UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 2014
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36473
Trinseo S.A.
(Exact name of registrant as specified in its charter)
Luxembourg | N/A | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
1000 Chesterbrook Boulevard
Suite 300
Berwyn, PA 19312
(Address of Principal Executive Offices)
(610) 240-3200
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨x No x¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 8,November 13, 2014, there were 48,769,567 shares of the registrant’s ordinary shares outstanding.
EXPLANATORY NOTE
Trinseo Materials Operating S.C.A., a Luxembourg partnership limited by shares (“Trinseo Materials”), and Trinseo Materials Finance, Inc., a Delaware corporation (together with Trinseo Materials, the “Subsidiary Registrants”) are two wholly-owned subsidiaries of Trinseo S.A., a public limited liability company (société anonyme) existing under the laws of Luxembourg (“Trinseo,” and together with its consolidated subsidiaries, the “Company”). The Subsidiary Registrants are the co-issuers of the Company’s 8.750% Senior Secured Notes due 2019 (the “Senior Notes”) and Trinseo is the parent guarantor of the Senior Notes. Trinseo’s registration statement on Form S-1 relating to the initial public offering of its ordinary shares was declared effective by the Securities and Exchange Commission on June 11, 2014. In reliance on Rule 12h-5 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 3-10 of Regulation S-X, the Subsidiary Registrants are exempt from, and have ceased to file reports under the Exchange Act.
Trinseo S.A.
Quarterly Report on Form 10-Q
For the quarterly period ended JuneSeptember 30, 2014
Unless otherwise indicated or required by context, as used in this Quarterly Report on Form 10-Q (“Quarterly Report”), the term “Trinseo” refers to Trinseo S.A. (NYSE: TSE), a public limited liability company (société anonyme) existing under the laws of Luxembourg, and not its subsidiaries. The terms “Company,” “we,” “us” and “our” refer to Trinseo and its consolidated subsidiaries, taken as a combined entity and as required by context, may also include our business as owned by our predecessor, The Dow Chemical Company, for any dates prior to June 17, 2010. All financial data provided in this Quarterly Report is the financial data of the Company unless otherwise indicated.
Prior to our formation, our business was wholly owned by The Dow Chemical Company. We refer to our predecessor business as “the Styron business.” On June 17, 2010, investment funds advised or managed by affiliates of Bain Capital Partners, LLC (“Bain Capital”) acquired the Styron business and Dow Europe Holding B.V., which we refer to as “Dow Europe,” or, together with other affiliates of The Dow Chemical Company, “Dow,” which also retained an ownership interest in the Styron business through an indirect ownership interest in us. We refer to our acquisition by Bain Capital as the “Acquisition.”
Cautionary Note on Forward-Looking Statements
This Quarterly Report contains forward-looking statements including, without limitation, statements concerning plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. Forward looking statements may be identified by the use of words like “expect,” “anticipate,” “intend,” “forecast,” “outlook,” “will,” “may,” “might,” “potential,” “likely,” “target,” “plan,” “contemplate,” “seek,” “attempt,” “should,” “could,” “would” or expressions of similar meaning. Forward-looking statements reflect management’s evaluation of information currently available and are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this Quarterly Reportour Registration Statement on Form S-1 declared effective by the Securities and Exchange Commission (“SEC”) on June 11, 2014 under “Risk Factors- Risks relating to our Business and Industry” and in Part II, Item 1A — “Risk Factors,”Factors” of our Quarterly Report on Form 10-Q for the period ended June 30, 2014 filed with the SEC on August 11, 2014, and elsewhere inwithin this Quarterly Report.
As a result of these or other factors, our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. We caution you therefore against relying on any of these forward-looking statements. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Where You Can Find Additional Information
Our website is www.trinseo.com. Information contained on our website is not part of this Quarterly Report on Form 10-Q.Report. Information that we file with or furnish to the Securities and Exchange Commission (the “SEC”),SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to or exhibits included in these reports are available for download, free of charge, on our website soon after such reports are filed with or furnished to the SEC. These reports and other information, including exhibits filed or furnished therewith, are also available at the SEC’s website at www.sec.gov. You may also obtain and copy any document we file with or furnish to the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
TRINSEO S.A.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
(Unaudited)
June 30, | December 31, | September 30, | December 31, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 323,544 | $ | 196,503 | $ | 152,127 | $ | 196,503 | ||||||||
Accounts receivable, net of allowance for doubtful accounts (June 30, 2014—$6,672; December 31, 2013—$5,866) | 775,152 | 717,482 | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts (September 30, 2014—$6,853; December 31, 2013—$5,866) | 726,293 | 717,482 | ||||||||||||||
Inventories | 526,195 | 530,191 | 508,467 | 530,191 | ||||||||||||
Deferred income tax assets | 9,941 | 9,820 | 12,723 | 9,820 | ||||||||||||
Other current assets | 19,382 | 22,750 | 21,990 | 22,750 | ||||||||||||
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Total current assets | 1,654,214 | 1,476,746 | 1,421,600 | 1,476,746 | ||||||||||||
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Investments in unconsolidated affiliates | 162,738 | 155,887 | 164,504 | 155,887 | ||||||||||||
Property, plant and equipment, net of accumulated depreciation (June 30, 2014—$312,383; December 31, 2013—$283,795) | 586,420 | 606,427 | ||||||||||||||
Property, plant and equipment, net of accumulated depreciation (September 30, 2014—$315,629; December 31, 2013—$283,795) | 552,038 | 606,427 | ||||||||||||||
Other assets | ||||||||||||||||
Goodwill | 36,967 | 37,273 | 34,316 | 37,273 | ||||||||||||
Other intangible assets, net | 189,084 | 171,514 | 172,923 | 171,514 | ||||||||||||
Deferred income tax assets—noncurrent | 38,941 | 42,938 | 38,098 | 42,938 | ||||||||||||
Deferred charges and other assets | 72,752 | 83,996 | 64,602 | 83,996 | ||||||||||||
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Total other assets | 337,744 | 335,721 | 309,939 | 335,721 | ||||||||||||
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Total assets | $ | 2,741,116 | $ | 2,574,781 | $ | 2,448,081 | $ | 2,574,781 | ||||||||
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Liabilities and shareholders’ equity | ||||||||||||||||
Current liabilities | ||||||||||||||||
Short-term borrowings and current portion of long-term debt | $ | 142,055 | $ | 8,754 | ||||||||||||
Short-term borrowings | $ | 8,813 | $ | 8,754 | ||||||||||||
Accounts payable | 507,036 | 509,093 | 486,930 | 509,093 | ||||||||||||
Income taxes payable | 10,033 | 9,683 | 10,127 | 9,683 | ||||||||||||
Deferred income tax liabilities | 1,427 | 2,903 | 1,959 | 2,903 | ||||||||||||
Accrued expenses and other current liabilities | 134,045 | 136,129 | 96,479 | 136,129 | ||||||||||||
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Total current liabilities | 794,596 | 666,562 | 604,308 | 666,562 | ||||||||||||
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Noncurrent liabilities | ||||||||||||||||
Long-term debt | 1,195,028 | 1,327,667 | 1,194,801 | 1,327,667 | ||||||||||||
Deferred income tax liabilities—noncurrent | 32,622 | 26,932 | 31,265 | 26,932 | ||||||||||||
Other noncurrent obligations | 209,261 | 210,418 | 200,636 | 210,418 | ||||||||||||
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Total noncurrent liabilities | 1,436,911 | 1,565,017 | 1,426,702 | 1,565,017 | ||||||||||||
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Commitments and contingencies (Note J) | ||||||||||||||||
Shareholders’ equity | ||||||||||||||||
Common stock, $0.01 nominal value, 50,000,000 shares authorized at June 30, 2014 and December 31, 2013, and 48,770 and 37,270 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively | 488 | 373 | ||||||||||||||
Common stock, $0.01 nominal value, 50,000,000 shares authorized at September 30, 2014 and December 31, 2013, and 48,770 and 37,270 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively | 488 | 373 | ||||||||||||||
Additional paid-in-capital | 542,654 | 339,055 | 544,808 | 339,055 | ||||||||||||
Accumulated deficit | (112,139 | ) | (84,604 | ) | (122,249 | ) | (84,604 | ) | ||||||||
Accumulated other comprehensive income | 78,606 | 88,378 | ||||||||||||||
Accumulated other comprehensive income (loss) | (5,976 | ) | 88,378 | |||||||||||||
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Total shareholders’ equity | 509,609 | 343,202 | 417,071 | 343,202 | ||||||||||||
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Total liabilities and shareholders’ equity | $ | 2,741,116 | $ | 2,574,781 | $ | 2,448,081 | $ | 2,574,781 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
TRINSEO S.A.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Net sales | $ | 1,340,935 | $ | 1,361,759 | $ | 2,700,067 | $ | 2,753,344 | $ | 1,305,493 | $ | 1,308,959 | $ | 4,005,560 | $ | 4,062,303 | ||||||||||||||||
Cost of sales | 1,248,525 | 1,296,250 | 2,509,028 | 2,607,032 | 1,237,257 | 1,212,442 | 3,746,285 | 3,819,474 | ||||||||||||||||||||||||
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Gross profit | 92,410 | 65,509 | 191,039 | 146,312 | 68,236 | 96,517 | 259,275 | 242,829 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 74,208 | 54,774 | 124,238 | 101,234 | 48,113 | 53,772 | 172,351 | 155,006 | ||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | 5,378 | 8,929 | 20,328 | 11,728 | 9,267 | 15,215 | 29,595 | 26,943 | ||||||||||||||||||||||||
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Operating income | 23,580 | 19,664 | 87,129 | 56,806 | 29,390 | 57,960 | 116,519 | 114,766 | ||||||||||||||||||||||||
Interest expense, net | 32,602 | 33,738 | 65,420 | 66,046 | 30,098 | 32,881 | 95,518 | 98,927 | ||||||||||||||||||||||||
Loss on extinguishment of long-term debt | — | — | — | 20,744 | 7,390 | — | 7,390 | 20,744 | ||||||||||||||||||||||||
Other expense, net | 30,149 | 11,840 | 31,044 | 5,708 | ||||||||||||||||||||||||||||
Other expense (income), net | (1,638 | ) | 14,142 | 29,406 | 19,850 | |||||||||||||||||||||||||||
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Loss before income taxes | (39,171 | ) | (25,914 | ) | (9,335 | ) | (35,692 | ) | ||||||||||||||||||||||||
Income (loss) before income taxes | (6,460 | ) | 10,937 | (15,795 | ) | (24,755 | ) | |||||||||||||||||||||||||
Provision for income taxes | 5,450 | 2,150 | 18,200 | 2,050 | 3,650 | 6,001 | 21,850 | 8,051 | ||||||||||||||||||||||||
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Net loss | $ | (44,621 | ) | $ | (28,064 | ) | $ | (27,535 | ) | $ | (37,742 | ) | ||||||||||||||||||||
Net income (loss) | $ | (10,110 | ) | $ | 4,936 | $ | (37,645 | ) | $ | (32,806 | ) | |||||||||||||||||||||
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Weighted average shares- basic and diluted | 38,912 | 37,270 | 38,096 | 37,270 | 48,770 | 37,270 | 41,693 | 37,270 | ||||||||||||||||||||||||
Net loss per share- basic and diluted | $ | (1.15 | ) | $ | (0.75 | ) | $ | (0.72 | ) | $ | (1.01 | ) | ||||||||||||||||||||
Net income (loss) per share- basic and diluted | $ | (0.21 | ) | $ | 0.13 | $ | (0.90 | ) | $ | (0.88 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TRINSEO S.A.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands, unless otherwise stated)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net loss | $ | (44,621 | ) | $ | (28,064 | ) | $ | (27,535 | ) | $ | (37,742 | ) | ||||
Other comprehensive income (loss), net of tax (tax amounts shown in millions below for the three and six months ended June 30, 2014 and 2013, respectively): | ||||||||||||||||
Cumulative translation adjustments (net of tax of: 2014—$0.0 and $0.0; 2013—$0.0 and $0.0) | (8,927 | ) | 21,459 | (10,352 | ) | (10,839 | ) | |||||||||
Pension and other postretirement benefit plans before reclassifications (net of tax of: 2014—$0.0 and $0.0; 2013—$(0.2) and $2.6) | — | (2,660 | ) | — | 19,901 | |||||||||||
Amounts reclassified from accumulated other comprehensive income: | ||||||||||||||||
Amortization of prior service credit (net of tax of: 2014—$0.0 and 0.0; 2013—$0.0 and $0.0)(1) | (216 | ) | (506 | ) | (430 | ) | (1,012 | ) | ||||||||
Amortization of net loss (net of tax of: 2014—$0.2 and $0.3; 2013—$0.2 and $0.4) (1) | 552 | 622 | 1,010 | 1,243 | ||||||||||||
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Total other comprehensive income (loss), net of tax | (8,591 | ) | 18,915 | (9,772 | ) | 9,293 | ||||||||||
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Comprehensive loss | $ | (53,212 | ) | $ | (9,149 | ) | $ | (37,307 | ) | $ | (28,449 | ) | ||||
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net income (loss) | $ | (10,110 | ) | $ | 4,936 | $ | (37,645 | ) | $ | (32,806 | ) | |||||
Other comprehensive income (loss), net of tax (tax amounts shown in millions below for the three and nine months ended September 30, 2014 and 2013, respectively): | ||||||||||||||||
Cumulative translation adjustments (net of tax of: 2014—$0 and $0; | (84,868 | ) | 40,965 | (95,220 | ) | 30,126 | ||||||||||
Pension and other postretirement benefit plans before reclassifications (net of tax of: 2014—$0 and $0; 2013—$(0.2) and $2.4) | — | (1,916 | ) | — | 17,985 | |||||||||||
Amounts reclassified from accumulated other comprehensive income: | ||||||||||||||||
Amortization of prior service credit (net of tax of: 2014—$0 and $0; 2013—$0 and $(0.1))(1) | (212 | ) | (501 | ) | (642 | ) | (1,513 | ) | ||||||||
Amortization of net loss (net of tax of: 2014—$0.2 and $0.5; | 498 | 595 | 1,508 | 1,838 | ||||||||||||
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Total other comprehensive income (loss), net of tax | (84,582 | ) | 39,143 | (94,354 | ) | 48,436 | ||||||||||
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Comprehensive income (loss) | $ | (94,692 | ) | $ | 44,079 | $ | (131,999 | ) | $ | 15,630 | ||||||
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(1) | These other comprehensive income (loss) components are included in the computation of net periodic benefit costs (see Note K). |
The accompanying notes are an integral part of these condensed consolidated financial statements.
TRINSEO S.A.
Condensed Consolidated Statements of Shareholders’ Equity
(In thousands)
(Unaudited)
Common Stock | Additional Paid-In | Accumulated Other Comprehensive | Accumulated | Total | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Income | Deficit | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2013 | 37,270 | $ | 373 | $ | 339,055 | $ | 88,378 | $ | (84,604 | ) | $ | 343,202 | 37,270 | $ | 373 | $ | 339,055 | $ | 88,378 | $ | (84,604 | ) | $ | 343,202 | ||||||||||||||||||||||||
Issuance of common stock (Note L) | 11,500 | 115 | 198,479 | — | — | 198,594 | 11,500 | 115 | 197,974 | — | — | 198,089 | ||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | (27,535 | ) | (27,535 | ) | — | — | — | — | (37,645 | ) | (37,645 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (9,772 | ) | — | (9,772 | ) | — | — | — | (94,354 | ) | — | (94,354 | ) | ||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 5,120 | — | — | 5,120 | — | — | 7,779 | — | — | 7,779 | ||||||||||||||||||||||||||||||||||||
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June 30, 2014 | 48,770 | $ | 488 | $ | 542,654 | $ | 78,606 | $ | (112,139 | ) | $ | 509,609 | ||||||||||||||||||||||||||||||||||||
September 30, 2014 | 48,770 | $ | 488 | $ | 544,808 | $ | (5,976 | ) | $ | (122,249 | ) | $ | 417,071 | |||||||||||||||||||||||||||||||||||
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December 31, 2012 | 37,270 | $ | 373 | $ | 329,105 | $ | 24,573 | $ | (62,386 | ) | $ | 291,665 | 37,270 | $ | 373 | $ | 329,105 | $ | 24,573 | $ | (62,386 | ) | $ | 291,665 | ||||||||||||||||||||||||
Net loss | — | — | — | — | (37,742 | ) | (37,742 | ) | — | — | — | — | (32,806 | ) | (32,806 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | 9,293 | — | 9,293 | — | — | — | 48,436 | — | 48,436 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 4,789 | — | — | 4,789 | — | — | 7,816 | — | — | 7,816 | ||||||||||||||||||||||||||||||||||||
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June 30, 2013 | 37,270 | $ | 373 | $ | 333,894 | $ | 33,866 | $ | (100,128 | ) | $ | 268,005 | ||||||||||||||||||||||||||||||||||||
September 30, 2013 | 37,270 | $ | 373 | $ | 336,921 | $ | 73,009 | $ | (95,192 | ) | $ | 315,111 | ||||||||||||||||||||||||||||||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
TRINSEO S.A.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net loss | $ | (27,535 | ) | $ | (37,742 | ) | $ | (37,645 | ) | $ | (32,806 | ) | ||||
Adjustments to reconcile net loss to net cash provided by operating activities | ||||||||||||||||
Depreciation and amortization | 50,941 | 47,800 | 78,798 | 71,037 | ||||||||||||
Amortization of deferred financing costs and issuance discount | 5,067 | 4,746 | 7,495 | 7,149 | ||||||||||||
Deferred income tax | 7,453 | (2,895 | ) | 4,716 | 3,851 | |||||||||||
Stock-based compensation | 5,120 | 4,789 | 7,779 | 7,816 | ||||||||||||
Earnings of unconsolidated affiliates, net of dividends | (7,829 | ) | (11,728 | ) | (9,596 | ) | (19,443 | ) | ||||||||
Unrealized losses on foreign exchange forward contracts | 13,324 | — | ||||||||||||||
Loss on extinguishment of long-term debt | — | 20,744 | 7,390 | 20,744 | ||||||||||||
Prepayment penalty on long-term debt | (3,975 | ) | — | |||||||||||||
Impairment charges | — | 4,571 | — | 4,571 | ||||||||||||
Loss (gain) on sale of businesses and other assets | (116 | ) | 3,261 | (116 | ) | 4,186 | ||||||||||
Changes in assets and liabilities | ||||||||||||||||
Accounts receivable | (59,874 | ) | (109,924 | ) | (42,015 | ) | (41,480 | ) | ||||||||
Inventories | 1,505 | 53,809 | (1,360 | ) | 93,949 | |||||||||||
Accounts payable and other current liabilities | 34,029 | 21,312 | 1,535 | (31,659 | ) | |||||||||||
Income taxes payable | 222 | (4,325 | ) | 764 | (8,792 | ) | ||||||||||
Other assets, net | (1,153 | ) | (5,010 | ) | (6,254 | ) | (6,969 | ) | ||||||||
Other liabilities, net | 34 | 4,104 | (19,179 | ) | 21,434 | |||||||||||
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Cash provided by (used in) operating activities | 7,864 | (6,488 | ) | |||||||||||||
Cash provided by operating activities | 1,661 | 93,588 | ||||||||||||||
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Cash flows from investing activities | ||||||||||||||||
Capital expenditures | (55,744 | ) | (29,122 | ) | (69,269 | ) | (52,318 | ) | ||||||||
Proceeds from the sale of property, plant and equipment | 5,434 | — | ||||||||||||||
Proceeds from the sale of businesses and other assets | 6,257 | 15,221 | ||||||||||||||
Proceeds from capital expenditures subsidy | — | 6,575 | — | 6,575 | ||||||||||||
Payment for working capital adjustment from sale of business | (700 | ) | — | (700 | ) | — | ||||||||||
Advance payment refunded | — | (2,711 | ) | — | (2,711 | ) | ||||||||||
Distributions from unconsolidated affiliates | 978 | 1,055 | 978 | 1,055 | ||||||||||||
Decrease in restricted cash | — | 7,852 | — | 7,852 | ||||||||||||
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Cash used in investing activities | (50,032 | ) | (16,351 | ) | (62,734 | ) | (24,326 | ) | ||||||||
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Cash flows from financing activities | ||||||||||||||||
Proceeds from initial public offering, net of offering costs | 199,152 | — | 198,087 | — | ||||||||||||
Deferred financing fees | — | (46,284 | ) | — | (46,834 | ) | ||||||||||
Short-term borrowings, net | (29,402 | ) | (17,848 | ) | (43,430 | ) | (32,676 | ) | ||||||||
Repayments of Term Loans | — | (1,239,000 | ) | — | (1,239,000 | ) | ||||||||||
Proceeds from the issuance of Senior Notes | — | 1,325,000 | — | 1,325,000 | ||||||||||||
Repayments of Senior Notes | (132,500 | ) | — | |||||||||||||
Proceeds from Accounts Receivable Securitization Facility | 178,603 | 222,592 | 283,292 | 351,630 | ||||||||||||
Repayments of Accounts Receivable Securitization Facility | (179,170 | ) | (165,884 | ) | (283,859 | ) | (391,181 | ) | ||||||||
Proceeds from Revolving Facility | — | 405,000 | — | 405,000 | ||||||||||||
Repayments of Revolving Facility | — | (525,000 | ) | — | (525,000 | ) | ||||||||||
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Cash provided by (used in) financing activities | 169,183 | (41,424 | ) | 21,590 | (153,061 | ) | ||||||||||
Effect of exchange rates on cash | 26 | (1,470 | ) | (4,893 | ) | 1,168 | ||||||||||
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Net change in cash and cash equivalents | 127,041 | (65,733 | ) | (44,376 | ) | (82,631 | ) | |||||||||
Cash and cash equivalents—beginning of period | 196,503 | 236,357 | 196,503 | 236,357 | ||||||||||||
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Cash and cash equivalents—end of period | $ | 323,544 | $ | 170,624 | $ | 152,127 | $ | 153,726 | ||||||||
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The accompanying notes are an integral part of these condensed consolidated financial statements.
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
NOTE A—BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements of Trinseo S.A. and its subsidiaries (the “Company”) as of and for the periods ended JuneSeptember 30, 2014 and 2013 were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are considered necessary for the fair statement of the results for the periods presented. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures normally provided in annual financial statements and, therefore, these statements should be read in conjunction with the 2013 audited consolidated financial statements included within the Company’s Registration Statement on Form S-1 (Registration No. 333-194561), which was declared effective by the SEC on June 11, 2014 (as amended, the “Registration Statement”).
The December 31, 2013 consolidated balance sheet data presented herein was derived from the Company’s December 31, 2013 audited consolidated financial statements, but does not include all disclosures required by GAAP for annual periods.
Reverse Stock Split and Initial Public Offering
On May 30, 2014, the Company amended its Articles of Association to effect a 1-for-436.69219 reverse stock split of its issued and outstanding common stock (“reverse split”) and to increase its authorized shares to 50.0 billion. All share and per share data have been retroactively adjusted in the accompanying financial statements to give effect to the reverse split.
On June 17, 2014, the Company completed an initial public offering (the “IPO”) of 11,500,000 ordinary shares at a price of $19.00 per share, which included 1,500,000 of shares sold pursuant to the underwriters’ exercise of their over-allotment option. The Company received cash proceeds of $203.2 million from this transaction, net of underwriting discounts. See Note L for more information.
