Item  1. Business

 

Unless the context otherwise requires, all references in this section to “we”, “us”, “our”, “Successor” and "Platform" refer to Platform Specialty Products Corporation and its subsidiaries, collectively, for all periods subsequent to the MacDermid Acquisition (as defined below).  All references in this annual report on Form 10-K (the “Annual Report”) to our “Predecessor” refer to MacDermid, Incorporated, a Connecticut corporation (“MacDermid”) and its subsidiaries for all periods prior to the MacDermid Acquisition (as defined below).

 

Overview

 

Platform is a global producer of high-technology specialty chemical products and provider of technical services.

 

We were initially incorporated with limited liability under the laws of the British Virgin Islands on April 23, 2013 under the name Platform Acquisition Holdings Limited. We were created for the purpose of acquiring a target company or business with an anticipated enterprise value of between $750 million and $2.50 billion.  We completed our initial public offering in the United Kingdom on May 22, 2013, raising approximately $881 million net proceeds and were listed on the London Stock Exchange.

 

On October 31, 2013, we indirectly acquired substantially all of the equity of MacDermid Holdings, LLC (“MacDermid Holdings”), which, at the time, owned approximately 97% of MacDermid (the “MacDermid Acquisition”). As a result, we became a holding company for the MacDermid business.   We acquired the remaining 3% of MacDermid (the “MacDermid Plan Shares”) on March 4, 2014, pursuant to the terms of an Exchange Agreement, dated October 25, 2013, between us and the fiduciaries of the MacDermid, Incorporated Profit Sharing and Employee Savings Plan (the “MacDermid Savings Plan”).  Concurrently with the closing of the MacDermid Acquisition, we changed our name to Platform Specialty Products Corporation. On January 22, 2014, we changed our jurisdiction of incorporation from the British Virgin Islands to Delaware (the “Domestication”), and on January 23, 2014, our shares of common stock, par value $0.01 per share (“Common Stock”), began trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “PAH”.

 

The total consideration for the MacDermid Acquisition and the Exchange Agreement was approximately $1.80 billion (including the assumption of approximately $756 million of indebtedness), plus (i) up to $100 million of contingent consideration tied to achievement of EBITDA and stock trading price performance metrics over a seven-year period following the closing of the MacDermid Acquisition and (ii) an interest in certain MacDermid pending litigation.  The consideration for the MacDermid Acquisition was paid in both equity interests and cash.  Certain sellers elected to receive common stock in our wholly owned subsidiary Platform Delaware Holdings, Inc. (“PDH”) representing approximately $97.0 million of the total consideration.  Holders of PDH common stock have the right to exchange such shares for shares of our Common Stock, on a one-for-one basis, at 25% per year, after the earlier of October 31, 2014 or a change of control of Platform.

 

Our Business

 

We are a global producer of high technology specialty chemical products and provider of technical services. As our name “Platform Specialty Products Corporation” implies, we continually seek opportunities to act as an acquirer and consolidator of specialty chemical businesses on a global basis, particularly those meeting Platform’s “asset lite, high touch” philosophy, which involves dedicating extensive resources to research and development and highly technical, post-sale customer service, while limiting our investments in fixed assets and capital expenditures. To date, Platform has completed one acquisition, the MacDermid Acquisition, on October 31, 2013.

 

Currently, our business involves the manufacture of a broad range of specialty chemicals, which we create by blending raw materials, and the incorporation of these chemicals into multi-step technological processes. These specialty chemicals and processes together encompass the products we sell to our customers in the electronics, metal and plastic plating, graphic arts, and offshore oil production and drilling industries. We refer to our products as “dynamic chemistries” due to their delicate chemical compositions, which are frequently altered during customer use. Our dynamic chemistries are used in a wide variety of attractive niche markets and we believe that the majority of our operations hold strong positions in the product markets they serve.

 

We generate revenue through the manufacture and sale of our dynamic chemistries and by providing highly technical post-sale service to our customers through our extensive global network of specially trained service personnel. Our personnel work closely with our customers to ensure that the chemical composition and function of our dynamic chemistries are maintained as intended. As an example, a customer will engage us to manufacture and sell a product consisting of a process composed of eight successive chemical baths, each of which is made up of our specialty chemicals, in order to enhance the overall performance of that customer’s circuit boards. In addition to providing such product, a member of our professional service team would visit the customer’s manufacturing facilities on a regular basis post-sale to ensure that the process sold maintains the correct chemical balance and can be used effectively in the manner and for the purpose desired.

 

We have more than 3,500 customers worldwide. Among these customers are some of the world’s preeminent companies, such as FIAT, Ford, GM, LG, Molex, Samsung, Stanley Black & Decker and major companies in the offshore oil and gas industries. We believe that we are able to service these customers and that we will attract new customers successfully through a global network of 14 manufacturing sites, 21 technical service facilities, including eight research centers, a direct sales force in 24 countries and through our several distribution partners in an additional ten countries. Our international reach, coupled with our local presence, enables us to meet the global and local needs of our customers.

 

We leverage our close customer relationships to execute our growth strategies by working with our customers to identify opportunities for new products, which we develop by drawing upon our significant intellectual property portfolio and technical expertise. We believe that our customers place significant value on the “MacDermid” brand, which has been developed through innovation, product leadership and customer service.

 

The diversity of our materials and suppliers, our end markets, products, product applications, customer base and the range of geographic regions in which we operate help to mitigate the effects of any adverse event affecting a particular raw material or a specific end market or region. In many of the regions in which we operate, we are able to increase our prices in response to increases in our costs.

 

While our dynamic chemistries typically represent only a small portion of our customers’ costs, we believe that they are critical to our customers’ manufacturing processes and overall product performance. Further, operational risks and switching costs make it difficult for our customers to change suppliers and allow us to retain customers and maintain our market positions.

 

We believe our business is currently benefiting from global growth trends in many of our end markets, including the increasing use of electronic devices such as mobile phones and computers, growth in worldwide automotive production and increasing oil production from offshore, sub-sea wells. We also believe that we are effectively expanding the existing market for our dynamic chemistries by developing new applications within the electronics, general industrial and automotive, graphic arts and offshore oil production and drilling markets. These new applications include surface coatings for solar panels, plated antennas for smart mobile devices, flexographic plates for printing consumer packaging materials, decorative components for automobile interiors and control system fluids used to prevent oil from seeping from ocean floor valves.

 

We report our business in two operating segments: a Performance Materials segment and a Graphic Solutions segment.

 

Performance Materials— Our Performance Materials segment manufactures and markets dynamic chemistry solutions that are used in the electronics, automotive and oil and gas production and drilling industries. We operate in the Americas, Asia and Europe. Our products include surface and coating materials and water-based hydraulic control fluids. In conjunction with the sale of these products, we provide extensive technical service and support to ensure superior performance of their application. The regional sales mix in this segment has shifted over the past several years from more industrialized nations towards emerging markets, such as Asia and South America. To better serve customers in these markets, we have developed state-of-the-art facilities in São Paulo, Brazil and Suzhou, China. We have over 600 personnel and three manufacturing facilities in Asia and remain focused on further increasing our presence in the region.

 

Our Performance Materials segment utilizes shared manufacturing facilities and administrative resources to provide specialty chemicals to three industries:

 

Industrial. We believe that we are one of the worldwide leaders in industrial metal and plastic finishing chemistries based on our 2013 net sales. In this industry, our dynamic chemistries are used for finishing, cleaning and providing surface coatings for a broad range of metal and non-metal surfaces. These coatings may have functional uses, such as improving wear and tear or providing corrosion resistance for appliance parts, or decorative uses, such as providing gloss finishes to components used in automotive interiors. As of December 31, 2013, we manufactured more than 1,000 chemical compounds for these surface coating applications, including cleaning, activating, polishing, electro and electroless plating, phosphatizing, stripping and coating, anti-tarnishing and rust inhibiting for metal and plastic surfaces. Electroless plating is a method of plating metals onto a variety of base materials using chemical reduction without the application of electrical power. Electro plating, in contrast, involves plating metals with the use of an electrical current. Phosphatizing is the application of phosphates, such as iron and zinc, to prevent corrosion of steel surfaces. Our industrial customer base is highly fragmented and includes customers in the following end markets: automotive parts, industrial parts, transportation equipment, electronics equipment and appliances and plumbing goods. We believe our growth in this industry will be primarily driven by increased world-wide automobile production and demand for appliances, computers and general engineering hardware.

 

Electronics. We believe we are one of the leading global suppliers of chemical compounds to the printed circuit board fabrication industry based on our combined 2013 net sales. In this industry, we design and formulate a complete line of proprietary “wet” dynamic chemistries that our customers use to process the surface of the printed circuit boards and other electronic components they manufacture. Our product portfolio in this business is focused on niches such as final finishes, through hole metallization and circuit formation, in which we are a small cost to the overall finished product, but a critical component for maintaining the products’ performance. We believe our growth in this industry will be driven by demand in telecommunication, wireless devices and computers, and the increasing use of electronics in automobiles. Our customer base includes customers in the following end markets: computers, telecommunications, wireless devices, audio visual, automotive and office equipment.

 

Offshore. We produce water-based hydraulic control fluids for major oil companies and drilling contractors for offshore deep water production and drilling applications. Production fluids are used in the control systems that open and close critical valves for the deep water oil extraction and transportation process. Drilling fluids are used in control systems to operate valves on the ocean floor. Our current customer base is primarily in the production area of this business. We believe there is significant growth potential for this business as the oil and gas industry continues to grow and as oil is produced from new offshore, sub-sea wells.

 

Graphic Solutions— Our Graphic Solutions segment primarily produces and markets photopolymers through an extensive line of flexographic plates that are used in the commercial packaging and printing industries. We manufacture photopolymers used to produce printing plates for transferring images onto commercial packaging, including packaging for consumer food products, pet food bags, corrugated boxes, labels and beverage containers. In addition, we also produce photopolymer printing plates for the flexographic and letterpress newspaper and publications markets. Our products are used to improve print quality and printing productivity. Flexography is a printing process that utilizes flexible printing plates made of rubber or other flexible plastics. Photopolymers are molecules that change properties upon exposure to light. Our business mix in this segment is focused on high innovation, higher cash flow businesses by offering new products. We believe growth in this segment will be driven by consumer demand and advertising.

 

Both of our operating segments include significant foreign operations. There are certain risks associated with our foreign operations. See Part I, Item 1A Risk Factors – “ Our substantial international operations subject us to risks not faced by domestic competitors, including unfavorable political, regulatory, labor, tax and economic conditions in other countries that could adversely affect our business, financial condition and results of operations ” included in this Annual Report.

 

For financial information about our operating segments, see Note 19 to our audited consolidated financial statements for the period from April 23, 2013 (inception) through December 31, 2013, which we refer to as the Successor 2013 Period, for the ten month period ended October 31, 2013, which we refer to as the Predecessor 2013 Period, and the years ended December 31, 2012 and 2011 included in this Annual Report.  For financial information about the geographic areas in which we operate see Note 19 to our consolidated audited financial statements for the Successor and Predecessor 2013 Periods and the years ended December 31, 2012 and 2011 included in this Annual Report.

 

Our Competitive Strengths

 

We believe that the following are our key competitive strengths:

 

Strong Market Position in Attractive Niche Markets. We believe, based on our combined 2013 net sales, that we are one of the leaders in each of the product markets that we serve. We believe that the combination of our global presence, innovative technology, process know-how, strong commitment to research and development, dedication to customer service and broad range of proprietary products distinguishes us from our competitors, allowing us to maintain our strong market share positions. Furthermore, we believe the diversity of the niche markets we serve will enable us to continue our growth throughout economic cycles and mitigate the impact of a downturn in any single market.

 

Proprietary Technology and Service Oriented Business Model. Our commitment to technological innovation and our extensive intellectual property portfolio of over 750 issued patents enables us to develop our cutting-edge products. In order to continue to provide innovative products and highly technical service to our customers, we place a premium on maintaining a specialized and qualified employee base. Our global sales and service personnel possess extensive knowledge of and experience in our local markets. For instance, our technical management team serving our Asian markets has, on average, over 20 years of experience, including decades of joint product development with our key customers located in the greater China region. We believe that our proprietary technology, extensive industry experience and customer service-focused business model are difficult for our competitors to replicate. As a result, and in order to avoid the transition risks that go along with switching suppliers, customers may elect not to switch from our products to those of our competitors. Switching suppliers generally may not make sense for our customers from a cost-benefit standpoint: the cost of our products is low relative to the potential cost savings, as switching expenses (including conducting expensive trials to ensure quality assurance and compliance with regulatory requirements, industry standards and internal protocols) can be significant.

 

 

The key role our products play in improving the efficacy of our customers’ manufacturing processes and reducing their total costs, combined with our extensive experience in local markets, our focus on highly technical customer service and the significant customer switching risks and costs inherent in our industry, have enabled us to establish and maintain our long-term customer relationships. We leverage these close relationships to identify opportunities for new products and position our portfolio of products within the ever-changing business environment.

 

Customer, Product, Application, End-Market and Geographic Diversity. We offer a broad range of products and services to diverse end markets, ranging from electronics to printing to offshore oil drilling. We have more than 3,500 customers globally. No single customer accounted for more than 3% of net sales for the Successor 2013 Period or Predecessor 2013 Period. We believe, based on our combined 2013 net sales to customers in Asia and Brazil, that we have a significant presence in the rapidly growing Asian and Brazilian markets. In addition, each of our product lines serves numerous and often unrelated end markets. Our customer, product and geographic diversity help to mitigate the effects of any adverse event affecting a specific industry, end market or region.

 

Limited Raw Material Concentration and Low Exposure to Energy Prices. We use in excess of 1,000 chemicals as raw materials in the manufacture of our proprietary products. No single raw material represented more than 4% of cost of sales for the Successor 2013 Period or the Predecessor 2013 Period. Further, the raw materials that are of greatest importance to our global operations are, in most cases, obtainable from multiple sources worldwide. In addition, energy costs, which have historically been volatile, only represented approximately 2% of cost of sales for the Successor 2013 Period and the Predecessor 2013 Period.

 

Item 1A.  Risk Factors

 

The ownership of our Common Stock involves a number of risks and uncertainties. Potential investors should carefully consider the risks and uncertainties described below and the other information in this Annual Report before deciding whether to invest in our securities. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The risks described below are not the only ones facing us. Additional risks that are currently unknown to us or that we currently consider to be immaterial may also impair our business or adversely affect our financial condition or results of operations.

 

Risks Relating to our Business

 

Our business and results of operations could be adversely affected if we fail to protect our intellectual property rights.

 

Our success depends to a significant degree upon our ability to protect and preserve our intellectual property rights and the rights to our proprietary processes, methods, compounds and other technology. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or in our having to pay other companies for infringing on their intellectual property rights. We rely on confidentiality agreements and patent, trade secret, trademark and copyright law as well as judicial enforcement of all of the foregoing to protect such technologies and intellectual property rights. In addition, some of our technologies are not covered by any patent or patent application.

 

We may be unable to prevent third parties from using our intellectual property and other proprietary information without our authorization or from independently developing intellectual property and other proprietary information that is similar to ours, particularly in countries where the laws do not protect our proprietary rights to the same degree as in the United States. The use of our intellectual property and other proprietary information by others could reduce or eliminate any competitive advantages we have developed, cause us to lose sales or otherwise harm our business. If it becomes necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly, and we may not prevail.

 

Our patents also may not provide us with any competitive advantage and may be challenged by third parties. Further, our competitors may attempt to design around our patents. Our competitors may also already hold or have applied for patents in the United States or abroad that, if enforced or issued, could prevail over our patent rights or otherwise limit our ability to manufacture or sell one or more of our products in the United States or abroad. With respect to our pending patent applications, we may not be successful in securing patents for these claims. Our failure to secure these patents may limit our ability to protect inventions that these applications were intended to cover. In addition, the expiration of a patent can result in increased competition with consequent erosion of profit margins.

 

Competitors or other parties may, from time to time, assert issued patents or other intellectual property rights against us. If we are legally determined to infringe or violate the intellectual property rights of another party, we may have to pay damages, stop the infringing use, or attempt to obtain a license agreement with the owner of such intellectual property. Further, even if we are successful in defending our rights, such litigation could be burdensome and costly.

 

In some cases, we rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally will enter into confidentiality agreements with our employees and third parties to protect our intellectual property, our confidentiality agreements could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. In addition, adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets or manufacturing expertise. Violations by others of our confidentiality agreements and the loss of employees who have specialized knowledge and expertise could harm our competitive position and cause our sales and operating results to decline as a result of increased competition.

 

In addition, we rely on both registered and unregistered trademarks to protect our name and brands. Failure by us to adequately maintain the quality of our products and services associated with our trademarks or any loss to the distinctiveness of our trademarks may cause us to lose certain trademark protection, which could result in the loss of goodwill and brand recognition in relation to our name and products. In addition, successful third-party challenges to the use of any of our trademarks may require us to rebrand our business or certain products or services associated therewith.

 

The failure of our patents, applicable intellectual property law or our confidentiality agreements to protect our intellectual property and other proprietary information, including our processes, apparatuses, technology, trade secrets, trade names and proprietary manufacturing expertise, methods and compounds, or if we are unsuccessful in our judicial enforcement proceedings, could have a material adverse effect on our competitive advantages and could have a material adverse effect on our business, results of operations and share price.

 

 

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We may experience claims that our products infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

 

We seek to improve our business processes and develop new products and applications. Many of our competitors have a substantial amount of intellectual property that we must continually monitor to avoid infringement. We cannot guarantee that we will not experience claims that our processes and products infringe issued patents (whether present or future) or other intellectual property rights belonging to others. For example, we are currently a defendant in a patent infringement claim, which has been vigorously opposed by us, relating to technology that is important to us, although we do not expect this claim to have a material adverse effect on our business, financial conditions, results of operations or reputation. From time to time, we oppose patent applications that we consider overbroad or otherwise invalid in order to maintain the ability to operate freely in our various business lines without the risk of being sued for patent infringement. If, however, patents are subsequently issued on any such applications by other parties, or if patents belonging to others already exist that cover our products, processes or technologies, we could experience claims for infringement or have to take other remedial or curative actions to continue our manufacturing and sales activities with respect to one or more products. Such actions could include payment of damages, stopping the use, obtaining licenses from these parties or substantially re-engineering our products or processes in order to avoid infringement. We may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer our products successfully. Moreover, if we are sued for infringement and lose, we could be required to pay substantial damages or be enjoined from using or selling the infringing products or technology. Further, intellectual property litigation is expensive and time-consuming, regardless of the merits of any claim, and could divert our management’s attention from operating our business.

 

Our relationship with our employees could deteriorate, and certain of our key employees could leave, which could adversely affect our business and our results of operations.

 

Our business involves complex operations and therefore demands a management team and employee workforce that is knowledgeable and expert in many areas necessary for our operations. As a company focused on manufacturing and highly technical customer service, we rely on our ability to attract and retain skilled employees, including our specialized research and development and sales and service personnel, to maintain our efficient production processes, to drive innovation in our product offerings and to maintain our deep customer relationships. As of December 31, 2013, we employed approximately 2,000 full-time employees, approximately 1,000 of whom were members of our research and development and sales and service teams. The departure of a significant number of our highly skilled employees or of one or more employees who hold key regional management positions could have an adverse impact on our operations, including as a result of customers choosing to follow a regional manager to one of our competitors.

 

In addition, many of our full-time employees are employed outside the United States. In certain jurisdictions where we operate, particularly Brazil, France, Germany, Italy and Japan, labor and employment laws are relatively stringent and, in many cases, grant significant job protection to certain employees, including rights on termination of employment. In addition, in certain countries where we operate, our employees are members of unions or are represented by a works council as required by law. We are often required to consult and seek the consent or advice of these unions and/or works councils. These laws, coupled with the requirement to consult with the relevant unions or works councils, could adversely affect our flexibility in managing costs and responding to market changes and could limit our ability to access the skilled employees on which our business depends.

 

The due diligence undertaken in connection with the MacDermid Acquisition may not have revealed all relevant considerations or liabilities of MacDermid, which could have a material adverse effect on our financial condition or results of operations.

 

There can be no assurance that the due diligence undertaken by us in connection with the MacDermid Acquisition has revealed all relevant facts that may be necessary to evaluate such acquisition. Furthermore, the information provided during due diligence may have been incomplete, inadequate or inaccurate. As part of the due diligence process, we have also made subjective judgments regarding the results of operations, financial condition and prospects of MacDermid. If the due diligence investigation has failed to correctly identify material issues and liabilities that may be present in MacDermid, or if we consider any identified material risks to be commercially acceptable relative to the opportunity, we may incur substantial impairment charges or other losses following the MacDermid Acquisition. In addition, we may be subject to significant, previously undisclosed liabilities of MacDermid that were not identified during due diligence and which could contribute to poor operational performance and have a material adverse effect on our financial condition and results of operations.

 

 

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Conditions in the global economy may directly adversely affect our net sales, gross profit and financial condition and may result in delays or reductions in our spending that could have a material adverse effect on our results of operations, prospects and share price.

 

Our products are sold in industries that are sensitive to changes in general economic conditions, including the metals and plastics finishings, electronics, oil production and drilling and graphic arts industries. Accordingly, our net sales, gross profit and financial condition depend significantly on general economic conditions and the demand for our specialty chemical products and services in the markets in which we compete. Delays or reductions in our customers’ chemical products purchasing that result from economic downturns would reduce demand for our products and services and could, consequently, have a material adverse effect on our results of operations, prospects and share price.

 

Our net sales and gross profit have varied depending on our product, customer and geographic mix for any given period, which makes it difficult to forecast future operating results.

 

Our net sales and gross profit vary among our products and customer groups and markets, and therefore may be different in future periods from historic or current periods. Overall gross profit margins in any given period are dependent in large part on the product, customer and geographic mix reflected in that period’s net sales. Market trends, competitive pressures, commoditization of products, increased component or shipping costs, regulatory conditions and other factors may result in reductions in revenue or pressure on the gross profit margins of certain segments in a given period. Given the nature of our business, the impact of these factors on our business and results of operations will likely vary from period to period and from product to product. For example, a change in market trends that results in a decline in demand for high margin products will have a disproportionately greater adverse effect on our gross profits for that period. The varying nature of our product, customer and geographic mix between periods therefore has materially impacted our net sales and gross profit between periods during certain recessionary times and may lead to difficulties in measuring the potential impact of market, regulatory and other factors on our business. As a result, we may be challenged in our ability to forecast our future operating results. Further, potential future business acquisitions can compound the difficulty in making comparisons between prior, current and future periods because acquisitions and divestitures, which are not ordinary course events, also affect our gross profit margins and our overall operating results.

 

Our business is significantly influenced by trends and characteristics in the specialty chemical industry and the printing industry.

 

        We believe that the specialty chemical industry and the printing industry are cyclical and subject to constant and rapid technological change, product obsolescence, price erosion, evolving standards, short product life-cycles, raw material price fluctuations and changes in product supply and demand. The specialty chemical industry is currently being affected by globalization and a shift in customers' businesses while the printing industry is currently shrinking. The trends and characteristics in these industries may cause significant fluctuations in our results of operations and cash flows and have a material adverse effect on our financial condition.

 

We face intense competition, and our failure to compete successfully may have an adverse effect on our net sales, gross profit and financial condition.

 

Our industry is highly competitive, and most of our product lines compete against product lines from at least two competitors. We encounter competition from numerous and varied competitors in all areas of our business; however, our most significant competitors are Atotech Inc. (a division of Total S.A), Enthone Inc. (an Alent plc company) and Rohm and Haas (a division of The Dow Chemical Company) for our Performance Materials segment and Asahi, DuPont and Flint Group for our Graphic Solutions segment. Further, in our Performance Materials segment, our products compete not only with similar products manufactured by our competitors, but also against a variety of chemical and non-chemical alternatives provided by our competitors. Industry consolidation may result in larger, more homogeneous and potentially stronger competitors in the markets in which we compete.

