Business context and reporting period
This is Platform Specialty Products Corporation’s Form 10-K for the fiscal year ended December 31, 2015—not a standalone fourth-quarter filing. The company, identified in the filing as Platform Specialty Products Corporation, is a global specialty-chemicals producer with Performance Solutions and Agricultural Solutions segments. The requested company name, Element Solutions Inc., does not appear as the issuer name in this filing.
Results are heavily affected by acquisitions and are not directly comparable with 2014. In 2015, Platform acquired Arysta (February), the OMG Businesses (October) and Alent (December), in addition to including fuller-period results from the 2014 CAS and Agriphar acquisitions.
Key financial results
Amounts are U.S. dollars. Figures below are consolidated unless otherwise noted.
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $2,542.3 million | $843.2 million |
| Gross profit / gross margin | $991.9 million / 39.0% | $396.6 million / 47.0% |
| Operating profit / operating margin | $71.6 million / 2.8% | $9.5 million / 1.1% |
| Net loss | $304.4 million | $24.2 million |
| Net loss attributable to common stockholders / loss per share | $308.6 million / $1.52 | $262.6 million / $1.94 |
| Cash provided by operating activities | $320.9 million | $98.2 million |
| Cash and cash equivalents at year-end | $432.2 million | $397.3 million |
| Total debt, as reported by management | Approximately $5.23 billion | $1.41 billion |
| Working capital | $1,208.1 million | $1,335.8 million |
Fourth-quarter 2015 unaudited results were sales of $735.1 million, gross profit of $273.5 million, net loss attributable to common stockholders of $129.6 million and loss per share of $0.60.
Segment adjusted EBITDA, a non-GAAP measure, was $567.6 million for 2015: $224.3 million for Performance Solutions and $343.3 million for Agricultural Solutions. The filing defines this measure with adjustments for acquisition-related and other non-operating or infrequent items; it should not be treated as a substitute for GAAP earnings.
Material changes versus the prior period
- Reported sales increased 202% to $2.54 billion, largely because acquired businesses contributed $1.83 billion of 2015 sales. Excluding acquisitions and foreign-currency translation, sales increased 1.4%.
- On that same adjusted basis, gross profit increased 3.2%, but operating profit declined $23.2 million. Management attributed the decline primarily to higher acquisition, integration and corporate infrastructure costs.
- Gross margin fell to 39.0% from 47.0%, reflecting the much different mix of acquired businesses and $76.5 million of purchase-accounting inventory charges. The filing reports the legacy MacDermid business’s overall margin at 52.1% in 2015 versus 51.1% in 2014.
- Net interest expense rose to $213.9 million from $37.9 million, principally due to debt raised for acquisitions. Other notable 2015 charges included a $73.7 million fair-value loss on Alent-related foreign-exchange contracts and $43.4 million of foreign-exchange losses.
- Cash from operations increased to $320.9 million. Investing activities used $4.26 billion, including $4.60 billion of net acquisition spending; financing activities provided $4.00 billion, mainly from debt and equity issuance.
Liquidity, debt and capital structure
At year-end, Platform had $432.2 million of cash and $618 million of availability under its revolving credit facility and other lines of credit and overdraft facilities. Approximately $415 million of cash was held by foreign subsidiaries; $405 million was in subsidiaries whose earnings were considered permanently reinvested. Management said available cash, operating cash flow and credit availability should meet working-capital, capital-expenditure and other business needs for at least the next 12 months, while future acquisitions or preferred-stock obligations could require additional financing.
Debt was approximately $5.23 billion. The company expected annual interest payments above $300 million; first significant principal maturities include approximately $3.20 billion in 2020. The company reported compliance with credit-facility covenants at December 31, 2015. Its revolving facility includes a first-lien net-leverage covenant and the debt agreements restrict, among other things, additional borrowing, dividends and certain transactions.
The Series B Convertible Preferred Stock issued in the Arysta acquisition has a stated $600 million liquidation preference and can convert into up to 22.1 million common shares. Any shares not converted are subject to required repurchase on April 20, 2017, with a potential cash make-whole payment; using the December 31, 2015 share price, the filing estimated that payment at approximately $316 million, before any offset related to arbitration. Holders were also entitled to incremental payments of $4 million per month from October 2016 through April 2017, subject to earlier conversion or redemption.
Outlook, risks and unusual items
- Outlook: No specific numerical earnings or revenue guidance is provided. Management described acquisition integration, product innovation, cost control and cash generation as priorities. It cited long-term demand drivers in crop protection, biosolutions, electronics and automotive applications, while noting cyclical and market-specific uncertainty.
- Restatement and controls: The company restated its third-quarter 2015 interim financial information after an income-tax error related to an unrealized loss on an Alent acquisition currency hedge. The restatement increased the third-quarter and nine-month net loss by $17.8 million and worsened loss per share by $0.08. Management and the auditor concluded internal control over financial reporting was ineffective at year-end, citing material weaknesses in acquisition accounting, income-tax accounting and the Agricultural Solutions close process. Acquired Alent, Arysta and OMG businesses—representing approximately 66% of assets and 51% of revenue—were excluded from the control assessment. Management described remediation efforts but provided no completion timetable.
- Compliance investigation: After acquiring Arysta, the company identified potentially illegal or inappropriate payments to third-party agents connected with government tender business in West Africa. It retained outside advisers, notified the SEC and U.S. Department of Justice, and said it was cooperating with the authorities. Management said that, based on the investigation’s results to date, it did not believe the payments or related revenue or operating income were material; the investigation was ongoing.
- Other unusual items: 2015 included $92.9 million of transaction costs, $54.8 million of acquisition integration costs and $76.5 million of purchase-accounting inventory charges. Other income included $17.7 million of legal settlement gains, including a $16.0 million Cookson litigation receipt. Alent and OMG purchase accounting remained subject to finalization in certain areas.
- Principal risks: High leverage and refinancing needs; acquisition integration and possible goodwill impairment; foreign-exchange exposure (77% of 2015 sales were in non-U.S.-dollar currencies); agricultural seasonality and weather; commodity, supplier and contract-manufacturer dependence; chemical, environmental and product-liability exposures; complex tax assessments; and regulatory, registration and anti-corruption compliance. Goodwill impairment testing found no 2015 charge, but the Agro Business reporting unit had $1.87 billion of goodwill and only 16.1% fair-value headroom; a 1% increase in the discount rate would have required the next impairment-test step.
Most important facts for investors to verify
- Reconcile reported growth with acquisition contributions and the company’s acquisition- and currency-adjusted performance; review segment trends and margins.
- Assess cash generation against debt service, the 2020 maturity concentration, covenant limits and the potential Series B repurchase and make-whole payments.
- Track remediation of the material weaknesses, the reliability of future financial reporting and any further restatements.
- Follow the West Africa payments investigation and any resulting regulatory, legal or financial consequences.
- Review final acquisition purchase-price allocations, integration costs, goodwill assumptions and environmental reserves, including Alent’s disclosed $23.9 million reserve for environmental matters.
- Consider that reported 2015 losses include substantial acquisition-related, financing, foreign-exchange, tax and purchase-accounting effects; the filing does not provide formal numerical guidance.