in Delaware in January 2014, is a leading global
specialty chemicals company whose businesses supply a broad range of solutions
that enhance the performance of products people use every day. Developed in
multi-step technological processes, these innovative solutions enable customers'
manufacturing processes in several key industries, including consumer
electronics, power electronics, semiconductor fabrication, communications and
data storage infrastructure, automotive systems, industrial surface finishing,
consumer packaging and offshore energy. Our businesses provide products that, in
substantially all cases, are consumed by customers as part of their production
process, providing us with reliable and recurring revenue streams as the
products are replenished in order to continue production. Our customers use our
innovation as competitive advantages, relying on us to help them navigate
through fast-paced, high-growth markets. Our product development and product
extensions are expected to continue to drive sales growth in both new and
existing markets, while expanding margins, through a consistent focus on
increasing customer value propositions.
We generate revenue from the development, formulation and sale of our chemistry
solutions globally. Our extensive global teams of specially trained scientists
and engineers develop our products and our expert sales and service
organizations ensure our customers' needs are met every day. We leverage close
relationships with our customers and OEMs to execute our growth strategy and
identify opportunities for new products. These new products are developed and
created by drawing upon our broad and longstanding intellectual property
portfolio and technical expertise. Our specialty chemicals and processes are
seen as integral to customer product performance. We believe that our customers
place significant value on the consistency and quality of our brands, which we
capitalize on through significant market share, customer loyalty and supply
chain access. Lastly, operational risks and switching costs make it difficult
for our customers to change suppliers which allows us to retain customers and
maintain our market positions.
Our Operations
Our operations are organized into two segments: Electronics and Industrial &
Specialty, which are each described below:
Electronics - The Electronics segment researches, formulates and sells specialty
chemicals and materials for all types of electronics hardware from complex
printed circuit board designs to advanced semiconductor packaging. In mobile
communications, computers, automobiles and aerospace equipment, its products are
an integral part of the electronics manufacturing process and the functionality
of end-products. The segment's "wet chemistries" for metallization, surface
treatments and solderable finishes form the physical circuitry pathways and its
"assembly materials," such as solders, pastes, fluxes and adhesives, join those
pathways together.
                                       19
--------------------------------------------------------------------------------

The segment provides specialty chemical solutions through the following businesses: Assembly Solutions

                As a global supplier of solder 

technologies, fluxes, cleaners and other

                                  attachment materials for the electronics 

assembly industry, we develop

                                  innovative materials that join electronic 

circuits in high volume device

                                  manufacturing. Our high-performing 

interconnect materials are used to

                                  assemble consumer electronics from 

circuit boards, discrete electronic

                                  components, connectors and integrated circuit substrates.
Circuitry Solutions               As a global supplier of chemical 

formulations to the electronics industry,

                                  we design and manufacture proprietary 

liquid chemical processes ("baths")

                                  used by our customers to manufacture 

printed circuit boards. Our product

                                  portfolio is focused on specialized 

consumable chemical processes, such as

                                  surface treatments, circuit formation, 

primary metallization, electroplate

                                  and final finishes.
Semiconductor Solutions           As a global supplier to the semiconductor 

industry, we provide advanced

                                  copper interconnects, die attachment, 

wafer bump processes and photomask

                                  technologies to our customers for 

integrated circuit fabrication and

                                  semiconductor packaging.


Industrial & Specialty - The Industrial & Specialty segment researches,
formulates and sells specialty chemicals that enhance surfaces or improve
industrial processes in diverse industrial sectors from automotive trim to
transcontinental infrastructure and from high-speed printing to high-design
faucets. Its products include chemical systems that protect and decorate metal
and plastic surfaces; consumable chemicals that enable printing image transfer
on flexible packaging materials; and chemistries used in water-based hydraulic
control fluids in offshore energy production. These fully consumable products
are used in the aerospace, automotive, construction, consumer electronics,
consumer packaged goods and oil and gas production end markets.
The segment provides specialty chemical solutions through the following
businesses:
Industrial Solutions             As a global supplier of industrial metal 

and plastic finishing chemistries, we

                                 primarily design and manufacture chemical 

systems that protect and decorate

                                 surfaces. Our high-performance functional 

coatings improve resistance to wear

                                 and tear, such as hard chrome plating of 

shock absorbers for cars or provide

                                 corrosion resistance for appliance parts. 

Our decorative performance coatings

                                 apply finishes for parts in various end 

markets such as automotive interiors

                                 or jewelry surfaces. As part of our 

broader sustainable solutions platform, we

                                 also provide both chemistry and equipment 

for turnkey wastewater treatment and

                                 recycle and reuse solutions. Our 

industrial customer base is highly diverse

                                 and includes customers in the following 

end markets: appliances and

                                 electronics equipment; automotive parts; 

industrial parts; plumbing goods;

                                 construction equipment and transportation 

equipment.