NOTE B—RECENT ACCOUNTING GUIDANCE
In February 2013, the Financial Accounting Standards Board (“FASB”) issued amendments for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance. This guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. This guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The Company adopted this guidance on a retrospective basis effective January 1, 2014, and the adoption did not have a significant impact on the Company’s financial position or results of operations.
In July 2013, the FASB issued guidance to clarify the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new guidance requires that unrecognized tax benefits be netted against all available same-jurisdiction losses or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the unrecognized tax benefits. The Company adopted this guidance prospectively effective January 1, 2014, and the adoption did not have a significant impact on the Company’s financial position or results of operations.
In April 2014, the FASB issued amendments to guidance for reporting discontinued operations and disposals of components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The implementation of the amended guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued new 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. This guidance is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted under GAAP and retrospective application is permitted, but not required. The Company is currently assessing the impact of adopting this guidance on its financial statements and results of operations.
In June 2014, the FASB issued updated guidance related to stock compensation. The updated guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The updated guidance is effective for annual and interim periods beginning after December 15, 2015 and can be applied either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and to all newly granted or modified awards thereafter. Early adoption is permitted. This guidance is not relevant to the Company’s currently outstanding awards; however, the Company will continue to evaluate the applicability of this guidance to future awards as necessary.
NOTE C—INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company is supplemented by two strategic joint ventures: Americas Styrenics LLC (“AmSty”, a polystyrene joint venture with Chevron Phillips Chemical Company LP) and Sumika Styron Polycarbonate Limited (“Sumika Styron”, a polycarbonate joint venture with Sumitomo Chemical Company, Limited). Investments held in the unconsolidated affiliates are accounted for by the equity method.
At JuneAs of September 30, 2014 and December 31, 2013, respectively, the Company’s investment in AmSty was $128.1$131.5 million and $118.3 million. At JuneAs of September 30, 2014 and December 31, 2013, respectively, the Company’s investment in AmSty was $115.6$113.0 million and $130.8 million less than the Company’s 50% share of AmSty’s underlying net assets. This amount represents 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 6.25.9 years as of JuneSeptember 30, 2014. The Company received dividends from AmSty of $7.5 million and $12.5$20.0 million during the three and sixnine months ended JuneSeptember 30, 2014, respectively. The Company received norespectively, compared to dividends from AmStyof $7.5 million during the three and sixnine months ended JuneSeptember 30, 2013.
At JuneAs of September 30, 2014 and December 31, 2013, respectively, the Company’s investment in Sumika Styron was $34.6$33.0 million and $37.6 million. At JuneAs of September 30, 2014 and December 31, 2013, respectively, the Company’s investment in Sumika Styron was $19.8$20.3 million and $20.8 million greater than the Company’s 50% share of Sumika Styron’s underlying net assets. This amount represents the fair value of certain identifiable assets which have not been recorded on the historical financial statements of Sumika Styron. This difference is being amortized over the remaining useful life of the contributed assets of 11.311.0 years as of JuneSeptember 30, 2014. The Company received dividends from Sumika Styron of zero and $1.0 million during the three and nine months ended September 30, 2014, respectively, compared to dividends of zero and $1.1 million during the sixthree and nine months ended JuneSeptember 30, 2014 and 2013, respectively. The Company did not receive dividends from Sumika Styron, however, during either of the three months ended June 30, 2014 and 2013.
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:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Sales | $ | 540,920 | $ | 568,815 | $ | 1,105,052 | $ | 1,167,469 | ||||||||
Gross profit | $ | (2,529 | ) | $ | 24,407 | $ | 35,479 | $ | 23,402 | |||||||
Net income (loss) | $ | (11,026 | ) | $ | 11,716 | $ | 10,494 | $ | (1,891 | ) |
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Sales | $ | 577,519 | $ | 601,585 | $ | 1,682,571 | $ | 1,769,054 | ||||||||
Gross profit | $ | 29,743 | $ | 40,066 | $ | 65,222 | $ | 63,468 | ||||||||
Net income | $ | 13,667 | $ | 24,039 | $ | 24,161 | $ | 22,148 |
NOTE D—INVENTORIES
Inventories consisted of the following:
June 30, | December 31, | September 30, | December 31, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Finished goods | $ | 307,868 | $ | 302,379 | $ | 303,788 | $ | 302,379 | ||||||||
Raw materials and semi-finished goods | 182,965 | 191,081 | 170,563 | 191,081 | ||||||||||||
Supplies | 35,362 | 36,731 | 34,116 | 36,731 | ||||||||||||
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Total | $ | 526,195 | $ | 530,191 | $ | 508,467 | $ | 530,191 | ||||||||
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NOTE E—GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table shows changes in the carrying amount of goodwill by segment from December 31, 2013 to JuneSeptember 30, 2014:
Emulsion Polymers | Plastics | Emulsion Polymers | Plastics | |||||||||||||||||||||||||||||||||||||
Latex | Synthetic Rubber | Styrenics | Engineered Polymers | Total | Latex | Synthetic Rubber | Styrenics | Engineered Polymers | Total | |||||||||||||||||||||||||||||||
December 31, 2013 | $ | 14,901 | $ | 10,205 | $ | 8,669 | $ | 3,498 | $ | 37,273 | $ | 14,901 | $ | 10,205 | $ | 8,669 | $ | 3,498 | $ | 37,273 | ||||||||||||||||||||
Foreign currency impact | (122 | ) | (84 | ) | (71 | ) | (29 | ) | (306 | ) | (1,182 | ) | (810 | ) | (688 | ) | (277 | ) | (2,957 | ) | ||||||||||||||||||||
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June 30, 2014 | $ | 14,779 | $ | 10,121 | $ | 8,598 | $ | 3,469 | $ | 36,967 | ||||||||||||||||||||||||||||||
September 30, 2014 | $ | 13,719 | $ | 9,395 | $ | 7,981 | $ | 3,221 | $ | 34,316 | ||||||||||||||||||||||||||||||
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Other Intangible Assets
The following table provides information regarding the Company’s other intangible assets as of JuneSeptember 30, 2014 and December 31, 2013, respectively:
June 30, 2014 | December 31, 2013 | September 30, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Estimated Useful Life (Years) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | Estimated Useful Life (Years) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||||||||||||||||||||||
Developed technology | 15 | $ | 208,818 | $ | (56,264 | ) | $ | 152,554 | $ | 210,546 | $ | (49,713 | ) | $ | 160,833 | 15 | $ | 196,903 | $ | (55,844 | ) | $ | 141,059 | $ | 210,546 | $ | (49,713 | ) | $ | 160,833 | ||||||||||||||||||||||||||
Manufacturing Capacity Rights | 6 | 25,939 | (1,052 | ) | 24,887 | — | — | — | 6 | 24,079 | (1,952 | ) | 22,127 | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Software | 5 | 11,395 | (5,229 | ) | 6,166 | 11,034 | (4,099 | ) | 6,935 | 5 | 11,837 | (5,790 | ) | 6,047 | 11,034 | (4,099 | ) | 6,935 | ||||||||||||||||||||||||||||||||||||||
Software in development | N/A | 5,477 | — | 5,477 | 3,746 | — | 3,746 | N/A | 3,690 | — | 3,690 | 3,746 | — | 3,746 | ||||||||||||||||||||||||||||||||||||||||||
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Total | $ | 251,629 | $ | (62,545 | ) | $ | 189,084 | $ | 225,326 | $ | (53,812 | ) | $ | 171,514 | $ | 236,509 | $ | (63,586 | ) | $ | 172,923 | $ | 225,326 | $ | (53,812 | ) | $ | 171,514 | ||||||||||||||||||||||||||||
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In March 2014, the Company entered into an agreement with material supplier JSR Corporation, Tokyo (“JSR”) to acquire its current production capacity rights at the Company’s rubber production facility in Schkopau, Germany for a purchase price of €19.0 million (approximately $26.1 million). Prior to this agreement, JSR held 50% of the capacity rights of one of the Company’s three solution styrene-butadiene rubber (“SSBR”) production trains in Schkopau. As a result, effective March 31, 2014, the Company had full capacity rights to this production train. The €19.0 million purchase price was recorded in “Other intangible assets, net” in the condensed consolidated balance sheet as of March 31, 2014 to be amortized over its estimated useful life of approximately 6 years.
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
Further, the purchase price was recorded within capital expenditures in investing activities in the condensed consolidated statement of cash flows for the sixnine months ended JuneSeptember 30, 2014.
Amortization expense on other intangible assets totaled $5.1$5.4 million and $9.2$14.6 million for the three and sixnine months ended JuneSeptember 30, 2014, respectively. Amortization expense on other intangible assets totaled $4.0respectively, and $3.8 million and $7.8$11.6 million for the three and sixnine months ended JuneSeptember 30, 2013, 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 | ||||
Remainder of 2014 | $ | 10,264 | ||
2015 | 20,519 | |||
2016 | 19,954 | |||
2017 | 19,117 | |||
2018 | 18,402 | |||
2019 | 18,255 |
Estimated Amortization Expense for the Next Five Years | ||||
Remainder of 2014 | $ | 4,951 | ||
2015 | 19,797 | |||
2016 | 19,233 | |||
2017 | 18,396 | |||
2018 | 17,690 | |||
2019 | 17,513 |
NOTE F—DEBT
Debt consisted of the following:
June 30, | December 31, | |||||||||||||||
2014 | 2013 | September 30, 2014 | December 31, 2013 | |||||||||||||
Senior Secured Credit Facility | ||||||||||||||||
Revolving Facility | $ | — | $ | — | $ | — | $ | — | ||||||||
Senior Notes | 1,325,000 | 1,325,000 | 1,192,500 | 1,325,000 | ||||||||||||
Accounts Receivable Securitization Facility | — | — | — | — | ||||||||||||
Other indebtedness | 12,083 | 11,421 | 11,114 | 11,421 | ||||||||||||
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Total debt | 1,337,083 | 1,336,421 | 1,203,614 | 1,336,421 | ||||||||||||
Less: short-term borrowings and current portion of long-term debt | (142,055 | ) | (8,754 | ) | ||||||||||||
Less: short-term borrowings | (8,813 | ) | (8,754 | ) | ||||||||||||
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Total long-term debt | $ | 1,195,028 | $ | 1,327,667 | $ | 1,194,801 | $ | 1,327,667 | ||||||||
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Senior Secured Credit Facility
In January 2013, the Company amended its credit agreement (“Senior Secured Credit Facility”) to, among other things, increase the Company’s revolving credit facility (“Revolving Facility”) borrowing capacity from $240.0 million to $300.0 million, decrease the borrowing rate of the Revolving Facility through a decrease in the applicable margin rate from 4.75% to 3.00% as applied to base rate loans (which shall bear interest at a rate per annum equal to the base rate plus the applicable margin (as defined therein)), or 5.75% to 4.00% as applied to LIBO rate loans (which shall bear interest at a rate per annum equal to the LIBO rate plus the applicable margin and the mandatory cost (as defined therein), if applicable), and extend the maturity date to January 2018. Concurrently, the Company repaid its then outstanding term loans under the Senior Secured Credit Facility (the “Term Loans”) of $1,239.0 million using the proceeds from its sale of $1,325.0 million aggregate principal amount of the 8.750% senior secured notes (“Senior Notes”) issued in January 2013 (refer below for further discussion).
Prior to the amendment, the Senior Secured Credit Facility required that the Company comply with certain affirmative and negative covenants, including restrictions with respect to payment of dividends and other distributions to shareholders, and financial covenants that include the maintenance of certain financial ratios. These ratios include both a maximum leverage ratio no greater than 5.25 to 1.00 and an interest coverage ratio no less than 2.00 to 1.00 for the most recent twelve-month period.
The amendment replaced the Company’s total leverage ratio requirement with a first lien net leverage ratio (as defined under the amended agreement) and removed the interest coverage ratio requirement. If the outstanding balance on the Revolving Facility exceeds 25% of the $300.0 million borrowing capacity (excluding undrawn letters of credit up to $10.0 million) at a quarter end, then
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
the Company’s first lien net leverage ratio may not exceed 5.25 to 1.00 for the quarter ending March 31, 2013, 5.00 to 1.00 for the subsequent quarters through December 31, 2013, 4.50 to 1.00 for each of the quarters ending in 2014 and 4.25 to 1.00 for each of the quarters ending in 2015 and thereafter. As of JuneSeptember 30, 2014, the Company was in compliance with all debt covenant requirements under the Senior Secured Credit Facility.
As a result of this amendment and repayment of the Term Loans in January 2013, the Company recognized a $20.7 million loss on extinguishment of long-term debt during the first quarter of 2013, which consisted of the write-off of existing unamortized debt issuance cost and debt discount attributable to the Term Loans. Fees and expenses incurred in connection with this amendment were $5.5 million, which were capitalized within “Deferred charges and other assets” in the condensed consolidated balance sheet and are being amortized into “Interest expense, net” in the condensed consolidated statement of operations over the remaining term of the Revolving Facility using the straight-line method.
As of JuneSeptember 30, 2014, the Company had no outstanding borrowings, and had $292.8$293.1 million (net of $7.2$6.9 million outstanding letters of credit) of funds available for borrowings under the Revolving Facility.
Senior Notes
In January 2013, the Company issued $1,325.0 million 8.750% Senior Notes.Notes under the indenture. Interest on the Senior Notes is payable semi-annually on February 1st and August 1st of each year, which commenced on August 1, 2013. The notes will mature on February 1, 2019, at which time the entire $1,325.0 millionprincipal amounts then outstanding will be due and payable. The proceeds from the issuance of the Senior Notes were used to repay all of the Company’s outstanding Term Loans and related refinancing fees and expenses.
The Company may redeem all or part of the Senior Notes at any time prior to August 1, 2015 by paying a make-wholecall premium, plus accrued and unpaid interest to the redemption date. The Company may redeem all or part of the Senior Notes at any time after August 1, 2015 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 the applicable date of redemption, if redeemed during the twelve-month period beginning on of the year indicated below:
12-month period commencing August 1 in Year | Percentage | |||
2015 | 104.375 | % | ||
2016 | 102.188 | % | ||
2017 and thereafter | 100.000 | % |
In addition, at any time prior to August 1, 2015, the Company may redeem up to 35% of the original principal amount of the notes at a redemption price equal to 108.750% of the face amount thereof plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds that the Company raises in certain equity offerings. The Company may also redeem, during any 12-month period commencing from the issue date until August 1, 2015, up to 10% of the original principal amount of the Senior Notes at a redemption price equal to 103% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.
In July 2014, using proceeds from the Company’s IPO (see Note L), the Company redeemed $132.5 million in aggregate principal amount of the Senior Notes, including a 103% call premium totaling $4.0 million, together with accrued and unpaid interest thereon of $5.2 million. As a result of this redemption, during the third quarter of 2014 the Company expects to incurincurred a loss on the extinguishment of debt of approximately $7.4 million, which includesincluded the above $4.0 million call premium and an approximatelya $3.4 million write-off of related unamortized debt issuance costs. The $132.5 million in aggregate principal amount of the Senior Notes was classified as a current liability within “Short-term borrowings and current portion of long-term debt” in the condensed consolidated balance sheet as of June 30, 2014. Pursuant to the Indenture, the Company may redeem another 10% of the original principal amount of the Senior Notes prior to August 1, 2015.
The Senior Notes rank equally in right of payment with all of the Company’s existing and future senior secured debt and pari passu with the Company and the Guarantors’ (as defined below) indebtedness that is secured by first-priority liens, including the Company’s Senior Secured Credit Facility (as defined above), to the extent of the value of the collateral securing such indebtedness and ranking senior in right of payment to all of the Company’s existing and future subordinated debt. However, claims under the Senior Notes effectively rank behind the claims of holders of debt, including interest, under the Senior Secured Credit Facility in respect of proceeds from any enforcement action with respect to the collateral or in any bankruptcy, insolvency or liquidation
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
proceeding. The Senior Notes are unconditionally guaranteed on a senior secured basis by each of the Company’s existing and future wholly-owned subsidiaries that guarantee the Senior Secured Credit Facility (other than the Company’s subsidiaries in France and Spain) (the “Guarantors”). The note guarantees rank equally in right of payment with all of the Guarantors’ existing and future senior secured debt and senior in right of payment to all of the Guarantors’ existing and future subordinated debt. The notes are structurally subordinated to all of the liabilities of each of the Company’s subsidiaries that do not guarantee the notes.
The indenture contains covenants that, among other things, limit the Company’s ability and the ability of the Company’s restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions, subject to certain exceptions. If the Senior Notes are assigned an investment grade by the rating agencies and the Company is not in default, certain covenants will be suspended. If the ratings on the Senior Notes decline to below investment grade, the suspended covenants will be reinstated. As of JuneSeptember 30, 2014, the Company was in compliance with all debt covenant requirements under the indenture.
Fees and expenses incurred in connection with the issuance of Senior Notes were approximately $42.0 million, which were capitalized and included in “Deferred charges and other assets” in the condensed consolidated balance sheet, and are being amortized into “Interest expense, net” in the condensed consolidated statement of operations over the term of the Senior Notes using the effective interest rate method.
Accounts Receivable Securitization Facility
In May 2013, the Company amended its existing accounts receivable securitization facility (“Accounts Receivable Securitization Facility”) which increased its borrowing capacity from $160.0 million to $200.0 million, extended the maturity date to May 2016 and allows for the expansion of the pool of eligible accounts receivable to include previously excluded U.S. and Netherlands subsidiaries. As a result of the amendment, the Company incurred $0.7 million in fees, which were capitalized within “Deferred charges and other assets” in the condensed consolidated balance sheet and are being amortized into “Interest expense, net” in the condensed consolidated statement of operations using the straight-line method over the remaining term.
The Accounts Receivable Securitization Facility is subject to interest charges against the amount of outstanding borrowings as well as the amount of available, but undrawn borrowings. As a result of the amendment to the Accounts Receivable Securitization Facility, in regards to outstanding borrowings, fixed interest charges decreased from 3.25% plus commercial paper rates to 2.60% plus variable commercial paper rates. In regards to available, but undrawn borrowings, fixed interest charges decreased from 1.50% to 1.40%.
As of JuneSeptember 30, 2014 and December 31, 2013, there were no amounts outstanding under the Accounts Receivable Securitization Facility, with approximately $199.8$186.1 million and $143.8 million, respectively, of accounts receivable available to support this facility, based on the pool of eligible accounts receivable.
NOTE G—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 managesCompany’s principal strategy in managing its exposuresexposure to changes in foreign currency exchange rates where possible by paying expenses inis to naturally hedge the foreign currency-denominated liabilities on our balance sheet against corresponding assets of the same currency such that any changes in which we generate salesliabilities due to fluctuations in a particular country as well as usingexchange 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 which are not designated for hedge accounting treatment. The Company does not hold or enter into financial instruments for trading or speculative purposes.
During 2012, the Company entered into foreign exchange forward contracts with a notional U.S. dollar equivalent amount of $82.0 million. These contracts were settled in February and May 2013. The Company recognized no gains or losses during the three months ended September 30, 2013, and recognized losses of $0.6 million that were not designatedduring the nine months ended September 30, 2013 related to these contracts.
In the third quarter of 2014, the Company entered into various foreign exchange forward contracts, each with an original maturity of less than three months. As of September 30, 2014, the Company had open foreign exchange forward contracts with a net notional U.S. dollar equivalent of $153.8 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as hedging instrumentsof September 30, 2014.
Buy / (Sell) | September 30, 2014 | |||
Euro | $ | 302,824 | ||
Chinese Yuan | $ | (118,938 | ) | |
Swiss Franc | $ | 39,286 | ||
Indonesian Rupiah | $ | (32,550 | ) | |
Japanese Yen | $ | (9,829 | ) |
Forward contracts are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in ordera single currency in the event of a default on or termination of any one contract. As a result, in accordance with the Company’s existing accounting policy, we recorded these foreign exchange forward contracts on a net basis, by counterparty within the condensed consolidated balance sheet.
The fair value of open foreign exchange forward contracts amounted to manage volatility$13.3 million of net unrealized losses as of September 30, 2014, which was recorded in foreign currency exposures. “Accounts payable” on the condensed consolidated balance sheet. The following tables summarize the financial assets and liabilities included in the condensed consolidated balance sheet:
September 30, 2014 | ||||||||||||
Description | Gross Amounts of Recognized Assets | Gross Amounts of Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet | |||||||||
Foreign exchange forward contracts | $ | 2,963 | $ | (2,963 | ) | $ | — | |||||
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Description | Gross Amounts of Recognized Liabilities | Gross Amounts of Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet | |||||||||
Foreign exchange forward contracts | $ | 16,287 | $ | (2,963 | ) | $ | 13,324 | |||||
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The Company had no derivative assets or liabilities outstanding as of December 31, 2013.
As these foreign exchange forward contracts wereare not designated for hedge accounting treatment, changes in the fair value of underlying instruments are recognized in “Other expense (income), net” in the condensed consolidated statement of operations.
These contracts were settled in February and May 2013, with no new contracts entered since that time. The Company recognizedrecorded losses from settlements and changes in the fair value of $1.0 million and $0.6outstanding forward contracts of $19.5 million during the three and six months ended JuneSeptember 30, 2013, respectively.
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars2014. These losses largely offset net foreign exchange transaction gains of $21.8 million during the quarter which resulted from the remeasurement of the Company’s foreign currency denominated assets and liabilities. The cash settlements of these forward exchange forward contracts are included within operating activities in thousands, unless otherwise stated)
(Unaudited)the condensed consolidated statement of cash flows.
NOTE H—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 tables presenttable summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheet at September 30, 2014. As discussed in Notes G, there were no outstanding foreign exchange forward contracts as of December 31, 2013, and as such, there were no balances to be recorded at fair value at that date.
September 30, 2014 | ||||||||||||||||
Assets (Liabilities) at Fair Value | Quoted Prices in Active Markets for Identical Items (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||
Foreign exchange forward contracts | $ | — | $ | (13,324 | ) | $ | — | $ | (13,324 | ) | ||||||
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Total fair value | $ | — | $ | (13,324 | ) | $ | — | $ | (13,324 | ) | ||||||
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The Company uses an income approach to value its foreign exchange forward contracts, utilizing discounted cash flow techniques, considering the terms of the contract and observable market information available as of the reporting date. Significant inputs to the valuation for foreign exchange forward contracts 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.
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 JuneSeptember 30, 2014 and December 31, 2013, respectively:
Quoted Prices in Active Markets for Identical Items (Level 1) | Significant Other Observable Inputs (Level 2) | Total | ||||||||||
June 30, 2014 | ||||||||||||
Senior Notes | $ | — | $ | 1,431,000 | $ | 1,431,000 | ||||||
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Total fair value | $ | — | $ | 1,431,000 | $ | 1,431,000 | ||||||
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Quoted Prices in Active Markets for Identical Items (Level 1) | Significant Other Observable Inputs (Level 2) | Total | ||||||||||
December 31, 2013 | ||||||||||||
Senior Notes | $ | — | $ | 1,366,406 | $ | 1,366,406 | ||||||
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Total fair value | $ | — | $ | 1,366,406 | $ | 1,366,406 | ||||||
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Senior Notes (Level 2) | $ | 1,255,106 | $ | 1,366,406 | ||||
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Total fair value | $ | 1,255,106 | $ | 1,366,406 | ||||
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There were no other significant financial instruments outstanding as of JuneSeptember 30, 2014 and December 31, 2013.
