Business context and reporting period
The supplied filing is Platform Specialty Products Corporation’s Form 10-K for the fiscal year ended December 31, 2014, not a filing under the name Element Solutions Inc. This summary follows the filing. The company reported specialty chemicals and technical services through Performance Materials, Graphic Solutions and a new AgroSolutions segment. The 2014 results include a full year of MacDermid but only partial periods for Agriphar and CAS; Arysta was acquired after year-end, on February 13, 2015.
Comparisons with 2013 are substantially affected by the MacDermid acquisition and differing reporting periods. Fourth-quarter information is unaudited.
Key financial metrics
| Metric | FY 2014 | Q4 2014 |
|---|---|---|
| Net sales | $843.2 million | $273.6 million |
| Gross profit / margin | $396.6 million / 47.0% | $112.4 million / 41.1% |
| Operating profit (loss) | $9.5 million | Not clearly provided for the quarter |
| Net income (loss) | $(24.2) million | $(34.0) million attributable to shareholders |
| Net income (loss) attributable to common shareholders | $(262.6) million; diluted loss per share $(1.94) | $(266.7) million |
| Adjusted EBITDA | $212.2 million | Not clearly provided for the quarter |
| Cash from operating activities | $98.2 million | Not clearly provided for the quarter |
The FY net loss attributable to common shareholders includes a $232.7 million accrued stock dividend associated with founder Series A preferred shares; this is distinct from operating performance. Management reported 2014 adjusted EBITDA, a non-GAAP measure, excluding items including acquisition costs and inventory purchase-accounting charges.
- Cash and liquidity at year-end: Cash and cash equivalents were $397.3 million, plus $600.0 million of restricted cash deposited for the pending Arysta acquisition. Working capital was $1.336 billion, including that restricted cash; revolving-credit availability was $173 million.
- Debt: Total debt was $1.416 billion, versus $752.3 million at December 31, 2013. Approximately $1.41 billion was variable-rate debt. The company said it was in compliance with credit-facility covenants at year-end.
- Cash uses and investment: Investing activities used $1.983 billion, including $1.362 billion for acquisitions and $600 million of restricted cash; capital expenditures were $18.5 million. Operating cash flow less capital expenditures was approximately $79.7 million.
- Segments: Sales were $589.3 million in Performance Materials, $165.9 million in Graphic Solutions and $88.0 million in AgroSolutions. Segment adjusted EBITDA was $148.7 million, $47.5 million and $16.0 million, respectively.
Material changes versus prior periods
- Revenue increased with the full-year consolidation of MacDermid and partial-year contributions of $26.1 million from Agriphar and $61.9 million from CAS. These acquisition effects make year-over-year comparisons difficult.
- Reported gross margin was 47.0%; excluding $35.5 million of acquisition-related inventory fair-value charges, management reported a 51.3% margin.
- Operating profit was affected by $47.8 million of acquisition-related transaction costs, the $35.5 million inventory charge and a $29.1 million non-cash increase in contingent consideration. Excluding acquisition-related expenses, management reported operating profit equal to 14.4% of sales.
- Performance Materials benefited from higher sales in electronics and certain industrial and offshore products. Graphic Solutions was pressured by lower newspaper-plate demand. The AgroSolutions result included only partial-year acquired-business results and significant purchase-accounting and transaction charges.
- The company raised substantial equity capital during 2014 and expanded debt to fund acquisitions. After year-end, it completed the Arysta acquisition, funded with cash, preferred stock, new notes, incremental term loans and revolving borrowings; those financing changes are not reflected in year-end debt above.
Outlook, commentary, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management described growth priorities including product innovation, international expansion, integration of acquisitions and further strategic acquisitions.
- Management expected year-end cash and operating cash generation to cover working capital, capital expenditures and other requirements for at least the next twelve months, while noting that future acquisitions could require further debt or equity financing.
- AgroSolutions is seasonal and exposed to weather, crop cycles, commodity prices and regional demand. Other stated risks include substantial leverage and variable interest rates, foreign-currency exposure, raw-material and supplier concentration, product registration and environmental requirements, acquisition integration, and intense competition. A 100-basis-point increase in LIBOR was estimated to increase annual interest expense by about $2.5 million.
- The Arysta acquisition was completed after year-end for approximately $3.57 billion. The filing noted that a $27.2 million valuation allowance for foreign tax credit carryforwards was expected in the first quarter of 2015 following that acquisition.
- No 2014 goodwill impairment was recorded, but the Offshore reporting unit had only 7.6% valuation headroom; a 1% decrease in terminal growth or a 1% increase in the discount rate would have triggered further impairment testing. Environmental reserves were reported as non-material. A $25 million settlement of MacDermid litigation occurred after year-end; proceeds are subject to transaction agreements.
- Management concluded internal control over financial reporting was effective at December 31, 2014, but excluded Agriphar and CAS from its assessment because they were acquired in the fourth quarter. The independent auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Confirm the issuer’s identity and reporting basis: the provided document is Platform Specialty Products Corporation’s 2014 10-K, and its acquired-business reporting periods are not directly comparable with prior periods.
- Reconcile reported results with management’s adjusted measures, particularly acquisition transaction costs, inventory fair-value charges, contingent consideration and the founder stock dividend.
- Review the post-Arysta pro forma debt, interest burden, liquidity, covenant headroom and dilution exposure from Series B preferred stock conversion or potential cash shortfall payments.
- Assess whether acquisition integration, synergies and AgroSolutions performance support the company’s growth assumptions, and monitor goodwill valuation sensitivity.
- Check developments in tax assessments and the expected foreign-tax-credit valuation allowance, environmental matters, litigation proceeds and the integration-control assessment.