Element Solutions Inc (NYSE:ESI, Financial) (“Element Solutions” or the “Company”), a global and diversified specialty chemicals company, today announced its financial results for the three and six months ended June 30, 2023.
Executive Commentary
President and Chief Executive Officer Benjamin Gliklich said, "Element Solutions reported sequential adjusted EBITDA growth in what we believe is the trough of the most severe dislocation in the electronics market in recent history. Our results demonstrate outperformance relative to a market that saw double digit declines in key electronics drivers, such as smartphone units and semiconductor production. We seized the opportunity created by this backdrop to improve our capabilities in leading-edge technologies at the bottom of the cycle. Bringing our ViaForm® product line fully in-house and adding Kuprion’s ActiveCopper™ applications to our portfolio immediately improved our offering at the leading edge. Customers' feedback has been extremely positive, and we have active commercial engagements associated with both offerings. These investments strengthen our ability to deliver technologies to the most demanding and innovative customers in the market, positioning our business to benefit disproportionately from the fastest growing and highest value segments in the electronics supply chain.”
Mr. Gliklich concluded, “We believe the second quarter was the trough and see evidence of acceleration in electronics already in July. Our semiconductor customers are increasing utilization and smartphone channel inventories are being digested based on third party sell-through and sell-in data. However, the baseline from which we are growing is lower than expected, compounded by additional currency headwinds from the Chinese renminbi, and therefore our expectations for 2023 full year earnings have moderated. We are reducing our full year 2023 adjusted EBITDA guidance to a range of $490 million to $500 million, which assumes recovering demand and the impact of certain cost actions underway. The expected exit velocity of our business together with the full year impact of our cost activity position us well for strong earnings growth in 2024. Our investments this quarter support significant longer-term outperformance.”
Second Quarter 2023 Highlights (compared with second quarter 2022)
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Net sales on a reported basis for the second quarter of 2023 were $586 million, a decrease of 13% over the second quarter of 2022. Organic net sales decreased 6%.
- Electronics: Net sales decreased 19% to $356 million. Organic net sales decreased 9%.
- Industrial & Specialty: Net sales decreased 2% to $230 million. Organic net sales decreased 2%.
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Second quarter of 2023 earnings per share (EPS) performance:
- GAAP diluted EPS was $0.11 for the second quarter of 2023 as compared to $0.25 for the second quarter of 2022.
- Adjusted EPS was $0.31, as compared to $0.38 for the same period last year.
- Reported net income was $27 million for the second quarter of 2023 as compared to $64 million for the second quarter of 2022.
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Adjusted EBITDA for the second quarter of 2023 was $116 million, a decrease of 17%. On a constant currency basis, adjusted EBITDA decreased 14%.
- Electronics: Adjusted EBITDA was $76 million, a decrease of 25%. On a constant currency basis, adjusted EBITDA decreased 22%.
- Industrial & Specialty: Adjusted EBITDA was $40 million, an increase of 2%. On a constant currency basis, adjusted EBITDA increased 5%.
- Adjusted EBITDA margin decreased 90 basis points to 19.8% on a reported basis. On a constant currency basis, adjusted EBITDA margin decreased 60 basis points.
Updated 2023 Guidance
The Company expects third quarter 2023 adjusted EBITDA of approximately $125 million. For the full-year 2023, the Company now expects adjusted EBITDA to be in the range of $490 million to $500 million. For 2023, the Company expects adjusted EPS of approximately $1.30 and free cash flow of approximately $265 million.
Recent Developments
ViaForm Distribution Rights - On June 1, 2023, the Company terminated its long-standing distribution agreement related to its ViaForm® electrochemical deposition products for $200 million, including $170 million paid at closing and a deferred payment of $30.0 million which remains contingent upon satisfaction of certain conditions during the applicable transition period. Following the transition period, the Company expects to manage all aspects of the ViaForm® product line in-house, which it believes will result in a more efficient supply chain and improved customer outcomes for leading semiconductor fabricators. Based on the run rate of adjusted EBITDA from the ViaForm® product line as of the closing date and at current demand levels, the Company expects the ViaForm® business to contribute a baseline of approximately $15 million to annual adjusted EBITDA, with significant growth potential from expected synergies and market opportunities.