Graphics Solutions               As a supplier of consumable materials used 

to transfer images on to consumer

                                 packaging materials, our products are used 

to improve print quality and

                                 printing productivity. We produce and 

market photopolymers through an

                                 extensive line of flexographic plates that 

are used in the consumer packaging

                                 and printing industries. Photopolymers are 

molecules that change properties

                                 upon exposure to light. Flexography is a 

printing process that utilizes

                                 flexible printing plates made of rubber or other flexible plastics.
Energy Solutions                 As a global supplier of specialized fluids 

to the offshore energy industry, we

                                 produce water-based hydraulic control 

fluids for major oil and gas companies

                                 and drilling contractors to be used in 

offshore deep-water production and

                                 drilling applications.


Recent Developments
HKW Acquisition
On May 5, 2021, we completed the HKW Acquisition for $50.9 million, net of cash,
subject to post-closing adjustments. The H.K. Wentworth business specializes in
conformal coatings, encapsulation resins, thermal interface materials, contact
lubricants and cleaning chemistry and complements our broader electronics
portfolio with many applications overlapping with semiconductor technologies.
The operations of the H.K. Wentworth business are included in our Electronics
business segment.
                                       20
--------------------------------------------------------------------------------

Proposed Coventya Acquisition
On June 11, 2021, we announced our planned acquisition of Coventya Holdings SAS,
a global provider of specialty chemicals for the surface finishing industry, for
a purchase price expected to be approximately €420 million, subject to
adjustments. This acquisition is expected to close in September 2021, subject to
customary closing conditions. We expect to fund this acquisition with $400
million of add-on debt to our existing term loans and cash on hand. The add-on
transaction, which was priced and allocated on June 23, 2021, is expected to
close concurrently with the Coventya acquisition, subject to the finalization
and execution of its definitive documentation. On June 29, 2021, we also entered
into forward starting swaps to effectively convert the $400 million of
anticipated add-on debt into fixed-rate euro-denominated debt through their
maturity in January 2025. The forward starting swaps are expected to become
effective when the add-on transaction closes.
COVID-19 Update
The 2020 COVID-19 pandemic caused a global economic slowdown, significant
end-market volatility and business uncertainty. In an effort to contain COVID-19
or slow its spread, governments and businesses around the world undertook
significant countermeasures, including business closures, mandated "shelter in
place" orders, travel restrictions and other edicts, which have negatively
impacted, and continue to negatively impact, business activity around the globe.
In the context of the COVID-19 pandemic, our highest priority is protecting our
employees, customers and other stakeholders. We proactively developed and
continue to implement Company-wide COVID-19 health and safety policies and
procedures based on guidance from global health organizations, relevant
governments and pandemic response best practices. As the administration of
vaccine programs ramps up, we continue to monitor the implications of the
pandemic on our business as well as our customers' and suppliers' businesses.
The ultimate extent of the impact of COVID-19 on our business or our future
results of operations, financial condition, expected cash flows and/or stock
price remains unknown as COVID-19, including its variants, continue to spread.
The long-term impact of this pandemic will depend on numerous and evolving
factors that are highly uncertain, vary by market and cannot be quantified at
this time. These factors include the duration of the pandemic, the efficacy,
availability and/or public acceptance of vaccines targeting COVID-19, the impact
of variants of COVID-19 that may affect its spread or virulence or the
effectiveness of vaccines on the virus and/or its variants, and evolving
macroeconomic factors driven by the virus's overall spread and impact.
Recent Accounting Pronouncements
Our recent accounting pronouncements have not changed materially from the
summary disclosed in Note 3, Recent Accounting Pronouncements, to the
Consolidated Financial Statements included in our 2020 Annual Report.
Non-GAAP Financial Measures
To supplement our financial results presented in accordance with GAAP in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations section, we present certain non-GAAP financial measures, such as
operating results on a constant currency and organic basis and Adjusted EBITDA.
Management internally reviews these non-GAAP measures to evaluate performance on
a comparative period-to-period basis in terms of absolute performance, trends
and expected future performance with respect to our business. We believe these
non-GAAP financial measures, which are each further described below, provide
investors with an additional perspective on trends and underlying operating
results on a period-to-period comparable basis. We also believe that investors
find this information helpful in understanding the ongoing performance of our
operations separate from items that may have a disproportionate positive or
negative impact on our financial results in any particular period or are
considered to be associated with our capital structure.
These non-GAAP financial measures, however, have limitations as analytical tools
and should not be considered in isolation from, or a substitute for, or superior
to, the related financial information that we report in accordance with GAAP.
The principal limitation of these non-GAAP financial measures is that they
exclude significant expenses and income that are required by GAAP to be recorded
in our financial statements and may not be comparable to similarly titled
measures of other companies due to potential differences in calculation methods.
In addition, these measures are subject to inherent limitations as
                                       21
--------------------------------------------------------------------------------

