Element Solutions Inc. (then Platform Specialty Products Corporation) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The company reported two segments: Performance Materials and Graphic Solutions. Comparisons with 2013 are not fully like-for-like: Platform acquired MacDermid on October 31, 2013, and the filing presents 2014 as the “Successor” and MacDermid’s 2013 results as the “Predecessor.”
Financial results
| Metric | Q2 2014 | Six months 2014 |
|---|---|---|
| Net sales | $189.1 million | $372.9 million |
| Gross profit / margin | $96.7 million / 51.1% | $180.9 million / 48.5% reported |
| Operating profit | $5.6 million | $9.6 million |
| Net income (loss) | $1.5 million consolidated; $0.4 million loss attributable to common shareholders | $4.5 million consolidated loss; $7.8 million loss attributable to common shareholders |
| Operating cash flow | Not separately presented for the quarter | $49.2 million |
- Q2 sales decreased 0.5% year over year; six-month sales increased 0.2%. Performance Materials grew, while Graphic Solutions sales fell 6.1% in both comparisons, mainly from weaker newspaper-plate demand.
- Q2 gross margin improved from 50.8% in the predecessor period to 51.1%, primarily on product mix. Six-month reported gross profit fell 4.7%; excluding a $12.0 million acquisition-related inventory step-up charge, management said gross margin was 51.7%, versus 51.0% in 2013.
- Q2 operating profit declined from $36.6 million in the 2013 predecessor period. Management cited acquisition-related contingent-consideration revaluation, acquired-intangible amortization and Chemtura transaction costs; before these incremental expenses, management said segment performance improved in Performance Materials but weakened in Graphic Solutions.
- For the six months, reported selling, technical, general and administrative expense rose $48.8 million, including a $23.8 million contingent-consideration fair-value charge, approximately $15.9 million of incremental acquired-intangible amortization and approximately $10.1 million of Chemtura transaction costs.
Balance sheet, cash flow and liquidity
- At June 30, cash and cash equivalents were $642.8 million; total debt was $748.5 million, including $747.5 million under the first-lien facility. Cash less debt was approximately negative $105.7 million.
- Current assets were $889.5 million and current liabilities $115.3 million. The company reported approximately $49 million of unused revolving credit capacity; it was in compliance with debt covenants.
- Six-month cash flow: $49.2 million provided by operations, $0.2 million provided by investing activities and $470.0 million provided by financing activities. Financing included net proceeds from the private placement and warrant exercises; cash ended the period at $642.8 million.
- Management stated cash and expected operating cash flow should meet working-capital, capital-expenditure and other business needs for at least 12 months. Of cash held by foreign subsidiaries, $51.0 million was in entities whose earnings were considered permanently reinvested.
Material developments, outlook and risks
- In May, the company sold 15.8 million shares in a private placement for $300.2 million gross proceeds. A resale registration statement covering 14.825 million shares became effective in June.
- The proposed Chemtura AgroSolutions acquisition was valued at approximately $1.0 billion, subject to adjustments and closing conditions. On July 3, $315 million was deposited into acquisition-restricted escrow; on July 15, the committed financing was reduced to a maximum $405 million first-lien facility and the $120 million second-lien commitment was eliminated. The filing expected closing in Q4 2014, but completion was uncertain. It disclosed a potential $49.7 million termination fee in specified financing-failure circumstances.
- After quarter-end, the company agreed to acquire Agriphar for €300 million, comprising €285 million cash and €15 million in shares, subject to closing conditions. The filing expected closing by December 31, 2014.
- A $4.5 million tax benefit in Q2 resulted from management’s decision to indefinitely reinvest certain foreign earnings. The six-month tax benefit was $1.9 million.
- Contingent consideration related to the MacDermid acquisition was valued at $58.6 million at quarter-end, up from $34.8 million at year-end; remeasurement expense was $10.8 million in Q2 and $23.8 million for the six months. The potential payment is tied to EBITDA and stock-price metrics.
- A federal jury found for MacDermid Printing Solutions in a July 8 verdict against Cortron and awarded damages, with additional amounts and collection subject to further proceedings and possible appeal. Proceeds are subject to transaction-agreement provisions.
- Environmental remediation, legal proceedings, foreign-exchange exposure, acquisition integration and possible dilution are key risks. Environmental reserves were $2.25 million; reserves for outstanding legal proceedings were approximately $3.29 million. Management said additional environmental costs were not expected to be material, while noting actual costs could differ from estimates.
- No specific financial guidance was provided. Management highlighted new-product sales and growth opportunities, but cautioned that forward-looking statements depend on assumptions and that acquisitions may be delayed, fail to close or deliver fewer benefits than expected.
Investor verification priorities
- Assess underlying operating trends separately from acquisition accounting, transaction costs and the non-comparable Successor/Predecessor periods.
- Verify Chemtura and Agriphar closing status, final purchase consideration, funding requirements and integration costs.
- Track conversion or exchange rights and potential dilution, including founder preferred-share dividends and the approximately 8.8 million shares potentially issuable for the MacDermid non-controlling interest.
- Review contingent-consideration valuation assumptions, debt-covenant headroom, cash restrictions and the effect of acquisition escrow on available liquidity.
- Monitor newspaper-product demand, environmental and legal exposures, and the uncertain Cortron judgment proceeds.