| (1) | We have certain raw material purchase contracts where we are required to purchase materials, to service our outstanding indebtedness, and to fund dividend payments to our shareholders. Our sources of liquidity include cash on hand, cash flow from operations, and amounts available under the Senior Credit Facility and the Accounts Receivable Securitization Facility (discussed further below). As of December 31, 2017 and 2016, we had $1,199.7 million and $1,187.4 million, respectively, in outstanding indebtedness and $1,019.6 million and $890.7 million, respectively, in working capital. In addition, as of December 31, 2017 and 2016, we had $128.3 million and $88.8 million, respectively, of foreign cash and cash equivalents on our consolidated balance sheets, outside of our country of domicile of Luxembourg, all of which is readily convertible into other foreign currencies, including the U.S. dollar. Our intention is not to permanently reinvest our foreign cash and cash equivalents. Accordingly, we record deferred income tax liabilities related to the unremitted earnings of our subsidiaries.
As noted in Note 10 of the consolidated financial statements, the Company completed a debt refinancing during the third quarter of 2017, the results of which are reflected in the table below. For a detailed description of the Company’s debt structure, borrowing rates, and expected future payment obligations, refer to Note 10 in the consolidated financial statements.
The following table outlines our outstanding indebtedness as of December 31, 2017 and 2016 and the associated interest expense, including amortization of deferred financing fees and debt discounts. Effective interest rates for the
borrowings included in the table below exclude the impact of deferred financing fee amortization and certain other fees charged to interest expense (such as fees for unused commitment fees during the period).
| | | | | | | | | | | | | | | | | | | | As of and for the Year Ended | | As of and for the Year Ended | | | | December 31, 2017 | | December 31, 2016 | | | | | | Effective | | | | | | Effective | | | | | | | | Interest | | Interest | | | | Interest | | Interest | | ($ in millions) | | Balance | | Rate | | Expense | | Balance | | Rate | | Expense | | Senior Credit Facility | | | | | | | | | | | | | | | | | | 2024 Term Loan B | | $ | 698.3 | | 3.9 | % | $ | 9.6 | | $ | — | | — | | $ | — | | 2022 Revolving Facility | | | — | | — | | | 1.0 | | | — | | — | | | — | | 2020 Senior Credit Facility | | | | | | | | | | | | | | | | | | 2021 Term Loan B | | | — | | 4.3 | % | | 15.9 | | | 491.5 | | 4.3 | % | | 23.3 | | 2020 Revolving Facility | | | — | | — | | | 2.3 | | | — | | — | | | 3.3 | | 2025 Senior Notes | | | 500.0 | | 5.4 | % | | 9.4 | | | — | | — | | | — | | 2022 Senior Notes | | | | | | | | | | | | | | | | | | USD Notes | | | — | | 6.8 | % | | 14.4 | | | 300.0 | | 6.8 | % | | 21.1 | | Euro Notes | | | — | | 6.4 | % | | 18.8 | | | 394.3 | | 6.4 | % | | 27.4 | | Accounts Receivable Securitization Facility | | | — | | — | | | 2.8 | | | — | | — | | | 3.3 | | Other indebtedness | | | 1.4 | | 4.8 | % | | 0.1 | | | 1.6 | | 4.8 | % | | 0.1 | | Total | | $ | 1,199.7 | | | | $ | 74.3 | | $ | 1,187.4 | | | | $ | 78.5 | |
Our Senior Credit Facility includes the 2022 Revolving Facility, which matures in September 2022, and has a borrowing capacity of $375.0 million. As of December 31, 2017, the Company had no outstanding borrowings, and had $360.2 million (net of $14.8 million outstanding letters of credit) of funds available for borrowing under this facility. Further, as of December 31, 2017, the Company is required to pay a quarterly commitment fee in respect of any unused commitments under the 2022 Revolving Facility equal to 0.375% per annum.
Also included in our Senior Credit Facility is our 2024 Term Loan B (with original principal of $700.0 million, maturing in September 2024), which requires scheduled quarterly payments in amounts equal to 0.25% of the original principal. During the year ended December 31, 2017, the Company made principal payments of $1.8 million on the 2024 Term Loan B, with an additional $7.0 million of scheduled future payments classified as current debt on the Company’s consolidated balance sheet as of December 31, 2017.
Our 2025 Senior Notes, as issued under the Indenture, include $500.0 million aggregate principal amount of 5.375% senior notes that mature on September 1, 2025. Interest on the 2025 Senior Notes is payable semi-annually on May 3 and November 3 of each year, commencing on May 3, 2018. These notes may be redeemed prior to their maturityminimum volumes at the option of the Company under certain circumstances at specific redemption prices. Refer to Note 10 in the consolidated financial statements for further information.
We also continue to maintain our Accounts Receivable Securitization Facility, as amended during the fourth quarter of 2017, which matures in May 2019 and contains a borrowing capacity is $150.0 million. As of December 31, 2017, there were no amounts outstanding under this facility, with approximately $122.1 million of funds available for borrowing, based on the pool of eligible accounts receivable.
The Senior Credit Facility and Indenture contain certain customary affirmative, negative and financial covenants. As of December 31, 2017, the Company was in compliance with all of these debt covenant requirements. Refer to Note 10 in the consolidated financial statements for further information on the details of these covenant requirements.
Our ability to raise additional financing and our borrowing costs may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios.
We and our subsidiaries, affiliates or significant direct or indirect shareholders may from time to time seek to retire or purchase our outstanding debt through cash purchases in the open market, privately negotiated transactions, exchange transactions or otherwise. Such repurchases or exchanges, if any, will depend onthen prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (the Issuers of our 2025 Senior Notes and Borrowers under our Senior Credit Facility) are dependent upon the cash generation and receipt of distributions and dividends or other paymentsprices. These commitments range from our subsidiaries and joint ventures in orderone to satisfy their debt obligations. There are no known significant restrictions by third parties on the ability of subsidiaries of the Company to disburse or dividend funds to the Issuers and the Borrowers in order to satisfy these obligations. However, as the Company’s subsidiaries are located in a variety of jurisdictions, the Company can give no assurances that our subsidiaries will not face transfer restrictions in the future due to regulatory or other reasons beyond our control.
The Senior Credit Facility and Indenture also limit the ability of the Borrowers and Issuers, respectively, to pay dividends or make other distributions to Trinseo S.A., which could then be used to make distributions to shareholders. During the year ended December 31, 2017, the Company declared total dividends of $1.38 per ordinary share (totaling $61.6 million), of which $16.9 million remains accrued as of December 31, 2017, and the majority of which will be paid in January 2018. These dividends are well within the available capacity under the terms of the restrictive covenants contained in the Senior Credit Facility and Indenture. Further, significant additional capacity continues to be available under the terms of these covenants to support expected future dividends to shareholders, should the Company continue to declare them.
The Company’s cash flow generation from operations continues to be strong (see discussion above). We believe that funds provided by operations, our existing cash and cash equivalent balances, and borrowings available under our 2022 Revolving Facility and our Accounts Receivable Securitization Facility will be adequate to meet planned operating and capital expenditures for at least the next 12 months under current operating conditions. Nevertheless, our ability to generate future cash and to pay our indebtedness and fund other liquidation needs is subject to certain risks described under Item 1A—Risk Factors. As of December 31, 2017 and 2016, we were in compliance with all the covenants and default provisions under our debt agreements.
Derivative Instruments
The Company’s ongoing global business operations and debt structure expose it to fluctuating foreign exchange rates as well as variability in interest rates. To manage this risk, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. A brief summary of these derivative financial instrument programs is described below; however, refer to Note 11 of the consolidated financial statements for further information. The Company does not hold or enter into financial instruments for trading or speculative purposes.
Foreign Exchange Forward Contracts
Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. Our principal strategy in managing exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on our consolidated balance sheets against corresponding assets of the same currency such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce our exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on our assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.
Foreign Exchange Cash Flow Hedges
The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by one of our subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rates.
Interest Rate Swaps
The Company enters into interest rate swap agreements to manage our exposure to variability in interest payments associated with the Company’s variable rate debt. Under these interest rate swap agreements, which are designated as
cash flow hedges, the Company is effectively converting a portion of our variable rate borrowings into a fixed rate obligation to mitigate the risk of variability in interest rates.
Net Investment Hedge
As of December 31, 2017, the Company had certain fixed-for-fixed cross currency swaps outstanding, swapping U.S. dollar principal and interest payments on the Company’s 2025 Senior Notes for euro-denominated payments. These cross currency swaps have been designated as a hedge of the Company’s net investment in certain European subsidiaries. As such, changes in their fair value, to the extent effective, are recorded within the cumulative translation adjustment account as a component of accumulated other comprehensive income or loss (“AOCI”).
Contractual Obligations and Commercial Commitments
The following table reflects our contractual obligations as of December 31, 2017. Amounts we pay in future periods may vary from those reflected in the table:
| | | | | | | | | | | | | | | | | | | | | | | (In millions) | | Payments due by year | | Contractual Obligations as of December 31, 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total | | Purchase commitments(1) | | $ | 1,480.1 | | $ | 1,007.5 | | $ | 866.6 | | $ | 4.8 | | $ | — | | $ | — | | $ | 3,359.0 | | Long-term Indebtedness(2) | | | 7.0 | | | 7.0 | | | 7.0 | | | 7.0 | | | 7.0 | | | 1,163.3 | | | 1,198.3 | | Interest payments on long-term debt (net of interest rate swap effects)(3) | | | 61.0 | | | 55.8 | | | 55.6 | | | 55.2 | | | 54.8 | | | 122.7 | | | 405.1 | | Pension and other postretirement benefits(4) | | | 5.5 | | | 21.2 | | | 6.2 | | | 5.7 | | | 6.5 | | | 50.5 | | | 95.6 | | Minimum operating lease commitments and other obligations(5) | | | 13.5 | | | 12.6 | | | 9.4 | | | 10.3 | | | 3.6 | | | 16.2 | | | 65.6 | | Uncertain tax positions, including interest and penalties(6) | | | — | | | — | | | — | | | — | | | — | | | 5.7 | | | 5.7 | | Total | | $ | 1,567.1 | | $ | 1,104.1 | | $ | 944.8 | | $ | 83.0 | | $ | 71.9 | | $ | 1,358.4 | | $ | 5,129.3 | |
| (1)
| | We have certain raw material purchase contracts where we are required to purchase certain minimum volumes at the then prevailing market prices. These commitments range from 1 to 4three years. In certain raw material purchase contracts, we have the right to purchase less than required minimums and pay a liquidated damages fee, or, in case of a permanent plant shutdown, to terminate the contracts. In such cases these obligations would be less than the obligations shown in the table above.
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| (2)
| | As part of the third quarter of 2017 debt refinancing, we redeemed our existing 2021 Term Loan B and 2022 Senior Notes, replacing those borrowings with a $700.0 million 2024 Term Loan B due September 2024 and $500.0 million 2025 Senior Notes due September 2025. The 2024 Term Loan B requires scheduled quarterly payments in amounts equal to 0.25% of the original principal, or $7.0 million per year. The long-term indebtedness line included in the table above excludes the impacts of certain fixed-for-fixed cross currency swaps (discussed in Note 11 to the consolidated financial statements) as well as all other debt outstanding as of December 31, 2017 totaling $1.4 million.
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| (3)
| | Interest payments on debt are calculated for future periods using interest rates in effect as of December 31, 2017. The amounts above include estimated interest on the 2024 Term Loan B and the related effects of interest rate swap agreements, as well as interest on the 2025 Senior Notes. This line excludes the impacts of certain fixed-for-fixed cross currency swaps discussed in further detail in Note 11 to the consolidated financial statements. Interest on the 2024 Term Loan B is payable quarterly, while interest on the 2025 Senior Notes is payable semi-annually on May 3rd and November 3rd of each year.Refer to Item 7A—Quantitative and Qualitative Disclosures about Market Risk for further discussion of interest rate and foreign currency risks. Certain of these projected interest payments may differ in the future based on changes in floating interest rates or other factors and events. Estimated interest payments do not include the 2022 Revolving Facility or Accounts Receivable Securitization Facility as amounts
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outstanding under these facilities vary due to periodic borrowings and repayments. There are no amounts outstanding under either facility as of December 31, 2017.
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| (4)
| | Includes minimum contributions required to be made to the funded pension plans and expected benefit payments to the employees for unfunded pension plans. With respect to our minimum funding requirements under our pension obligations, we may elect to make contributions in excess of the minimum funding requirements in response to investment performance or changes in interest rates or when we believe that it is financially advantageous to do so and based on our other cash requirements. Our minimum funding requirements after 2017 will depend on several factors, including investment performance and interest rates. Our minimum funding requirements may also be affected by changes in applicable legal requirements. We also have payments due with respect to our postretirement benefit obligations, which we do not fund in advance. Rather, payments are made as costs are incurred by covered retirees. We expect benefit payments related to our postretirement benefit obligations to be $3.2 million through 2027. The payments identified above as subsequent to 2022 represent estimated pension and postretirement payments from 2023 through 2027. Also included in the above is a $16.0 million expected benefit obligation for payments estimated to be payable in 2019 under the Company’s non-qualified supplemental employee retirement plan. Refer to Note 15 in the consolidated financial statements for further information.
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| (5)
| | Excludes certain estimated future commitments under agreements with Dow, including the SAR MOSA, under which Dow provides administrative and operational services to us, and the 25-year SAR SSAs, under which Dow provides utilities and site services to certain of our facilities co-located with Dow. For more information regarding these agreements, including details regarding the rights of the Company and Dow to terminate said agreements, refer to Item 1— Business— Our Relationship with Dow.
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As of December 31, 2017, we estimate our minimum obligation under the SAR MOSA to be approximately $16.9 million. Utilizing current year known costs and assuming that we continue with this agreement through its completion on December 31, 2020, we estimate our contractual obligations for the SAR MOSA to be approximately $47.0 million annually for 2018 through 2020.
Additionally, utilizing current year known costs and assuming that we continue with the SAR SSAs, we estimate our contractual obligations under these agreements to be approximately $186.0 million annually for 2018 through 2022, and a total of $2,877.1 million thereafter through June 2038.
Refer to Note 17 in the consolidated financial statements for further information.
| (6)
| | Due to uncertainties in the timing of the effective settlement of tax positions with the respective taxing authorities, we are unable to determine the timing of payments related to our uncertain tax positions, including interest and penalties. Amounts are therefore reflected in “Thereafter”.
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Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations and financial condition are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported. We base these estimates and judgments on historical experiences and assumptions believed to be reasonable under the circumstances. Actual results could vary from our estimates under different conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 2 in the consolidated financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. The following critical accounting policies reflect our most significant estimates and assumptions used in the preparation of the consolidated financial statements.
Pension Plans and Postretirement Benefits
We have various company-sponsored retirement plans covering substantially all employees. We also provide certain health care and life insurance benefits to retired employees in the United States. Prior to the divestiture of our latex binders and automotive businesses in Brazil in 2016 (refer to Note 3 in the consolidated financial statements), we also provided health care and life insurance benefits to retired employees in Brazil. The U.S.-based plan provides health
care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits. We recognize the underfunded or overfunded status of a defined benefit pension or postretirement plan as an asset or liability in our consolidated balance sheets and recognize changes in the funded status in the year in which the changes occur through AOCI, which is a component of shareholders’ equity.
A settlement is a transaction that is an irrevocable action that relieves the employer (or the plan) of primary responsibility for a pension or postretirement benefit obligation, and that eliminates significant risks related to the obligation and the assets used to effect the settlement. The Company does not record settlement gains or losses during interim periods when the cost of all settlements in a year is less than or equal to the sum of the service cost and interest cost components of net periodic pension cost for the plan in that year.
Pension benefits associated with these plans are generally based on each participant’s years of service, compensation, and age at retirement or termination. The discount rate is an important element of expense and liability measurement. We evaluate our assumptions at least once each year, or as facts and circumstances dictate, and make changes as conditions warrant.
We determine the discount rate used to measure plan liabilities as of the December 31 measurement date for the pension and postretirement benefit plans. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. We set our rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Using this methodology, we determined a weighted-average discount rate of 1.79% for pension and 3.68% for postretirement benefits to be appropriate as of December 31, 2017.
In 2016, we changed the method used to estimate the future service and interest cost components of net periodic benefit cost for our defined benefit pension and other postretirement benefit plans. Historically, we estimated the future service and interest cost components using a single weighted‐average discount rate derived from the yield curve that was used to measure the benefit obligation at the beginning of the period. For 2017 and beyond, we have elected to use a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We have made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of service and interest costs. This change did not affect the measurement of our total benefit obligations, as the change in the service cost and interest cost was entirely offset in the actuarial loss reported. We have accounted for this as a change in estimate that was applied prospectively beginning in the first quarter of 2017.
The weighted-average discount rates that we used to measure service cost for pension and postretirement plans during 2017 were 1.64% and 4.18%, respectively. The weighted-average discount rates that we used to measure interest cost for pension and postretirement plans during 2017 were 1.42% and 3.81%, respectively. Had we not changed our estimation approach, we would have utilized the December 31, 2016 liability discount rates of 1.65% for pension and 4.16% for postretirement benefits to determine service and interest cost. The changes to service cost and interest cost for 2017 associated with this change are not material to the consolidated financial statements.
We determine the expected long-term rate of return on assets by performing a detailed analysis of historical and expected returns based on the underlying assets, which generally are insurance contracts. We also consider our historical experience with the pension fund asset performance. The expected return of each asset class is derived from a forecasted future return confirmed by current and historical experience. The weighted-average long-term rate of return assumptions used for determining net periodic pension expense were 1.44% and 1.79% for 2017 and 2016, respectively. The decrease was primarily due to lower interest rates during 2017 on certain assets with guaranteed returns. Future actual pension expense will depend on the performance of the underlying assets and changes in future discount rates, among other factors.
Holding all other factors constant, a 0.25 percentage point increase (decrease) in the discount rate used to determine net periodic cost would decrease (increase) 2018 pension expense by approximately $1.4 million and $(1.2) million, respectively. Holding all other factors constant, a 0.25 percentage point increase (decrease) in the long-term rate of return on assets used to determine net periodic cost would decrease (increase) 2018 pension expense by approximately $0.1 million and $(0.1) million, respectively.
As noted above, plan assets are invested primarily in insurance contracts that provide for guaranteed returns. As of December 31, 2017 and 2016, respectively, plan assets totaled $140.1 million and $114.2 million. Investments in the pension plan insurance are valued utilizing unobservable inputs, which are contractually determined based on cash surrender values, returns, fees, and the present value of the future cash flows of the contracts, and are classified as Level 3 investments.