NOTE I—PROVISION FOR INCOME TAXES
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Effective income tax rate | (13.9)% | (8.3)% | (195.0)% | (5.7)% |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Effective income tax rate | (56.5 | )% | 54.9 | % | (138.3 | )% | (32.5 | )% |
Provision for income taxes for the three and sixnine months ended JuneSeptember 30, 2014 were $5.5$3.7 million and $21.9 million, resulting in a negative effective tax rate of 13.9%,56.5% and $18.2 million, resulting in a negative effective tax rate of 195.0%138.3%, respectively. Provision for income taxes for the three and sixnine months ended JuneSeptember 30, 2013 were $2.2$6.0 million, resulting in an effective tax rate of 54.9%, and $8.1 million, resulting in a negative effective tax rate of 8.3%, and $2.1 million, resulting in a negative effective tax rate of 5.7%32.5%, respectively.
The increase in provision foreffective income taxes for the six months ended June 30, 2014 was primarily driven by the decrease in loss before income taxes from $35.7 million of loss for the six months ended June 30, 2013 to $9.3 million of loss for the six months ended June 30, 2014. During the periods ended June 30, 2013, the Company incurred a loss on extinguishment of debt of $20.7 million, which provided a $4.3 million tax benefit in those periods. This one time item did not recur in the periods ended June 30, 2014.
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
Although the Company had losses before income taxesrates for the three and sixnine months ended JuneSeptember 30, 2014 it generatedwere impacted by losses of approximately $73.6$22.6 million and $97.2$119.8 million, during these respective periods mostlyrespectively, primarily within our holding companies incorporated in Luxembourg, which did not provide a tax benefit as management does not believe thatto the Company will utilizeCompany. These losses included non-deductible interest and stock-based compensation expenses. Additionally, during the nine months ended September 30, 2014, these losses in the foreseeable future. Included in these losses were payments made during the three months ended June 30, 2014 ofincluded certain other non-deductible expenses, such as a $32.5 million charge related to an agreement with Dow to terminate the Latex JV Option Agreement and a portionapproximately $18.6 million of the fees related to the termination of the Advisory Agreement with Bain Capital of approximately $18.6 million (see(both incurred in the second quarter; see Note NN). The effective income tax rates for further discussion on both of these payments). These non deductible expenses unfavorably impacted the effective tax rate during the three and sixnine months ended JuneSeptember 30, 2014.2013 were impacted by losses of $15.4 million and $59.7 million, respectively, primarily within our the holding companies incorporated in Luxembourg, stemming mainly from non-deductible interest and stock-based compensation expenses.
Offsetting the
Partially offsetting this unfavorable impact to the effective tax rate was a tax benefit recognized forduring the three and sixnine months ended JuneSeptember 30, 2014, as the Company effectively settled its 2010 and 2011 auditaudits with the IRS and received a refund of $3.2 million in July 2014. As a result, the Company recorded a previously unrecognized tax benefit in the amount of $2.7 million, including penalties and interest, relating to its 2011 tax return filing. Additionally, the tax benefit generated from the Advisory Agreement termination fee noted above was $1.2 million for the periods ended June 30, 2014. No similar tax benefits were recorded in the periodsnine months ended JuneSeptember 30, 2013.
NOTE J—COMMITMENTS AND CONTINGENCIES
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. At JuneAs of September 30, 2014 and December 31, 2013, the Company had no accrued obligations for environmental remediation and restoration costs. Pursuant to the terms of the Styron sales and purchase agreement, 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 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, Terneuzen, The Netherlands, and Guaruja, Brazil. 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.
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 7 years. 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 annual commitment as disclosed in the 2013 consolidated financial statements.
The Company has service agreements with Dow which contain fixed annual fees. See Note N for further discussion.
Litigation Matters
From time to time, the Company may be subject to various legal claims and proceedings incidental to the normal conduct of business, relating to such matters as product liability, antitrust/competition, past waste disposal practices and release of chemicals into the environment. While it is impossible at this time to determine with certainty the ultimate outcome of these routine claims, the Company does not believe that the ultimate resolution of these claims will have a material adverse effect on the Company’s results of operations, financial condition or cash flow.
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
Legal costs, including those legal costs expected to be incurred in connection with a loss contingency, are expensed as incurred.
NOTE K—PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic benefit costs for all significant plans were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Defined Benefit Pension Plans | ||||||||||||||||||||||||||||||||
Service cost | $ | 3,529 | $ | 3,679 | $ | 7,044 | $ | 7,357 | $ | 3,454 | $ | 3,795 | $ | 10,498 | $ | 11,152 | ||||||||||||||||
Interest cost | 1,943 | 1,660 | 3,876 | 3,321 | 1,902 | 1,853 | 5,778 | 5,174 | ||||||||||||||||||||||||
Expected return on plan assets | (624 | ) | (428 | ) | (1,245 | ) | (856 | ) | (611 | ) | (416 | ) | (1,856 | ) | (1,272 | ) | ||||||||||||||||
Amortization of prior service credit | (257 | ) | (526 | ) | (513 | ) | (1,052 | ) | (252 | ) | (519 | ) | (765 | ) | (1,571 | ) | ||||||||||||||||
Amortization of net loss | 598 | 812 | 1,065 | 1,624 | 520 | 780 | 1,585 | 2,404 | ||||||||||||||||||||||||
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Net periodic benefit cost | $ | 5,189 | $ | 5,197 | $ | 10,227 | $ | 10,394 | $ | 5,013 | $ | 5,493 | $ | 15,240 | $ | 15,887 | ||||||||||||||||
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
Other Postretirement Plans | ||||||||||||||||||||||||||||||||
Service cost | $ | 75 | $ | 71 | $ | 150 | $ | 141 | ||||||||||||||||||||||||
Interest cost | 78 | 65 | 156 | 131 | ||||||||||||||||||||||||||||
Amortization of prior service cost | 26 | — | 52 | — | ||||||||||||||||||||||||||||
Amortization of net gain | (37 | ) | — | (74 | ) | — | ||||||||||||||||||||||||||
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Net periodic benefit cost | $ | 142 | $ | 136 | $ | 284 | $ | 272 | ||||||||||||||||||||||||
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Other Postretirement Plans Service cost Interest cost Amortization of prior service cost Amortization of net gain Net periodic benefit cost Three Months Ended
September 30, Nine Months Ended
September 30, 2014 2013 2014 2013 $ 74 $ 70 $ 224 $ 211 78 65 234 196 26 — 78 — (37 ) — (111 ) — $ 141 $ 135 $ 425 $ 407
As of JuneSeptember 30, 2014 and December 31, 2013, the Company’s benefit obligations included in “Other noncurrent obligations” in the condensed consolidated balance sheets were $167.1$158.7 million and $163.2 million, respectively. The net periodic benefit costs are recognized in the condensed consolidated statement of operations as “Cost of sales” and “Selling, general and administrative expenses.”
The Company made cash contributions of approximately $2.7$1.5 million and $6.9$8.4 million during the three and sixnine months ended JuneSeptember 30, 2014, respectively. The Company expects to make additional cash contributions, including benefit payments to unfunded plans, of approximately $9.1$7.0 million to its defined benefit plans for the remainder of 2014.
Affiliation Agreements and Successor Plans
A majority of Company employees are participants in various defined benefit pension and other postretirement plans which are administered and sponsored by Trinseo. In connection with the Acquisition, the Company and Dow entered into affiliation agreements in certain jurisdictions (the “Affiliation Agreements”) allowing employees who transferred from Dow to the Company as of June 17, 2010 to remain in the Dow operated pension plans (“Dow Plans”) until the Company established its own pension plans. The Affiliation Agreements ended on December 31, 2012. Effective January 1, 2013, all remaining employees of the Company who were previously participants of the Dow Plans in Switzerland and the Netherlands transferred to separately administered and sponsored pension plans of the Company (the “Successor Plans”). The benefit obligation and related plan assets in the Dow Plans belonging to the Company’s employees were transferred to the Successor Plans. As a result of the transfer, the Company recognized prior service credits and net losses of approximately $26.8 million and $1.4 million, respectively, in other comprehensive income for the sixnine months ended JuneSeptember 30, 2013.
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
NOTE L—STOCKHOLDERS’ EQUITY
On May 30, 2014, the Company amended its Articles of Association to effect a 1-for-436.69219 reverse split of its issued and outstanding common stock and to increase its authorized shares of common stock to 50.0 billion. Pursuant to the reverse split, every 436.69219 shares of the Company’s then issued and outstanding common stock was converted into one share of common stock. The reverse split did not change the par value of the Company’s common stock. The condensed consolidated financial statements have been retroactively adjusted to give effect to the reverse split.
On June 17, 2014, the Company completed the IPO of 11,500,000 ordinary shares at a price of $19.00 per share. The number of ordinary shares at closing included 1,500,000 of shares sold pursuant to the underwriters’ over-allotment option. The Company received cash proceeds of $203.2 million from this transaction, net of underwriting discounts. These net proceeds were used by the Company for: i) the July 2014 repayment of $132.5 million in aggregate principal amount of the 8.750% Senior Notes due 2019, together with accrued and unpaid interest thereon of $5.2 million and a call premium of $4.0 million (see Note F); ii) the payment of approximately $23.3 million in connection with the termination of the Advisory Agreement with Bain Capital (see Note N); iii) the payment of approximately $4.6$5.1 million of advisory, accounting, legal and printing expenses directly related to the offering which were recorded to additional paid-in capital in the condensed consolidated balance sheet; and iv) general corporate purposes.
NOTE M—STOCK-BASED COMPENSATION
Restricted Stock Awards
On June 17, 2010, Bain Capital Everest Manager Holding SCA, which we refer to as the “Parent”, authorized the issuance of up to 750,000 shares in time-based and performance-based restricted stock to certain key members of management. Any related compensation associated with these awards is allocated to the Company from the Parent. With the adoption of the Company’s 2014 Omnibus Incentive Plan (see discussion below), no further grants will be issued under the Parent’s restricted stock awards plan.
Time-based Restricted Stock Awards
For the sixnine month period ended JuneSeptember 30, 2014, there were no grants of time-based restricted stock awards. Total compensation expense for time-based restricted stock awards was $2.2$1.1 million and $2.7 million for each of the three months ended JuneSeptember 30, 2014 and 2013, respectively, and $4.7$5.8 million and $3.9$6.6 million for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. As of JuneSeptember 30, 2014, there was $7.6$6.3 million of total unrecognized compensation cost related to time-based restricted stock awards. This cost is expected to be recognized over a weighted-average period of 3.02.8 years.
Performance-based Restricted Stock Awards
For the sixnine month period ended JuneSeptember 30, 2014, there were no grants of performance-based restricted stock awards. In previous periods, the performance-based restricted stock awards contained provisions wherein vesting was subject to the full satisfaction of both time and performance vesting criterion. The performance component of the awards could only be satisfied if certain targets were achieved based on various returns realized by the Company’s shareholders on a change in control or an IPO. The time vesting requirements for the performance-based restricted stock generally vested in the same manner as the related time-based award. In previous periods,Prior to the Company’s IPO, the Company hashad not recorded any compensation expense related to these awards as the likelihood of achieving the existing performance condition of a change in control or IPO was not deemed to be probable.
Prior to the completion of the Company’s IPO, on June 10, 2014 the Parent entered into agreements to modify the outstanding performance-based restricted stock awards held by the Company’s employees to remove the performance-based vesting condition associated with such awards related to the achievement of certain investment returns (while maintaining the requirement for a change in control or IPO). This modification also changed the time-based vesting requirement associated with such shares to provide that any shares which would have satisfied the time-based vesting condition previously applicable to such shares on or prior to June 30, 2017 will instead vest on June 30, 2017, subject to the holder remaining continuously employed by us through such date. Any such shares that are subject to a time-based vesting condition beyond June 30, 2017 will remain subject to the time-based vesting condition previously applicable to such awards. Henceforth, these awards will be described as the Company’s modified time-based restricted stock awards.
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
On June 17, 2014, with the completion of the Company’s IPO, the remaining performance condition associated with these modified time-based restricted stock awards was achieved. As a result, the Company will now beginhas begun recognizing compensation expense related to these awards based on the vesting described above. However, theTotal compensation expense related to thesefor modified time-based restricted stock awards was not material$1.3 million for the sixthree and nine months ended JuneSeptember 30, 2014.2014, respectively. As of JuneSeptember 30, 2014, there was $13.8$12.3 million of total unrecognized compensation cost related to these awards, which will be recognized over a weighted-average period of 3.22.9 years.
Management Retention Awards
During the year ended December 31, 2012, the Parent agreed to retention awards with certain officers. These awards generally vest over one to four years, and are payable upon vesting subject to the participant’s continued employment with the Company on the vesting date. Compensation expense related to these retention awards is equivalent to the value of the award, and is being recognized ratably over the applicable service period. Total compensation expense for these retention awards was $0.2 million and $0.3 million for the three months ended JuneSeptember 30, 2014 and 2013, respectively, and $0.5$0.7 million and $0.7$1.1 million for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. As of JuneSeptember 30, 2014, there was $0.8$0.6 million in unrecognized compensation cost related to these retention awards. This cost is expected to be recognized over a period of 1.61.3 years.
2014 Omnibus Incentive Plan
In connection with the IPO, the Company’s board of directors approved the Trinseo S.A. 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”), adopted on May 28, 2014, under which the maximum number of shares of common stock that may be delivered upon satisfaction of awards granted under such plan is 4.5 million shares. Following the IPO, all equity-based awards granted by the Company will be granted under the 2014 Omnibus Plan. The 2014 Omnibus Plan provides for awards of stock options, share appreciation rights, restricted stock, unrestricted stock, stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of the Company’s common stock. For a full description of all provisions of this plan, refer to the Company’s Registration Statement, to which the 2014 Omnibus Plan in full has been filed as an exhibit.
In connection with the IPO, two of the Company’s newly appointed independent directors (Messrs. Cote and De Leener) received a grant of 4,736 restricted stock units, respectively, under the 2014 Omnibus Plan each with a grant date fair value of $0.1 million, whichmillion. These awards will vest in full on the first anniversary of the date of grant, subject to the director’s continued service as a member of the Company’s board through such date. For the three and six months ended June 30, 2014, theTotal compensation expense relatedfor these restricted stock units was not material toless than $0.1 million for the Company’s results of operations.three and nine months ended September 30, 2014, respectively.
NOTE N—RELATED PARTY AND DOW TRANSACTIONS
In connection with the Acquisition, the Company entered into the Advisory Agreementa ten year initial term advisory agreement with Bain Capital (the “Advisory Agreement”) wherein Bain Capital provides management and consulting services and financial and other advisory services to the Company. Pursuant to this agreement, we paid Bain Capital fees (including out-of-pocket expenses) of $0.8 million and $1.2 million for the three months ended June 30, 2014 and 2013, respectively, and $2.0 million and $2.4 million for the six months ended June 30, 2014 and 2013, respectively. The Advisory Agreement terminated upon consummation of the Company’s IPO in June 2014 and pursuant to theits terms, of the Advisory Agreement, the Company paid $23.3 million of termination fees representing acceleration of the advisory fees for the remainder of the original term. The termination fee wasfees were paid in June 2014 using the proceeds from the IPO, and waswere recorded as an expense within “Selling, general and administrative expenses” in the condensed consolidated statements of operations for the three and sixnine months ended JuneSeptember 30, 2014. Bain Capital will continue to provide an immaterial level of ad hoc advisory services for the Company going forward. In conjunction with the above, we paid Bain Capital fees (including out-of-pocket expenses) of $0.1 million and $1.2 million for the three months ended September 30, 2014 and 2013, respectively, and $2.2 million and $3.6 million for the nine months ended September 30, 2014 and 2013, respectively (excluding the termination fees noted above).
Bain Capital also provides advice pursuant to a 10-year Transaction Services Agreementtransaction services agreement with fees payable equaling 1% of the transaction value of each financing, acquisition or similar transaction. In connection with the IPO, Bain Capital received $2.2 million of transaction fees, which were recorded within “Additional paid-in-capital” on the condensed consolidated balance sheet as of JuneSeptember 30, 2014 (see Note L). Bain Capital also received fees of approximately $13.9 million related to the issuance of the Senior Notes and the amendment to the Senior Secured Credit Facility in January 2013, which were included in the financing fees capitalized and included in “Deferred charges and other assets” in the condensed consolidated balance sheet (see Note F for further discussion).
In connection with the Acquisition in 2010, certain of the Company’s affiliates entered into a latex joint venture option agreement (the “Latex JV Option Agreement”) with Dow, pursuant to which Dow was granted an irrevocable option to purchase 50% of the issued and outstanding interests in a joint venture to be formed by Dow and the Company’s affiliates with respect to the SB Latex business in Asia, Latin America, the Middle East, Africa, Eastern Europe, Russia and India. On May 30, 2014, the Company’s
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
affiliates entered into an agreement with Dow to terminate the Latex JV Option Agreement, Dow’s rights to the option, and all other obligations thereunder, in exchange for a termination payment of $32.5 million. This termination payment was made on May 30, 2014, and the termination of the Latex JV Option Agreement became effective as of such date. This termination payment was recorded as an expense within “Other expense (income), net” in the condensed consolidated statements of operations for the three and sixnine months ended JuneSeptember 30, 2014.
NOTE O—SEGMENTS
The Company operates four segments under two principal business units. The Emulsion Polymers business unit includes a Latex segment and a Synthetic Rubber segment. The Plastics business unit includes a Styrenics segment and an Engineered Polymers segment.
The Latex segment produces styrene-butadiene latex (“SB latex”) primarily for coated paper and packaging board, carpet and artificial turf backings, as well as a number of performance latex applications. The Synthetic Rubber segment produces synthetic rubber products used predominantly in tires, with additional applications in polymer modification and technical rubber goods, including conveyer and fan belts, hoses, seals and gaskets. The Styrenics and Engineered Polymers segments offer complementary plastics products with formulations developed for durable applications, such as consumer electronics, automotive and construction. Through these two segments, the Company provides a broad set of plastics product solutions to its customers.
Emulsion Polymers | Plastics | Emulsion Polymers | Plastics | |||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Latex | Synthetic Rubber | Styrenics | Engineered Polymers | Corporate Unallocated | Total | Latex | Synthetic Rubber | Styrenics | Engineered Polymers | Corporate Unallocated | Total | ||||||||||||||||||||||||||||||||||||
June 30, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales to external customers | $ | 320,682 | $ | 164,926 | $ | 589,739 | $ | 265,588 | $ | — | $ | 1,340,935 | ||||||||||||||||||||||||||||||||||||
Equity in earnings (losses) of unconsolidated affiliates | — | — | 6,806 | (1,428 | ) | — | 5,378 | |||||||||||||||||||||||||||||||||||||||||
EBITDA(1) | 24,818 | 37,034 | 27,168 | 5,116 | ||||||||||||||||||||||||||||||||||||||||||||
Investment in unconsolidated affiliates | — | — | 128,107 | 34,631 | — | 162,738 | ||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 7,336 | 8,474 | 7,360 | 3,166 | 877 | 27,213 | ||||||||||||||||||||||||||||||||||||||||||
June 30, 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales to external customers | $ | 344,962 | $ | 156,174 | $ | 597,327 | $ | 263,296 | $ | — | $ | 1,361,759 | ||||||||||||||||||||||||||||||||||||
Equity in earnings (losses) of unconsolidated affiliates | — | — | 9,246 | (317 | ) | — | 8,929 | |||||||||||||||||||||||||||||||||||||||||
EBITDA(1) | 22,047 | 27,946 | 17,572 | (2,922 | ) | |||||||||||||||||||||||||||||||||||||||||||
Investment in unconsolidated affiliates | — | — | 113,695 | 37,282 | — | 150,977 | ||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 6,660 | 7,407 | 7,306 | 1,792 | 768 | 23,933 | ||||||||||||||||||||||||||||||||||||||||||
Emulsion Polymers | Plastics | |||||||||||||||||||||||||||||||||||||||||||||||
Six Months Ended | Latex | Synthetic Rubber | Styrenics | Engineered Polymers | Corporate Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||
June 30, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales to external customers | $ | 646,988 | $ | 341,639 | $ | 1,184,080 | $ | 527,360 | $ | — | $ | 2,700,067 | $ | 328,394 | $ | 155,452 | $ | 560,527 | $ | 261,120 | $ | — | $ | 1,305,493 | ||||||||||||||||||||||||
Equity in earnings (losses) of unconsolidated affiliates | — | — | 22,342 | (2,014 | ) | — | 20,328 | — | — | 10,854 | (1,587 | ) | — | 9,267 | ||||||||||||||||||||||||||||||||||
EBITDA(1) | 50,331 | 80,134 | 69,435 | 2,757 | 25,389 | 26,590 | 21,628 | 1,838 | ||||||||||||||||||||||||||||||||||||||||
Investment in unconsolidated affiliates | — | — | 128,107 | 34,631 | — | 162,738 | — | — | 131,460 | 33,044 | — | 164,504 | ||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 13,639 | 15,645 | 14,749 | 4,940 | 1,968 | 50,941 | 6,456 | 8,653 | 7,279 | 3,856 | 1,613 | 27,857 | ||||||||||||||||||||||||||||||||||||
June 30, 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales to external customers | $ | 701,718 | $ | 332,590 | $ | 1,199,297 | $ | 519,739 | $ | — | $ | 2,753,344 | $ | 332,102 | $ | 141,549 | $ | 576,276 | $ | 259,032 | $ | — | $ | 1,308,959 | ||||||||||||||||||||||||
Equity in earnings (losses) of unconsolidated affiliates | — | — | 12,378 | (650 | ) | — | 11,728 | |||||||||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | — | — | 15,208 | 7 | — | 15,215 | ||||||||||||||||||||||||||||||||||||||||||
EBITDA(1) | 24,052 | 12,805 | 66,005 | 1,967 | ||||||||||||||||||||||||||||||||||||||||||||
Investment in unconsolidated affiliates | — | — | 121,403 | 37,289 | — | 158,692 | ||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 6,068 | 7,051 | 6,861 | 1,932 | 1,325 | 23,237 |
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
Emulsion Polymers | Plastics | Emulsion Polymers | Plastics | |||||||||||||||||||||||||||||||||||||||||||||
Six Months Ended | Latex | Synthetic Rubber | Styrenics | Engineered Polymers | Corporate Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||
Nine Months Ended | Latex | Synthetic Rubber | Styrenics | Engineered Polymers | Corporate Unallocated | Total | ||||||||||||||||||||||||||||||||||||||||||
September 30, 2014 | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales to external customers | $ | 975,382 | $ | 497,091 | $ | 1,744,608 | $ | 788,479 | $ | — | $ | 4,005,560 | ||||||||||||||||||||||||||||||||||||
Equity in earnings (losses) of unconsolidated affiliates | — | — | 33,196 | (3,601 | ) | — | 29,595 | |||||||||||||||||||||||||||||||||||||||||
EBITDA(1) | 48,773 | 58,605 | 42,963 | (3,717 | ) | 75,717 | 106,722 | 91,060 | 4,591 | |||||||||||||||||||||||||||||||||||||||
Investment in unconsolidated affiliates | — | — | 113,695 | 37,282 | — | 150,977 | — | — | 131,460 | 33,044 | — | 164,504 | ||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 13,471 | 14,439 | 14,904 | 3,473 | 1,513 | 47,800 | 20,095 | 24,298 | 22,028 | 8,796 | 3,581 | 78,798 | ||||||||||||||||||||||||||||||||||||
September 30, 2013 | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales to external customers | $ | 1,033,820 | $ | 474,139 | $ | 1,775,573 | $ | 778,771 | $ | — | $ | 4,062,303 | ||||||||||||||||||||||||||||||||||||
Equity in earnings (losses) of unconsolidated affiliates | — | — | 27,586 | (643 | ) | — | 26,943 | |||||||||||||||||||||||||||||||||||||||||
EBITDA(1) | 72,825 | 71,410 | 108,968 | (1,750 | ) | |||||||||||||||||||||||||||||||||||||||||||
Investment in unconsolidated affiliates | — | — | 121,403 | 37,289 | — | 158,692 | ||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 19,539 | 21,490 | 21,765 | 5,405 | 2,838 | 71,037 |
(1) | Reconciliation of EBITDA to net |
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Total Segment EBITDA | $ | 94,136 | $ | 64,643 | $ | 202,657 | $ | 146,624 | $ | 75,445 | $ | 104,829 | $ | 278,090 | $ | 251,453 | ||||||||||||||||
Corporate unallocated | (73,492 | ) | (32,886 | ) | (95,631 | ) | (68,470 | ) | (23,950 | ) | (37,774 | ) | (119,569 | ) | (106,244 | ) | ||||||||||||||||
Less: Interest expense, net | 32,602 | 33,738 | 65,420 | 66,046 | 30,098 | 32,881 | 95,518 | 98,927 | ||||||||||||||||||||||||
Less: Provision for income taxes | 5,450 | 2,150 | 18,200 | 2,050 | 3,650 | 6,001 | 21,850 | 8,051 | ||||||||||||||||||||||||
Less: Depreciation and amortization | 27,213 | 23,933 | 50,941 | 47,800 | 27,857 | 23,237 | 78,798 | 71,037 | ||||||||||||||||||||||||
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Net loss | $ | (44,621 | ) | $ | (28,064 | ) | $ | (27,535 | ) | $ | (37,742 | ) | ||||||||||||||||||||
Net income (loss) | $ | (10,110 | ) | $ | 4,936 | $ | (37,645 | ) | $ | (32,806 | ) | |||||||||||||||||||||
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Corporate unallocated includes certain corporate overhead costs, loss on extinguishment of long-term debt, and certain other income and expenses.
