Business context and reporting period
Platform Specialty Products Corporation (the issuer named in this 10-Q; the filing does not identify itself as Element Solutions Inc.) reported unaudited results for the quarter and nine months ended September 30, 2015. It operated through Performance Applications and Agricultural Solutions, producing specialty chemicals for industrial, electronics, offshore, printing and agricultural markets. The sharp year-over-year growth largely reflects acquisitions: Arysta closed in February 2015, following CAS and Agriphar in late 2014.
Financial results and liquidity
Amounts are in millions of U.S. dollars except per-share data.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $597.3 | $196.8 | $1,807.3 | $569.6 |
| Gross profit | $242.7 | $103.2 | $718.5 | $284.1 |
| Gross margin | 40.6% | 52.4% | 39.8% | 49.9% |
| Operating profit | $31.3 | $23.3 | $77.5 | $32.9 |
| Operating margin | 5.2% | 11.8% | 4.3% | 5.8% |
| Net income (loss) attributable to common stockholders | $(122.3) | $11.9 | $(161.1) | $4.1 |
| Diluted earnings (loss) per share | $(0.58) | $0.08 | $(0.81) | $0.03 |
| Adjusted EBITDA | $115.1 | $52.4 | $413.2 | $146.5 |
Q3 sales increased 203.5%, but sales adjusted for acquisitions and foreign-currency translation were down 0.3%; nine-month adjusted sales increased 3.0%. Agricultural Solutions contributed $417.6 of Q3 sales and $1,265.7 for the nine-month period. The company reported Q3 net interest expense of $52.7 and losses on derivative contracts of $47.3, alongside a $36.9 foreign-exchange loss. Those items, as well as acquisition costs and tax expense, contributed to the net loss.
For the nine months, operating cash flow was $131.1, versus $79.5 in 2014. Investing activities used $2,305.8, primarily reflecting the Arysta acquisition; financing activities provided $2,481.0. Cash and cash equivalents were $682.0 at quarter-end. Total debt and capital lease obligations were $3,417.5, including $3,401.4 classified as long-term and $16.1 current. The company reported $398 million of availability under its various lines of credit and overdraft facilities and stated it was in compliance with its credit covenants.
Current assets were $2,312.7 and current liabilities $965.1. Goodwill was $2,842.0 and intangible assets, net, were $2,577.9. The filing reports a $645.9 Series B redeemable preferred-stock balance outside stockholders’ equity.
Material changes versus the prior comparable period
- Reported sales and Adjusted EBITDA rose substantially, primarily because the acquired agricultural businesses were included. Performance Applications’ Q3 sales were $179.7 versus $196.8 a year earlier; its Adjusted EBITDA was $54.5 versus $52.4.
- Margins weakened: Q3 gross margin fell to 40.6% from 52.4%, and operating margin to 5.2% from 11.8%. Management cited acquisition-related purchase-accounting inventory charges and higher selling, general and administrative costs, among other factors.
- Debt and interest costs increased substantially to fund acquisitions. The company issued $1.10 billion of 6.50% U.S.-dollar notes and €350 million of 6.00% euro notes in February 2015, alongside additional term and revolving borrowings.
- Foreign-currency translation reduced other comprehensive income by $614.0 for the nine months. The company also reported a $73 million prior-period Arysta purchase-accounting/foreign-currency error, which it deemed not material and corrected in the June 2015 quarter.
- A June 2015 equity offering raised approximately $483 million gross, issuing 18.2 million shares at $26.50 per share.
Outlook, commentary, risks and unusual items
- Management said cash and operating cash generation should be sufficient for working capital, capital expenditures and other business needs for at least 12 months, while noting pending and future acquisitions may require additional debt or equity financing. No quantified earnings or revenue guidance is provided in the filing text.
- The Alent acquisition, valued at approximately £1.35 billion ($2.10 billion at the cited exchange rate), was expected to close in early December 2015, subject to remaining conditions. The company had entered into a $1.88 billion interim facility commitment and foreign-exchange hedges. After quarter-end, it completed a $500 million 10.375% notes offering, with proceeds held in escrow pending conditions including completion of Alent. A £27 million break-up fee could apply in specified circumstances if the transaction failed.
- After quarter-end, the company completed the first closing of its OMG Businesses acquisition on October 28, 2015, for approximately $367 million, subject to adjustments; the Malaysian subsidiary was expected to close in Q1 2016.
- The Series B preferred stock issued in the Arysta acquisition carries a potential cash make-whole obligation. At the September 30 share price of $12.65, the company estimated a potential payment of approximately $320 million, assuming no reduction for the arbitration matter. On October 27, the maturity was extended to April 20, 2017; the amendment also provides for cash dividends of $4 million per month from the original maturity date until redemption or the extended maturity date, subject to its terms.
- Disclosure controls and procedures were deemed ineffective because of two material weaknesses: controls over acquisition accounting and non-routine transactions, and monitoring of CAS financial reporting and account reconciliations. The company was adding accounting resources and performing additional procedures; it warned that weaknesses could lead to undetected misstatements or restatements.
- Key exposures include acquisition integration and financing, foreign exchange and interest rates, weaker demand in some industrial and electronics products, agricultural product-liability and environmental claims, and tax assessments. The company reported $1.7 million reserved for environmental matters and $6.6 million for legal proceedings. Several Brazilian environmental and tax claims and a Mexican crop-contamination claim remain outstanding; management described its defenses and did not record a reserve for the Mexican claim.
- Other unusual items included a $16.0 million gain recognized from a litigation settlement, $18.2 million of nine-month restructuring costs, and $48.1 million of Q3 fair-value losses on a deal-contingent foreign-exchange contract related to Alent. The CEO announced an intention to retire no later than March 31, 2016, or earlier upon a successor’s appointment or company election.
Important facts for investors to verify
- How much reported growth and Adjusted EBITDA is attributable to acquired businesses versus organic performance, and whether margins improve as integration proceeds.
- Debt service, refinancing needs and covenant headroom, particularly given the Alent and OMG transactions and the high-cost November notes financing.
- The ultimate Series B preferred-stock conversion or redemption cost, including the make-whole exposure, amended maturity and post-original-maturity dividends.
- Progress in remediating the two material weaknesses and the results of the required independent auditor assessment of internal controls.
- Cash conversion and working-capital trends: management reported 121 days sales outstanding and 114 days inventory outstanding at September 30, 2015, citing the acquired agricultural business mix.
- Remaining acquisition conditions and financing, foreign-exchange exposure, and developments in the disclosed legal, environmental and tax matters.