 

We compete primarily on the basis of quality, technology, performance, reliability, brand, reputation, range of products, and service and support. We expect our competitors to continue to develop and introduce new products and to enhance their existing products, which could cause a decline in market acceptance of our products. Our competitors may also improve their manufacturing processes or expand their manufacturing capacity, which could make it more difficult or expensive for us to compete successfully. In addition, our competitors could enter into exclusive arrangements with our existing or potential customers or suppliers, which could limit our ability, or make it significantly more expensive, to acquire necessary raw materials or to generate sales.

 

 

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Some of our competitors may have greater financial, technical and marketing resources than we do and may be able to devote greater resources to promoting and selling certain products. Unlike many of our competitors who specialize in a single or limited number of product lines, we have a portfolio of businesses and must allocate resources across those businesses. As a result, we may invest less in certain areas of our business than our competitors invest in competing businesses, and our competitors may therefore have greater financial, technical and marketing resources available to them with respect to those businesses.

 

Some of our competitors may also incur fewer expenses than we do in creating, marketing and selling certain products and may face fewer risks in introducing new products to the market. This circumstance results from the nature of our business model, which is based on providing innovative and high quality products and therefore may require that we spend a proportionately greater amount on research and development than some of our competitors. If our pricing and other factors are not sufficiently competitive, or if there is an adverse reaction to our product decisions, we may lose market share in certain areas, which could adversely affect our net sales, gross profit and our prospects. Further, because many of our competitors are small divisions of large, international businesses, these competitors may have access to greater resources then we do and may therefore be better able to withstand a change in conditions within our industry and throughout the economy as a whole.

 

If we do not compete successfully by developing and deploying new cost effective products, processes and technologies on a timely basis and by adapting to changes in our industry and the global economy, our net sales, gross profit and financial condition could be adversely affected.

 

Our substantial international operations subject us to risks not faced by domestic competitors, including unfavorable political, regulatory, labor, tax and economic conditions in other countries that could adversely affect our business, financial condition and results of operations.

 

Currently, we operate, or others operate on our behalf, facilities in 24 countries, in addition to our operations in the United States. We expect sales from international markets to represent an increasing portion of our net sales. Accordingly, our business is subject to risks related to the different legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent to our international operations include the following:

 

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agreements and intellectual property rights may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system;

 

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foreign customers may have increased credit risk and different financial conditions, which may necessitate longer payment cycles or result in increased bad debt write-offs or additions to reserves related to our foreign receivables;

 

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foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including currency exchange controls;

 

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foreign exchange controls may delay, restrict or prohibit the repatriation of funds, and any restrictions on the repatriation of funds may result in adverse tax consequences and tax inefficiencies;

 

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U.S. export licenses may be difficult to obtain;

 

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there may be delays and interruptions in transportation of our products;

 

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fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. Dollars of products and services provided by us in markets where payment for our products and services is made in currencies other than the U.S. Dollar;

 

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general economic conditions in the countries in which we operate, including fluctuations in gross domestic product, interest rates, market demand, labor costs and other factors beyond our control, could have an adverse effect on our net sales in those countries;

 

 

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our results of operations in a particular country could be affected by political or economic instability on a country-specific or global level from various causes, including the possibility of hyperinflationary conditions, natural disasters and terrorist activities and the response to such conditions and events;

 

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we may experience difficulties in staffing and managing multi-national operations, including the possibility of labor disputes abroad;

 

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unexpected adverse changes in foreign laws or regulatory requirements may occur, including environmental, health and safety laws (such as the European Commission’s REACH regulations) and laws and regulations affecting export and import duties and quotas;

 

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compliance with a variety of foreign laws and regulations may be difficult;

 

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we may be subject to the risks of divergent business expectations resulting from cultural incompatibility; and

 

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overlap of different tax regimes may subject us to additional taxes.

 

Our business in emerging markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as a global business depends, in part, upon our ability to succeed in different legal, regulatory, economic, social and political conditions. We cannot assure you that we will succeed in developing and implementing policies and strategies which will be effective in each location where we do business. Furthermore, any of the foregoing factors or any combination thereof could have a material adverse effect on our business, financial condition and results of operations.

 

We have made investments in and are expanding our business into emerging markets and regions, which exposes us to certain risks.

 

As the regional sales mix in the Performance Materials segment has shifted from more industrialized nations towards emerging markets, we have increased our presence in emerging markets, including greater China, Southeast Asia and South America, by investing significantly in these regions. For example, we have developed state-of-the-art facilities in São Paulo, Brazil and Suzhou, China to better serve our customers and we remain focused on further increasing our presence in these markets. Furthermore, sales into Asia (excluding the non-emerging markets of Australia, Hong Kong, Japan and Singapore) and Brazil represented 27% of all net sales for the year ended December 31, 2013. Our operations in these markets may be subject to a variety of risks including economies that may be dependent on only a few products and therefore subject to significant fluctuations, consumers with limited or fluctuating disposable income and discretionary spending on which the end users of our products depend, weak legal systems which may affect our ability to enforce our intellectual property and contractual rights, exchange controls, unstable governments and privatization, changes in customs or tax regimes, or other government actions affecting the flow of goods and currency. Accordingly, changes in any of these areas may have significant negative impacts on our financial condition and operating results.

 

We are exposed to fluctuations in foreign exchange rates, which may adversely affect our operating results and may significantly affect the comparability of our results between financial periods.

 

The results of operations and financial condition of each of our foreign operating subsidiaries are reported in the relevant local currency and then translated to U.S. Dollars for inclusion in our audited consolidated financial statements. Exchange rates between these currencies and the U.S. Dollar in recent years have fluctuated significantly and are likely to continue to do so in the future. For the combined Successor and Predecessor 2013 Periods, an average of approximately 67% of our net sales were denominated in currencies other than the U.S. Dollar. These foreign currencies included predominantly the Brazilian Real, British Pound Sterling, Chinese Yuan, Euro, Hong Kong Dollar and Japanese Yen. A depreciation of these currencies against the U.S. Dollar will decrease the U.S. Dollar equivalent of the amounts derived from operations reported in these foreign currencies and an appreciation of these currencies will result in a corresponding increase in such amounts. From time to time we may engage in exchange rate hedging activities in an effort to mitigate the impact of exchange rate fluctuations. We cannot, however, assure you that this arrangement or any other exchange rate hedging arrangements we may enter into from time to time will be effective. If our hedging activities are not effective or if additional hedging transactions are not available, changes in currency exchange rates may have a more significant impact on our results of operations.

 

 

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Because we do not manage our foreign currency exposure in a manner that would eliminate the effects of changes in foreign exchange rates on our net sales, cash flows and reported amount of assets and liabilities, our financial performance can be positively or negatively impacted by changes in foreign exchange rates in any given reporting period.

 

Besides currency translation risks, we incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency from their functional currency. Given the volatility of exchange rates, we cannot assure you that we will be able to effectively manage our currency transaction or translation risks or that any volatility in currency exchange rates will not have an adverse effect on our financial condition or results of operations.

 

Failure to comply with the FCPA, and other similar anti-corruption laws, could subject us to penalties and damage our reputation.

 

We are subject to the FCPA, which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain certain policies and procedures. Certain of the jurisdictions in which we conduct business are at a heightened risk for corruption, extortion, bribery, pay-offs, theft and other fraudulent practices. Under the FCPA, U.S. companies may be held liable for actions taken by their strategic or local partners or representatives. If we, or our intermediaries, fail to comply with the requirements of the FCPA, or similar laws of other countries, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.

 

Changes in our customers’ products and processes can reduce the demand for our specialty chemicals.

 

Our specialty chemicals are used for a broad range of applications by our customers. Changes, including technological changes, in our customers’ products or processes may make our specialty chemicals unnecessary, which would reduce the demand for those chemicals. We have had, and may continue to have, customers that find alternative materials or processes and therefore no longer require our products, which would have a material adverse effect on our business, financial condition and results of operations.

 

We generally do not have long-term contracts with the customers in our Performance Materials segment.

 

With some exceptions, our relationships with the customers in our Performance Materials segment are based primarily upon individual sales orders. As such, our customers in the Performance Materials segment could cease buying our products from us at any time, for any reason, with little or no recourse. If multiple customers, or a material customer, within this segment elected not to purchase products from us, our business prospects, financial condition and results of operations could be adversely affected.

 

The loss of certain customers or independent, third-party distributors in either our Performance Materials or Graphic Solutions segment could adversely affect our overall sales and profitability.

 

In both our Performance Materials and our Graphic Solutions segment, we have customers and independent, third-party distributors, the loss of which could have a material adverse effect on our results of operations for the affected earnings periods. The principal products purchased by such customers are surface finishing chemicals in our Performance Materials segment and solid sheet printing elements in our Graphic Solutions segment.

 

Our net sales, gross profit and financial condition could be reduced by decreases in the average selling prices of products in the specialty chemicals industry.

 

Decreases in the average selling prices of our products may have a material adverse effect on our net sales, gross profit and financial condition. Our ability to maintain or increase our gross profit margin will continue to be dependent, in large part, upon our ability to offset decreases in average selling prices by improving production efficiency or by shifting to higher margin chemical products. In the past, MacDermid has elected to discontinue selling certain products as a result of sustained material decreases in the selling price of its products and its inability to effectively offset such decrease through shifts in operations. If we are unable to respond effectively to decreases in the average selling prices of our products in the future, our net sales, gross profit and financial condition could be materially and adversely affected. Further, while we may elect to discontinue products that are significantly affected by such price decreases, we cannot assure you that any such discontinuation will mitigate the related declines in our financial condition.

 

 

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Increases in costs or reductions in the supplies of specialty and commodity chemicals we use in our manufacturing process could materially and adversely affect our results of operations.

 

We use a variety of specialty and commodity chemicals in our manufacturing processes. Our manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. We typically purchase our major raw materials on a contract or as needed basis from outside sources. The availability and prices of raw materials may be subject to curtailment or change due to, among other things, the financial stability of our suppliers, suppliers’ allocations to other purchasers, interruptions in production by suppliers, new laws or regulations, changes in exchange rates and worldwide price levels. Further, in some cases, we are limited in our ability to purchase certain raw materials from other suppliers by our supply agreements which contain certain minimum purchase requirements. Additionally, we cannot assure you that, as our supply contracts expire, we will be able to renew them or, or if they are terminated, that we will be able to obtain replacement supply agreements on terms favorable to us. Our results of operations could be adversely affected if we are unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increase significantly.

 

From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. In addition, some of the raw materials that we use are derived from petrochemical-based feedstocks, and there have been historical periods of rapid and significant upward and downward movements in the prices of these feedstocks. We cannot always pass on these price increases to our customers due to competitive pricing pressure, and, even when we have been able to do so, there has historically been a time delay between increased raw material prices and our ability to increase the prices of our products. Any limitation on, or delay in, our ability to pass on any price increases could have an adverse effect on our results of operations.

 

We may incur material costs relating to environmental and health and safety requirements or liabilities.

 

As a manufacturer and distributor of specialty chemicals and systems, we are subject to extensive U.S. and foreign laws and regulations relating to environmental protection and worker health and safety, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated properties and occupational safety and health matters. We could in the future incur significant costs, including cleanup costs, fines and sanctions and third-party claims for property or natural resource damage or personal injuries as a result of past or future violations of, or liabilities under, such laws and regulations.

 

Liability under some environmental laws relating to contaminated sites can be imposed retroactively, regardless of fault or the legality of the activities that gave rise to the contamination. Some of our manufacturing facilities have an extended history of chemical manufacturing operations or other industrial activities, and contaminants have been detected at some of our sites and offsite disposal locations. We are actively remediating certain of these properties. As of December 31, 2013, we had appropriate reserves for various non-material environmental matters. Ultimate environmental costs are difficult to predict and may vary from current estimates and reserves, and the discovery of additional contaminants at these or other sites, or the imposition of additional cleanup obligations at these or other sites, or third-party claims relating thereto, could result in significant additional costs.

 

In addition, MacDermid in the past has incurred, and will in the future incur, significant costs and capital expenditures in complying with environmental, health and safety laws and regulations. Future events, such as changes in or more rigorous enforcement of environmental laws and regulations, could require us to make additional expenditures, modify or curtail our operations or install pollution control equipment.

 

Global climate change legislation could negatively impact our results of operations or limit our ability to operate our business.

 

We operate production facilities in several countries. In many of the countries in which we operate, legislation has been passed, or proposed legislation is being considered, to limit greenhouse gases through various means, including emissions credits. Greenhouse gas regulation in the jurisdictions in which we operate could negatively impact our future results from operations through increased costs of production. We may be unable to pass such increased costs on to our customers, which may decrease our gross profit and results of operations. In addition, the potential impact of climate change regulation on our customers is highly uncertain and may also adversely affect our business.

 

 

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We may be unable to respond effectively to technological changes in our industry, which could reduce the demand for our products and adversely affect our results of operations.

 

Our future business success will depend upon our ability to maintain and enhance our technological capabilities, develop and market products and applications that meet changing customer needs and successfully anticipate or respond to technological changes on a cost effective and timely basis. Our inability to anticipate, respond to or utilize changing technologies could have an adverse effect on our business, financial condition or results of operations.

 

Our substantial indebtedness may adversely affect our cash flow and our ability to operate our business and fulfill our obligations under our indebtedness.

 

As of December 31, 2013, on a consolidated basis, we had approximately $751 million in debt outstanding under our first lien credit facility.

 

Our substantial indebtedness could have important consequences to you. For example, it could:

 

·

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, dividends, research and development efforts and other general corporate purposes;

 

·

increase the amount of our interest expense, because our borrowings are at variable rates of interest, which, if interest rates increase, would result in higher interest expense;

 

·

increase our vulnerability to general adverse economic and industry conditions;

 

·

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

·

limit our ability to make strategic acquisitions, introduce new technologies or exploit business opportunities; and

 

·

place us at a competitive disadvantage compared to our competitors that have less indebtedness.

 

In addition, the amended and restated credit agreement governing our first lien credit facility and our revolving credit facility contains covenants that restrict our operations. These covenants restrict, among other things, our ability to incur additional debt, grant liens, pay cash dividends, enter new lines of business, repurchase our shares of Common Stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. These restrictions could limit our ability to plan for or react to market conditions, meet extraordinary capital needs or otherwise take actions that we believe are in our best interest. Further, a failure by us to comply with any of these covenants and restrictions could result in an event of default. An event of default under our amended and restated credit agreement, if not waived or cured, may allow our creditors to accelerate the related debt.  Furthermore, substantially all of our domestic assets (including equity interests) secure our indebtedness under our amended and restated credit agreement.  If we default on our amended and restated credit agreement, our lenders could foreclose on their security interest in such assets, which would have a material adverse effect on our business, results of operations and financial condition. 

 

Our ability to borrow under our revolving credit facility depends on our level of indebtedness and our financial performance, and any deterioration in our results of operations or increase in our indebtedness could therefore have a material adverse effect on our liquidity.

 

Deterioration in our results of operations or an increase in our indebtedness may limit our access to borrowings under our revolving credit facility that is part of our credit facilities. Under the terms of our amended and restated credit agreement governing our credit facilities, if our borrowings under our revolving credit facility exceed $12.5 million in the aggregate as of the last day of any fiscal quarter, we must maintain a 6.5 to 1.0 ratio of (x) consolidated indebtedness served by a first lien minus unrestricted cash and cash equivalents to (y) consolidated EBITDA for the four most recent fiscal quarters, subject to a right to cure.

 

Our ability to comply with these financial maintenance covenants depends, in part, on our financial performance and may be affected by events beyond our control. Any material deviations from our operating forecasts could require us to seek waivers or amendments of these covenants, alternative sources of financing or reductions in expenditures. We may not be able to obtain such waivers, amendments or alternative financings, or if we obtain them, they may not be on terms favorable to us.

 

 

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Despite the restrictions set forth in the agreements governing our existing indebtedness, we may be able to incur substantial additional indebtedness in the future. Increases in the aggregate amount of our indebtedness may also result in our being unable to comply with the financial maintenance covenants, and our inability to borrow under our revolving credit facility as a result of such non-compliance could have an adverse effect on our cash flow and liquidity.

 

Chemical manufacturing is inherently hazardous and could result in accidents that disrupt our operations or expose us to significant losses or liabilities.

 

The hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes are inherent in our operations. These hazards could lead to an interruption or suspension of operations and have a material adverse effect on the productivity and profitability of a particular manufacturing facility or on our business as a whole. These potential risks include:

 

·

pipeline and storage tank leaks and ruptures;

 

·

explosions and fires;

 

·

inclement weather and natural disasters;

 

·

terrorist attacks;

 

·

mechanical failure;

 

·

unscheduled downtime;

 

·

labor difficulties;

 

·

transportation interruptions; and

 

·

chemical spills and other discharges or releases of toxic or hazardous substances or gases.

 

These hazards may result in personal injury and loss of life, damage to property and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal fines, penalties and other sanctions, cleanup costs and claims by governmental entities or third parties. We are dependent on the continued operation of our production facilities, and the loss or shutdown of operations over an extended period at our Morristown, Tennessee facility, which is our only Graphic Solutions segment sheet production facility, or any of our other major operating facilities could have a material adverse effect on our financial condition and results of operations.

 

Our offshore industry products are subject to the hazards inherent in the offshore oil production and drilling industry, and we may incur substantial liabilities or losses as a result of these hazards.

 

We produce water-based hydraulic control fluids for major oil companies and drilling contractors to be used for potentially hazardous offshore deep water production and drilling applications. Offshore deep water oil production and drilling are subject to hazards that include blowouts, explosions, fires, collisions, capsizing, sinking and damage or loss to pipeline, subsea or other facilities from severe weather conditions. These hazards could result in personal injury and loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage and suspension of operations. A catastrophic occurrence at a location where our products are used may expose us to substantial liability for personal injury, wrongful death, product liability or commercial claims. To the extent available, we maintain insurance coverage that we believe is customary in our industry. Such insurance does not, however, provide coverage for all liabilities, and we cannot assure you that our insurance coverage will be adequate to cover claims that may arise or that we will be able to maintain adequate insurance at rates we consider reasonable. The occurrence of a significant offshore deep water oil production or drilling event that results in liability to us that is not fully insured could materially and adversely affect our results of operations and financial condition.

 

 

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We are not insured against all potential risks.

 

To the extent available, we maintain insurance coverage that we believe is customary in our industry. Such insurance does not, however, provide coverage for all liabilities, including certain hazards incidental to our business, and we cannot assure you that our insurance coverage will be adequate to cover claims that may arise or that we will be able to maintain adequate insurance at rates we consider reasonable. For example, the occurrence of a significant offshore deep water oil production or drilling event, or a significant business interruption in the operation of one or more of our facilities, could result in liability to us that is not insured and therefore could materially and adversely affect our results of operations and financial condition. In addition, our products are used in or integrated with many high-risk end products and therefore if such products were involved in a disaster or catastrophic accident, we could be involved in litigation arising out of such incidents and susceptible to significant expenses or losses.

 

Compliance with government regulations, or penalties for non-compliance, could prevent or increase the cost of the development, distribution and sale of our products.

 

We, our business, our products and our customers’ products are subject to regulation by many U.S. and non-U.S. supranational, national, federal, state and local governmental authorities. These regulations include customs, imports and international trade laws, export control, antitrust laws, environmental requirements and zoning and occupancy laws that regulate manufacturers generally or govern the importation, promotion and sale of our products, the operation of our factories and warehouse facilities and our relationship with our customers, suppliers and competitors. Our products and manufacturing processes are also subject to ongoing reviews by certain governmental authorities.

 

New laws and regulations may be introduced, or existing laws and regulations may be changed or may become subject to new interpretations, which could result in additional compliance costs, seizures, confiscations, recalls, monetary fines or delays that could affect us or our customers. These effects could prevent or inhibit the development, distribution and sale of our products and may harm our reputation. In addition, changes in foreign governmental, federal and state minimum wage laws and other laws relating to employee benefits could cause us to incur additional wage and benefit costs, which could negatively impact our profitability. Further, if any of the regulations to which we are subject were violated by our management, employees, suppliers, buying agents or trading companies, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our products, hurt our business and negatively impact our results of operations and share price.

 

Further, in some circumstances, before we may sell some of our products, governmental authorities must approve these products, our manufacturing processes and facilities. In order to obtain regulatory approval of certain new products, we must, among other things, demonstrate to the relevant authority that the product is safe and effective for its intended uses and that we are capable of manufacturing the product in accordance with current regulations. The approval process can be costly, time consuming and subject to unanticipated and significant delays.

 

We cannot assure you that approvals will be granted to us on a timely basis, or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate revenue from those products.

 

We are exposed to intangible asset risk.

 

We have recorded intangible assets, including goodwill in connection with the MacDermid Acquisition. Such valuation amounts are preliminary and will be updated with a third party valuation report in conjunction with purchase accounting. Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets of an acquired business. We do not amortize goodwill and other intangible assets that have indefinite useful lives; rather, goodwill and other intangible assets with indefinite useful lives are tested for impairment periodically. Indefinite-lived intangible assets are reviewed for potential impairment on an annual basis or when events or changes in circumstances indicate that indefinite-lived intangible assets might be impaired by comparing the estimated fair value of the indefinite-lived intangible assets to their carrying value. Goodwill will be tested for impairment at the reporting unit level annually, or when events or changes in circumstances indicate that goodwill might be impaired.

 

 

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Obligations and expenses related to our defined benefit pension plans and other postretirement benefit plans could negatively affect our financial condition and results of operations.

 

We have defined benefit pension plans and other postretirement benefit plans in the United States and a number of other countries. Changes in the market value of plan assets, investment returns, discount rates, mortality rates, regulations and the rate of increase in compensation levels may affect the funded status of our plans and could cause volatility in the net periodic benefit cost, future funding requirements of the plans and the funded status of the plans. As of December 31, 2013, our U.S. pension plans were underfunded by approximately $10.4 million and our U.S. post-retirement benefits plans were underfunded by approximately $6.8 million. A significant increase in our obligations or future funding requirements could have a negative impact on our results of operations and cash flows for a particular period and on our financial condition.

 

We may not be able to consummate future acquisitions or successfully integrate acquisitions into our business, which could result in unanticipated expenses and losses.

 

Part of our strategy is to grow through acquisitions. Consummating acquisitions of related businesses, or our failure to integrate such businesses successfully into our existing businesses, could result in unanticipated expenses and losses. Furthermore, we may not be able to realize any of the anticipated benefits from the acquisitions.

 

In connection with potential future acquisitions, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with acquisitions include:

 

·

unexpected losses of key employees or customers of the acquired company;

 

·

conforming the acquired company’s standards, processes, procedures and controls with our operations;

 

·

coordinating new product and process development;

 

·

hiring additional management and other critical personnel;

 

·

negotiating with labor unions; and

 

·

increasing the scope, geographic diversity and complexity of our operations.

 

In addition, we may encounter unforeseen obstacles or costs in the integration of businesses we may acquire. Also, the presence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition may have a material adverse effect on our financial condition or results of operations.

 

Business disruptions could seriously harm our net sales and increase our costs and expenses.

 

Our worldwide operations could be subject to extraordinary events, including natural disasters, political disruptions, terrorist attacks, acts of war and other business disruptions, which could seriously harm our net sales and increase our costs and expenses. Some areas, including parts of the East Coast and Midwest of the United States, have previously experienced, and may in the future experience, major power shortages and blackouts, significant floods and strong tornadoes and other storms. These blackouts, floods and storms could cause disruptions to our operations or the operations of our suppliers, distributors, resellers or customers. Similar losses and interruptions could also be caused by earthquakes, telecommunications failures, water shortages, tsunamis, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters for which we are predominantly self-insured.

 

Productivity initiatives aimed at making our company more profitable and our operations more efficient are part of our strategy. We may not realize all of the anticipated benefits from the implementation of such productivity initiatives.

 

Our initiatives may reduce our workforce in our manufacturing, research and development, selling, technical, general and administrative functions. We cannot assure you that the assumptions underlying our decisions as to which reductions and eliminations to make as part of these operational restructuring initiatives will prove to be correct and, accordingly, we may determine that we have reduced or eliminated resources that are necessary to, or desirable for, our business. Any reduction or elimination of resources made in error could adversely affect our ability to operate or grow our business and may negatively impact our results of operations. Further, we may not realize all of the anticipated benefits from productivity initiatives in which we may engage in the future.