they reflect the exercise of judgment by management about which items are
excluded or included in determining these non-GAAP financial measures. Investors
are encouraged to review the definitions and reconciliations of these non-GAAP
financial measures to their most comparable GAAP financial measures included in
this Quarterly Report and not to rely on any single financial measure to
evaluate our business.
Constant Currency
We disclose operating results, from net sales through operating profit and
Adjusted EBITDA, on a constant currency basis by adjusting to exclude the impact
of changes due to the translation of foreign currencies of our international
locations into U.S. dollars. Management believes this non-GAAP financial
information facilitates period-to-period comparison in the analysis of trends in
business performance, thereby providing valuable supplemental information
regarding our results of operations, consistent with how we internally evaluate
our financial results.
The impact of foreign currency translation is calculated by converting our
current-period local currency financial results into U.S. dollars using the
prior period's exchange rates and comparing these adjusted amounts to our prior
period reported results. The difference between actual growth rates and constant
currency growth rates represents the estimated impact of foreign currency
translation.
Organic Net Sales Growth
Organic net sales growth is defined as net sales excluding the impact of foreign
currency translation, changes due to the pass-through pricing of certain metals
and acquisitions and/or divestitures, as applicable. Management believes this
non-GAAP financial measure provides investors with a more complete understanding
of the underlying net sales trends by providing comparable net sales over
differing periods on a consistent basis.
For a reconciliation of GAAP net sales growth to organic net sales growth, see
"Net Sales" within the "Results of Operations" section below.
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA, excluding the impact of additional items
included in GAAP earnings which we believe are not representative or indicative
of our ongoing business or are considered to be associated with our capital
structure. Management believes Adjusted EBITDA provides investors with a more
complete understanding of the long-term profitability trends of our business and
facilitates comparisons of our profitability to prior and future periods.
For a reconciliation of "Net income attributable to common stockholders" to
Adjusted EBITDA, and more information about the adjustments made, see Note 13,
Segment Information, to the unaudited Condensed Consolidated Financial
Statements included in this Quarterly Report.
                                       22
--------------------------------------------------------------------------------

Results of Operations
Three and six months ended June 30, 2021 as compared to the three and six months
ended June 30, 2020
                                  Three Months Ended June 30,                                   % Change                                     Six Months Ended June 30,                                    % Change
 (dollars in millions)               2021                 2020            Reported          Constant Currency          Organic                 2021                 2020            Reported          Constant Currency          Organic
Net sales                      $       586.6           $ 387.0               52%                   44%                   30%            $      1,136.7           $ 839.6               35%                   30%                   20%
Cost of sales                          348.1             224.5               55%                   46%                                           657.2             479.8               37%                   31%
Gross profit                           238.5             162.5               47%                   41%                                           479.5             359.8               33%                   28%
Gross margin                            40.7   %          42.0  %         (130) bps             (100) bps                                        
42.2   %          42.9  %         (70) bps              (50) bps
Operating expenses                     167.5             123.0               36%                   31%                                           308.6             265.7               16%                   12%
Operating profit                        71.0              39.5               80%                   70%                                           170.9              94.1               82%                   73%
Operating margin                        12.1   %          10.2  %          190bps                180bps                                           15.0   %          11.2  %          380bps                370bps
Other expense, net                     (23.8)            (31.4)             (24)%                                                                (10.3)            (73.5)             (86)%
Income tax benefit (expense)            31.9              (5.8)             (nm)                                                                   0.8              (9.9)             (nm)
Net income from continuing
operations                              79.1               2.3              (nm)                                                                 161.4              10.7              (nm)
Income (loss) from
discontinued operations, net
of tax                                   2.0              (1.1)             (nm)                                                                   2.0              (0.9)             (nm)
Net income                     $        81.1           $   1.2              (nm)                                                        $        163.4           $   9.8              (nm)

Adjusted EBITDA                $       133.1           $  84.8               57%                   47%                                  $        271.0           $ 194.9               39%                   32%
Adjusted EBITDA margin                  22.7   %          21.9  %           80bps                 50bps                                           23.8   %          23.2  %           60bps                 40bps

(nm) Calculation not meaningful.