The primary measure of segment operating performance is EBITDA, which is defined as net income (loss) before interest, income taxes, depreciation and amortization. EBITDA is a key metric that is used by management to evaluate business performance in comparison to budgets, forecasts, and prior year financial results, providing a measure that management believes reflects the Company’s core operating performance. EBITDA is useful for analysisanalytical purposes; however, it should not be considered an alternative to the Company’s reported GAAP results, as there are limitations in using such financial measures. Other companies in the industry may define EBITDA differently than the Company, and as a result, it may be difficult to use EBITDA, or similarly-named financial measures, that other companies may use to compare the performance of those companies to the Company’s performance.
Asset and capital expenditure information is not accounted for at the segment level and consequently is not reviewed or included with the Company’s internal management reporting. Therefore, the Company has not disclosed asset and capital expenditure information for each reportable segment.
NOTE P—DIVESTITURES
EPS Divestiture
In June 2013, the Company’s board of directors approved the sale of its expandable polystyrene (“EPS”) business within the Company’s Styrenics segment, under a sale and purchase agreement which was signed in July 2013. The sale closed on September 30, 2013 and the Company received $15.2 million of sales proceeds during the third quarter of 2013, subject to a $0.7 million working capital adjustment, which was paid by the Company during the first quarter of 2014 and is reflected within investing activities in the condensed consolidated statement of cash flows the sixnine months ended JuneSeptember 30, 2014. The Company recognized a loss from the sale of $4.2 million recorded in “Other expense (income), net” in the condensed consolidated statement of operations for the nine months ended September 30, 2013, of which $1.0 million was recognized during the three months ended September 30, 2013.
EPS business results of operations were not classified as discontinued operations as the Company will have significant continuing cash flows as a result of a long-term supply agreement of styrene monomer to the EPS business, which was entered into contemporaneously with the sale and purchase agreement. The supply agreement will have an initial term of approximately 10 years from the closing date of the sale and will continue year-to-year thereafter. Under the supply agreement, we will supply a minimum of approximately 77 million pounds and a maximum of approximately 132 million pounds of styrene monomer annually or equivalent to 70% to 100% of the EPS business’s historical production consumption.
TRINSEO S.A.
NotesFurther, under the terms of the sale and purchase agreement, should the divested EPS business record EBITDA (as defined therein) greater than zero for fiscal year 2014, the Company will receive an incremental payment of €0.5 million to Condensed Consolidated Financial Statements
(Dollarsbe payable in thousands, unless otherwise stated)
(Unaudited)
the first half of 2015. As the meeting of this EBITDA threshold is not yet considered probable, the Company has not recorded the contingent gain on sale related to this potential incremental payment as of September 30, 2014.
Livorno Land Sale
In April 2014, the Company completed the sale of a portion of land at its manufacturing site in Livorno, Italy for a purchase price of €4.95 million (approximately $6.8 million). As a result, the Company recognized a gain on sale of $0.1 million within “Other expense (income), net” in the condensed consolidated statements of operations for the three and sixnine months ended JuneSeptember 30, 2014. As of December 31, 2013, this land was classified as held-for-sale within the caption “Other current assets” in the condensed consolidated balance sheet.
NOTE Q—RESTRUCTURING
Restructuring in Engineered Polymers Business
During the second quarter of 2014, the Company announced a planned restructuring within its Engineered Polymers business to exit the commodity market for polycarbonate in North America and to terminate existing arrangements with Dow regarding manufacturing services for the Company at Dow’s Freeport, Texas facility. The Company also entered into a new long-term supply contract with a third party to supply polycarbonate in North America. These revised arrangements are expected to become operational in the fourth quarter of 2014. In addition, the Company has executed revised supply contracts for certain raw materials that are processed at its polycarbonate manufacturing facility in Stade, Germany, which is expected to take effect beginning January 1, 2015. These revised agreements are expected to facilitate improvements in future results of operations for the Engineered Polymers segment.
For the three and sixnine months ended JuneSeptember 30, 2014, the Company recorded restructuring charges of $1.5$2.0 million and $3.5 million, respectively, relating to the accelerated depreciation of the related assets at Dow’s Freeport, Texas facility and other charges. These charges were included in “Selling, general and administrative expenses” in the condensed consolidated statements of operations, and were allocated entirely to the Engineered Polymers segment. Production at the Freeport, Texas facility ceased as of September 30, 2014, and decommissioning and demolition is expected to occur in the fourth quarter of 2014 and throughout 2015. The Company is likely to incur additional charges, not to exceed $10.0$7.0 million, in conjunction with the reimbursement of Dow’s expected decommissioning and demolition costs from its Freeport, Texasthis facility, which will be expensed as incurred. Decommissioning and demolition is expected to commence in second half of 2014.
Altona Plant Shutdown
In July 2013, the Company’s board of directors approved the plan to close the Company’s latex manufacturing facility in Altona, Australia. This restructuring plan was a strategic business decision to improve the results of the overall Latex segment. The facility manufactured SB latex used in the carpet and paper markets. Production at the facility ceased in the third quarter of 2013, followed by decommissioning, with demolition expected throughout 2014. As a result of the plant closure, the Company recorded restructuring charges of $10.8 million for the year ended December 31, 2013 ($6.52.5 million and $9.0 million of which were recorded in the three and sixnine month periods ended JuneSeptember 30, 2013)2013, respectively). These charges consisted of property, plant and equipment and other asset impairment charges, employee termination benefit charges, contract termination charges, and incurred decommissioning charges, of which approximately $4.8 million remained accrued on the Company’s consolidated balance sheet as of December 31, 2013. For the three and sixnine months ended JuneSeptember 30, 2014, the Company recorded additional restructuring charges of approximately $1.5$0.7 million and $2.1$2.8 million, respectively, related to incremental employee termination benefit charges, contract termination charges, and decommissioning costs. These charges were included in “Selling, general and administrative expenses” in the condensed consolidated statements of operations, and were allocated entirely to the Latex segment. The remaining employee termination benefits, contract termination costs, and decommissioning costs are recorded in “Accrued expenses and other current liabilities” in the condensed consolidated balance sheet.
The following table provides a rollforward of the liability balances associated with the Altona plant shutdown:
Balance at December 31, 2013 | Expenses | Deductions* | Balance at June 30, 2014 | Balance at December 31, 2013 | Expenses | Deductions* | Balance at September 30, 2014 | |||||||||||||||||||||||||
Employee termination benefit charges | $ | 1,408 | $ | 302 | $ | (1,327 | ) | $ | 383 | $ | 1,408 | $ | 302 | $ | (1,559 | ) | $ | 151 | ||||||||||||||
Contract termination charges | 3,388 | 1,409 | (1,534 | ) | 3,263 | 3,388 | 1,409 | (2,269 | ) | 2,528 | ||||||||||||||||||||||
Other** | 26 | 548 | (504 | ) | 70 | 26 | 1,263 | (1,040 | ) | 249 | ||||||||||||||||||||||
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Total | $ | 4,822 | $ | 2,259 | $ | (3,365 | ) | $ | 3,716 | $ | 4,822 | $ | 2,974 | $ | (4,868 | ) | $ | 2,928 | ||||||||||||||
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* | Includes primarily payments made against |
** | Includes demolition and decommissioning charges incurred in 2014, primarily related to labor and third party service costs. |
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
NOTE R—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of income taxes, consisted of:
Currency Translation Adjustment, Net | Employee Benefits, Net | Total | Currency Translation Adjustment, Net | Employee Benefits, Net | Total | |||||||||||||||||||
December 31, 2013 | $ | 116,146 | $ | (27,768 | ) | $ | 88,378 | $ | 116,146 | $ | (27,768 | ) | $ | 88,378 | ||||||||||
Other comprehensive income (loss) | (10,352 | ) | 580 | (9,772 | ) | (95,220 | ) | 866 | (94,354 | ) | ||||||||||||||
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June 30, 2014 | $ | 105,794 | $ | (27,188 | ) | $ | 78,606 | |||||||||||||||||
September 30, 2014 | $ | 20,926 | $ | (26,902 | ) | $ | (5,976 | ) | ||||||||||||||||
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December 31, 2012 | $ | 62,807 | $ | (38,234 | ) | $ | 24,573 | $ | 62,807 | $ | (38,234 | ) | $ | 24,573 | ||||||||||
Other comprehensive income (loss) | (10,839 | ) | 20,132 | 9,293 | 30,126 | 18,310 | 48,436 | |||||||||||||||||
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June 30, 2013 | $ | 51,968 | $ | (18,102 | ) | $ | 33,866 | |||||||||||||||||
September 30, 2013 | $ | 92,933 | $ | (19,924 | ) | $ | 73,009 | |||||||||||||||||
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NOTE S—EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (“basic EPS”) is computed by dividing net income (loss) available to common shareholders by the weighted average number of the Company’s common shares outstanding for the applicable period. Diluted earnings (loss) per share (“diluted EPS”) is calculated using net income (loss) available to common shareholders divided by diluted weighted-average shares of common shares outstanding during each period, which includes unvested restricted shares. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect.
The following table presents basic EPS and diluted EPS for the three and sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. These balances have been retroactively adjusted to give effect to the Company’s 1-for-436.69219 reverse stock split declared effective on May 30, 2014, discussed in Note L to the condensed consolidated financial statements.
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in thousands, except per share data) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||
Earnings (losses): | ||||||||||||||||||||||||||||||||
Net loss available to common shareholders | $ | (44,621 | ) | $ | (28,064 | ) | $ | (27,535 | ) | $ | (37,742 | ) | ||||||||||||||||||||
Net income (loss) available to common shareholders | $ | (10,110 | ) | $ | 4,936 | $ | (37,645 | ) | $ | (32,806 | ) | |||||||||||||||||||||
Shares: | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding | 38,912 | 37,270 | 38,096 | 37,270 | 48,770 | 37,270 | 41,693 | 37,270 | ||||||||||||||||||||||||
Dilutive effect of restricted stock units* | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Diluted weighted average shares outstanding | 38,912 | 37,270 | 38,096 | 37,270 | 48,770 | 37,270 | 41,693 | 37,270 | ||||||||||||||||||||||||
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Loss per share: | ||||||||||||||||||||||||||||||||
Loss per share—basic and diluted | $ | (1.15 | ) | $ | (0.75 | ) | $ | (0.72 | ) | $ | (1.01 | ) | ||||||||||||||||||||
Income (loss) per share: | ||||||||||||||||||||||||||||||||
Income (loss) per share—basic and diluted | $ | (0.21 | ) | $ | 0.13 | $ | (0.90 | ) | $ | (0.88 | ) | |||||||||||||||||||||
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* | Refer to Note M for discussion of restricted stock units granted in June 2014 to certain Company directors. As net loss was reported for each of the above periods of 2014, potentially dilutive awards have not been included within the calculation of diluted EPS, as they would have an anti-dilutive effect. |
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
NOTE T—SUBSEQUENT EVENTS
In JulyOctober 2014, using proceeds from the Company’s IPO, the Company redeemed $132.5 millionannounced that effective January 1, 2015, it will realign its business divisions, creating two new business groups called Performance Materials and Basic Plastics and Feedstocks. This new alignment will better reflect the nature of our businesses, grouping together businesses with similar strategies and aspirations, with the intention of accelerating growth in aggregate principal amountPerformance Materials and optimizing profitability and cash generation in Basic Plastics and Feedstocks. The Performance Materials division will include the following reporting segments: Rubber, Latex and Performance Plastics (consisting of its 8.750% Senior Notes due 2019. See Note Fthe Automotive and Consumer Essential Markets businesses). The Basic Plastics and Feedstocks division will also represent a separate segment for additional information.reporting purposes and will include the following businesses: Styrenic Polymers (Polystyrene, ABS, SAN), Polycarbonate, and Styrene Monomer.
NOTE U—SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
In connection with the issuance of the Senior Notes by Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (the “Issuers”), this supplemental guarantor financial statement disclosure is included in accordance with Rule 3-10 of Regulation S-X. The Senior Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, in each case, subject to certain exceptions, by Trinseo S.A. (the “Parent Guarantor”) and by certain subsidiaries (together, the “Guarantor Subsidiaries”).
Each of the Guarantor Subsidiaries is 100 percent owned by the Company. None of the other subsidiaries of the Company, either direct or indirect, guarantee the Senior Notes (together, the “Non-Guarantor Subsidiaries”). The Guarantor Subsidiaries of the Senior Notes, excluding the Parent Guarantor, will be automatically released from those guarantees upon the occurrence of certain customary release provisions.
The following supplemental condensed consolidating financial information is presented to comply with the Company’s requirements under Rule 3-10 of Regulation S-X:
The Condensed Consolidating Financial Statements are presented using the equity method of accounting for its investments in 100 percent owned subsidiaries. Under the equity method, the investments in subsidiaries are recorded at cost and adjusted for the share of the subsidiaries cumulative results of operations, capital contributions, distributions and other equity changes. The elimination entries principally eliminate investments in subsidiaries and intercompany balances and transactions. The financial information in this footnote should be read in conjunction with the Condensed Consolidated Financial Statements presented and other notes related thereto contained within this Quarterly Report.
In connection with the preparation of the Issuers’ Registration Statement on Form S-4 (Registration No. 333-191460), and all related amendments (the “Form S-4”), the Company determined its subsidiary Styron Italia S.R.L. (“Styron Italy”), which had previously been a Guarantor Subsidiary of the Senior Notes, did not meet the “full and unconditional” guarantee requirements under Rule 3-10 of Regulation S-X (“Rule 3-10”) in order for this entity to be presented as a guarantor entity within the supplemental guarantor condensed consolidating financial statements. Therefore, the Company removed Styron Italy as a Guarantor Subsidiary under both the Indenture and Credit Agreement, through the provisions allowable under such agreements, in order to comply with Rule 3-10. The supplemental guarantor condensed consolidating financial statements presented below now reflect Styron Italy as a Non-Guarantor Subsidiary for all periods presented. The revision to the supplemental condensed consolidating statement of comprehensive income (loss) and statement of cash flows for the six month period ended June 30, 2013 are reflected below.
The Company also identified an incorrect presentation of an intercompany loan between an Issuer and Non-Guarantor Subsidiary in the supplemental condensed consolidating statement of cash flows for the six months ended June 30, 2013 presented in the Issuers’ initial Form S-4. The impact of this misclassification to the Issuers was a $4.0 million overstatement of cash flows from investing activities with an offsetting understatement of cash flow from financing activities and the impact to Non-Guarantor Subsidiaries was a $4.0 million reclassification between captions within cash flows from financing activities. This error did not change the total cash flows reported for either the Issuers or Non-Guarantor Subsidiaries and had no impact on the consolidated financial statements of the Company or any debt covenants. The revision to the supplemental condensed consolidating statement of cash flows for the six months ended June 30, 2013 is reflected below.
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
The Company assessed the materiality of these items on its previously issued supplemental condensed consolidating financial information in accordance with SEC Staff Accounting Bulletin No. 99 and No. 108, and concluded that the errors were not material to any prior period.