 

 

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We are subject to litigation that could have an adverse effect upon our business, financial condition or results of operations.

 

We are a defendant in numerous lawsuits that result from, and are incidental to, the conduct of our business. These suits concern issues including product liability, contract disputes, labor-related matters, patent infringement, environmental proceedings, property damage and personal injury matters. For example, we are currently a defendant in a patent infringement claim, which has been vigorously opposed by us, relating to technology that is important to us, although we do not expect this claim to have a material adverse effect on our business, financial conditions, results of operations or reputation. The ultimate resolution of such claims, proceedings and lawsuits is inherently unpredictable and, as a result, our estimates of liability, if any, are subject to change and actual results may materially differ from our estimates. If there is an unfavorable resolution of a matter, our reputation may be harmed and there could be a material adverse effect on our business, financial condition or results of operations. Moreover, we cannot assure you that we will have any or adequate insurance coverage to protect us from any adverse resolution.

 

We may be liable for damages based on product liability claims brought against our customers in our end use markets, and any successful claim for damages could have a material adverse effect on our financial condition or results of operations.

 

Many of our products provide critical performance attributes to our customers’ products that are sold to consumers who could potentially bring product liability suits related to such products. Our sale of these products therefore involves the risk of product liability claims. If a person were to bring a product liability suit against one of our customers, this customer may attempt to seek contribution from us. A person may also bring a product liability claim directly against us. A successful product liability claim or series of claims against us in excess of our insurance coverage for payments, for which we are not otherwise indemnified, could have a material adverse effect on our financial condition or results of operations. While we endeavor to protect ourselves from such claims and exposures in our contractual negotiations, we cannot assure you that our efforts in this regard will ultimately protect us from any such claims.

 

We will face new challenges, increased costs and administrative responsibilities as an independent public company, particularly after we are no longer an “emerging growth company”.

 

As a publicly traded company with listed equity securities, we are required to comply with certain laws, regulations and requirements, including certain provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), certain regulations of the Securities and Exchange Commission (the “SEC”) and certain of the NYSE requirements applicable to public companies. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our Board of Directors and management and will significantly increase our costs and expenses.

 

We are required to:

 

·

institute a more comprehensive compliance framework;

 

·

update, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of Sarbanes-Oxley and the related rules and regulations of the SEC;

 

·

prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

 

·

revise our existing internal policies, such as those relating to disclosure controls and procedures and insider trading;

 

·

comply with SEC rules and guidelines requiring registrants to provide their financial statements in interactive data format using eXtensible Business Reporting Language (“XBRL”);

 

·

involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

·

enhance our investor relations function.

 

 

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However, for as long as we are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we are permitted to, and intend to, take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” We are an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of $1 billion or more, (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our Common Stock pursuant to an effective registration statement, (iii) the date on which we have, during the previous 3-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a “large accelerated issuer” as defined under the federal securities laws. For so long as we remain an “emerging growth company,” we will not be required to:

 

·

have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of Sarbanes-Oxley;

 

·

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);

 

·

submit certain executive compensation matters to shareholders advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; and

 

·

include detailed compensation discussion and analysis in our filings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and instead may provide a reduced level of disclosure concerning executive compensation.

 

Although we intend to rely on the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies. In addition, as our business grows, we may no longer satisfy the conditions of an emerging growth company. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot assure you that we will be able to take advantage of all of the benefits from the JOBS Act. In addition, we also expect that being a public company subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our Board of Directors, particularly to serve on our audit committee.

 

Failure to establish and maintain effective internal controls in accordance with Section 404 of Sarbanes-Oxley could have a material adverse effect on our business and share price.

 

As a publicly traded company, we are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of Sarbanes-Oxley, which will require, beginning with our annual report on Form 10-K for the year ending December 31, 2014, annual management assessments of the effectiveness of our internal control over financial reporting. Additionally, as of the later of the filing of such annual report and the date we are no longer an “emerging growth company” as defined in the JOBS Act, Section 404 of Sarbanes-Oxley will require a report by our independent registered public accounting firm that addresses the effectiveness of our internal control over financial reporting. We will remain an “emerging growth company” for up to five years, although we would cease to be an “emerging growth company” as of December 31 of a particular year if (1) we had gross revenue of $1 billion or more in such year, (2) the market value of our shares of Common Stock that are held by non-affiliates exceeds $700 million as of June 30 in such year or (3) at any point in such year, we would have issued more than $1 billion of non-convertible debt during the three-year period prior thereto. During the course of our testing, we may identify weaknesses or deficiencies. If such weaknesses or deficiencies are not remediated in time, investors may lose confidence in the accuracy of our financial reporting, which could have a material adverse effect on the price of our Common Stock.

 

Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. We also expect the regulations to increase our legal and financial compliance costs, make it more difficult to attract and retain qualified executive officers and members of our Board of Directors, particularly to serve on our audit committee, and make some activities more difficult, time consuming and costly. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of Sarbanes-Oxley and, when applicable to us, our independent registered public accounting firm may not be able or willing to issue an unqualified report on the effectiveness of our internal control over financial reporting. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or their effect on our operations.

 

 

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We are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure and governance requirements applicable to “emerging growth companies”, our shares of Common Stock may be less attractive to investors.

 

In addition to taking advantage of certain exemptions from various reporting requirements listed above, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We may elect to delay such adoption of new or revised accounting standards, and as a result, we may choose not to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies other than “emerging growth companies”. As a result of such election, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates of such new or revised accounting standards. We cannot predict if investors will find our Common Stock less attractive because we will rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less attractive trading market for our Common Stock and our stock price may be more volatile.

 

Risks Relating to Ownership of our Common Stock

 

An active trading market for our Common Stock may not develop.

 

We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or how liquid that market might become. An active public market for our Common Stock may not develop or be sustained. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of Common Stock at a price that is attractive to you, or at all.

 

We have numerous equity instruments outstanding that would require us to issue additional shares of Common Stock. Therefore, you may experience significant dilution of your ownership interests and the future issuance of additional shares of our Common Stock, or the anticipation of such issuances, could have an adverse effect on our stock price.

 

We currently have outstanding numerous equity instruments outstanding that would require us to issue additional shares of Common Stock for no or a fixed amount of additional consideration. Specifically, as of March 26, 2014, we had outstanding the following:

 

·

2,000,000 shares of Series A preferred stock (the “Series A Preferred Stock”), which were automatically converted from ordinary shares held by Mariposa Acquisition, LLC and Berggruen Acquisition Holdings, IV, Ltd. (collectively, the “Founder Entities”) before the Domestication, and which are convertible into shares of our Common Stock, on a one-for-one basis, at any time at the option of the Founder Entities;

 

·

4,573,602 warrants, which will be exercisable for 1,524,534 shares of our Common Stock at $11.50 per share;

 

·

8,905,776 exchange rights which will require us to issue shares of our Common Stock for shares of PDH common stock at the option of the holder, on a one-for-one basis, at 25% per year after the earlier of October 31, 2014 or a change of control of Platform; and

 

·

250,000 options which are exercisable to purchase share of our Common Stock, on a one-for-one basis, at any time at the option of the holder.

 

In addition, beginning in 2014, if the average stock price of our shares of Common Stock exceeds $11.50 per share during the calendar year, we are required to pay dividends on the Series A Preferred Stock in the form of shares of our Common Stock equal to 20% of the appreciation over $10.00 of the market price for the last ten days of our calendar year, which could have a dilutive impact on, and reduce the value of, our outstanding Common Stock. For more information of the Series A Preferred Stock, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report . We may also issue additional shares of our Common Stock or other securities that are convertible into or exercisable for our Common Stock in connection with future acquisitions, future issuances of our securities for capital raising purposes or for other business purposes. Future sales of substantial amounts of our Common Stock, or the perception that sales could occur, could have a material adverse effect on the price of our Common Stock.

 

 

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We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of our Common Stock.

 

Our Board of Directors is authorized to create and issue one or more additional series of preferred stock, and, with respect to each series, to determine number of shares constituting the series and the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, which may include dividend rights, conversion or exchange rights, voting rights, redemption rights and terms and liquidation preferences, without stockholder approval. If we create and issue one or more additional series of preferred stock, it could affect your rights or reduce the value of our outstanding Common Stock. Our Board of Directors could, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our Common Stock and which could have certain anti-takeover effects.

 

We cannot assure you that we will declare dividends or have the available cash to make dividend payments.

 

To the extent we intend to pay dividends on our Common Stock, we will pay such dividends at such times (if any) and in such amounts (if any) as our Board of Directors determines appropriate and in accordance with applicable law. Payments of such dividends will be dependent on the availability of any dividends or other distributions from MacDermid and its subsidiaries to us. Additionally, we are subject to certain restrictions in our amended and restated credit agreement which may prohibit or limit our ability to pay dividends.   We can therefore give no assurance that we will be able to pay dividends going forward or as to the amount of such dividends, if any.

 

We are governed by Delaware law, which has anti-takeover implications.

 

As a result of the Domestication, we and our organizational documents are governed by Delaware law rather than British Virgin Islands law. The application of Delaware law to us may have the effect of deterring hostile takeover attempts or a change in control. In particular, Section 203 of the Delaware General Corporation Law imposes certain restrictions on merger, business combinations and other transactions between us and holders of 15% or more of our Common Stock. A Delaware corporation may opt out of this provision either with an express provision in its original certificate of incorporation or in an amendment to its certificate of incorporation or by-laws approved by its stockholders. We have not opted out of this provision. Section 203 could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.

 

We operate as a holding company and our principal source of operating cash will be income received from our subsidiaries.

 

We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends is highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. As a result, we are dependent on the income generated by our subsidiaries to meet our expenses and operating cash requirements. The amount of distributions and dividends, if any, which may be paid from our subsidiaries to us will depend on many factors, including results of operations and financial condition, limits on dividends under applicable law, its constitutional documents, documents governing any indebtedness of the respective subsidiary, and other factors which may be outside our control. If our subsidiaries are unable to generate sufficient cash flow, we may be unable to pay our expenses or make distributions and dividends on the shares of Common Stock.

 

 

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Item  1B. Unresolved Staff Comments

 

         Not applicable.

Item  2. Properties

 

At December 31, 2013, we lease or own facilities and laboratories throughout the United States, some of which have multiple buildings and warehouses, and these U.S. facilities encompass approximately 0.9 million square feet. We lease or own international facilities encompassing approximately 1.3 million square feet primarily in Asia, Europe and South America. Of the United States and international manufacturing and warehouse facilities, approximately 1.6 million square feet of space is owned, while the remaining 0.6 million square feet of space is leased. The approximate percentage of the facility square footage used by the Performance Materials segment and the Graphic Solutions segment is 71% and 29%, respectively. We believe that all of our facilities and equipment are in good condition, well maintained, adequate for our present operations and utilized for their intended purposes.

Item  3. Legal Proceedings

 

In the ordinary course of our business, we are subject to periodic lawsuits, investigations and claims, including, but not limited to, product liability claims, contractual disputes, premises claims and employment and environmental, health, and safety matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows and results of operations.

 

We are a manufacturer and distributor of specialty chemical products, and are therefore exposed to the risk of liability or claims with respect to environmental cleanup or other matters, including those in connection with the disposal or releases of hazardous materials. We have received notices of violation with respect to instances of non-compliance with environmental laws. A number of our facilities and former facilities have been environmentally impacted from historic operations and some of our facilities are in the process of being investigated and remediated. See Note 16 to our audited consolidated financial statements for the year ended December 31, 2013.

 

We or our affiliates have been named as a potentially responsible party in numerous superfund sites due to historic operations. Asbestos and other hazardous substances are or may be present at our facilities. We are subject to extensive domestic and foreign laws and regulations relating to environmental protection and worker health and safety, including those governing discharges of pollutants into soil, air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated properties. We have incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations. Additional costs could be incurred, including cleanup costs, fines, sanctions, and third-party claims, as a result of violations of or liabilities under environmental laws. As of December 31, 2013, we had appropriate reserves for various non-material environmental matters.

Item  4. Mine Safety Disclosure

 

         Not applicable.

 

 

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Part II

 

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market for our Common Stock

 

Our ordinary shares (which were converted into shares of Common Stock upon the Domestication) were previously listed for trading on the London Stock Exchange under the ticker symbol “PAH” in U.S. Dollars. Our shares began trading on the London Stock Exchange on May 17, 2013 and were traded until October 10, 2013 when trading was halted due to the announcement of the then-pending MacDermid Acquisition. The following table sets forth the quarterly range of high and low reported sale prices of our ordinary shares as reported on the London Stock Exchange for the periods indicated:

 

Period		High				Low
Second Quarter 2013 (May 17, 2013 to June 30, 2013)		$	11.00			$	10.05
Third Quarter 2013		$	10.80			$	10.13
Fourth Quarter 2013 (through October 10, 2013)		$	10.60			$	10.46

 

Our Common Stock commenced trading under the ticker symbol “PAH” on the NYSE on January 23, 2014.

 

Holders

As of March 26, 2014, we had approximately 373 registered holders of record of our Common Stock, par value $0.01 per share.

Dividends

 

We have not declared or paid any dividends on the shares of our Common Stock (or the ordinary shares from which our shares of Common Stock were converted) since our inception and have no current plans to pay dividends on such shares of Common Stock in the foreseeable future. Beginning in 2014, if the average stock price of our shares of Common Stock exceeds $11.50 per share during the calendar year, we are required to pay dividends on the Series A Preferred Stock in the form of shares of our Common Stock equal to 20% of the appreciation over $10.00 of the market price for the last ten days of our calendar year. Additionally, we are subject to certain restrictions in our amended and restated credit agreement which may prohibit or limit our ability to pay dividends.

Recent Sales of Unregistered Securities

 

In December 2013, we issued to certain of our employees, pursuant to purchase rights under the Platform Specialty Products Corporation 2013 Incentive Compensation Plan (as may be amended from time to time, the “2013 Plan”) an aggregate of 349,691 common shares for aggregate consideration of approximately $3.8 million. The securities issued under the 2013 Plan were not registered under the Securities Act and were issued pursuant to Rule 701 promulgated by the SEC under the Securities Act.

 

In December 2013, prior to the Domestication, we sold an aggregate 1,900 ordinary shares to an accredited investor for a total consideration of $0.02 million.  The securities issued under such offering were not registered under the Securities Act and were issued pursuant to Rule 506 of the Securities Act .

 

 

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Item  6. Selected Financial Data

 

Platform’s Selected Consolidated Financial Information

 

The following table presents our selected consolidated historical financial data for us and our Predecessor as of the dates and for each of the periods indicated.  The selected consolidated historical data for the period from our inception (April 23, 2013) to December 31, 2013 (“Successor 2013 Period”) and as of December 31, 2013 has been derived from our audited consolidated financial statements included in this Annual Report.  The selected consolidated historical data for our Predecessor for the period from January 1, 2013 to October 31, 2013 (“Predecessor 2013 Period”) and the years ended December 31, 2012 and 2011 (“Predecessor 2012 Period” and “Predecessor 2011 Period”, respectively) and as of December 31, 2012 and December 31, 2011 have been derived from the audited consolidated financial statements of our Predecessor included in this Annual Report. The selected consolidated historical financial data presented below contain all normal recurring adjustments that, in the opinion of management, are necessary to present fairly our financial position and results of operations as of and for the periods presented. The selected historical consolidated financial data included below and elsewhere in this Annual Report are not necessarily indicative of future results and should be read in conjunction with the section entitled “Financial Statements and Supplementary Data” included in Part II, Item 8 of this Annual Report, and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report.

 

Unless the context otherwise requires, all references in this section to “we”, “us”, “our” and “Successor” refer to Platform and its subsidiaries, collectively, for all periods subsequent to the MacDermid Acquisition.  All references in this section to our “Predecessor” refer to MacDermid and its subsidiaries for all periods prior to the MacDermid Acquisition.

 

(amounts in thousands, except per share data)		Successor					Predecessor
Statement of Operations Data		Period from Inception (April 23, 2013) to December 31, 2013					Period from January 1, 2013 to October 31, 2013					Year Ended December 31, 2012				Year Ended December 31, 2011
Net sales		$	118,239				$	627,712				$	731,220			$	728,773
Gross profit			35,652					322,837					355,054				340,475
Operating (loss) profit			(195,632	)	(1)			91,749		(2)			115,097				55,948
(Loss) income from continuing operations before income taxes, non-controlling interest and accumulated payment-in-kind dividend on cumulative preferred shares			(201,444	)	(1)			26,475		(2)			70,939				11,306
Income tax benefit (expense)			5,819					(12,961	)				(24,673	)			(9,953	)
Net (loss) income			(195,625	)	(1)			13,514		(2)			46,266				1,353
Basic earnings per share			(2.10	)	(1)			n/a					n/a				n/a
Diluted earnings per share			(2.10	)	(1)			n/a					n/a				n/a
		Successor					Predecessor
		December 31, 2013					December 31, 2012
Balance Sheet Data
Cash & cash equivalents		$	123,040				$	143,351
Working capital   (3)			242,847					246,383
Total assets			2,241,888					1,233,917
Total debt & capital lease obligations			752,249					720,640
Total  Equity			1,128,616					272,437

 

(1)    Includes the following significant items related to the MacDermid Acquisition affecting comparability in the Successor 2013 Period:

 

·

Non-cash charge related to the Founder Preferred Share dividend rights of $172.0 million;

·

Purchase accounting adjustment of $23.9 million charged to cost of sales for the manufacturer’s profit in inventory adjustment; and

·

Transaction costs, primarily comprised of professional fees, of $15.2 million.

 

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(2)    Includes the following significant items related to the MacDermid Acquisition affecting comparability in the Predecessor 2013 Period:

 

·

Transaction costs primarily for professional fees and fees paid to Predecessor shareholders resulting from management fees payable in conjunction with consummation of  the MacDermid Acquisition of $16.9 million; and

·

Deemed compensation expense related to pre-acquisition share awards of approximately $9.3 million.

(3)    Working capital is defined as current assets less current liabilities.

Platform has not declared or paid any dividends on its shares of Common Stock since its incorporation and does not anticipate that it will do so in the foreseeable future. Beginning in 2014, if the average stock price of our shares of Common Stock exceeds $11.50 per share for the last ten days of the calendar year, we are required to pay dividends on the Series A Preferred Stock in the form of shares of our Common Stock equal to 20% of the appreciation over $10.00 of the market price for the last ten days of our calendar year.

 

Item  7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following is a discussion of our financial condition and results of operations during the Successor 2013 Period and each of the Predecessor 2013 Period, the Predecessor 2012 Period and the Predecessor 2011 Period. We did not own MacDermid for any of the Predecessor periods or for the entirety of the Successor 2013 Period. Consequently, these results may not be indicative of the results that we would expect to recognize for future periods. This discussion should be read in conjunction with the section entitled “Financial Statements and Supplementary Data,” included in Part II, Item 8 of this Annual Report, and with the section entitled “Selected Financial Data” included in Part II, Item 6 of this Annual Report.

 

Unless the context otherwise requires, all references in this section to “we”, “us”, “our, “Successor” and “Platform” refer to Platform Specialty Products Corporation and its subsidiaries, collectively, for all periods subsequent to the MacDermid Acquisition.  All references in this section to our “Predecessor” refer to MacDermid and its subsidiaries for all periods prior to the MacDermid Acquisition.

 

Overview

 

We are a global producer of high technology specialty chemical products and provider of post-sale technical services. As our name “Platform Specialty Products Corporation” implies, we continually seek opportunities to act as an acquirer and consolidator of specialty chemical businesses on a global basis, particularly those meeting Platform’s “asset lite, high touch” philosophy, which involves dedicating extensive resources to research and development and highly technical, post-sale customer service, while limiting our investments in fixed assets and capital expenditures. To date, Platform has completed one acquisition, the MacDermid Acquisition, on October 31, 2013.

 

Currently, our business involves the manufacture of a broad range of specialty chemicals, which we create by blending raw materials, and the incorporation of these chemicals into multi-step technological processes. These specialty chemicals and processes together encompass the products we sell to our customers in the electronics, metal and plastic plating, graphic arts, and offshore oil production and drilling industries. We refer to our products as “dynamic chemistries” due to their delicate chemical compositions, which are frequently altered during customer use. Our dynamic chemistries are used in a wide variety of attractive niche markets and we believe that the majority of our operations hold strong positions in the product markets they serve.

 

We were initially incorporated with limited liability under the laws of the British Virgin Islands on April 23, 2013 under the name Platform Acquisition Holdings Limited. We were created for the purpose of acquiring a target company or business with an anticipated enterprise value of between $750 million and $2.50 billion.  We completed our initial public offering in the United Kingdom on May 22, 2013, raising $881.2 million net proceeds and were listed on the London Stock Exchange.

 

On October 31, 2013, we indirectly acquired substantially all of the equity of MacDermid Holdings, LLC (“MacDermid Holdings”), which, at the time, owned approximately 97% of MacDermid, which we refer to as the “MacDermid Acquisition”. As a result, we became a holding company for the MacDermid business. We acquired the remaining 3% of MacDermid (the “MacDermid Plan Shares”) on March 4, 2014, pursuant to the terms of an Exchange Agreement, dated October 25, 2013, between us and the fiduciaries of the MacDermid, Incorporated Profit Sharing and Employee Savings Plan (the “MacDermid Savings Plan”). Concurrently with the closing of the MacDermid Acquisition, we changed our name to Platform Specialty Products Corporation (“Platform”). On January 22, 2014, we changed our jurisdiction of incorporation from the British Virgin Islands to Delaware (the “Domestication”) and on January 23, 2014, our shares of Common Stock, par value $0.01 per share (“Common Stock”) began trading on the New York Stock Exchange (“NYSE”) under the ticker symbol “PAH”.

 

 

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Prior to the MacDermid Acquisition, we had no revenue. During the Successor 2013 Period, we had losses relating to formation and administrative costs and approximately $4 million of diligence costs related to the MacDermid Acquisition. We had no other operations other than the active solicitation of a target business with which to complete a business combination. We relied upon the sale of our ordinary and preferred shares to fund our limited acquisition-related operations.

 

We manage our business in two operating segments:

 

Performance Materials – Our Performance Materials segment manufactures and markets dynamic chemistry solutions that are used in the electronics, automotive and oil and gas production and drilling industries. We operate in the Americas, Asia and Europe. Our products include surface and coating materials and water-based hydraulic control fluids. In conjunction with the sale of these products, we provide post-sale technical service and support when necessary to ensure superior performance of their application.

 

Graphic Solutions – Our Graphic Solutions segment primarily produces and markets photopolymers through an extensive line of flexographic plates that are used in the commercial packaging and printing industries. Sales in the Graphic Solutions segment are predominately in the Americas and Europe.

 

We sell our products into three geographic regions: the Americas, Asia and Europe. Because the Performance Materials segment utilizes shared facilities and administrative resources and offers products that are distinct from those within the Graphic Solutions segment, we make decisions about how to manage our operations by reference to each segment and not with respect to the underlying products or geographic regions that comprise each segment.

Global Economic and Industry Conditions

 

Our products are sold in industries that we believe are sensitive to changes in general economic conditions. Accordingly, net sales, gross profit and financial condition depend significantly on general economic conditions and the impact of these conditions on demand for our dynamic chemistries and services in the markets in which we compete. Our business is particularly impacted by demand for chemistry products utilized in the automotive, printed circuit board, offshore oil production and commercial packaging industries.

 

Our business is also significantly influenced by trends and characteristics in the specialty chemical industry and the printing industry. We believe that these industries are cyclical and subject to constant and rapid technological change, product obsolescence, price erosion, evolving standards, short product life-cycles, raw material price fluctuations and changes in product supply and demand.

 

The specialty chemical industry is currently being affected by globalization and a shift in customers’ businesses out of traditional geographic markets and into high-growth, emerging markets.

 

The printing industry is currently shrinking, which is reflected in the newspaper closures and consolidations that have occurred during the past three years. The newspapers are also reducing capital spending due to outsourcing their production. As a result, sales of newspaper plates have been adversely impacted by these trends. This adverse impact has been offset by the double digit growth in the consumer packaging market, which typically commands higher margins.