                                       23
--------------------------------------------------------------------------------

Net Sales
Net sales in the second quarter of 2021 increased by 52% on a reported basis,
44% on a constant currency basis and 30% on an organic basis. Electronics'
consolidated results were positively impacted by $41.6 million of pass-through
metals pricing and $6.1 million of acquisitions and Industrial & Specialty's
consolidated results were positively impacted by $5.0 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and
organic net sales growth:
                                    Three Months Ended June 30,                                                                                    % Change
                                                                         Reported Net              Impact of
 (dollars in millions)                 2021              2020            Sales Growth              Currency             Constant Currency          Pass-Through Metals Pricing          Acquisitions           Organic Net Sales Growth
Electronics:
Assembly Solutions                  $  205.1          $ 112.2                 83%                    (9)%                      74%                            (37)%                          -%                          37%
Circuitry Solutions                    111.5             92.8                 20%                    (7)%                      13%                             -%                            -%                          13%
Semiconductor Solutions                 65.3             48.2                 35%                    (4)%                      31%                             -%                           (13)%                        18%
Total                                  381.9            253.2                 51%                    (7)%                      44%                            (16)%                         (2)%                         25%

Industrial & Specialty:
Industrial Solutions                   148.2             83.6                 77%                    (10)%                     67%                             -%                           (6)%                         61%
Graphics Solutions                      40.0             34.6                 16%                    (5)%                      11%                             -%                            -%                          11%
Energy Solutions                        16.5             15.6                 6%                     (6)%                       0%                             -%                            -%                           0%
Total                                  204.7            133.8                 53%                    (8)%                      45%                             -%                           (4)%                         41%

Total                               $  586.6          $ 387.0                 52%                    (8)%                      44%                            (11)%                         (3)%                         30%


NOTE: Totals may not sum due to rounding.
Electronics' net sales in the second quarter of 2021 increased 51% on a reported
basis and 25% on an organic basis.
•Assembly Solutions: net sales increased 83% on a reported basis and 37% on an
organic basis. Pass-through metals pricing had a positive impact of 37% on
reported net sales. Foreign exchange had a positive impact of 9% on reported net
sales. The increase in organic net sales was primarily due to continued recovery
compared to COVID-19-related production slowdowns in the same period in 2020 as
well as stronger demand from power electronics customers.
•Circuitry Solutions: net sales increased 20% on a reported basis and 13% on an
organic basis. Foreign exchange had a positive impact of 7% on reported net
sales. The increase in organic net sales was primarily due to higher automotive
demand in Asia and stronger demand from memory disk customers.
•Semiconductor Solutions: net sales increased 35% on a reported basis and 18% on
an organic basis. The HKW Acquisition had a positive impact of 13% on reported
net sales. Foreign exchange had a positive impact of 4% on reported net sales.
The increase in organic net sales was primarily due to higher net sales of
advanced plating chemistries containing precious metals and strong demand for
wafer plating chemistries in the 5G telecommunications infrastructure and
automotive end markets.
Industrial & Specialty's net sales in the second quarter of 2021 increased 53%
on a reported basis and 41% on an organic basis.
•Industrial Solutions: net sales increased 77% on a reported basis and 61% on an
organic basis. The DMP Acquisition had a positive impact of 6% on reported net
sales. Foreign exchange had a positive impact of 10% on reported net sales. The
increase in organic net sales was primarily due to strong global recovery
compared to COVID-19-related production slowdowns in the same period in 2020,
primarily in the automotive markets, and improved demand in construction and
industrial manufacturing markets in Europe.
•Graphics Solutions: net sales increased 16% on a reported basis and 11% on an
organic basis. Foreign exchange had a positive impact of 5% on reported net
sales. The increase in organic net sales was primarily due to packaging growth
in the Americas and Europe.
                                       24
--------------------------------------------------------------------------------

•Energy Solutions: net sales increased 6% on a reported basis and remained
relatively flat on an organic basis. Foreign exchange had a positive impact of
6% on reported net sales. Organic results reflect muted new drilling activity in
both the current and prior year periods.
Year to date, net sales increased by 35% on a reported basis, 30% on a constant
currency basis and 20% on an organic basis. Electronics' consolidated results
were positively impacted by $64.3 million of pass-through metals pricing and
$6.1 million of acquisitions and Industrial & Specialty's consolidated results
were positively impacted by $9.7 million of acquisitions.
The following table reconciles GAAP net sales growth to constant currency and
organic net sales growth:
                                         Six Months Ended June 30,                                                                                        % Change
                                                                                Reported Net              Impact of
 (dollars in millions)                     2021                 2020            Sales Growth              Currency             Constant Currency          Pass-Through Metals Pricing          Acquisitions          Organic Net Sales Growth
Electronics:
Assembly Solutions                  $         394.1          $ 238.2                 65%                    (7)%                      58%                            (27)%                          -%                         31%
Circuitry Solutions                           219.8            185.7                 18%                    (6)%                      12%                             -%                            -%                         12%
Semiconductor Solutions                       121.5             98.2                 24%                    (3)%                      21%                             -%                           (6)%                        15%
Total                                         735.4            522.1                 41%                    (6)%                      35%                            (12)%                         (1)%                        21%

Industrial & Specialty:
Industrial Solutions                          294.5            209.5                 41%                    (7)%                      34%                             -%                           (5)%                        29%
Graphics Solutions                             74.7             73.2                 2%                     (3)%                      (1)%                            -%                            -%                         (1)%
Energy Solutions                               32.1             34.8                (8)%                    (3)%                     (10)%                            -%                            -%                        (10)%
Total                                         401.3            317.5                 26%                    (5)%                      21%                             -%                           (3)%                        18%