The impact of the revisions noted above is reflected in the following tables:
Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss):
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | ||||||||||||||||||||||||||||||||||||
As Reported | As Revised | As Reported | As Revised | As Reported | As Revised | As Reported | As Revised | As Reported | As Revised | |||||||||||||||||||||||||||||||
Six Months Ended June 30, 2013 | ||||||||||||||||||||||||||||||||||||||||
Net sales | $ | — | $ | — | $ | — | $ | — | $ | 2,493,615 | $ | 2,492,478 | $ | 656,638 | $ | 766,674 | $ | (396,909 | ) | $ | (505,808 | ) | ||||||||||||||||||
Operating income (loss) | (5,266 | ) | (5,266 | ) | (1,983 | ) | (1,983 | ) | 53,683 | 53,351 | 9,452 | 9,784 | 920 | 920 | ||||||||||||||||||||||||||
Net income (loss) | (37,742 | ) | (37,742 | ) | (23,328 | ) | (23,328 | ) | (10,013 | ) | (10,006 | ) | (1,484 | ) | (1,673 | ) | 34,825 | 35,007 |
Supplemental Condensed Consolidating Statements of Cash Flows:
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | ||||||||||||||||||||||||||||||||||||
As Reported | As Revised | As Reported | As Revised | As Reported | As Revised | As Reported | As Revised | As Reported | As Revised | |||||||||||||||||||||||||||||||
Six Months Ended June 30, 2013 | ||||||||||||||||||||||||||||||||||||||||
Cash flows from operating activities | $ | (29 | ) | $ | (29 | ) | $ | 61,692 | $ | 61,692 | $ | (19,911 | ) | $ | (17,783 | ) | $ | (48,240 | ) | $ | (50,368 | ) | $ | — | $ | — | ||||||||||||||
Cash flows from investing activities | — | — | — | (4,000 | ) | (220,820 | ) | (218,353 | ) | 3,660 | 1,193 | 200,809 | 204,809 | |||||||||||||||||||||||||||
Cash flows from financing activities | 36 | 36 | (90,003 | ) | (86,003 | ) | 188,834 | 184,224 | 60,518 | 65,128 | (200,809 | ) | (204,809 | ) |
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
June 30, 2014 | ||||||||||||||||||||||||
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 2,857 | $ | 2,439 | $ | 267,815 | $ | 50,433 | $ | — | $ | 323,544 | ||||||||||||
Accounts receivable, net | — | 49 | 250,423 | 524,680 | — | 775,152 | ||||||||||||||||||
Intercompany receivables | — | 505,580 | 1,349,191 | 134,327 | (1,989,098 | ) | — | |||||||||||||||||
Inventories | — | — | 433,033 | 96,137 | (2,975 | ) | 526,195 | |||||||||||||||||
Deferred income tax assets | — | — | 4,633 | 5,308 | — | 9,941 | ||||||||||||||||||
Other current assets | — | 270 | 7,916 | 11,196 | — | 19,382 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current assets | 2,857 | 508,338 | 2,313,011 | 822,081 | (1,992,073 | ) | 1,654,214 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Investments in unconsolidated affiliates | — | — | 162,738 | — | — | 162,738 | ||||||||||||||||||
Property, plant and equipment, net | — | — | 456,142 | 130,278 | — | 586,420 | ||||||||||||||||||
Other assets | ||||||||||||||||||||||||
Goodwill | — | — | 36,967 | — | — | 36,967 | ||||||||||||||||||
Other intangible assets, net | — | — | 188,911 | 173 | — | 189,084 | ||||||||||||||||||
Investments in subsidiaries | 508,555 | 1,291,864 | 626,186 | — | (2,426,605 | ) | — | |||||||||||||||||
Intercompany notes receivable— noncurrent | — | 1,355,675 | 17,593 | — | (1,373,268 | ) | — | |||||||||||||||||
Deferred income tax assets—noncurrent | — | — | 33,064 | 5,877 | — | 38,941 | ||||||||||||||||||
Deferred charges and other assets | 14 | 44,581 | 26,824 | 687 | 646 | 72,752 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total other assets | 508,569 | 2,692,120 | 929,545 | 6,737 | (3,799,227 | ) | 337,744 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total assets | $ | 511,426 | $ | 3,200,458 | $ | 3,861,436 | $ | 959,096 | $ | (5,791,300 | ) | $ | 2,741,116 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities and shareholders’ equity | ||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Short-term borrowings and current portion of long-term debt | $ | — | $ | 132,500 | $ | — | $ | 9,555 | $ | — | $ | 142,055 | ||||||||||||
Accounts payable | 64 | 2,154 | 441,654 | 63,164 | — | 507,036 | ||||||||||||||||||
Intercompany payables | 1,295 | 780,468 | 527,708 | 678,598 | (1,988,069 | ) | — | |||||||||||||||||
Income taxes payable | — | 4 | 7,147 | 2,916 | (34 | ) | 10,033 | |||||||||||||||||
Deferred income tax liabilities | — | — | 1,112 | 315 | — | 1,427 | ||||||||||||||||||
Accrued expenses and other current liabilities | 458 | 57,009 | 61,361 | 15,217 | — | 134,045 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current liabilities | 1,817 | 972,135 | 1,038,982 | 769,765 | (1,988,103 | ) | 794,596 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Noncurrent liabilities | ||||||||||||||||||||||||
Long-term debt | — | 1,192,500 | 2,528 | — | — | 1,195,028 | ||||||||||||||||||
Intercompany notes payable—noncurrent | — | — | 1,343,860 | 29,408 | (1,373,268 | ) | — | |||||||||||||||||
Deferred income tax liabilities—noncurrent | — | 2,441 | 21,428 | 8,753 | — | 32,622 | ||||||||||||||||||
Other noncurrent obligations | — | — | 196,678 | 12,583 | — | 209,261 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total noncurrent liabilities | — | 1,194,941 | 1,564,494 | 50,744 | (1,373,268 | ) | 1,436,911 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Commitments and contingencies (Note J) | ||||||||||||||||||||||||
Shareholders’ equity | 509,609 | 1,033,382 | 1,257,960 | 138,587 | (2,429,929 | ) | 509,609 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities and shareholders’ equity | $ | 511,426 | $ | 3,200,458 | $ | 3,861,436 | $ | 959,096 | $ | (5,791,300 | ) | $ | 2,741,116 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
December 31, 2013 | September 30, 2014 | |||||||||||||||||||||||||||||||||||||||||||||||
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 2 | $ | 954 | $ | 154,770 | $ | 40,777 | $ | — | $ | 196,503 | $ | 1,322 | $ | 1,267 | $ | 98,498 | $ | 51,040 | $ | — | $ | 152,127 | ||||||||||||||||||||||||
Accounts receivable, net | — | — | 272,745 | 444,739 | (2 | ) | 717,482 | — | 58 | 248,836 | 477,399 | — | 726,293 | |||||||||||||||||||||||||||||||||||
Intercompany receivables | — | 554,795 | 1,242,405 | 93,841 | (1,891,041 | ) | — | — | �� | 523,204 | 1,492,030 | 141,537 | (2,156,771 | ) | — | |||||||||||||||||||||||||||||||||
Inventories | — | — | 439,952 | 93,019 | (2,780 | ) | 530,191 | — | — | 400,069 | 111,241 | (2,843 | ) | 508,467 | ||||||||||||||||||||||||||||||||||
Deferred income tax assets | — | — | 5,077 | 4,743 | — | 9,820 | — | — | 5,911 | 6,812 | — | 12,723 | ||||||||||||||||||||||||||||||||||||
Other current assets | — | 3,954 | 4,386 | 14,410 | — | 22,750 | — | 229 | 9,317 | 12,444 | — | 21,990 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total current assets | 2 | 559,703 | 2,119,335 | 691,529 | (1,893,823 | ) | 1,476,746 | 1,322 | 524,758 | 2,254,661 | 800,473 | (2,159,614 | ) | 1,421,600 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Investments in unconsolidated affiliates | — | — | 155,887 | — | — | 155,887 | — | — | 164,504 | — | — | 164,504 | ||||||||||||||||||||||||||||||||||||
Property, plant and equipment, net | — | — | 476,137 | 130,290 | — | 606,427 | — | — | 426,152 | 125,886 | — | 552,038 | ||||||||||||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | — | — | 37,273 | — | — | 37,273 | — | — | 34,316 | — | — | 34,316 | ||||||||||||||||||||||||||||||||||||
Other intangible assets, net | — | — | 171,352 | 162 | — | 171,514 | — | — | 171,415 | 1,508 | — | 172,923 | ||||||||||||||||||||||||||||||||||||
Investments in subsidiaries | 343,429 | 1,232,608 | 615,153 | — | (2,191,190 | ) | — | 417,646 | 1,412,250 | 730,759 | — | (2,560,655 | ) | — | ||||||||||||||||||||||||||||||||||
Intercompany notes receivable— noncurrent | — | 1,359,637 | 17,739 | — | (1,377,376 | ) | — | — | 1,332,663 | 16,332 | — | (1,348,995 | ) | — | ||||||||||||||||||||||||||||||||||
Deferred income tax assets—noncurrent | — | — | 36,260 | 6,678 | — | 42,938 | — | — | 34,016 | 4,082 | — | 38,098 | ||||||||||||||||||||||||||||||||||||
Deferred charges and other assets | — | 48,801 | 33,607 | 990 | 598 | 83,996 | — | 39,049 | 24,201 | 817 | 535 | 64,602 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total other assets | 343,429 | 2,641,046 | 911,384 | 7,830 | (3,567,968 | ) | 335,721 | 417,646 | 2,783,962 | 1,011,039 | 6,407 | (3,909,115 | ) | 309,939 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total assets | $ | 343,431 | $ | 3,200,749 | $ | 3,662,743 | $ | 829,649 | $ | (5,461,791 | ) | $ | 2,574,781 | $ | 418,968 | $ | 3,308,720 | $ | 3,856,356 | $ | 932,766 | $ | (6,068,729 | ) | $ | 2,448,081 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Liabilities and shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Short-term borrowings and current portion of long-term debt | $ | — | $ | 3,646 | $ | — | $ | 5,108 | $ | — | $ | 8,754 | ||||||||||||||||||||||||||||||||||||
Short-term borrowings | $ | — | $ | — | $ | — | $ | 8,813 | $ | — | $ | 8,813 | ||||||||||||||||||||||||||||||||||||
Accounts payable | — | 2,570 | 436,147 | 70,378 | (2 | ) | 509,093 | 12 | 1,872 | 419,091 | 65,955 | — | 486,930 | |||||||||||||||||||||||||||||||||||
Intercompany payables | 158 | 763,022 | 550,741 | 576,354 | (1,890,275 | ) | — | 1,823 | 948,814 | 559,835 | 646,265 | (2,156,737 | ) | — | ||||||||||||||||||||||||||||||||||
Income taxes payable | — | — | 9,407 | 276 | — | 9,683 | — | — | 8,327 | 2,364 | (564 | ) | 10,127 | |||||||||||||||||||||||||||||||||||
Deferred income tax liabilities | — | — | 784 | 2,119 | — | 2,903 | — | — | 1,580 | 379 | — | 1,959 | ||||||||||||||||||||||||||||||||||||
Accrued expenses and other current liabilities | 71 | 58,977 | 66,061 | 11,020 | — | 136,129 | 62 | 26,111 | 56,049 | 14,257 | — | 96,479 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total current liabilities | 229 | 828,215 | 1,063,140 | 665,255 | (1,890,277 | ) | 666,562 | 1,897 | 976,797 | 1,044,882 | 738,033 | (2,157,301 | ) | 604,308 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Noncurrent liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt | — | 1,325,000 | 2,667 | — | — | 1,327,667 | — | 1,192,500 | 2,301 | — | — | 1,194,801 | ||||||||||||||||||||||||||||||||||||
Intercompany notes payable—noncurrent | — | — | 1,347,773 | 29,602 | (1,377,375 | ) | — | — | — | 1,312,819 | 36,176 | (1,348,995 | ) | — | ||||||||||||||||||||||||||||||||||
Deferred income tax liabilities—noncurrent | — | 1,600 | 17,115 | 8,217 | — | 26,932 | — | 2,541 | 20,748 | 7,976 | — | 31,265 | ||||||||||||||||||||||||||||||||||||
Other noncurrent obligations | — | — | 198,479 | 11,939 | — | 210,418 | — | — | 188,214 | 12,422 | — | 200,636 | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total noncurrent liabilities | — | 1,326,600 | 1,566,034 | 49,758 | (1,377,375 | ) | 1,565,017 | — | 1,195,041 | 1,524,082 | 56,574 | (1,348,995 | ) | 1,426,702 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Commitments and contingencies (Note J) | ||||||||||||||||||||||||||||||||||||||||||||||||
Shareholders’ equity | 343,202 | 1,045,934 | 1,033,569 | 114,636 | (2,194,139 | ) | 343,202 | 417,071 | 1,136,882 | 1,287,392 | 138,159 | (2,562,433 | ) | 417,071 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 343,431 | $ | 3,200,749 | $ | 3,662,743 | $ | 829,649 | $ | (5,461,791 | ) | $ | 2,574,781 | $ | 418,968 | $ | 3,308,720 | $ | 3,856,356 | $ | 932,766 | $ | (6,068,729 | ) | $ | 2,448,081 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
December 31, 2013 | ||||||||||||||||||||||||
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 2 | $ | 954 | $ | 154,770 | $ | 40,777 | $ | — | $ | 196,503 | ||||||||||||
Accounts receivable, net | — | — | 272,745 | 444,739 | (2 | ) | 717,482 | |||||||||||||||||
Intercompany receivables | — | 554,795 | 1,242,405 | 93,841 | (1,891,041 | ) | — | |||||||||||||||||
Inventories | — | — | 439,952 | 93,019 | (2,780 | ) | 530,191 | |||||||||||||||||
Deferred income tax assets | — | — | 5,077 | 4,743 | — | 9,820 | ||||||||||||||||||
Other current assets | — | 3,954 | 4,386 | 14,410 | — | 22,750 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current assets | 2 | 559,703 | 2,119,335 | 691,529 | (1,893,823 | ) | 1,476,746 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Investments in unconsolidated affiliates | — | — | 155,887 | — | — | 155,887 | ||||||||||||||||||
Property, plant and equipment, net | — | — | 476,137 | 130,290 | — | 606,427 | ||||||||||||||||||
Other assets | ||||||||||||||||||||||||
Goodwill | — | — | 37,273 | — | — | 37,273 | ||||||||||||||||||
Other intangible assets, net | — | — | 171,352 | 162 | — | 171,514 | ||||||||||||||||||
Investments in subsidiaries | 343,429 | 1,232,608 | 615,153 | — | (2,191,190 | ) | — | |||||||||||||||||
Intercompany notes receivable— noncurrent | — | 1,359,637 | 17,739 | — | (1,377,376 | ) | — | |||||||||||||||||
Deferred income tax assets—noncurrent | — | — | 36,260 | 6,678 | — | 42,938 | ||||||||||||||||||
Deferred charges and other assets | — | 48,801 | 33,607 | 990 | 598 | 83,996 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total other assets | 343,429 | 2,641,046 | 911,384 | 7,830 | (3,567,968 | ) | 335,721 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total assets | $ | 343,431 | $ | 3,200,749 | $ | 3,662,743 | $ | 829,649 | $ | (5,461,791 | ) | $ | 2,574,781 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Liabilities and shareholders’ equity | ||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Short-term borrowings | $ | — | $ | 3,646 | $ | — | $ | 5,108 | $ | — | $ | 8,754 | ||||||||||||
Accounts payable | — | 2,570 | 436,147 | 70,378 | (2 | ) | 509,093 | |||||||||||||||||
Intercompany payables | 158 | 763,022 | 550,741 | 576,354 | (1,890,275 | ) | — | |||||||||||||||||
Income taxes payable | — | — | 9,407 | 276 | — | 9,683 | ||||||||||||||||||
Deferred income tax liabilities | — | — | 784 | 2,119 | — | 2,903 | ||||||||||||||||||
Accrued expenses and other current liabilities | 71 | 58,977 | 66,061 | 11,020 | — | 136,129 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total current liabilities | 229 | 828,215 | 1,063,140 | 665,255 | (1,890,277 | ) | 666,562 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Noncurrent liabilities | ||||||||||||||||||||||||
Long-term debt | — | 1,325,000 | 2,667 | — | — | 1,327,667 | ||||||||||||||||||
Intercompany notes payable—noncurrent | — | — | 1,347,773 | 29,602 | (1,377,375 | ) | — | |||||||||||||||||
Deferred income tax liabilities—noncurrent | — | 1,600 | 17,115 | 8,217 | — | 26,932 | ||||||||||||||||||
Other noncurrent obligations | — | — | 198,479 | 11,939 | — | 210,418 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total noncurrent liabilities | — | 1,326,600 | 1,566,034 | 49,758 | (1,377,375 | ) | 1,565,017 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Commitments and contingencies (Note J) | ||||||||||||||||||||||||
Shareholders’ equity | 343,202 | 1,045,934 | 1,033,569 | 114,636 | (2,194,139 | ) | 343,202 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities and shareholders’ equity | $ | 343,431 | $ | 3,200,749 | $ | 3,662,743 | $ | 829,649 | $ | (5,461,791 | ) | $ | 2,574,781 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Three Months Ended June 30, 2014 | Three Months Ended September 30, 2014 | |||||||||||||||||||||||||||||||||||||||||||||||
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||
Net sales | $ | — | $ | — | $ | 1,236,394 | $ | 358,624 | $ | (254,083 | ) | $ | 1,340,935 | $ | — | $ | — | $ | 1,201,521 | $ | 343,949 | $ | (239,977 | ) | $ | 1,305,493 | ||||||||||||||||||||||
Cost of sales | — | 211 | 1,156,891 | 344,556 | (253,133 | ) | 1,248,525 | — | 98 | 1,144,191 | 333,048 | (240,080 | ) | 1,237,257 | ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Gross profit | — | (211 | ) | 79,503 | 14,068 | (950 | ) | 92,410 | — | (98 | ) | 57,330 | 10,901 | 103 | 68,236 | |||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 2,590 | 16,444 | 49,108 | 6,066 | — | 74,208 | 3,197 | 648 | 39,943 | 4,325 | — | 48,113 | ||||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | — | — | 5,378 | — | — | 5,378 | — | — | 9,267 | — | — | 9,267 | ||||||||||||||||||||||||||||||||||||
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Operating income (loss) | (2,590 | ) | (16,655 | ) | 35,773 | 8,002 | (950 | ) | 23,580 | (3,197 | ) | (746 | ) | 26,654 | 6,576 | 103 | 29,390 | |||||||||||||||||||||||||||||||
Interest expense, net | — | 31,628 | 328 | 646 | — | 32,602 | — | 29,046 | 559 | 493 | — | 30,098 | ||||||||||||||||||||||||||||||||||||
Intercompany interest expense (income), net | 3 | (20,898 | ) | 18,031 | 2,861 | 3 | — | 3 | (20,571 | ) | 17,685 | 2,905 | (22 | ) | — | |||||||||||||||||||||||||||||||||
Other expense (income) | 727 | 23,894 | 101 | 5,441 | (14 | ) | 30,149 | |||||||||||||||||||||||||||||||||||||||||
Loss on extinguishment of long-term debt | — | 7,390 | — | — | — | 7,390 | ||||||||||||||||||||||||||||||||||||||||||
Other expense (income), net | 579 | 180 | (6,653 | ) | 4,256 | — | (1,638 | ) | ||||||||||||||||||||||||||||||||||||||||
Equity in loss (earnings) of subsidiaries | 41,301 | (23,627 | ) | 30,980 | — | (48,654 | ) | — | 6,331 | (15,458 | ) | 2,063 | — | 7,064 | — | |||||||||||||||||||||||||||||||||
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Income (loss) before income taxes | (44,621 | ) | (27,652 | ) | (13,667 | ) | (946 | ) | 47,715 | (39,171 | ) | (10,110 | ) | (1,333 | ) | 13,000 | (1,078 | ) | (6,939 | ) | (6,460 | ) | ||||||||||||||||||||||||||
Provision for (benefit from) income taxes | — | 1,017 | 4,019 | 741 | (327 | ) | 5,450 | — | — | 3,893 | 185 | (428 | ) | 3,650 | ||||||||||||||||||||||||||||||||||
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Net income (loss) | $ | (44,621 | ) | $ | (28,669 | ) | $ | (17,686 | ) | $ | (1,687 | ) | $ | 48,042 | $ | (44,621 | ) | $ | (10,110 | ) | $ | (1,333 | ) | $ | 9,107 | $ | (1,263 | ) | $ | (6,511 | ) | $ | (10,110 | ) | ||||||||||||||
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Comprehensive income (loss) | $ | (53,212 | ) | $ | (37,260 | ) | $ | (26,536 | ) | $ | (1,428 | ) | $ | 65,224 | $ | (53,212 | ) | $ | (94,692 | ) | $ | (85,915 | ) | $ | (73,219 | ) | $ | (3,519 | ) | $ | 162,653 | $ | (94,692 | ) | ||||||||||||||
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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Three Months Ended June 30, 2013 | Three Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||
Net sales | $ | — | $ | — | $ | 1,223,278 | $ | 393,342 | $ | (254,861 | ) | $ | 1,361,759 | $ | — | $ | — | $ | 1,177,331 | $ | 358,806 | $ | (227,178 | ) | $ | 1,308,959 | ||||||||||||||||||||||
Cost of sales | — | 217 | 1,165,656 | 384,801 | (254,424 | ) | 1,296,250 | — | 104 | 1,091,387 | 347,966 | (227,015 | ) | 1,212,442 | ||||||||||||||||||||||||||||||||||
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Gross profit | — | (217 | ) | 57,622 | 8,541 | (437 | ) | 65,509 | — | (104 | ) | 85,944 | 10,840 | (163 | ) | 96,517 | ||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 3,112 | 272 | 45,994 | 5,396 | — | 54,774 | 3,051 | 1,692 | 42,703 | 6,326 | — | 53,772 | ||||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | — | — | 8,929 | — | — | 8,929 | — | — | 15,215 | — | — | 15,215 | ||||||||||||||||||||||||||||||||||||
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Operating income (loss) | (3,112 | ) | (489 | ) | 20,557 | 3,145 | (437 | ) | 19,664 | (3,051 | ) | (1,796 | ) | 58,456 | 4,514 | (163 | ) | 57,960 | ||||||||||||||||||||||||||||||
Interest expense, net | — | 31,830 | 1,258 | 650 | — | 33,738 | — | 31,574 | 609 | 698 | — | 32,881 | ||||||||||||||||||||||||||||||||||||
Intercompany interest expense (income), net | 2 | (22,235 | ) | 18,990 | 3,182 | 61 | — | 3 | (23,531 | ) | 20,247 | 3,267 | 14 | — | ||||||||||||||||||||||||||||||||||
Other expense (income) | 2 | (3,238 | ) | 11,290 | 4,144 | (358 | ) | 11,840 | ||||||||||||||||||||||||||||||||||||||||
Other expense (income), net | 4 | (6,530 | ) | 14,227 | 6,244 | 197 | 14,142 | |||||||||||||||||||||||||||||||||||||||||
Equity in loss (earnings) of subsidiaries | 24,948 | 12,888 | 23,886 | — | (61,722 | ) | — | (7,994 | ) | (14,517 | ) | (4,260 | ) | — | 26,771 | — | ||||||||||||||||||||||||||||||||
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Income (loss) before income taxes | (28,064 | ) | (19,734 | ) | (34,867 | ) | (4,831 | ) | 61,582 | (25,914 | ) | 4,936 | 11,208 | 27,633 | (5,695 | ) | (27,145 | ) | 10,937 | |||||||||||||||||||||||||||||
Provision for (benefit from) income taxes | — | — | 3,268 | (918 | ) | (200 | ) | 2,150 | — | — | 4,900 | 712 | 389 | 6,001 | ||||||||||||||||||||||||||||||||||
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Net income (loss) | $ | (28,064 | ) | $ | (19,734 | ) | $ | (38,135 | ) | $ | (3,913 | ) | $ | 61,782 | $ | (28,064 | ) | $ | 4,936 | $ | 11,208 | $ | 22,733 | $ | (6,407 | ) | $ | (27,534 | ) | $ | 4,936 | |||||||||||||||||
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Comprehensive income (loss) | $ | (9,149 | ) | $ | (819 | ) | $ | (20,060 | ) | $ | (3,073 | ) | $ | 23,952 | $ | (9,149 | ) | $ | 44,079 | $ | 50,351 | $ | 59,996 | $ | (4,527 | ) | $ | (105,820 | ) | $ | 44,079 | |||||||||||||||||
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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Six Months Ended June 30, 2014 | Nine Months Ended September 30, 2014 | |||||||||||||||||||||||||||||||||||||||||||||||
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||
Net sales | $ | — | $ | — | $ | 2,463,957 | $ | 705,921 | $ | (469,811 | ) | $ | 2,700,067 | $ | — | $ | — | $ | 3,665,478 | $ | 1,049,870 | $ | (709,788 | ) | $ | 4,005,560 | ||||||||||||||||||||||
Cost of sales | — | 368 | 2,303,968 | 674,279 | (469,587 | ) | 2,509,028 | — | 466 | 3,448,159 | 1,007,326 | (709,666 | ) | 3,746,285 | ||||||||||||||||||||||||||||||||||
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Gross profit | — | (368 | ) | 159,989 | 31,642 | (224 | ) | 191,039 | — | (466 | ) | 217,319 | 42,544 | (122 | ) | 259,275 | ||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 5,296 | 17,130 | 91,184 | 10,628 | — | 124,238 | 8,493 | 17,778 | 131,127 | 14,953 | — | 172,351 | ||||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | — | — | 20,328 | — | — | 20,328 | — | — | 29,595 | — | — | 29,595 | ||||||||||||||||||||||||||||||||||||
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Operating income (loss) | (5,296 | ) | (17,498 | ) | 89,133 | 21,014 | (224 | ) | 87,129 | (8,493 | ) | (18,244 | ) | 115,787 | 27,591 | (122 | ) | 116,519 | ||||||||||||||||||||||||||||||
Interest expense, net | — | 63,216 | 641 | 1,563 | — | 65,420 | — | 92,263 | 1,199 | 2,056 | — | 95,518 | ||||||||||||||||||||||||||||||||||||
Intercompany interest expense (income), net | 5 | (40,728 | ) | 34,678 | 6,013 | 32 | — | 8 | (61,299 | ) | 52,363 | 8,918 | 10 | — | ||||||||||||||||||||||||||||||||||
Other expense (income) | 727 | 20,806 | (723 | ) | 10,248 | (14 | ) | 31,044 | ||||||||||||||||||||||||||||||||||||||||
Loss on extinguishment of long-term debt | — | 7,390 | — | — | — | 7,390 | ||||||||||||||||||||||||||||||||||||||||||
Other expense (income), net | 1,306 | 20,986 | (7,372 | ) | 14,504 | (18 | ) | 29,406 | ||||||||||||||||||||||||||||||||||||||||
Equity in loss (earnings) of subsidiaries | 21,507 | (59,013 | ) | 3,813 | — | 33,693 | — | 27,838 | (74,471 | ) | 5,876 | — | 40,757 | — | ||||||||||||||||||||||||||||||||||
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Income (loss) before income taxes | (27,535 | ) | (1,779 | ) | 50,724 | 3,190 | (33,935 | ) | (9,335 | ) | (37,645 | ) | (3,113 | ) | 63,721 | 2,113 | (40,871 | ) | (15,795 | ) | ||||||||||||||||||||||||||||
Provision for (benefit from) income taxes | — | 1,017 | 13,201 | 4,057 | (75 | ) | 18,200 | — | 1,016 | 17,094 | 4,242 | (502 | ) | 21,850 | ||||||||||||||||||||||||||||||||||
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Net income (loss) | $ | (27,535 | ) | $ | (2,796 | ) | $ | 37,523 | $ | (867 | ) | $ | (33,860 | ) | $ | (27,535 | ) | $ | (37,645 | ) | $ | (4,129 | ) | $ | 46,627 | $ | (2,129 | ) | $ | (40,369 | ) | $ | (37,645 | ) | ||||||||||||||
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Comprehensive income (loss) | $ | (37,307 | ) | $ | (12,568 | ) | $ | 28,098 | $ | (1,214 | ) | $ | (14,316 | ) | $ | (37,307 | ) | $ | (131,999 | ) | $ | (98,483 | ) | $ | (45,124 | ) | $ | (4,732 | ) | $ | 148,339 | $ | (131,999 | ) | ||||||||||||||
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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Six Months Ended June 30, 2013 | Nine Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||
Net sales | $ | — | $ | — | $ | 2,492,478 | $ | 766,674 | $ | (505,808 | ) | $ | 2,753,344 | $ | — | $ | — | $ | 3,669,809 | $ | 1,125,480 | $ | (732,986 | ) | $ | 4,062,303 | ||||||||||||||||||||||
