Element Solutions (ESI) - 2024 Q3 - Quarterly Results

Q3 2024 Financial Results Overview This section provides an overview of Element Solutions' strong third-quarter 2024 financial performance, including key metrics, executive insights, updated full-year guidance, and recent strategic developments Financial Highlights Element Solutions reported strong growth in the third quarter of 2024, with net sales increasing 8% to $645 million and a significant turnaround in profitability, posting a net income of $40 million compared to a net loss in the prior-year period. Adjusted EBITDA grew by 6% to $143 million, driven by a strong performance in the Electronics segment Q3 2024 Key Financial Metrics (vs. Q3 2023) | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Net Sales (million USD) | $645 | $599.3 | +8% Reported, +6% Organic | | Net Income (Loss) (million USD) | $40 | ($32) | N/A | | Adjusted EBITDA (million USD) | $143 | $134 | +6% Reported, +8% Constant Currency | | GAAP Diluted EPS (USD) | $0.17 | ($0.13) | N/A | | Adjusted EPS (USD) | $0.39 | $0.36 | +8.3% | | Free Cash Flow (million USD) | $86 | $74.9 | +14.8% | Executive Commentary The CEO highlighted strong execution across the company, with the Electronics segment capitalizing on high-growth technology trends and the Industrial & Specialty segment showing resilience. The planned sale of MacDermid Graphics Solutions is expected to enhance the company's growth profile, margins, and balance sheet, positioning Element Solutions for a record year in 2025 - The Electronics segment is successfully capitalizing on high-value, fast-growing trends like advanced packaging and high-performance computing, offsetting softness in traditional markets like Western smartphones and automotive[2] - The sale of MacDermid Graphics Solutions is a strategic move to focus on core markets, expected to improve the company's growth rate, margins, and cash return on investment[2] - Following the divestiture, the company's net leverage ratio is projected to be approximately 2.5x by year-end 2024, creating significant capacity for strategic capital deployment[2] Updated 2024 Guidance The company has narrowed its full-year 2024 guidance, projecting record earnings despite end-markets remaining below prior peak levels. Adjusted EBITDA is expected to be between $535 million and $540 million, with free cash flow forecasted in the range of $280 million to $300 million Full Year 2024 Guidance | Metric | Guidance Range | | :--- | :--- | | Adjusted EBITDA (million USD) | $535 to $540 | | Free Cash Flow (million USD) | $280 to $300 | Recent Developments Element Solutions has entered an agreement to sell its MacDermid Graphics Solutions business for approximately $325 million, with the transaction expected to close by mid-2025. The company also successfully repriced its term loans, reducing borrowing by $100 million and lowering its interest rate by 25 basis points - On September 1, 2024, the company agreed to sell its MacDermid Graphics Solutions business for approximately $325 million. The deal is expected to close between Q4 2024 and H1 2025[6] - On October 15, 2024, the company completed a syndication of $1.04 billion in new term loans, reducing its interest rate by 25 basis points and decreasing total borrowing under its credit agreement by $100 million[7] Segment Performance This section details the third-quarter 2024 performance of the Electronics and Industrial & Specialty segments, highlighting their respective sales growth, profitability, and market dynamics Electronics The Electronics segment delivered strong performance in Q3 2024, with net sales increasing 14% to $419.1 million and organic net sales growing 9%. Adjusted EBITDA for the segment rose 9% to $98.6 million, although the adjusted EBITDA margin saw a slight contraction of 110 basis points to 23.5% Electronics Segment Q3 2024 Performance (vs. Q3 2023) | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Net Sales (million USD) | $419.1 | $367.0 | +14% | | Organic Net Sales Growth (%) | 9% | - | - | | Adjusted EBITDA (million USD) | $98.6 | $90.4 | +9% | | Adjusted EBITDA Margin (%) | 23.5% | 24.6% | -110 bps | Industrial & Specialty The Industrial & Specialty segment faced challenging market conditions, with reported net sales declining 3% to $225.9 million in Q3 2024. However, organic net sales remained flat, and the segment achieved a 1% increase in adjusted EBITDA to $44.1 million, with an improved adjusted EBITDA margin of 19.5% Industrial & Specialty Segment Q3 2024 Performance (vs. Q3 2023) | Metric | Q3 2024 | Q3 2023 | Change | | :--- | :--- | :--- | :--- | | Net Sales (million USD) | $225.9 | $232.3 | -3% | | Organic Net Sales Growth (%) | 0% | - | - | | Adjusted EBITDA (million USD) | $44.1 | $43.7 | +1% | | Adjusted EBITDA