Element Solutions Inc Releases Final 2018 Fourth Quarter and Full Year Financial Results

Element Solutions Inc (NYSE:ESI) (“Element Solutions” or the “Company”), a global and diversified specialty chemicals company, today announced its financial results from continuing operations for the three and twelve months ended December 31, 2018.

Following today's filing of its annual report on Form 10-K, Element Solutions is providing its usual set of financial results for the three and twelve months ended December 31, 2018. Unless otherwise specified, the results presented in this press release exclude discontinued operations which relate to Element Solutions' former Agricultural Solutions business, which consisted of Arysta LifeScience Inc. and its subsidiaries. The sale of Arysta LifeScience Inc. to UPL Corporation Ltd. for $4.2 billion in cash, subject to adjustments, closed on January 31, 2019. For the three and twelve months ended December 31, 2018, the Company's continuing operations include the then existing senior notes and term loans as well as the related liabilities and interest expense.

Executive Commentary

Chief Executive Officer Benjamin Gliklich said, “In line with the preliminary results we released on January 28th, our final 2018 results demonstrate strong performance for the year. We once again delivered organic growth, despite a difficult environment particularly in the second half. We remain cautious about macro conditions in 2019; however we continue to believe that we can grow the top line organically and deliver earnings growth over and above revenue growth. Considering our improved balance sheet and our recent share buyback, this should be a year of strong earnings per share growth. We are even more excited to demonstrate the compelling cash flow characteristics of this business in the year to come. Finally, we remain committed to our goal of keeping our net leverage ratio below 3.5x adjusted EBITDA and, barring further opportunistic buybacks or tuck-in acquisitions, expect it to be less than 3.0x by the end of the year.”

Fourth Quarter 2018 Highlights (compared with fourth quarter 2017) for continuing operations:

• Net sales on a reported basis for the fourth quarter of 2018 were $478 million, a decrease of 2% over the prior fourth quarter period. Organic net sales, which exclude the impact of currency changes, certain pass-through metal prices and acquisitions increased 1%.
  • Electronics: Net sales decreased 4% to $282 million. Organic net sales decreased 1%.
  • Industrial & Specialty: Net sales increased 1% to $196 million. Organic net sales increased 4%.

• Reported net loss from continuing operations for the fourth quarter of 2018 was $14 million, as compared to a loss of $19 million for the fourth quarter of 2017.
• Adjusted EBITDA for the fourth quarter of 2018 was $99 million, a decrease of 5%. On a constant currency basis, adjusted EBITDA decreased 1%.
  • Electronics: Adjusted EBITDA was $58 million, a decrease of 8%. On a constant currency basis, adjusted EBITDA decreased 5%.
  • Industrial & Specialty: Adjusted EBITDA was $41 million, an increase of 1%. On a constant currency basis, adjusted EBITDA increased 5%.
  • Adjusted EBITDA margin for the combined company decreased by 50 basis points to 21%. On a constant currency basis, adjusted EBITDA margin decreased by 40 basis points.

Full Year 2018 Highlights (compared with full year 2017) for continuing operations:

• Net sales on a reported basis for the full year 2018 were $1.96 billion, an increase of 4% over the prior full year period. Organic net sales increased 3%.
  • Electronics: Net sales increased 3% to $1.16 billion. Organic net sales increased 2%.
  • Industrial & Specialty: Net sales increased 6% to $804 million. Organic net sales increased 5%.
• Reported net loss from continuing operations for the full year 2018 was $77 million, as compared to a net loss of $192 million in 2017.
• Adjusted EBITDA for the full year 2018 was $421 million, an increase of 5%. On a constant currency basis, adjusted EBITDA increased 4%.
  • Electronics: Adjusted EBITDA was $248 million, an increase of 6%. On a constant currency basis, adjusted EBITDA increased 5%.
  • Industrial & Specialty: Adjusted EBITDA was $173 million, an increase of 3%. On a constant currency basis, adjusted EBITDA increased 2%.
  • Adjusted EBITDA margin for the combined company improved by 10 basis points to 21%. On a constant currency basis, adjusted EBITDA margin remained flat.

2019 Guidance Reaffirmed

Element Solutions reaffirmed its prior 2019 financial guidance. For 2019, the Company expects organic net sales growth of between 1% and 3% and constant currency adjusted EBITDA growth of between 5% and 8%. Based on year-end 2018 exchange rates, the Company anticipates foreign exchange headwinds of approximately 2% to net sales and approximately $15 million to adjusted EBITDA. Adjusted earnings per share is expected to be between $0.82 and $0.87, including impact of lower share count as a result of the Company's repurchase of 37 million shares on February 8, 2019. This expected range benefits from an improved tax rate expectation of 27% vs. the 34% used in 2018.