Business Combinations and Asset Impairments
Business Combinations
Acquisitions that qualify as a business combination are accounted for using the purchase accounting method. Amounts paid for an acquisition are allocated to the assets acquired and liabilities assumed based on their fair value as of the date of acquisition. Goodwill is recorded as the difference in the fair value of the acquired assets and liabilities assumed (net assets acquired) and the purchase price. Goodwill is not amortized, but is reviewed for impairment annually as of October 1st, or when events or changes in the business environment indicate that the carrying value of a reporting unit may exceed its fair value. Refer to discussion below for further information regarding asset impairments.
Under the purchase accounting method, the Company completes valuation procedures for an acquisition, often with the assistance of third-party valuation specialists, to determine the fair value of the assets acquired and liabilities assumed. These valuation procedures require management to make assumptions and apply significant judgment to estimate the fair value of the assets acquired and liabilities assumed. If the estimates or assumptions used should significantly change, the resulting differences could materially affect the fair value of net assets.
Specifically, the calculation of the fair value of tangible assets, including property, plant and equipment, utilizes the cost approach, which computes the cost to replace the asset, less accrued depreciation resulting from physical deterioration, and functional and external obsolescence. The calculation of the fair value of identified intangible assets is determined using cash flow models following the income approach. Significant inputs include estimated future cash flows, discount rates, royalty rates, growth rates, sales projections, retention rates, and terminal values, all of which require significant management judgment. Definite-lived intangible assets, which are primarily comprised of developed technology, customer relationships, manufacturing capacity rights, and software, are amortized over their estimated useful lives using the straight-line method and are assessed for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable.
Asset Impairments
As of December 31, 2017, net property, plant and equipment, net identifiable finite-lived intangible assets, and goodwill totaled $627.0 million, $207.5 million, and $72.5 million, respectively. Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or impairment may be recorded based on a change in the expected use of the asset or performance of the related asset group.
We evaluate long-lived assets and identifiable finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset grouping may not be recoverable. In the event the carrying value of the asset exceeds its undiscounted future cash flows and the carrying value is not considered recoverable, impairment may exist. An impairment loss, if any, is measured as the excess of the asset’s carrying value over its fair value, generally based on a discounted future cash flow method, independent appraisals, etc.
In August 2016, we announced our plan to cease manufacturing activities at the Company’s latex binders manufacturing facility in Livorno, Italy. As a result, we determined that the long-lived assets at this facility, which included land and depreciable long-lived assets, should be assessed for impairment. This assessment indicated that the carrying value of the asset group was not recoverable when compared to the expected undiscounted cash flows from the operation and eventual disposition of these assets. The fair value of the depreciable assets was determined under the income approach, utilizing a discounted cash flow model. The key assumption in this model was cash flow projections, which were determined to be nil, as the plant ceased manufacturing operations in October 2016. The fair value of the land was determined utilizing a combination of the market and income approaches, utilizing key inputs such as recent comparable market transactions, expected date of sale, and discount rate. Based upon this assessment, for the year ended
December 31, 2016, we recorded an impairment loss of approximately $13.7 million. The amount was included in “Selling, general and administrative expenses” in the consolidated statement of operations and was allocated entirely to the Latex Binders segment.
Through December 31, 2017, we have continued to assess the recoverability of certain assets, and concluded there are no additional significant events or circumstances identified by management that would indicate these assets are not recoverable. However, the current environment is subject to changing market conditions and requires significant management judgment to identify the potential impact to our assessment. If we are not able to achieve certain actions or our future operating results do not meet our expectations, it is possible that impairment charges may need to be recorded on one or more of our operating facilities.
Long-lived assets to be disposed of by sale are classified as held-for-sale and are reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of in a manner other than by sale are classified as held-and-used until they are disposed.
As noted above, our goodwill impairment testing is performed annually as of October 1st at a reporting unit level. We perform more frequent impairment tests when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. As of our annual assessment date of October 1, 2017, each of our reporting units had fair values that exceeded the carrying value of their net assets, indicating that no impairment of goodwill is warranted.
An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined using a market approach and an income approach (under the discounted cash flow method). When supportable, the Company employs the qualitative assessment of goodwill impairment prescribed by ASC 350. As of December 31, 2017, our $72.5 million in total goodwill is allocated to our reportable segments as follows: $16.5 million to Latex Binders, $11.7 million to Synthetic Rubber, $36.4 million to Performance Plastics, and $7.9 million to Basic Plastics, with no amounts allocated to the Feedstocks or Americas Styrenics segments.
Factors which could result in future impairment charges, among others, include changes in worldwide economic conditions, changes in technology, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These factors are discussed in Item 7A—Quantitative and Qualitative Disclosures about MarketRisk and Item 1A— Risk Factors included in this Annual Report
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date.
On December 22, 2017, the “Tax Cuts and Jobs Act” was signed into law in the U.S. This tax reform legislation includes a broad range of new tax laws affecting businesses, including corporate tax rates, business deductions, and international tax provisions. The Company has evaluated and accounted for all material impacts of this reform within the consolidated financial statements for the year ended December 31, 2017. The resulting impact was a one-time $3.1 million increase to tax expense related to the revaluation of the Company’s U.S. federal deferred tax assets and liabilities at the new U.S. federal corporate tax rate of 21%. There were no other applicable provisions of this newly enacted tax law that have a significant impact to the Company’s financial statements.
Deferred taxes are provided on the outside basis differences and unremitted earnings of subsidiaries outside of Luxembourg. All undistributed earnings of foreign subsidiaries and affiliates are expected to be repatriated as of December 31, 2017. Based on the evaluation of available evidence, both positive and negative, we recognize future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not.
As of December 31, 2017, we had deferred tax assets of $39.2 million, after valuation allowances of $149.6 million. In evaluating the ability to realize the deferred tax assets, we rely on, in order of increasing subjectivity, taxable income in prior carryback years, the future reversals of existing taxable temporary differences, tax planning strategies and forecasted taxable income using historical and projected future operating results.
As of December 31, 2017, we had deferred tax assets for tax loss carryforward of approximately $535.6 million, $42.1 million of which is subject to expiration in the years between 2018 and 2022. We continue to evaluate our historical and projected operating results for several legal entities for which we maintain valuation allowances on net deferred tax assets.
We are subject to income taxes in Luxembourg, the United States and numerous foreign jurisdictions, and are subject to audit within these jurisdictions. Therefore, in the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. The tax provision includes amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ from the amounts accrued. Since significant judgment is required to assess the future tax consequences of events that have been recognized in our financial statements or tax returns, the ultimate resolution of these events could result in adjustments to our financial statements and such adjustments could be material. Therefore, we consider such estimates to be critical in preparation of our financial statements.
The financial statement effect of an uncertain income tax position is recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Accruals are recorded for other 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. Uncertain income tax positions have been recorded in “Other noncurrent obligations” in the consolidated balance sheets for the periods presented.
Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. The valuation allowance is based on our estimates of future taxable income and the period over which we expect the deferred tax assets to be recovered. Our assessment of future taxable income is based on historical experience and current and anticipated market and economic conditions and trends. In the event that actual results differ from these estimates or we adjust our estimates in the future, we may need to adjust our valuation allowance, which could materially impact our financial position and results of operations.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note 2 to the consolidated financial statements, included elsewhere within this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to changes in interest rates and foreign currency exchange rates because we finance certain operations through fixed and variable rate debt instruments and denominate our transactions in a variety of foreign currencies. We are also exposed to changes in the prices of certain commodities that we use in production. Changes in these rates and commodity prices may have an impact on future cash flows and earnings. We manage these risks through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We do not enter into financial instruments for trading or speculative purposes.
By using derivative instruments, we are subject to credit and market risk. The fair market value of the derivative instruments is determined by using valuation models whose inputs are derived using market observable inputs, including interest rate yield curves, as well as foreign exchange and commodity spot and forward rates, and reflects the asset or liability position as of the end of each reporting period. When the fair value of a derivative contract is positive, the counterparty owes us, thus creating a receivable risk for us. We are exposed to counterparty credit risk in the event of non-performance by counterparties to our derivative agreements. We minimize counterparty credit (or repayment) risk by entering into transactions with various major financial institutions of investment grade credit rating.
Our exposure to market risk is not hedged in a manner that completely eliminates the effects of changing market conditions on earnings or cash flows.
Interest Rate Risk
Given the Company’s debt structure, we have certain exposure to changes in interest rates. Refer to Note 10 in the consolidated financial statements for further information regarding the Company’s debt facilities.
On September 6, 2017, the Company issued the 2024 Term Loan B, which bears an interest rate of LIBOR plus 2.50%, subject to a 0.00% LIBOR floor. In order to reduce the variability in interest payments associated with the Company’s variable rate debt, during the third quarter of 2017, the Company entered into certain interest rate swap agreements to convert a portion of these variable rate borrowings into a fixed rate obligation. These interest rate swap agreements are designated as cash flow hedges, and as such, the contracts are marked to market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to interest expense in the period during which the transaction effects earnings or it becomes probable that the forecasted transaction will not occur.
Based on weighted-average outstanding borrowings under the 2024 Term Loan B from the date of issuance through December 31, 2017, an increase in 100 basis points in the LIBO rate would have resulted in approximately $1.4 million of additional interest expense for the period, inclusive of the impact of the interest rate swap agreements discussed above.
Loans under the 2022 Revolving Facility, at the Borrowers’ option, may be maintained as (a) LIBO rate loans, which bear interest at a rate per annum equal to the LIBO rate plus the applicable margin (as defined in the Credit Agreement), if applicable, or (b) base rate loans which shall bear interest at a rate per annum equal to the base rate plus the applicable margin (as defined in the Credit Agreement). As of December 31, 2017, the Borrowers are required to pay a quarterly commitment fee in respect of any unused commitments under the 2022 Revolving Facility equal to 0.375% per annum. As of and throughout the year ended December 31, 2017, we had no variable rate debt issued under our 2022 Revolving Facility (or under our previous 2020 Revolving Facility) and as such we incurred no variable rate interest related to these facilities during the period.
Our Accounts Receivable Securitization Facility is subject to interest charges against both the amount of outstanding borrowings as well as the amount of available, but undrawn commitments under the facility. As a result of an amendment to the facility during the fourth quarter, as of December 31, 2017, fixed interest charges on outstanding borrowings for this facility are 1.95% plus variable commercial paper rates which vary by month and by currency, as outstanding balances can be denominated in euro and U.S. dollar. Fixed interest charges on available, but undrawn commitments for this facility are 1.0%. As of and throughout the year ended December 31, 2017, we had no variable rate debt issued under our Accounts Receivable Securitization Facility, and as such we incurred no variable rate interest related to this facility during the period.
Foreign Currency Risks
The Company’s ongoing business operations expose it to foreign currency risks, including fluctuating foreign exchange rates. Our primary foreign currency exposure is to the U.S. dollar to euro, noting that approximately 60% of our net sales were generated in Europe for the year ended December 31, 2017. To a lesser degree, we are also exposed to other currencies, including the Chinese yuan, Swiss franc, and Indonesian rupiah. To manage these risks, the Company periodically enters into derivative financial instruments such as foreign exchange forward contracts.
Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. Our principal strategy in managing exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on our consolidated balance sheets against corresponding assets of the same currency such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce our exposure, we also use foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on our assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.
The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by one of our subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rates. The qualifying hedge contracts are marked-to-
market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur. For 2018, the Company has hedged approximately 60% of our exposure to the euro at a rate of 1.15. Inclusive of these hedges, a 1% change in the euro will impact our annual profitability by approximately $2.0 million on a pre-tax basis.
We have legal entities consolidated in our financial statements that have functional currencies other than U.S. dollar, our reporting currency. As a result of currencies fluctuating against the U.S. dollar, currency translation gains and losses are recorded in other comprehensive income, primarily as a result of the remeasurement of our euro functional legal entities as of December 31, 2017 and 2016.
Commodity Price Risk
We purchase certain raw materials such as benzene, ethylene, butadiene, BPA and styrene primarily under short- and long-term supply contracts. The pricing terms for these raw material purchases are generally determined based on commodity indices and prevailing market conditions within the relevant geography. The selling prices of our products are generally based, in part, on the current or forecasted costs of our key raw materials, but are often subject to a predetermined lag period for the pass through of these costs. As such, during periods of significant raw material price volatility, the Company may experience material volatility in earnings and cash flows due to the lag in passing through raw material costs, primarily benzene, ethylene, butadiene, and styrene. Assuming no changes in sales price, volume or mix, a hypothetical 10% change in the market price of our raw materials would have impacted cost of sales by approximately $300.0 million for the year ended December 31, 2017.
We mitigate the risk of volatility in commodity prices where possible by passing changes in raw material costs through to our customers by adjusting our prices or including provisions in our contracts that allow us to adjust prices in such a circumstance or by including pricing formulas which utilize commodity indices. Nevertheless, we may be subject to the timing differences described above for the pass through of these costs. In addition, even when raw material costs may be passed on to our customers, during periods of high raw material price volatility, customers without minimum purchase requirements with us may choose to delay purchases of our materials or, in some cases, substitute purchases of our materials with less costly products.
We do not currently enter into derivative financial instruments for trading or speculative purposes to manage our commodity price risk relating to our raw material contracts.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by Regulation S-X are included in Item 15- Exhibits, Financial Statements Schedules contained in Part IV of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in our reports that we file or submit under the Exchange Act (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) 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 our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2017. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Annual Report were effective to provide the reasonable level of assurance described above.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in July 2017, the Company completed the acquisition of API Plastics. The Company began to integrate API Plastics into our internal control over financial reporting structure subsequent to the acquisition date and expects to complete this integration by June 2018. As permitted by the SEC, management has elected to exclude this acquisition from our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017. API Plastics constituted approximately 2% of the Company’s total assets as of December 31, 2017, and approximately 1% of the Company’s net sales for the year then ended.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate.
Management conducted an assessment of the Company’s internal control over financial reporting as of December 31, 2017 based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management concluded that, as of December 31, 2017, the Company’s internal control over financial reporting is effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 is incorporated herein by reference from the sections captioned “Election of Directors,” “Corporate Governance,” “Stock Ownership Information,” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s definitive proxy statement for the 2018 annual general meeting of shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the “2018 Proxy Statement”).
Code of Ethics
The Company has adopted a Code of Business Conduct applicable to all of our directors, officers and employees, and a Code of Ethics for Senior Financial Employees applicable to our principal executive, financial and accounting officers, and all persons performing similar functions. A copy of each of those Codes is available on the Company’s corporate website at www.trinseo.com under Investor Relations—Corporate Governance—Ethics and Compliance. If we
make any substantive amendments to these Codes, or grant any waivers, including any implicit waivers from the provisions of these Codes, we will make a disclosure on our website or in a report on Form 8-K. Our Code of Business of Conduct is supported by a number of subsidiary policies which are specifically referenced in the Code, and several of which are also available on our corporate website. Our website and the information contained on that site, or accessible through that site, are not incorporated into and are not a part of this Annual Report.
Item 11. Executive Compensation
The information required by this Item 11 will be contained in our 2018 Proxy Statement and is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be contained in our 2018 Proxy Statement and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 will be contained in our 2018 Proxy Statement and is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 will be contained in our 2018 Proxy Statement and is incorporated by reference herein.
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Financial statements:
Report of Independent Registered Public Accounting Firm
| F-2
| Consolidated Balance Sheets as of December 31, 2017 and 2016
| F-4
| Consolidated Statements of Operations for the years ended December 31, 2017, 2016, and 2015
| F-5
| Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016, and 2015
| F-6
| Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016, and 2015
| F-7
| Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
| F-8
| Notes to Consolidated Financial Statements for the years ended December 31, 2017, 2016, and 2015
| F-9
| Financial Statement Schedule – Schedule II. Valuation and Qualifying Accounts for the years ended December 31, 2017, 2016, and 2015
| F-57
| | | | | Americas Styrenics LLC
| | Audited Consolidated Financial Statements
| | Report of Independent Registered Public Accounting Firm
| F-58
| Consolidated Balance Sheets as of December 31, 2017 and 2016
| F-59
| Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015
| F-60
| Consolidated Statements of Members’ Equity for the years ended December 31, 2017, 2016, and 2015
| F-61
| Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
| F-62
| Notes to Consolidated Financial Statements for the years ended December 31, 2017, 2016, and 2015
| F-63
|
2. Exhibits: The exhibits to this report are listed in the exhibit index below.
EXHIBIT INDEX
| | | Exhibit
No.
| | Description
| 3.1
| | Amended and Restated Articles of Association of Trinseo S.A., as amended (incorporated herein by reference to Exhibit 3.1 to the Quarterly Report filed on Form 10-Q, File No. 001-36473, filed August 3, 2017)
| | | | 4.1
| | Indenture among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc. and The Bank of New York Mellon, as Trustee, dated as of August 29, 2017 (incorporated herein by reference to Exhibit 4.1 to the Current Report filed on Form 8-K, File No. 001-36473, filed September 5, 2017)
| | | | 4.2
| | Form of Specimen Share Certificate of Trinseo S.A. (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 of the Registration Statement filed on Form S-1, File No. 333-194561, filed May 16, 2014)
| | | | 10.1
| | Credit Agreement among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc. together with Trinseo Holdings S.à r.l., and Trinseo Materials S.à r.l., Deutsche Bank AG New York Branch, as administrative agent, collateral agent, L/C issuer and swing line lender, and the guarantors and lenders from time to time party thereto, dated as of September 6, 2017 (incorporated herein by reference to Exhibit 10.1 to the Current Report filed on Form 8-K, No. 001-36473, filed September 7, 2017)
| | | | 10.2
| | Form of Cross-Currency Rate Swap Transaction Confirmation (incorporated herein by reference to Exhibit 10.2 to the Current Report filed on Form 8-K, File No. 001-36473, filed September 7, 2017)
| | | | 10.3
| | Amended and Restated Employment Agreement, among Trinseo US Holding, Inc. and Christopher D. Pappas, dated December 20, 2017 (incorporated herein by reference to Exhibit 10.1 to the Current Report filed on Form 8-K, File No. 001-36473, filed December 27, 2017)
| | | | 10.4
| | Employment Agreement between Trinseo LLC and Barry Niziolek, dated May 20, 2016 (incorporated herein by reference to Exhibit 10.1 to the Current Report filed on Form 8-K, File No. 001-36473, filed May 23, 2016)
| | | | 10.5
| | Employment Agreement, dated September 14, 2015 by and between Trinseo Europe GmbH. and Timothy M. Stedman (incorporated herein by reference to Exhibit 10.11 to the Annual Report filed on Form 10-K, File No. 001-36473, filed March 11, 2016)
| | | | 10.6
| | Employment Agreement, dated August 7, 2015, by and between Trinseo Europe GmbH and Hayati Yarkadas (incorporated herein by reference to Exhibit 10.12 to the Annual Report filed on Form 10-K, File No. 001-36473, filed March 11, 2016)
| | | | 10.7
| | Employment Agreement, among Trinseo US Holding, Inc. (f/k/a Bain Capital Everest US Holding, Inc.) Bain Capital Everest Manager Holding SCA and Marilyn Horner, dated January 5, 2011 (incorporated herein by reference to Exhibit 10.12 to the Annual Report filed on Form 10-K, File No. 001-36473, filed March 10, 2015)
| | | | 10.8
| | First Amendment to Employment Agreement, among Trinseo US Holding, Inc. (f/k/a Bain Capital Everest US Holding, Inc.) Bain Capital Everest Manager Holding SCA and Marilyn Horner, dated February 14, 2012 (incorporated herein by reference to Exhibit 10.13 to the Annual Report filed on Form 10-K, File No. 001-36473, filed March 10, 2015)
| | | |
| | | Exhibit
No.