Total                               $       1,136.7          $ 839.6                 35%                    (6)%                      30%                            (8)%                          (2)%                        20%


NOTE: Totals may not sum due to rounding.
Year to date, Electronics' net sales increased 41% on a reported basis and 21%
on an organic basis.
•Assembly Solutions: net sales increased 65% on a reported basis and 31% on an
organic basis. Pass-through metals pricing had a positive impact of 27% on
reported net sales. Foreign exchange had a positive impact of 7% on reported net
sales. The increase in organic net sales was primarily due to automotive
recovery compared to COVID-19-related production slowdowns in the first half of
2020 as well as stronger demand from power electronics customers.
•Circuitry Solutions: net sales increased 18% on a reported basis and 12% on an
organic basis. Foreign exchange had a positive impact of 6% on reported net
sales. The increase in organic net sales was primarily due to robust demand in
mobile applications and automotive compared to COVID-19-related production
slowdowns in the first half of 2020.
•Semiconductor Solutions: net sales increased 24% on a reported basis and 15% on
an organic basis. The HKW Acquisition had a positive impact of 6% on reported
net sales. Foreign exchange had a positive impact of 3% on reported net sales.
The increase in organic net sales was primarily due to higher net sales of
advanced plating chemistries containing precious metals and strong demand for
wafer plating chemistries in the 5G telecommunications infrastructure and
automotive end markets.
Year to date, Industrial & Specialty's net sales increased 26% on a reported
basis and 18% on an organic basis.
•Industrial Solutions: net sales increased 41% on a reported basis and 29% on an
organic basis. The DMP Acquisition had a positive impact of 5% on reported net
sales. Foreign exchange had a positive impact of 7% on reported net sales. The
increase in organic net sales was primarily due to strong global recovery
compared to COVID-19-related production slowdowns in the first half of 2020, and
improved demand in construction and industrial manufacturing markets in Europe.
•Graphics Solutions: net sales increased 2% on a reported basis and decreased 1%
on an organic basis. Foreign exchange had a positive impact of 3% on reported
net sales. The decrease in organic net sales was primarily due to stronger
COVID-19-related demand in Europe and the Americas for consumer packaged goods
in the first quarter of 2020 that did not recur.
                                       25
--------------------------------------------------------------------------------

•Energy Solutions: net sales decreased 8% on a reported basis and 10% on an
organic basis. Foreign exchange had a positive impact of 3% on reported net
sales. The decrease in organic net sales was primarily due to volatile energy
prices, which significantly curtailed production and drilling activity globally,
primarily in the first quarter of 2021.
Gross Profit
                                 Three Months Ended June 30,                         % Change                          Six Months Ended June 30,                         % Change
 (dollars in millions)              2021                 2020            Reported          Constant Currency             2021                2020            Reported          Constant Currency
Gross profit
Electronics                   $       149.3           $ 101.9               47%                   41%              $      299.0           $ 214.3               40%                   34%
Industrial & Specialty                 89.2              60.6               47%                   41%                     180.5             145.5               24%                   20%
Total                         $       238.5           $ 162.5               47%                   41%              $      479.5           $ 359.8               33%                   28%

Gross margin
Electronics                            39.1   %          40.3  %         (120) bps             (90) bps                    40.7   %          41.1  %         (40) bps              (30) bps
Industrial & Specialty                 43.6   %          45.3  %         (170) bps             (130) bps                   45.0   %          45.8  %         (80) bps              (50) bps
Total                                  40.7   %          42.0  %         (130) bps             (100) bps                   42.2   %          42.9  %         (70) bps              (50) bps


Electronics' gross profit in the second quarter of 2021 increased by 47% on a
reported basis and 41% on a constant currency basis. The constant currency
increase in gross profit was primarily driven by increased net sales in all
business lines. The decrease in gross margin was primarily due to increased net
sales of products containing metals in our Assembly business, higher logistics
costs and raw material prices.

Industrial & Specialty's gross profit in the second quarter of 2021 increased by
47% on a reported basis and 41% on a constant currency basis. The constant
currency increase in gross profit was primarily driven by the impact of higher
volumes in automotive, construction and industrial manufacturing. The decrease
in gross margin was primarily due to unfavorable product mix and higher raw
material prices.

Year to date, Electronics' gross profit increased by 40% on a reported basis and
34% on a constant currency basis. The constant currency increase in gross profit
was primarily driven by increased net sales in all business lines. The decrease
in gross margin was primarily due to increased net sales of products containing
metals in our Assembly business, higher raw material prices and logistics costs,
primarily in the second quarter of 2021.