Recent Developments

On January 31, 2019, the Company completed the sale of its former Agricultural Solutions segment to UPL Corporation Limited (the "Arysta Sale") for $4.2 billion in cash, subject to adjustments. On the closing date of the Arysta Sale, the Company changed its name from "Platform Specialty Products Corporation" to "Element Solutions Inc" and, effective February 1, 2019, its shares of common stock began trading on the NYSE under the ticker symbol “ESI.” The Company also launched a new corporate website: www.elementsolutionsinc.com. Element Solutions' investor relations information, including press releases and links to its filings with the Securities and Exchange Commission, can now be found on this website.

Using the proceeds from the Arysta Sale, on January 31, 2019, the Company paid down its outstanding debt under its prior credit agreement, which was then terminated. In addition, on January 31, 2019, the Company entered into a new credit agreement which provides for new senior secured credit facilities in an aggregate principal amount of $1.08 billion, consisting of a revolving facility of $330 million maturing in 2024 and a term loan of $750 million maturing in 2026. On the closing date of the Arysta Sale, the $750 million term loan was borrowed under the Company's new credit agreement. Effective February 1, 2019, the Company's outstanding 6.00% EUR Notes due 2023 and 6.50% USD Notes due 2022 were redeemed. As a result, the Company's new debt capital structure consists of its outstanding 5.875% senior notes due 2025 and borrowings under the new credit agreement.

Finally, on February 8, 2019, as part of its previously-announced stock repurchase program, Element Solutions repurchased 37 million shares of its common stock from Pershing Square Capital Management, L.P., advisor to certain Pershing Square investment funds, in a privately-negotiated transaction, for an aggregate purchase price of $434 million. These repurchased shares, which represented approximately 13% of the Company's issued and outstanding common stock, were retired on that date.

About Element Solutions

Element Solutions Inc is a leading specialty chemicals company whose businesses formulate a broad range of solutions that enhance the performance of products people use every day. Developed in multi-step technological processes, our businesses’ innovative solutions enable customers' manufacturing processes in several key industries, including electronic circuitry, communications 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," "estimate," "predict," "seek," "continue," "outlook," "may," "might," "should," "can have," "likely," "potential" "target" or "goal" 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 Company's 2019 financial guidance; macro conditions in 2019; organic and earnings growth; earning per share growth; cash flow of the Company's businesses; the Company's goal of keeping its net leverage ratio below 3.5x adjusted EBITDA and expected net leverage ratio of 3.0x adjusted EBITDA by the end of the year. 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. Actual results could differ materially from those expressed or implied in the 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 Company's ability to realize the anticipated benefits, efficiencies and cost savings expected from the recent sale of its Agricultural Solutions business; the impact of this transaction on the Company's share price and market volatility; the Company’s ability to retain customers and suppliers, retain or hire key personnel, and maintain relationships with customers, suppliers and lenders; the success of the Company’s leadership transition and go-forward structure and strategy; the impact of acquisitions, divestitures, restructurings, refinancings, and other unusual items, including the Company's ability to raise and/or retire new debt and/or equity and 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 Element Solutions' periodic and other reports filed with the Securities and Exchange Commission. Element Solutions undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Non-GAAP Measures

To supplement the financial measures prepared in accordance with GAAP, Element Solutions has provided in this release the following non-GAAP financial measures: EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted earnings per share (EPS), adjusted EPS guidance, net debt to adjusted EBITDA ratio, and organic net sales growth. The Company also evaluates and presents its results of operations on a constant currency basis.

Management internally reviews each of the non-GAAP measures mentioned above to evaluate performance on a comparative period-to-period basis in terms of absolute performance, trends and expected future performance with respect to the Company’s business, and believes that these non-GAAP measures provide investors with an additional perspective on trends and underlying operating results on a period-to-period comparable basis. The Company also believes that investors find this information helpful in understanding the ongoing performance of its operations separate from items that may have a disproportionate positive or negative impact on its financial results in any particular period or are considered to be costs associated with its capital structure. These non-GAAP financial measures, however, have limitations as analytical tools, and should not be considered in isolation from, a substitute for, or superior to, the related financial information that Element Solutions reports 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 the Company’s financial statements, and may not be completely 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 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 reconciliations of these non-GAAP financial measures to their most comparable GAAP financial measures included in this press release, and not to rely on any single financial measure to evaluate the Company's businesses.