Margin (%) | 19.5% | 18.9% | +60 bps | Financial Statements This section provides the consolidated financial statements for Element Solutions, including the statements of operations, balance sheets, and cash flows, detailing the company's financial position and performance Consolidated Statements of Operations For the third quarter of 2024, the company generated $645.0 million in net sales and achieved an operating profit of $95.0 million, a substantial improvement from the $0.9 million operating loss in the same period last year, which was impacted by a goodwill impairment. Net income attributable to common stockholders was $40.3 million, or $0.17 per diluted share Q3 2024 Statement of Operations Highlights (in millions, except per share data) | Line Item | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Net Sales (million USD) | $645.0 | $599.3 | | Gross Profit (million USD) | $267.5 | $241.9 | | Operating Profit (Loss) (million USD) | $95.0 | $(0.9) | | Net Income (Loss) Attributable to Common Stockholders (million USD) | $40.3 | $(31.8) | | Diluted EPS Attributable to Common Stockholders (USD) | $0.17 | $(0.13) | Consolidated Balance Sheets As of September 30, 2024, Element Solutions had total assets of $5.10 billion, up from $4.97 billion at the end of 2023. Cash and cash equivalents increased to $376.0 million, and total equity grew to $2.45 billion. The balance sheet also reflects assets and liabilities held for sale related to the MacDermid Graphics Solutions divestiture Balance Sheet Highlights (in millions) | Line Item | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents (million USD) | $376.0 | $289.3 | | Total current assets (million USD) | $1,351.2 | $1,197.5 | | Total assets (million USD) | $5,098.2 | $4,974.1 | | Total debt (million USD) | $1,926.2 | $1,932.5 | | Total equity (million USD) | $2,454.7 | $2,344.3 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2024, the company generated $223.3 million in net cash from operating activities, a slight increase from the prior year. Net cash used in investing activities was significantly lower at $56.4 million, primarily due to the absence of major acquisitions. Free cash flow for the third quarter was $85.9 million Cash Flow Highlights - Nine Months Ended Sep 30 (in millions) | Line Item | 2024 | 2023 | | :--- | :--- | :--- | | Net cash flows provided by operating activities (million USD) | $223.3 | $221.8 | | Net cash flows used in investing activities (million USD) | $(56.4) | $(226.2) | | Net cash flows used in financing activities (million USD) | $(82.3) | $74.6 | | Net increase in cash and cash equivalents (million USD) | $86.7 | $64.0 | Non-GAAP Financial Measures and Reconciliations This section defines the non-GAAP financial measures used by Element Solutions and provides detailed reconciliations to their most directly comparable GAAP measures, offering additional insights into the company's performance Explanation of Non-GAAP Measures The company uses several non-GAAP financial measures, including adjusted EBITDA, adjusted EPS, free cash flow, and organic net sales growth, to evaluate performance. Management believes these metrics provide a clearer view of underlying operating results and trends by excluding items like amortization, restructuring costs, and other non-recurring charges - The company presents non-GAAP measures such as EBITDA, adjusted EBITDA, adjusted EPS, free cash flow, and organic net sales growth to supplement its GAAP financial reporting[22] - Management uses these measures to evaluate performance on a comparative basis, believing they offer investors additional perspective on underlying operating trends by excluding items that may have a disproportionate impact in a given period[23] Reconciliation of Net Sales to Organic Net Sales Growth For Q3 2024, the company's reported net sales growth of 8% was adjusted for a 1% positive impact from currency and a 3% negative impact from pass-through metals pricing, resulting in organic net sales growth of 6%. The Electronics segment showed 9% organic growth, while Industrial & Specialty was flat Q3 2024 Net Sales Growth to Organic Net Sales Growth Reconciliation | Segment | Reported Growth (%) | Impact of Currency (%) | Constant Currency Growth (%) | Change in Pass-Through Metals (%) | Organic Growth (%) | | :--- | :--- | :--- | :--- | :--- | :--- | | Electronics | 14% | 0% | 15% | (5)% | 9% | | Industrial & Specialty | (3)% | 2% | 0% | 0% | 0% | | Total | 8% | 1% | 9% | (3)% | 6% | Reconciliation of Net Income to Adjusted EPS Adjusted EPS for Q3 2024 was $0.39. The calculation starts with a net income of $40.4 million and adjusts for items such as amortization ($29.4 million), foreign exchange effects, and other non-recurring items, applying a normalized 20% tax rate. This compares