Element Solutions Inc. (then Platform Specialty Products Corporation) — Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing is by Platform Specialty Products Corporation, the company identified in the request as Element Solutions Inc. Amounts below are U.S. dollars unless noted.
Business context and results
The company produces specialty chemicals through two segments: Performance Solutions and Agricultural Solutions. It describes an acquisition-led, “Asset-Lite, High-Touch” strategy centered on technical service, research and development, and selective capital investment. Interim results may be affected by seasonality and other factors.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $941.1 million | $921.6 million | $1,802.9 million | $1,745.4 million |
| Gross profit | $399.9 million | $380.6 million | $778.3 million | $736.6 million |
| Gross margin | 42.5% | 41.3% | 43.2% | 42.2% |
| Operating profit | $90.4 million | $94.9 million | $189.7 million | $147.0 million |
| Operating margin | 9.6% | 10.3% | 10.5% | 8.4% |
| Net loss | $60.0 million | $8.1 million | $83.6 million | $142.4 million |
| Net loss attributable to common stockholders | $61.1 million | $8.8 million | $85.5 million | $143.6 million |
| Loss per diluted share | $0.21 | $0.04 | $0.30 | $0.63 |
| Adjusted EBITDA (non-GAAP) | $205.2 million | $192.9 million | $398.3 million | $361.3 million |
Q2 sales rose 2% reported and 2% organically; first-half sales rose 3% reported and 3% organically. First-half operating profit improved 29% reported, while Q2 operating profit declined 5%. Interest expense fell to $85.0 million in Q2 and $174.4 million for the half, but Q2’s $59.9 million foreign-exchange loss (versus a $25.0 million gain a year earlier) drove total other expense higher and contributed to the larger quarterly net loss.
Segments and material changes
- Performance Solutions: Q2 sales increased 6% to $462.3 million, with 6% organic growth; first-half sales increased 6% to $909.4 million. Assembly, Industrial, and Electronics were growth drivers; Graphics and Offshore were weaker. Q2 adjusted EBITDA was $102.7 million, up 5% reported; first-half adjusted EBITDA was $205.0 million, up 13%.
- Agricultural Solutions: Q2 sales declined 1% to $478.8 million, including a 2% organic decline; first-half sales increased 1% to $893.5 million, with organic sales approximately flat. Higher-margin product mix and sourcing savings lifted gross margin, but Q2 operating profit declined 13% to $49.0 million amid increased selling and administrative costs. Q2 adjusted EBITDA rose 8% to $102.5 million; first-half adjusted EBITDA rose 7% to $193.3 million.
- Consolidated gross margin improved 119 basis points in Q2 and 97 basis points for the first half. Performance Solutions’ Q2 gross margin fell 208 basis points, partly due to product mix and raw-material costs; Agricultural Solutions’ rose 416 basis points.
- Management attributed Agricultural Solutions’ sales pressure to a changed West Africa selling strategy, pricing pressure, currency-related price adjustments in Latin America, and a shift away from lower-margin U.S. products. The West Africa strategy change reduced segment growth by approximately 2%.
Cash flow, debt and liquidity
- Six-month operating cash flow was negative $13.2 million, versus negative $113.3 million in 2016. Investing cash flow was negative $48.0 million, including $28.7 million of capital expenditures and $18.1 million for product registrations. Financing cash flow was positive $47.3 million. Cash increased $4.5 million to $427.1 million.
- At June 30, cash was $427.1 million and current assets were $2,342.4 million, against current liabilities of $1,204.9 million. The company said $417 million of cash was held by foreign subsidiaries.
- Total debt and capital lease obligations were $5.46 billion, including $1.97 billion of Senior Notes, $3.32 billion of term loans, and $155 million of local and revolving borrowings. Expected annual interest payments were approximately $300 million over the next three years; the company identified $1.38 billion of principal payments due in 2020.
- April’s refinancing repriced approximately $1.93 billion of term loans, reducing rates by 100 basis points across U.S.-dollar and euro tranches. Management estimated annualized cash interest savings of approximately $20 million. Refinancing costs included $8.5 million of debt-fee and discount write-offs and $5.3 million of issuance costs.
- The $500 million revolving facility had $376 million available, net of letters of credit; availability under other lines and overdraft facilities was approximately $97 million. The filing also reports aggregate availability of approximately $473 million across these facilities. The company reported compliance with debt covenants at June 30.
- Non-recourse factoring utilization was approximately $91.7 million, versus $167 million at year-end 2016; management cited $43 million of net proceeds from a new receivables factoring program as a contributor to operating cash flow. The filing also discloses on-balance-sheet factoring with recourse.
Outlook, unusual items and risks
- No specific revenue, earnings, or full-year financial guidance is provided in the supplied filing text. Management said cash, operating cash generation, and available credit should meet working-capital, capital-expenditure, and other needs for at least the next 12 months, while noting that shortfalls or acquisitions could require additional borrowing or financing.
- A $20 million DuPont settlement payment was made July 14, 2017, following a June 27 agreement resolving litigation involving MacDermid Printing, DuPont, and Cortron. The company recorded a $10.6 million net settlement gain in Q2; settlement proceeds are subject to pending-litigation provisions in the business combination agreement.
- Foreign exchange and raw-material-price movements are material exposures. The company uses currency forwards, interest-rate swaps, and metals futures; the filing reports a $72.5 million first-half foreign-exchange loss, primarily related to remeasurement of foreign-currency debt and intercompany balances.
- Environmental liabilities were $31.4 million, asset-retirement obligations $22.5 million, and legal-proceeding accruals $6.9 million at June 30. Management did not anticipate material environmental losses above recorded amounts but said it could not estimate the reasonably possible excess exposure. Disclosed matters include Brazilian claims and tax assessments; contested Brazilian tax assessments totaled approximately $27 million including interest and penalties.
- The company reported that disclosure controls were not effective because previously identified material weaknesses in internal control over financial reporting continued, involving insufficient accounting personnel with appropriate expertise. Remediation was underway, but no completion timetable was provided; management cautioned that weaknesses could result in undetected or unprevented material misstatements.
- Management said the SEC and U.S. Department of Justice had closed their review of potentially improper payments connected with Arysta’s West African government-tender business and declined to take action.
Important facts for investors to verify
- Reconcile the Q2 net loss with the unusually large foreign-exchange loss, and assess the sensitivity of foreign-currency debt and intercompany balances.
- Track working-capital needs, factoring use, cash conversion, and the concentration of cash in foreign subsidiaries.
- Review debt maturities, refinancing savings, covenant headroom, and the company’s ability to manage substantial interest and principal obligations.
- Assess whether Agricultural Solutions can sustain margin gains while addressing sales declines, higher bad-debt provisions, and factoring and supply-agreement costs.
- Monitor progress and independent evidence of remediation of the disclosed material weaknesses in internal controls.
- Follow the status and possible financial effects of environmental, product-liability, Brazilian litigation, and tax matters, as well as the allocation of settlement proceeds.