 

Net sales in future periods will depend, among other factors, upon a continued general improvement in global economic conditions, our ability to meet unscheduled or temporary changes in demand, and our ability to penetrate new markets with strategic product initiatives in specific targeted markets.

 

Foreign Currency Exposure

 

For the Successor 2013 Period and the Predecessor 2013 Period, approximately 68% and 67%, respectively, of net sales, were denominated in currencies other than the U.S. Dollar—predominantly the Brazilian Real, British Pound Sterling, Chinese Yuan, Euro, Hong Kong Dollar and Japanese Yen. For the years ended December 31, 2012 and 2011, approximately 67% and 69%, respectively, of our net sales were denominated in currencies other than the U.S. Dollar. We do not manage our foreign currency exposure in a manner that eliminates the effects of changes in foreign exchange rates on its net sales, cash flows or the reported amount of its assets and liabilities. Therefore, our financial performance is positively or negatively impacted by changes in foreign exchange rates in any given reporting period. For most currencies, we are a net receiver of the foreign currency and therefore benefits from a weaker U.S. Dollar and are adversely affected by a stronger U.S. Dollar relative to the foreign currency.

 

 

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For both the Successor 2013 Period and the Predecessor 2013 Periods, net sales were negatively impacted as the U.S. Dollar strengthened against the Brazil Real, British Pound Sterling and Euro when compared to 2012. However, the absolute impact on the combined Successor and Predecessor 2013 net sales was not material.

 

For the year ended December 31, 2012, net sales were negatively impacted as the U.S. Dollar strengthened against the Brazil Real, British Pound Sterling and Euro when compared to 2011. However, the absolute impact on 2012 net sales was not material.

 

Factors Affecting Comparability of Results of Operations

 

  The MacDermid Acquisition

 

The MacDermid Acquisition was accounted for using the acquisition method of accounting, or “acquisition accounting”, in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 805, Business Combinations. Acquisition accounting provides a period of up to one year to obtain the information necessary to finalize the fair value of all assets acquired and liabilities assumed at October 31, 2013.  As of December 31, 2013, we have recorded preliminary acquisition accounting allocations. Acquisition accounting resulted in certain items that affect the comparability of the results of operations between us and our Predecessor, including changes in asset carrying values (and related depreciation and amortization), and expenses related to assumption of the debt that financed the MacDermid Acquisition that were capitalized and amortized as interest expense. See Note 1 of the accompanying audited consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” describing the preliminary allocation of consideration to the net tangible and intangible assets acquired and liabilities assumed.

 

In connection with the MacDermid Acquisition, fees and expenses related to the MacDermid Acquisition totaled $41.4 million ($15.2 million in the Successor 2013 Period and $26.2 million in the Predecessor 2013 Period), including $32.1 million ($15.2 million in the Successor 2013 Period and $16.9 million in the Predecessor 2013 Period) consisting principally of professional fees and deemed compensation expenses related to pre-acquisition share awards of $9.3 million (in the Predecessor 2013 Period) all of which are included as a component of our selling, technical, general and administrative expenses.

 

 

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Results of Operations

 

         The following table summarizes the results of operations for both the Successor 2013 Period and Predecessor 2013 Period:

 

		Period from
		Inception				January 1,
		(April 23, 2013)				2013
Statement of Operations Data:		through				through				Year Ended
(amounts in thousands)		December 31,				October 31,				December 31,
		2013				2013				2012				2011
		Successor				Predecessor				Predecessor				Predecessor
Net sales		$	118,239			$	627,712			$	731,220			$	728,773
Cost of sales			82,587				304,875				376,166				388,298
Gross profit			35,652				322,837				355,054				340,475
Operating expenses:
Selling, technical, general and administrative			54,521				207,554				214,614				260,665
Non-cash charge related to preferred stock dividend rights			172,006				-				-				-
Research and development			3,995				19,898				25,051				22,966
Restructuring			762				3,636				292				896
Total operating expenses			231,284				231,088				239,957				284,527
Operating (loss) profit			(195,632	)			91,749				115,097				55,948
Other income (expense):
Interest, net			(5,372	)			(45,929	)			(49,139	)			(54,054	)
Loss on extinguishment of debt			-				(18,788	)			-				-
Other (expense) income, net			(440	)			(557	)			4,981				9,412
			(5,812	)			(65,274	)			(44,158	)			(44,642	)
(Loss) income before income taxes, non-controlling
interest and accumulated payment-in-kind dividend
on cumulative preferred shares			(201,444	)			26,475				70,939				11,306
Income tax benefit (provision)			5,819				(12,961	)			(24,673	)			(9,953	)
Net (loss) income			(195,625	)			13,514				46,266				1,353
Net loss (income) attributable to the non-controlling
interest			1,403				(295	)			(289	)			(366	)
Net (loss) income attributable to Platform Specialty Products
Corporation			(194,222	)			13,219				45,977				987
Accrued payment-in-kind dividend on cumulative
preferred shares			-				(22,454	)			(44,605	)			(40,847	)
Net (loss) income attributable to common shares		$	(194,222	)		$	(9,235	)		$	1,372			$	(39,860	)

 

Successor 2013 Period (April 23, 2013 to December 31, 2013)

 

Net Sales

 

Net sales for the Successor 2013 Period were approximately $118 million which were comprised of global sales from our Performance Materials and Graphic Solutions segments of $92.7 million and $25.6 million, respectively.  We believe that net sales of products that we have identified as new products, which represent opportunities to enter markets adjacent to those we currently serve, were $11.2 million for the Successor 2013 Period.  We not only periodically introduce new products to market, but also continuously modify our existing products, often at the request of, or in collaboration with, our customers. The impact of new product sales is a recurring factor to our results of operations.

 

For the Successor 2013 Period, net sales in the Americas were $42.7 million. In Europe and Asia, net sales were $41.0 million and $34.6 million, respectively, for the Successor 2013 Period.

 

Changes in our product mix and the average selling prices of products did not have a material impact on net sales for the Successor 2013 Period.

 

 

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Gross Profit

 

For the Successor 2013 Period, gross profit was $35.7 million and gross margin was 30.2%. The largest driver of the decrease in the gross margin as compared to the Predecessor periods was a $23.9 million charge to cost of sales for the recognition of two-thirds of the inventory step up in connection with the MacDermid Acquisition. Excluding this charge, our gross margin was 50.4%. Changes in the product mix and the average selling prices of products did not have a material impact on gross profit for the Successor 2013 Period.

 

Non-Cash Charges related to Preferred Stock Dividend Rights

 

Preferred stock issued by Platform has dividend rights that were triggered upon the successful close of an acquisition.  Beginning in 2014, if the average price of our Common Stock exceeds $11.50 per share for 10 consecutive trading days, which has occurred, the holders of the Preferred stock are entitled to a dividend in the form of ordinary shares.   The dividend amount is calculated at the end of each calendar year equal to 20% of the appreciation of the market price of our Common Stock (calculated as the average Common Stock price for the last ten days of the calendar year) compared to the initial offering price of $10.00 per ordinary share times the number of common shares issued in the initial offering (approximately 90.5 million shares). In subsequent years, the dividend amount will be calculated based on the appreciated Common Stock price compared to the highest Common Stock price previously used in calculating the dividend. Dividends are paid for the term the Preferred stock is outstanding. The Preferred shares will be automatically converted into shares of our Common Stock on a one for one basis (i) in the event of a change of control of Platform following an acquisition or (ii) upon the last day of the seventh full financial year following the completion of the MacDermid Acquisition, being December 31, 2020 (extendable by our Board of Directors for three additional years). Each Preferred share is convertible into one share of our Common Stock at the option of the holder until December 31, 2020 and has certain voting rights.  We recognized a non-cash charge related to the fair value of the preferred dividend rights of $172,006 upon the completion of the MacDermid Acquisition.  The fair value of the preferred dividend rights was measured based on significant inputs not observable in the market (Level 3 inputs).  Key assumptions included the fair value of our Common Stock and an assumption of volatility.  The fair value was calculated using a Monte-Carlo simulation.

   

Selling, Technical, General and Administrative Expense

 

Selling, technical, general and administrative expense was $54.5 million for the Successor 2013 Period. As a percentage of net sales, selling, technical, general and administrative expense was 46.1% for the Successor 2013 Period. Such expenses were higher than the Predecessor periods due primarily to acquisition-related charges of $15.2 million for professional fees in addition to incremental amortization expense on newly valued intangible assets.

 

Research and Development Expense

 

Research and development expense for the Successor 2013 Period was $4.0 million and was the result of additional investments made to support certain strategic projects. As a percentage of net sales, research and development expense was 3.4% for the Successor 2013 Period.

 

Operating Profit (Loss)

 

Operating losses for the Performance Materials segment and the Graphic Solutions segment for the Successor 2013 Period were approximately $(109) million and $(86.6) million, respectively. The operating losses were due to the segment allocation of adjustments recorded in connection with the MacDermid Acquisition.

 

Restructuring Expense

 

Restructuring expense for the Successor 2013 Period was $0.8 million and was comprised of several small restructuring initiatives in an effort to achieve cost savings.

 

Interest Expense, net

 

Interest expense, net for the Successor 2013 Period was $5.4 million and primarily represents interest, inclusive of amortization of deferred financing fees, on the first lien credit facility assumed in the MacDermid Acquisition of $5.5 million net of interest income.

 

Other (Expense) Income, net

 

Other expense for the Successor 2013 Period was $0.4 million due primarily to foreign exchange losses.

 

Income Tax (Benefit) Expense

 

For the Successor 2013 Period, we recorded an income tax benefit of $5.8 million. Our effective tax rate was 2.89% income tax benefit on pre-tax losses of $201.4 million.  The effective tax rate was negatively impacted by the non-deductible charge related to preferred stock dividend rights of $60.2 million and non-deductible transaction costs of $4.2 million.

 

 

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Predecessor 2013 Period (January 1, 2013 to October 31, 2013)

 

The following discussion and analysis compares (1) the operating results of the Predecessor for the period January 1, 2013 to October 31, 2013, which we refer to as the Predecessor 2013 Period, to the year ended December 31, 2012 and (2) the operating results for the years ended December 31, 2012 and 2011 to one another.

 

Net Sales

 

MacDermid’s net sales decreased in the Predecessor 2013 Period by approximately $104 million, or 14.2%, as compared to the annual 2012 period. The decrease in net sales is primarily attributable to comparing operating results for a ten month period to a period consisting of a full twelve months.   MacDermid believes that net sales of products that it has identified as new products, which represent opportunities to enter markets adjacent to those it currently serves, was $65.6 million for the Predecessor 2013 Period, compared to $66.7 million for the year ended December 31, 2012. MacDermid not only periodically introduces new products to market, but also continuously modifies its existing products, often at the request of, or in collaboration with, its customers. The impact of new product sales is a recurring factor to MacDermid’s results of operations.

 

Net sales in the Performance Materials segment decreased by $77.7 million, or 13.9%, as compared to the annual 2012 period. The decrease in net sales is primarily attributable to comparing operating results for a ten month period to one consisting of a full twelve months. Net sales in the Graphic Solutions segment decreased by $25.8 million, or 15.0%, as compared to the annual 2012 period. The decrease in net sales is primarily attributable to comparing operating results for a ten month period to a period consisting of a full 12 months.

For the Predecessor 2013 Period, net sales in the Americas were $237 million. In Europe and Asia, net sales were $214 million and $177 million, respectively, for the Predecessor 2013 Period.

 

Changes in the average selling prices of MacDermid products did not have a material impact on net sales for the Predecessor 2013 Period compared to the year ended December 31, 2012.

 

Gross Profit

 

Gross profit decreased in the Predecessor 2013 Period by $32.2 million, or 9.1%, as compared to the annual 2012 period.   The decrease in gross profit is primarily attributable to comparing operating results for a ten month period to a period consisting of a full twelve months. Despite lower gross profit, the g ross margin of 51.4% in the Predecessor 2013 Period represented an increase of 2 80 basis points as compared to the year ended December 31, 2012 period gross margin of 48.6% primarily due to favorable changes in product mix.

 

Selling, Technical, General and Administrative Expense

 

Selling, technical, general and administrative expense decreased in the Predecessor 2013 Period by $7.1 million, or 3.3%, as compared to the annual 2012 period.   The decrease in selling, technical, general and administrative is primarily attributable to comparing operating results for a ten month period to a period consisting of a full twelve months. As a percentage of net sales, selling, technical, general and administrative expense was 33.1% and 29.4% for the Predecessor 2013 Period and the year ended December 31, 2012, respectively. The Predecessor 2013 Period includes $16.9 million of acquisition-related costs primarily comprised of professional fees in addition to compensation expense of $9.3 million associated with recognition of legacy MacDermid Class C Junior shares representing 100% of expense for the vested shares due to the MacDermid Acquisition being sufficiently probable. Excluding these charges, selling, technical, general and administrative expense as a percentage of sales was 29.0%.

 

Research and Development Expense

 

Research and development expense decreased in the Predecessor 2013 Period by $5.2 million, or 20.6%, as compared to the annual 2012 period.   The decrease in research and development expense is primarily attributable to comparing operating results for a ten month period to a period consisting of a full twelve months. As a percentage of net sales, research and development expense was 3.2% and 3.4% for the Predecessor 2013 Period and the year ended December 31, 2012, respectively. The slight decrease is due to higher investments made to support certain strategic projects for the year ended December 31, 2012 that were non-recurring in the Predecessor 2013 Period.

 

 

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Operating Profit (Loss)

 

Operating profit for the Performance Materials segment in the Predecessor 2013 Period decreased by $8.5 million, or 10.4%, as compared to the year ended December 31, 2012. The decrease in operating profit is primarily attributable to the allocation of approximately $13.0 million of acquisition-related costs as previously discussed in addition to comparing operating results for a ten month period to one consisting of a full twelve months. Partially offsetting these decreases are increases from higher sales of offshore industry products and higher margins on industrial products sold in the United States and electronics industry products sold in Asia.

 

Operating profit for the Graphic Solutions segment in the Predecessor 2013 Period decreased by $14.8 million, or 45.0%, as compared to the annual 2012 period. The decrease in operating profit is primarily attributable to the allocation of approximately $13.0 million of acquisition-related costs as previously discussed in addition to comparing operating results for a ten month period to a period consisting of a full twelve months. Partially offsetting these decreases are increases in operating profit from higher net sales in the Americas and Europe, as discussed above, and the continued market share gains related to new and higher margin products.

 

Restructuring Expense

 

           Restructuring expense increased in the Predecessor 2013 Period by $3.3 million as compared to the year ended December 31, 2012.   The primary driver of the increase is due to $2.2 million of restructuring charges related to the elimination of certain positions in the Graphic Solutions segment in the Americas and $0.7 million related to the elimination of certain positions in the Performance Materials segment in Europe. MacDermid anticipates that these headcount reductions will have annual cash cost savings of approximately $3.4 million going forward. Actual cash cost savings to be realized depend on the timing of payments and many other factors, some of which are beyond MacDermid’s control, and could differ materially from its estimates. MacDermid anticipates recognizing the estimated cash cost savings once all payments have been finalized related to these restructuring initiatives.

 

Interest Expense, net

 

Interest expense, net decreased in the Predecessor 2013 Period by $3.2 million, or 6.5%, as compared to the annual 2012 period.   The decrease in interest expense is primarily attributable to comparing operating results for a ten month period to a period consisting of a full twelve months. Partially offsetting the favorable impact due to the lower number of months of operations included in each period were higher debt balances outstanding in the Predecessor 2013 Period.

 

Loss on Extinguishment of Debt

 

In the Predecessor 2013 Period, we recorded a loss of $18.8 million related to the refinancing of tranche B and tranche C term loans and senior subordinated notes. This amount consisted of $12.5 million of call premiums on the senior subordinated notes and $6.3 million of write-offs of deferred financing fees related to the extinguished debt.

 

Other (Expense) Income, net

 

The Predecessor 2013 Period included other expense, net of $0.6 million compared to other income, net of $5.0 million for the year ended December 31, 2012. The primary components of other expense, net in the Predecessor 2013 Period were foreign currency exchange losses of $1.4 million partially offset by a remeasurement gain of $1.1 million on Euro denominated debt, due to the fluctuation of the Euro compared to the U.S.Dollar. The primary components of other income, net for the year ended December 31, 2012 were a   remeasurement gain of $8.4 million on foreign currency denominated intercompany loans partially offset by a remeasurement loss of $2.7 million on Euro denominated debt and foreign exchange losses of $1.1 million.

 

Income Tax Expense

 

 Income tax expense was $13.0 million in the Predecessor 2013 Period compared to $24.7 million for the year ended December 31, 2012. For the Predecessor 2013 Period and the year ended December 31, 2012, MacDermid’s effective tax rate was 49.0% and 34.8%, respectively. The effective tax rate for the Predecessor 2013 Period was increased by non-deductible transaction costs of $1.9 million and an increase in the valuation allowance for federal, state and foreign net operating losses and tax credits of $3.6 million.  MacDermid is a U.S. based company with a statutory income tax rate of 35%. MacDermid operates in various foreign countries, which have tax rates that are different from the U.S. statutory tax rate. The effective tax rate for the period ended December 31, 2012 was impacted by the imposition of foreign taxes at different tax rates of ($11.6 million), an increase in uncertain tax positions of $5.7 million and an increase in the valuation allowance for federal, state and foreign net operating losses and tax credits of $6.9 million.

 

 

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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Net Sales

 

Net sales of approximately $731 million for the year ended December 31, 2012 increased by $2.4 million, or 0.3%, compared to the same period in 2011. Net sales for the year ended December 31, 2011 were negatively impacted by $18.6 million due to the increase in value of the U.S. Dollar during the year ended December 31, 2012 compared to the same period in 2011. MacDermid believes that net sales of products that it has identified as new products, which represent opportunities to enter markets adjacent to those it currently serves, were $66.7 million for the year ended December 31, 2012, compared to $56.0 million for the same period in 2011. MacDermid not only periodically introduces new products to market, but also continuously modifies its existing products, often at the request of, or in collaboration with, its customers. The impact of new product sales is a recurring factor to MacDermid’s results of operations.

 

The Performance Materials segment had lower net sales for the year ended December 31, 2012 of $9.1 million, or 1.6%, compared to the same period in 2011. This decrease was attributable to an increase of $17.2 million, or 25.2%, in net sales of offshore industry products due primarily to higher worldwide demand for offshore fluids, offset by a decrease of $15.3 million, or 4.5%, in net sales of industrial products due to a stronger U.S. Dollar against the Britain Pound Sterling and Euro, lower automotive sales in Brazil and Europe and a decrease of $10.9 million, or 6.8%, in net sales of electronics industry products primarily attributable to lower product sales in China during 2012. The Graphic Solutions segment had higher net sales for the year ended December 31, 2012 of $11.5 million, or 7.2%, compared to the same period in 2011 due to higher sales of new products and market share gains.

 

For the year ended December 31, 2012, net sales in the Performance Materials segment increased by $14.1 million, or 8.6%, in the Americas due to higher demand for offshore industry products as discussed above. In Asia, net sales in the Performance Materials segment decreased by $12.1 million, or 6.0%, for the year ended December 31, 2012 compared to the same period in 2011 due to lower sales in Japan as economic conditions in Japan caused lower consumer demand for electronics and MacDermid’s strategic decision in 2011 to cease selling low margin products in Asia negatively impacting sales in 2012. In Europe, net sales in the Performance Materials segment decreased by $11.1 million, or 5.5%, for the year ended December 31, 2012 compared to the same period in 2011 due to a stronger U.S. Dollar which increased by 1.1% against the British Pound Sterling and 7.7% against the Euro. Excluding the impact of the stronger U.S. dollar, the Performance Materials segment in Europe experienced modest growth from the year ended December 31, 2011 to the year ended December 31, 2012.

 

The Graphic Solutions segment in the Americas reported higher net sales levels for the year ended December 31, 2012 of $9.0 million, or 10.2%, compared to the same period in 2011 due to stronger customer demand for digital printing sheets and the introduction of new products. This increase primarily reflects a gain in market share as a result of customers switching to MacDermid’s LUX ® process. The Graphic Solutions segment in Europe had higher net sales for the year ended December 31, 2012 of $2.6 million, or 4.6%, compared to the same period in 2011 due to market share gains from new product sales. Changes in MacDermid’s product mix and the average selling prices of products did not have a material impact on net sales for the year ended December 31, 2012 compared to the same period in 2011.

 

Gross Profit

 

For the year ended December 31, 2012, gross profit increased $14.6 million, or 4.3%, compared to the same period in 2011 primarily attributable to MacDermid’s decision in 2011 to cease selling low margin products in Asia and higher sales levels of high margin products in 2012. Gross profit for the year ended December 31, 2011 was negatively impacted by $9.7 million due to the increase in value of the U.S. Dollar during the year ended December 31, 2012 compared to the same period in 2011. As a percentage of net sales, gross profit for the year ended December 31, 2012 was 48.6%, as compared to 46.7% for the same period in 2011. Changes in the product mix and the average selling prices of products did not have a material impact on gross profit for the year ended December 31, 2012 compared to the same period in 2011.

 

Selling, Technical, General and Administrative Expense

 

Selling, technical, general and administrative expense increased $1.9 million, or 1.0%, for the year ended December 31, 2012 compared to the same period in 2011 primarily as the result of higher selling expenses associated with higher sales and an increase in salary expenses. As a percentage of net sales, selling, technical, general and administrative expense was 25.6% for the year ended December 31, 2012, compared to 25.5% for the same period in 2011.

 

 

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Research and Development Expense

 

Research and development expense for the year ended December 31, 2012 increased $2.1 million, or 9.1%, from the same period in 2011 primarily due to additional investments made to support certain strategic projects. As a percentage of net sales, research and development expense was 3.4% for the year ended December 31, 2012, as compared to 3.2% for the same period in 2011, due to higher salary expense.

 

Restructuring Expense

 

During the year ended December 31, 2012, MacDermid recorded $0.3 million of restructuring expense primarily due to the elimination of certain positions in the Performance Materials segment in Europe. MacDermid anticipates that these headcount reductions will have annual cash savings of approximately $0.3 million going forward. The actual cash cost savings to be realized depend on the timing of payments and many other factors, some of which are beyond MacDermid’s control, and could differ materially from our estimates.

 

During the year ended December 31, 2011, MacDermid recorded $0.9 million of operational restructuring expense primarily due to the elimination of certain positions in the Performance Materials segment in Europe

 

Impairment Charges

 

During 2011, MacDermid recorded $46.4 million of impairment charges related to a write down of certain customer list intangible assets in the Performance Materials segment in Asia to their estimated fair values. MacDermid concluded that certain indicators were present suggesting a potential impairment of certain customer list intangible assets of the Performance Materials segment in Asia. The indicators of this potential impairment included:

·

Recent reductions in gross profit margins of certain products;

 

·

Increases in raw material prices used in manufacturing process that were difficult to pass along to customers;

 

·

Increased pricing pressure for certain products from competitors; and

 

·

Customers’ reluctance to accept product price increases and MacDermid’s reluctance to continue selling certain products, which require technical support, at low margin levels.

 

Based upon the above indicators, MacDermid evaluated these customer list intangible assets for potential impairment. In accordance with ASC 360, a long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that a long-lived asset (asset group) may not be recoverable. Under ASC 360, impairment is defined as the condition that exists when the carrying amounts of a long-lived asset (asset group) exceeds its fair value. MacDermid utilized an “income approach” method to test the Performance Materials Asia customer list intangible assets for impairment. In step one of the testing, MacDermid compared the carrying amounts of the Performance Materials Asia customer list intangible assets to the undiscounted cash flows expected to be generated from the use and eventual disposition of the customer list intangible assets over their remaining useful lives. Four of the customer lists passed the first step of the testing procedures, with significant headroom. Two of the customer lists failed the first step of the testing procedures; therefore, MacDermid performed the second step of impairment testing. In the second step of the testing procedures, the estimated fair value of the Performance Materials Asia customer list intangible assets was determined by estimating the after-tax cash flows attributable to the assets and then discounting these cash flows to a present value using a risk-adjusted discount rate. The cash flow model utilized in the customer list intangible asset impairment test involves significant judgments related to future growth rates, discount rates and tax rates, among other considerations. The step-two testing procedures indicated that the two customer lists that failed the first step of the testing were impaired because the carrying value of these assets exceeded their estimated fair value by $46.4 million.