The transaction was funded with $150 million of term loans A under the Company's senior credit facility and cash on hand. The Company also entered into interest rate swaps and cross-currency swaps to effectively convert the term loans A from U.S. dollar denominated debt obligations into fixed-rate euro-denominated debt through January 2026.
Kuprion Acquisition - On May 19, 2023, the Company completed the acquisition of Kuprion, Inc. for approximately $15.9 million, net of cash with potential additional payments in various installments to be made upon the achievement of certain milestones associated with product qualification and revenue through December 31, 2030. Kuprion is a developer of next-generation nano-copper technology to the semiconductor, circuit board and electronics assembly markets.
Conference Call
Element Solutions will host a webcast/dial-in conference call to discuss its 2023 second quarter financial results at 8:30 a.m. (Eastern Time) on Thursday, July 27, 2023. Participants on the call will include President and Chief Executive Officer Benjamin Gliklich, Chief Financial Officer Carey J. Dorman and Executive Chairman Sir Martin E. Franklin.
To listen to the call by telephone, please dial 888-510-2346 (domestic) or 646-960-0111 (international) and provide the Conference ID: 3799230. The call will be simultaneously webcast at www.elementsolutionsinc.com. A replay of the call will be available after completion of the live call at www.elementsolutionsinc.com.
About Element Solutions
Element Solutions Inc 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.
More information about the Company is available at www.elementsolutionsinc.com.
Forward-Looking Statements
This release is intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995 as it contains "forward-looking statements" within the meaning of the federal securities laws. These statements will often contain words such as "expect," "anticipate," "project," "will," "should," "believe," "intend," "plan," "assume," "estimate," "predict," "seek," "continue," "outlook," "may," "might," "aim," "can have," "likely," "potential," "target," "hope," "goal," "priority," "guidance" or "confident" and variations of such words and similar expressions. Examples of forward-looking statements include, but are not limited to, statements, beliefs, projections and expectations regarding the expected benefits of the ViaForm® and Kuprion investments, including improved capabilities and offerings in leading edge technologies and market position to benefit disproportionately from market trends; commercial engagements and deferred payments related to these investments; expected contribution of the ViaForm® transaction to the Company's adjusted EBITDA and revenue and significant growth potential; evidence of acceleration in electronics in July 2023; increased utilization from semiconductor customers; smartphone channel inventories trends; recovering demand and impact of certain cost activity in 2023; strong earnings growth in 2024; longer-term outperformance; third quarter 2023 adjusted EBITDA guidance; and full-year 2023 guidance for adjusted EBITDA, adjusted EPS and free cash flow. These projections and statements are based on management's estimates, assumptions or expectations with respect to future events and financial performance, and are believed to be reasonable, though are inherently uncertain and difficult to predict. Such projections and statements are based on the assessment of information available as of the current date, and the Company does not undertake any obligations to provide any further updates. Actual results could differ materially from those expressed or implied in these forward-looking statements if one or more of the underlying estimates, assumptions or expectations prove to be inaccurate or are unrealized. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the continuing economic impact of the coronavirus (COVID-19) and its variants on the global economy, the Company's business, financial results, customers, suppliers, vendors and/or stock price, including the impact of related governmental responses, the efficacy of vaccines and treatments targeting COVID-19 and/or its variants; the general impact of the ongoing conflict between Russia and Ukraine on economic activity, including financial market instability and disruption of global supply chains, and on the Company's customers, employees, suppliers, vendors and other stakeholders; inflation and fluctuations in foreign exchange rates; business and management strategies; outstanding debt and debt leverage ratio; shares repurchases; debt and/or equity issuance or retirement; returns to stockholders; and the impact of acquisitions, divestitures, restructurings, refinancings, impairments and other unusual items, including the Company's ability to integrate and obtain the anticipated benefits, results and synergies from these items or other related strategic initiatives. Additional information concerning these and other factors that could cause actual results to vary is, or will be, included in the Company's periodic and other reports filed with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Certain information contained in this release is based on historical results and forecasts provided in connection with the ViaForm® and Kuprion transactions. Use of different methods for preparing, calculating or presenting such information may lead to different results and such differences may be material. While the Company believes this information is reliable and appropriate, investors are cautioned not to place undue reliance on this information.