Year to date, Industrial & Specialty's gross profit increased by 24% on a
reported basis and 20% on a constant currency basis. The constant currency
increase in gross profit was primarily driven by the impact of higher volumes in
automotive, construction and industrial manufacturing. The decrease in gross
margin was primarily due to higher raw material prices and logistics costs,
primarily in the second quarter of 2021.
                                       26
--------------------------------------------------------------------------------
Operating Expenses
                                   Three Months Ended June 30,                         % Change                          Six Months Ended June 30,                         % Change
 (dollars in millions)                2021                 2020            Reported          Constant Currency             2021                2020            Reported          Constant Currency
Selling, technical, general and
administrative                  $       154.7           $ 113.4               36%                   31%              $      284.3           $ 238.6               19%                   15%
Research and development                 12.8               9.6               34%                   32%                      24.3              27.1              (10)%                 (12)%
Total                           $       167.5           $ 123.0               36%                   31%              $      308.6           $ 265.7               16%                   12%

Operating expenses as % of Net
sales
Selling, technical, general and
administrative                           26.4   %          29.3  %         (290) bps             (260) bps                   25.0   %          28.4  %         (340) bps             (310) bps
Research and development                  2.2   %           2.5  %         (30) bps              (20) bps                     2.1   %           3.2  %         (110) bps             (100) bps
Total                                    28.6   %          31.8  %         (320) bps             (280) bps                   27.2   %          31.6  %         (440) bps             (420) bps


Operating expenses in the second quarter of 2021 increased 36% on a reported
basis and 31% on a constant currency basis. The increase was primarily driven by
a stock compensation adjustment of $13.6 million for performance-based RSUs
previously considered not probable and $6.9 million of higher incentive
compensation costs, primarily due to higher accruals associated with increased
expectations for strong full year 2021 financial results. In addition, higher
personnel costs, including the impact of temporary employee salary reductions
and furloughs in the prior year period, $4.7 million of operating expenses
related to the recently acquired H.K. Wentworth and the DMP businesses that were
not in the prior year period and $4.6 million of higher acquisition and
integration expenses, including the proposed Coventya acquisition.

Year to date, operating expenses increased 16% on a reported basis and 12% on a
constant currency basis. The increase was primarily driven by a stock
compensation adjustment of $13.6 million for performance-based RSUs previously
considered not probable and $13.5 million of higher incentive compensation
costs, primarily due to higher accruals associated with increased expectations
for strong full year 2021 financial results. In addition, higher personnel
costs, including the impact of temporary employee salary reductions and
furloughs in the prior year period and $6.8 million of operating expenses
related to the recently acquired H.K. Wentworth and the DMP businesses that did
not impact the prior year period contributed to the increase. These increases
were partially offset by $6.3 million of research and development expense
incurred in the first quarter of 2020 related to the acquisition of a new subsea
production control fluid designed to complement our Energy Solutions business.

Other (Expense) Income

                                                    Three Months Ended June 30,            Six Months Ended June 30,
 (dollars in millions)                                 2021              2020                2021                2020
Other (expense) income
Interest expense, net                               $  (12.9)         $ (16.9)         $       (25.8)         $ (33.6)
Foreign exchange (loss) gain                            (5.2)           (12.8)                  22.8            (38.6)
Other expense, net                                      (5.7)            (1.7)                  (7.3)            (1.3)
Total                                               $  (23.8)         $ (31.4)         $       (10.3)         $ (73.5)


Interest Expense, Net
For the three and six months ended June 30, 2021, net interest expense decreased
$4.0 million and $7.8 million, respectively, primarily due to our private
offering of $800 million aggregate principal amount of 3.875% USD Notes due 2028
and the subsequent full redemption of our 5.875% USD Notes due 2025 during the
third quarter of 2020.
Foreign Exchange (Loss) Gain
For the three months ended June 30, 2021, foreign exchange loss decreased $7.6
million primarily due to the remeasurement of euro-denominated intercompany
balances.
                                       27
--------------------------------------------------------------------------------

