Element Solutions Inc. (then Platform Specialty Products Corporation) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016. The filing’s financial statements are unaudited. The company produces specialty chemicals through Performance Solutions and Agricultural Solutions.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $861.8 million | $823.8 million |
| Gross profit / margin | $378.4 million / 43.9% | $356.0 million / 43.2% |
| Operating profit / margin | $99.3 million / 11.5% | $52.1 million / 6.3% |
| Net loss attributable to common stockholders | $24.4 million; $0.09 per share | $134.8 million; $0.59 per share |
| Adjusted EBITDA | $193.1 million | $168.4 million |
| Cash used in operating activities | $120.4 million | $210.4 million |
- Sales increased 5% as reported and 5% at constant currency. Performance Solutions sales rose 6% (9% constant currency) to $447.1 million; Agricultural Solutions rose 3% (2% constant currency) to $414.7 million.
- Adjusted EBITDA increased 15% (18% constant currency). Performance Solutions contributed $102.3 million, up 23%; Agricultural Solutions contributed $90.8 million, up 6%.
- Operating profit improved substantially as selling, technical, general and administrative expense fell to $257.5 million from $284.0 million. Management cited integration synergies and lower corporate acquisition, legal and other costs.
- Net loss narrowed primarily because foreign-exchange losses fell to $12.6 million from $71.1 million. Net interest expense was $89.4 million, and income tax expense was $18.7 million despite a pretax loss.
- Other comprehensive income was $181.5 million, primarily reflecting foreign-currency translation gains; it is not equivalent to operating earnings.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $366.4 million, down from $422.6 million at year-end 2016. Current assets were $2.26 billion and current liabilities $1.20 billion.
- Total debt and capital lease obligations were $5.35 billion, including $1.94 billion of senior notes, $3.22 billion of first-lien term loans and $179 million of local and revolving-line borrowings. Interest expense was $89.4 million for the quarter; management estimated annual interest payments of approximately $325 million over the next three years before the subsequent refinancing.
- Unused availability was $403 million under the Revolving Credit Facility and approximately $63.4 million under other lines and overdraft facilities. The company reported compliance with its debt covenants.
- Operating cash use improved year over year, which management attributed to higher cash operating profit and improved working capital, partly offset by incentive compensation and cash taxes. Investing activities used $25.4 million; financing activities provided $80.0 million, mainly through line-of-credit borrowings.
- Receivables and inventory rose from year-end: current accounts receivable increased to $1.19 billion from $1.05 billion, and current inventory to $516.7 million from $416.4 million.
Material changes and management commentary
- Performance Solutions benefited from strength in Industrial and Electronics, product mix and integration savings. Metal-price pass-through added about $13 million to sales. Graphics sales, particularly flexographic plates in Latin America, declined.
- Agricultural Solutions growth was led by Latin America and EMEA. Weather and lower North American sales, African business restructuring, and a colder, delayed Western European growing season were offsets. Management also cited procurement savings and continued cost-improvement efforts.
- Q1 2016 operating results included a $12 million acquisition-related inventory step-up charge and substantially larger foreign-exchange losses, which make the year-over-year improvement less indicative of underlying growth alone.
- On April 18, 2017, the company refinanced approximately $1.23 billion of U.S.-dollar term loans and €650 million of euro term loans. The rate reduction was 100 basis points for each tranche; management expected approximately $22 million in annual cash interest savings. The transaction occurred after quarter-end.
- Management said available cash, operating cash generation and credit availability should meet working-capital, capital-expenditure and other business needs for at least 12 months. It also noted future acquisitions or working-capital shortfalls could require additional borrowing or equity financing. Approximately $352 million of quarter-end cash was held by foreign subsidiaries; repatriation could involve additional taxes.
- No specific earnings or revenue guidance was provided in the supplied filing text. The company described its growth strategy as product innovation, technical customer service, targeted agricultural offerings and selective acquisitions.
Risks, contingencies and unusual items
- Internal controls: Disclosure controls were deemed ineffective because previously identified material weaknesses in financial reporting persisted, relating to insufficient accounting personnel with appropriate expertise and training. The weaknesses had contributed to prior interim financial-statement restatements. Remediation was underway, but management gave no expected completion timetable; it cautioned that misstatements could occur before remediation is effective.
- Environmental and legal matters: Recorded environmental liabilities were $32.4 million. Management did not anticipate material losses beyond recorded amounts but said it could not estimate the range of reasonably possible excess environmental losses. Legal accruals were $7.7 million. Disclosed matters include Brazilian environmental and worker claims, Brazilian tax assessments totaling about $28 million, and ongoing litigation; outcomes remain uncertain.
- Debt and interest-rate exposure: Debt maturities include significant principal payments in 2020 and 2021. The revolver has a first-lien net leverage covenant, and covenant breach could trigger default and acceleration. The filing also describes foreign-exchange, interest-rate and commodity-price exposures.
- Other items: The company said the SEC and Department of Justice closed their review of potentially improper third-party payments connected with Arysta’s West African government-tender business and declined action. Q1 restructuring expense was $2.3 million, primarily related to integration.
Most important facts for investors to verify
- Whether cash conversion and working capital improve, particularly given higher receivables and inventory and continued quarterly operating cash outflow.
- Debt repayment capacity, covenant headroom, upcoming maturities and whether the April refinancing achieves the stated annual interest savings.
- Whether segment growth and margins persist after accounting for currency movements, commodity pass-through and the prior-year inventory charge.
- Progress and independently verifiable remediation of the material weaknesses in internal control over financial reporting.
- Developments in environmental, product-liability, Brazilian tax and other litigation matters, including any exposure beyond recorded liabilities.