ELEMENT SOLUTIONS INC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(dollars in millions, except per share amounts) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Net sales | $ | 586.1 | $ | 676.9 | $ | 1,160.5 | $ | 1,357.1 | ||||||||
Cost of sales | 357.6 | 427.1 | 704.2 | 844.3 | ||||||||||||
Gross profit | 228.5 | 249.8 | 456.3 | 512.8 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, technical, general and administrative | 147.0 | 146.5 | 295.9 | 299.9 | ||||||||||||
Research and development | 28.9 | 12.8 | 41.4 | 26.9 | ||||||||||||
Total operating expenses | 175.9 | 159.3 | 337.3 | 326.8 | ||||||||||||
Operating profit | 52.6 | 90.5 | 119.0 | 186.0 | ||||||||||||
Other (expense) income: | ||||||||||||||||
Interest expense, net | (12.0 | ) | (13.2 | ) | (23.7 | ) | (27.3 | ) | ||||||||
Foreign exchange gain | 9.0 | 2.7 | 13.9 | 2.0 | ||||||||||||
Other (expense) income, net | (1.6 | ) | 7.5 | (1.3 | ) | 3.2 | ||||||||||
Total other expense | (4.6 | ) | (3.0 | ) | (11.1 | ) | (22.1 | ) | ||||||||
Income before income taxes and non-controlling interests | 48.0 | 87.5 | 107.9 | 163.9 | ||||||||||||
Income tax expense | (21.2 | ) | (23.9 | ) | (38.1 | ) | (43.9 | ) | ||||||||
Net income from continuing operations | 26.8 | 63.6 | 69.8 | 120.0 | ||||||||||||
Income from discontinued operations, net of tax | 2.9 | 1.8 | 2.9 | 1.8 | ||||||||||||
Net income | 29.7 | 65.4 | 72.7 | 121.8 | ||||||||||||
Net loss (income) attributable to non-controlling interests | 0.2 | (0.2 | ) | 0.1 | (0.5 | ) | ||||||||||
Net income attributable to common stockholders | $ | 29.9 | $ | 65.2 | $ | 72.8 | $ | 121.3 | ||||||||
Earnings per share | ||||||||||||||||
Basic from continuing operations | $ | 0.11 | $ | 0.25 | $ | 0.29 | $ | 0.48 | ||||||||
Basic from discontinued operations | 0.01 | 0.01 | 0.01 | 0.01 | ||||||||||||
Basic attributable to common stockholders | $ | 0.12 | $ | 0.26 | $ | 0.30 | $ | 0.49 | ||||||||
Diluted from continuing operations | $ | 0.11 | $ | 0.25 | $ | 0.29 | $ | 0.48 | ||||||||
Diluted from discontinued operations | 0.01 | 0.01 | 0.01 | 0.01 | ||||||||||||
Diluted attributable to common stockholders | $ | 0.12 | $ | 0.26 | $ | 0.30 | $ | 0.49 | ||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 241.4 | 247.1 | 241.1 | 247.2 | ||||||||||||
Diluted | 241.7 | 247.5 | 241.6 | 248.3 | ||||||||||||
ELEMENT SOLUTIONS INC CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | ||||||||
June 30, | December 31, | |||||||
(dollars in millions) | 2023 | 2022 | ||||||
Assets | ||||||||
Cash & cash equivalents | $ | 282.4 | $ | |||||