 

Interest Expense, net

 

Interest expense for the year ended December 31, 2012 decreased by $4.9 million, or 9.0%, compared to the same period in 2011 due to lower outstanding debt balances.

 

Other (Expense) Income, net

 

Other income, net for the year ended December 31, 2012 was $5.0 million compared to the $9.4 million of other income, net recorded during the same period in 2011. For the year ended December 31, 2012, MacDermid recorded a net remeasurement gain of $5.7 million on foreign currency denominated debt partially offset by foreign exchange losses of $1.1 million. For the year ended December 31, 2011, MacDermid recorded a net remeasurement gain of $9.2 million on foreign currency denominated debt and a gain of $0.6 million on settled foreign currency hedges partially offset by foreign exchange of $0.2 million.

 

 

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Income Tax Expense

 

Income tax expense was $24.7 million in the year ended December 31, 2012 compared to $10 million for the year ended December 31, 2011.  For the year ended December 31, 2012, MacDermid’s effective tax rate was 34.8% compared to 88.0% for the same period in 2011. MacDermid is a U.S. based company with a statutory income tax rate of 35%.  MacDermid operates in various foreign countries, which have tax rates that are different from the U.S. statutory tax rate. The effective tax rate for the period ended December 31, 2012 was impacted by the imposition of foreign taxes at different tax rates of ($11.6 million), an increase in uncertain tax positions of $5.7 million and an increase in the valuation allowance for federal, state and foreign net operating losses and tax credits of $6.9 million.  The effective tax rate for the period ended December 31, 2011 was impacted an increase in the valuation allowance for federal, state and foreign net operating losses and tax credits of $6.7 million.

 

Segment Reporting

 

The following discussion breaks down MacDermid’s net sales and operating profit by operating segment for the year ended December 31, 2012 compared to the same period in 2011.

 

Performance Materials— Net sales decreased by $9.1 million, or 1.6%, for the year ended December 31, 2012 as compared to the same period in 2011, and were negatively impacted by $14.8 million due to the increase in value of the U.S. Dollar during the year ended December 31, 2012 compared to the same period in 2011. Our Americas operations experienced the highest net sales growth among the geographic regions in our Performance Materials segment for the year ended December 31, 2012 of $14.1 million, or 8.6%, due to an increase in our sales of offshore industry products. In Europe, our Performance Materials segment had lower sales of $11.1 million, or 5.5%, due to a stronger U.S. Dollar against the Euro and British Pound Sterling as discussed above. Our Performance Materials segment in Asia had lower sales of $12.1 million, or 6.0%, for the year ended December 31, 2012 compared to the year ended December 31, 2011 due to lower sales in China as a result of our strategic decision in 2011 to cease selling low margin products in Asia which negatively impacted sales in 2012 and the sale of our Australian and New Zealand industrial operations in 2011, which negatively impacted 2012 sales by approximately $6.8 million. Overall our sales of our offshore products increased by 25.5% from the year ended December 31, 2011 compared to same period in 2012 within our Performance Materials segment while our sales of our industrial and electronics products decreased by 4.5% and 6.8%, respectively, from the year ended December 31, 2011 compared to the same period in 2012 within our Performance Materials segment.

 

Operating profit for the Performance Materials segment for the year ended December 31, 2012 increased by $51.8 million, or 170.7%, as compared to the same period in 2011. This increase is primarily attributable to the $46.4 million of impairment charges related to a write down of certain customer list intangible assets in the Performance Materials segment in Asia recorded during the year ended December 31, 2011 and the decision in 2011 to cease selling low margin products in Asia. The Performance Materials segment operating profit was positively impacted by $2.3 million for the year ended December 31, 2012 due to the increase in value of the U.S. Dollar during the year ended December 31, 2012 compared to the same period in 2011.

 

		Year Ended
		December 31,
		2012				2011				Change
(amounts in thousands)		Predecessor				Predecessor
Performance Materials
Net sales		$	559,520			$	568,578				-1.6	%
Operating profit			82,101				30,331				170.7	%

 

Graphic Solutions— Net sales increased by $11.5 million, or 7.2%, for the year ended December 31, 2012 as compared to the same period in 2011, and were negatively impacted by $3.8 million due to the increase in value of the U.S. Dollar. The Graphic Solutions segment in the Americas reported higher net sales levels for the year ended December 31, 2012 of $9.0 million, or 10.2%, compared to the same period in 2011 due to stronger customer demand for digital printing sheets and the introduction of new products. This increase primarily reflects a gain in market share as a result of customers switching to MacDermid’s LUX ® process. The Graphic Solutions segment in Europe had higher net sales for the year ended December 31, 2012 of $2.6 million, or 4.6%, compared to the same period in 2011 due to market share gains from new product sales.

 

 

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Operating profit for the Graphic Solutions segment for the year ended December 31, 2012 was $7.4 million, or 28.8%, higher than the same period in 2011, an increase primarily due to the increase in net sales in the Graphic Solutions segment in the Americas and Europe, as discussed above, and the introduction of higher margin products in 2011 in those operations which carried into the full year of 2012. The Graphic Solutions segment operating profit for the year ended December 31, 2012 was negatively impacted by $1.1 million due to the increase in value of the U.S. Dollar during the year ended December 31, 2012 compared to the same period in 2011.

 

		Year Ended
		December 31,
		2012				2011				Change
(amounts in thousands)		Predecessor				Predecessor
Graphic Solutions
Net sales		$	171,700			$	160,195				7.2	%
Operating profit			32,996				25,617				28.8	%

 

Liquidity and Capital Resources

 

Our primary sources of liquidity in the Successor 2013 Period were cash raised from the initial equity offering, the warrant exchange and cash generated from operations. Our primary uses of cash and cash equivalents are raw material purchases, salary expense, capital expenditures and debt service obligations. We believe that our cash and cash equivalent balance and cash generated from operations will be sufficient to meet our working capital needs, capital expenditures and other business requirements for at least the next twelve months.  At December 31, 2013, we had $123 million in cash and cash equivalents.

 

Of our $123 million of cash and cash equivalents at December 31, 2013, $41.5 million was held by our foreign subsidiaries. The majority of the cash held by foreign subsidiaries is generally available for the ongoing needs of our operations. The laws of certain countries may limit our ability to utilize cash resources held in those countries for operations in other countries. However, these laws are not likely to impact our liquidity in any material way. The operations of each foreign subsidiary generally fund such subsidiary’s capital requirements. In the event that other foreign operations or operations within the United States require additional cash, we may transfer cash between and among subsidiaries as needed so long as such transfers are in accordance with law. As of December 31, 2013, we had the ability to repatriate $10.3 million of cash at our discretion from the foreign subsidiaries and branches while the remaining balance of $31.2 million was held at subsidiaries in which earnings are considered permanently reinvested.  Repatriation of some of these funds could be subject to delay and could have potential tax consequences, principally with respect to withholding taxes paid in foreign jurisdictions. If cash is repatriated from jurisdictions in which earnings are considered permanently reinvested we will be required to accrue and pay U.S. income taxes on such repatriations.

 

The following is a summary of our cash flows provided by (used in) operating, investing and financing activities during the periods indicated ($ in thousands):

 

		Period from Inception				January 1, 2013				Year Ended
		(April 23, 2013) to				through				December 31,
		December 31, 2013				Octobesr 31, 2013				2012				2011
(amounts in thousands)		Successor				Predecessor				Predecessor				Predecessor
Cash and cash equivalents, beginning of the period		$	-			$	143,351			$	113,452			$	106,740
Cash provided by operating activities			7,523				56,062				75,176				49,746
Cash used in investing activities			(920,231	)			(7,815	)			(18,277	)			(3,454	)
Cash provided by (used in) financing activities			1,035,656				(104,240	)			(27,232	)			(37,798	)
Exchange rate impact on cash and cash equivalents			92				(303	)			232				(1,782	)
Cash and cash equivalents, end of the period		$	123,040			$	87,055			$	143,351			$	113,452

 

 

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Successor 2013 Period (April 23, 2013 to December 31, 2013)

 

Operating Activities

 

During the Successor 2013 Period, we generated $7.5 million in cash from operating activities primarily due to the favorable changes in working capital of approximately $8.1 million.

 

Investing Activities

 

During the Successor 2013 Period, we used cash from investing activities of approximately $920 million primarily for the MacDermid Acquisition.

 

Financing Activities

 

During the Successor 2013 Period, we generated cash from financing activities of $1.04 billion from proceeds received from the issuance of common and preferred shares and warrants.

 

Predecessor 2013 Period (January 1, 2013 to October 31, 2013)

 

Operating Activities

 

During the Predecessor 2013 Period, we generated cash from operating activities of $56.1 million which was primarily comprised of net income of $13.5 million, depreciation and amortization of $32.8 million, and $18.8 million related to the loss on extinguishment of debt partially offset by unfavorable changes in working capital of $13.6 million.

 

Investing Activities

 

During the Predecessor 2013 Period, we used cash from investing activities of $7.8 million primarily for the purchase of capital expenditures of $8.9 million.

 

Financing Activities

 

During the Predecessor 2013 Period, we used cash from financing activities of approximately $104 million as borrowings of $1.10 billion (net of debt discounts of $5.5 million) were used primarily to (1) pay off tranche B and tranche C terms loans of approximately $380 million, (2) pay off  senior subordinated notes of approximately $355 million (inclusive of a call premium payment), (3) repurchase approximately $270 million of outstanding Series A preferred stock, (4) pay accumulated dividends on the Series A preferred stock of approximately $230 million and (5) pay $13.6 million of financing costs . Additionally, an advance of $33.3 million was sent by Platform Acquisition Holdings Limited and received by MacDermid prior to the acquisition.

 

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Operating Activities

 

  MacDermid generated cash flows from operating activities of $75.2 million for the year ended December 31, 2012, compared to $49.7 million for the same period in 2011. The increase in cash flow provided by operations, for the year ended December 31, 2012 was primarily attributable to an increase in earnings of $44.9 million, a decrease of $46.4 million in impairment charges, a $3.5 million increase in remeasurement charges on foreign currency denominated debt, an increase of deferred income taxes of $7.6 million primarily due to a change in the deferred tax balances associated with the Euro denominated debt and the $46.4 million of impairment charges related to a write down of customer list intangible assets, a decrease in accounts receivable of $4.5 million, an increase in accounts payable of $6.8 million attributable to higher inventory levels, a $9.1 million increase in accrued expenses due to higher bonus accruals and a $5.3 million increase in income tax balances due to recording higher income taxes payable based upon earnings.

 

We review accounts receivable on a consolidated basis on a business-by-business level. These quarterly reviews focus primarily on the seasonality and collectability of accounts receivable. As a result of these reviews, MacDermid determined that the composition of accounts receivable did not change in any material respect during (1) the Successor 2013 Period, (2) the Predecessor 2013 Period or (3) the year ended December 31, 2012 compared to the year ended December 31, 2011. MacDermid’s management uses days sales outstanding (“DSO”) to measure how efficiently MacDermid manages the billing and collection of accounts receivable. MacDermid calculates DSO by dividing the product of 360 and its accounts receivable balance by its annualized net sales. At December 31, 2013 and December 31, 2012, DSO was 73 days and 68 days, respectively.

 

 

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The primary components of MacDermid’s inventory are finished goods, raw materials and supplies and equipment. MacDermid reviews its inventories quarterly on a consolidated basis on a business-by-business level for obsolescence and excess quantities and to evaluate the appropriateness of the composition of its inventory at any given time. MacDermid’s management uses days in inventory (“DII”) to calculate its efficiency at realizing inventories. MacDermid calculates DII by dividing the product of 360 and its inventory balance, net of reserves, by its annualized cost of sales, excluding any intercompany sales. At December 31, 2013 and December 31, 2012, DII was 88 days (inclusive of finished goods step-up adjustment of $35.9 million and related recognition of two-thirds of the inventory step-up in the Successor 2013 Period of $23.9 million in connection with the MacDermid Acquisition) and 73 days, respectively. Its products generally have shelf lives that exceed one year.

 

Investing Activities

 

Net cash flows used in investing activities for the year ended December 31, 2012 was $18.3 million compared to $3.5 million for the same period in 2011. The decrease of $14.8 million was primarily attributable to $13.4 million of capital expenditures and $5.0 million related to the acquisition of a company in Brazil during the year ended December 31, 2012 compared to $3.3 million of proceeds from the sale of business units, $0.3 million of proceeds from the sale of assets, capital expenditures of $8.7 million, the purchase of equity securities of $0.8 million and the redemption of a certificate of deposit of $2.5 million during the year ended December 31, 2011.

 

Financing Activities

 

          Net cash flows used in financing activities for the year ended December 31, 2012 was $27.2 million compared to $37.8 million for the same period in 2011, a decrease of $10.6 million primarily due to $10.9 million in lower payments of long-term debt made during the year ended December 31, 2012 compared to the same period in 2011. The decrease in long-term debt payments was due to a $14.6 million mandatory excess cash flow payment based upon MacDermid’s 2011 operating results made during the first quarter of 2012, compared to a $24.2 million mandatory excess cash flow payment based upon MacDermid’s 2010 operating results made during the same time period in 2011. MacDermid also had a decrease in short term borrowings of $1.3 million for the year ended December 31, 2012 compared to the same period in 2011, offset by lower proceeds from capital leases of $1.1 million for the year ended December 31, 2012 compared to the same period in 2011.

 

Financial Borrowings

 

Credit Facilities

 

We are party to an amended and restated credit agreement consisting of (i) a $755 million first lien credit facility (which we refer to as our “first lien credit facility”) and (ii) a $50.0 million revolving credit facility (which we refer to as our “revolving credit facility”, and together with our first lien credit facility, our “credit facilities”).  A portion of our revolving credit facility not in excess of $15.0 million is available for the issuance of letters of credit.  As of December 31, 2013, we had approximately $751 million of indebtedness outstanding under our first lien credit facility and there were no borrowings under our revolving credit facility, other than stand-by letters of credit issued in the amount of $4.6 million which reduce the borrowings available under our revolving credit facility.  Our credit facilities contain various covenants, including limitations on additional indebtedness, dividends and other distributions, entry into new lines of business, use of loan proceeds, capital expenditures, restricted payments, restrictions on liens, transactions with affiliates, amendments to organizational documents, accounting changes, sale and leaseback transactions and dispositions. In addition, the revolving credit facility requires us to comply with certain financial covenants, including consolidated leverage and interest coverage ratios and limitations on capital expenditures if funding under the revolving credit facility exceeds $12.5 million at the end of any fiscal quarter. In June 2013, we entered into a $360 million second lien facility that was repaid in connection with the MacDermid Acquisition.

 

 

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Senior Subordinated Notes

 

On April 12, 2007, MacDermid issued $350 million of senior subordinated notes with a fixed interest rate of 9.50% at par. The senior subordinated notes were called and retired in the Predecessor 2013 Period.

 

Contractual Obligations and Commitments

 

We own most of our major manufacturing facilities, but we do lease certain office, manufacturing factories and warehouse space and land, as well as other equipment primarily under non-cancelable operating leases.

 

Summarized in the table below are our obligations and commitments to make future payments in connection with debt and minimum lease payment obligations (net of minimum sublease income) as of December 31, 2013:

 

		Payment Due by Period
																						2019 and
(amounts in thousands)		2014				2015				2016				2017				2018				Thereafter				Total
Debt obligations (including
short-term debt (1)		$	7,550			$	7,550			$	7,550			$	7,550			$	7,550			$	713,475			$	751,225
Capital lease obligations (2)			408				342				186				71				17				-				1,024
Operating leases (3)			7,449				4,970				3,625				2,900				2,482				17,295				38,721
Interest payments (4)			29,924				29,611				29,300				28,994				28,690				40,596				187,115
Redeemable 401(k) plan interest (5)			20,972				-				-				-				-				-				20,972
Long term contingent consideration (6)			-				-				-				-				-				100,000				100,000
Total cash contractual obligations		$	66,303			$	42,473			$	40,661			$	39,515			$	38,739			$	871,366			$	1,099,057

 

(1)	Reflects the principal payments on the credit facilities.

(2)	Excludes interest on capital lease obligations of $0.1 million at December 31, 2013.

(3)	Amounts are net of sublease income on operating leases of approximately $0.1 million in 2014 and $0.1 million in 2015.

(4)	Amounts are based on currently applicable interest rates in the case of variable interest rate debt.

(5)	Reflects payment to be made pursuant to the Exchange Agreement to the fiduciaries of the MacDermid Savings Plan.

(6)	Reflects the expected payout of 100% of the contingent purchase price relating to the MacDermid Acquisition in December 2020.

To the extent we can reliably determine when payments will occur pertaining to unrecognized tax benefit liabilities, the related amount will be included in the table above. However, due to the high degree of uncertainty regarding the timing of potential future cash flows associated with the $25.7 million of such liabilities at December 31, 2013, we are unable to make a reliable estimate of when (if at all) amounts may be paid to the respective taxing authorities.

 

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Off-Balance Sheet Transactions

 

We use customary off-balance sheet arrangements, such as operating leases and letters of credit, to finance our business. None of these arrangements has or is reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Significant Accounting Policies and Critical Estimates

 

Our significant accounting policies are more fully described in Note 1 to the audited consolidated financial statements. As disclosed in Note 1, the preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that impact the reported amounts and accompanying disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and also assumptions upon which accounting estimates are based. We apply judgment based on our understanding and analysis of the relevant circumstances to reach these decisions. By their nature, these judgments are subject to an inherent degree of uncertainty. Accordingly, actual results could differ significantly from the estimates applied.

 

Those areas requiring the greatest degree of management judgment or deemed most critical to our financial reporting involve:

 

Stock-based Compensation

 

We expense employee stock-based compensation over the requisite service period based on the estimated grant-date fair value of the awards and forfeiture rates, if any. Compensation cost is determined using the Black-Scholes option pricing model to estimate the fair value of the awards at the grant date. An offsetting increase to stockholders’ equity is recorded equal to the amount of the compensation expense charge. The assumptions used in calculating the fair value of stock-based awards represent our best estimates and involve inherent uncertainties and the application of judgment. The amount of the compensation expense is based on the estimated fair value of the awards of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. On May 17, 2013, we issued an aggregate of 250,000 options to our non-founder directors. The expense related to this issuance is included in stock-based compensation expense in the accompanying Statement of Operations.

 

Revenue Recognition – The Company recognizes revenue, including freight charged to customers, when the earnings process is complete.  This occurs when products are shipped to or received by the customer in accordance with the terms of the agreement, title and risk of loss have been transferred, collectability is probable and pricing is fixed or determinable.  Shipping terms are customarily “FOB shipping point” and do not include right of inspection or acceptance provisions.  Equipment sales arrangements may include right of inspection or acceptance provisions, in which case revenue is deferred until these provisions are satisfied.

 

Earnings per Share

 

Basic earnings (loss) per ordinary share excludes dilution and is computed by dividing net income (loss) by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per ordinary share reflect the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares or resulted in the issuance of ordinary shares that then shared in the earnings of the entity. Since we have only incurred losses, basic and diluted losses per share are the same. The amount of potentially dilutive securities excluded from the calculation at December 31, 2013 was 16,247,554 ordinary shares underlying 48,742,662 warrants, 2,000,000 preferred shares (convertible into ordinary shares on a one-for-one basis) and options to purchase 250,000 ordinary shares.

 

Fair Value Measurement

 

We record cash equivalents at fair value. Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures”, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:

 

Level 1—

Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2—

Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

 

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Level 3—

Unobservable inputs that reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability in which there is little, if any, market activity for the asset or liability  at the measurement date.

 

We used Level 1 fair value hierarchy assumptions to measure the fair value of all of our cash and cash equivalents as of December 31, 2013.

 

Goodwill

 

Goodwill is tested for impairment at the reporting unit level annually, or when events or changes in circumstances indicate that goodwill might be impaired. We test goodwill for impairment at our reporting unit level in accordance with ASC 350-20 “Intangibles—Goodwill and Other”. Our reporting units are determined based upon our organizational structure in place at that date of the goodwill impairment test. Our evaluation of potential impairment of goodwill did not change for the Successor 2013 Period, the Predecessor 2013 Period or the years ended December 31, 2012 and 2011. For goodwill, a two-step impairment test is performed at the reporting unit level. In the first step of impairment testing, the fair value of each reporting unit is compared to its carrying value. The fair value of each reporting unit is determined based on the present value of discounted future cash flows. The discounted cash flows are prepared based upon cash flows at the reporting unit level for the twelve months ended preceding the date of impairment testing. The cash flows utilized in goodwill impairment testing differ from actual consolidated cash flows due to exclusion of non-recurring charges. The cash flow model utilized in the goodwill impairment test involves significant judgments related to future growth rates, discount rates and tax rates, among other considerations. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to that reporting unit exceeds the fair value of that reporting unit, then the second step of the impairment test must be performed to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recorded equal to the difference. For the Predecessor annual impairment testing related to goodwill performed on April 1, 2011, 2012 and 2013, respectively, no reporting units had lower estimated fair values than carrying values in the first step of goodwill impairment evaluation; therefore no further testing was performed and no goodwill impairment charges were recorded. Platform will perform its annual goodwill assessment on October 1. There were no other events or changes in circumstances indicated that goodwill might be impaired.

 

As of April 1, 2013 and 2012, we had four reporting units that have been allocated goodwill. As of April 1, 2013, no reporting units had lower estimated fair values than carrying values in the first step of the goodwill impairment evaluation; therefore no further testing was performed and no goodwill impairment charges were recorded. As of April 1, 2013, the estimated fair value of all of the reporting units substantially exceeded their carrying value. The estimated discounted cash flows utilized in our April 1, 2013 goodwill impairment testing procedures were prepared based upon the cash flows at the reporting unit level for the 12 months preceding the date of the impairment testing. The cash flows utilized in the goodwill impairment testing differ from the actual consolidated cash flows due to exclusion of non-recurring charges utilized in the cash flows.

 

Indefinite-Lived Intangible Assets

 

Indefinite-lived intangible assets (including our tradenames) are reviewed for potential impairment on an annual basis when events or circumstances indicate that these indefinite-lived intangible assets may be impaired by comparing the estimated fair value of the indefinite-lived purchased intangible assets to the carrying value. An impairment charge is recognized when the estimated fair value of an indefinite-lived intangible asset is less than the carrying value. We use the “relief from royalty” method to test trade name intangible assets for impairment. The primary assumptions in these calculations are our net sales projections, growth rates and the weighted average cost of capital (“WACC”) that we apply to determine the present value of these cash flows. The WACC we utilize is based upon comparable industry averages. We then apply a royalty rate to the projected net sales. The royalty rate is based on market royalty rates and royalties we pay to outside parties. The resulting royalty savings are reduced by income taxes resulting from the annual royalty savings at a market participant corporate income tax rate to arrive at the after-tax royalty savings associated with owning the trade names. Finally, the present value of the estimated annual after-tax royalty savings for each year is used to estimate the fair value of the trade names. Assumptions concerning net sales are impacted by global and local economic conditions in the various markets we serve as well as uncertainties related to sales growth, economic growth, future product development and cost estimates.

 

 

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Long-Lived Assets Including Finite-Lived Intangible Assets

 

Finite-lived intangible assets such as developed technology and customer lists are amortized on a straight-line basis over their estimated useful lives, which are currently range between seven to ten years for developed technology and between eight and twenty years for customer lists. If circumstances require a long-lived asset group to be tested for possible impairment, we first determine whether the estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, based on comparable market values.

 

Income Taxes

 

We recognize deferred tax assets and liabilities based on the differences between the financial statement bases and the tax bases of assets, liabilities, net operating losses and tax credit carry-forwards. A valuation allowance is required to be recognized to reduce the recorded deferred tax asset to the amount that will more likely than not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income by jurisdiction during the periods in which those temporary differences become deductible or when carry-forwards can be utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable and tax planning strategies in this assessment. If these estimates and related assumptions change in the future, we may be required to record additional valuation allowances against our deferred tax assets resulting in additional income tax expense.  Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences and loss carryforwards are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.