Cost of sales | — | 578 | 2,367,050 | 746,132 | (506,728 | ) | 2,607,032 | — | 682 | 3,458,437 | 1,094,098 | (733,743 | ) | 3,819,474 | ||||||||||||||||||||||||||||||||||
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Gross profit | — | (578 | ) | 125,428 | 20,542 | 920 | 146,312 | — | (682 | ) | 211,372 | 31,382 | 757 | 242,829 | ||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 5,266 | 1,405 | 83,805 | 10,758 | — | 101,234 | 8,317 | 3,097 | 126,508 | 17,084 | — | 155,006 | ||||||||||||||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | — | — | 11,728 | — | — | 11,728 | — | — | 26,943 | — | — | 26,943 | ||||||||||||||||||||||||||||||||||||
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Operating income (loss) | (5,266 | ) | (1,983 | ) | 53,351 | 9,784 | 920 | 56,806 | (8,317 | ) | (3,779 | ) | 111,807 | 14,298 | 757 | 114,766 | ||||||||||||||||||||||||||||||||
Interest expense, net | — | 62,561 | 2,477 | 1,008 | — | 66,046 | — | 94,135 | 3,086 | 1,706 | — | 98,927 | ||||||||||||||||||||||||||||||||||||
Intercompany interest expense (income), net | 3 | (43,109 | ) | 36,756 | 6,346 | 4 | — | 6 | (66,640 | ) | 57,003 | 9,613 | 18 | — | ||||||||||||||||||||||||||||||||||
Loss on extinguishment of long-term debt | — | 20,744 | — | — | — | 20,744 | — | 20,744 | — | — | — | 20,744 | ||||||||||||||||||||||||||||||||||||
Other expense (income) | (1 | ) | 3,661 | (4,272 | ) | 6,501 | (181 | ) | 5,708 | |||||||||||||||||||||||||||||||||||||||
Other expense (income), net | 3 | (2,869 | ) | 9,955 | 12,745 | 16 | 19,850 | |||||||||||||||||||||||||||||||||||||||||
Equity in loss (earnings) of subsidiaries | 32,474 | (22,688 | ) | 24,904 | — | (34,690 | ) | — | 24,480 | (37,205 | ) | 20,644 | — | (7,919 | ) | — | ||||||||||||||||||||||||||||||||
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Income (loss) before income taxes | (37,742 | ) | (23,152 | ) | (6,514 | ) | (4,071 | ) | 35,787 | (35,692 | ) | (32,806 | ) | (11,944 | ) | 21,119 | (9,766 | ) | 8,642 | (24,755 | ) | |||||||||||||||||||||||||||
Provision for (benefit from) income taxes | — | 176 | 3,492 | (2,398 | ) | 780 | 2,050 | — | 176 | 8,392 | (1,686 | ) | 1,169 | 8,051 | ||||||||||||||||||||||||||||||||||
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Net income (loss) | $ | (37,742 | ) | $ | (23,328 | ) | $ | (10,006 | ) | $ | (1,673 | ) | $ | 35,007 | $ | (37,742 | ) | $ | (32,806 | ) | $ | (12,120 | ) | $ | 12,727 | $ | (8,080 | ) | $ | 7,473 | $ | (32,806 | ) | |||||||||||||||
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Comprehensive income (loss) | $ | (28,449 | ) | $ | (14,035 | ) | $ | (1,585 | ) | $ | (801 | ) | $ | 16,421 | $ | (28,449 | ) | $ | 15,630 | $ | 36,316 | $ | 58,411 | $ | (5,328 | ) | $ | (89,399 | ) | $ | 15,630 | |||||||||||||||||
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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
Six Months Ended June 30, 2014 | Nine Months Ended September 30, 2014 | |||||||||||||||||||||||||||||||||||||||||||||||
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash provided by (used in) operating activities | $ | (119 | ) | $ | (54,821 | ) | $ | 18,723 | $ | 44,081 | $ | — | $ | 7,864 | $ | (626 | ) | $ | (94,841 | ) | $ | 41,451 | $ | 55,677 | $ | — | $ | 1,661 | ||||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital expenditures | — | — | (49,676 | ) | (6,068 | ) | — | (55,744 | ) | — | — | (59,942 | ) | (9,327 | ) | — | (69,269 | ) | ||||||||||||||||||||||||||||||
Proceeds from the sale of property, plant and equipment | — | — | — | 5,434 | — | 5,434 | ||||||||||||||||||||||||||||||||||||||||||
Proceeds from the sale of businesses and other assets | — | — | — | 6,257 | — | 6,257 | ||||||||||||||||||||||||||||||||||||||||||
Payment for working capital adjustment from sale of business | — | — | (700 | ) | — | — | (700 | ) | — | — | (700 | ) | — | — | (700 | ) | ||||||||||||||||||||||||||||||||
Distributions from unconsolidated affiliates | — | — | 978 | — | — | 978 | — | — | 978 | — | — | 978 | ||||||||||||||||||||||||||||||||||||
Investments in subsidiaries | (196,400 | ) | (10,000 | ) | (7,226 | ) | — | 213,626 | — | (196,400 | ) | (199,400 | ) | (196,626 | ) | — | 592,426 | — | ||||||||||||||||||||||||||||||
Intercompany investing activities | — | 2,000 | (89,900 | ) | — | 87,900 | — | — | 2,000 | (250,817 | ) | — | 248,817 | — | ||||||||||||||||||||||||||||||||||
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Cash provided by (used in) investing activities | (196,400 | ) | (8,000 | ) | (146,524 | ) | (634 | ) | 301,526 | (50,032 | ) | (196,400 | ) | (197,400 | ) | (507,107 | ) | (3,070 | ) | 841,243 | (62,734 | ) | ||||||||||||||||||||||||||
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Cash flows from financing activities | ||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from initial public offering, net of offering costs | 199,152 | — | — | — | — | 199,152 | 198,087 | — | — | — | — | 198,087 | ||||||||||||||||||||||||||||||||||||
Intercompany short-term borrowings, net | 222 | 67,924 | 21,670 | (12,916 | ) | (76,900 | ) | — | 260 | 49,631 | 4,670 | (6,144 | ) | (48,417 | ) | — | ||||||||||||||||||||||||||||||||
Short-term borrowings, net | — | (3,646 | ) | (140 | ) | (25,616 | ) | — | (29,402 | ) | — | (3,646 | ) | (208 | ) | (39,576 | ) | — | (43,430 | ) | ||||||||||||||||||||||||||||
Contributions from parent companies | — | — | 206,400 | 7,226 | (213,626 | ) | — | — | 189,400 | 395,800 | 7,226 | (592,426 | ) | — | ||||||||||||||||||||||||||||||||||
Proceeds from issuance of intercompany long-term debt | — | — | 13,000 | (2,000 | ) | (11,000 | ) | — | ||||||||||||||||||||||||||||||||||||||||
Proceeds from issuance of Accounts Receivable Securitization Facility | — | — | — | 178,603 | — | 178,603 | ||||||||||||||||||||||||||||||||||||||||||
Repayments of Senior Notes | — | (132,500 | ) | — | — | — | (132,500 | ) | ||||||||||||||||||||||||||||||||||||||||
Proceeds from (repayments of) intercompany long-term debt | — | 189,400 | 13,000 | (2,000 | ) | (200,400 | ) | — | ||||||||||||||||||||||||||||||||||||||||
Proceeds from Accounts Receivable Securitization Facility | — | — | — | 283,292 | — | 283,292 | ||||||||||||||||||||||||||||||||||||||||||
Repayments of Accounts Receivable Securitization Facility | — | — | — | (179,170 | ) | — | (179,170 | ) | — | — | — | (283,859 | ) | — | (283,859 | ) | ||||||||||||||||||||||||||||||||
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Cash provided by (used in) financing activities | 199,374 | 64,278 | 240,930 | (33,873 | ) | (301,526 | ) | 169,183 | 198,347 | 292,285 | 413,262 | (41,061 | ) | (841,243 | ) | 21,590 | ||||||||||||||||||||||||||||||||
Effect of exchange rates on cash | — | 28 | (84 | ) | 82 | — | 26 | (1 | ) | 269 | (3,878 | ) | (1,283 | ) | — | (4,893 | ) | |||||||||||||||||||||||||||||||
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Net change in cash and cash equivalents | 2,855 | 1,485 | 113,045 | 9,656 | — | 127,041 | 1,320 | 313 | (56,272 | ) | 10,263 | — | (44,376 | ) | ||||||||||||||||||||||||||||||||||
Cash and cash equivalents—beginning of period | 2 | 954 | 154,770 | 40,777 | — | 196,503 | 2 | 954 | 154,770 | 40,777 | — | 196,503 | ||||||||||||||||||||||||||||||||||||
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Cash and cash equivalents—end of period | $ | 2,857 | $ | 2,439 | $ | 267,815 | $ | 50,433 | $ | — | $ | 323,544 | $ | 1,322 | $ | 1,267 | $ | 98,498 | $ | 51,040 | $ | — | $ | 152,127 | ||||||||||||||||||||||||
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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
Six Months Ended June 30, 2013 | Nine Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||
Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | Parent Guarantor | Issuers | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash provided by (used in) operating activities | $ | (29 | ) | $ | 61,692 | $ | (17,783 | ) | $ | (50,368 | ) | $ | — | $ | (6,488 | ) | $ | (44 | ) | $ | 3,607 | $ | 34,551 | $ | 55,474 | $ | — | $ | 93,588 | |||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||||||||||||||||||||||||
Capital expenditures | — | — | (25,174 | ) | (3,948 | ) | — | (29,122 | ) | — | — | (45,075 | ) | (7,243 | ) | — | (52,318 | ) | ||||||||||||||||||||||||||||||
Proceeds from the sale of businesses and other assets | — | — | 15,221 | — | — | 15,221 | ||||||||||||||||||||||||||||||||||||||||||
Proceeds from capital expenditures subsidy | — | — | 6,575 | — | — | 6,575 | — | — | 6,575 | — | — | 6,575 | ||||||||||||||||||||||||||||||||||||
Advance payment refunded | — | — | — | (2,711 | ) | — | (2,711 | ) | — | — | — | (2,711 | ) | — | (2,711 | ) | ||||||||||||||||||||||||||||||||
Distributions from unconsolidated affiliates | — | — | 1,055 | — | — | 1,055 | — | — | 1,055 | — | — | 1,055 | ||||||||||||||||||||||||||||||||||||
Intercompany investing activities | — | (4,000 | ) | (200,809 | ) | — | 204,809 | — | — | (4,000 | ) | (139,267 | ) | — | 143,267 | — | ||||||||||||||||||||||||||||||||
Decrease in restricted cash | — | — | — | 7,852 | — | 7,852 | — | — | — | 7,852 | — | 7,852 | ||||||||||||||||||||||||||||||||||||
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Cash provided by (used in) investing activities | — | (4,000 | ) | (218,353 | ) | 1,193 | 204,809 | (16,351 | ) | — | (4,000 | ) | (161,491 | ) | (2,102 | ) | 143,267 | (24,326 | ) | |||||||||||||||||||||||||||||
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Cash flows from financing activities | ||||||||||||||||||||||||||||||||||||||||||||||||
Deferred financing fees | — | (46,284 | ) | — | — | — | (46,284 | ) | — | (46,572 | ) | (262 | ) | — | — | (46,834 | ) | |||||||||||||||||||||||||||||||
Intercompany short-term borrowings, net | 36 | (2,178 | ) | 184,355 | 18,596 | (200,809 | ) | — | 53 | 57,490 | 57,654 | 24,070 | (139,267 | ) | — | |||||||||||||||||||||||||||||||||
Short-term borrowings, net | — | (3,541 | ) | (131 | ) | (14,176 | ) | — | (17,848 | ) | — | (5,540 | ) | (199 | ) | (26,937 | ) | — | (32,676 | ) | ||||||||||||||||||||||||||||
Proceeds from issuance of intercompany long-term debt | — | — | — | 4,000 | (4,000 | ) | — | |||||||||||||||||||||||||||||||||||||||||
Proceeds from (repayments of) intercompany long-term debt | — | — | — | 4,000 | (4,000 | ) | — | |||||||||||||||||||||||||||||||||||||||||
Repayments of Term Loans | — | (1,239,000 | ) | — | — | — | (1,239,000 | ) | — | (1,239,000 | ) | — | — | — | (1,239,000 | ) | ||||||||||||||||||||||||||||||||
Proceeds from issuance of Senior Notes | — | 1,325,000 | — | — | — | 1,325,000 | — | 1,325,000 | — | — | — | 1,325,000 | ||||||||||||||||||||||||||||||||||||
Proceeds from issuance of Accounts Receivable Securitization Facility | — | — | — | 222,592 | — | 222,592 | ||||||||||||||||||||||||||||||||||||||||||
Proceeds from Accounts Receivable Securitization Facility | — | — | — | 351,630 | — | 351,630 | ||||||||||||||||||||||||||||||||||||||||||
Repayments of Accounts Receivable Securitization Facility | — | — | — | (165,884 | ) | — | (165,884 | ) | — | — | — | (391,181 | ) | — | (391,181 | ) | ||||||||||||||||||||||||||||||||
Proceeds from the draw of revolving debt | — | 405,000 | — | — | — | 405,000 | ||||||||||||||||||||||||||||||||||||||||||
Repayments on the revolving debt | — | (525,000 | ) | — | — | — | (525,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Proceeds from Revolving Facility | — | 405,000 | — | — | — | 405,000 | ||||||||||||||||||||||||||||||||||||||||||
Repayments of Revolving Facility | — | (525,000 | ) | — | — | — | (525,000 | ) | ||||||||||||||||||||||||||||||||||||||||
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Cash provided by (used in) financing activities | 36 | (86,003 | ) | 184,224 | 65,128 | (204,809 | ) | (41,424 | ) | 53 | (28,622 | ) | 57,193 | (38,418 | ) | (143,267 | ) | (153,061 | ) | |||||||||||||||||||||||||||||
Effect of exchange rates on cash | — | 31 | (1,295 | ) | (206 | ) | — | (1,470 | ) | — | (72 | ) | 1,356 | (116 | ) | — | 1,168 | |||||||||||||||||||||||||||||||
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Net change in cash and cash equivalents | 7 | (28,280 | ) | (53,207 | ) | 15,747 | — | (65,733 | ) | 9 | (29,087 | ) | (68,391 | ) | 14,838 | — | (82,631 | ) | ||||||||||||||||||||||||||||||
Cash and cash equivalents—beginning of period | 3 | 29,411 | 182,088 | 24,855 | — | 236,357 | 3 | 29,411 | 182,088 | 24,855 | — | 236,357 | ||||||||||||||||||||||||||||||||||||
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Cash and cash equivalents—end of period | $ | 10 | $ | 1,131 | $ | 128,881 | $ | 40,602 | $ | — | $ | 170,624 | $ | 12 | $ | 324 | $ | 113,697 | $ | 39,693 | $ | — | $ | 153,726 | ||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading global materials company engaged in the manufacture and marketing of emulsion polymers and plastics, including various specialty and technologically differentiated products. We have leading market positions in many of the markets in which we compete. We believe we have developed these strong market positions due to our technological differentiation, diverse global manufacturing base, long-standing customer relationships, commitment to sustainable solutions and competitive cost positions. We believe that growth in overall consumer spending and construction activity, increased demand in the automotive industry for higher fuel efficiency and lighter-weight materials, and improving living standards in emerging markets will result in growth in the global markets in which we compete. In addition, we believe our increasing business presence in developing regions such as China, Southeast Asia, Latin America, and Eastern Europe further enhances our prospects.
We develop emulsion polymers and plastics products that are incorporated into a wide range of our customers’ products throughout the world, including tires and other products for automotive applications, carpet and artificial turf backing, coated paper and packaging board, food service packaging, appliances, medical devices, consumer electronics and construction applications, among others. We seek to regularly develop new and improved products and processes, supported by our strong patent portfolio, designed to enhance our customers’ product offerings. We have long-standing relationships with a diverse base of global customers, many of whom are leaders in their markets and rely on us for formulation, technological differentiation, and compounding expertise to find sustainable solutions for their businesses. Many of our products represent only a small portion of a finished product’s production costs, but provide critical functionality to the finished product and are often specifically developed to customer specifications. We believe these product traits result in substantial customer loyalty for our products.
We operate in four reporting segments under two business units. Our Emulsion Polymers business unit includes our Latex reporting segment and our Synthetic Rubber reporting segment. Our Plastics business unit includes our Styrenics reporting segment and our Engineered Polymers reporting segment.
1st Quarter 2014 Year-to-Date Highlights
In February 2014, the Company announced plans to add an additional 25 kMT of SB latex capacity at our facility in Zhangjiagang, China, which we expect to become operational in the second quarter of 2015 and will represent a 33% increase in our SB latex capacity in China. This expansion will allow us to capitalize on the expected growth in demand for latex in China’s paper and paperboard industry, forecast to grow in the next five years.
In March 2014, the Company entered into an agreement with material supplier JSR to acquire its current production capacity rights at the Company’s rubber production facility in Schkopau, Germany for a purchase price of €19.0 million (approximately $26.1 million). Prior to this agreement, JSR held 50% of the capacity rights of one of the Company’s three SSBR production trains in Schkopau. As a result, effective March 31, 2014, the Company had full capacity rights to this production train, enabling us to increase our capabilities to serve the global tire market.
2nd Quarter 2014 Highlights
In April 2014, the Company completed the sale of a portion of our land at our manufacturing site in Livorno, Italy for a purchase price of €4.95 million (approximately $6.8 million). This sale had no significant impact on the ongoing operations of the Company, but provided an opportunity to generate additional cash flows for the Company.
Also in April 2014, the Company announced plans for the conversion of our nickel polybutadiene rubber (“Ni-PBR”) production train in Schkopau, Germany, to neodymium polybutadiene rubber (“Nd-PBR”), which we expect to be completed and operational in the fourth quarter of 2015. Nd-PBR is a synthetic rubber used mainly in the production of tires as well as in a variety of other applications such as industrial rubber goods and polymer modification. Nd-PBR in ultra-high performance tires allows for the increase of elasticity, endurance and durability which results in improved rolling resistance in tires. The Nd-PBR conversion will allow us to further grow our rubber business and broaden our product range.
On May 30, 2014, our affiliates entered into an agreement with Dow to terminate the Latex JV Option Agreement, eliminating Dow’s right to exercise their option, and all other obligations of the Company thereunder, in exchange for a termination payment thereon of $32.5 million.
During the second quarter of 2014, the Company announced a planned restructuring within our Engineered Polymers business to exit the commodity market for polycarbonate in North America and to terminate its existing arrangements with Dow regarding manufacturing services for the Company at Dow’s Freeport, Texas facility. The Company also entered into a new long-term supply contract with a third party to supply polycarbonate in North America. These revised arrangements are expected to becomebecame operational in the fourth quarter of 2014. In addition, the Company has executed revised supply contracts for certain raw materials that are processed at its polycarbonate manufacturing facility in Stade, Germany, which is expected to take effect beginning January 1, 2015. These revised agreements are expected to facilitate improvements in our future results of operations of our Engineered Polymers segment.
On June 17, 2014, the Company completed an initial public offering of 11,500,000 ordinary shares at a price of $19.00 per share, receiving cash proceeds of $203.2 million from this transaction, net of underwriting discounts. These net proceeds were primarily used by the Company to repay, in July 2014 to repay $132.5 million in aggregate principal amount of our 8.750% Senior Notes due 2019 at a call premium of 103%, together with accrued and unpaid interest thereon, along with certain related contract termination and offering expenses and general corporate purposes.
In October 2014, the Company announced that effective January 1, 2015, it will realign its business divisions, creating two new business groups called Performance Materials and Basic Plastics and Feedstocks. This new alignment better reflects the nature of our businesses, grouping together businesses with similar strategies and aspirations, with the intention of accelerating growth in Performance Materials and optimizing profitability and cash generation in Basic Plastics and Feedstocks. The Performance Materials division will include the following reporting segments: Rubber, Latex and Performance Plastics (consisting of the Automotive and Consumer Essential Markets businesses). The Basic Plastics and Feedstocks division will also represent a separate segment for reporting purposes and will include the following businesses: Styrenic Polymers (Polystyrene, ABS, SAN), Polycarbonate, and Styrene Monomer.
Results of Operations
Results of Operations for the Three and SixNine Months Ended JuneSeptember 30, 2014 and 2013
The tables below set forth our historical results of operations, and these results as a percentage of net sales for the periods indicated:
(in millions) | Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Net sales | $ | 1,340.9 | $ | 1,361.8 | $ | 2,700.1 | $ | 2,753.3 | $ | 1,305.5 | $ | 1,309.0 | $ | 4,005.6 | $ | 4,062.3 | ||||||||||||||||
Cost of sales | 1,248.5 | 1,296.3 | 2,509.0 | 2,607.0 | 1,237.3 | 1,212.5 | 3,746.3 | 3,819.5 | ||||||||||||||||||||||||
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Gross profit | 92.4 | 65.5 | 191.1 | 146.3 | 68.2 | 96.5 | 259.3 | 242.8 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 74.2 | 54.8 | 124.2 | 101.2 | 48.1 | 53.8 | 172.4 | 155.0 | ||||||||||||||||||||||||
Equity in earnings of unconsolidated affiliates | 5.4 | 8.9 | 20.3 | 11.7 | 9.3 | 15.2 | 29.6 | 26.9 | ||||||||||||||||||||||||
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Operating income | 23.6 | 19.6 | 87.2 | 56.8 | 29.4 | 57.9 | 116.5 | 114.7 | ||||||||||||||||||||||||
Interest expense, net | 32.6 | 33.7 | 65.4 | 66.0 | 30.1 | 32.9 | 95.5 | 98.9 | ||||||||||||||||||||||||
Loss on extinguishment of long-term debt | — | — | — | 20.7 | 7.4 | — | 7.4 | 20.7 | ||||||||||||||||||||||||
Other expense, net | 30.1 | 11.8 | 31.1 | 5.7 | ||||||||||||||||||||||||||||
Other expense (income), net | (1.7 | ) | 14.1 | 29.3 | 19.8 | |||||||||||||||||||||||||||
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Loss before income taxes | (39.1 | ) | (25.9 | ) | (9.3 | ) | (35.6 | ) | ||||||||||||||||||||||||
Income (loss) before income taxes | (6.4 | ) | 10.9 | (15.7 | ) | (24.7 | ) | |||||||||||||||||||||||||
Provision for income taxes | 5.5 | 2.2 | 18.2 | 2.1 | 3.7 | 6.0 | 21.9 | 8.1 | ||||||||||||||||||||||||
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Net loss | $ | (44.6 | ) | $ | (28.1 | ) | $ | (27.5 | ) | $ | (37.7 | ) | ||||||||||||||||||||
Net income (loss) | $ | (10.1 | ) | $ | 4.9 | $ | (37.6 | ) | $ | (32.8 | ) | |||||||||||||||||||||
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Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Cost of sales | 93.1 | % | 95.2 | % | 92.9 | % | 94.7 | % | 94.8 | % | 92.6 | % | 93.5 | % | 94.0 | % | ||||||||||||||||
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Gross profit | 6.9 | % | 4.8 | % | 7.1 | % | 5.3 | % | 5.2 | % | 7.4 | % | 6.5 | % | 6.0 | % | ||||||||||||||||
Selling, general and administrative expenses | 5.5 | % | 4.0 | % | 4.6 | % | 3.7 | % | 3.7 | % | 4.1 | % | 4.3 | % | 3.8 | % | ||||||||||||||||
Equity in earnings of unconsolidated affiliates | 0.4 | % | 0.7 | % | 0.8 | % | 0.4 | % | 0.7 | % | 1.2 | % | 0.7 | % | 0.7 | % | ||||||||||||||||
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Operating income | 1.8 | % | 1.5 | % | 3.3 | % | 2.0 | % | 2.2 | % | 4.5 | % | 2.9 | % | 2.9 | % | ||||||||||||||||
Interest expense, net | 2.4 | % | 2.5 | % | 2.4 | % | 2.4 | % | 2.3 | % | 2.5 | % | 2.4 | % | 2.4 | % | ||||||||||||||||
Loss on extinguishment of long-term debt | 0.0 | % | 0.0 | % | 0.0 | % | 0.8 | % | 0.6 | % | 0.0 | % | 0.2 | % | 0.5 | % | ||||||||||||||||
Other expense, net | 2.2 | % | 0.9 | % | 1.2 | % | 0.2 | % | ||||||||||||||||||||||||
Other expense (income), net | (0.1 | )% | 1.1 | % | 0.7 | % | 0.5 | % | ||||||||||||||||||||||||
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Loss before income taxes | (2.8 | )% | (1.9 | )% | (0.3 | )% | (1.4 | )% | ||||||||||||||||||||||||
Income (loss) before income taxes | (0.6 | )% | 0.9 | % | (0.4 | )% | (0.5 | )% | ||||||||||||||||||||||||
Provision for income taxes | 0.4 | % | 0.2 | % | 0.7 | % | 0.1 | % | 0.3 | % | 0.5 | % | 0.5 | % | 0.2 | % | ||||||||||||||||
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Net loss | (3.2 | )% | (2.1 | )% | (1.0 | )% | (1.5 | )% | ||||||||||||||||||||||||
Net income (loss) | (0.9 | )% | 0.4 | % | (0.9 | )% | (0.7 | )% | ||||||||||||||||||||||||
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Three Months Ended JuneSeptember 30, 2014 Compared to the Three Months Ended JuneSeptember 30, 2013
Net Sales
Net sales for the three months ended JuneSeptember 30, 2014 decreased by $20.9$3.5 million, or 1.5%0.3%, to $1,340.9$1,305.5 million from $1,361.8$1,309.0 million infor the three months ended JuneSeptember 30, 2013. Of the 1.5%0.3% decrease, 5.2%2.2% was due to lower selling prices, which was partially offset by a favorable currency impact of approximately 3.3%1.0%, as the U.S. dollar weakened compared to the euro, and a slight0.9% increase due to sales volume driven by higher SSBR volume. The overall decrease in selling prices was primarily due to the pass through of lower butadiene costsstyrene prices to our customers in Latex and Synthetic Rubber and lower styrene monomer related costs to ourthe Styrenics and Latex customers.segment.
