Element Solutions Inc. (then Platform Specialty Products Corporation) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing was issued under the Platform Specialty Products Corporation name; management planned to change the name to Element Solutions Inc. upon closing the Arysta sale. Unless noted, results below are from continuing operations, principally Performance Solutions; Agricultural Solutions is reported as discontinued operations.
Business context and key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $488.5 million | $480.6 million | $1,482.6 million | $1,390.0 million |
| Gross profit / margin | $209.6 million / 42.9% | $208.2 million / 43.3% | $635.4 million / 42.9% | $601.6 million / 43.3% |
| Operating profit / margin | $59.6 million / 12.2% | $56.8 million / 11.8% | $177.7 million / 12.0% | $147.6 million / 10.6% |
| Net loss from continuing operations | $4.3 million | $36.9 million | $62.8 million | $173.0 million |
| Adjusted EBITDA (non-GAAP) | $108.3 million | $107.8 million | $321.8 million | $297.7 million |
Q3 diluted loss per share from continuing operations was $0.02; total diluted loss per share, including discontinued operations, was $1.42. Nine-month total diluted loss per share was $1.25. Q3 Adjusted EBITDA margin was 22.2%, versus 22.4%; nine-month margin was 21.7%, versus 21.4%.
Cash flow and liquidity: For the first nine months, continuing operations used $26.4 million in operating cash, $18.0 million in investing cash and $0.8 million in financing cash. Capital expenditures were $19.6 million. At September 30, cash and cash equivalents were $252.2 million, of which $247 million was held by foreign subsidiaries. Total debt and capital lease obligations were $5.40 billion; reported long-term debt was $5.39 billion. The company reported $468 million of unused Revolving Credit Facility availability, net of letters of credit, and compliance with debt covenants. Management said available cash, operating cash generation and credit availability should cover requirements for at least 12 months.
Material changes versus prior comparable periods
- Q3 sales increased 2% reported, 4% at constant currency and 3% organically. Nine-month sales increased 7% reported and 4% on both constant-currency and organic bases.
- Q3 operating profit rose 5% reported (9% at constant currency); nine-month operating profit rose 20% reported (17% at constant currency). Improved operating profit reflected sales growth and, year to date, lower operating expenses.
- Gross margin declined 40 basis points in both the quarter and nine-month period. Management cited unfavorable product mix, raw-material inflation and higher logistics and warehousing costs.
- Interest expense declined to $77.9 million in Q3 from $84.7 million and to $233.4 million for nine months from $256.3 million, mainly reflecting prior debt redemption and term-loan repricing.
- Total Q3 net loss was $405.9 million, compared with $66.3 million in 2017, primarily because of the Arysta-related impairment and discontinued-operations loss.
Outlook, unusual items and risks
- Arysta transaction: On July 20, 2018, the company agreed to sell Agricultural Solutions to UPL for $4.2 billion in cash, subject to adjustments and closing conditions. Closing was targeted for December 31, 2018, subject to outstanding regulatory clearances. Management expected proceeds to be used primarily to reduce debt.
- Impairment: The company recorded an estimated $376 million impairment on discontinued operations in Q3, mainly reflecting foreign-currency translation adjustments. The final sale loss may vary with exchange rates at closing and other adjustments. Discontinued operations generated a $401.6 million Q3 after-tax loss and a $293.3 million nine-month after-tax loss.
- Capital allocation and reorganization: The board conditionally authorized up to $750 million of share repurchases after the sale closes; timing and amount were undetermined. The company also planned a post-sale shift to a “one-company” structure and the Element Solutions name. Management cautioned that the reorganization may disrupt operations or fail to deliver expected efficiencies.
- Debt and financing: Management estimated annual interest payments of approximately $275 million over the next two years before any use of sale proceeds. About 69% of debt was fixed through swaps; the remainder was exposed to LIBOR and EURIBOR movements. Sale proceeds, permitted debt repayments and potential buybacks remain subject to financing terms and covenants.
- Controls: Disclosure controls were deemed ineffective because a previously reported material weakness in income-tax accounting remained unremediated. Management targeted remediation by the 2018 Form 10-K filing, while warning the weakness could result in undetected or unprevented material misstatements.
- Other exposures: Environmental liabilities were $18.6 million; management did not anticipate material losses above recorded amounts but could not estimate the range of reasonably possible excess losses. The filing also identifies sale-approval and closing risks, foreign-exchange exposure, and possible disruption during the transaction.
The filing provides no specific forward earnings guidance. Management’s outlook statements are subject to transaction completion, market conditions, foreign exchange, costs and other risks.
Important facts for investors to verify
- Whether the Arysta sale closed on the expected terms and timing, including final proceeds, adjustments and any additional loss on sale.
- How sale proceeds were allocated among debt repayment, any share repurchases and transaction or recapitalization costs.
- Post-sale debt, interest expense, liquidity, covenant headroom and the resulting capital structure.
- Whether the income-tax control weakness was remediated and disclosure controls improved.
- Whether operating growth and margins persisted despite mix, input-cost and logistics pressures, and whether the planned reorganization achieved its stated benefits.