Business context and reporting period
Platform Specialty Products Corporation (then NYSE: PAH) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The filing describes a global specialty-chemicals business with Performance Solutions and Agricultural Solutions segments. The request identifies Element Solutions Inc.; the filing itself names Platform Specialty Products Corporation, so confirm the issuer and corporate-history mapping before relying on this summary.
Key financial results
Amounts are in U.S. dollars; financial-statement figures are in millions except per-share data.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $904.3 | $890.5 | $2,707.2 | $2,635.9 |
| Gross profit | $371.1 | $375.1 | $1,149.4 | $1,111.8 |
| Gross margin | 41.0% | 42.1% | 42.5% | 42.2% |
| Operating profit | $83.5 | $79.9 | $273.2 | $227.0 |
| Operating margin | 9.2% | 9.0% | 10.1% | 8.6% |
| Net income (loss) | $(66.3) | $65.9 | $(149.9) | $(76.6) |
| Net income (loss) attributable to common stockholders | $(69.2) | $104.7 | $(154.7) | $(39.0) |
| Diluted EPS | $(0.24) | $(0.15) | $(0.54) | $(0.71) |
| Adjusted EBITDA | $196.6 | $190.1 | $594.9 | $551.4 |
For the first nine months, operating cash flow was $83.5 million, versus cash used of $24.0 million in 2016. Investing activities used $73.3 million and financing activities used $69.3 million; cash declined $31.7 million to $390.9 million. Capital expenditures were $41.4 million and product-registration investments were $25.8 million.
At September 30, cash was $390.9 million, current assets $2,296.6 million and current liabilities $1,120.4 million. Total debt and capital lease obligations were $5,422.7 million, including $90.0 million current; long-term debt and leases were $5,332.7 million. The company reported $456 million available under its revolver and approximately $117 million under other credit and overdraft facilities, for total stated availability of $573 million. It was in compliance with credit covenants.
Material changes versus prior periods
- Q3 sales rose 2% reported, but declined 1% organically; nine-month sales rose 3% reported and 2% organically.
- Performance Solutions grew: Q3 sales increased 6% reported and 4% organically; nine-month sales increased 6% and 5%, respectively. Assembly and Industrial were key contributors, while Graphics remained weak.
- Agricultural Solutions weakened in Q3: sales declined 3% reported and 5% organically, primarily reflecting drought-related volume weakness in Latin America and Europe. Nine-month organic sales declined 2%, also affected by pricing pressure and a West Africa selling-strategy change.
- Operating profit and adjusted EBITDA increased, supported by cost reductions, integration synergies and growth in Performance Solutions. Q3 consolidated gross margin fell 108 basis points, reflecting business mix, raw-material costs and weaker Agricultural Solutions gross profit.
- Net results were affected by prior-year unusual gains: 2016 included a $103 million gain associated with the Series B preferred-stock settlement, a $32.9 million gain on amendment of that stock, and other significant gains. The 2017 nine-month period included a $10.6 million net gain from a DuPont litigation settlement.
- Interest expense declined, reflecting term-debt repricings; foreign-exchange losses increased to $97.4 million for the first nine months, largely from remeasurement of foreign-currency debt and intercompany balances.
Outlook, commentary, risks and unusual items
- The company expected to separate Agricultural Solutions into an independent company in 2018, subject to Board approval, regulatory and other conditions, market conditions and completion of required work. The business remained in continuing operations at September 30, 2017. The filing gives no clear numerical operating guidance.
- An October 3, 2017 refinancing, subsequent to quarter-end, reduced interest rates by 100 basis points on specified term-loan tranches. Management estimated approximately $14 million in annual cash-interest savings from that transaction and approximately $34 million in aggregate annualized savings from the April and October refinancings.
- Management expected cash, operating cash generation and available credit to cover working capital, capital expenditure and other needs for at least 12 months. It cited approximately $300 million of expected annual interest payments over the next two years and $1.41 billion of significant principal payments due in 2020.
- Separation risks include delay or failure to complete, execution costs and management distraction, potential customer or supplier disruption, credit-rating effects, uncertain tax treatment and the possibility that costs outweigh benefits. Preliminary tax analysis indicated the separation may be taxable; the final treatment remained uncertain.
- Disclosure controls were assessed as ineffective because previously identified material weaknesses in internal control over financial reporting continued, including insufficient appropriately qualified accounting personnel. Remediation was underway, but there was no expected completion timetable.
- Environmental liabilities were $31.1 million; recorded legal-proceeding accruals were $6.8 million. The filing discusses product-related litigation in Mexico, environmental and labor claims in Brazil, and contested Brazilian tax assessments of approximately $28.3 million; management did not expect material losses beyond recorded accruals, while noting uncertainty.
- Non-recourse receivables factoring of approximately $107 million was in use at quarter-end and excluded from the balance sheet. Approximately $374 million of the $390.9 million cash balance was held by foreign subsidiaries; repatriation could entail additional taxes.
- The company reported that the SEC and U.S. Department of Justice had closed an inquiry into potentially inappropriate third-party payments in Arysta’s West Africa government-tender business without action.
Most important facts for investors to verify
- Confirm the issuer identity and its relationship to Element Solutions Inc., given the name discrepancy between the request and filing.
- Assess the durability of operating-profit and adjusted-EBITDA growth against weaker Agricultural Solutions sales, lower Q3 gross margin and continued Graphics weakness.
- Review leverage, debt maturities, covenant headroom, refinancing terms and whether projected interest savings are realized.
- Track separation approvals, timeline, costs, tax treatment and any effect on credit ratings or liquidity.
- Monitor remediation of the disclosed material weaknesses and effectiveness of financial-reporting controls.
- Evaluate working-capital movements, factoring dependence, overseas cash accessibility, and potential environmental, legal and tax exposures.