Element Solutions Inc. (then Platform Specialty Products Corporation) — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The filing was signed November 7, 2016. The company is a global specialty-chemicals and technical-services provider, reporting Performance Solutions and Agricultural Solutions. Results include recent acquisitions, notably Alent, OMG and OMG Malaysia; reported year-over-year growth therefore substantially reflects a larger acquired-business base.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $890.5 million | $597.3 million | $2,635.9 million | $1,807.3 million |
| Gross profit / margin | $375.1 million / 42.1% | $242.7 million / 40.6% | $1,111.8 million / 42.2% | $718.5 million / 39.8% |
| Operating profit / margin | $79.9 million / 9.0% | $31.3 million / 5.2% | $227.0 million / 8.6% | $77.5 million / 4.3% |
| Net income (loss) | $65.9 million | $(139.6) million | $(76.6) million | $(174.9) million |
| Net income (loss) attributable to common stockholders | $104.7 million | $(140.1) million | $(39.0) million | $(178.9) million |
| Adjusted EBITDA | $190.1 million | $113.6 million | $551.4 million | $413.4 million |
- Reported sales rose 49.1% in Q3 and 45.8% year to date. Excluding acquisitions and currency translation, sales increased 1.1% in Q3 and 5.2% year to date.
- Performance Solutions Q3 sales were $454.9 million and adjusted EBITDA $109.9 million; Agricultural Solutions sales were $435.6 million and adjusted EBITDA $80.2 million. On an acquisition- and currency-adjusted basis, Performance Solutions sales declined 1.1%, while Agricultural Solutions sales grew 2.0%.
- Q3 common-stockholder income included a $103 million gain from the Series B preferred-stock settlement and a $32.9 million gain on amendment of the preferred shares. The nine-month common-stockholder loss was also affected by substantial interest and foreign-exchange expense. Basic EPS was $0.45 in Q3; diluted EPS was a loss of $0.15, reflecting adjustments for the preferred-stock transactions and dilution.
- Net interest expense was $98.5 million in Q3 and $289.7 million year to date, versus $52.7 million and $143.2 million in the prior-year periods.
Cash, debt and liquidity
- Cash and cash equivalents were $714.1 million at September 30, 2016, up from $432.2 million at year-end 2015. Total debt and capital-lease obligations were $5.28 billion; the filing reports expected annual interest payments above $300 million. The current preferred-stock redemption liability was $504 million, separate from reported debt.
- For the first nine months, operating cash flow was negative $24.0 million, compared with positive $131.1 million in 2015. The company attributed the deterioration mainly to a $190 million unfavorable year-over-year change in cash used for assets and liabilities, including lower accounts payable and accrued expenses.
- Capital expenditures were $32.8 million and product-registration investment was $22.4 million year to date. Financing activities provided $337.4 million, including $391.5 million net proceeds from the September share offering.
- At quarter-end, the company reported $500 million available under its revolving credit facility and approximately $618 million of total availability under revolving, line-of-credit and overdraft facilities. It was in compliance with debt covenants and stated it expected cash, operating cash generation and available facilities to cover needs for at least 12 months; future acquisitions or preferred-stock settlement needs could require additional financing.
- After quarter-end, an October 14 credit amendment refinanced term loans, reduced rates by 50 basis points on new U.S.-dollar loans and 75 basis points on new euro loans, and was expected to reduce annual interest by about $11 million. It extended maturity to June 2023, subject to an earlier November 2021 maturity condition tied to the 2022 USD notes.
Changes, outlook and significant items
- Acquired businesses contributed $643.9 million of Q3 sales and $1.81 billion of nine-month sales. Performance Solutions’ comparable Q3 sales were pressured by softness in offshore markets associated with lower oil prices and delayed project starts. Agricultural Solutions’ comparable growth reflected stronger product volumes and mix, while North American demand remained soft.
- The September 2016 equity offering issued 48.8 million shares at $8.25 each, raising approximately $402.5 million gross and $391.5 million net. The share issuance increased liquidity but diluted existing shareholders.
- Under the September settlement with the Arysta Seller, the company could, through December 15, 2016, settle Series B obligations by issuing 5.5 million common shares and paying $1, and pay $460 million to resolve the make-whole obligation. Without settlement, a 2017 repurchase and potentially substantial cash make-whole payment could be due; the estimated maximum make-whole at the September 30 share price was approximately $421 million. The filing does not provide earnings guidance.
- Environmental reserves rose to $47.9 million from $25.7 million, primarily for Alent-related remediation. The company said it did not then anticipate material losses above recorded reserves, but could not estimate the reasonably possible excess range.
- An internal investigation into potentially improper payments in Arysta’s West Africa government-tender business was ongoing. The company had informed the SEC and Department of Justice and was cooperating; management said results to date did not indicate a material business impact. A securities class action was pending; a related shareholder derivative action had been dismissed.
- Management reported disclosure controls were ineffective because previously identified material weaknesses in financial-reporting controls remained. The company was implementing remediation measures. Controls over Alent, OMG and OMG Malaysia were excluded from the quarter-end evaluation while integration and assessment continued.
- The 2015 comparative financial statements were restated for an income-tax accounting error that had understated tax expense by $17.8 million. A separate $6.1 million cumulative prior-period allocation error involving non-controlling interests was corrected in the 2016 statements and deemed immaterial by management.
Investor verification priorities
- Track resolution of the Series B preferred-stock obligations, including the December 15, 2016 settlement election, cash funding and resulting share dilution.
- Reconcile adjusted EBITDA and comparable organic results to GAAP results, with attention to acquisition contributions, integration costs and unusual preferred-stock gains.
- Assess debt service and refinancing risk against operating cash flow, working-capital needs, covenant headroom and the stated liquidity facilities.
- Monitor remediation of material weaknesses and the continuing evaluation of controls at acquired businesses; review the company’s subsequent reporting for any further restatements.
- Follow developments in the West Africa investigation, environmental remediation exposure and pending securities litigation.