Element Solutions Inc annual report, FY2017

Business context and reporting period

This is Platform Specialty Products Corporation’s Form 10-K for the fiscal year ended December 31, 2017. The provided filing identifies the registrant as Platform Specialty Products Corporation; it does not identify Element Solutions Inc. as the filing registrant. The company operated two segments: Performance Solutions, specialty chemicals for electronics, industrial finishing, graphics and offshore applications; and Agricultural Solutions, crop protection, BioSolutions and seed treatments.

The company reported 2017 annual results and unaudited quarterly data. Fourth-quarter 2017 sales were $1,068.7 million, gross profit was $439.6 million, and net loss attributable to common stockholders was $141.5 million.

Financial performance and liquidity

Reported sales increased 5% and organic sales increased 4%. Segment sales were approximately evenly split: Performance Solutions $1,878.6 million and Agricultural Solutions $1,897.3 million. Cash used in investing activities was $92.6 million, including $59.4 million of capital expenditures and $40.5 million invested in product registrations. Cash used in financing activities was $67.4 million. The company reported $606 million of availability under revolving and other credit lines, including $481 million of unused Revolving Credit Facility capacity, net of letters of credit. It was in compliance with its debt covenants at year-end.

Material changes versus the prior comparable period

• Sales rose 5% reported and 4% organic; Adjusted EBITDA rose 7%.
• Gross margin was broadly stable, up 4 basis points, but operating profit fell 13% and operating margin declined 121 basis points.
• A $160.0 million goodwill impairment in Agricultural Solutions contributed to lower operating profit; 2016 had a $46.6 million impairment in Performance Solutions.
• Net loss widened substantially, reflecting, among other items, higher foreign-exchange losses on foreign-denominated debt and intercompany balances. Net foreign-exchange loss was $107.5 million versus $14.1 million in 2016; net interest expense was $341.6 million versus $375.7 million.
• Cash from operations was nearly flat year over year despite higher sales; management cited increased working-capital needs, including inventory buildup and stronger fourth-quarter Agricultural Solutions sales.

Outlook, commentary, risks and unusual items

• Management expected to complete the proposed separation of Agricultural Solutions from Performance Solutions in 2018, subject to board approval and financial, legal, tax, regulatory and operational conditions. The filing provides no numerical earnings or revenue guidance.
• Management described growth from Assembly and Industrial Solutions, geographic expansion and BioSolutions, while noting weakness in flexographic printing plates, regional volume declines and pricing pressure. Agricultural sales and cash flows are seasonal and sensitive to weather, crop cycles and commodity conditions.
• Year-end debt was approximately $5.48 billion; expected interest payments were approximately $275 million annually over the next two years, with $1.33 billion of principal payments due in 2020. The company refinanced debt in 2017, including issuing $800 million of 5.875% notes due 2025 and redeeming its 10.375% notes due 2021.
• Unusual items included the $160 million goodwill impairment, $83.2 million of debt-refinancing costs, $30.8 million of restructuring costs, $12.1 million of separation costs, and $10.5 million of pension settlement and curtailment costs. A legal settlement generated a $10.8 million net gain. Adjusted EBITDA excludes specified items and is a non-GAAP measure.
• The company recorded a provisional $46.3 million tax benefit from the 2017 U.S. tax law changes; its analysis was incomplete and subject to adjustment. It also reported $90.3 million of unrecognized tax benefits and contested tax assessments, including matters in Brazil.
• Management and the auditor concluded that internal control over financial reporting was ineffective at year-end because of a material weakness in income-tax accounting controls. The auditor nevertheless gave an unqualified opinion on the consolidated financial statements. The weakness had not been fully remediated; management targeted remediation by the 2018 Form 10-K.
• Other significant risks include high leverage and refinancing needs, separation execution and tax treatment, goodwill valuation sensitivity, foreign-exchange exposure, environmental and product-regulatory obligations, and agricultural dependence on weather and market conditions.

Most important facts for investors to verify

• Confirm the issuer identity: the supplied filing names Platform Specialty Products Corporation, despite the request metadata naming Element Solutions Inc.
• Track remediation of the income-tax control weakness and assess whether future filings report restatements or additional control deficiencies.
• Review separation progress, financing requirements, tax consequences, costs and any change to the expected 2018 timetable.
• Assess debt maturities, refinancing options, interest-rate exposure and the company’s ability to generate cash against scheduled principal and interest payments.
• Monitor Agricultural Solutions performance and the assumptions supporting the $160 million impairment, as well as the limited fair-value cushion in the Offshore Solutions reporting unit.
• Reconcile reported results with non-GAAP Adjusted EBITDA and its exclusions; evaluate cash conversion and working-capital demands alongside sales growth.