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Element Solutions (ESI) - 2022 Q1 - Quarterly Report

Part I. Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) Net sales increased to $680.2 million in Q1 2022, but net income decreased to $56.1 million and operating cash flow turned negative due to higher costs and working capital needs Condensed Consolidated Statements of Operations Q1 2022 net sales grew to $680.2 million, but gross profit saw a smaller increase, and net income attributable to common stockholders fell to $56.1 million due to higher costs Q1 2022 vs Q1 2021 Statement of Operations (in millions, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net sales | $680.2 | $550.1 | | Gross profit | $263.0 | $241.0 | | Operating profit | $95.5 | $99.9 | | Net income attributable to common stockholders | $56.1 | $82.3 | | Diluted EPS | $0.23 | $0.33 | Condensed Consolidated Balance Sheets As of March 31, 2022, total assets remained stable at $5.13 billion, with a decrease in cash to $218.8 million offset by increases in receivables and inventories Balance Sheet Highlights (in millions) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total current assets | $1,216.9 | $1,214.5 | | Cash & cash equivalents | $218.8 | $330.1 | | Inventories | $323.4 | $274.4 | | Goodwill | $2,518.6 | $2,526.3 | | Total assets | $5,128.8 | $5,138.4 | | Total liabilities | $2,615.3 | $2,637.6 | | Total equity | $2,513.5 | $2,500.8 | Condensed Consolidated Statements of Cash Flows Q1 2022 saw net cash used in operating activities of $5.6 million, a significant decline from prior year, driven by increased working capital and HSO acquisition-related investing activities Q1 2022 vs Q1 2021 Cash Flows (in millions) | Cash Flow Category | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash flows (used in) provided by operating activities | $(5.6) | $32.6 | | Net cash flows (used in) provided by investing activities | $(37.1) | $10.5 | | Net cash flows used in financing activities | $(67.1) | $(14.2) | | Net (decrease) increase in cash and cash equivalents | $(111.3) | $25.6 | Notes to the Condensed Consolidated Financial Statements Notes detail the $23 million HSO acquisition, stable $1.91 billion total debt, $18.8 million in share repurchases, and segment revenue growth with compressed margins due to higher costs - On January 26, 2022, the Company completed the acquisition of HSO for approximately $23 million, recording $11.7 million of finite-lived intangible assets and $7.1 million of goodwill3132 - Total debt obligations stood at approximately $1.91 billion as of March 31, 2022, primarily consisting of $1.11 billion in term loans and $790 million in senior notes35132 - The company repurchased 0.8 million shares of its common stock for $18.8 million during Q1 2022 under its stock repurchase program, with approximately $713 million remaining authorized for future repurchases61 Segment Performance Q1 2022 vs Q1 2021 (in millions) | Segment | Net Sales 2022 | Net Sales 2021 | Adjusted EBITDA 2022 | Adjusted EBITDA 2021 | | :--- | :--- | :--- | :--- | :--- | | Electronics | $426.9 | $353.5 | $97.3 | $92.4 | | Industrial & Specialty | $253.3 | $196.6 | $47.5 | $45.4 | | Total | $680.2 | $550.1 | $144.8 | $137.8 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported 24% net sales growth in Q1 2022, driven by acquisitions and pricing, but gross and Adjusted EBITDA margins declined due to higher raw material and logistics costs Q1 2022 vs Q1 2021 Key Metrics | Metric | Q1 2022 | Q1 2021 | Reported % Change | Constant Currency % Change | Organic % Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $680.2M | $550.1M | 24% | 28% | 7% | | Gross profit | $263.0M | $241.0M | 9% | 12% | N/A | | Gross margin | 38.7% | 43.8% | (510) bps | (540) bps | N/A | | Adjusted EBITDA | $144.8M | $137.8M | 5% | 9% | N/A | | Adjusted EBITDA margin | 21.3% | 25.0% | (370) bps | (370) bps | N/A | Results of Operations Q1 2022 net sales grew 24% to $680.2 million, with both Electronics and Industrial & Specialty segments showing growth but experiencing margin compression due to higher costs - Electronics' net sales increased 21% on a reported basis and 8% organically, with Semiconductor Solutions showing strong organic growth of 11% due to demand in advanced packaging106 - Industrial & Specialty's net sales grew 29% on a reported basis and 4% organically, with acquisitions contributing 44% to Industrial Solutions' reported net sales107 - Gross margin for the total company decreased by 510 basis points, primarily due to increased raw material prices, logistics costs, and the impact of pass-through metals110111 - Operating expenses increased by 19% (21% constant currency), mainly driven by $21.2 million in expenses related to recent acquisitions112 Liquidity and Capital Resources Q1 2022 cash uses included the $23 million HSO acquisition, $19.9 million in dividends, and $18.3 million in share repurchases, with total debt at $1.91 billion and $349 million in available liquidity - Primary uses of cash in Q1 2022 were the HSO Acquisition, dividend payments, and share repurchases121 - The decrease in operating cash flow was primarily driven by a build of safety inventory, higher raw materials costs, and higher annual incentive compensation payments129 - As of March 31, 2022, the company had $1.91 billion of indebtedness and $349 million of availability under its revolving credit facilities132133 Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes were reported regarding quantitative and qualitative disclosures about market risk from the 2021 Annual Report - Disclosures about market risk have not changed materially from the 2021 Annual Report135 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures are effective137 - No material changes to internal control over financial reporting occurred during the first quarter of 2022138 Part II. Other Information Item 1. Legal Proceedings The company is involved in various legal proceedings, including environmental claims, which are considered incidental to its business operations - The company is involved in various legal proceedings and claims, particularly concerning environmental matters, which are considered incidental to its business operations140 Item 1A. Risk Factors No material changes to the company's risk factors were reported from those disclosed in its 2021 Annual Report on Form 10-K - No material changes to the risk factors from the 2021 Annual Report were reported141 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2022, the company repurchased 830,448 shares for approximately $18.8 million, with $713 million remaining authorized for future repurchases Share Repurchases for Q1 2022 | Period | Total Shares Purchased | Average Price Paid Per Share | Remaining Authorization (in millions) | | :--- | :--- | :--- | :--- | | Jan 2022 | 328,374 | $23.00 | $725 | | Feb 2022 | 220,403 | $23.52 | $719 | | Mar 2022 | 281,671 | $21.29 | $713 | | Total | 830,448 | $22.56 | $713 | Item 6. Exhibits This section lists exhibits filed with the quarterly report, including officer certifications and XBRL data files - The report includes a list of filed exhibits, such as officer certifications and XBRL interactive data files145