 

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating its uncertain tax positions and determining its provision for income taxes. The first step in evaluating the tax position for recognition is to determine the amount of evidence that supports a favorable conclusion for the tax position upon audit. In order to recognize the tax position, we must determine whether it is more likely than not that the position is sustainable. The final requirement is to measure the tax benefit as the largest amount that has a more than 50% chance of being realized upon final settlement.

 

The Company accrues for non-income tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated.

 

Employee Benefits and Pension Obligations

 

Amounts recognized in our audited consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in such valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could be settled, rates of increase in future compensation levels, mortality rates. These assumptions are updated annually and are disclosed in Note 7 to our audited consolidated financial statements. In accordance with GAAP, actual results that differ from the assumptions are accumulated in other comprehensive income and amortized over future periods and, therefore, affect expense recognized.

 

We consider a number of factors in determining and selecting assumptions for the overall expected long-term rate of return on plan assets. We consider the historical long-term return experience of our assets, the current and expected allocation of our plan assets, and expected long-term rates of return. We derive these expected long-term rates of return with the assistance of our investment advisors. We base our expected allocation of plan assets on a diversified portfolio consisting of domestic and international equity securities, fixed income, real estate and alternative asset classes. The measurement date used to determine pension and other postretirement benefits is December 31, at which time the minimum contribution level for the following year is determined.

 

With respect to U.S. plans, our investment policies incorporate an asset allocation strategy that emphasizes the long-term growth of capital and acceptable asset volatility as long as it is consistent with the volatility of the relevant market indexes. The investment policies attempt to achieve a mix of approximately 75% of plan investments for long-term growth and 25% for near-term benefit payments. We believe this strategy is consistent with the long-term nature of plan liabilities and ultimate cash needs of the plans. Plan assets consist primarily of corporate bond mutual funds, limited partnership interests, listed stocks and cash. The corporate bond mutual funds held by the pension plan include primarily corporate bonds from companies from diversified industries located in the U.S. The listed stocks are investments in large-cap and mid-cap companies located in the U.S. The assets from the limited partnership investments primarily include listed stocks located in the U.S. The weighted average asset allocation of the MacDermid, Incorporated Employees’ Pension Plan (the “Pension Plan”) was 22% equity securities and managed equity funds, 65% limited partnership interests, 9% bond mutual fund holdings and 4% cash at December 31, 2013. Return on asset (“ROA”) assumptions are determined annually based on a review of the asset mix as well as individual ROA performances, benchmarked against indexes such as the S&P 500 Index and the Russell 2000 Index. In determining an assumed rate of return on plan assets, we consider past performance and economic forecasts for the types of investments held by the Pension Plan. The asset allocation strategy and ROA assumptions for the non-U.S. plans are determined based on similar set of criteria adapted for local investments, inflation rates and in certain cases specific government requirements.

 

 

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JOBS Act

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may, under Section 7(a)(2)(B) of the Securities Act, delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise apply to private companies. We may take advantage of this extended transition period until the first to occur of the date that we (i) are no longer an "emerging growth company" or (ii) affirmatively and irrevocably opt out of this extended transition period. We may elect to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date that we are no longer an “emerging growth company” or affirmatively and irrevocably opt out of the exemption provided by Section 7(a)(2)(B) of the Securities Act, upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard.

 

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (the “FASB”) issued ASU No.2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income ,” which adds additional disclosure requirements for items reclassified out of accumulated other comprehensive income. We adopted the amendments in this ASU effective January 1, 2013, and the initial adoption of the amendments in this ASU concerns presentation and disclosure only and did not have a significant impact on our audited consolidated financial statements.

 

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” which resolves diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investments in a foreign entity. In addition, the standard resolves diversity in practice for the treatment of business combinations achieved in stages involving a foreign entity. The guidance is effective prospectively for fiscal years and interim periods beginning after December 15, 2013. We do not anticipate the adoption of this new ASU to have a material impact on our audited consolidated financial statements.

 

In July 2013, the FASB also issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which requires standard presentation of an unrecognized tax benefit when a carryforward related to net operating losses or tax credits exist. The guidance is effective prospectively for fiscal years and interim periods beginning after December 15, 2013, with early adoption permitted. We adopted this new ASU in the period ended October 31, 2013. The adoption of this ASU did not have a material impact on our audited consolidated financial statements.

 

In July 2013, the FASB also issued ASU No. 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, (a Consensus of the FASB Emerging Issues Task Force),” which permits the use of the Fed Funds Effective Swap Rate (OIS) as an acceptable benchmark interest rate for hedge accounting purposes in addition to U.S. Treasury rates and the LIBOR swap rate. This ASU was effective upon issuance and should be applied prospectively for qualifying new or redesignated hedging relationships entered into. We do not anticipate the adoption of this new ASU to have a material impact on our audited consolidated financial statements.

 

 

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Information Regarding Forward-Looking Statements

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of Platform. Platform may from time to time make written or oral statements that are “forward-looking,” including statements contained in this Annual Report, other filings with the SEC and in reports to its stockholders. Such forward-looking statements include Platform’s adjusted earnings per share, expected or estimated revenue, the outlook for Platform’s markets and the demand for its products, estimated sales, segment earnings, net interest expense, income tax provision, restructuring and other charges, cash flows from operations, consistent profitable growth, free cash flow, future revenues and gross operating and adjusted EBITDA margin improvement requirement and expansion, organic net sales growth, bank debt covenants, the success of new product introductions, growth in costs and expenses, the impact of commodities and currencies and Platform’s ability to manage its risk in these areas, and the impact of acquisitions, divestitures, restructuring and other unusual items, including Platform’s ability to successfully complete as well as integrate and obtain the anticipated results and synergies from its consummated and future acquisitions. These statements are made on the basis of management’s views and assumptions as of the time the statements are made and Platform undertakes no obligation to update these statements. There can be no assurance, however, that its expectations will necessarily come to pass. Significant factors affecting these expectations are set forth in Part I, Item 1A.—Risk Factors of this Annual Report.

 

Item  7A. Quantitative and Qualitative Disclosures about Market Risk

 

Foreign Currency Risk

 

We conduct a significant portion of our business in currencies other than the U.S. Dollar, the currency in which our audited consolidated financial statements are reported. Generally, each of our operations utilizes the local currency of the operation as its functional currency—the currency in which it incurs operating expenses and collects accounts receivable. Our business is exposed to foreign currency risk primarily from changes in the exchange rate between the U.S. Dollar and the following currencies: the Euro, British Pound Sterling, Hong Kong Dollar, Chinese Yuan, Japanese Yen and Brazilian Real. As a result, our operating results could be affected by foreign currency exchange rate volatility relative to the U.S. Dollar.

 

Generally, we have not utilized foreign currency hedges to mitigate exchange rate changes between the U.S. Dollar and the foreign currencies of our operations other than with respect to the British Pound Sterling. However, approximately 25% of the net sales of our Autotype foreign subsidiary, which is based in the United Kingdom and utilizes the British Pound Sterling as its functional currency, are denominated in U.S. Dollars. For that reason, we utilize foreign currency hedges between the British Pound Sterling and the U.S. Dollar to help mitigate the risk of a stronger British Pound Sterling for our Autotype foreign subsidiary. To hedge against the risk of a stronger British Pound Sterling with respect to our Autotype foreign subsidiary, in 2013, 2012 and 2011, we contracted with a financial institution to deliver U.S. Dollars at a fixed British Pound Sterling rate and to receive British Pound Sterling in exchange for the U.S. Dollar. We did not pay up-front premiums to obtain the hedge. As of December 31, 2013, the aggregate U.S. Dollar notional amount of foreign currency forward contracts, designated as hedges, was $9.5 million. These contracts were all denominated in British Pound Sterling. The fair value of the foreign currency forward contract at December 31, 2013, was a $0.2 million current asset.

 

Our policies prohibit us from speculating in financial instruments for profit on exchange rate price fluctuations, from trading in currencies for which there are no underlying exposures, and from entering into trades for any currency to intentionally increase the underlying exposure.

 

Interest Rate Risk

 

We are also exposed to interest rate risk associated with our cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, long-term debt, and other financing commitments. At December 31, 2013, we had cash and cash equivalents of $123 million. At December 31, 2013, we had total debt of approximately $752 million including approximately $751 million of variable interest rate debt based on 1-month LIBOR. Our remaining variable interest rate debt is subject to interest rate risk, because its interest payments will fluctuate as the underlying interest rates change from market changes. A 100 basis point increase in LIBOR rates would result in a higher interest expense of approximately $1.3 million annually.

 

 

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Counterparty Risk

 

Outstanding financial derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements. The credit exposure related to these financial instruments is represented by the fair value of contracts with an obligation fair value as of December 31, 2013. On a periodic basis, we review the credit ratings of our counterparties and adjust our exposure as deemed appropriate. As of December 31, 2013, we believe that our exposure to counterparty risk is immaterial.

 

Item  8. Financial Statements and Supplementary Data

 

See “Index to Consolidated Financial Statements,” in this Annual Report.

 

Item  9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item  9A. Controls and Procedures

 

Disclosure Controls and Procedures - We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer, who is our principal executive officer (“CEO”), and Chief Financial Officer, who is our principal financial officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As of the end of the period covered by this Annual Report, with the supervision and participation of management, including our CEO and CFO, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Internal Control over Financial Reporting - This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of Platform’s registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.

 

In addition, we are an “emerging growth company,” as defined under the JOBS Act, and are subject to reduced public company reporting requirements. The JOBS Act provides that an emerging growth company is not required to have the effectiveness of such company's internal control over financial reporting audited by its external auditors for as long as such company is deemed to be an emerging growth company.

 

Changes to Internal Control Over Financial Reporting - There were no changes in our internal control over financial reporting during the period ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

Amended and Restated By-laws

 

On and effective as of March 26, 2014, our Board of Directors amended and restated Platform’s by-laws (the “Amended and Restated By-laws”) to provide in Article I, Section 1.7 that, at any meeting of stockholders, all elections, questions or matters presented to the stockholders at such meeting shall be decided by the affirmative vote of the holders of at least a majority of the votes cast at such meeting with respect to any such election, question or other matter presented to the stockholders (unless a different number or voting by class is required pursuant to an express provision of our certificate of incorporation, by-laws or the laws of the State of Delaware). Platform’s by-laws previously provided for the affirmative vote of the holders of at least a majority in voting power of the then outstanding shares of capital stock of Platform entitled to vote.

 

 

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On and effective as of March 26, 2014, our Board of Directors also amended and restated Platform’s by-laws to add a forum selection provision for the adjudication of certain disputes as Article VII, Section 7.7. The provision provides that unless Platform consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of Platform, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Platform to Platform or Platform's stockholders, (iii) any action asserting a claim arising pursuant to any provision of the General Corporation Law of Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the State of Delaware, in all cases subject to such court having personal jurisdiction over the indispensible parties named as defendants. The provision further provides that any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of Platform shall be deemed to have notice of and consented to the provisions of such Section 7.7.

 

The foregoing description of Platform’s Amended and Restated By-laws is qualified in its entirety by reference to, and should be read in conjunction with, the complete text of the Amended and Restated By-laws, a copy of which is filed herewith as Exhibit 3.2.

 

Code of Ethics for Senior Financial Officers

 

On March 26, 2014, our Board of Directors approved a Code of Ethics for Senior Financial Officers (the “Code of Ethics”), which is applicable to our CEO, CFO and principal accounting officer in addition to Platform’s Business Conduct and Ethics Policy, which is applicable to all directors and employees of Platform and its subsidiaries. The Code of Ethics   is located on our website at www.platformspecialtyproducts.com under “Investor Relations – Corporate Governance.” We intend to provide disclosure of any amendment to or waiver of our Code of Ethics on our website within four business days following the date of such amendment or waiver.

 

A copy of Platform’s Code of Ethics is filed herewith as Exhibit 14.1.

 

Director and Officer Indemnification Agreement

 

In connection with the approval from our Board of Directors, on October 31, 2013, of a form of Director and Officer Indemnification Agreement (the “Indemnification Agreement”) to be entered into between Platform and its directors and officers, Platform entered into an Indemnification Agreement with each of its current directors and executive officers. The Indemnification Agreement clarifies and supplements indemnification provisions already contained in Platform’s certificate of incorporation and by-laws, and generally provides that Platform shall indemnify each director and officer to the fullest extent permitted by Delaware law, subject to certain exceptions, against expenses, judgments, fines and other amounts actually and reasonably incurred in connection with their service as a director and/or officer of Platform. The Indemnification Agreement also includes rights to advancement of expenses and contribution.

 

The form of Indemnification Agreement was attached as Exhibit 10.12 to Platform’s Registration Statement on Form S-4, which was filed with the SEC on January 2, 2014.

Part III

 

Item  10.  Directors, Executive Officers and Corporate Governance

 

We maintain a Business Conduct and Ethics Policy (the “Policy”) applicable to all directors and employees of Platform and its subsidiaries. The Policy is located on our website at www.platformspecialtyproducts.com under “Investor Relations – Corporate Governance.” We intend to provide disclosure of any amendment to or waiver of our Policy on our website within four business days following the date of such amendment or waiver.

 

We also maintain a Code of Ethics for Senior Financial Officers (the “Code of Ethics”) applicable to our CEO, CFO and principal accounting officer. The Code of Ethics is located on our website at www.platformspecialtyproducts.com under “Investor Relations – Corporate Governance.” We intend to provide disclosure of any amendment to or waiver of our Code of Ethics on our website within four business days following the date of such amendment or waiver.

 

The remaining items required by Part III, Item 10 are incorporated herein by reference from Platform’s Proxy Statement for its 2014 annual meeting of stockholders. Platform intends to file its Proxy Statement no later than April 30, 2014.

 

 

48

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Item  11. Executive Compensation

 

The items required by Part III, Item 11 are incorporated herein by reference from Platform’s Proxy Statement for its 2014 annual meeting of stockholders. Platform intends to file its Proxy Statement with the SEC no later than April 30, 2014.

 

Item  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The Equity Compensation Plan Information table required by Item 201(d) of Regulation S-K and the remaining items required by Part III, Item 12 are incorporated herein by reference from Platform’s Proxy Statement for its 2014 annual meeting of stockholders. Platform intends to file its Proxy Statement with the SEC no later than April 30, 2014.

 

Item  13. Certain Relationships and Related Transactions, and Director Independence

 

The items required by Part III, Item 13 are incorporated herein by reference from Platform’s Proxy Statement for its 2014 annual meeting of stockholders. Platform intends to file its Proxy Statement with the SEC no later than April 30, 2014.

 

Item  14. Principal Accounting Fees and Services

 

The items required by Part III, Item 14 are incorporated herein by reference from Platform’s Proxy Statement for its 2014 annual meeting of stockholders. Platform intends to file its Proxy Statement with the SEC no later than April 30, 2014.

 

 

49

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Part IV

 

Item 15. Exhibits, Financial Statement Schedules

 

		Incorporated by Reference				Included in this Annual Report
Exhibit Nb.	Exhibit Description	Form	File Nb.	Exhibit Nb.	Filing Date
2.1	Business Combination Agreement And Plan Of Merger, dated as of October 10, 2013, by and among Platform Acquisition Holdings Limited, Platform Delaware Holdings, Inc., Platform Merger Sub, LLC, MacDermid Holdings, LLC, MacDermid, Incorporated, Tartan Holdings, LLC, and CSC Shareholder Services LLC as seller representative for the direct and indirect beneficial owners of the Company	S-4	333-192778	2.1	12/11/13
2.2	Exchange Agreement, dated as of October 25, 2013, by and between Platform Acquisition Holdings Limited and the MacDermid Incorporated Profit Sharing and Employee Savings Plan	S-4	333-192778	2.2	12/11/13
3.1	Certificate of Incorporation	S-4 POS	333-192778	3.1	01/24/14
3.2	Amended and Restated By-laws					X
4.1	Specimen Common Stock certificate	S-4	333-192778	4.1	01/02/14
4.2	Warrant Instrument, dated as of May 17, 2013, executed by Platform Acquisition Holdings Limited (form of Warrant contained in Schedule 1 thereto)	S-4	333-192778	4.2	01/02/14
4.3	Form of Supplement to Warrant Instrument	S-4	333-192778	4.3	01/02/14
10.1	Severance Agreement Letter, dated as of May 23, 2011, between MacDermid, Incorporated and Daniel H. Leever	S-4	333-192778	10.1	01/02/14
10.2	Severance Agreement Letter, dated as of January 7, 2003, between MacDermid, Incorporated and Frank J. Monteiro	S-4	333-192778	10.2	01/02/14
10.3	Severance Agreement Letter, dated as of July 22, 2002, between MacDermid, Incorporated and John L. Cordani	S-4	333-192778	10.3	01/02/14
10.4	Memorandum of Agreement, dated as of July 9, 2001, between MacDermid, Incorporated and John L. Cordani	S-4	333-192778	10.4	01/02/14
10.5	MacDermid, Incorporated Profit Sharing and Employee Savings Plan (as amended and restated generally effective January 1, 2010)	S-4	333-192778	10.5	12/11/13
10.6	MacDermid, Incorporated Employees’ Pension Plan (as amended and restated generally effective January 1, 2009)	S-4	333-192778	10.6	12/11/13
10.7	MacDermid, Incorporated Supplemental Executive Retirement Plan, effective April 1, 1994, as amended on February 25, 2005, and as further amended on July 11, 2013	S-4	333-192778	10.7	01/02/14
10.8	Second Amendment to MacDermid, Incorporated Employees’ Pension Plan, 2009 Restatement	S-4	333-192778	10.8	01/02/14
10.9	Amendment No. 1 to MacDermid, Incorporated Supplemental Executive Retirement Plan (as Previously Amended and Restated)	S-4	333-192778	10.9	01/02/14

 

 

50

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Exhibit Nb.	Exhibit Description	Form	File Nb.	Exhibit Nb.	Filing Date	Included in this Annual Report
10.10	Platform Specialty Products Corporation Amended and Restated 2013 Incentive Compensation Plan	S-8	333-194012	10.1	02/18/14
10.11	Form of Restricted Stock Agreement – Platform Specialty Products Corporation Equity Incentive Plan	S-4	333-192778	10.11	01/02/14
10.12	Form of Director and Officer Indemnification Agreement	S-4	333-192778	10.12	01/02/14
10.13	Amended and Restated Credit Agreement, dated as of October 31, 2013, among, inter alia, Platform Acquisition Holding Limited, MacDermid Holdings, LLC, Matrix Acquisition Corp., MacDermid, Incorporated (as successor to Matrix Acquisition Corp., the borrower), the subsidiaries of the borrower from time to time parties thereto, the lenders from time to time parties thereto and Credit Suisse AG, as administrative agent and as collateral agent	S-4	333-192778	10.13	01/02/14
10.14	Form of Retaining Holder Securityholders Agreement	S-4	333-192778	10.14	01/02/14
10.15	Advisory Services Agreement, dated October 31, 2013, by and between Platform Specialty Products Corporation and Mariposa Capital, LLC	S-4	333-192778	10.15	01/02/14
10.16	Letter Agreement with respect to Supplemental Executive Retirement Plan payment, dated as of October 29, 2013, between Platform Acquisition Holdings Limited and Daniel H. Leever	S-4	333-192778	10.16	01/02/14
10.17	Security Holder’s Agreement dated as of November 7, 2013	S-4	333-192778	10.17	01/02/14
10.18	Placing Agreement, dated May 17, 2013, by and between Platform Acquisition Holdings Limited, certain of its Directors, Berggruen Acquisition Holdings IV Ltd., Mariposa Acquisition, LLC, and Barclays Bank and Citigroup Global Markets Limited as placing banks	S-4	333-192778	10.18	01/02/14
10.19	Form of Option Deeds	S-4	333-192778	10.19	01/02/14
10.20	Form of Interest Notice	S-4	333-192778	10.20	01/15/14
10.21	Third Amendment to Amended and Restated MacDermid, Incorporated Employees’ Pension Plan	S-4	333-192778	10.21	01/02/14
10.22	Form of Non-Qualified Stock Option Agreement – Platform Specialty Products Corporation Equity Incentive Plan	S-4	333-192778	10.22	01/02/14
10.23	Form of Incentive Stock Option Agreement – Platform Specialty Products Corporation Equity Incentive Plan	S-4	333-192778	10.23	01/02/14
10.24	Irrevocable Election	S-4	333-192778	10.24	01/17/14
10.25	Amended and Restated Pledge and Security Agreement, amended and restated as of October 31, 2013					X
14.1	Code of Ethics for Senior Financial Officers					X
21.1	List of subsidiaries					X
23.1	Consent of PricewaterhouseCoopers LLP					X
23.2	Consent of KPMG LLP					X
24.1	Power of Attorney					X
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X

 

 

 

51

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

			PLATFORM SPECIALTY PRODUCTS CORPORATION
			By:	/s/ Frank J. Monteiro
				Name: Frank J. Monteiro
				Title: Senior Vice President and Chief Financial Officer
			Date:	March 31, 2014

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature		Title		Date
/s/ Daniel H. Leever		Chief Executive Officer, President and Vice Chairman		March 31, 2014
Daniel H. Leever		(Principal executive officer)
/s/ Frank J. Monteiro		Senior Vice President and Chief Financial Officer		March 31, 2014
Frank J. Monteiro		(Principal financial officer and principal accounting officer)
/s/ Martin E. Franklin		Chairman of the Board		March 31, 2014
Martin E. Franklin
/s/ Ian G.H. Ashken		Director		March 31, 2014
Ian G. H. Ashken
/s/ Nicolas Berggruen		Director		March 31, 2014
Nicolas Berggruen
/s/ Michael F. Goss		Director		March 31, 2014
Michael F. Goss
/s/ Ryan Israel		Director		March 31, 2014
Ryan Israel
/s / E. Stanley O’Neal		Director		March 31, 2014
E. Stanley O’Neal

 

 

 

52

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Index to Consolidated Financial Statements		Page
Report of Independent Registered Public Accounting Firm – Successor
Report of Independent Registered Public Accounting Firm – Predecessor
Consolidated Financial Statements
Consolidated Statements of Operations		F-1
Consolidated Statements of Comprehensive Income		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Cash Flows		F-4
Consolidated Statements of Changes in Stockholders’ Equity		F-5 to F-6
Notes to Consolidated Financial Statements		F-7 to F-50
Financial Statement Schedule:
Schedule II  - Valuation and Qualifying Accounts and Reserves

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders’

of Platform Specialty Products Corporation:

In our opinion, the accompanying consolidated balance sheet as of December 31, 2013 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the period from inception (April 23, 2013) to December 31, 2013 present fairly, in all material respects, the financial position of Platform Specialty Products Corporation and its subsidiaries at December 31, 2013, and the results of their operations and their cash flows for the period from inception (April 23, 2013) to December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Stamford, Connecticut

March 31, 2014

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

MacDermid, Incorporated:

 

We have audited the accompanying consolidated balance sheet of MacDermid, Incorporated and subsidiaries (the “Company”) as of December 31, 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the ten-month period ended October 31, 2013 and each of the years in the two-year period ended December 31, 2012. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule a s of and for the ten-month period ended October 31, 2013 and as of and for each of the years in the two-year period ended December 31, 2012 .  These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MacDermid, Incorporated and subsidiaries as of December 31, 2012, and the results of their operations and their cash flows for the ten-month period ended October 31, 2013 and each of the years in the two-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.  Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material aspects, the information set forth therein.

