Element Solutions Inc. (then Platform Specialty Products Corporation) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing reports the company under its former name, Platform Specialty Products Corporation (NYSE: PAH). It operated two reportable segments: Performance Solutions and Agricultural Solutions.
Key financial results
- Revenue: $964.1 million, up 12% reported and 5% organic year over year. Foreign currency translation contributed approximately 7 percentage points to reported growth.
- Profitability: Gross profit was $404.7 million, up 7%; gross margin declined to 42.0% from 43.9%. Operating profit rose 5% to $104.2 million, while operating margin fell to 10.8% from 11.5%.
- Net income and EPS: Net income was $38.0 million versus a $23.6 million loss; income attributable to common stockholders was $37.3 million, or $0.13 per diluted share, versus a $24.4 million loss, or $0.09 per share. Results included a $58.0 million foreign-exchange gain and $19.0 million of other income; income tax expense was $65.0 million.
- Adjusted EBITDA (non-GAAP): $207.2 million, up 7% reported but down 3% at constant currency. Adjusted EBITDA margin was 21.5%, down from 22.4%.
- Cash flow: Operating cash use was $161.1 million, compared with $119.4 million used in Q1 2017. Capital expenditures were $10.0 million. Cash, cash equivalents and restricted cash ended at $417.9 million, down $66.0 million from the start of the quarter.
- Debt and liquidity: Total debt and capital lease obligations were $5.61 billion; cash and cash equivalents were $412.6 million. The company reported $423 million available under its revolving credit facility, net of letters of credit, and approximately $552 million of combined availability under revolving and other credit lines. It was in compliance with debt covenants at quarter-end.
- Balance-sheet liquidity: Current assets were $2.55 billion and current liabilities $1.24 billion, implying a current ratio of approximately 2.1. Working capital cash use was significant, including increases in receivables and inventories.
Changes versus the prior comparable period
- Reported sales rose in both segments: Performance Solutions to $492.4 million (+10%) and Agricultural Solutions to $471.7 million (+14%). Organic growth was 4% and 6%, respectively.
- Performance Solutions operating profit increased to $77.0 million from $67.2 million, and its operating margin improved to 15.6% from 15.0%.
- Agricultural Solutions operating profit declined to $48.1 million from $51.9 million; its operating margin contracted to 10.2% from 12.5%. Management cited input-cost pressure, unfavorable mix and higher selling and administrative costs.
- Net interest expense declined by $11.2 million to $78.2 million, primarily reflecting 2017 debt redemption and repricing. The reported swing to net income also reflected large foreign-exchange and other-income movements, rather than operating profit alone.
- Operating cash use increased by $41.7 million year over year, driven mainly by lower cash operating profits and cash tied up in receivables and inventory.
Outlook, commentary and risks
- Management expected the proposed separation of Agricultural Solutions from Performance Solutions to be completed in 2018, subject to Board approval and conditions including market, legal, tax, regulatory and implementation considerations. Agricultural Solutions remained in continuing operations at March 31, 2018. No quantified earnings guidance was provided in the supplied filing text.
- Management believed cash, operating cash generation and available credit would meet working-capital, interest, capital-expenditure and other needs for at least the next 12 months, while noting that working-capital cycles or acquisitions could require additional funding. Expected annual interest payments on senior notes and term loans were approximately $275 million over the next two years.
- Foreign exchange and interest-rate exposures are material: approximately 84% of quarterly sales were generated outside the U.S.; $389 million of quarter-end cash was held by foreign subsidiaries. About 67% of debt was fixed through swaps, with the remainder exposed to LIBOR and EURIBOR fluctuations.
- Disclosure controls and procedures were deemed ineffective because a previously reported material weakness in income-tax accounting remained unresolved. Management was pursuing remediation and targeted completion alongside the 2018 Form 10-K; until remediated, the weakness could result in undetected or unprevented material misstatements.
- The company continued evaluating the Tax Cuts and Jobs Act, including GILTI accounting and foreign-earnings reinvestment; related estimates were provisional. Environmental liabilities were $25.2 million, and the filing identified environmental, Brazilian litigation and tax-assessment matters. Management did not expect material losses beyond recorded liabilities, but outcomes remain uncertain.
- Other notable items included an $11.3 million gain on sale of an equity investment, a $4.8 million favorable asset-retirement-obligation adjustment and a $3.7 million insurance gain. These contributed to the period’s other income.
Investor verification priorities
- Reconcile the $58.0 million foreign-exchange gain and $19.0 million other income to underlying, potentially nonrecurring items; assess earnings excluding these effects.
- Track gross-margin and Agricultural Solutions profitability trends, including input-cost inflation, product mix and the ability to recover costs through pricing.
- Assess operating cash conversion and working-capital requirements, particularly receivables, inventory and factoring activity.
- Review debt maturities, borrowing availability, covenant headroom, floating-rate exposure and the company’s ability to service its substantial debt.
- Monitor separation approvals, timing, costs and financing or debt-allocation implications, as well as remediation of the income-tax control weakness.
- Verify developments in tax assessments, environmental exposures and the disclosed Brazilian proceedings, and whether recorded reserves remain adequate.