Business context and reporting period
Element Solutions Inc. (formerly Platform Specialty Products Corporation) filed this Form 10-K for the fiscal year ended December 31, 2018. The filing presents unaudited fourth-quarter figures as well as full-year results. The continuing business is a global specialty chemicals company reported in two segments: Electronics and Industrial & Specialty. Agricultural Solutions, including Arysta, is classified as discontinued operations.
Continuing-operations sales were generated by recurring-use specialty chemicals for electronics, industrial surface finishing, graphics and offshore energy applications. No customer represented 10% or more of consolidated sales.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Continuing-operations net sales | $1,961.0 million | $1,878.6 million |
| Gross profit / margin | $837.6 million / 42.7% | $813.8 million / 43.3% |
| Operating profit / margin | $248.5 million / 12.7% | $200.2 million / 10.7% |
| Adjusted EBITDA / margin | $420.7 million / 21.5% | $401.2 million / 21.4% |
| Net loss from continuing operations | $77.0 million | $191.8 million |
| Net loss from discontinued operations | $242.9 million | $103.8 million |
| Consolidated net loss | $319.9 million | $295.6 million |
| Net interest expense | $311.0 million | $336.9 million |
Continuing-operations sales grew 4% reported and 3% on a constant-currency and organic basis. Segment sales were $1,157.5 million for Electronics and $803.5 million for Industrial & Specialty; segment Adjusted EBITDA was $248.2 million and $172.5 million, respectively.
For Q4 2018, continuing-operations net sales were $478.4 million, gross profit was $202.2 million and continuing-operations net loss was $14.2 million. Discontinued operations reported income of $50.4 million for the quarter, producing consolidated net income of $36.2 million. Q4 discontinued results include the final $74 million portion of the estimated Arysta-related impairment.
Continuing-operations cash used in operating activities was $0.8 million; capital expenditures were $28.4 million. Cash and cash equivalents on the continuing-operations balance sheet were $233.6 million, working capital was $545.2 million, and total debt was $5.376 billion at year-end. The company reported $481 million of availability under revolving and other credit lines, net of letters of credit. Approximately $216 million of year-end cash was held by foreign subsidiaries. The filing reports no clear consolidated free-cash-flow figure.
Material changes versus the prior comparable period
- Continuing-operations sales increased 4%, while gross margin declined 60 basis points to 42.7%. Management attributed margin pressure principally to product mix, raw-material inflation, and logistics and warehousing costs.
- Operating profit rose 24%, helped by lower operating expenses, including a $21.8 million favorable non-cash change in contingent consideration and lower restructuring costs.
- Adjusted EBITDA increased 5% to $420.7 million. Electronics’ margin improved 60 basis points; Industrial & Specialty’s margin declined 70 basis points.
- Continuing-operations net loss narrowed, but consolidated net loss increased, principally reflecting the $450 million estimated impairment of discontinued Agricultural Solutions. The impairment primarily reflected foreign-currency translation adjustments and remains subject to closing adjustments.
- Net interest expense fell by $25.9 million, mainly reflecting a full year of benefit from 2017 debt actions. Foreign-exchange loss also decreased substantially, from $53.7 million to $5.5 million.
- Other comprehensive loss was $370.7 million, compared with $256.1 million of other comprehensive income in 2017, primarily due to foreign-currency translation losses.
Outlook, management commentary, risks and unusual items
The Arysta sale to UPL closed on January 31, 2019 for approximately $4.2 billion in cash, subject to post-closing adjustments. Proceeds, together with new term-loan borrowings, were used to repay approximately $4.6 billion of existing debt. A new senior secured credit agreement provides a $750 million term loan due 2026 and a $330 million revolving facility due 2024. The company redeemed its prior senior notes on February 1, 2019; its 5.875% notes due 2025 remained outstanding.
On February 8, 2019, the company repurchased and retired 37 million shares, approximately 13% of then-outstanding common shares, for $434 million, funded with cash and new-credit-agreement borrowings. Management said available cash, operating cash generation and credit availability should be sufficient for working-capital needs, interest, capital expenditures and other requirements for at least 12 months. The filing provides no quantified operating earnings or sales guidance.
Management expects to focus on the remaining specialty-chemicals businesses, organic growth, innovation, operating efficiency and disciplined capital allocation. It also said the post-sale corporate reorganization is intended to reduce costs, but warned that savings may not be achieved and that restructuring could disrupt operations or cause key-personnel losses. The company does not intend to pay common-stock cash dividends in the foreseeable future.
- Key risks include cyclical and rapidly changing end markets, competition, raw-material and freight cost volatility, foreign-exchange exposure, and dependence on successful product innovation and customer retention.
- International operations bring regulatory, trade, tax, political and currency risks. Environmental, chemical-safety and product-liability matters could result in additional costs; recorded environmental liabilities were $18.3 million, with the ultimate exposure and timing uncertain.
- The company retained certain Arysta legal and tax liabilities, primarily involving a Brazilian subsidiary. Management did not expect a material loss, but resolution may take several years and could adversely affect results.
- Debt covenants restrict certain actions, including additional borrowing, dividends, share repurchases and asset transactions. Before the sale, approximately 69% of debt was fixed through swaps; remaining variable-rate exposure and the planned post-sale refinancing are relevant to the debt-cost outlook.
- Other notable items include a $11.3 million gain on sale of an investment, $12.1 million of acquisition and integration costs, $6.3 million of restructuring costs, and a $41.8 million net tax benefit related to the Tax Cuts and Jobs Act. The prior-year comparison included $83.1 million of debt-refinancing costs.
- Management reported effective disclosure controls and internal control over financial reporting at year-end; the previously reported material weakness in income-tax accounting was stated to be remediated.
Investor verification priorities
- Confirm final Arysta sale proceeds after working-capital, cash and debt adjustments, and the ultimate impairment and retained-liability outcomes.
- Reconcile post-sale debt balances, repayment and redemption costs, interest-rate hedges, maturity schedule, and available revolving capacity, including the effect of the $434 million share repurchase.
- Assess the sustainability of continuing-operations growth and margins, particularly Electronics’ mobile-phone exposure and Industrial & Specialty’s product-mix and input-cost pressures.
- Review the cash conversion profile: continuing-operations operating cash flow was slightly negative despite positive Adjusted EBITDA, with higher inventory needs cited as a factor.
- Evaluate the assumptions and limitations underlying Adjusted EBITDA and the contingent-consideration fair-value gain; both are non-GAAP or estimate-sensitive measures.
- Track retained Brazilian legal and tax matters, environmental liabilities, tax valuation allowances and unrecognized tax benefits.