 

 

/s/ KPMG LLP

 

Hartford, Connecticut

February 11, 2014

 

 

 

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PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

		Period from
		Inception				January 1,
		(April 23, 2013)				2013
		through				through				Year Ended
		December 31,				October 31,				December 31,
		2013				2013				2012				2011
		Successor				Predecessor				Predecessor				Predecessor
Net sales		$	118,239			$	627,712			$	731,220			$	728,773
Cost of sales			82,587				304,875				376,166				388,298
Gross profit			35,652				322,837				355,054				340,475
Operating expenses:
Selling, technical, general and administrative			54,521				207,554				214,614				260,665
Non-cash charge related to preferred stock dividend rights			172,006				-				-				-
Research and development			3,995				19,898				25,051				22,966
Restructuring			762				3,636				292				896
Total operating expenses			231,284				231,088				239,957				284,527
Operating (loss) profit			(195,632	)			91,749				115,097				55,948
Other (expense) income:
Interest, net			(5,372	)			(45,929	)			(49,139	)			(54,054	)
Loss on extinguishment of debt			-				(18,788	)			-				-
Other (expense) income, net			(440	)			(557	)			4,981				9,412
			(5,812	)			(65,274	)			(44,158	)			(44,642	)
(Loss) income before income taxes, non-controlling
interests and accrued payment-in-kind dividends on
cumulative preferred shares			(201,444	)			26,475				70,939				11,306
Income tax benefit (provision)			5,819				(12,961	)			(24,673	)			(9,953	)
Net (loss) income			(195,625	)			13,514				46,266				1,353
Net loss (income) attributable to the non-controlling
interests			1,403				(295	)			(289	)			(366	)
Net (loss) income attributable to Common
Shareholders			(194,222	)			13,219				45,977				987
Accrued payment-in-kind dividend on cumulative
preferred shares			-				(22,454	)			(44,605	)			(40,847	)
Net (loss) income attributable to common shares		$	(194,222	)		$	(9,235	)		$	1,372			$	(39,860	)
Earnings (loss) per share
Basic		$	(2.10	)			n/a				n/a				n/a
Diluted		$	(2.10	)			n/a				n/a				n/a
Weighted average shares outstanding (In thousands)
Basic			92,563				n/a				n/a				n/a
Diluted			92,563				n/a				n/a				n/a

PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

		Period from
		Inception				January 1,
		(April 23, 2013)				2013
		through				through				Year Ended
		December 31,				October 31,				December 31,
		2013				2013				2012				2011
		Successor				Predecessor				Predecessor				Predecessor
Net (loss) income		$	(195,625	)		$	13,514			$	46,266			$	1,353
Other comprehensive (loss) income, before tax
Foreign currency translation adjustments			12,855				(6,136	)			(6,232	)			(5,683	)
Pension and postretirement plans			3,534				30,716				(16,653	)			(22,691	)
Unrealized gain (loss) on available for sale securities			65				223				290				(153	)
Derivative financial instruments revaluation			163				(384	)			3,047				3,485
Total other comprehensive (loss) income, before tax			16,617				24,419				(19,548	)			(25,042	)
Income tax (expense) benefit on comprehensive (loss) income			(1,838	)			(10,082	)			4,247				6,085
Other comprehensive income (loss), net of tax			14,779				14,337				(15,301	)			(18,957	)
Comprehensive loss (income) attributable to the non-controlling interests			1,403				(292	)			(299	)			(366	)
Comprehensive (loss) income attributable to Common Shareholders		$	(179,443	)		$	27,559			$	30,666			$	(17,970	)

PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

		As of December 31,
		2013				2012
		Successor				Predecessor
Assets
Cash & cash equivalents		$	123,040			$	143,351
Accounts receivable, net of allowance for doubtful accounts of $10,113
and $8,831 at December 31, 2013 and 2012, respectively			140,525				138,970
Inventories			89,618				76,093
Prepaid expenses & other current assets			30,056				16,115
Total current assets			383,239				374,529
Property, plant & equipment, net			139,670				100,391
Goodwill			1,002,886				476,232
Intangible assets, net			683,004				251,772
Other assets			33,089				30,993
Total assets			2,241,888				1,233,917
Liabilities & Stockholders' Equity
Accounts payable			56,156				53,416
Accrued salaries, wages and employee benefits			22,656				14,289
Accrued interest			143				6,985
Current installments of long-term debt			7,958				26,819
Accrued income taxes payable			6,610				4,443
Accrued expenses and other current liabilities			25,897				22,194
Total current liabilities			119,420				128,146
Long-term debt			744,291				693,821
Long-term retirement benefits, less current portion			25,129				54,207
Long-term deferred income taxes			138,273				49,411
Long-term contingent consideration			34,800				-
Other long-term liabilities			30,387				35,895
Total liabilities			1,092,300				961,480
Commitments and contingencies (Note 16)			-				-
Redeemable 401(k) plan interest			20,972				-
Stockholders' Equity
Successor preferred shares (2,000,000 designated as Series A), 5,000,000 shares authorized, 2,000,000 shares issued and outstanding at December 31, 2013			-				-
Predecessor 9.00% cumulative Series A preferred shares, 316,000 shares authorized and issued, 315,144 shares outstanding at  December 31, 2012			-				525,027
Predecessor 9.50% cumulative Series B preferred shares, 44,977 shares authorized and 0 shares outstanding at December 31, 2012			-				-
Successor common shares, 200,000,000 shares authorized, 103,571,941 shares issued and outstanding at December 31, 2013			-				-
Predecessor common shares, 50,000,000 shares authorized and  issued, 49,582,936 shares outstanding at December 31, 2012			-				50,000
Additional paid-in capital			1,212,038				2,318
Accumulated deficit			(194,222	)			(273,086	)
Accumulated other comprehensive income (loss)			14,779				(30,270	)
Less: Treasury stock, at stock (856 Predecessor 9% Series A cumulative preferred shares and 417,064 Predecessor common shares at December  31, 2012)			-				(1,264	)
Total stockholders equity			1,032,595				272,725
Non-controlling interests			96,021				(288	)
Total equity			1,128,616				272,437
Total liabilities, redeemable 401(k) plan interest and stockholders equity		$	2,241,888			$	1,233,917

PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		Period from
		Inception				January 1,
		(April 23, 2013)				2013
		through				through				Year Ended
		December 31,				October 31,				December 31,
		2013				2013				2012				2011
		Successor				Predecessor				Predecessor				Predecessor
Cash flows from operating activities:
Net (loss) income		$	(195,625	)		$	13,514			$	46,266			$	1,353
Adjustments to reconcile net (loss) income from operations
to net cash flows provided by operating activities:
Non-cash charge related to preferred stock dividend rights			172,006				-				-				-
Depreciation and amortization			12,778				32,835				42,193				46,745
Deferred income taxes			(7,481	)			(4,845	)			(8,364	)			(16,010	)
Manufacturer's profit in inventory adjustment			23,912				-				-				-
Loss on extinguishment of debt			-				18,788				-				-
Equity compensation expense			542				9,317				162				727
Impairment charges			-				427				-				46,438
Other, net			(523	)			6,754				335				(877	)
Changes in assets & liabilities, net of acquisitions:
Accounts receivable			6,222				(11,345	)			(4,912	)			(401	)
Inventory			2,090				(4,612	)			789				1,481
Accounts payable			(193	)			2,367				3,274				(3,498	)
Accrued expenses			(8,719	)			3,915				(3,603	)			(12,743	)
Income tax balances			(1,321	)			(8,231	)			3,315				(2,011	)
Long term assets			(419	)			(2,243	)			(1,550	)			(10,977	)
Other assets and liabilities			4,254				(579	)			(2,729	)			(481	)
Net cash flows provided by operating activities			7,523				56,062				75,176				49,746
Cash flows from investing activities:
Capital expenditures			(2,263	)			(8,931	)			(13,399	)			(8,741	)
Proceeds from sale of non-financial assets			4,393				2,133				140				3,528
Acquisition of business, net of cash acquired			(922,361	)			-				(5,059	)			-
Purchases of marketable securities			(359,934	)			-				-				-
Redemption of marketable securities			359,934				-				-				-
Other, net			-				(1,017	)			41				1,759
Net cash flows used in investing activities			(920,231	)			(7,815	)			(18,277	)			(3,454	)
Cash flows from financing activities:
Proceeds from issuance of debt, net of discount and fees			200				1,109,513				-				-
Repayments of borrowings			(2,180	)			(732,873	)			(26,092	)			(36,983	)
Repurchase of Series A preferred stock			-				(270,167	)			-				-
Advance from Platform Acquisition Holdings Limited			-				33,268				-				-
Proceeds from issuance of preferred stock, net			20,000				-				-				-
Proceeds from issuance of common stock, net			1,019,491				-				-				-
Payment of accumulated dividends on Series A preferred stock			-				(229,833	)			-				-
Payment of financing fees			(1,830	)			(13,589	)			(321	)			(264	)
Other, net			(25	)			(559	)			(819	)			(551	)
Net cash flows provided by (used in) financing activities			1,035,656				(104,240	)			(27,232	)			(37,798	)
Effect of exchange rate changes on cash and cash equivalents			92				(303	)			232				(1,782	)
Net increase (decrease) in cash and cash equivalents			123,040				(56,296	)			29,899				6,712
Cash and cash equivalents at beginning of period			-				143,351				113,452				106,740
Cash and cash equivalents at end of period		$	123,040			$	87,055			$	143,351			$	113,452
Supplemental disclosure information:
Cash paid for interest		$	5,084			$	49,958			$	45,235			$	50,040
Cash paid for income taxes		$	2,932			$	21,808			$	27,144			$	25,878
Non-cash financing activities:
Cash paid by Platform Acquisition Holdings, Ltd for interest		$	-			$	5,028			$	-			$	-

PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share and per share amounts)

Predecessor
		Series A Preferred Shares				Series B Preferred Shares				Common Shares				Additional Paid-In Capital				Accumulated deficit				Accumulated other comprehensive income (loss)				Treasury Shares				Non-controlling interest				Total equity (deficit)
Balance at December 31, 2011		$	480,449			$	-			$	50,000			$	2,156			$	(274,458	)		$	(14,959	)		$	(994	)		$	(388	)		$	241,806
Net income			-				-				-				-				45,977				-				-				289				46,266
Equity compensation			-				-				-				162				-				-				-				-				162
Accrual of paid in kind dividend on cumulative preferred shares			44,605				-				-				-				(44,605	)			-				-				-				-
Foreign currency translation adjustments			-				-				-				-				-				(6,242	)			-				10				(6,232	)
Pension and postretirement plans, net of tax benefit of $5,415			-				-				-				-				-				(11,238	)			-				-				(11,238	)
Derivatives valuation, net of tax expense of $1,067			-				-				-				-				-				1,980				-				-				1,980
Shares repurchased			-				-				-				-				-				-				(270	)			-				(270	)
Unrealized gain on available for sale equity securities, net of tax expense of $101			-				-				-				-				-				189				-				-				189
Dividend paid to non-controlling interest partner			-				-				-				-				-				-				-				(677	)			(677	)
Dividend paid on preferred stock			(27	)			-				-				-				-				-				-				-				(27	)
Assignment of value for non controlling interest in business acquisition			-				-				-				-				-				-				-				447				447
Sale of noncontrolling interest in subsidiary			-				-				-				-				-				-				-				31				31
Balance at December 31, 2012			525,027				-				50,000				2,318				(273,086	)			(30,270	)			(1,264	)			(288	)			272,437
Net income			-				-				-				-				13,219				-				-				295				13,514
Equity compensation			-				-				-				281				-				-				-				-				281
Accrual of paid in kind dividend on cumulative preferred shares			20,805				1,649				-				-				(22,454	)			-				-				-				-
Foreign currency translation adjustments			-				-				-				-				-				(6,133	)			-				(3	)			(6,136	)
Pension and postretirement plans, net of tax expense of $10,139			-				-				-				-				-				20,577				-				-				20,577
Derivatives valuation, net of tax  benefit of $135			-				-				-				-				-				(249	)			-				-				(249	)
Unrealized loss on available for sale equity securities, net of tax expense of $79			-				-				-				-				-				145				-				-				145
Shares repurchased			(500,000	)							-				-				-				-				(35	)			-				(500,035	)
Shares exchanged			(44,977	)			44,977				-				-				-				-				-				-				-
Shares canceled			(855	)			-				(417	)			-				-				-				1,272				-				-
Dividend paid to non-controlling interest partner			-				-				-				-				-				-				-				(552	)			(552	)
Assignment of value for non controlling interest in business acquisition			-				-				-				-				-				-				-				17				17
Balance at October 31, 2013		$	-			$	46,626			$	49,583			$	2,599			$	(282,321	)		$	(15,930	)		$	(27	)		$	(531	)		$	(200,001	)

PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (continued)

(In thousands, except share and per share amounts)

Successor
		Preferred Stock								Common Stock
		Shares				Amount				Shares				Amount				Additional Paid-in Capital				Accumulated Deficit				Accumulated other comprehensive income (loss)								Non-controlling interest				Total equity
Total stockholders' equity as of April 23, 2013 (inception)			-			$	-				-			$	-			$	-			$	-			$	-			$	-			$	-			$	-
Issuance of 2 preferred shares @ $10.00 per share on April 25, 2013			2				-				-				-				-				-				-				-				-				-
Issuance of 1,999,998 preferred shares @ $10.00 per share with matching warrants on May 22, 2013 along with 2 matching warrants matching with previously issued preferred shares			1,999,998				-				-				-				20,000				-				-				20,000				-				20,000
Issuance of 88,529,500 common shares @ $10.00 per share with matching warrants on May 22, 2013			-				-				88,529,500				-				885,000				-				-				885,000				-				885,000
Equity offering cost			-				-				-				-				(24,078	)			-				-				(24,078	)			-				(24,078	)
Equity compensation			-				-				-				-				542				-				-				542				-				542
Exercise of warrants for 13,071,199 common shares @ $10.50 per share on October 30, 2013			-				-				13,071,199				-				137,248				-				-				137,248				-				137,248
Preferred stock dividend rights			-				-				-				-				172,006				-				-				172,006				-				172,006
Exercise of warrants for 391,081 common shares @ $10.50 on November 13, 2013			-				-				391,081				-				4,106				-				-				4,106				-				4,106
Issuance of 761,904 common shares @ $10.50 per share on November 13, 2013			-				-				761,904				-				8,000				-				-				8,000				-				8,000
Exchange of warrants for 466,666 common shares @ $11.50 per share on November 20, 2013			-				-				466,666				-				5,367				-				-				5,367				-				5,367
Issuance of 349,691 common shares @ $11.00 per share on December 23, 2013			-				-				349,691				-				3,847				-				-				3,847				-				3,847
Issuance of 1,900 common shares @ $11.00 per share on December 23, 2013 to an unrelated third party for services			-				-				1,900				-				-				-				-				-				-				-
Net loss			-				-				-				-				-				(194,222	)			-				(194,222	)			(1,403	)			(195,625	)
Foreign currency translation adjustments			-				-				-				-				-				-				12,855				12,855				16				12,871
Pension and postretirement plans, net of tax expense of $1,750			-				-				-				-				-				-				1,784				1,784				-				1,784
Derivatives valuation, net of tax expense of $63			-				-				-				-				-				-				100				100				-				100
Unrealized gain on available for sale equity securities, net of tax expense of $25			-				-				-				-				-				-				40				40				-				40
Dividend paid to non-controlling interest partner			-				-				-				-				-				-				-				-				(25	)			(25	)
Assignment of value for non controlling interest in business acquisition			-				-				-				-				-				-				-				-				97,433				97,433
Balance at December 31, 2013			2,000,000			$	-				103,571,941			$	-			$	1,212,038			$	(194,222	)		$	14,779			$	1,032,595			$	96,021			$	1,128,616

3.  INVENTORIES

 

The major components of inventory were as follows

 

		December 31, 2013				December 31, 2012
		Successor				Predecessor
Finished goods		$	58,360			$	46,820
Raw materials and supplies			29,870				27,657
Equipment			1,388				1,616
Total inventory, net		$	89,618			$	76,093

PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

4.  PROPERTY, PLANT AND EQUIPMENT

 

The major components of property, plant and equipment were as follows:

 

		December 31, 2013				December 31, 2012
		Successor				Predecessor
Land and leasehold improvements		$	31,246			$	22,370
Buildings and improvements			41,118				63,979
Machinery, equipment and fixtures			63,475				98,401
			135,839				184,750
Less: accumulated depreciation			(3,900	)			(89,118	)
			131,939				95,632
Construction in process			7,731				4,759
Property, plant and equipment, net		$	139,670			$	100,391

5.  GOODWILL AND INTANGIBLE ASSETS

 

The changes in the carrying amount of goodwill by segment are as follows:

 

		Performance Materials				Graphic Solutions				Total
Predecessor:
Balance, December 31, 2011		$	446,101			$	28,480			$	474,581
Addition from acquisitions			1,940				-				1,940
Foreign currency translation and other			(289	)			-				(289	)
Balance, December 31, 2012			447,752				28,480				476,232
Foreign currency translation and other			(4,436	)			-				(4,436	)
Balance, October 31, 2013		$	443,316			$	28,480			$	471,796
Successor:
Balance, April 23, 2013 (Inception)			-				-				-
Addition from acquisitions			766,994				226,825				993,819
Foreign currency translation and other			6,719				2,348				9,067
Balance, December 31, 2013		$	773,713			$	229,173			$	1,002,886

PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

The carrying value of indefinite-lived intangible assets other than goodwill was as follows:

 

		December 31, 2013				December 31, 2012
		Successor				Predecessor
Tradenames		$	73,400			$	58,417

		December 31, 2013												December 31, 2012
		Successor												Predecessor
		Gross Carrying Amount				Accumulated Amortization and Foreign Exchange				Net Book Value				Gross Carrying Amount				Accumulated Amortization and Foreign Exchange				Net Book Value
Customer lists		$	458,400			$	(2,290	)		$	456,110			$	276,480			$	(119,120	)		$	157,360
Developed technology			155,000				(1,506	)			153,494				83,760				(47,883	)			35,877
Other			-				-				-				376				(258	)			118
Total		$	613,400			$	(3,796	)		$	609,604			$	360,616			$	(167,261	)		$	193,355

A Shares:		A Shares				Weighted Average Grant Date Fair Value
Outstanding non-vested balance at December 31, 2012			18,598			$	1.00
Changes during the period:
Vesting			(12,598	)			1.00
Forfeited			(6,000	)			1.00
Granted			-				-
Nonvested balance at October 31, 2013			-			$	1.00

B Shares:		B Shares				Weighted Average Grant Date Fair Value
Nonvested balance at December 31, 2012			653,064			$	0.67
Changes during the period:
Forfeited			(8,000	)			0.67
Canceled			-				-
Vested			(645,064	)			0.67
Granted			-				-
Nonvested balance at October 31, 2013			-			$	0.67

		For the period from inception (April 23, 2013) through December 31, 2013								For the ten months ended October 31, 2013								For the year ended December 31, 2012								For the year ended December 31, 2011
		(Successor)								(Predecessor)								(Predecessor)								(Predecessor)
Pension & SERP Benefits:		Domestic				Foreign				Domestic				Foreign				Domestic				Foreign				Domestic				Foreign
Net periodic benefit expense:
Service cost		$	698			$	130			$	3,595			$	560			$	3,647			$	678			$	2,982			$	654
Interest cost on the projected benefit obligation			1,178				495				5,216				2,453				6,096				3,096				5,806				3,262
Expected return on plan assets			(1,576	)			(714	)			(6,632	)			(4,088	)			(7,330	)			(4,478	)			(7,104	)			(4,314	)
Amortization of prior service cost			-				-				77				-				93				-				54				-
Amortization of net loss			-				-				1,654				433				601				508				(54	)			90
Plan curtailments			(3,028	)			(2	)			-				-				-				68				-				-
Net periodic (benefit) cost		$	(2,728	)		$	(91	)		$	3,910			$	(642	)		$	3,107			$	(128	)		$	1,684			$	(308	)

 

		For the period from inception (April 23, 2013) through December 31, 2013								For the ten months ended October 31, 2013								For the year ended December 31, 2012								For the year ended December 31, 2011
		(Successor)								(Predecessor)								(Predecessor)								(Predecessor)
Postretirement Benefits:		Domestic				Foreign				Domestic				Foreign				Domestic				Foreign				Domestic				Foreign
Net periodic benefit expense:
Service cost		$	11			$	5			$	60			$	35			$	65			$	-			$	99			$	-
Interest cost on the projected benefit obligation			54				6				243				31				305				-				398				-
Amortization of prior service cost			-				-				(117	)			24				(140	)			-				-				-
Net periodic cost (benefit)		$	65			$	11			$	186			$	90			$	230			$	-			$	497			$	-

		For the period from inception (April 23, 2013) through December 31, 2013
		(Successor)
		Pension								Postretirement Medical Benefits
		Domestic				Foreign				Domestic				Foreign				Total
Current year actuarial gain (loss)		$	5,655			$	(1,851	)		$	(71	)		$	46			$	3,779
Amortization of actuarial (loss) gain			-				(228	)			-				-				(228	)
Translation adjustment			-				(40	)			-				(1	)			(41	)
Total recognized in other comprehensive income (loss) (pre tax)		$	5,655			$	(2,119	)		$	(71	)		$	45			$	3,510

PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

 

		For the ten months ended October 31, 2013
		(Predecessor)
		Pension								Postretirement Medical Benefits
		Domestic				Foreign				Domestic				Foreign				Total
Current year actuarial (loss) gain		$	(22,877	)		$	(5,307	)		$	(171	)		$	(96	)		$	(28,451	)
Amortization of prior service cost			(77	)			-				118				(23	)			18
Amortization of actuarial (loss) gain			(1,654	)			(433	)			-				-				(2,087	)
Translation adjustment			-				(360	)			-				(19	)			(379	)
Total recognized in other comprehensive (loss) income  (pre tax)		$	(24,608	)		$	(6,100	)		$	(53	)		$	(138	)		$	(30,899	)

 

		For the year ended December 31, 2012
		(Predecessor)
		Pension								Postretirement Medical Benefits
		Domestic				Foreign				Domestic				Foreign				Total
Current year actuarial (loss) gain		$	(14,830	)		$	(1,792	)		$	(780	)		$	-			$	(17,402	)
Amortization of prior service cost			93				-				(139	)			(364	)			(410	)
Amortization of actuarial (loss) gain			601				576				-				-				1,177
Translation adjustment			-				(701	)			-				-				(701	)
Total recognized in other comprehensive (loss) income  (pre tax)		$	(14,136	)		$	(1,917	)		$	(919	)		$	(364	)		$	(17,336	)

		Pension and SERP Benefits
		December 31, 2013								December 31, 2012
		(Successor)								(Predecessor)
		Domestic				Foreign				Domestic				Foreign
Weighted average assumptions used to measure benefit obligations at measurement date:
Discount rate			5.2	%			4.2	%			4.4	%			4.2	%
Rate of compensation increase			4.0	%			3.3	%			4.0	%			3.4	%

 

Postretirement Medical Benefits

December 31, 2013

December 31, 2012

(Successor)

(Predecessor)

Domestic

Foreign

Domestic

Foreign

Weighted average assumptions used to measure benefit obligations at measurement date:

Discount rate

5.1

%

12.4

%

4.7

%

10.8

%

Rate of compensation increase

**

**

**

**

						Fair Value Measurements Using
		December 31, 2013				Quoted prices in active markets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)
		(Successor)
Asset Category
Domestic equities		$	19,124			$	19,124			$				$	-
Pooled funds holding global equity securities			10,945				-				10,945				-
Pooled funds holding global fixed income securities			71,166				-				71,166				-
Mutual funds holding U.S. Treasury Securities			11,762				11,762				-				-
Mutual funds holding domestic securities			4,399				4,399				-				-
Limited partnership interests (b)			82,355				-				82,355				-
Designated benefit fund (c)			1,464				-				1,464				-
Cash and cash equivalents			13,898				13,898				-				-
Total		$	215,113			$	49,183			$	165,930			$	-

		For the period from inception (April 23, 2013) through December 31, 2013				For the ten months ended October 31, 2013				For the year ended December 31, 2012
		(Successor)				(Predecessor)				(Predecessor)
Beginning balance		$	-			$	5,376			$	5,298
Acquisitions			5,424
Unrealized gains relating to instruments still held in the reporting period			115				293				342
Purchases			-				-				-
Sales			(5,539	)			(245	)			(264	)
Ending balance		$	-			$	5,424			$	5,376

Year End		Domestic				Foreign				Postretirement Benefits				Total
2014		$	4,514			$	3,254			$	398			$	8,166
2015			5,671				3,338				408				9,417
2016			5,188				3,448				408				9,044
2017			5,442				3,473				421				9,336
2018			5,796				3,537				430				9,763
Thereafter			39,154				18,859				2,028				60,041
Total		$	65,765			$	35,909			$	4,093			$	105,767