For the six months ended June 30, 2021, foreign exchange gain increased $61.4
million primarily due to the remeasurement of euro- and British
pound-denominated intercompany balances.
Other Expense, Net
For the three and six months ended June 30, 2021, other expense, net included
$1.8 million of expense associated with the forward starting swaps discussed in
Note 7, Financial Instruments. Losses associated with metals forward contracts
were $3.4 million and $6.8 million for the three and six months ended June 30,
2021, respectively, and $1.6 million and $1.7 million for the three and six
months ended June 30, 2020, respectively.
Income Tax
The comparison of the Company's income tax provision between periods can be
significantly impacted by the level and mix of earnings and losses by tax
jurisdiction and discrete items. See Note 11, Income Taxes, for further
information.
Other Comprehensive Income (Loss)
Other comprehensive income for the three months ended June 30, 2021 totaled
$37.1 million, as compared to $11.2 million for the same period in the prior
year. The change was primarily driven by foreign currency translation gains
associated with the Brazilian real and Chinese yuan.
Other comprehensive loss for the six months ended June 30, 2021 totaled $8.2
million, as compared to $43.3 million for the same period in the prior year. The
change was primarily driven by the revaluation of the Company's interest rate
swaps and foreign currency translation gains associated with the Brazilian real
and Chinese yuan partially offset by foreign currency translation losses
associated with the euro and British pound.
Segment Adjusted EBITDA Performance
                                    Three Months Ended June 30,                        % Change                          Six Months Ended June 30,                         % Change
 (dollars in millions)                 2021                2020            Reported          Constant Currency             2021                2020            Reported          Constant Currency
Adjusted EBITDA:
Electronics                      $        90.7           $ 58.0               56%                   46%              $      183.2           $ 124.5               47%                   39%
Industrial & Specialty                    42.4             26.8               58%                   50%                      87.8              70.4               25%                   19%
Total                            $       133.1           $ 84.8               57%                   47%              $      271.0           $ 194.9               39%                   32%

Adjusted EBITDA margin:
Electronics                               23.7   %         22.9  %          80 bps                50 bps                     24.9   %          23.9  %          100 bps               70 bps
Industrial & Specialty                    20.7   %         20.0  %          70 bps                70 bps                     21.9   %          22.2  %         (30) bps              (30) bps
Total                                     22.7   %         21.9  %          80 bps                50 bps                     23.8   %          23.2  %          60 bps                40 bps


For the three months ended June 30, 2021, Electronics' Adjusted EBITDA increased
56% on a reported basis and 46% on a constant currency basis. Industrial &
Specialty's Adjusted EBITDA increased 58% on a reported basis and 50% on a
constant currency basis. The constant currency increase in both segments was
primarily driven by higher gross profit and leverage on disciplined operating
expense growth compared to COVID-19-related production slowdowns in the second
quarter of 2020.

For the six months ended June 30, 2021, Electronics' Adjusted EBITDA increased
47% on a reported basis and 39% on a constant currency basis. The constant
currency increase was primarily driven by higher gross profit and leverage on
disciplined operating expense recovery. Industrial & Specialty's Adjusted EBITDA
increased 25% on a reported basis and 19% on a constant currency basis. The
constant currency increase was primarily driven by higher gross profit modestly
offset by increased incentive compensation costs, primarily due to increased
expectations for strong full year 2021 financial results compared to
COVID-19-related production slowdowns in the first half of 2020.
                                       28
--------------------------------------------------------------------------------

Liquidity and Capital Resources
Our primary source of liquidity during the six months ended June 30, 2021 was
available cash generated from operations. Our primary uses of cash and cash
equivalents were to fund operations, debt service obligations, capital
expenditures, working capital, dividend payments and the HKW Acquisition. Our
first significant debt principal payment of approximately $700 million, related
to the maturity of our outstanding term loans under the Credit Agreement, is not
due until 2026.
We currently expect to pay a 6 cents per share dividend on a quarterly basis.
However, the actual declaration of any cash dividends, as well as their amounts
and timing, will be subject to the final determination of our Board of Directors
based on factors including our future earnings and cash flow generation.
On June 11, 2021, we announced our planned acquisition of Coventya Holdings SAS,
a global provider of specialty chemicals for the surface finishing industry, for
a purchase price expected to be approximately €420 million, subject to
adjustments. This acquisition is expected to close in September 2021, subject to
customary closing conditions. We expect to fund this acquisition with $400
million of add-on debt to our existing term loans and cash on hand. The add-on
transaction, which was priced and allocated on June 23, 2021, is expected to
close concurrently with the Coventya acquisition, subject to the finalization
and execution of its definitive documentation, including entering into an
amendment to the Credit Agreement and closing of the incremental facility for
the increase of the existing term loans. On June 29, 2021, we also entered into
forward starting swaps to effectively convert the $400 million of anticipated
add-on debt into fixed-rate euro-denominated debt through their maturity in
January 2025. The forward starting swaps are expected to become effective when
the add-on transaction closes.
We believe that our cash and cash equivalents and cash generated from
operations, supplemented by our availability under our lines of credit,
including our revolving credit facility under the Credit Agreement, will be
sufficient to meet our working capital needs, interest payments, capital
expenditures, potential dividend payments and other business requirements for at
least the next twelve months. However, working capital cycles and/or future
repurchases of our common stock and/or acquisitions may require additional
funding, which may include future debt and/or equity offerings. Our long-term
liquidity may be influenced by our ability to borrow additional funds,
renegotiate existing debt and raise equity under terms that are favorable to us.
We may from time to time seek to repurchase our equity and/or to retire or
repurchase our outstanding debt through cash purchases and/or exchanges for
equity, in open market purchases, privately negotiated transactions or
otherwise. Such repurchases or exchanges, if any, will depend on prevailing
market conditions, our liquidity requirements, contractual restrictions,
applicable restrictions under our various financing arrangements and other
factors.
During the six months ended June 30, 2021, approximately 75% of our net sales
were generated from non-U.S. operations, and we expect a large portion of our
net sales to continue to be generated outside of the U.S. As a result, our
foreign subsidiaries will likely continue to hold a substantial portion of our
cash. We expect to manage our worldwide cash requirements based on available
funds among the many subsidiaries through which we conduct business and the cost
effectiveness with which those funds can be accessed. We may transfer cash from
certain international subsidiaries to the U.S. and/or other international
subsidiaries when we believe it is cost effective to do so.
We continually review our domestic and foreign cash profile, expected future
cash generation and investment opportunities, which support our current
designation of a portion of these funds as being indefinitely reinvested, and
reassess whether there are demonstrated needs to repatriate a portion of these
funds being held internationally. If, as a result of our review, we determine
that all or a portion of the funds require repatriation, we may be required to
accrue additional taxes. Of our $318 million of cash and cash equivalents at
June 30, 2021, $186 million was held by our foreign subsidiaries. During the six
months ended June 30, 2021, domestic cash was primarily used for debt service
obligations and dividend payments.
                                       29
--------------------------------------------------------------------------------