Cost of Sales
Cost of sales for the three months ended JuneSeptember 30, 2014 decreasedincreased by $47.8$24.8 million, or 3.7%2.0%, to $1,248.5$1,237.3 million from $1,296.3$1,212.5 million infor the three months ended JuneSeptember 30, 2013. Of the 3.7% decrease, 8.1%2.0% increase, 5.3% was attributable to lowerhigher prices forin styrene-related raw materials, primarily butadiene and styrene monomer and the impact of product mix, partially offset bywith an additional 1.0% increase due to an unfavorable currency impact, of approximately 3.3% due to the weakening ofas the U.S. dollar weakened compared to the euro and 1.1% slighteuro. These increases were partially offset by a 4.1% decrease due to volume mix, as we had a decrease in higher cost products offsetting the increase in sales volume. The remaining variance is due to a slight decrease in manufacturing costs.lower cost products.
Gross Profit
Gross profit for the three months ended JuneSeptember 30, 2014 increaseddecreased by $26.9$28.3 million, or 41.1%29.3%, to $92.4$68.2 million from $65.5$96.5 million infor the three months ended JuneSeptember 30, 2013. The increasedecrease was primarily attributable to higher marginlower margins in the Styrenics and Engineered Polymers segments, with lower raw material cost, as well assegment, driven by a reduction in the spread on styrene monomer production compared to the prior year, which was partially offset by higher volume to SSBR customers due to an improving Europe tire market.and margins in Synthetic Rubber.
Selling, General and Administrative Expenses
SG&A expenses for the three months ended JuneSeptember 30, 2014 increaseddecreased by $19.4$5.7 million, or 35.4%10.6%, to $74.2$48.1 million from $54.8$53.8 million infor the three months ended JuneSeptember 30, 2013. The increasedecrease in SG&A expenses was primarily due to $23.3 million in termination fees paid related to the Advisory Agreement with Bain which we terminated upon consummation of the IPO on June 17, 2014, offset by higherlower restructuring charges incurred in the second quarter2014 of 2013approximately $0.7 million related to the shutdown of our latex facility in Altona, Australia of approximately $6.5 million compared to the additional restructuring charges of $1.5$2.5 million duringin 2013, approximately $1.1 million less in advisory fees to Bain Capital compared to prior year as a result of the secondtermination of the Advisory Agreement upon the consummation of the IPO on June 17, 2014, and decreases in incentive compensation and normal operating costs. These decreases were partially offset by $2.0 million of additional charges incurred in the third quarter of 2014. Other increases2014 in expenses included salaries, incentives and other normal increasesconnection with the restructuring of part of our Engineered Polymers business to exit the commodity market for polycarbonate in operating costs.North America. For more information regarding the Advisory Agreement termination fee and restructuring charges noted above, refer to Notes N and Q to the condensed consolidated financial statements.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates for the three months ended JuneSeptember 30, 2014 was $5.4$9.3 million compared to equity in earnings of $8.9$15.2 million for the three months ended JuneSeptember 30, 2013. AmSty equity earnings decreased to $6.8$10.9 million for the three months ended JuneSeptember 30, 2014 from $9.2$15.2 million for the three months ended JuneSeptember 30, 2013 while Sumika Styron had equity losses of $1.4$1.6 million for the three months ended JuneSeptember 30, 2014 and $0.3equity earnings of less than $0.1 million for the three months ended JuneSeptember 30, 2013, respectively. AmSty earnings decreased primarily due to decreases in Styrenics sales volume and increases in the cost of raw materials.lower styrene production margins.
Interest Expense, Net
Interest expense, net for the three months ended JuneSeptember 30, 2014 was $32.6$30.1 million compared to $33.7$32.9 million for the three months ended JuneSeptember 30, 2013. This decrease in interest expense was primarily attributable to the redemption of $132.5 million in aggregate principal amount of the Senior Notes in July 2014 as well as the lower average borrowings and outstanding balance on both the Revolving Facility and the Accounts Receivable Securitization Facility during the three months ended JuneSeptember 30, 2014 compared to the three months ended JuneSeptember 30, 2013.
Loss on Extinguishment of Long-Term Debt
Loss on extinguishment of long-term debt was $7.4 million for the three months ended September 30, 2014, related to the redemption of $132.5 million in aggregate principal amount of the Senior Notes in July 2014, using proceeds from the Company’s IPO. This loss was comprised of a $4.0 million call premium and a $3.4 million write-off of related unamortized debt issuance costs. There was no loss on extinguishment of long-term debt incurred during the three months ended September 30, 2013.
Other Expense (Income), net
Other expense,income, net infor the three months ended JuneSeptember 30, 2014 was $30.1$1.7 million, which included a $32.5consisted primarily of $2.2 million termination payment madeof net foreign exchange transaction gains, partially offset by other expenses. During the third quarter of 2014, the Company recorded foreign exchange transaction gains of $21.8 million primarily driven by the remeasurement of our euro denominated payables due to Dow in connection with terminationthe strengthening of the Latex JV Option Agreement as discussedU.S. dollar against the euro during the quarter. Separately, beginning in the third quarter, the Company entered into foreign exchange forward contracts and recorded related losses of approximately $19.5 million, largely offsetting the above described net gains (see Note NG in the condensed consolidated financial statements, offset by $2.1statements).
Other expense, net for the three months ended September 30, 2013 was $14.1 million, which consisted primarily of $11.9 million of foreign exchange transaction gains.
Other expense, net in the three months ended June 30, 2013 was $11.8losses, a $1.0 million of which $7.6 million relates to foreign exchange transaction losses and $3.3 million was due to losses in connection withadditional loss on the sale of ourthe Company’s Styrenics EPS business as discussed in(refer to Note P in the condensed consolidated financial statements.statements), and other expenses.
Foreign exchange transaction gains and losses are primarily driven by the remeasurement of our euro denominated payables to the U.S. dollar.
Provision for (Benefit from) Income Taxes
Provision for income taxes for the three months ended JuneSeptember 30, 2014 was $5.5$3.7 million, resulting in a negative effective tax rate of 13.9%56.5%. Provision for income tax for the three months ended JuneSeptember 30, 2013 was $2.2$6.0 million, resulting in a negativean effective tax rate of 8.3%54.9%.
The decrease in provision for income taxes was driven by a reduction in income before taxes, from $10.9 million of income for the three months ended September 30, 2013 to $6.5 million of loss for the three months ended September 30, 2014. This decrease in the provision for income taxes was partially offset by a lower proportion of income before taxes attributable to non-U.S. jurisdictions, where the statutory income tax rate is lower than the U.S. statutory income tax rate.
Although the Company had losses before income taxes of $39.2$6.5 million for the three months ended JuneSeptember 30, 2014, itapproximately $22.6 million of losses were generated losses of approximately $73.6 million mostlyprimarily within our holding companies incorporated in Luxembourg, which did not provide a tax benefit as management does not believe thatto the Company will utilize these losses in the foreseeable future. Included in these losses were payments made during the three months ended June 30, 2014 of $32.5 million related to an agreement with Dow to terminate the Latex JV Option Agreement and a portion of the fees related to the termination of the Advisory Agreement with Bain Capital of approximately $18.6 million (see Note N to the condensed consolidating financial statements for further discussion on both of these payments).
Offsetting the unfavorable impact to thetherefore unfavorably impacted our effective tax rate was aduring period. These losses stemmed primarily from non-deductible interest and stock-based compensation expenses. The effective income tax benefit recognized for the period ended June 30, 2014 as the Company effectively settled its 2010 and 2011 audit with the IRS and received a refund of $3.2 million in July 2014. As a result, the Company recorded a previously unrecognized tax benefit in the amount of $2.7 million, including penalties and interest, relating to its 2011 tax return filing. Additionally, the tax benefit generated from the Advisory Agreement termination fee noted above was $1.2 millionrate for the three months ended JuneSeptember 30, 2014. No similar tax benefits were recorded2013 was impacted by losses of $15.4 million, primarily within our holding companies incorporated in the three months ended June 30, 2013.Luxembourg, related to non-deductible interest and stock-based compensation expenses.
SixNine Months Ended JuneSeptember 30, 2014 Compared to the SixNine Months Ended JuneSeptember 30, 2013
Net Sales
Net sales for the sixnine months ended JuneSeptember 30, 2014 decreased by $53.2$56.7 million, or 1.9%1.4%, to $2,700.1$4,005.6 million from $2,753.3$4,062.3 million infor the sixnine months ended JuneSeptember 30, 2013. Of the 1.9%1.4% decrease, 5.3%4.3% was due to lower selling prices, which was partially offset by a favorable currency impact of approximately 2.5%2.1% as the U.S. dollar weakened compared to the euro and slight increasesa 1.1% increase in sales volume.volume driven by the Synthetic Rubber segment. The overall decrease in selling prices was primarily due to the pass through of lower butadiene costs to our customers in Latex and Synthetic Rubber and styrene monomer to our Styrenics and Latex customers.
Cost of Sales
Cost of sales for the sixnine months ended JuneSeptember 30, 2014 decreased by $98.0$73.2 million, or 3.8%1.9%, to $2,509.0$3,746.3 million from $2,607.0$3,819.5 million infor the sixnine months ended JuneSeptember 30, 2013. Of the 3.8%1.9% decrease, 7.9%2.0% was attributable to lower prices for raw materials, primarily butadiene and styrene monomer, andwhile an additional 2.0% decrease was due to volume mix, as we had a decrease in higher cost products offsetting the impact of product mix,increase in lower cost products. These decreases were partially offset by an unfavorable currency impact of approximately 2.5%2.1% due to the weakening of the U.S. dollar compared to the euro and 1.6% slight increase in sales volume. The remaining variance was due to a slight increase in manufacturing costs in the first half of 2014.euro.
Gross Profit
Gross profit for the sixnine months ended JuneSeptember 30, 2014 increased by $44.8$16.5 million, or 30.6%6.8%, to $191.1$259.3 million from $146.3$242.8 million infor the sixnine months ended JuneSeptember 30, 2013. The increase was primarily attributable to higher volume to SSBR customers due to the improving tire market in Europe, as well as higher marginmargins due to lower raw material costs.
Selling, General and Administrative Expenses
SG&A expenses for the sixnine months ended JuneSeptember 30, 2014 increased by $23.0$17.4 million, or 22.7%11.2%, to $124.2$172.4 million from $101.2$155.0 million infor the sixnine months ended JuneSeptember 30, 2013. The increase in SG&A expenses was primarily due to $23.3 million in termination fees paid related to the Advisory Agreement with Bain Capital which terminated upon consummation of the IPO on June 17, 2014, and $1.5$3.5 million restructuringof charges in connection with the restructuring part of our Engineered Polymers business to exit the commodity
market for polycarbonate in North America. These increases were offset by higher restructuring charges incurred in the first halfthree quarters of 2013 of approximately $6.5$9.0 million related to the shutdown of our latex facility in Altona, Australia compared to the additional restructuring charges of $2.1$2.8 million in 2014. Other increasesdecreases in expenses included salaries, incentivesincentive compensation and other normal increases in operating costs. For more information regarding the Advisory Agreement termination fee and restructuring charges noted above, refer to Notes N and Q to the condensed consolidated financial statements.
Equity in Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates for the sixnine months ended JuneSeptember 30, 2014 was $20.3$29.6 million compared to equity in earnings of $11.7$26.9 million for the sixnine months ended JuneSeptember 30, 2013. AmSty equity earnings increased to $22.3$33.2 million for the sixnine months ended JuneSeptember 30, 2014 from $12.4$27.6 million for the sixnine months ended JuneSeptember 30, 2013 primarily due to stronger operating performance driven by improved market conditions. Sumika Styron had equity losses of $2.0$3.6 million for the sixnine months ended JuneSeptember 30, 2014 and $0.7$0.6 million for the sixnine months ended JuneSeptember 30, 2013, respectively.
Interest Expense, Net
Interest expense, net for the sixnine months ended JuneSeptember 30, 2014 was $65.4$95.5 million compared to $66.0$98.9 million for the sixnine months ended JuneSeptember 30, 2013. The decrease in interest expense is primarily attributable to the redemption of $132.5 million in aggregate principal amount of the Senior Notes in July 2014 as well as lower average borrowings and outstanding principal balances on both the Revolving Facility and the Accounts Receivable Securitization Facility during the sixnine months ended JuneSeptember 30, 2014 compared to the sixnine months ended JuneSeptember 30, 2013. Partially offsetting this decrease
Loss on Extinguishment of Long-Term Debt
Loss on extinguishment of long-term debt was increased interest expense$7.4 million for the nine months ended September 30, 2014, related to the redemption of $132.5 million in aggregate principal amount of the Senior Notes in July 2014, using proceeds from the Company’s IPO. This loss was comprised of a $4.0 million call premium and a $3.4 million write-off of related unamortized debt issuance costs.
Loss on extinguishment of long-term debt was $20.7 million for the nine months ended September 30, 2013 related to the extinguishment of our $1,239.0 million Term Loans under our Senior Notes,Secured Credit Facility, which were issued in late January 2013, which bear an interest ratewas comprised of 8.75% comparedthe write-off of existing unamortized deferred financing fees and original issue discount attributable to a 6.0% interest rate on the Term Loans during the month of January 2013.totaling $14.4 million and $6.3 million, respectively.
Other Expense (Income), net
Other expense, net infor the sixnine months ended JuneSeptember 30, 2014 was $31.1$29.3 million, which included a $32.5 million termination payment made to Dow in connection with termination of the Latex JV Option Agreement as discussed in Note N in the condensed consolidated financial statements, slightly offset by net foreign exchange transaction gains of $1.7$3.9 million.
During 2014, the Company recorded foreign exchange transaction gains of $23.4 million primarily driven by the remeasurement of our euro denominated payables due to the strengthening of the U.S. dollar against the euro during the year. Separately, beginning in the third quarter, the Company entered into foreign exchange forward contracts and other income.recorded related losses of approximately $19.5 million, largely offsetting the above described net gains (see Note G in the condensed consolidated financial statements).
Other expense, net infor the sixnine months ended JuneSeptember 30, 2013 was $5.7$19.8 million, of which $3.3included a $4.2 million was due to losses in connection withloss on the sale of ourthe Company’s Styrenics EPS business as discussed in(refer to Note P in the condensed consolidated financial statements. The remaining $2.4statements), $12.2 million relates toof foreign exchange transaction losses, and other expenses.
Foreign exchange transaction gains and losses are primarily driven by the remeasurement of our euro denominated payables to the U.S. dollar.
Provision for (Benefit from) Income Taxes
Provision for income taxes for the sixnine months ended JuneSeptember 30, 2014 was $18.2$21.9 million, resulting in a negative effective tax rate of 195%138.3%. Provision for income taxes for the sixnine months ended JuneSeptember 30, 2013 was $2.1$8.1 million, resulting in a negative effective tax rate of 5.7%32.5%.
The increase in provision for income taxes was primarily driven by the decreasehigher taxable income in loss before income taxes from $35.7 millionour subsidiaries outside of loss for the six months ended June 30, 2013 to $9.3 million of loss for the six months ended June 30, 2014. During the period ended June 30, 2013, the Company incurred a loss on extinguishment of debt of $20.7 million, which provided a $4.3 million tax benefit. This one time item did not recur in the six month period ended June 30, 2014.Luxembourg.
Although the Company had a losslosses before income taxes of $9.3$15.8 million for the periodnine months ended JuneSeptember 30, 2014, itapproximately $119.8 million of losses were generated losses of approximately $97.2 million mostlyprimarily within our holding companies incorporated in Luxembourg, which did not provide a tax benefit as management does not believeto the Company will utilizeand therefore unfavorably impacted the effective tax rate during the period. Included in these losses in the foreseeable future. As discussed above, these losses included payments made during the three months endedwere non-deductible interest and stock-based compensation expenses, as well as certain non-deductible expenses, such as a $32.5 million charge related to an agreement with Dow to terminate the Latex JV Option Agreement and a portionapproximately $18.6 million of the fees related to the termination of the Advisory Agreement with Bain Capital. These non deductible expenses unfavorably impacted theThe effective income tax rate duringfor the periodnine months ended JuneSeptember 30, 2014.2013 was impacted by losses of $59.7 million, primarily within our holding companies incorporated in Luxembourg, related to non-deductible interest and stock-based compensation expenses.
Partially offsetting this unfavorable impact to the effective tax rate was a tax benefit recognized forduring the sixnine months ended JuneSeptember 30, 2014, related to the settlement of prior period audits by the IRS as the Company effectively settled its 2010 and 2011 audit with the IRS and received a refund of $3.2 million in July 2014. As a result, the Company recorded a previously unrecognized tax benefit in the amount of $2.7 million, including penalties and interest, relating to its 2011 tax return filing. No similar tax benefits were recorded in the sixnine months ended JuneSeptember 30, 2013.
Selected Segment Information
The following tables present net sales and EBITDA by segment and as a percentage of total net sales and net sales by segment, respectively, for the following periods:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||
Net sales(1) | ||||||||||||||||||||||||||||||||
Latex segment | $ | 320.7 | $ | 345.0 | $ | 647.0 | $ | 701.7 | $ | 328.4 | $ | 332.1 | $ | 975.4 | $ | 1,033.8 | ||||||||||||||||
Synthetic Rubber segment | 164.9 | 156.2 | 341.6 | 332.6 | 155.5 | 141.5 | 497.1 | 474.1 | ||||||||||||||||||||||||
Styrenics segment | 589.7 | 597.3 | 1,184.1 | 1,199.3 | 560.5 | 576.3 | 1,744.6 | 1,775.6 | ||||||||||||||||||||||||
Engineered Polymers segment | 265.6 | 263.3 | 527.4 | 519.7 | 261.1 | 259.1 | 788.5 | 778.8 | ||||||||||||||||||||||||
Corporate unallocated(2) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Total | $ | 1,340.9 | $ | 1,361.8 | $ | 2,700.1 | $ | 2,753.3 | $ | 1,305.5 | $ | 1,309.0 | $ | 4,005.6 | $ | 4,062.3 | ||||||||||||||||
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EBITDA(3) | ||||||||||||||||||||||||||||||||
Latex segment | $ | 24.8 | $ | 22.1 | $ | 50.3 | $ | 48.8 | $ | 25.4 | $ | 24.0 | $ | 75.7 | $ | 72.8 | ||||||||||||||||
Synthetic Rubber segment | 37.0 | 27.9 | 80.1 | 58.6 | 26.6 | 12.8 | 106.7 | 71.4 | ||||||||||||||||||||||||
Styrenics segment | 27.2 | 17.5 | 69.4 | 43.0 | 21.6 | 66.0 | 91.1 | 109.0 | ||||||||||||||||||||||||
Engineered Polymers segment | 5.1 | (2.9 | ) | 2.8 | (3.7 | ) | 1.8 | 2.0 | 4.6 | (1.8 | ) | |||||||||||||||||||||
Corporate unallocated(2) | (73.5 | ) | (32.8 | ) | (95.6 | ) | (68.5 | ) | (23.9 | ) | (37.8 | ) | (119.6 | ) | (106.2 | ) | ||||||||||||||||
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Total | $ | 20.6 | $ | 31.8 | $ | 107.0 | $ | 78.2 | $ | 51.5 | $ | 67.0 | $ | 158.5 | $ | 145.2 | ||||||||||||||||
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Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
Net sales(1) | ||||||||||||||||||||||||||||||||
Latex segment | 23.9 | % | 25.3 | % | 24.0 | % | 25.5 | % | 25.2 | % | 25.4 | % | 24.4 | % | 25.4 | % | ||||||||||||||||
Synthetic Rubber segment | 12.3 | % | 11.5 | % | 12.7 | % | 12.1 | % | 11.9 | % | 10.8 | % | 12.4 | % | 11.7 | % | ||||||||||||||||
Styrenics segment | 44.0 | % | 43.9 | % | 43.9 | % | 43.6 | % | 42.9 | % | 44.0 | % | 43.6 | % | 43.7 | % | ||||||||||||||||
Engineered Polymers segment | 19.8 | % | 19.3 | % | 19.4 | % | 18.8 | % | 20.0 | % | 19.8 | % | 19.6 | % | 19.2 | % | ||||||||||||||||
Corporate unallocated(2) | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
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Latex segment | 7.7 | % | 6.4 | % | 7.8 | % | 7.0 | % | 7.7 | % | 7.2 | % | 7.8 | % | 7.0 | % | ||||||||||||||||
Synthetic Rubber segment | 22.4 | % | 17.9 | % | 23.4 | % | 17.6 | % | 17.1 | % | 9.0 | % | 21.5 | % | 15.1 | % | ||||||||||||||||
Styrenics segment | 4.6 | % | 2.9 | % | 5.9 | % | 3.6 | % | 3.9 | % | 11.5 | % | 5.2 | % | 6.1 | % | ||||||||||||||||
Engineered Polymers segment | 1.9 | % | (1.1 | )% | 0.5 | % | (0.7 | )% | 0.7 | % | 0.8 | % | 0.6 | % | (0.2 | )% | ||||||||||||||||
Corporate unallocated(2) | (5.5 | )% | (2.4 | )% | (3.5 | )% | (2.5 | )% | (1.8 | )% | (2.9 | )% | (3.0 | )% | (2.6 | )% | ||||||||||||||||
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Total | 1.5 | % | 2.3 | % | 4.0 | % | 2.8 | % | 3.9 | % | 5.1 | % | 4.0 | % | 3.6 | % | ||||||||||||||||
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(1) | Inter-segment sales have been eliminated. |
(2) | Corporate unallocated includes corporate overhead costs, loss on extinguishment of long-term debt, and certain other income and expenses. Percentages for corporate unallocated are based on total sales. |
(3) | EBITDA is a non-GAAP financial measure that we refer to in making operating decisions because we believe it provides meaningful supplemental information regarding our operational performance. We present EBITDA because we believe that it is useful for investors to analyze disclosures of our operating results on the same basis as that used by our management. We believe the use of EBITDA as a metric assists our board of directors, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense), asset base (such as depreciation and amortization) and tax structure. See a reconciliation of net |
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||
Net loss | $ | (44.6 | ) | $ | (28.1 | ) | $ | (27.5 | ) | $ | (37.7 | ) | ||||||||||||||||||||
Net income (loss) | $ | (10.1 | ) | $ | 4.9 | $ | (37.6 | ) | $ | (32.8 | ) | |||||||||||||||||||||
Interest expense, net | 32.6 | 33.7 | 65.4 | 66.0 | 30.1 | 32.9 | 95.5 | 98.9 | ||||||||||||||||||||||||
Provision for income taxes | 5.5 | 2.2 | 18.2 | 2.1 | 3.7 | 6.0 | 21.9 | 8.1 | ||||||||||||||||||||||||
Depreciation and amortization | 27.1 | 24.0 | 50.9 | 47.8 | 27.8 | 23.2 | 78.7 | 71.0 | ||||||||||||||||||||||||
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EBITDA | $ | 20.6 | $ | 31.8 | $ | 107.0 | $ | 78.2 | $ | 51.5 | $ | 67.0 | $ | 158.5 | $ | 145.2 | ||||||||||||||||
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There are limitations to using financial measures such as EBITDA. Other companies in our industry may define EBITDA differently than we do. As a result, it may be difficult to use EBITDA, or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing reconciliations of our EBITDA results to our net loss,income (loss), which is determined in accordance with GAAP.