| | Description
| 10.9†
| | Second Amendment to Employment Agreement, among Trinseo US Holding, Inc., Trinseo S.A. and Marilyn Horner, dated December 20, 2017
| | | | 10.10†
| | Retention Award Letter Agreement, dated December 21, 2017, between Trinseo US Holding, Inc., Trinseo LLC and Marilyn Horner
| | | | 10.11
| | Letter Agreement, dated March 1, 2016, between Trinseo S.A. and Marilyn N. Horner, defining retirement for purpose of equity awards (incorporated by reference to Exhibit 10.5 to the Quarterly Report filed on Form 10-Q, File No. 001-36473, filed May 5, 2016)
| | | | 10.12
| | Employment Agreement, dated November 17, 2014, by and between Trinseo US Holding, Inc. (f/k/a Bain Capital Everest US Holding, Inc.) and Angelo N. Chaclas (incorporated herein by reference to Exhibit 10.10 to the Annual Report filed on Form 10-K, File No. 001-36473, filed March 11, 2016)
| | | | 10.13*
| | Second Amended and Restated Master Outsourcing Services Agreement, among The Dow Chemical Company and Trinseo LLC (f/k/a Styron LLC) and Trinseo Holding B.V. (f/k/a Styron Holding B.V.), dated June 1, 2013 (incorporated herein by reference to Exhibit 10.19 to Amendment No. 2 to the Registration Statement filed on Form S-4, File No. 333-191460, filed December 17, 2013)
| | | | 10.14*
| | Contract of Sale, by and between Americas Styrenics LLC and The Dow Chemical Company, dated December 1, 2009, as amended by that certain Amendment to and Consent to Partial Assignment, dated April 1, 2010 (incorporated herein by reference to Exhibit 10.20 to Amendment No. 2 to the Registration Statement filed on Form S-4, File No. 333-191460, filed December 17, 2013)
| | | | 10.15*
| | Amended and Restated Ethylene Sales Contract (Europe), between Dow Europe GmbH and Trinseo Europe GmbH (f/k/a Styron Europe GmbH), dated June 17, 2010 (incorporated herein by reference to Exhibit 10.22 to Amendment No. 2 to the Registration Statement filed on Form S-4, File No. 333-191460, filed December 17, 2013)
| | | | 10.16*
| | Amended and Restated Benzene Sales Contract (Europe), between Dow Europe GmbH and Trinseo Europe GmbH (f/k/a Styron Europe GmbH), dated June 17, 2010 (incorporated herein by reference to Exhibit 10.23 to Amendment No. 2 to the Registration Statement filed on Form S-4, File No. 333-191460, filed December 17, 2013)
| | | | 10.17*
| | Amended and Restated Butadiene Sales Contract (Europe), between Dow Europe GmbH and Trinseo Europe GmbH (f/k/a Styron Europe GmbH), dated June 17, 2010 (incorporated herein by reference to Exhibit 10.27 to Amendment No. 2 to the Registration Statement filed on Form S-4, File No. 333-191460, filed December 17, 2013)
| | | | 10.18*
| | Amended and Restated MOD5 Computerized Process Control Software Agreement, Licenses and Services, between Rofan Services Inc. and Trinseo LLC (f/k/a Styron LLC), dated as of June 17, 2010 (incorporated herein by reference to Exhibit 10.29 to the Registration Statement filed on Form S-4, File No. 333-191460, filed September 30, 2013)
| | | | 10.19*
| | Amendment No. 1 to the Amended and Restated MOD5 Computerized Process Control Software Agreement, Licenses and Services, between Rofan Services Inc. and Trinseo LLC (f/k/a Styron LLC), dated as of June 1, 2013 (incorporated herein by reference to Exhibit 10.30 to Amendment No. 2 to the Registration Statement filed on Form S-4, File No. 333-191460, filed December 17, 2013)
| | | |
| | | Exhibit
No.
| | Description
| 10.20*
| | Amended and Restated Styron License Agreement, among The Dow Chemical Company, Dow Global Technologies Inc. and Trinseo LLC (f/k/a Styron LLC), dated as of June 17, 2010. (incorporated herein by reference to Exhibit 10.31 to Amendment No. 2 to the Registration Statement filed on Form S-4, File No. 333-191460, filed December 17, 2013)
| | | | 10.21†
| | Deed of Amendment, Restatement and Accession, dated December 21, 2017 entered into by and among Trinseo Europe GmbH, Trinseo Export GmbH, Trinseo Deutschland Anlagengesellschaft mbH, Trinseo Netherlands B.V., Trinseo LLC, Trinseo U.S. Receivables Company SPV LLC, Styron Receivables Funding Designated Activity Company, Trinseo Finance Luxembourg S.à r.l., Luxembourg, Zweigniederlassung Horgen, Regency Assets Designated Activity Company, HSBC Bank plc, Trinseo Holding S.à r.l., TMF Administration Services Limited and the Law Debenture Trust Corporation plc
| | | | 10.22
| | Form of Restoration and Elective Deferral Plan (incorporated herein by reference to Exhibit 10.35 to Amendment No. 2 to the Registration Statement on Form S-1, File No. 333-194561, filed May 5, 2014)
| | | | 10.23
| | Performance Award (PA) Plan (incorporated herein by reference to Exhibit 10.36 to Amendment No. 2 to the Registration Statement on Form S-1, File No. 333-194561, filed May 5, 2014)
| | | | 10.24
| | Form of 2014 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.34 to Amendment No. 3 to the Registration Statement on Form S-1, File No. 333-194561, filed May 16, 2014)
| | | | 10.25
| | Trinseo S.A. Cash Incentive Plan (incorporated herein by reference to Exhibit 10.35 to Amendment No. 3 to the Registration Statement on Form S-1, File No. 333-194561, filed May 16, 2014)
| | | | 10.26
| | Form of Indemnification Agreement for Directors and Officers (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, File No.001-36473, filed August 3, 2017)
| | | | 10.27†
| | Form of Director Offer Letter
| | | | 10.28
| | Form of Restricted Stock Unit Agreement for Directors (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, File No. 001-36473, filed May 3, 2017)
| | | | 10.29
| | Form of Restricted Stock Unit Award Agreement for Executives (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report filed on Form 10-Q, File No. 001-36473, filed May 3, 2017)
| | | | 10.30
| | Form of Non-statutory Stock Option Award Agreement for Executives (incorporated herein by reference to Exhibit 10.3 to the Quarterly Report filed on Form 10-Q, File No. 001-36473, filed May 3, 2017)
| | | | 10.31
| | Form of Performance Award Stock Unit Agreement for Executives (incorporated herein by reference to Exhibit 10.4 to the Quarterly Report filed on Form 10-Q, File No. 001-36473, filed May 3, 2017)
| | | | 10.32
| | Form of Restricted Stock Unit Award Agreement for Employees (incorporated herein by reference to Exhibit 10.5 to the Quarterly Report filed on Form 10-Q, File No. 001-36473, filed May 3, 2017)
| | | | 10.33
| | Form of Non-statutory Stock Option Award Agreement for Employees (incorporated herein by reference to Exhibit 10.6 to the Quarterly Report filed on Form 10-Q, File No. 001-36473, filed May 3, 2017)
| | | |
*Application has been made to the Securities and Exchange Commission for confidential treatment of certain provisions of these exhibits. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.
†Filed herewith.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 1, 2018
| TRINSEO S.A.
| | | | | By:
| /s/ Christopher D. Pappas
| | Name:
| Christopher D. Pappas
| | Title:
| President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature
| | Title
| | Date
| | | | | | /s/ Christopher D. Pappas
| | President and Chief Executive Officer
| | March 1, 2018
| Christopher D. Pappas
| | (Principal Executive Officer)
| | | | | | | | /s/ Barry J. Niziolek
| | Executive Vice President and Chief Financial Officer
| | March 1, 2018
| Barry J. Niziolek
| | (Principal Financial Officer)
| | | | | | | | /s/ Ryan J. Leib
| | Vice President, Global Controller and Principal Accounting Officer
| | March 1, 2018
| Ryan J. Leib
| | (Principal Accounting Officer)
| | | | | | | | /s/ Joseph Alvarado
| | Director
| | March 1, 2018
| Joseph Alvarado
| | | | | | | | | | /s/ Jeffrey J. Cote
| | Director
| | March 1, 2018
| Jeffrey J. Cote
| | | | | | | | | | /s/ Pierre-Marie De Leener
| | Director
| | March 1, 2018
| Pierre-Marie De Leener
| | | | | | | | | | /s/ K’Lynne Johnson
| | Director
| | March 1, 2018
| K’Lynne Johnson
| | | | | | | | | | /s/ Philip R. Martens
| | Director
| | March 1, 2018
| Philip R. Martens
| | | | | | | | | | /s/ Donald T. Misheff
| | Director
| | March 1, 2018
| Donald T. Misheff
| | | | | | | | | | /s/ Henri Steinmetz
| | Director
| | March 1, 2018
| Henri Steinmetz
| | | | | | | | | | /s/ Stephen M. Zide
| | Director
| | March 1, 2018
| Stephen M. Zide
| | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | Audited Consolidated Financial Statements
| | Report of Independent Registered Public Accounting Firm
| F-2
| Consolidated Balance Sheets as of December 31, 2017 and 2016
| F-4
| Consolidated Statements of Operations for the years ended December 31, 2017, 2016, and 2015
| F-5
| Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016, and 2015
| F-6
| Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2017, 2016, and 2015
| F-7
| Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
| F-8
| Notes to Consolidated Financial Statements for the years ended December 31, 2017, 2016, and 2015
| F-9
| Financial Statement Schedule – Schedule II. Valuation and Qualifying Accounts for the years ended December 31, 2017, 2016, and 2015
| F-57
| | | Americas Styrenics LLC*
| | Audited Consolidated Financial Statements
| | Report of Independent Registered Public Accounting Firm
| F-58
| Consolidated Balance Sheets as of December 31, 2017 and 2016
| F-59
| Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015
| F-60
| Consolidated Statements of Members’ Equity for the years ended December 31, 2017, 2016, and 2015
| F-61
| Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015
| F-62
| Notes to Consolidated Financial Statements for the years ended December 31, 2017, 2016, and 2015
| F-63
|
*The audited financial statements of Americas Styrenics LLC as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 have been included in this Annual Report in accordance with the requirements of Rule 3-09 of Regulation S-X.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Trinseo S.A.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Trinseo S.A. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, based on our audit, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
We did not audit the financial statements of Americas Styrenics LLC, a 50% equity investment of Trinseo S.A., as of and for the years ended December 31, 2017 and 2016, which is reflected in the consolidated financial statements of Trinseo S.A. as an equity method investment of $152.5 million and $149.7 million as of December 31, 2017 and 2016, respectively, and income from equity investment of $122.9 million, $135.8 million and $135.3 million for the years ended December 31, 2017, 2016 and 2015 respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Americas Styrenics LLC, is based solely on the report of the other auditors.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it presents and classifies certain items in the consolidated statements of cash flows in 2017.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits and the report of other auditors provide a reasonable basis for our opinions.
As described in Management’s Annual Report on Internal Control over Financial Reporting, management has excluded API Plastics from its assessment of internal control over financial reporting as of December 31, 2017 because it was acquired by the Company in a purchase business combination during 2017. We have also excluded API Plastics from our audit of internal control over financial reporting. API Plastics is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 2% and 1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
March 1, 2018
We have served as the Company’s auditor since 2010.
TRINSEO S.A.
Consolidated Balance Sheets
(In millions, except per share data)
| | | | | | | | | | December 31, | | | | 2017 | | 2016 | | Assets | | | | | | | | Current assets | | | | | | | | Cash and cash equivalents | | $ | 432.8 | | $ | 465.1 | | Accounts receivable, net of allowance | | | 685.5 | | | 564.4 | | Inventories | | | 510.4 | | | 385.3 | | Other current assets | | | 17.5 | | | 18.1 | | Total current assets | | | 1,646.2 | | | 1,432.9 | | Investments in unconsolidated affiliates | | | 152.5 | | | 191.4 | | Property, plant and equipment, net | | | 627.0 | | | 510.0 | | Other assets | | | | | | | | Goodwill | | | 72.5 | | | 38.0 | | Other intangible assets, net | | | 207.5 | | | 177.3 | | Deferred income tax assets | | | 35.5 | | | 43.8 | | Deferred charges and other assets | | | 30.8 | | | 27.9 | | Total other assets | | | 346.3 | | | 287.0 | | Total assets | | $ | 2,772.0 | | $ | 2,421.3 | | Liabilities and shareholders’ equity | | | | | | | | Current liabilities | | | | | | | | Short-term borrowings and current portion of long-term debt | | $ | 7.0 | | $ | 5.0 | | Accounts payable | | | 436.8 | | | 378.0 | | Income taxes payable | | | 35.9 | | | 23.8 | | Accrued expenses and other current liabilities | | | 146.9 | | | 135.4 | | Total current liabilities | | | 626.6 | | | 542.2 | | Noncurrent liabilities | | | | | | | | Long-term debt, net of unamortized deferred financing fees | | | 1,165.0 | | | 1,160.4 | | Deferred income tax liabilities | | | 49.2 | | | 24.8 | | Other noncurrent obligations | | | 256.4 | | | 246.2 | | Total noncurrent liabilities | | | 1,470.6 | | | 1,431.4 | | Commitments and contingencies (Note 14) | | | | | | | | Shareholders’ equity | | | | | | | | Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (December 31, 2017: 48.8 shares issued and 43.4 shares outstanding; December 31, 2016: 48.8 shares issued and 44.3 shares outstanding) | | | 0.5 | | | 0.5 | | Additional paid-in-capital | | | 578.8 | | | 573.7 | | Treasury shares, at cost (December 31, 2017: 5.4 shares; December 31, 2016: 4.5 shares) | | | (286.8) | | | (217.5) | | Retained earnings | | | 527.9 | | | 261.2 | | Accumulated other comprehensive loss | | | (145.6) | | | (170.2) | | Total shareholders’ equity | | | 674.8 | | | 447.7 | | Total liabilities and shareholders’ equity | | $ | 2,772.0 | | $ | 2,421.3 | |
The accompanying notes are an integral part of these consolidated financial statements.
TRINSEO S.A.
Consolidated Statements of Operations
(In millions, except per share data)
| | | | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | 2015 | | Net sales | | $ | 4,448.1 | | $ | 3,716.6 | | $ | 3,971.9 | | Cost of sales | | | 3,794.1 | | | 3,129.0 | | | 3,502.8 | | Gross profit | | | 654.0 | | | 587.6 | | | 469.1 | | Selling, general and administrative expenses | | | 239.0 | | | 241.5 | | | 208.0 | | Equity in earnings of unconsolidated affiliates | | | 123.7 | | | 144.7 | | | 140.2 | | Operating income | | | 538.7 | | | 490.8 | | | 401.3 | | Interest expense, net | | | 70.1 | | | 75.0 | | | 93.2 | | Loss on extinguishment of long-term debt | | | 65.3 | | | — | | | 95.2 | | Other expense (income), net | | | (7.8) | | | 10.5 | | | 9.1 | | Income before income taxes | | | 411.1 | | | 405.3 | | | 203.8 | | Provision for income taxes | | | 82.8 | | | 87.0 | | | 70.2 | | Net income | | $ | 328.3 | | $ | 318.3 | | $ | 133.6 | | Weighted average shares- basic | | | 43.8 | | | 46.5 | | | 48.8 | | Net income per share- basic | | $ | 7.49 | | $ | 6.84 | | $ | 2.74 | | Weighted average shares- diluted | | | 45.0 | | | 47.5 | | | 49.0 | | Net income per share- diluted | | $ | 7.30 | | $ | 6.70 | | $ | 2.73 | | | | | | | | | | | | | Dividends per share | | $ | 1.38 | | $ | 0.90 | | $ | — | |
The accompanying notes are an integral part of these consolidated financial statements.
TRINSEO S.A.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
| | | | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | 2015 | | Net income | | $ | 328.3 | | $ | 318.3 | | $ | 133.6 | | Other comprehensive income (loss), net of tax: | | | | | | | | | | | Cumulative translation adjustments | | | 24.5 | | | (9.8) | | | (91.4) | | Net gain (loss) on cash flow hedges | | | (18.4) | | | 6.7 | | | 5.6 | | Pension and other postretirement benefit plans: | | | | | | | | | | | Prior service credit arising during period (net of tax of $0, $0, and $0.2) | | | — | | | — | | | 3.2 | | Net gain (loss) arising during period (net of tax of $10.8, $(7.3), and $2.8) | | | 31.8 | | | (20.6) | | | 4.7 | | Amounts reclassified from accumulated other comprehensive income (loss) | | | (13.3) | | | 3.3 | | | 3.4 | | Total other comprehensive income (loss), net of tax | | | 24.6 | | | (20.4) | | | (74.5) | | Comprehensive income | | $ | 352.9 | | $ | 297.9 | | $ | 59.1 | |
The accompanying notes are an integral part of these consolidated financial statements.
TRINSEO S.A.
