Filing summary: quarter ended September 30, 2014
Issuer identification: The supplied filing is for Platform Specialty Products Corporation (ticker PAH), not Element Solutions Inc. The filing describes a specialty chemicals and technical-services business. It reports the three and nine months ended September 30, 2014; financial statement amounts below are rounded to millions of dollars unless noted.
Business context and comparability
Platform’s businesses operated in Performance Materials and Graphic Solutions. Its strategy emphasized technical customer support and growth through acquisitions. Platform acquired MacDermid in October 2013, so 2014 successor results are compared with MacDermid predecessor results for 2013. The company cautions that these periods are not fully comparable; purchase accounting, acquisition costs and the change in reporting entity affect the comparisons.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 comparator | Nine months 2014 | Nine months 2013 comparator |
|---|---|---|---|---|
| Net sales | $196.8 | $188.4 | $569.6 | $560.6 |
| Gross profit | $103.2 | $99.0 | $284.1 | $288.8 |
| Operating profit | $23.4 | $38.6 | $33.0 | $105.0 |
| Net income | $13.9 | $14.6 | $9.5 | $24.2 |
| Operating cash flow | Not separately provided | Not separately provided | $79.5 | $64.4 |
Revenue rose 4.4% in Q3 and 1.6% year to date. Reported gross margin was 52.5% in Q3 versus 52.5% in the predecessor quarter; for nine months it was approximately 49.9% versus 51.5%. Excluding a $12.0 million purchase-accounting inventory charge, 2014 nine-month gross margin was 52.0%, according to management. Reported operating margin was approximately 11.9% for Q3 and 5.8% year to date; management stated that, excluding specified acquisition-related and purchase-accounting items, the corresponding margins were 21.1% and 19.9%.
Net income attributable to common shareholders was $11.9 million in Q3 and $4.1 million for the nine months; basic and diluted EPS were $0.09 and $0.08 for Q3, and $0.03 for the nine-month period. Comparisons of common-shareholder income and EPS are especially affected by differences in entity, capital structure and preferred dividends.
At September 30, cash and cash equivalents were $281.7 million, with a further $315.0 million classified as restricted cash for the Chemtura acquisition. Total debt was $746.4 million, including $7.9 million current and $738.5 million long-term; the first-lien facility carried a 4.00% weighted-average rate and was due in 2020. The company reported approximately $49 million of unused revolving capacity and compliance with debt covenants. Current assets were $911.7 million and current liabilities $141.3 million, but current assets include restricted acquisition cash and prepaid purchase price.
Nine-month investing cash use was $380.8 million, principally the Chemtura escrow deposit and Agriphar prepayment. Financing provided $463.6 million, primarily from equity issuance and warrant exercises. Capital expenditures were $6.8 million. Cash and cash equivalents increased from $123.0 million at year-end 2013 to $281.7 million.
Changes versus the prior comparable period
- Q3 Performance Materials sales increased 5.7%, mainly on stronger European industrial and new-product demand and higher offshore-fluid sales in the Americas. Graphic Solutions sales were roughly flat.
- Nine-month Performance Materials sales grew 3.4%; Graphic Solutions sales fell 4.1%, reflecting lower newspaper-plating demand.
- Reported operating profit declined sharply in both periods, despite higher sales. Management attributed much of the decline to acquisition transaction costs, acquired-intangible amortization, the contingent-consideration fair-value increase and, year to date, the inventory step-up charge. Excluding identified items, management said operating margins improved versus the comparable predecessor periods.
- Net interest expense declined year over year, which the filing attributes primarily to lower debt balances. Foreign-currency translation and forward-contract movements also affected results and equity.
Outlook, acquisitions, risks and unusual items
- No specific quantified revenue or earnings guidance is provided. Management said it expected cash, operating cash generation and debt and equity financing to support working capital, capital expenditure and other needs for at least the next 12 months.
- Agriphar closed October 1, 2014 for approximately €300 million, including cash and shares. Chemtura AgroSolutions closed November 3, 2014 for approximately $1.0 billion, including cash, shares and assumed liabilities. These acquisitions occurred after quarter-end and were not included in the quarter’s operating results.
- Platform agreed to acquire Arysta for approximately $3.51 billion, including $2.91 billion cash and $600 million of convertible preferred stock. Closing was targeted for the first quarter of 2015, subject to regulatory and other conditions. The filing describes substantial proposed debt and equity financing; completion and integration were uncertain.
- After quarter-end, the company reported approximately $651.5 million net proceeds from an October/November private placement and announced a public offering of common stock, subject to closing conditions. These financings and acquisition-related borrowings materially change the post-quarter capital structure.
- Unusual nine-month expenses included $26.1 million from a contingent-consideration fair-value increase, approximately $23.5 million of incremental acquired-intangible amortization, approximately $18.9 million of acquisition transaction costs and the $12.0 million inventory charge. The contingent consideration liability was $60.9 million at quarter-end, with the increase primarily tied to stock-price performance targets.
- The quarter included tax benefits from expired statutes of limitation; management noted a further potential $2.1 million tax benefit within 12 months. A $4.5 million deferred-tax-liability reduction reflected a change in the company’s assertion that certain foreign earnings would remain reinvested abroad.
- Key risks include acquisition financing, integration and realization of expected benefits; agrochemical seasonality, weather, product registration and regulation; foreign currency exposure; and environmental and legal contingencies. Environmental reserves were $2.2 million. A MacDermid subsidiary won a jury verdict against Cortron, but the final damages and collection remained uncertain. Management stated that other pending claims were not expected to have a material adverse effect.
- Management concluded disclosure controls and procedures were effective as of September 30, 2014.
Important facts for investors to verify
- Confirm issuer identity: this filing names Platform Specialty Products Corporation, not Element Solutions Inc.
- Review the basis and limits of the successor-versus-predecessor comparisons, particularly reported operating profit, earnings and margins.
- Reconcile post-quarter acquisition funding, new borrowings, equity issuance and resulting debt, liquidity and dilution.
- Assess whether the Arysta transaction closed on the anticipated terms and whether integration, regulatory and financing risks were resolved.
- Track the contingent-consideration valuation, acquisition-related costs, environmental exposures and outcome and collectability of the Cortron judgment.