to an adjusted EPS of $0.36 in the prior-year quarter Q3 2024 Net Income to Adjusted Net Income Reconciliation (in millions) | Description | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Net income (loss) (million USD) | $40.4 | $(31.7) | | Reversal of amortization expense (million USD) | $29.4 | $32.7 | | Goodwill impairment (million USD) | - | $80.0 | | Other adjustments, net (million USD) | $8.4 | $12.7 | | Tax effect adjustments (million USD) | $13.0 | $(6.6) | | Adjusted net income (million USD) | $94.9 | $87.4 | - The company uses a non-GAAP effective tax rate of 20% to facilitate period-to-period comparisons, reflecting its estimated long-term expectations for taxes paid on adjusted earnings[32][36] Reconciliation of Net Income to Adjusted EBITDA Adjusted EBITDA for Q3 2024 was $142.7 million. This was derived by adjusting the net income of $40.4 million for taxes, interest, D&A, and other specific items such as acquisition expenses and foreign exchange impacts on intercompany loans. The prior-year period's adjusted EBITDA was $134.1 million Q3 2024 Net Income to Adjusted EBITDA Reconciliation (in millions) | Description | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Net income (loss) (million USD) | $40.4 | $(31.7) | | Income tax expense (million USD) | $36.8 | $15.3 | | Interest expense, net (million USD) | $14.2 | $13.3 | | Depreciation & Amortization (million USD) | $39.4 | $44.5 | | EBITDA (million USD) | $130.8 | $41.4 | | Goodwill impairment (million USD) | - | $80.0 | | Other adjustments, net (million USD) | $11.9 | $12.7 | | Adjusted EBITDA (million USD) | $142.7 | $134.1 | Reconciliation of Operating Cash Flow to Free Cash Flow The company generated $85.9 million in free cash flow in Q3 2024, calculated from $98.5 million in cash from operating activities minus $12.6 million in capital expenditures. This represents an increase from the $74.9 million in free cash flow generated in Q3 2023 Q3 2024 Free Cash Flow Reconciliation (in millions) | Line Item | Q3 2024 | Q3 2023 | | :--- | :--- | :--- | | Cash flows from operating activities (million USD) | $98.5 | $87.4 | | Capital expenditures (million USD) | $(12.6) | $(13.4) | | Proceeds from disposal of property, plant and equipment (million USD) | - | $0.9 | | Free cash flow (million USD) | $85.9 | $74.9 | Other Information This section provides additional information on Element Solutions' capital structure, outlines important forward-looking statements, and details company background and conference call information Capital Structure As of September 30, 2024, Element Solutions had total debt of $1.94 billion and a cash balance of $376.0 million, resulting in net debt of $1.57 billion. The company's debt is comprised of term loans and senior notes, with 100% of the debt being fixed rate through the use of swaps Capital Structure as of September 30, 2024 (in millions) | Instrument | Amount | | :--- | :--- | | Total First Lien Debt (million USD) | $1,141.4 | | Senior Notes due 2028 (million USD) | $800.0 | | Total Debt (million USD) | $1,941.4 | | Cash Balance (million USD) | $376.0 | | Net Debt (million USD) | $1,565.4 | - Through the use of interest rate and cross-currency swaps, 100% of the company's debt was at a fixed rate as of September 30, 2024[20] Forward-Looking Statements This report contains forward-looking statements regarding future performance, market trends, and the expected benefits of strategic actions like the MacDermid Graphics Solutions divestiture. These statements are based on current estimates and are subject to various risks and uncertainties, including geopolitical conflicts, economic impacts, and inflation - The report includes forward-looking statements concerning technology trends, market growth, benefits of the MacDermid transaction, net leverage, capital deployment, and guidance for 2024 and 2025[12] - Actual results could differ materially due to factors such as geopolitical conflicts (Russia-Ukraine, Israel-Hamas), economic impacts from COVID-19, price volatility, inflation, and risks related to acquisitions and divestitures[12] Company Information and Conference Call Element Solutions is a global specialty chemicals company serving key industries like electronics, automotive, and industrial finishing. The company will host a conference call on October 29, 2024, to discuss its Q3 2024 financial results with CEO Benjamin Gliklich and CFO Carey J. Dorman - The company will host a conference call and webcast on October 29, 2024, at 8:30 a.m. (Eastern Time) to discuss the third-quarter results[8] - Element Solutions supplies a broad range of specialty chemical solutions for industries including consumer electronics, power electronics, semiconductor fabrication, automotive systems, and industrial surface finishing[10]