Consolidated Statements of Shareholders’ Equity
(In millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | Shares | | Shareholders' Equity | | | | Ordinary Shares Outstanding | | Treasury Shares | | Ordinary Shares | | Additional
Paid-In Capital | | Treasury Shares | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total | | Balance at December 31, 2014 | | 48.8 | | — | | $ | 0.5 | | $ | 547.6 | | $ | — | | $ | (75.3) | | $ | (149.2) | | $ | 323.6 | | Net income | | — | | — | | | — | | | — | | | — | | | — | | | 133.6 | | | 133.6 | | Other comprehensive loss | | — | | — | | | — | | | — | | | — | | | (74.5) | | | — | | | (74.5) | | Stock-based compensation activity | | — | | — | | | — | | | 9.0 | | | — | | | — | | | — | | | 9.0 | | Balance at December 31, 2015 | | 48.8 | | — | | $ | 0.5 | | $ | 556.6 | | $ | — | | $ | (149.8) | | $ | (15.6) | | $ | 391.7 | | Adoption of new accounting standard | | — | | — | | | — | | | 0.9 | | | — | | | — | | | (0.9) | | | — | | Net income | | — | | — | | | — | | | — | | | — | | | — | | | 318.3 | | | 318.3 | | Other comprehensive loss | | — | | — | | | — | | | — | | | — | | | (20.4) | | | — | | | (20.4) | | Stock-based compensation activity | | — | | — | | | — | | | 16.2 | | | 1.0 | | | — | | | — | | | 17.2 | | Purchase of treasury shares | | (4.5) | | 4.5 | | | — | | | — | | | (218.5) | | | — | | | — | | | (218.5) | | Dividends on ordinary shares ($0.90 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (40.6) | | | (40.6) | | Balance at December 31, 2016 | | 44.3 | | 4.5 | | $ | 0.5 | | $ | 573.7 | | $ | (217.5) | | $ | (170.2) | | $ | 261.2 | | $ | 447.7 | | Net income | | — | | — | | | — | | | — | | | — | | | — | | | 328.3 | | | 328.3 | | Other comprehensive income | | — | | — | | | — | | | — | | | — | | | 24.6 | | | — | | | 24.6 | | Stock-based compensation activity | | 0.5 | | (0.5) | | | — | | | 5.1 | | | 17.5 | | | — | | | — | | | 22.6 | | Purchase of treasury shares | | (1.4) | | 1.4 | | | — | | | — | | | (86.8) | | | — | | | — | | | (86.8) | | Dividends on ordinary shares ($1.38 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (61.6) | | | (61.6) | | Balance at December 31, 2017 | | 43.4 | | 5.4 | | $ | 0.5 | | $ | 578.8 | | $ | (286.8) | | $ | (145.6) | | $ | 527.9 | | $ | 674.8 | |
The accompanying notes are an integral part of these consolidated financial statements.
TRINSEO S.A.
Consolidated Statements of Cash Flows
(In millions)
| | | | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | 2015 | | Cash flows from operating activities | | | | | | | | | | | Net income | | $ | 328.3 | | $ | 318.3 | | $ | 133.6 | | Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | Depreciation and amortization | | | 110.6 | | | 96.4 | | | 96.8 | | Amortization of deferred financing fees and issuance discount | | | 5.1 | | | 5.8 | | | 7.7 | | Deferred income tax | | | 14.8 | | | 16.1 | | | (0.1) | | Stock-based compensation expense | | | 13.8 | | | 17.1 | | | 9.0 | | Earnings of unconsolidated affiliates, net of dividends | | | 5.3 | | | (13.4) | | | (15.2) | | Unrealized net losses (gains) on foreign exchange forward contracts | | | 2.6 | | | 3.2 | | | (9.0) | | Loss on extinguishment of long-term debt | | | 65.3 | | | — | | | 95.2 | | Loss (gain) on sale of businesses and other assets | | | (10.5) | | | 14.9 | | | — | | Impairment charges | | | 4.3 | | | 15.1 | | | — | | Pension curtailment and settlement gains | | | (21.6) | | | — | | | — | | Changes in assets and liabilities | | | | | | | | | | | Accounts receivable | | | (51.8) | | | (96.4) | | | 65.1 | | Inventories | | | (80.2) | | | (51.0) | | | 97.2 | | Accounts payable and other current liabilities | | | 9.3 | | | 57.1 | | | (71.9) | | Income taxes payable | | | 9.9 | | | 3.8 | | | 12.0 | | Other assets, net | | | (4.5) | | | 5.4 | | | 3.2 | | Other liabilities, net | | | (9.4) | | | 11.3 | | | (1.7) | | Cash provided by operating activities | | | 391.3 | | | 403.7 | | | 421.9 | | Cash flows from investing activities | | | | | | | | | | | Capital expenditures | | | (147.4) | | | (123.9) | | | (109.3) | | Cash paid to acquire a business, net of cash acquired | | | (82.3) | | | — | | | — | | Proceeds from capital expenditures subsidy | | | — | | | — | | | 2.2 | | Proceeds from the sale of businesses and other assets | | | 46.2 | | | 2.0 | | | 0.8 | | Distributions from unconsolidated affiliates | | | 0.9 | | | 4.8 | | | — | | Other investing cash outflows | | | — | | | (0.2) | | | (0.4) | | Cash used in investing activities | | | (182.6) | | | (117.3) | | | (106.7) | | Cash flows from financing activities | | | | | | | | | | | Deferred financing fees | | | (21.5) | | | — | | | (28.2) | | Short-term borrowings, net | | | (0.3) | | | (0.3) | | | (18.4) | | Purchase of treasury shares | | | (88.9) | | | (215.1) | | | — | | Dividends paid | | | (58.0) | | | (27.3) | | | — | | Proceeds from exercise of option awards | | | 9.3 | | | 0.2 | | | — | | Withholding taxes paid on restricted share units | | | (0.3) | | | (0.1) | | | — | | Net proceeds from issuance of 2024 Term Loan B | | | 700.0 | | | — | | | — | | Repayments of 2024 Term Loan B | | | (1.8) | | | — | | | — | | Repayments of 2021 Term Loan B | | | (492.5) | | | (5.0) | | | (2.5) | | Net proceeds from issuance of 2025 Senior Notes | | | 500.0 | | | — | | | — | | Repayments of 2022 Senior Notes | | | (746.0) | | | — | | | — | | Prepayment penalty on long-term debt | | | (53.0) | | | — | | | (68.6) | | Net proceeds from issuance of 2021 Term Loan B | | | — | | | — | | | 498.8 | | Net proceeds from issuance of 2022 Senior Notes | | | — | | | — | | | 716.6 | | Repayments of 2019 Senior Notes | | | — | | | — | | | (1,192.5) | | Proceeds from Accounts Receivable Securitization Facility | | | — | | | — | | | 25.0 | | Repayments of Accounts Receivable Securitization Facility | | | — | | | — | | | (25.0) | | Cash used in financing activities | | | (253.0) | | | (247.6) | | | (94.8) | | Effect of exchange rates on cash | | | 12.0 | | | (5.0) | | | (9.9) | | Net change in cash and cash equivalents | | | (32.3) | | | 33.8 | | | 210.5 | | Cash and cash equivalents—beginning of period | | | 465.1 | | | 431.3 | | | 220.8 | | Cash and cash equivalents—end of period | | $ | 432.8 | | $ | 465.1 | | $ | 431.3 | | Supplemental disclosure of cash flow information | | | | | | | | | | | Cash paid for income taxes, net of refunds | | $ | 75.0 | | $ | 66.6 | | $ | 58.2 | | Cash paid for interest, net of amounts capitalized | | $ | 63.3 | | $ | 69.4 | | $ | 121.2 | | Accrual for property, plant and equipment | | $ | 15.6 | | $ | 35.6 | | $ | 14.2 | |
The accompanying notes are an integral part of these consolidated financial statements.
TRINSEO S.A.
Notes to Consolidated Financial Statements
(Dollars in millions, unless otherwise stated)
NOTE 1—ORGANIZATION AND BUSINESS ACTIVITIES
Organization
On June 3, 2010, Bain Capital Everest Manager Holding SCA, an affiliate of Bain Capital to which we refer to as the former Parent, was formed through investment funds advised or managed by Bain Capital. Dow Europe Holding B.V. (together with The Dow Chemical Company, “Dow”) retained an indirect ownership interest in the former Parent. Trinseo S.A. (“Trinseo”, and together with its subsidiaries, the “Company”) was also formed on June 3, 2010, incorporated under the existing laws of the Grand Duchy of Luxembourg. At that time, all ordinary shares of Trinseo were owned by the former Parent. On June 17, 2010, Trinseo acquired 100% of the former Styron business from Dow (the “Acquisition”), at which time, the Company commenced operations.
During the year ended December 31, 2016, the former Parent sold 37,269,567 ordinary shares pursuant to the Company’s shelf registration statement filed with the SEC. As such, the former Parent no longer holds an ownership interest in the Company.
Business Activities
The Company is a leading global materials company engaged in the manufacturing and marketing of synthetic rubber, latex binders, and plastics, including various specialty and technologically differentiated products. The Company develops synthetic rubber, latex binders, and plastics products that are incorporated into a wide range of products throughout the world, including tires and other products for automotive applications, carpet and artificial turf backing, coated paper and packaging board, food packaging, appliances, medical devices, consumer electronics and construction applications, among others.
The Company’s operations are located in Europe, North America, and Asia Pacific, supplemented by, Americas Styrenics, a styrenics joint venture with Chevron Phillips Chemical Company LP. Refer to Note 4 for further information regarding our investment in Americas Styrenics.
The Company has significant manufacturing and production operations around the world, which allow service to its global customer base. As of December 31, 2017, the Company’s production facilities included 30 manufacturing plants (which included a total of 75 production units) at 23 sites across 12 countries, including joint ventures and contract manufacturers. Additionally, as of December 31, 2017, the Company operated 11 research and development (R&D) facilities globally, including mini plants, development centers and pilot coaters.
The Company’s chief executive officer, who is the chief operating decision maker, manages the Company’s operations under two divisions, Performance Materials and Basic Plastics & Feedstocks. The Performance Materials division includes the following reportable segments: Latex Binders, Synthetic Rubber, and Performance Plastics. The Basic Plastics & Feedstocks division includes the following reportable segments: Basic Plastics, Feedstocks, and Americas Styrenics.
NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017 are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements of the Company contain the accounts of all entities that are controlled and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. A VIE is defined as a legal entity that has equity investors that do not have sufficient equity at risk for the entity to support its activities without additional subordinated financial support or, as a group, the holders of the equity at risk lack (i) the power to direct the entity’s activities or (ii) the obligation to absorb the expected losses or the right to
receive the expected residual returns of the entity. A VIE is required to be consolidated by a company if that company is the primary beneficiary. Refer to Note 10 for further discussion of the Company’s Accounts Receivable Securitization Facility, which qualifies as a VIE and is consolidated within the Company’s financial statements.
All intercompany balances and transactions are eliminated. Joint ventures over which the Company has the ability to exercise significant influence that are not consolidated are accounted for by the equity method.
Certain prior year amounts have been reclassified to conform to the current year presentation. Effective September 30, 2017, the Company adopted guidance that aims to eliminate diversity in practice for how certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. Refer to the discussion below under “Recent Accounting Guidance” for the impact of this adoption to the Company’s consolidated statement of cash flows for the periods presented herein.
Revisions
In 2017, the Company corrected its accounting related to a contract manufacturing agreement with a customer that had been entered into in conjunction with the Acquisition, in order to properly adjust for an embedded direct financing lease as well as an unfavorable contract liability, which had not been previously identified. As this agreement has been in place since the Acquisition, this correction includes an adjustment to the original purchase price allocation, resulting in an increase to goodwill of $8.5 million. Additional impacts from this adjustment are described below.
The Company assessed the materiality of this correction to prior periods’ financial statements in accordance with SEC Staff Accounting Bulletin No. (SAB) 99, Materiality, and concluded that the corrections were not material to prior periods, either individually or in the aggregate, and therefore, amendments of previously filed reports are not required. Although the corrections were immaterial to prior periods, in accordance with SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company has revised its previously reported consolidated financial statements and related notes thereto.
The following table details the effects of these revisions on impacted line items from the Company’s consolidated balance sheet as of December 31, 2016:
| | | | | | | | | | | | | As of December 31, 2016 | | Balance Sheet Caption | | As Reported | | Adjustment | | As Revised | | Property, plant and equipment, net | | $ | 513.8 | | $ | (3.8) | | $ | 510.0 | | Goodwill | | | 29.5 | | | 8.5 | | | 38.0 | | Deferred income tax assets | | | 40.2 | | | 3.6 | | | 43.8 | | Deferred charges and other assets | | | 24.4 | | | 3.5 | | | 27.9 | | Total other assets | | | 271.4 | | | 15.6 | | | 287.0 | | Total assets | | | 2,409.5 | | | 11.8 | | | 2,421.3 | | Other noncurrent obligations | | | 237.1 | | | 9.1 | | | 246.2 | | Total noncurrent liabilities | | | 1,422.3 | | | 9.1 | | | 1,431.4 | | Retained earnings | | | 258.5 | | | 2.7 | | | 261.2 | | Total shareholders’ equity | | | 445.0 | | | 2.7 | | | 447.7 | | Total liabilities and shareholders’ equity | | �� | 2,409.5 | | | 11.8 | | | 2,421.3 | |
The impact of the correction on the Company’s consolidated statements of operations and consolidated statements of cash flows was not significant, and therefore those statements have not been revised herein.
As this error originated in periods prior to those presented, “Accumulated Deficit” as of December 31, 2014 has been reduced from $151.9 million to $149.2 million, and “Accumulated Deficit” as of December 31, 2015 has been reduced from $18.3 million to $15.6 million.
In addition, the Company revised certain previously reported amounts included within Notes 7, 8, 13, and 18 in the consolidated financial statements to correct for the impact of the above adjustments. The Company concluded that its compliance with debt covenants would not have been affected by the adjustments above for any period.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual amounts could differ from these estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable. The Company uses major financial institutions with high credit ratings to engage in transactions involving cash equivalents. The Company minimizes credit risk in its receivables by selling products to a diversified portfolio of customers in a variety of markets located throughout the world.
The Company performs ongoing evaluations of its customers’ credit and generally does not require collateral. The Company maintains an allowance for doubtful accounts for losses resulting from the inability of specific customers to meet their financial obligations, representing our best estimate of probable credit losses in existing trade accounts receivable. A specific reserve for doubtful receivables is recorded against the amount due from these customers. For all other customers, the Company recognizes reserves for doubtful receivables based on historical experience.
Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued and other current liabilities, approximate fair value due to their generally short maturities.
The estimated fair value of the Company’s 2024 Term Loan B and 2025 Senior Notes (both of which are defined in Note 10) are determined using Level 2 inputs within the fair value hierarchy. Refer to Note 12 for the fair value of these debt instruments. When outstanding, the estimated fair values of borrowings under the Company’s 2022 Revolving Facility and Accounts Receivable Securitization Facility (both of which are defined in Note 10) are determined using Level 2 inputs within the fair value hierarchy. The carrying amounts of borrowings under the 2022 Revolving Facility and Accounts Receivable Securitization Facility approximate fair value as these borrowings bear interest based on prevailing variable market rates.
At times, the Company manages its exposure to changes in foreign currency exchange rates, where possible, by entering into foreign exchange forward contracts. Additionally, the Company manages its exposure to variability in interest payments associated with the Company’s variable rate debt by entering into interest rate swap agreements. When outstanding, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the consolidated balance sheets at fair value. The fair value of the derivatives is determined from sources independent of the Company, including the financial institutions which are party to the derivative instruments. The fair value of derivatives also considers the credit default risk of the paying party. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item will be recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative will be recorded in other comprehensive income and will be recognized in the consolidated statements of operations when the hedged item affects earnings.
As of December 31, 2017 and 2016, the Company had certain foreign exchange forward contracts outstanding that were not designated for hedge accounting treatment. As such, the settlements and changes in fair value of underlying instruments are recognized in “Other expense (income), net” in the consolidated statements of operations. For the years ended December 31, 2017 and 2015, the Company recognized losses related to these forward contracts of $19.2 million and $16.5 million, respectively, while for the year ended December 31, 2016 the Company recognized gains related to these forward contracts of $3.7 million.
As of December 31, 2017 and 2016, the Company had foreign exchange forward contracts which are designated as cash flow hedges. Additionally, as of December 31, 2017, the Company had interest rate swap agreements designated as cash flow hedges. As such, the qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive income or loss, or AOCI, to the extent effective. Amounts are reclassified to “Cost of sales”, in the context of foreign exchange forward contracts, and “Interest expense, net”, in the context of interest rate swap agreements, in the consolidated statements of operations in the period
during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur. No interest rate swap agreements were outstanding as of December 31, 2016.
Forward contracts and interest rate swap agreements are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in a single currency in the event of a default on or termination of any one contract. The Company records these foreign exchange forward contracts and interest rate swap agreements on a net basis, by counterparty within the consolidated balance sheets.
As of December 31, 2017, the Company has certain fixed-for-fixed cross currency swaps outstanding, swapping U.S. dollar principal and interest payments on the Company’s 2025 Senior Notes for euro-denominated payments. These cross currency swaps have been designated as a hedge of the Company’s net investment in certain European subsidiaries. As such, to the extent that these cross currency swaps are deemed to be highly effective hedges, changes in their fair value are recorded within the cumulative translation adjustment account as a component of AOCI. The resulting gain or loss will be subsequently reclassified into earnings when the hedged net investment is either sold or substantially liquidated. No cross currency swaps were outstanding as of December 31, 2016.
The Company presents the cash receipts and payments from hedging activities in the same category as the cash flows from the items subject to hedging relationships. As the items subject to economic hedging relationships are the Company’s operating assets and liabilities, the related cash flows are classified within operating activities in the consolidated statements of cash flows.
Foreign Currency Translation
For the majority of the Company’s subsidiaries, the local currency has been identified as the functional currency. For remaining subsidiaries, the U.S. dollar has been identified as the functional currency due to the significant influence of the U.S. dollar on their operations. Gains and losses resulting from the translation of various functional currencies into U.S. dollars are not recorded within the consolidated statements of operations. Rather, they are recorded within the cumulative translation adjustment account as a separate component of shareholders’ equity (AOCI) in the consolidated balance sheets. The Company translates asset and liability balances at exchange rates in effect at the end of the period and income and expense transactions at the average exchange rates in effect during the period. Gains and losses resulting from foreign currency transactions are recorded within the consolidated statements of operations.
For the years ended December 31, 2017 and 2015, the Company recognized net foreign exchange transaction gains of $20.6 million and $6.1 million, respectively, while for the year ended December 31, 2016, the Company recognized net foreign exchange transaction losses of $5.5 million. These amounts exclude the impacts of foreign exchange forward contracts discussed above. Gains and losses on net foreign exchange transactions are recorded within “Other expense (income), net” in the consolidated statements of operations.
Environmental Matters
Accruals for environmental matters are recorded when it is considered probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information become available. Accruals for environmental liabilities are recorded within “Other noncurrent obligations” in the consolidated balance sheets at undiscounted amounts. As of December 31, 2017 and 2016, there were no accruals for environmental liabilities recorded.
Environmental costs are capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction or normal operation of a long-lived asset. Any costs related to environmental contamination treatment and clean-ups are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.
Cash and Cash Equivalents
Cash and cash equivalents generally include time deposits or highly liquid investments with original maturities of three months or less and no material liquidity fee or redemption gate restrictions.