	For the period from inception (April 23, 2013) through December 31, 2013					For the ten months ended October 31, 2013				For the year ended December 31, 2012				For the year ended December 31, 2011
	(Successor)					(Predecessor)				(Predecessor)				(Predecessor)
Domestic (1) (2)		$	(7,949	)		$	(74,244	)		$	(36,846	)		$	(45,363	)
Foreign (1)			(193,495	)			100,719				107,785				56,669
Total		$	(201,444	)		$	26,475			$	70,939			$	11,306

		For the period from inception (April 23, 2013) through December 31, 2013				For the ten months ended October 31, 2013				For the year ended December 31, 2012				For the year ended December 31, 2011
		(Successor)				(Predecessor)				(Predecessor)				(Predecessor)
U.S. Federal Statutory tax rate			35.0	%			35.0	%			35.0	%			35.0	%
Taxes computed at U.S. statutory rate		$	(70,505	)		$	9,267			$	24,829			$	3,957
State income taxes, net of Federal benefit			389				(2,232	)			(459	)			(702	)
Preferred dividend valuation			60,202				-				-				-
Tax on foreign operations			396				805				(11,613	)			(1,469	)
Net change in reserve			(713	)			(76	)			5,724				(27	)
Change in valuation allowances			(880	)			3,635				6,915				6,674
Provision for tax on undistributed foreign earnings			752				(682	)			204				(260	)
Change of tax rate			-				(487	)			(1,054	)			(847	)
Foreign exchange impact on provision			-				54				100				1,193
Non-deductible Transaction Costs			4,234				1,901				-				-
Other, net			306				776				27				1,434
Income tax (benefit) expense		$	(5,819	)		$	12,961			$	24,673			$	9,953
Effective tax rate			2.89	%			48.95	%			34.78	%			88.02	%

		December 31, 2013				December 31, 2012
		(Successor)				(Predecessor)
Net current deferred tax asset		$	10,760			$	5,169
Net noncurrent deferred tax asset			2,209				1,812
			12,969				6,981
Net noncurrent deferred tax liability			138,273				49,411
Total net deferred tax liability		$	125,304			$	42,430

	For the period from inception (April 23, 2013) through December 31, 2013					For the ten months ended October 31, 2013				For the year ended December 31, 2012				For the year ended December 31, 2011
	(Successor)					(Predecessor)				(Predecessor)				(Predecessor)
Unrecognized tax benefits at beginning of period		$	-			$	22,759			$	18,833			$	22,502
Additions based on current year tax positions			328				837				2,308				3,716
Additions based upon prior year tax positions (including acquired uncertain tax positions)			26,349				283				1,748				(3,881	)
Reductions due to closed statutes			(1,024	)			(379	)			(130	)			-
Reductions for settlements and payments			-				-				-				(3,504	)
Total Unrecognized Tax benefits at end of period		$	25,653			$	23,500			$	22,759			$	18,833

9.  DEBT AND CAPITAL LEASES

 

The Company’s debt and capital lease obligations consisted of the following:

 

		December 31, 2013				December 31, 2012
		(Successor)				(Predecessor)
Borrowings under lines of credit		$	-			$	-
First lien secured credit facility, due 2020, interest at the greater of 4.00% or LIBOR plus 3.00%, weighted average interest rate of 4.00% at December 31, 2013			751,225				-
Senior secured credit facility, tranche B due 2014, LIBOR plus 2.00%, weighted average interest rate of 0% and 2.29%, respectively; Credit facility paid in full June 7, 2013			-				217,656
Senior secured credit facility, tranche C due 2014, EURIBOR plus 2.25%, weighted average interest rate of 0% and 2.64%, respectively; credit facility paid in full June 7, 2013			-				147,337
Called senior subordinated notes due 2017, 9.5% interest rate; notes paid in full July 8, 2013			-				350,000
Japanese senior secured bank debt, due in 2014, weighted average interest rate of 2.40% and 1.90%, respectively, paid in full October 2013			-				4,698
Capital lease obligations			1,024				949
Total debt and capital lease obligations			752,249				720,640
Less: current portion debt and capital lease obligations			(7,958	)			(26,819	)
Total long-term debt and capital lease obligations		$	744,291			$	693,821

		Local Currency Amount				U.S. Dollar Amount				Percentage Settled Within One Year			Dates Contracts are Through
Derivative Assets
Great Britain Pound			£2,796			$	4,500				100	%	March 31, 2014
Great Britain Pound			£3,107				5,000				100	%	June 30, 2014
						$	9,500

		December 31, 2013				December 31, 2012
		(Successor)				(Predecessor)
Foreign currency translation adjustments		$	12,855			$	3,317
Pension and postretirement benefit plans, net of tax			1,784				(33,908	)
Foreign currency hedges - derivative valuation, net of tax			100				217
Avaialble for sale securities, net of tax			40				104
Accumulated other comprehensive income (loss)		$	14,779			$	(30,270	)

13.  EARNINGS PER SHARE

 

A computation of the weighted average shares outstanding for the Successor 2013 Period follows. No such computation is necessary for the Predecessor 2013 Period or for the years ended December 31, 2012 and 2011.

 

(in thousands)		2013
Weighted average shares outstanding:
Basic			92,563
Convertible securities			-	1
Diluted			92,563

 

1	No share adjustments are included in the dilutive weighted average shares outstanding computation as the Successor 2013 Period resulted in a net loss.

 

At December 31, 2013, the portion of 16,247,554 outstanding common shares convertible from the 48,742,662 outstanding warrants, accounted for under the treasury stock method, have been excluded from the computation of diluted earnings per share as the effect would be antidilutive.

 

 

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PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

 

14.  OPERATING LEASE COMMITMENTS

 

The Company leases certain land, office space, warehouse space and equipment under agreements which are classified as operating leases for financial statement purposes. Certain of these leases provide for payment of real estate taxes, common area maintenance, insurance and certain other expenses. Lease terms may have escalating rent provisions and rent holidays which are recognized on a straight-line basis over the term of the lease. The leases expire at various dates through 2047. Total rental expense for leases for the Successor and Predecessor 2013 Periods was $1,458 and $9,142, respectively. Total rental expense for leases for the years ended December 31, 2012 and 2011 was $9,700 and $10,224, respectively. The fixed operating lease commitments detailed below assume that the Company continues the leases through their initial lease terms.

 

Minimum future non-cancelable operating lease commitments are as follows:

 

2014		$	7,449
2015			4,970
2016			3,625
2017			2,900
2018			2,482
Thereafter			17,295
		$	38,721

 

15.  OTHER (EXPENSE) INCOME, NET

 

The major components of other (expense) income, net are as follows:

 

	For the period from inception (April 23, 2013) through December 31, 2013					For the ten months ended October 31, 2013				For the year ended December 31, 2012				For the year ended December 31, 2011
	(Successor)					(Predecessor)				(Predecessor)				(Predecessor)
Other income:
Remeasurement gain on foreign currency denominated debt		$	-			$	1,137			$	-			$	4,093
Remeasurement gain on foreign currency denominated intercompany loans			-				-				8,430				5,063
Other, net			190				93				521				986
Total other income		$	190			$	1,230			$	8,951			$	10,142

 

		For the period from inception (April 23, 2013) through December 31, 2013				For the ten months ended October 31, 2013				For the year ended December 31, 2012				For the year ended December 31, 2011
		(Successor)				(Predecessor)				(Predecessor)				(Predecessor)
Other expense:
Remeasurement loss on foreign currency denominated debt		$	-			$	-			$	(2,728	)		$	-
Foreign exchange loss, net			(630	)			(1,380	)			(1,050	)			(208	)
Other, net			-				(407	)			(192	)			(522	)
Total other expense			(630	)			(1,787	)			(3,970	)			(730	)
Net other (expense) income		$	(440	)		$	(557	)		$	4,981			$	9,412

 

 

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PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

 

16. CONTINGENCIES, ENVIRONMENTAL AND LEGAL MATTERS

 

Asset Retirement Obligations

 

The Company has recognized asset retirement obligations (“AROs”) for properties where it can make a reasonable estimate of the future expenditures necessary to satisfy the related obligations. The Company considers identified legally enforceable obligations, estimated settlement dates and appropriate discount and inflation rates in calculating the fair value of its AROs. At December 31, 2013 (Successor) and December 31, 2012 (Predecessor), the Company has accrued $4,765 and $2,283, respectively, for its AROs at sites in the U.S., Europe and Japan.  The AROs are included in the other long-term liabilities in the Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012. Changes in the Company’s AROs for the Successor and Predecessor 2013 Periods  are as follows:

 

Successor:
Balance, April 23, 2013 (inception)		$	-
Acquisitions			2,206
Additional obligations incurred			2,558
Accretion expense			31
Foreign currency adjustments			(30	)
Balance, December 31, 2013		$	4,765
Predecessor:
Balance, December 31, 2012		$	2,283
Settlements			(96	)
Accretion expense			117
Foreign currency adjustments			(98	)
Balance, October 31, 2013		$	2,206

 

Changes in the Company’s AROs for the years ended December 31, 2012 and 2011, respectively, are as follows:

 

Predecessor:
Balance, December 31, 2011		$	2,497
Additional obligations incurred			100
Settlements			(259	)
Accretion expense			227
Revisions			(200	)
Foreign currency adjustments			(82	)
Balance, December 31, 2012		$	2,283
Predecessor:
Balance, December 31, 2010		$	2,283
Accretion expense			170
Foreign currency adjustments			44
Balance, December 31, 2011		$	2,497

 

 

F-43

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PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

 

Environmental

 

The Company is a manufacturer and distributor of specialty chemical products, and is exposed to claims with respect to environmental cleanup or other matters, including those in connection with the disposal of hazardous materials.  The Company is subject to extensive domestic and foreign laws and regulations relating to environmental protection and worker health and safety, including those governing discharges of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated properties.  The Company has incurred, and will continue to incur, costs and capital expenditures in complying with these laws and regulations.  Additional costs could be incurred, including cleanup costs, fines, sanctions, and third-party claims, as a result of violations of or liabilities under environmental laws.

 

Remediation activities vary substantially in duration and cost from site to site. These activities, and their associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, as well as the presence or absence of potentially responsible parties.  The Company has received notices of violation with respect to instances of non-compliance with environmental laws. A number of facilities and former facilities of the Company have been environmentally impacted from historic operations and some facilities are in the process of being investigated and remediated.  As of December 31, 2013 (Successor) and December 31, 2012 (Predecessor), $2,896 and $2,142, respectively, was reserved for various environmental matters. Ultimate costs may vary from current estimates, and the discovery of additional contaminants at these facilities or other sites, or the imposition of additional cleanup obligations or third-party claims relating thereto could result in additional costs.  The Company’s management believes that any possible losses related to environmental remediation in addition to the amounts recorded as of December 31, 2013 (Successor) and December 31, 2012 (Predecessor) would not be material to the consolidated financial position, results of operations or cash flows.

 

Legal Proceedings

 

From time to time, the Company is involved in various legal proceedings in the normal course of its business. MacDermid believes that the resolution of these claims, to the extent not covered by insurance, will not individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows. As of December 31, 2013 (Successor) and December 31, 2012 (Predecessor), the Company has reserved approximately $2,881 and $1,041, respectively, for its outstanding legal proceedings.

 

17.  RELATED PARTY TRANSACTIONS

 

For the Predecessor 2013 Period, the Company paid management fees of $7,515 to Court Square Capital Partners II LP (“Court Square” or “CSC”), an investor. For the years ended December 31, 2012 and 2011, the Predecessor paid management fees of $305 and $509, respectively, to Court Square. Three of MacDermid’s board members prior to the MacDermid Acquisition were employees of Court Square. The significant increase in management fees paid compared to the year ended December 31, 2012 was due to a final payment made to CSC in connection with the consummation of the MacDermid Acquisition and per the terms of the Management Agreement.

 

For the Predecessor 2013 Period, the Company paid management fees to Weston Presidio, an investor, of $1,723. For the years ended December 31, 2012 and 2011, the Predecessor paid management fees to Weston Presidio of $116 and $70, respectively.

 

On August 26, 2013, MacDermid loaned $275 to an officer in exchange for a promissory note bearing interest atPrime plus 1% per annum. As collateral, the note was secured by real estate owned by the officer. The principal amount of the loan and the accrued interest was repaid in full on October 31, 2013.

 

On October 31, 2013, in order to complete the MacDermid Acquisition, Platform advanced $33,268 to MacDermid representing the portion of the cash consideration required to purchase the equity held by MacDermid employee shares in connection with the MacDermid Acquisition. Also in conjunction with closing of the MacDermid Acquisition, Platform paid $5,028 of interest on the first and second lien credit facilities on MacDermid’s behalf.

 

Immediately prior to the closing of the MacDermid Acquisition, each holder of a portion of MacDermid Holdings not owned by Platform (each, a “Retaining Holder”), including certain officers of MacDermid, executed a Retaining Holder Securityholders’ Agreement (a “RHSA”) with the Company pursuant to which they agreed to exchange their respective interests in MacDermid Holdings for shares of common stock of Platform’s subsidiary Platform Delaware Holdings, Inc. (the “PDH Common Stock”), at an exchange rate of $11.00 per share plus, with respect to the common, class A and class B unit equity interests of MacDermid Holdings held by the Retaining Holder (i) a proportionate share of a contingent interest in certain pending litigation (the “CLP”), and (ii) a proportionate share of up to $100 million of contingent purchase price payable upon the attainment of certain EBITDA and stock trading price performance metrics during the seven-year period following the Closing Date (the “CPP”) as discussed further in Note 2. Immediately prior to the closing of the MacDermid Acquisition, members of MacDermid management and certain affiliates, including certain officers of MacDermid, contributed all or a portion of their MacDermid Holdings interests to Tartan Holdings, LLC, a newly-formed Delaware limited liability company (“Tartan”), and Tartan agreed to receive the PDH Common Stock in exchange for such MacDermid Holdings equity interests. The resulting noncontrolling interest percentage for the Retaining Holders was 6.76%.

 

 

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PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

 

On October 31, 2013, the Company entered into an Advisory Services Agreement with Mariposa Capital, LLC, an affiliate of one of our founder directors. Under this agreement, Mariposa Capital, LLC will provide certain advisory services. In connection with these services, Mariposa Capital, LLC will be entitled to receive an annual fee equal to $2,000, payable in quarterly installments. This agreement will expire on October 31, 2014 but will be automatically renewed for successive one-year terms unless either party notifies the other party in writing of its intention not to renew this agreement no later than 90 days prior to the expiration of the term. This agreement may only be terminated by the Company upon a vote of a majority of its directors. In the event that this agreement is terminated by the Company, the effective date of the termination will be six months following the expiration of the initial term or a renewal term, as the case may be. The Company paid $440 during 2013 under this agreement.

 

On November 7, 2013, the Company entered into a registration rights agreement with Pershing Square Capital Management, L.P. (“Pershing Square”), the beneficial owner of approximately 31.0% of the Company’s outstanding shares. Those shares were acquired by Pershing Square in the Offering and the Warrant Exchange Offer. Pursuant to the agreement, for so long as any of the included funds managed by Pershing Square holds any Platform shares, the Company agreed to cooperate with such holders’ reasonable requests to facilitate any proposed sale of shares by the requesting holder(s) in accordance with the provisions of Rule 144 promulgated under the Securities Act or any successor rule (“Rule 144”), including, without limitation, by complying with the current public information requirements of Rule 144 and providing opinions of counsel, to the extent required. Additionally, the Company agreed that promptly after becoming eligible to utilize a Form S-3 registration statement, the Company will file with the SEC a registration statement on Form S-3 registering (among other securities) the resale of the Company shares held by the holders and use its commercially reasonable efforts to have such registration statement declared effective as soon as practicable after its filing. The Company’s obligations under the registration rights agreement shall terminate on the earlier of (i) the date on which all of a holder’s shares have been sold, and (ii) the date on which all of a holder’s shares may be sold pursuant to Rule 144 without volume or other restrictions.

 

18.  RESTRUCTURING ACTIVITIES

 

The Company continuously evaluates all operations to identify opportunities to improve profitability by leveraging existing infrastructure to reduce operating costs and respond to overall economic conditions. The Predecessor implemented certain restructuring actions which were intended to better align the Company’s manufacturing capacity, eliminate excess capacity by lowering operating costs, and streamline the organizational structure for improved long-term profitability. The restructuring actions consist of facility consolidations and closures and employee terminations. The Company expects to incur incremental manufacturing costs at the operating locations impacted by the restructuring actions during the related restructuring implementation period. The restructuring plans initiated in 2013 primarily related to the consolidation of manufacturing processes which affected a manufacturing facility in the Graphic Solutions segment.

 

During the Successor 2013 Period and the Predecessor 2013 Period, the Company recorded $762 and $3,636, respectively, of restructuring expense primarily relating to the elimination of certain positions in both the Graphic Solutions the Performance Materials segments. As of December 31, 2013, the Company has accrued restructuring costs of $2,029 that are anticipated to be paid out in the next twelve months.

 

During the year ended December 31, 2012, the Company recorded $292 of restructuring expense primarily relating to the elimination of certain positions in the Performance Materials Europe reporting unit.

 

 

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PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

 

The activity in the restructuring liabilities was as follows:

 

						For the Successor 2013 Period
Successor		Balance, November 1, 2013				Charges to Expense				Cash Payments				Non-cash Adjustments				Total Costs and Adjustments				Balance, December 31, 2013
Graphic Solutions:
Severance and other benefits		$	666			$	-			$	-			$	33			$	33			$	699
Total Graphics Solutions			666				-				-				33				33				699
Performance Materials:
Severance and other benefits			1,671				762				(1,117	)			14				(341	)			1,330
Total Performance Materials			1,671				762				(1,117	)			14				(341	)			1,330
Total restructuring liability		$	2,337			$	762			$	(1,117	)		$	47			$	(308	)		$	2,029

 

						For the Predecessor 2013 Period
Predecessor		Balance, December 31, 2012				Charges to Expense				Cash Payments				Non-cash Adjustments				Total Costs and Adjustments				Balance, October 31, 2013
Graphic Solutions:
Severance and other benefits		$	-			$	2,159			$	(1,493	)		$	-			$	666			$	666
Total Graphics Solutions			-				2,159				(1,493	)			-				666				666
Performance Materials:
Severance and other benefits			632				1,477				(458	)			20				1,039				1,671
Total Performance Materials			632				1,477				(458	)			20				1,039				1,671
Total restructuring liability		$	632			$	3,636			$	(1,951	)		$	20			$	1,705			$	2,337

 

						For the year ended December 31, 2012
Predecessor		Balance, December 31, 2011				Charges to Expense				Cash Payments				Non-cash Adjustments				Total Costs and Adjustments				Balance, December 31, 2012
Graphic Solutions:
Severance and other benefits		$	20			$	67			$	(87	)		$	-			$	(20	)		$	-
Total Graphics Solutions			20				67				(87	)			-				(20	)			-
Performance Materials:
Severance and other benefits			1,012				396				(814	)			22				(396	)			616
Other			215				(171	)			(28	)			-				(199	)			16
Total Performance Materials			1,227				225				(842	)			22				(595	)			632
Total restructuring liability		$	1,247			$	292			$	(929	)		$	22			$	(615	)		$	632

 

 

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PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

 

19.  SEGMENT INFORMATION

 

The Company’s operations are organized into two reportable segments: Performance Materials and Graphic Solutions. The segments represent businesses for which separate financial information is utilized by the chief operating decision maker (the “CODM”) for purpose of allocating resources and evaluating performance. Each of the reportable segments has its own president who report to the CODM.

 

The Performance Materials segment manufactures and markets dynamic chemistry solutions that are used in the electronics, automotive and oil and gas production and drilling industries. Its products include surface and coating materials and water-based hydraulic control fluids. In conjunction with the sale of these products, we provide extensive technical service and support to ensure superior performance of their application. Within the Performance Materials segment, the Company has two primary categories of products. Industrial products are materials used to improve the performance or look of a component of an industrial part or process. Electronic products are materials used to manufacture and improve the performance of circuit boards and similar electronic items.

 

The Graphic Solutions segment primarily produces and markets photopolymers through an extensive line of flexographic plates that are used in the commercial packaging and printing industries. The Company evaluates the performance of its operating segments based on net sales and operating profit. Operating profit for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Operating profit for each segment includes an allocation of corporate costs such as corporate salary and wages, equity compensation expense and legal costs.

 

Segment assets include cash, prepaid expenses, receivables, inventories, capital assets, goodwill, intangible assets, deferred taxes and other long term assets. Segment assets exclude corporate assets, which consist primarily of cash and cash equivalents, corporate property, plant and equipment, goodwill and other intangible assets.

 

The following table summarizes financial information regarding each reportable segment’s results of operations for the periods presented:

 

		For the period from inception (April 23, 2013) through December 31, 2013				For the ten months ended October 31, 2013				For the year ended December 31, 2012				For the year ended December 31, 2011
		(Successor)				(Predecessor)				(Predecessor)				(Predecessor)
Net Sales:
Performance Materials		$	92,671			$	481,823			$	559,520			$	568,578
Graphic Solutions			25,568				145,889				171,700				160,195
Consolidated net sales			118,239				627,712				731,220				728,773
Depreciation and amortization:
Performance Materials			9,698				26,520				33,965				37,827
Graphic Solutions			3,080				6,315				8,228				8,918
Consolidated depreciation and amortization			12,778				32,835				42,193				46,745
Operating (loss) profit:
Performance Materials			(109,043	)			73,588				82,101				30,331
Graphic Solutions			(86,589	)			18,161				32,996				25,617
Consolidated operating (loss) profit		$	(195,632	)		$	91,749			$	115,097			$	55,948

 

 

F-47

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PLATFORM SPECIALTY PRODUCTS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(In thousands, except share and per share amounts)

 

Total assets by reportable segment as of December 31, 2013 (Successor) and December 31, 2012 (Predecessor) were as follows:

 

		December 31, 2013				December 31, 2012
		(Successor)				(Predecessor)
Performance Materials		$	1,260,840			$	665,354
Graphic Solutions			803,446				421,402
Corporate/ Unallocated			177,602				147,161
Total consolidated assets		$	2,241,888			$	1,233,917

		For the period from inception (April 23, 2013) through December 31, 2013				For the ten months ended October 31, 2013				For the year ended December 31, 2012				For the year ended December 31, 2011
		(Successor)				(Predecessor)				(Predecessor)				(Predecessor)
Net Sales*:
United States		$	31,506			$	176,390			$	205,567			$	187,480
Foreign Net Sales:
United Kingdom			17,756				93,395				115,160				113,129
China			13,524				64,179				66,294				72,763
Other countries			55,453				293,748				344,199				355,401
Total Foreign Net Sales			86,733				451,322				525,653				541,293
Total consolidated net sales		$	118,239			$	627,712			$	731,220			$	728,773

		December 31, 2013				December 31, 2012
		(Successor)				(Predecessor)
Long lived assets, net (1) :
United States		$	57,267			$	39,818
Foreign countries
United Kingdom			30,649				21,463
Italy			13,687				14,266
China			17,162				8,766
Other countries			20,905				16,078
			82,403				60,573
Total long lived assets, net		$	139,670			$	100,391

		Predecessor
		2013
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter (c)
Net sales		$	182,132			$	189,992			$	188,433			$	67,155
Gross profit			93,314				96,541				98,972				34,010
Net income (loss) attributable to MacDermid, Inc.			15,248				(5,855	)			14,497				(10,671	)
Basic earnings (loss) per share (a)			n/a				n/a				n/a				n/a
Diluted earnings (loss) per share (a)			n/a				n/a				n/a				n/a

 

		Predecessor
		2012
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Net sales		$	182,195			$	186,203			$	180,427			$	182,395
Gross profit			86,311				90,289				89,686				88,768
Net income (loss) attributable to MacDermid, Inc.			4,887				25,533				10,012				5,545
Basic earnings (loss) per share (a)			n/a				n/a				n/a				n/a
Diluted earnings (loss) per share (a)			n/a				n/a				n/a				n/a