Element Solutions Inc. (then Platform Specialty Products Corporation) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company was a global specialty chemicals producer with two reportable segments: Performance Solutions and Agricultural Solutions. The Agricultural Solutions business remained in continuing operations at quarter-end; the sale agreement was signed after the reporting period.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,022.5 million | $941.1 million | $1,986.6 million | $1,802.9 million |
| Gross profit | $422.9 million | $399.9 million | $827.6 million | $778.3 million |
| Operating profit | $117.0 million | $90.5 million | $221.2 million | $189.9 million |
| Net income (loss) | $11.8 million | $(60.0) million | $49.8 million | $(83.6) million |
| Net income (loss) attributable to common stockholders | $12.0 million | $(61.1) million | $49.3 million | $(85.5) million |
| Diluted EPS | $0.04 | $(0.21) | $0.17 | $(0.30) |
| Adjusted EBITDA (non-GAAP) | $226.0 million | $205.2 million | $433.2 million | $398.3 million |
- Q2 sales rose 9% reported and 7% organically; six-month sales rose 10% reported and 6% organically. Q2 organic growth was 5% in Performance Solutions and 10% in Agricultural Solutions.
- Q2 gross margin was 41.4%, down 110 basis points year over year; operating margin improved to 11.4% from 9.6%. Agricultural Solutions faced active-ingredient cost inflation, generic-product pricing pressure and unfavorable mix.
- Q2 Adjusted EBITDA increased 10% reported; its margin was 22.1%, up 30 basis points. Six-month Adjusted EBITDA increased 9% reported, but margin decreased to 21.8% from 22.1%.
- Interest expense declined to $79.5 million in Q2 and $157.7 million for six months, mainly following prior-year note redemption and term-loan repricing. Q2 included a $52.2 million foreign-exchange loss, contributing to a $2.8 million pretax loss despite higher operating profit. Six-month foreign-exchange results were a $5.8 million gain versus a $72.5 million loss in 2017.
Cash, debt and liquidity
- Six-month operating cash flow was negative $91.7 million, compared with negative $10.3 million in 2017. Management attributed the increased cash use mainly to working capital, including higher receivables and inventory.
- Capital expenditures were $24.3 million; cash used in investing activities was $32.7 million. Financing activities provided $103.2 million, primarily reflecting increased borrowings. Cash, cash equivalents and restricted cash ended the period at $446.9 million; balance-sheet cash and cash equivalents were $442.4 million.
- Total debt and capital lease obligations were $5.54 billion, including $138.8 million classified as current. The company reported $503 million of availability across its revolving and other credit facilities, net of specified letters of credit, and compliance with debt covenants.
- Approximately 68% of debt was fixed-rate through swaps. Management estimated annual interest payments of approximately $275 million over the next two years before any effect of the proposed sale, and believed liquidity would meet needs for at least 12 months.
Material developments, outlook and risks
- Arysta sale: On July 20, 2018, the company agreed to sell Agricultural Solutions to UPL for $4.2 billion in cash, subject to adjustments, customary conditions and regulatory approvals. Closing was expected in late 2018 or early 2019. The company expected proceeds to be used primarily to repay debt.
- Management expected the sale to result in a third-quarter 2018 impairment charge of approximately $450 million to $550 million, primarily from foreign-currency translation adjustments. The final loss could vary with exchange rates and closing adjustments. Agricultural Solutions was expected to be reported as discontinued operations beginning with the Q3 filing.
- The board authorized up to $750 million of potential share repurchases, conditioned on closing the sale; timing and amount remained undetermined. The company also planned to change its name to Element Solutions Inc. at closing.
- Transaction risks include failure or delay in obtaining regulatory approvals or satisfying closing conditions, possible termination, and disruption to customers, employees, lenders and operations while the transaction is pending. A post-sale reorganization to a “one-company” structure also carries execution and retention risks.
- Other notable items included a $4.0 million impairment charge on a cost-method investment in Q2 and a $11.3 million gain on an equity-investment sale in the six-month period. Environmental liabilities were $21.5 million; management said it could not estimate reasonably possible environmental losses beyond recorded amounts. The filing also describes Brazilian environmental litigation and tax assessments; management did not expect material losses beyond accrued liabilities.
- Disclosure controls were assessed as ineffective because a previously reported material weakness in income-tax accounting remained at June 30, 2018. Management was pursuing remediation and targeted completion by the 2018 Form 10-K, while warning the weakness could result in undetected or unprevented material misstatements.
Important facts for investors to verify
- Progress toward closing the $4.2 billion Arysta sale, required approvals, final proceeds and resulting debt reduction.
- The final sale-related impairment and any changes to the expected accounting classification or timing.
- Working-capital conversion and operating cash flow, given the substantial six-month cash use.
- Debt maturities, covenant headroom, facility availability and the intended allocation between debt repayment and any share repurchases.
- Whether the income-tax control weakness is remediated and whether environmental, legal or Brazilian tax matters change materially.