Inventories
Inventories are stated at the lower of cost or net realizable value (“NRV”), with cost being determined on the first-in, first-out (“FIFO”) method. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation. The Company periodically reviews its inventory for excess or obsolete inventory, and will write-down the excess or obsolete inventory value to its net realizable value, if applicable.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation and less impairment, if applicable, and are depreciated over their estimated useful lives using the straight-line method.
Expenditures for maintenance and repairs are recorded in the consolidated statement of operations as incurred. Expenditures that significantly increase asset value, extend useful asset lives or adapt property to a new or different use are capitalized. These expenditures include planned major maintenance activity or turnaround activities that increase our manufacturing plants’ output and improve production efficiency as compared to pre-turnaround operations. As of December 31, 2017 and 2016, $11.6 million and $9.2 million, respectively, of the Company’s net costs related to turnaround activities were capitalized within “Deferred charges and other assets” in the consolidated balance sheets, and are being amortized over the period until the next scheduled turnaround.
The Company periodically evaluates actual experience to determine whether events and circumstances have occurred that may warrant revision of the estimated useful lives of property, plant and equipment. Engineering and other costs directly related to the construction of property, plant and equipment are capitalized as construction in progress until construction is complete and such property, plant and equipment is ready and available to perform its specifically assigned function. Upon retirement or other disposal, the asset cost and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds, is charged or credited to income. The Company also capitalizes interest as a component of the cost of capital assets constructed for its own use.
Impairment and Disposal of Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value based on a discounted cash flow analysis utilizing market participant assumptions. Refer to Note 12 for further information.
Long-lived assets to be disposed of by sale are classified as held-for-sale and are reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of in a manner other than by sale are classified as held-and-used until they are disposed.
Goodwill and Other Intangible Assets
The Company records goodwill when the purchase price of a business acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level annually, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. The Company utilizes a market approach and an income approach (under the discounted cash flow method) to calculate the fair value of its reporting units. When supportable, the Company employs the qualitative assessment of goodwill impairment prescribed by ASC 350. The annual impairment assessment is completed using a measurement date of October 1st. No goodwill impairment losses were recorded in the years ended December 31, 2017, 2016, and 2015.
Finite-lived intangible assets, such as developed technology, customer relationships, manufacturing capacity rights, and computer software for internal use are amortized on a straight-line basis over their estimated useful life and are reviewed for impairment or obsolescence if events or changes in circumstances indicate that their carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows. No intangible asset impairment losses were recorded in the years ended December 31, 2017, 2016, and 2015.
Acquired developed technology is recorded at fair value upon acquisition and is amortized using the straight-line method over the estimated useful life ranging from 9 years to 15 years. We determine amortization periods for developed
technology based on our assessment of various factors impacting estimated useful lives and timing and extent of estimated cash flows of the acquired assets. This includes estimates of expected period of future economic benefit and competitive advantage related to existing processes and procedures at the date of acquisition. Significant changes to any of these factors may result in a reduction in the useful life of these assets.
Customer relationships are recorded at fair value upon acquisition and are amortized using the straight-line method over the estimated useful life of 19 years. We determine amortization periods for customer relationships based on our assessment of various factors impacting estimated useful lives and timing and extent of estimated cash flows of the acquired assets. This includes estimates of expected period of future economic benefit and customer retention rates. Significant changes to any of these factors may result in a reduction in the useful life of these assets.
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates in which the Company has the ability to exercise significant influence (generally, 20% to 50%-owned companies) are accounted for using the equity method. Investments are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. An impairment loss is recorded whenever a decline in fair value of an investment in an unconsolidated affiliate below its carrying amount is determined to be other-than-temporary.
As discussed below, in conjunction with the adoption of new cash flow guidance that aims to eliminate diversity in practice for how certain cash receipts and payments are presented and classified in the consolidated statements of cash flows, the Company made an accounting policy election to use the cumulative earnings approach for presenting distributions received from equity method investees, which is consistent with its existing approach.
Deferred Financing Fees
Capitalized fees and costs incurred in connection with the Company’s recognized debt liabilities are presented in the consolidated balance sheets as a direct reduction from the carrying value of those debt liabilities, consistent with debt discounts. Deferred financing fees related to the Company’s revolving debt facilities are included within “Deferred charges and other assets” in the consolidated balance sheets.
For the 2024 Term Loan B and 2025 Senior Notes (and the 2021 Term Loan B and 2022 Senior Notes, prior to their repayment in September 2017), deferred financing fees are amortized over the term of the agreement using the effective interest method, while for the 2022 Revolving Facility and the Accounts Receivable Securitization Facility, deferred financing fees are amortized using the straight-line method over the term of the respective facility. Amortization of deferred financing fees is recorded in “Interest expense, net” within the consolidated statements of operations.
Sales
Sales are recognized when the revenue is realized or realizable and the earnings process is complete, which occurs when risk and title to the product transfers to the customer, typically at the time shipment is made. As such, title to the product generally passes when the product is delivered to the freight carrier. Standard terms of delivery are included in contracts of sale, order confirmation documents and invoices. Taxes on sales are excluded from net sales.
Sales are recorded net of estimates for returns and price allowances, including discounts for prompt payment and volume-based incentives.
Cost of Sales
The Company classifies the costs of manufacturing and distributing its products as cost of sales. Manufacturing costs include raw materials, utilities, packaging, employee salary and benefits and fixed manufacturing costs associated with production. Fixed manufacturing costs include such items as plant site operating costs and overhead, production planning, depreciation and amortization, repairs and maintenance, environmental, and engineering costs. Distribution costs include shipping and handling costs. Freight and any directly related costs of transporting finished products to customers are also included within cost of sales. As discussed above, inventory costs are recorded within cost of sales utilizing the FIFO method.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses are generally charged to expense as incurred. SG&A expenses are the cost of services performed by the marketing and sales functions (including sales managers, field sellers, marketing research, marketing communications and promotion and advertising materials) and by administrative functions (including product management, R&D, business management, customer invoicing, human resources, information technology, legal and finance services, such as accounting and tax). Salary and benefit costs, including stock-based compensation, for these sales personnel and administrative staff are included within SG&A expenses. R&D expenses include the cost of services performed by the R&D function, including technical service and development, process research including pilot plant operations, and product development. The Company also includes restructuring charges within SG&A expenses.
Total R&D costs included in SG&A expenses were $51.9 million, $51.0, million and $51.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.
The Company expenses promotional and advertising costs as incurred to SG&A expenses. Total promotional and advertising expenses were $1.5 million, $3.0 million, and $3.5 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Restructuring charges included within SG&A expenses were $8.0 million, $23.9 million and $8.2 million for the years ended December 31, 2017, 2016, and 2015, respectively. Refer to Note 19 for further information.
Pension and Postretirement Benefits Plans
The Company has several defined benefit plans, under which participants earn a retirement benefit based upon a formula set forth in the plan. The Company also provides certain health care and life insurance benefits to retired employees mainly in the United States. Prior to the divestiture of our latex binders and automotive businesses in Brazil (refer to Note 3) we also provided health care and life insurance benefits to retired employees in Brazil. The U.S.-based plan provides health care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits.
Accounting for defined benefit pension plans and other postretirement benefit plans, and any curtailments and settlements thereof, requires various assumptions, including, but not limited to, discount rates, expected rates of return on plan assets and future compensation growth rates. The Company evaluates these assumptions at least once each year, or as facts and circumstances dictate, and makes changes as conditions warrant.
In 2016, the Company changed the method used to estimate the future service and interest cost components of net periodic benefit cost for our defined benefit pension and other postretirement benefit plans. As a result, beginning in 2017, the Company employed a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
A settlement is a transaction that is an irrevocable action that relieves the employer (or the plan) of primary responsibility for a pension or postretirement benefit obligation, and that eliminates significant risks related to the obligation and the assets used to effect the settlement. When a settlement occurs, the Company does not record settlement gains or losses during interim periods when the cost of all settlements in a year is less than or equal to the sum of the service cost and interest cost components of net periodic benefit cost for the plan in that year.
Income Taxes
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. For each tax jurisdiction in which the Company operates, deferred tax assets and liabilities are offset against one another and are presented as a single noncurrent amount within the consolidated balance sheets.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision is made for income taxes on unremitted earnings of subsidiaries and affiliates, unless such earnings are deemed to be indefinitely invested.
The Company recognizes the financial statement effects of uncertain income tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accrues for other 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. Interest accrued related to unrecognized tax and income tax related penalties are included in the provision for income taxes. The current portion of uncertain income taxes positions is recorded in “Income taxes payable” while the long-term portion is recorded in “Other noncurrent obligations” in the consolidated balance sheets.
Stock-based Compensation
Refer to Note 16 for detailed discussion regarding the Company’s stock-based compensation award programs. In connection with the Company’s initial public offering (“IPO”), the Company’s board of directors approved the 2014 Omnibus Plan. Since that time, certain equity grants have been awarded, comprised of restricted share units (“RSUs”), option awards, and performance share units (“PSUs”). Stock-based compensation expense recognized in our consolidated financial statements is based on awards that are ultimately expected to vest. The Company’s policy election is to recognize forfeitures as incurred, rather than estimating forfeitures in advance.
Compensation costs for the RSUs are measured at the grant date based on the fair value of the award and are recognized ratably as expense over the applicable vesting term. The fair value of RSUs is equal to the fair market value of the Company’s ordinary shares based on the closing price on the date of grant. Dividend equivalents will accumulate on RSUs during the vesting period, and will be payable in cash and will not accrue interest. Award holders have no right to receive the dividend equivalents unless and until the associated RSUs vest.
Compensation costs for the option awards are measured at the grant date based on the fair value of the award and is recognized as expense over the appropriate service period utilizing graded vesting. The fair value for option awards is computed using the Black-Scholes pricing model, whose inputs and assumptions are determined as of the date of grant.
Compensation costs for the PSUs are measured at the grant date based on the fair value of the award, which is computed using a Monte Carlo valuation model, and is recognized ratably as expense over the applicable vesting term. Dividend equivalents will accumulate on PSUs during the vesting period, and will be payable in cash and will not accrue interest. Award holders have no right to receive the dividend equivalents unless and until the associated PSUs vest.
Treasury Shares
The Company may, from time to time, repurchase its ordinary shares at prevailing market rates. Share repurchases are recorded at cost within “Treasury shares” within shareholders’ equity in the consolidated balance sheets. It is the Company’s policy that, as RSUs, PSUs, and option awards vest or are exercised, ordinary shares will be issued from the existing pool of treasury shares on a first-in-first-out basis. Refer to Note 16 for details of vesting for RSUs and PSUs as well as the exercises of option awards.
Recent Accounting Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued guidance which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the FASB has issued certain clarifying updates to this guidance, which the Company has considered as part of our adoption, which is effective as of January 1, 2018. The Company has completed its scoping assessment for the adoption of this guidance by conducting surveys with relevant stakeholders in the business, including commercial and finance leadership, reviewing a representative sample of revenue arrangements across all businesses, and identifying potential qualitative revenue recognition changes related to the new standard update. In completing this phase, the Company identified its major revenue streams, which are concentrated within individual product sales within
each of our reportable segments. As a result of this work, the Company concluded that it will adopt this new guidance applying the modified retrospective approach. In addition, the Company has established key accounting policies and evaluated impacts on business processes, information technology, and controls resulting from the adoption of this new standard. Additionally, the Company does not expect the impacts of adoption will have a material impact on its consolidated financial statements. The Company remains in the process of assessing new disclosure requirements under this standard, which will be included in the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2018.
In July 2015, the FASB issued guidance which simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value (“NRV”) test. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation. The Company adopted this guidance effective January 1, 2017, and the adoption did not have a material impact on the Company’s financial position or results of operations.
In February 2016, the FASB issued guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize on the consolidated balance sheets lease liabilities and corresponding right-of-use assets for all leases with terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. This new guidance is effective for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. The Company is in the process of assessing the impact on its consolidated financial statements from the adoption of the new guidance. However, as we are the lessee under various real estate, railcar, and other equipment leases, which we currently account for as operating leases, we anticipate an increase in the recognition of right-of-use assets and lease liabilities as a result of this adoption.
In August 2016, the FASB issued guidance that aims to eliminate diversity in practice for how certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. Additionally, the FASB has issued further guidance related to the presentation of restricted cash on the consolidated statement of cash flows. The Company adopted this guidance effective September 30, 2017 on a retrospective basis and the consolidated statements of cash flows for the periods presented herein reflect this adoption. The most significant impact of this adoption to the Company was the requirement to classify debt prepayment or extinguishment costs, which the Company had historically classified within cash flows from operating activities, as financing cash outflows. For the years ended December 31, 2017 and 2015, respectively, $53.0 million and $68.6 million of debt prepayment penalties are reflected as financing cash outflows. No debt prepayment penalties were incurred during the year ended December 31, 2016. Additionally, in conjunction with this adoption, the Company made an accounting policy election to use the cumulative earnings approach for presenting distributions received from equity method investees, which is consistent with its existing approach.
In January 2017, the FASB issued guidance that revises the definition of a business in order to assist in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, fewer transactions are expected to be accounted for as business combinations. The Company adopted this guidance during the first quarter of 2017. We expect this adoption could affect conclusions reached for future transactions in several areas, including acquisitions and disposals.
In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment by removing Step 2 of the test, which requires a hypothetical purchase price allocation. As a result, a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted this guidance during the first quarter of 2017, which did not have a material impact to the Company’s financial position or results of operations.
In March 2017, the FASB issued guidance that requires employers to present the service cost component of net periodic benefit cost in the same statement of operations line item as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are to be presented outside of any subtotal of operating income. The Company adopted this guidance effective January 1, 2018 on a retrospective basis. As a result of this adoption, in future filings, the Company will reclassify approximately $13.7 million of net periodic benefit income for the year ended December 31, 2017 and $7.4 million of net periodic benefit cost for the year ended
December 31, 2016 from “Cost of sales” and “Selling, general and administrative expenses”, collectively, to “Other expense (income), net” within the consolidated statements of operations.
In August 2017, the FASB issued significant amendments to existing hedge accounting guidance. Among other things, this guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting, amend presentation and disclosure requirements, and change how companies assess effectiveness. This guidance is required for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the timing and related impact of adopting this guidance on its financial position and results of operations.
In February 2018, the FASB issued guidance to address certain stranded income tax effects in AOCI resulting from the enactment of the U.S. “Tax Cuts and Jobs Act” signed into law on December 22, 2017. The amendment provides financial statement preparers with an option to reclassify stranded tax effects within AOCI, resulting from the reduction of the U.S. federal corporate income tax rate, to retained earnings. The amendment also includes disclosure requirements regarding the Company’s accounting policy for releasing income tax effects from AOCI. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, and the provisions of the amendment should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the “Tax Cuts and Jobs Act” is recognized. While the Company is still evaluating the provisions of this amendment, should the Company choose to adopt this guidance, it is not expected to have a material impact on the Company’s consolidated financial statements.
NOTE 3—ACQUISITIONS AND DIVESTITURES
The Acquisition
The Company accounted for the Acquisition (as discussed in Note 1) under the purchase method of accounting, whereby the purchase price paid, net of working capital adjustments, was allocated to the acquired assets and liabilities at fair value.
As part of the Acquisition, the Company has been indemnified for various tax matters, including income tax and value add taxes, as well as legal liabilities which have been incurred prior to the Acquisition. Conversely, certain tax matters which the Company has benefitted from are subject to reimbursement by Trinseo to Dow. These amounts have been estimated and provisional amounts have been recorded based on the information known during the measurement period; however, these amounts remain subject to change based on the completion of our annual statutory filings, tax authority review as well as a final resolution with Dow on amounts due to and due from the Company. Management believes the Company’s estimates and assumptions are reasonable under the circumstances, however, settlement negotiations or changes in estimates around pre-acquisition indemnifications could result in a material impact on the consolidated financial statements.
Acquisition of API Plastics
On July 10, 2017, the Company acquired 100% of the equity interest of API Applicazioni Plastiche Industriali S.p.A, or API Plastics, a privately held company. The gross purchase price for the acquisition was $90.6 million, inclusive of $8.4 million of cash acquired, yielding a net purchase price of $82.3 million, all of which was paid for in the year ended December 31, 2017. API Plastics, based in Mussolente, Italy, is a manufacturer of soft-touch polymers and bioplastics, such as thermoplastic elastomers (“TPEs”). TPEs can be molded over rigid plastics such as ABS and PC/ABS, which presents opportunities for complementary technology product offerings within our Performance Plastics segment. The acquisition was funded through existing cash on hand.
The Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The Company calculated the fair value of the assets acquired using the income and cost approaches (or a combination thereof). Fair values were determined based on Level 3 inputs including estimated future cash flows, discount rates, royalty rates, growth rates, sales projections, retention rates and terminal values, all of which require significant management judgment.
The purchase price allocation is based upon preliminary information and is subject to change if additional
information about the facts and circumstances that existed at the acquisition date becomes available. Additional information is being gathered to finalize these preliminary measurements, particularly with respect to property, plant and equipment, intangible assets, inventory, deferred income taxes and income taxes payable. Further adjustments may be necessary as a result of the Company’s on-going assessment of additional information related to the fair value of assets acquired and liabilities assumed, including goodwill, during the measurement period.
The following table summarizes the preliminary fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
| | | | | | | July 10, | | | | 2017 | | Cash and cash equivalents | | $ | 8.4 | | Accounts receivable | | | 16.5 | | Inventories | | | 10.3 | | Other current assets | | | 0.8 | | Property, plant, and equipment | | | 23.3 | | Other intangible assets(1) | | | | | Customer relationships | | | 14.0 | | Developed technology | | | 11.5 | | Other amortizable intangible assets | | | 3.5 | | Total fair value of assets acquired | | $ | 88.3 | | | | | | | Accounts payable | | $ | 12.2 | | Income taxes payable | | | 0.2 | | Accrued expenses and other current liabilities | | | 1.4 | | Deferred income tax liabilities | | | 11.3 | | Other noncurrent obligations | | | 1.3 | | Total fair value of liabilities assumed | | $ | 26.4 | | Net identifiable assets acquired | | $ | 61.9 | | Goodwill(2) | | | 28.7 | | Net assets acquired | | $ | 90.6 | |
| (1)
| | The expected lives of the acquired intangible assets are 19 years for customer relationships, 9 years for developed technology, and 3 years for other amortizable intangible assets.
|
| (2)
| | Goodwill consists of expected operating synergies resulting from combining API Plastics with our existing businesses, and is allocated entirely to the Performance Plastics segment. None of the goodwill related to this acquisition will be deductible for income tax purposes.
|
During the year ended December 31, 2017, transaction and integration costs related to advisory and professional fees incurred in conjunction with the API Plastics acquisition were $3.4 million, and were included within “Selling, general and administrative expenses” in the consolidated statement of operations. Additionally, during the year ended December 31, 2017, the Company recorded a $1.3 million non-cash fair value inventory adjustment related to the API Plastics acquisition which was included within “Cost of sales” in the consolidated statement of operations when the acquired inventory was sold.
