Element Solutions Inc. (then Platform Specialty Products Corporation) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing is for Platform Specialty Products Corporation, the company’s name at the time, and presents unaudited consolidated results. The year-over-year comparison is substantially affected by acquisitions completed after June 30, 2014.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $675.1 million | $189.1 million | $1,209.9 million | $372.8 million |
| Gross profit / margin | $268.6 million / 39.8% | $96.7 million / 51.1% | $475.7 million / 39.3% | $180.9 million / 48.5% |
| Operating profit / margin | $44.0 million / 6.5% | $5.6 million / 3.0% | $46.2 million / 3.8% | $9.6 million / 2.6% |
| Net income (loss) attributable to common stockholders | $(12.2) million | $(0.4) million | $(38.9) million | $(7.8) million |
| Adjusted EBITDA (non-GAAP) | $167.6 million | $48.2 million | $298.1 million | $94.1 million |
| Net cash from operating activities | Not presented separately for the quarter | Not presented separately for the quarter | $100.3 million | $49.2 million |
Q2 net interest expense was $51.1 million, versus $7.7 million a year earlier; first-half expense was $90.5 million, versus $15.4 million. First-half other income of $33.4 million included foreign-exchange gains and a $16.0 million legal settlement gain. First-half income-tax expense was $24.5 million despite a pretax loss of $10.9 million, principally reflecting a $23.8 million valuation allowance on foreign tax credit carryforwards.
At June 30, cash and cash equivalents were $672.2 million; current assets were $2,387.3 million and current liabilities $858.0 million. Total debt and capital leases were $3,418.4 million, including $22.4 million of revolving borrowings; the company reported $367 million of availability under various lines of credit and was in compliance with credit-facility covenants. Debt was $1,405.6 million at December 31, 2014. First-half capital expenditures were $29.3 million.
Changes and business drivers
- Reported sales increased 257% in Q2 and 225% in the first half, primarily because of acquisitions. Arysta, CAS and Agriphar contributed $493.5 million of Q2 sales and $848.0 million for the first half; these businesses were not included in the comparable 2014 reported periods.
- On a basis adjusted for acquisitions and currency translation, sales rose 4.1% in Q2 and 4.8% in the first half. Management attributed the increase mainly to stronger offshore production-control-fluid demand; first-half results also reflected higher Asian electronic-chemicals and packaging sales.
- Performance Applications generated Q2 sales of $181.5 million and adjusted EBITDA of $53.9 million. Agricultural Solutions generated sales of $493.6 million and adjusted EBITDA of $113.7 million. Segment comparisons are affected by the acquired businesses.
- Gross margin declined year over year, in part reflecting acquired business mix and acquisition-related inventory accounting. First-half adjusted operating performance also benefited from the nonrecurrence of a $12.0 million 2014 purchase-accounting inventory charge and lower contingent-consideration remeasurement expense.
Outlook, transactions and notable items
- Management said cash, operating cash generation and credit availability were expected to meet working-capital, capital-expenditure and other business needs for at least 12 months. Future acquisitions could require revolving borrowings and additional debt or equity financing. The filing provides no specific earnings or revenue guidance.
- The proposed OMG Businesses acquisition, announced in May, had an approximate $367 million purchase price and was expected to close in stages in Q4 2015 and Q1 2016, subject to closing conditions. The filing notes potential termination fees and expense reimbursements in specified circumstances.
- After quarter-end, the company announced a recommended offer for Alent valued at approximately £1.35 billion ($2.10 billion at the cited exchange rate), expected to close in late 2015 or early 2016 subject to approvals and other conditions. A $1.88 billion interim financing facility was arranged; the filing warns that acquisition financing could be more costly than existing debt and that completion is not assured.
- The company identified a material weakness in internal control over financial reporting: insufficient accounting personnel expertise for acquisition accounting and non-routine transactions. A purchase-accounting and foreign-currency error related to Arysta had understated goodwill and overstated translation loss by approximately $73 million; management deemed it not material and corrected it in Q2. Disclosure controls were consequently assessed as ineffective. Management said it had added internal and external resources to begin remediation.
- Other unusual items include $13.7 million of first-half restructuring charges, primarily acquisition integration; a $16.0 million settlement receipt; and substantial foreign-currency effects, including a $263.7 million first-half translation loss in other comprehensive income. A Q2 goodwill impairment test for ASF Americas found estimated fair value 11.8% above carrying value, but the filing said a 1 percentage-point increase in the discount rate would cause carrying value to exceed fair value.
- Risks include significant leverage and variable interest rates, acquisition financing and integration, seasonality and weather exposure in Agricultural Solutions, foreign-exchange movements, environmental and product-liability matters, and contested Brazilian tax assessments. Environmental reserves were $2.1 million; legal reserves were $5.9 million. Disclosed claims include an $11.3 million Mexican crop-contamination claim for which no reserve was recorded, and Brazilian environmental and personal-injury proceedings with potentially substantial claimed amounts; management stated it did not expect material losses beyond accrued liabilities.
Most important facts for investors to verify
- Whether acquisition-driven growth translates into durable organic growth and improved gross margins, and how acquired businesses perform through seasonal cycles.
- Debt service, refinancing and financing costs, especially if the OMG and Alent transactions proceed; assess dilution and the Series B preferred stock’s conversion and cash make-whole terms.
- Progress in remediating the material weakness and whether future filings report effective internal controls, particularly as acquisition accounting is finalized.
- Cash conversion and working-capital trends: first-half operating cash flow was $100.3 million, while management cited slower collections and higher Agricultural Solutions inventory; reported DSO and inventory days increased.
- Resolution and reserve adequacy for acquisition-related purchase accounting, tax exposures, environmental matters, litigation and goodwill valuation assumptions.