The Company only provides adjusted EBITDA guidance, adjusted EPS guidance and organic net sales growth expectations on a non-GAAP basis and does not provide reconciliations of such forward-looking non-GAAP measures to GAAP due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliations, including adjustments that could be made for restructurings, refinancings, divestitures, integration and acquisition-related expenses, share-based compensation amounts, non-recurring, unusual or unanticipated charges, expenses or gains, adjustments to inventory and other charges reflected in our reconciliation of historic numbers, the amount of which, based on historical experience, could be significant.

Constant Currency:

The Company discloses net sales and adjusted EBITDA on a constant currency basis by adjusting to exclude the impact of changes due to the translation of foreign currencies of its international locations into U.S. dollar. 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 its results of operations, consistent with how the Company internally evaluates its financial results.

The impact of foreign currency translation is calculated by converting the Company's current-period local currency financial results into U.S. dollar using the prior period's exchange rates and comparing these adjusted amounts to its prior period reported results. The difference between actual growth rates and constant currency growth rates represents the 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.

The following tables reconcile GAAP net sales growth to organic net sales growth for the three and twelve months ended December 31, 2018:

For the three months ended December 31, 2018, Electronics' and the Company's consolidated results were positively impacted by $2.2 million of acquisitions and negatively impacted by $1.4 million of pass-through metals pricing.

For the twelve months ended December 31, 2018, Electronics' and the Company's consolidated results were positively impacted by $5.7 million of acquisitions and negatively impacted by $3.4 million of pass-through metals pricing.

Adjusted Earnings Per Share:

Adjusted earnings per share (EPS) is defined as net loss from continuing operations attributable to common stockholders adjusted to reflect adjustments consistent with the Company's definition of adjusted EBITDA. Additionally, the Company eliminates the amortization associated with intangibles assets recognized in purchase accounting for acquisitions. Further, the Company adjusts its effective tax rate to 34% for the three and twelve months ended December 31, 2018 and 35% for the three and twelve months ended December 31, 2017, as described in footnote (11) under the reconciliation table below. The 2019 adjusted EPS guidance reflects the elimination of the step-up depreciation associated with fixed assets recognized in purchase accounting for acquisitions and an effective tax rate of 27%. In addition, this guidance is based on the Company's new capital structure by assuming that the Arysta Sale had closed, and the new credit agreement had been in place, on January 1, 2019, which the Company believes is more reflective of the go-forward capital structure of the Company.

The resulting adjusted net income from continuing operations is then divided by Element Solution's outstanding number of shares of common stock plus the number of shares that would be issued if all convertible stock was converted to common stock, stock options were vested and exercised and equity grants were vested and issued at each period presented. Adjusted earnings per share is a key metric used by management to measure operating performance and trends as management believes the exclusion of certain expenses in calculating adjusted earnings per share facilitates operating performance comparisons on a period-to-period basis.

The following table reconciles GAAP "Net income (loss) attributable to common stockholders" to "Adjusted net income from continuing operations attributable to common stockholders" and presents the adjusted number of common shares used in calculating adjusted earnings per share for each period presented below:

NON-GAAP ADJUSTED SHARES AT DECEMBER 31, 2018 AND 2017 (UNAUDITED)

The following table shows Element Solution's adjusted common shares outstanding at each period presented which consists of Element Solution's outstanding number of shares of common stock plus the number of shares that would be issued if all convertible stock was converted into common stock, stock options were vested and exercised and equity grants were vested and issued at each period presented:

EBITDA and Adjusted EBITDA:

EBITDA represents earnings before interest, provision for income taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA, excluding the impact of additional items included in GAAP earnings which we believe are not representative or indicative of our ongoing business, as described in the footnotes located under the Adjusted Earnings Per Share reconciliation table above. Adjusted EBITDA for each segment also includes an allocation of corporate costs, such as compensation expense and professional fees. Management believes adjusted EBITDA and adjusted EBITDA margin provide investors with a more complete understanding of the long-term profitability trends of Element Solution's business and facilitate comparisons of its profitability to prior and future periods. However, these measures, which do not consider certain cash requirements, should not be construed as an alternative to net income or cash flow from operations as a measure of profitability or liquidity.

The following tables reconcile GAAP net income (loss) attributable to common stockholders to adjusted EBITDA for each of the periods presented:

Net Debt to Adjusted EBITDA Ratio:

Net debt to adjusted EBITDA Ratio is defined as total debt and capital lease obligations, excluding unamortized premium, discounts and debt issuance costs, less cash divided by adjusted EBITDA.

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