Pro forma results of operations information has not been presented, as the effect of the API Plastics acquisition is not material. The operating results of API Plastics are included within the Company's consolidated statement of operations since the acquisition date of July 10, 2017 and were not material to the Company's results for the year ended December 31, 2017.
Divestiture of Brazil Business
During the second quarter of 2016, the Company signed a definitive agreement to sell Trinseo do Brasil Comercio de Produtos Quimicos Ltda. (“Trinseo Brazil”), its primary operating entity in Brazil which includes both a latex binders
and automotive business. Under the agreement of sale, which closed on October 1, 2016, Trinseo Brazil was sold to a single counterparty, for a selling price that is subject to certain contingent consideration payments, which could be paid by the buyer over a 5-year period subsequent to the closing date, based on the results of the Trinseo Brazil latex binders business during that time.
As a result of this agreement, during the year ended December 31, 2016, the Company recorded impairment charges for the estimated loss on sale of approximately $15.1 million within “Other expense (income), net” in the consolidated statement of operations. The $15.1 million charge primarily relates to the unrecoverable net book value of property, plant and equipment along with certain working capital balances, and also includes $0.4 million of goodwill written off with the sale (entirely attributable to the Latex Binders segment). This charge has been allocated as $9.4 million, $4.9 million, and $0.7 million to the Performance Plastics segment, Latex Binders segment, and Corporate, respectively. During the years ended December 31, 2017 and 2016, the Company has received $1.7 million and $1.8 million in proceeds from the sale of these businesses, respectively.
The results of operations associated with the latex binders and automotive businesses of Trinseo Brazil were not classified as discontinued operations as the decision to divest these businesses does not represent a strategic shift that has, or will have, a major effect on the Company’s financial position or results of operations.
NOTE 4—INVESTMENTS IN UNCONSOLIDATED AFFILIATES
During the year ended December 31, 2017, the Company had two joint ventures: Americas Styrenics, a styrene and polystyrene joint venture with Chevron Phillips Chemical Company LP, and Sumika Styron Polycarbonate, a polycarbonate joint venture with Sumitomo Chemical Company Limited. The results of Americas Styrenics are included within its own reporting segment, and the results of Sumika Styron Polycarbonate were included within the Basic Plastics reporting segment until the Company sold its 50% share of the entity in January 2017. Refer to the discussion below for further information about the sale of the Company’s share in Sumika Styron Polycarbonate during the first quarter of 2017.
Equity in earnings from unconsolidated affiliates was $123.7 million, $144.7 million and $140.2 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Both of the unconsolidated affiliates are privately held companies; therefore, quoted market prices for their stock are not available. The summarized financial information of the Company’s unconsolidated affiliates is shown below. This table includes summarized financial information for Sumika Styron Polycarbonate through the date of sale in January 2017.
| | | | | | | | | | December 31, | | | | 2017 | | 2016 | | Current assets | | $ | 364.0 | | $ | 457.9 | | Noncurrent assets | | | 236.2 | | | 269.6 | | Total assets | | $ | 600.2 | | $ | 727.5 | | Current liabilities | | $ | 184.3 | | $ | 207.8 | | Noncurrent liabilities | | | 17.9 | | | 31.4 | | Total liabilities | | $ | 202.2 | | $ | 239.2 | |
| | | | | | | | | | | | | Year Ended | | | | December 31, | | | | 2017 | | 2016 | | 2015 | | Sales | | $ | 1,798.1 | | $ | 1,649.4 | | $ | 1,753.5 | | Gross profit | | $ | 243.6 | | $ | 318.5 | | $ | 318.1 | | Net income | | $ | 196.3 | | $ | 249.2 | | $ | 250.1 | |
Sales to unconsolidated affiliates for the years ended December 31, 2017, 2016, and 2015 were $3.6 million, $4.2 million and $2.5 million, respectively. Purchases from unconsolidated affiliates were $78.8 million, $157.4 million and $178.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017 and 2016, respectively, $0.1 million and $0.7 million due from unconsolidated affiliates was included in “Accounts receivable, net of allowance” and $4.7 million and $16.3 million due to unconsolidated affiliates was included in “Accounts payable” in the consolidated balance sheets.
Americas Styrenics
As of December 31, 2017 and 2016, respectively, the Company’s investment in Americas Styrenics was $152.5 million and $149.7 million, which was $46.4 million and $71.2 million less than the Company’s 50% share of Americas Styrenics’ underlying net assets. These amounts represent the difference between the book value of assets contributed to the joint venture at the time of formation (May 1, 2008) and the Company’s 50% share of the total recorded value of the joint venture’s assets and certain adjustments to conform with the Company’s accounting policies. This difference is being amortized over a weighted average remaining useful life of the contributed assets of approximately 2.8 years as of December 31, 2017. The Company received dividends from Americas Styrenics of $120.0 million, $130.0 million, and $125.0 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Sumika Styron Polycarbonate
On January 31, 2017, the Company completed the sale of its 50% share in Sumika Styron Polycarbonate to Sumitomo Chemical Company Limited for total sales proceeds of approximately $42.1 million. As a result, the Company recorded a gain on sale of $9.3 million during the year ended December 31, 2017, which was included within “Other expense (income), net” in the consolidated statement of operations and was allocated entirely to the Basic Plastics segment. In addition, the parties have entered into a long-term agreement to continue sourcing polycarbonate resin from Sumika Styron Polycarbonate to the Company’s Performance Plastics segment.
As of December 31, 2016, the Company’s investment in Sumika Styron Polycarbonate was $41.7 million. Due to the sale in January 2017, the Company no longer has an investment in Sumika Styron Polycarbonate as of December 31, 2017. The Company received dividends from Sumika Styron Polycarbonate of $9.8 million and $6.2 million for the years ended December 31, 2017 and 2016, respectively. The Company received no dividends from Sumika Styron Polycarbonate for the year ended December 31, 2015.
NOTE 5—ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
| | | | | | | | | | December 31, | | | | 2017 | | 2016 | | Trade receivables | | $ | 570.3 | | $ | 479.3 | | Non-income tax receivables | | | 79.3 | | | 55.2 | | Other receivables | | | 41.5 | | | 33.0 | | Less: allowance for doubtful accounts | | | (5.6) | | | (3.1) | | Total | | $ | 685.5 | | $ | 564.4 | |
The allowance for doubtful accounts was approximately $5.6 million and $3.1 million as of December 31, 2017 and 2016, respectively. For the years ended December 31, 2017, 2016, and 2015, respectively, the Company recognized bad debt expense of $1.5 million, $1.0 million, and $0.3 million.
NOTE 6—INVENTORIES
Inventories consisted of the following:
| | | | | | | | | | December 31, | | | | 2017 | | 2016 | | Finished goods | | $ | 250.9 | | $ | 187.5 | | Raw materials and semi-finished goods | | | 226.7 | | | 168.8 | | Supplies | | | 32.8 | | | 29.0 | | Total | | $ | 510.4 | | $ | 385.3 | |
NOTE 7—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| | | | | | | | | | | | | | Estimated Useful | | December 31, | | | | Lives (Years) | | 2017 | | 2016 | | Land | | Not applicable | | $ | 40.8 | | $ | 35.0 | | Land and waterway improvements | | 1 | - | 20 | | | 16.4 | | | 14.6 | | Buildings | | 2 | - | 40 | | | 87.9 | | | 57.1 | | Machinery and equipment(1) | | 1 | - | 20 | | | 874.5 | | | 659.6 | | Utility and supply lines | | 1 | - | 10 | | | 8.1 | | | 7.3 | | Leasehold interests | | 1 | - | 45 | | | 41.9 | | | 39.2 | | Other property | | 1 | - | 8 | | | 25.1 | | | 27.0 | | Construction in process | | Not applicable | | | 56.0 | | | 83.1 | | Property, plant and equipment | | | | | | | 1,150.7 | | | 922.9 | | Less: accumulated depreciation | | | | | | | (523.7) | | | (412.9) | | Property, plant and equipment, net | | | | | | $ | 627.0 | | $ | 510.0 | |
| (1)
| | Approximately 95% of our machinery and equipment had a useful life of three to ten years as of December 31, 2017 and 2016.
|
| | | | | | | | | | | | | Year Ended | | | | December 31, | | | | 2017 | | 2016 | | 2015 | | Depreciation expense | | $ | 77.9 | | $ | 71.3 | | $ | 74.9 | | Capitalized interest | | $ | 5.0 | | $ | 3.4 | | $ | 3.9 | |
NOTE 8—GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table shows changes in the carrying amount of goodwill, by segment, from December 31, 2015 to December 31, 2016 and from December 31, 2016 to December 31, 2017, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | Performance Materials | | Basic Plastics & Feedstocks | | | | | | | Latex | | Synthetic | | Performance | | Basic | | | | Americas | | | | | | | Binders | | Rubber | | Plastics | | Plastics | | Feedstocks | | Styrenics | | Total | | Balance at December 31, 2015 | | $ | 15.7 | | $ | 10.9 | | $ | 5.6 | | $ | 7.4 | | $ | — | | $ | — | | $ | 39.6 | | Acquisitions/Divestitures (Note 3) | | | (0.4) | | | — | | | — | | | — | | | — | | | — | | | (0.4) | | Foreign currency impact | | | (0.5) | | | (0.3) | | | (0.2) | | | (0.2) | | | — | | | — | | | (1.2) | | Balance at December 31, 2016 | | $ | 14.8 | | $ | 10.6 | | $ | 5.4 | | $ | 7.2 | | $ | — | | $ | — | | $ | 38.0 | | Acquisitions/Divestitures (Note 3) | | | — | | | — | | | 28.7 | | | — | | | — | | | — | | | 28.7 | | Foreign currency impact | | | 1.7 | | | 1.1 | | | 2.3 | | | 0.7 | | | — | | | — | | | 5.8 | | Balance at December 31, 2017 | | $ | 16.5 | | $ | 11.7 | | $ | 36.4 | | $ | 7.9 | | $ | — | | $ | — | | $ | 72.5 | |
Goodwill impairment testing is performed annually as of October 1st. In 2017, the Company performed its annual impairment test for goodwill and determined that the estimated fair value of each reporting unit was in excess of the carrying value indicating that none of the Company’s goodwill was impaired. The Company concluded there were no goodwill impairments or triggering events for the years ended December 31, 2017, 2016, and 2015.
Other Intangible Assets
The following table provides information regarding the Company’s other intangible assets as of December 31, 2017 and 2016, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | December 31, 2016 | | | | Estimated | | Gross | | | | | | | | Gross | | | | | | | | | | Useful Life | | Carrying | | Accumulated | | | | | Carrying | | Accumulated | | | | | | | (Years) | | Amount | | Amortization | | Net | | Amount | | Amortization | | Net | | Developed technology(1) | | 9 - 15 | | $ | 201.6 | | $ | (96.1) | | $ | 105.5 | | $ | 166.2 | | $ | (72.2) | | $ | 94.0 | | Customer Relationships(1) | | 19 | | | 14.7 | | | (0.4) | | | 14.3 | | | — | | | — | | | — | | Manufacturing Capacity Rights | | 6 | | | 22.8 | | | (13.9) | | | 8.9 | | | 20.0 | | | (8.9) | | | 11.1 | | Software | | 5 - 10 | | | 89.5 | | | (25.2) | | | 64.3 | | | 82.3 | | | (15.1) | | | 67.2 | | Software in development | | N/A | | | 11.5 | | | — | | | 11.5 | | | 4.8 | | | — | | | 4.8 | | Other(1) | | 3 | | | 3.4 | | | (0.4) | | | 3.0 | | | 0.2 | | | — | | | 0.2 | | Total | | | | $ | 343.5 | | $ | (136.0) | | $ | 207.5 | | $ | 273.5 | | $ | (96.2) | | $ | 177.3 | |
| (1)
| | Balances as of December 31, 2017 include assets acquired related to the acquisition of API Plastics. Refer to Note 3 for further information.
|
During 2016, the Company completed an upgrade of our legacy ERP environment to the latest version of SAP. The total amount of capitalized software related to this project was $57.4 million, which is being amortized over its estimated useful life of approximately 9 years.
Amortization expense related to finite-lived intangible assets totaled $27.0 million, $21.3 million, and $18.5 million, for the years ended December 31, 2017, 2016, and 2015, respectively.
The following table details the Company’s estimated amortization expense for the next five years, excluding any amortization expense related to software currently in development:
| | | | | | | | | | | | | | | Estimated Amortization Expense for the Next Five Years | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | $ | 29.7 | | $ | 29.5 | | $ | 25.9 | | $ | 23.1 | | $ | 22.2 | |
NOTE 9—ACCOUNTS PAYABLE
Accounts payable consisted of the following:
| | | | | | | | | | December 31, | | | | 2017 | | 2016 | | Trade payables | | $ | 387.3 | | $ | 341.9 | | Other payables | | | 49.5 | | | 36.1 | | Total | | $ | 436.8 | | $ | 378.0 | |
NOTE 10—DEBT
Refer to discussion below for details and definitions of the Company’s debt facilities, as well as details of the Company’s debt refinancing that occurred during the third quarter of 2017. The Company was in compliance with all debt related covenants as of December 31, 2017 and 2016.
| | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | Interest Rate as of December 31, 2017 | | Maturity
Date | | Carrying
Amount | | Unamortized Deferred Financing Fees(1) | | Total Debt,
Less
Unamortized
Deferred
Financing
Fees | | Senior Credit Facility | | | | | | | | | | | | | | | 2022 Revolving Facility(2) | | Various | | September 2022 | | $ | — | | $ | — | | $ | — | | 2024 Term Loan B | | 4.069% | | September 2024 | | | 698.3 | | | (18.3) | | | 680.0 | | 2025 Senior Notes | | 5.375% | | September 2025 | | | 500.0 | | | (9.4) | | | 490.6 | | Accounts Receivable Securitization Facility(3) | | Various | | May 2019 | | | — | | | — | | | — | | Other indebtedness | | Various | | Various | | | 1.4 | | | — | | | 1.4 | | Total debt | | | | | | $ | 1,199.7 | | $ | (27.7) | | $ | 1,172.0 | | Less: current portion | | | | | | | | | | | | | (7.0) | | Total long-term debt, net of unamortized deferred financing fees | | | | | | | | | | | | $ | 1,165.0 | |
| | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | | Interest Rate as of December 31, 2016 | | Maturity
Date | | Carrying
Amount | | Unamortized Deferred Financing Fees(1) | | Total Debt,
Less
Unamortized
Deferred
Financing
Fees | | 2020 Senior Credit Facility | | | | | | | | | | | | | | | 2020 Revolving Facility | | Various | | May 2020 | | $ | — | | $ | — | | $ | — | | 2021 Term Loan B | | 4.250% | | November 2021 | | | 491.5 | | | (9.2) | | | 482.3 | | 2022 Senior Notes | | | | | | | | | | | | | | | USD Notes | | 6.750% | | May 2022 | | | 300.0 | | | (5.7) | | | 294.3 | | Euro Notes | | 6.375% | | May 2022 | | | 394.3 | | | (7.1) | | | 387.2 | | Accounts Receivable Securitization Facility | | Various | | May 2019 | | | — | | | — | | | — | | Other indebtedness | | Various | | Various | | | 1.6 | | | — | | | 1.6 | | Total debt | | | | | | $ | 1,187.4 | | $ | (22.0) | | $ | 1,165.4 | | Less: current portion | | | | | | | | | | | | | (5.0) | | Total long-term debt, net of unamortized deferred financing fees | | | | | | | | | | | | $ | 1,160.4 | |
| (1)
| | This caption does not include deferred financing fees related to the Company’s revolving facilities, which are included within “Deferred charges and other assets” on the consolidated balance sheets and are amortized using the straight-line method over the term of the respective facility.
|
| (2)
| | The Company had $360.2 million (net of $14.8 million outstanding letters of credit) of funds available for borrowing under this facility as of December 31, 2017. Additionally, the Company is required to pay a quarterly commitment fee in respect of any unused commitments under this facility equal to 0.375% per annum.
|
| (3)
| | As a result of an amendment to the facility during the fourth quarter of 2017, the Accounts Receivable Securitization Facility has a borrowing capacity of $150.0 million as of December 31, 2017. Additionally, as of December 31, 2017, the Company had approximately $122.1 million of accounts receivable available to support this facility, based on the pool of eligible accounts receivable. In regards to outstanding borrowings, fixed interest charges are 1.95% plus variable commercial paper rates, while for available, but undrawn commitments, fixed interest charges are 1.0%, both of which were reduced as a result of the amendment in December 2017.
|
For the years ended December 31, 2017, 2016, and 2015, interest charges, amortization of deferred financing fees and debt discounts, and cash paid for interest by debt facility are included in the tables below. Interest charges and amortization of deferred financing fees and debt discounts are recorded within “Interest expense, net” in the consolidated statements of operations.
| | | | | | | | | | | | | Year Ended December 31, 2017 | | | Interest expense | | Amortization of deferred financing fees and debt discounts | | Cash paid for interest | | Senior Credit Facility | | | | | | | | | | | 2022 Revolving Facility | | $ | 0.7 | | $ | 0.3 | | $ | 0.6 | | 2024 Term Loan B | | | 8.8 | | | 0.8 | | | 8.6 | | 2025 Senior Notes | | | 9.1 | | | 0.3 | | | — | | Accounts Receivable Securitization Facility | | | 2.8 | | | — | | | 2.8 | | 2020 Senior Credit Facility | | | | | | | | | | | 2020 Revolving Facility | | | 1.3 | | | 1.0 | | | 1.1 | | 2021 Term Loan B | | | 14.6 | | | 1.3 | | | 14.7 | | 2022 Senior Notes | | | 31.9 | | | 1.4 | | | 39.1 | |
| | | | | | | | | | | | | Year Ended December 31, 2016 | | | Interest expense | | Amortization of deferred financing fees and debt discounts | | Cash paid for interest | | 2020 Senior Credit Facility | | | | | | | | | | | 2020 Revolving Facility | | $ | 1.8 | | $ | 1.5 | | $ | 1.6 | | 2021 Term Loan B | | | 21.4 | | | 1.9 | | | 21.4 | | 2022 Senior Notes | | | 46.6 | | | 1.9 | | | 47.2 | | Accounts Receivable Securitization Facility | | | 2.8 | | | 0.5 | | | 2.8 | |
| | | | | | | | | | | | | Year Ended December 31, 2015 | | | Interest expense | | Amortization of deferred financing fees and debt discounts | | Cash paid for interest | | 2020 Senior Credit Facility | | | | | | | | | | | 2020 Revolving Facility | | $ | 1.3 | | $ | 1.0 | | $ | 1.3 | | 2021 Term Loan B | | | 14.2 | | | 1.2 | | | 14.2 | | 2022 Senior Notes | | | 30.5 | | | 1.2 | | | 22.8 | | Accounts Receivable Securitization Facility | | | 2.8 | | | 1.2 | | | 2.8 | | 2018 Revolving Facility | | | 0.6 | | | 1.0 | | | 0.6 | | 2019 Senior Notes | | | 38.3 | | | 2.1 | | | 81.7 | |
Total accrued interest on outstanding debt as of December 31, 2017 and 2016 was $9.3 million and $7.6 million, respectively. Accrued interest is recorded in “Accrued expenses and other current liabilities” within the consolidated balance sheets.