The following is a summary of our cash flows provided by (used in) operating,
investing, and financing activities of continuing operations during the periods
indicated:
                                                 Six Months Ended June 30,
 (dollars in millions)                               2021                 2020

Cash provided by operating activities     $       113.0                 $ 

124.7

Cash used in investing activities         $       (49.1)                $ 

(19.2)

Cash used in financing activities         $       (37.3)                $ 

(38.3)



Operating Activities
Net cash flows provided by operating activities decreased $11.7 million. Higher
cash operating profits (net income adjusted for non-cash items) and $6.5 million
of lower interest payments were more than offset by higher levels of working
capital, including a build of safety inventory and higher raw materials costs,
higher annual incentive compensation payments, primarily in the first quarter
that were associated with our 2020 performance, and $5.6 million of higher cash
taxes.
Investing Activities
The increase in net cash flows used in investing activities was primarily driven
by the $50.9 million payment for the HKW Acquisition in the second quarter of
2021 partially offset by $19.0 million of cash received for the sale of a
dormant facility in New Jersey during the first quarter of 2021.
Financing Activities
During the six months ended June 30, 2021, we paid dividends of $27.2 million.
During the six months ended June 30, 2020, we repurchased shares of our common
stock for an aggregate purchase price of $33.1 million.
Financial Borrowings
Credit Facilities & Senior Notes
At June 30, 2021, we had $1.51 billion of indebtedness, net of unamortized
discounts and debt issuance costs, which primarily included:
•$789 million of 3.875% USD Notes due 2028; and
•$725 million of term debt arrangements outstanding under our term loans.
Availability under the revolving credit facility and various lines of credit and
overdraft facilities totaled $349 million at June 30, 2021 (net of $5.5 million
of stand-by letters of credit which reduce our borrowing capacity).
Covenants
At June 30, 2021, we were in compliance with the customary affirmative and
negative covenants, events of default and other customary provisions of the
Credit Agreement, as well as with the covenants included in the indenture
governing the 3.875% USD Notes.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The quantitative and qualitative disclosures about market risk required by this
item have not changed materially from those disclosed in our 2020 Annual Report.
For a discussion of our exposure to market risk, refer to Part II, Item 7A,
Quantitative and Qualitative Disclosures about Market Risk, contained in our
2020 Annual Report.
                                       30

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses

All news about ELEMENT SOLUTIONS INC
10/14ELEMENT SOLUTIONS INC : Announces Date for 2021 Third Quarter Earnings Release
BU
10/13ELEMENT : Mizuho Securities Starts Element Solutions at Buy With $27 Price Target
MT
10/01ELEMENT : Morgan Stanley Adjusts Price Target on Element Solutions to $22.50 From $22, Mai..
MT
09/01ELEMENT SOLUTIONS INC : Entry into a Material Definitive Agreement, Creation of a Direct F..
AQ
09/01Element Solutions Inc, MacDermid, Incorporated, Certain Subsidiaries of the Company Par..
CI
09/01ELEMENT : Complete $500 Million Acquisition of Coventya Holding
MT
09/01ELEMENT SOLUTIONS INC : Announces Closing of Coventya Acquisition
BU
08/19ELEMENT SOLUTIONS INC : Declares Q3 Dividend of $0.06 Per Share
BU
08/19Element Solutions Inc Declares Quarterly Cash Dividend, Payable on September 15, 2021
CI
07/29ELEMENT : Management's Discussion and Analysis of Financial Condition and Results of Opera..
AQ
More news
Analyst Recommendations on ELEMENT SOLUTIONS INC
More recommendations