2020 Senior Credit Facility
On May 5, 2015, Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (together, the “Issuers” or the “Borrowers”), both wholly-owned subsidiaries of the Company, entered into a senior secured credit agreement, which provided senior secured financing of up to $825.0 million (the “2020 Senior Credit Facility”). The 2020 Senior Credit Facility provided for senior secured financing consisting of a (i) $325.0 revolving credit facility, with a $25.0 million swingline subfacility and a $35.0 million letter of credit subfacility (the “2020 Revolving Facility”) maturing in May 2020 and (ii) $500.0 million senior secured term loan B facility maturing in November 2021 (the “2021 Term Loan B”). In conjunction with this agreement, the Company terminated its previous credit agreement (the “2018 Senior Secured Credit Facility”) and revolving facility (the “2018 Revolving Facility”).
In September 2017, upon completion of the refinancing transactions discussed below, the Company terminated the 2020 Senior Credit Facility. Prior to this termination, the Company had no outstanding borrowings under the 2020 Revolving Facility and had $490.0 million outstanding under the 2021 Term Loan B, excluding unamortized original issue discount. As a result of this termination, the Company recognized a $0.8 million loss on extinguishment of long-term debt, comprised entirely of the write-off of a portion of the existing unamortized deferred financing fees and unamortized original issue discount related to the 2021 Term Loan B. The remaining unamortized deferred financing fees and unamortized original issue discount for both the 2020 Revolving Facility and 2021 Term Loan B remain capitalized and will be amortized along with new deferred financing fees over the life of the new facilities, discussed in further detail below.
Senior Credit Facility
On September 6, 2017, the Issuers entered into a new senior secured credit agreement (the “Credit Agreement”), which provides senior secured financing of up to $1,075.0 million (the “Senior Credit Facility”). The Senior Credit Facility provides for senior secured financing consisting of a (i) $375.0 million revolving credit facility, with a $25.0 million swingline subfacility and a $35.0 million letter of credit subfacility maturing in September 2022 (the “2022 Revolving Facility”) and a (ii) $700.0 million senior secured term loan B facility maturing in September 2024 (the “2024 Term Loan B”). Amounts under the 2022 Revolving Facility are available in U.S. dollars and euros.
The 2024 Term Loan B bears an interest rate of LIBOR plus 2.50%, subject to a 0.00% LIBOR floor. Further, the 2024 Term Loan B requires scheduled quarterly payments in amounts equal to 0.25% of the original principal amount of the 2024 Term Loan B, with the balance to be paid at maturity. As of December 31, 2017, $7.0 million of the scheduled future payments related to this facility were classified as current debt on the Company’s consolidated balance sheet.
Loans under the 2022 Revolving Facility, at the Borrowers’ option, may be maintained as (a) LIBO rate loans, which bear interest at a rate per annum equal to the LIBO rate plus the applicable margin (as defined in the Credit Agreement), if applicable, or (b) base rate loans which shall bear interest at a rate per annum equal to the base rate plus the applicable margin (as defined in the Credit Agreement).
The Senior Credit Facility is collateralized by a security interest in substantially all of the assets of the Borrowers, and the guarantors thereunder, including Trinseo Materials S.à r.l., certain Luxembourg subsidiaries and certain foreign subsidiaries organized in the United States, The Netherlands, Hong Kong, Singapore, Ireland, Germany and Switzerland.
The Senior Credit Facility requires the Borrowers and their restricted subsidiaries to comply with customary affirmative, negative and financial covenants, including limitations on their abilities to incur liens; make certain loans and investments; incur additional debt (including guarantees or other contingent obligations); merge, consolidate liquidate or dissolve; transfer or sell assets; pay dividends and other distributions to shareholders or make certain other restricted payments; enter into transactions with affiliates; restrict any restricted subsidiary from paying dividends or making other distributions or agree to certain negative pledge clauses; materially alter the business we conduct; prepay certain other indebtedness; amend certain material documents; and change our fiscal year.
The 2022 Revolving Facility contains a financial covenant that requires compliance with a springing first lien net leverage ratio test. If the outstanding balance under the 2022 Revolving Facility exceeds 30% of the $375.0 million borrowing capacity (excluding undrawn letters of credit up to $10.0 million and cash collateralized letters of credit) at a quarter end, then the Borrowers’ first lien net leverage ratio may not exceed 2.00 to 1.00.
Fees incurred in connection with the issuance of the 2024 Term Loan B were $12.3 million. Due to a portion of the 2024 Term Loan B meeting the criteria for modification accounting, $1.2 million of these fees were expensed and included within “Other expense (income), net” in the consolidated statement of operations for the year ended December 31, 2017. The remaining $11.1 million of fees were capitalized and recorded within “Long-term debt, net of unamortized deferred financing fees” on the consolidated balance sheet, to be amortized along with the remaining $8.1 million of unamortized deferred financing fees from the 2021 Term Loan B. Capitalized fees related to the 2024 Term Loan B are being amortized over the 7.0 year term of the facility using the effective interest method.
Fees incurred in connection with the issuance of the 2022 Revolving Facility were $0.8 million and were capitalized and recorded within “Deferred charges and other assets” in the consolidated balance sheets. The new capitalized fees related to the 2022 Revolving Facility (along with $4.0 million of unamortized deferred financing fees from the 2020 Revolving Facility) are being amortized over the 5.0 year term of the facility using the straight-line
method. Unamortized deferred financing fees related to the 2022 Revolving Facility were $4.5 million as of December 31, 2017.
2019 Senior Notes
In January 2013, the Company issued $1,325.0 million 8.750% senior notes due to mature on February 1, 2019 (the “2019 Senior Notes”). The proceeds from the issuance of the 2019 Senior Notes were used to repay all of the Company’s then outstanding term loans and related refinancing fees and expenses.
On May 13, 2015, using the net proceeds from the issuance of the 2021 Term Loan B discussed above, together with the net proceeds from the issuance of the 2022 Senior Notes (defined and discussed below) and available cash, the Company redeemed all outstanding borrowings under the 2019 Senior Notes, then totaling $1,192.5 million in principal, together with a call premium of $68.6 million (with a redemption price of 103% on the first $132.5 million and 106.097% on the remaining balance) and accrued and unpaid interest thereon of $29.6 million.
As a result, during the year ended December 31, 2015, the Company recorded a loss on extinguishment of long-term debt of $94.5 million, which includes the above $68.6 million call premium and a $25.9 million write-off of unamortized deferred financing fees related to the 2019 Senior Notes. Prior to the May 2015 redemption, fees and expenses incurred in connection with the issuance of 2019 Senior Notes were being amortized over the term of the 2019 Senior Notes using the effective interest rate method.
2022 Senior Notes
On May 5, 2015, the Issuers executed an indenture pursuant to which they issued $300.0 million aggregate principal amount of 6.750% senior notes due May 1, 2022 (the “USD Notes”) and €375.0 million aggregate principal amount of 6.375% senior notes due May 1, 2022 (the “Euro Notes”, and together with the USD Notes, the “2022 Senior Notes”).
On September 7, 2017, using the net proceeds from the issuance of the 2024 Term Loan B discussed above, together with the net proceeds from the issuance of the 2025 Senior Notes (defined and discussed below), and available cash, the Company redeemed all outstanding borrowings under the 2022 Senior Notes, totaling $746.0 million in USD-equivalent principal, together with a total combined call premium of $53.0 million (with a redemption price of approximately 106.572% on the USD Notes and a redemption price of approximately 107.459% on the Euro Notes), and accrued and unpaid interest thereon of $17.0 million, using applicable foreign exchange rates.
As a result of this redemption, during the year ended December 31, 2017, the Company recorded a loss on extinguishment of long-term debt of $64.5 million, which includes the above $53.0 million call premium and an $11.5 million write-off of unamortized deferred financing fees related to the 2022 Senior Notes. Prior to the September 2017 redemption, fees and expenses incurred in connection with the issuance of 2022 Senior Notes were being amortized over the term of the 2022 Senior Notes using the effective interest rate method.
2025 Senior Notes
On August 29, 2017, the Issuers executed an indenture (the “Indenture”) pursuant to which they issued $500.0 million aggregate principal amount of 5.375% senior notes due 2025 (the “2025 Senior Notes”) in a 144A private transaction exempt from the registration requirements of the Securities Act of 1933, as amended. Interest on the 2025 Senior Notes is payable semi-annually on May 3 and November 3 of each year, commencing on May 3, 2018. The 2025 Senior Notes mature on September 1, 2025.
At any time prior to September 1, 2020, the Issuers may redeem the 2025 Senior Notes in whole or in part, at their option, at a redemption price equal to 100% of the principal amount of such notes plus the relevant applicable premium as of, and accrued and unpaid interest to, but not including, the redemption date. At any time and from time to time after September 1, 2020, the Issuers may redeem the 2025 Senior Notes, in whole or in part, at a redemption price equal to the
percentage of principal amount set forth below plus accrued and unpaid interest, if any, on the notes redeemed to, but not including, the redemption date:
| | | | 12-month period commencing September 1 in Year | | Percentage | | 2020 | | 102.688 | % | 2021 | | 101.792 | % | 2022 | | 100.896 | % | 2023 and thereafter | | 100.000 | % |
At any time prior to September 1, 2020, the Issuers may redeem up to 40% of the aggregate principal amount of the 2025 Senior Notes at a redemption price equal to 105.375%, plus accrued and unpaid interest to, but not including, the redemption date, with the aggregate gross proceeds from certain equity offerings.
The 2025 Senior Notes are the Issuers’ senior unsecured obligations and rank equally in right of payment with all of the Issuers’ existing and future indebtedness that is not expressly subordinated in right of payment thereto. The 2025 Senior Notes will be senior in right of payment to any future indebtedness that is expressly subordinated in right of payment thereto and effectively junior to (a) the Issuers’ existing and future secured indebtedness, including the Company’s accounts receivable facility and the Issuers’ Senior Credit Facility (discussed above), to the extent of the value of the collateral securing such indebtedness and (b) all existing and future liabilities of the Issuers’ non-guarantor subsidiaries.
The Indenture contains customary covenants that, among other things, limit the Issuers’ and certain of their subsidiaries’ ability to incur additional indebtedness and guarantee indebtedness; pay dividends on, redeem or repurchase capital stock; make investments; prepay certain indebtedness; create liens; enter into transactions with the Issuers’ affiliates; designate the Issuers’ subsidiaries as Unrestricted Subsidiaries (as defined in the Indenture); and consolidate, merge, or transfer all or substantially all of the Issuers’ assets. The covenants are subject to a number of exceptions and qualifications. Certain of these covenants will be suspended during any period of time that (1) the 2025 Senior Notes have investment grade ratings (as defined in the Indenture) and (2) no default has occurred and is continuing under the Indenture. In the event that the 2025 Senior Notes are downgraded to below an investment grade rating, the Issuers and certain subsidiaries will again be subject to the suspended covenants with respect to future events.
Fees and expenses incurred in connection with the issuance of the 2025 Senior Notes were $9.7 million, which were capitalized and recorded within “Long-term debt, net of unamortized deferred financing fees” on the consolidated balance sheet, and are being amortized into “Interest expense, net” in the consolidated statements of operations over their 8.0 year term using the effective interest method.
Accounts Receivable Securitization Facility
In 2010, Styron Receivable Funding Ltd. (“SRF”), a VIE in which the Company is the primary beneficiary, executed an agreement for an accounts receivable securitization facility (“Accounts Receivable Securitization Facility”). As of December 31, 2017, the facility, as amended in December 2017, permitted borrowings by two of the Company’s subsidiaries, Trinseo Europe GmbH (“TE”) and Trinseo Export GmbH (“Trinseo Export”), up to a total of $150.0 million and has a maturity date of May 2019.
Under the facility, TE and Trinseo Export sell their accounts receivable to SRF. In turn, SRF may utilize these receivables as collateral to borrow from commercial paper conduits in exchange for cash. The Company has agreed to continue servicing the receivables for SRF. If utilized as collateral by SRF, the conduits have a first priority perfected security interest in such receivables and, as a result, the receivables will not be available to the creditors of the Company or its other subsidiaries.
NOTE 11—DERIVATIVE INSTRUMENTS
The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. The Company does not hold or enter into financial instruments for trading or speculative purposes. All derivatives are recorded in the consolidated balance sheets at fair value. Refer to Note 12 for fair value disclosures related to these instruments.
Foreign Exchange Forward Contracts
Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company’s principal strategy in managing its exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on our consolidated balance sheets against corresponding assets of the same currency such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce its exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on our assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.
As of December 31, 2017, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $225.8 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of December 31, 2017:
| | | | | | | December 31, | | Buy / (Sell) | | 2017 | | Chinese Yuan | | $ | (75.4) | | Euro | | $ | (62.1) | | Indonesian Rupiah | | $ | (23.0) | | Swiss Franc | | $ | 14.8 | | Japanese Yen | | $ | (11.1) | |
Open foreign exchange forward contracts as of December 31, 2017 have maturities of less than three months.
Foreign Exchange Cash Flow Hedges
The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by one of its subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
Open foreign exchange cash flow hedges as of December 31, 2017 have maturities occurring over a period of 12 months, and have a net notional U.S. dollar equivalent of $216.0 million.
Interest Rate Swaps
As discussed in Note 10, on September 6, 2017, the Company issued the 2024 Term Loan B, which bears an interest rate of LIBOR plus 2.50%, subject to a 0.00% LIBOR floor. In order to reduce the variability in interest payments associated with the Company’s variable rate debt, during the third quarter of 2017, the Company entered into certain interest rate swap agreements to convert a portion of these variable rate borrowings into a fixed rate obligation. These interest rate swap agreements are designated as cash flow hedges, and as such, the contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to interest expense in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
As of December 31, 2017, the Company had open interest rate swap agreements with a net notional U.S. dollar equivalent of $200.0 million which had an effective date of September 29, 2017 and mature over a period of five years. Under the terms of the swap agreements, we are required to pay the counterparties a stream of fixed interest payments at a rate of 1.81%, and in turn, receive variable interest payments based on 1-month LIBOR (1.57% as of December 31, 2017) from the counterparties.
Net Investment Hedge
Through August 31, 2017, the Company had designated a portion (€280.0 million) of the original principal amount of the Company’s previous €375.0 million Euro Notes as a hedge of the foreign currency exposure of the Issuers’ net investment in certain European subsidiaries. Effective September 1, 2017, the Company de-designated the Euro Notes as a net investment hedge of the Issuers’ net investment in certain European subsidiaries, as the Euro Notes were redeemed on September 7, 2017 (refer to Note 10 for further information). Through the date of de-designation, this hedge was deemed to be highly effective, and changes in the Euro Notes’ carrying value resulting from fluctuations in the euro exchange rate were recorded as cumulative foreign currency translation loss of $24.1 million within AOCI.
On August 29, 2017, the Issuers executed an indenture pursuant to which they issued the $500.0 million 5.375% 2025 Senior Notes (refer to Note 10 for further information). Subsequently, on September 1, 2017, the Company entered into certain fixed-for-fixed cross currency swaps (“CCS”), swapping U.S. dollar principal and interest payments on the newly issued 2025 Senior Notes for euro-denominated payments. Under the terms of the CCS, the Company has notionally exchanged $500.0 million at an interest rate of 5.375% for €420 million at a weighted-average interest rate of 3.45% for approximately five years.
Effective September 1, 2017, the Company designated the full notional amount of the CCS (€420 million) as a hedge of the Issuers’ net investment in certain European subsidiaries. As the CCS were deemed to be highly effective hedges, changes in the fair value of the CCS were recorded as cumulative foreign currency translation loss of $17.5 million within AOCI as of December 31, 2017.
Summary of Derivative Instruments
Information regarding changes in the fair value of the Company’s derivative instruments, net of tax, including those not designated for hedge accounting treatment, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | Gain (Loss) Recognized in | | Gain (Loss) Recognized in | | | | | AOCI on Balance Sheet | | Statement of Operations | | | | | Year Ended December 31, | | Statement of Operations | | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | Classification | Designated as Cash Flow Hedges | | | | | | | | | | | | | | | | | | | | | Foreign exchange cash flow hedges | | $ | (21.3) | | $ | 6.7 | | $ | 5.6 | | $ | (2.0) | | $ | 2.8 | | $ | 0.5 | | Cost of sales | Interest rate swaps | | | 2.9 | | | — | | | — | | | (0.3) | | | — | | | — | | Interest expense, net | Total | | $ | (18.4) | | $ | 6.7 | | $ | 5.6 | | $ | (2.3) | | $ | 2.8 | | $ | 0.5 | | | Net Investment Hedges | | | | | | | | | | | | | | | | | | | | | Euro Notes | | $ | 38.6 | | $ | 14.1 | | $ | 0.4 | | $ | — | | $ | — | | $ | — | | | Cross-currency swaps | | | (17.5) | | | — | | | — | | | — | | | — | | | — | | | Total | | $ | 21.1 | | $ | 14.1 | | $ | 0.4 | | $ | — | | $ | — | | $ | — | | | Not Designated as Cash Flow Hedges | | | | | | | | | | | | | | | | | | | | | Foreign exchange forward contracts | | $ | — | | $ | — | | $ | — | | $ | (19.2) | | $ | 3.7 | | $ | (16.5) | | Other expense (income), net | Total | | $ | — | | $ | — | | $ | — | | $ | (19.2) | | $ | 3.7 | | $ | (16.5) | | |
The Company recorded losses of $19.2 million and $16.5 million during the years ended December 31, 2017 and 2015, respectively, and gains of $3.7 million during the year ended December 31, 2016 from settlements and changes in the fair value of outstanding forward contracts (not designated as hedges). The activity from these forward contracts offset net foreign exchange transaction gains of $20.6 million and $6.1 million during the years ended December 31, 2017 and 2015, respectively, and losses of $5.5 million during the year ended December 31, 2016 which resulted from the remeasurement of the Company’s foreign currency denominated assets and liabilities. The cash settlements of these foreign exchange forward contracts are included within operating activities in the consolidated statements of cash flows.
As of December 31, 2017, the Company had no ineffectiveness related to its derivatives designated as hedging instruments. Further, the Company expects to reclassify in the next twelve months an approximate $11.2 million net loss from AOCI into earnings related to the Company’s outstanding foreign exchange cash flow hedges and interest rate swaps as of December 31, 2017 based on current foreign exchange rates.
The following table summarizes the net unrealized gains and losses and balance sheet classification of outstanding derivatives recorded in the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | December 31, 2016 | | | | Foreign
Exchange | | Foreign
Exchange | | Interest | | Cross- | | | | Foreign
Exchange | | Foreign
Exchange | | | | | | Forward | | Cash Flow | | Rate | | Currency | | | | Forward | | Cash Flow | | | | Balance Sheet Classification | | Contracts | | Hedges | | Swaps | | Swaps | | Total | | Contracts | | Hedges | | Total | | Asset Derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts receivable, net of allowance | | $ | 0.1 | | $ | — | | $ | — | | $ | 10.8 | | $ | 10.9 | | $ | 1.7 | | $ | 11.0 | | $ | 12.7 | | Deferred charges and other assets | | | — | | | — | | | 3.0 | | | — | | | 3.0 | | | — | | | — | | | — | | Total asset derivatives | | $ | 0.1 | | $ | — | | $ | 3.0 | | $ | 10.8 | | $ | 13.9 | | $ | 1.7 | | $ | 11.0 | | $ | 12.7 | | Liability Derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | Accounts payable | | $ | 2.5 | | $ | 11.1 | | $ | 0.1 | | $ | — | | $ | 13.7 | | $ | 0.5 | | $ | — | | $ | 0.5 | | Other noncurrent obligations | | | — | | | — | | | — | | | 28.3 | | | 28.3 | | | — | | | — | | | — | | Total liability derivatives | | $ | 2.5 | | $ | 11.1 | | $ | 0.1 | | $ | 28.3 | | $ | 42.0 | | $ | 0.5 | | $ | — | | $ | 0.5 | |
Forward contracts, interest rate swaps, and cross currency swaps are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in a single currency in the event of a default on or termination of any one contract. As such, in accordance with the Company’s accounting policy, we record these derivative instruments on a net basis by counterparty within the consolidated balance sheets. Information regarding the gross amounts of the Company’s derivative instruments and the amounts offset in the consolidated balance sheets is as follows:
| | | | | | | | | | | | | Gross Amounts | | Gross Amounts | | Net Amounts | | | | Recognized in the | | Offset in the | | Presented in the | | | | Balance Sheet | | Balance Sheet | | Balance Sheet | | Balance at December 31, 2017 | | | | | | | | | | | Derivative assets | | $ | 14.5 | | $ | (0.6) | | $ | 13.9 | | Derivative liabilities | | | 42.6 | | | (0.6) | | | 42.0 | | | | | | | | | | | | | Balance at December 31, 2016 | | | | | | | | | | | Derivative assets | | $ | 23.4 | | $ | (10.7) | | $ | 12.7 | | Derivative liabilities | | | 11.2 | | | (10.7) | | | 0.5 | |
Refer to Notes 12 and 20 for further information regarding the fair value of the Company’s derivative instruments and the related changes in AOCI.
NOTE 12—FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.
Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis in the consolidated balance sheets at December 31, 2017 and 2016:
| | | | | | | | | | | | | | | | December 31, 2017 | | | | Quoted Prices in Active Markets for Identical Items | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | | Assets (Liabilities) at Fair Value | | (Level 1) | | (Level 2) | | (Level 3) | | Total | | Foreign exchange forward contracts—Assets | | $ | — | | $ | 0.1 | | $ | — | | $ | 0.1 | | Foreign exchange forward contracts—(Liabilities) | | | — | | | (2.5) | | | — | | | (2.5) | | Foreign exchange cash flow hedges—(Liabilities) | | | — | | | (11.1) | | | — | | | (11.1) | | Interest rate swaps—Assets | | | — | | | 3.0 | | | — | | | 3.0 | | Interest rate swaps—(Liabilities) | | | — | | | (0.1) | | | — | | | (0.1) | | Cross-currency swaps—Assets | | | — | | | 10.8 | | | — | | | 10.8 | | Cross-currency swaps—(Liabilities) | | | — | | | (28.3) | | | — | | | (28.3) | | Total fair value | | $ | — | | $ | (28.1) | | $ | — | | $ | (28.1) | |
| | | | | | | | | | | | | | | | December 31, 2016 | | | | Quoted Prices in Active Markets for Identical Items | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | | Assets (Liabilities) at Fair Value | | (Level 1) | | (Level 2) | | (Level 3) | | Total | | Foreign exchange forward contracts—Assets | | $ | — | | $ | 1.7 | | $ | — | | $ | 1.7 | | Foreign exchange forward contracts—(Liabilities) | | | — | | | (0.5) | | | — | | | (0.5) | | Foreign exchange cash flow hedges—Assets | | | — | | | 11.0 | | | — | | | 11.0 | | Total fair value | | $ | — | | $ | 12.2 | | $ | — | | $ | 12.2 | |
The Company uses an income approach to value its derivative instruments, utilizing discounted cash flow techniques, considering the terms of the contract and observable market information available as of the reporting date, such as interest rate yield curves and currency spot and forward rates. Significant inputs to the valuation for these derivative instruments are obtained from broker quotations or from listed or over-the-counter market data, and are classified as Level 2 in the fair value hierarchy.
Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2016 were as follows:
| | | | | | | | | | | | | | | | December 31, 2016 | | | | | | | Quoted Prices in Active Markets for Identical Items
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | Total Expense for the Year Ended December 31, 2016 | | Assets: | | | | | | | | | | | | | | Livorno property, plant and equipment (Note 19) | | $ | — | | $ | — | | $ | 11.0 | | $ | 13.7 | | Total | | $ | — | | $ | — | | $ | 11.0 | | $ | 13.7 | |
Refer to Note 19 for information regarding the Livorno plant restructuring announced during the third quarter of 2016. As a result, the Company determined that the long-lived assets at the Livorno latex binders facility, which included land and depreciable long-lived assets, should be assessed for impairment. This assessment indicated that the carrying
value of the asset group was not recoverable when compared to the expected undiscounted cash flows from the operation and eventual disposition of these assets. Based upon our assessment, the Company concluded that the fair value of this asset group totaled $11.0 million as of December 31, 2016. As a result, the Company recorded an impairment loss on these assets of approximately $13.7 million for the year ended December 31, 2016. The amount was recorded within “Selling, general and administrative expenses” in the consolidated statement of operations and allocated entirely to the Latex Binders segment.
The fair value of the depreciable assets was determined under the income approach, utilizing a discounted cash flow model. The key assumption in this model was cash flow projections, which were determined to be nil, as the plant ceased manufacturing operations in October 2016. The fair value of the land was determined utilizing a combination of the market and income approaches, utilizing key inputs such as recent comparable market transactions, expected date of sale, and discount rate.
Fair Value of Debt Instruments
The following table presents the estimated fair value of the Company’s outstanding debt not carried at fair value as of December 31, 2017 and 2016, respectively:
| | | | | | | | | | As of | | As of | | | | December 31, 2017 | | December 31, 2016 | | 2025 Senior Notes | | $ | 518.8 | | $ | — | | 2022 Senior Notes | | | | | | | | USD Notes | | | — | | | 315.0 | | Euro Notes | | | — | | | 424.4 | | 2024 Term Loan B | | | 705.7 | | | — | | 2021 Term Loan B | | | — | | | 498.0 | | Total fair value | | $ | 1,224.5 | | $ | 1,237.4 | |
The fair value of the Company’s debt facilities above (each Level 2 securities) is determined using over-the-counter market quotes and benchmark yields received from independent vendors.
There were no other significant financial instruments outstanding as of December 31, 2017 and 2016.
NOTE 13—INCOME TAXES
Income before income taxes earned within and outside the United States is shown below:
| | | | | | | | | | | | | Year Ended | | | | December 31, | | | | 2017 | | 2016 | | 2015 | | United States | | $ | 138.0 | | $ | 137.2 | | $ | 105.2 | | Outside of the United States | | | 273.1 | | | 268.1 | | | 98.6 | | Income before income taxes | | $ | 411.1 | | $ | 405.3 | | $ | 203.8 | |
The provision for income taxes is composed of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended | | Year Ended | | Year Ended | | | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | | | Current | | Deferred | | Total | | Current | | Deferred | | Total | | Current | | Deferred | | Total | | U.S. federal | | $ | 33.5 | | $ | 6.9 | | $ | 40.4 | | $ | 24.8 | | $ | 15.6 | | $ | 40.4 | | $ | 28.3 | | $ | 0.2 | | $ | 28.5 | | U.S. state and other | | | 4.8 | | | — | | | 4.8 | | | 4.0 | | | 1.4 | | | 5.4 | | | 4.5 | | | — | | | 4.5 | | Non-U.S. | | | 29.7 | | | 7.9 | | | 37.6 | | | 42.1 | | | (0.9) | | | 41.2 | | | 37.5 | | | (0.3) | | | 37.2 | | Total | | $ | 68.0 | | $ | 14.8 | | $ | 82.8 | | $ | 70.9 | | $ | 16.1 | | $ | 87.0 | | $ | 70.3 | | $ | (0.1) | | $ | 70.2 | |
The effective tax rate on pre-tax income differs from the U.S. statutory rate due to the following:
| | | | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | 2015 | | Taxes at U.S. statutory rate(1) | | $ | 143.9 | | $ | 141.9 | | $ | 71.4 | | State and local income taxes | | | 3.4 | | | 3.9 | | | 3.0 | | Non U.S. statutory rates, including credits | | | (98.6) | | | (77.8) | | | (29.9) | | U.S. tax effect of foreign earnings and dividends | | | (1.6) | | | (1.7) | | | (1.9) | | Unremitted earnings | | | 6.6 | | | 3.8 | | | 4.0 | | Change in valuation allowances | | | 34.0 | | | 6.2 | | | 24.3 | | Uncertain tax positions | | | (10.7) | | | (1.8) | | | 1.2 | | Withholding taxes on interest and royalties | | | 2.9 | | | 2.4 | | | 2.6 | | U.S. manufacturing deduction | | | (3.6) | | | (2.9) | | | (3.0) | | Stock-based compensation | | | (1.1) | | | 2.1 | | | 1.2 | | Non-deductible interest | | | 2.9 | | | 2.5 | | | 3.1 | | Non-deductible other expenses | | | 1.2 | | | 6.0 | | | 0.9 | | Impact on foreign currency exchange | | | 0.4 | | | 2.1 | | | (3.5) | | Other—net(2) | | | 3.1 | | | 0.3 | | | (3.2) | | Total provision for income taxes | | $ | 82.8 | | $ | 87.0 | | $ | 70.2 | | Effective tax rate | | | 20 | % | | 21 | % | | 34 | % |
| (1)
| | The U.S. statutory rate has been used as management believes it is more meaningful to the Company.
|
| (2)
| | Included in “Other-net” is $3.1 million of one-time income tax expense related to the revaluation of our U.S. federal deferred tax assets and liabilities at the new U.S. federal corporate income tax rate of 21% in accordance with the enactment of the “Tax Cuts and Jobs Act” signed into law on December 22, 2017. There were no other applicable provisions of this newly enacted tax law that have a significant impact to the Company’s financial statements.
|
Deferred income taxes reflect temporary differences between the valuation of assets and liabilities for financial and tax reporting:
| | | | | | | | | | | | | | | | December 31, | | | | 2017 | | 2016 | | | | Deferred | | Deferred | | Deferred | | Deferred | | | | Tax | | Tax | | Tax | | Tax | | | | Assets | | Liabilities | | Assets | | Liabilities | | Tax loss and credit carry forwards | | $ | 137.3 | | $ | — | | $ | 104.4 | | $ | — | | Unremitted earnings | | | — | | | 17.2 | | | — | | | 10.6 | | Unconsolidated affiliates | | | — | | | 0.1 | | | 4.4 | | | — | | Other accruals and reserves | | | 2.2 | | | — | | | 5.2 | | | — | | Property, plant and equipment | | | — | | | 34.4 | | | — | | | 44.3 | | Goodwill and other intangible assets | | | — | | | 1.2 | | | 13.8 | | | — | | Deferred financing fees | | | 12.9 | | | — | | | 13.2 | | | — | | Employee benefits | | | 36.4 | | | — | | | 45.4 | | | — | | | | | 188.8 | | | 52.9 | | | 186.4 | | | 54.9 | | Valuation allowance | | | (149.6) | | | — | | | (112.6) | | | — | | Total | | $ | 39.2 | | $ | 52.9 | | $ | 73.8 | | $ | 54.9 | |
As of December 31, 2017 and 2016, all undistributed earnings of foreign subsidiaries and affiliates are expected to be repatriated.
Operating loss carryforwards amounted to $535.6 million in 2017 and $404.6 million in 2016. As of December 31, 2017, $42.1 million of the operating loss carryforwards were subject to expiration in 2018 through 2022, and $493.5 million of the operating loss carryforwards expire in years beyond 2022 or have an indefinite carryforward period. The Company had valuation allowances which were related to the realization of recorded tax benefits on tax loss
carryforwards, as well as other net deferred tax assets, primarily from subsidiaries in Luxembourg and China, of $149.6 million as of December 31, 2017 and $112.6 million as of December 31, 2016.
For the years presented, a reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
| | | | Balance as of December 31, 2014 | | $ | 20.4 | Increases related to current year tax positions | | | 1.3 | Decreases related to prior year tax positions | | | (1.6) | Balance as of December 31, 2015 | | $ | 20.1 | Increases related to current year tax positions | | | 0.1 | Increases related to prior year tax positions | | | 4.0 | Decreases related to prior year tax positions | | | (6.0) | Settlement of uncertain tax positions | | | (1.1) | Decreases due to expiration of statues of limitations | | | (1.0) | Balance as of December 31, 2016 | | $ | 16.1 | Increases related to current year tax positions | | | — | Increases related to prior year tax positions | | | 0.9 | Decreases related to prior year tax positions | | | (8.0) | Settlement of uncertain tax positions | | | (0.7) | Decrease due to expiration of statutes of limitations | | | (1.3) | Balance as of December 31, 2017 | | $ | 7.0 |
In regard to unrecognized tax benefits, the Company recognized a benefit related to interest and penalties of $2.4 million during the year ended December 31, 2017, whereas the Company recognized expense related to interest and penalties of $0.9 million and $0.7 million during the years ended December 31, 2016 and 2015, respectively. Interest and penalties related to unrecognized tax benefits was included as a component of income tax expense in the consolidated statements of operations. As of December 31, 2017 and 2016, the Company had $0.9 million and $3.1 million, respectively, accrued for interest and penalties. To the extent that the unrecognized tax benefits are recognized in the future, $3.3 million will impact the Company’s effective tax rate.
As of December 31, 2017, the Company anticipates that it is reasonably possible that approximately $1.0 million to $2.0 million of unrecognized tax benefits, including the impact relating to accrued interest and penalties, could be realized within the next twelve months due to the expiration of the statute of limitations in certain jurisdictions.
During the year ended December 31, 2017, the Company recorded a previously unrecognized tax benefit in the amount of $8.5 million, including interest and penalties, upon completion of the 2010 through 2013 audit with the German taxing authority.
Tax years that remain subject to examination for the Company’s major tax jurisdictions are shown below.
| | | | Major Tax Jurisdictions
| | | Earliest Open Year
| United States: Federal income tax
| | | 2012 | Germany
| | | 2014 | Switzerland
| | | 2014 | Netherlands
| | | 2017 | Luxembourg
| | | 2011 | China
| | | 2007 | Hong Kong
| | | 2006 | Indonesia
| | | 2011 | Italy
| | | 2010 |
NOTE 14—COMMITMENTS AND CONTINGENCIES
Leased Property
The Company routinely leases premises for use as sales and administrative offices, warehouses and tanks for product storage, railcars, motor vehicles, and other equipment under operating leases. Rental expense for these leases was $16.2 million, $16.0 million and $18.4 million during the years ended December 31, 2017, 2016, and 2015, respectively.
Future minimum rental payments under operating leases with remaining non-cancelable terms in excess of one year are as follows:
| | | | | | | Annual | | Year | | Commitment | | 2018 | | $ | 13.5 | | 2019 | | | 12.6 | | 2020 | | | 9.4 | | 2021 | | | 10.3 | | 2022 | | | 3.6 | | Thereafter | | | 16.2 | | Total | | $ | 65.6 | |
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law, existing technologies and other information. As of December 31, 2017 and 2016, the Company had no accrued obligations for environmental remediation and restoration costs. Pursuant to the terms of the Acquisition, the pre-closing environmental conditions were retained by Dow and the Company has been indemnified by Dow from and against all environmental liabilities incurred or relating to the predecessor periods. There are several properties which the Company now owns on which Dow has been conducting investigation, monitoring, or remediation to address historical contamination. Those properties include Allyn’s Point, Connecticut, Dalton, Georgia, and Livorno, Italy. There are other properties with historical contamination that are owned by Dow that the Company leases for its operations, including its facilities in Midland, Michigan, Schkopau, Germany, and Terneuzen, The Netherlands. No environmental claims have been asserted or threatened against the Company, and the Company is not a potentially responsible party at any Superfund Sites.
Inherent uncertainties exist in the Company’s potential environmental liabilities primarily due to unknown conditions, whether future claims may fall outside the scope of the indemnity, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. In connection with the Company’s existing indemnification, the possibility is considered remote that environmental remediation costs will have a material adverse impact on the consolidated financial statements.
There were no amounts recorded in the consolidated statements of operations relating to environmental remediation for the years ended December 31, 2017, 2016, and 2015.
Purchase Commitments
In the normal course of business, the Company has certain raw material purchase contracts where it is required to purchase certain minimum volumes at current market prices. These commitments range from 1 to 4 years. The following table presents the fixed and determinable portion (based on current pricing) of the obligation under the Company’s purchase commitments as of December 31, 2017:
| | | | | | | Annual | | Year | | Commitment | | 2018 | | $ | 1,480.1 | | 2019 | | | 1,007.5 | | 2020 | | | 866.6 | | 2021 | | | 4.8 | | 2022 | | | — | | Thereafter | | | — | | Total | | $ | 3,359.0 | |
In certain raw material purchase contracts, the Company has the right to purchase less than the required minimums and pay a liquidated damages fee, or, in case of a permanent plant shutdown, to terminate the contracts. In such cases these obligations would be less than the obligations shown in the table above.
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