Latex Segment
We are a global leader in SB latex, holding a strong market position across the geographies and applications in which we compete. We produce SB latex primarily for coated paper used in advertising and magazines, packaging board coatings, carpet and artificial turf backings, as well as a number of performance latex applications. For the sixnine months ended JuneSeptember 30, 2014, approximately half of our Latex segment’s net sales were generated in Europe, approximately 25% were generated in the United States and the remainder was generated in Asia and other geographies.
Three Months Ended JuneSeptember 30, 2014 Compared to the Three Months Ended JuneSeptember 30, 2013
Net sales for the three months ended JuneSeptember 30, 2014 decreased by $24.3$3.7 million, or 7.0%1.1%, to $320.7$328.4 million from $345.0$332.1 million infor the three months ended JuneSeptember 30, 2013. Of the 7.0%1.1% decrease in net sales, 6.4%1.9% was due to lower selling prices primarily from the pass through of lower styrene prices as well as continued competitive pressures, which was partially offset a by favorable currency impact of 0.7% as the U.S. dollar weakened compared the euro and a slight increase in sales volume.
EBITDA for the three months ended September 30, 2014 increased by $1.4 million, or 5.8%, to $25.4 million from $24.0 million for the three months ended September 30, 2013. The EBITDA increase was driven by a decrease in restructuring related charges of $1.8 million (see Note Q in the condensed consolidated financial statements), as well as higher volume impact of 2.8% and a decrease in fixed costs of approximately 17.5% driven by Altona operating costs in the prior year, a higher level of fixed cost absorption in the current year, and continued fixed cost management. These favorable impacts were partially offset by lower margins which decreased EBITDA by approximately 23.1%, due to higher raw material costs and a continued competitive environment.
Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013
Net sales for the nine months ended September 30, 2014 decreased by $58.4 million, or 5.6%, to $975.4 million from $1,033.8 million for the nine months ended September 30, 2013. Of the 5.6% decrease in net sales, 5.2% was due to lower selling prices primarily from the pass through of lower butadiene and styrene cost and 3.0% from lower sales volume driven by lower sales to the Europe and North America paper markets which were partially offset by higher sales to the Asia paper and North America carpet markets. Currency had a favorable impact of 2.4% as the U.S. dollar weakened compared to the euro.
EBITDA for the three months ended June 30, 2014 increased by $2.7 million, or 12.2%, to $24.8 million from $22.1 million in the three months ended June 30, 2013. The EBITDA increase was driven by a decrease in restructuring related charges of $5.0 million (see Note Q in the condensed consolidated financial statements) as well as a favorable currency impact of 2.1% as the U.S. dollar weakened compared to the euro. These favorable impacts were partially offset by a lower volume impact of 7.2% driven by lower sales to the Europe and North America paper markets.
Six Months Ended June 30, 2014 Compared to the Six Months Ended June 30, 2013
Net sales for the six months ended June 30, 2014 decreased by $54.7 million, or 7.8%, to $647.0 million from $701.7 million in the six months ended June 30, 2013. Of the 7.8% decrease in net sales, 6.8% was due to lower selling prices primarily from the pass through of lower butadiene and styrene cost and 2.9%1.9% from lower sales volume driven by lower sales to the Europe and North America paper markets. The volume impact was partially offset by a 1.8%1.5% favorable currency impact as the U.S. dollar weakened compared to the euro.
EBITDA for the sixnine months ended JuneSeptember 30, 2014 increased by $1.5$2.9 million, or 3.1%4.0%, to $50.3$75.7 million from $48.8$72.8 million infor the sixnine months ended JuneSeptember 30, 2013. The EBITDA increase was driven by a decrease in restructuring related charges of $4.4$6.2 million (see Note Q in the condensed consolidated financial statements) as well as a favorable currency impact of 1.8%1.4% as the U.S. dollar weakened compared to the euro. Offsetting these increases was lower sales volume, driven by lower sales to the Europe and North America paper markets, which caused EBITDA to decrease by 6.8%4.0%.
Synthetic Rubber Segment
We are a significant producer of styrene-butadiene and polybutadiene-based rubber products and we have a leading European market position in SSBR. While 100% of our sales were generated in Europe for the sixnine months ended JuneSeptember 30, 2014, approximately 15% of these net sales were exported to Asia, 10% to Latin America and 6%7% to North America.
We have a broad synthetic rubber technology and product portfolio, focusing on specialty products, such as SSBR and lithium polybutadiene rubber (“Li-PBR”), while also producing core products, such as emulsion styrene-butadiene rubber (“ESBR”), and Ni-PBR. Our synthetic rubber products are extensively used in tires, with an estimated 86% of our net sales from this segment in 2013 attributable to the tire market. We estimate that three quarters of these sales relate to replacement tires. Other applications for our synthetic rubber products include polymer modification and technical rubber goods.
Three Months Ended JuneSeptember 30, 2014 Compared to the Three Months Ended JuneSeptember 30, 2013
Net sales for the three months ended JuneSeptember 30, 2014 increased by $8.7$14.0 million, or 5.6%9.9%, to $164.9$155.5 million from $156.2$141.5 million infor the three months ended JuneSeptember 30, 2013. Of the 5.6%9.9% increase in net sales, 14.0%5.1% was due to an increase in sales volume resulting from higher sales of SSBR to tire producers, plus a 4.4% increase in net salesand 3.1% was due to ahigher selling prices mostly from higher butadiene costs passed through to customers. A favorable currency impact contributed an additional 1.7% increase as the U.S dollar weakened compared to the euro. These increases were partially offset by a decrease in net sales of 12.8% due to lower selling prices mostly from lower butadiene costs passed through to customers.
EBITDA for the three months ended JuneSeptember 30, 2014 increasedmore than doubled compared to the prior year, increasing by $9.1$13.8 million, or 32.6%107.8%, to $37.0$26.6 million from $27.9compared to $12.8 million infor the three months ended JuneSeptember 30, 2013. Higher volume, driven by an increase in SSBR sales, and margin, driven by favorable raw material cost timing, resulted in a 24.6%127.7% increase in EBITDA. These favorable impacts were partially offset by a 22.0% decrease in EBITDA plusdue to higher fixed costs related primarily to a favorable currency impactplanned turnaround at one of approximately 5.7% as the U.S. dollar weakened compared to the euro.our ESBR plants.
SixNine Months Ended JuneSeptember 30, 2014 Compared to the SixNine Months Ended JuneSeptember 30, 2013
Net sales for the sixnine months ended JuneSeptember 30, 2014 increased by $9.0$23.0 million, or 2.7%4.9%, to $341.6$497.1 million from $332.6$474.1 million infor the sixnine months ended JuneSeptember 30, 2013. Of the 2.7%4.9% increase in net sales, 13.9%11.0% was due to an increase in sales volume resulting from higher sales of SSBR to tire producers, plusand 3.3% was due to a favorable currency impact of approximately 3.0% as the U.S dollar weakened compared to the euro. These increases were offset by lower selling prices due to the pass through of lower butadiene costs to customers, which decreased net sales by approximately 14.2%9.5%.
EBITDA for the sixnine months ended JuneSeptember 30, 2014 increased by $21.5$35.3 million, or 36.7%49.4%, to $80.1$106.7 million from $58.6$71.4 million infor the sixnine months ended JuneSeptember 30, 2013. Higher volume, and margins, driven by higher SSBR sales, and margin, driven by favorable raw material cost timing, increased EBITDA by approximately 42.8% plus57.0%. In addition, currency had a favorable currency impact of approximately 4.5%3.7% as the U.S. dollar weakened compared to the euro. These increases were partially offset by higher fixed costs, which decreased EBITDA by approximately 10.6%.11.2%, and were driven by a lower level of fixed cost absorption.
Styrenics Segment
Our Styrenics segment includes polystyrene, acrylonitrile butadiene-styrene (“ABS”) and styrene-acrylonitrile (“SAN”) products, as well as our internal production and sourcing of styrene monomer, a raw material common in SB latex, synthetic rubber and styrenics products. We are a leading producer of polystyrene and mass ABS, or mABS, where we focus our efforts on differentiated applications such as the liners and encasements of appliances and consumer electronics including smartphones and tablets. Within these applications, we have worked collaboratively with customers to develop more advanced grades of plastics such as our high impact polystyrene (“HIPS”) and mABS products. These products offer superior properties, such as rigidity, insulation and colorability, and, in some cases, an improved environmental footprint compared to general purpose polystyrene or emulsion ABS. Our Styrenics segment also serves the packaging and construction end-markets, where we have launched a new general purpose polystyrene product for improved performance in foam insulation applications.
Three Months Ended JuneSeptember 30, 2014 Compared to the Three Months Ended JuneSeptember 30, 2013
Net sales for the three months ended JuneSeptember 30, 2014 decreased by $7.6$15.8 million, or 1.3%2.7%, to $589.7$560.5 million from $597.3$576.3 million infor the three months ended JuneSeptember 30, 2013. Of the 1.3%2.7% decrease in net sales, 3.8%4.5% was driven by decreases in selling prices due primarily to the pass through of lower styrene cost to customers, and approximately 1.3% was due to a decrease in sales volume. These decreases were partially offset by a favorable currency impact of approximately 3.8%1.0% as the U.S. dollar weakened compared to the euro.euro and a 0.8% increase due to sales volume.
EBITDA for the three months ended JuneSeptember 30, 2014 increaseddecreased by $9.7$44.4 million, or 55.4%67.3%, to $27.2$21.6 million from $17.5$66.0 million infor the three months ended JuneSeptember 30, 2013. Of the 55.4% increase, 44.3% was driven by higher margins due to lower raw material and utility costs compared to the three months ended June 30, 2013. In addition, 18.9% of the increase67.3% decrease, 65.3% was due to lower margins, driven by a reduction in the spread on styrene monomer production compared to the prior year. In addition, a $4.4 million decrease in equity earnings from our AmSty joint venture resulted in a 6.6% reduction in EBITDA. These decreases were partially offset by a 4.5% increase from lower fixed costs 18.5% wasand a 1.5% increase due to an impairment loss in the prior year in connection with the sale of our EPS business, and 8.1% was due to favorable currency impacts as the U.S. dollar weakened compared to the euro. These increases were offset by lower volumes, which reduced EBITDA by 20.8% and a decrease of $2.4 million in equity earnings from our AmSty joint venture, which reduced EBITDA by 13.9%.
SixNine Months Ended JuneSeptember 30, 2014 Compared to the SixNine Months Ended JuneSeptember 30, 2013
Net sales for the sixnine months ended JuneSeptember 30, 2014 decreased by $15.2$31.0 million, or 1.3%1.7%, to $1,184.1$1,744.6 million from $1,199.3$1,775.6 million infor the sixnine months ended JuneSeptember 30, 2013. Of the 1.3%1.7% decrease in net sales, 3.2%3.6% was driven by decreases in selling prices due to the pass through of lower styrene costcosts to customers and approximately 0.9%0.3% was due to a decrease in sales volume. These decreases were partially offset by a 2.8%2.2% favorable currency impact to our net sales as the U.S. dollar weakened compared to the euro.
EBITDA for the sixnine months ended JuneSeptember 30, 2014 increaseddecreased by $26.4$17.9 million, or 61.4%16.4%, to $69.4$91.1 million from $43.0$109.0 million infor the sixnine months ended JuneSeptember 30, 2013. Of the 61.4% increase, 29.2%16.4% decrease, 27.3% was driven by higherlower margins due mainly to lower raw material and utility costsa reduction in the spread on styrene monomer production margins compared to the six months ended June 30, 2013. In addition, 23.2% ofprior year. Also contributing to the decrease was a 7.9% reduction in sales volume, driven by lower sales in Europe and Asia polystyrene. These decreases were offset by a 7.9% increase was due to equity earnings from our AmSty joint venture which increased by $10.0 million during the six months ended June 30, 2014, and 20.8% wasin EBITDA due to lower fixed costs, driven by the EPS divestiture and continued cost management. These increases were offset by lower volumes,management, as well as a 5.1% increase due to equity earnings from our AmSty joint venture which reduced EBITDA by 16.4%increased $5.6 million during the nine months ended September 30, 2014. Currency had a favorable impact of approximately 2.1%.
Engineered Polymers Segment
We are a leading producer of engineered polymers. Our products are predominantly used in the automotive, consumer electronics, construction, and medical device markets. We are focused on differentiated products which we produce in our polymer and compounds and blends manufacturing facilities located across Europe, Asia, North America and Latin America. We believe that the strategic locations of these facilities combined with close customer collaboration offers us a strategic advantage in serving our customers. Many of our polycarbonate (“PC”) products and more than half of our compounds and blends products are differentiated based on their physical properties, performance and aesthetic advantages. Our history of innovation has contributed to long-standing relationships with customers who are recognized leaders in their respective end-markets. We have established a strong market presence in the global automotive and electronics sector, targeting both component suppliers and final product manufacturers. Our Engineered Polymers segment also compounds and blends our PC and mABS plastics into differentiated products for customers within these sectors, as well as into compounds of polypropylene. We have also developed compounds containing post-consumer recycle polymers to respond to what we believe is a growing need for some customers to include recycled content in their products. We are currently focused on reducing costs in order to improve our competitiveness in polycarbonate.
Three Months Ended JuneSeptember 30, 2014 Compared to the Three Months Ended JuneSeptember 30, 2013
Net sales for the three months ended JuneSeptember 30, 2014 increased by $2.3$2.0 million, or 0.9%0.8%, to $265.6$261.1 million from $263.3$259.1 million infor the three months ended JuneSeptember 30, 2013. The 0.9%0.8% increase in net sales was primarily due to favorable currency impact of approximately 3.0%0.8% as the U.S. dollar weakened compared to the euro, plus a slight increasewith minimal impact from changes in sales volume of approximately 0.1%, offset by aor selling price decrease of approximately 2.2% due to the pass through of lower raw material and a continued competitive environment in the polycarbonate market.price.
EBITDA for the three months ended JuneSeptember 30, 2014 increaseddecreased by $8.0$0.2 million, or 275.9%10.0%, to $5.1$1.8 million from $(2.9)$2.0 million infor the three months ended JuneSeptember 30, 2013. This increasedecrease was primarily due to higher marginslower equity affiliate income from Sumika Styron which was mostly offset by lower utility costs in the second quarter of 2014 from sales of our compounds and blends products to the automotive and electronic markets.Polycarbonate business.
SixNine Months Ended JuneSeptember 30, 2014 Compared to the SixNine Months Ended JuneSeptember 30, 2013
Net sales for the sixnine months ended JuneSeptember 30, 2014 increased by $7.7$9.7 million, or 1.5%1.2%, to $527.4$788.5 million from $519.7$778.8 million infor the sixnine months ended JuneSeptember 30, 2013. The 1.5%1.2% increase in net sales was due to a favorable currency impact of 2.3%1.8% as the U.S. dollar weakened compared to the euro, plusas well as increased sales volume of approximately 1.5%1.1% from higher sales to the Europe, North America, and Asia automotive markets as well as the Asia electronics market. These increases were partially offset by a 2.3%1.6% decrease in selling prices primarily due to the pass through of lower raw materials costs and continued competitive challenges in the polycarbonate market.
EBITDA for the sixnine months ended JuneSeptember 30, 2014 increased by $6.5$6.4 million, or 175.7%355.6%, to $2.8$4.6 million from $(3.7)$(1.8) million infor the sixnine months ended JuneSeptember 30, 2013. This increase was primarily due to higher volume and margins in the first half of 2014 from sales of our compounds and blends products to the automotive and electronic markets.
Other Important Performance Measures
We believe that the presentation of Adjusted EBITDA and Adjusted EBITDA excluding inventory revaluation provides investors with a useful analytical indicator of our performance and of our ability to service our indebtedness.
We define Adjusted EBITDA as income (loss) from continuing operations before interest expense, net; income tax provision; depreciation and amortization expense; loss on extinguishment of long-term debt; asset impairment charges; advisory fees paid to affiliates of Bain Capital; gains or losses on the dispositions of businesses and assets; restructuring and other non-recurring items. We describe these other costs in more detail below.
We present Adjusted EBITDA excluding inventory revaluation in order to facilitate the comparability of results from period to period by adjusting cost of sales to reflect the cost of raw material during the period, which is often referred to as the replacement cost method of inventory valuation. We believe this measure minimizes the impact of raw material purchase price volatility in evaluating our performance. Our approach to calculating inventory revaluation is intended to represent the difference between the results under the FIFO and the replacement cost methods. However, our calculation could differ from the replacement cost method if the monthly raw material standards are different from the actual raw material prices during the month and production and purchase volumes differ from sales volumes during the month. These factors could have a significant impact on the inventory revaluation calculation.
There are limitations to using financial measures such as Adjusted EBITDA and Adjusted EBITDA excluding inventory revaluation. These performance measures are not intended to represent cash flow from operations as defined by GAAP and should not be used as alternatives to net income (loss) as indicators of operating performance or to cash flow as measures of liquidity. Other companies in our industry may define Adjusted EBITDA and Adjusted EBITDA excluding inventory revaluation differently than we do. As a result, it may be difficult to use these or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing reconciliations of these performance measures to our net income (loss), which is determined in accordance with GAAP.
Adjusted EBITDA and Adjusted EBITDA excluding inventory revaluation are calculated as follows for the three and sixnine months ended JuneSeptember 30, 2014 and 2013, respectively:
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
(in millions) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||
Net loss | $ | (44.6 | ) | $ | (28.1 | ) | $ | (27.5 | ) | $ | (37.7 | ) | ||||||||||||||||||||
Net income (loss) | $ | (10.1 | ) | $ | 4.9 | $ | (37.6 | ) | $ | (32.8 | ) | |||||||||||||||||||||
Interest expense, net | 32.6 | 33.7 | 65.4 | 66.0 | 30.1 | 32.9 | 95.5 | 98.9 | ||||||||||||||||||||||||
Provision for income taxes | 5.5 | 2.2 | 18.2 | 2.1 | 3.7 | 6.0 | 21.9 | 8.1 | ||||||||||||||||||||||||
Depreciation and amortization | 27.1 | 24.0 | 50.9 | 47.8 | 27.8 | 23.2 | 78.7 | 71.0 | ||||||||||||||||||||||||
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EBITDA(a) | $ | 20.6 | $ | 31.8 | $ | 107.0 | $ | 78.2 | $ | 51.5 | $ | 67.0 | $ | 158.5 | $ | 145.2 | ||||||||||||||||
Loss on extinguishment of long-term debt | — | — | — | 20.7 | 7.4 | — | 7.4 | 20.7 | ||||||||||||||||||||||||
Asset impairment charges or write-offs (b) | — | 0.7 | — | 0.7 | — | — | — | 0.7 | ||||||||||||||||||||||||
Net loss on disposition of businesses and assets (c) | — | 3.2 | — | 3.2 | — | 1.0 | — | 4.2 | ||||||||||||||||||||||||
Restructuring and other charges (d) | 2.1 | 6.5 | 2.7 | 6.5 | 0.8 | 2.6 | 3.5 | 9.1 | ||||||||||||||||||||||||
Fees paid pursuant to advisory agreement (e) | 24.2 | 1.2 | 25.4 | 2.4 | — | 1.2 | 25.4 | 3.6 | ||||||||||||||||||||||||
Other non-recurring items (f) | 32.5 | — | 32.5 | 1.1 | 1.9 | — | 34.4 | 1.1 | ||||||||||||||||||||||||
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Adjusted EBITDA | $ | 79.4 | $ | 43.4 | $ | 167.6 | $ | 112.8 | $ | 61.6 | $ | 71.8 | $ | 229.2 | $ | 184.6 | ||||||||||||||||
Inventory revaluation | (2.6 | ) | 26.2 | (8.2 | ) | 26.0 | 0.8 | 26.4 | (7.4 | ) | 52.4 | |||||||||||||||||||||
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Adjusted EBITDA, excluding inventory revaluation (g) | $ | 76.8 | $ | 69.6 | $ | 159.4 | $ | 138.8 | $ | 62.4 | $ | 98.2 | $ | 221.8 | $ | 237.0 | ||||||||||||||||
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(a) | We refer to EBITDA in making operating decisions because we believe it provides meaningful supplemental information regarding our operational performance. Other companies in our industry may define EBITDA differently than we do. As a result, it may be difficult to use EBITDA, or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing reconciliations of our EBITDA results to our net income (loss), which is determined in accordance with GAAP. See the “Selected Segment Information” for further detail. |
(b) | Asset impairment charges or write-offs for the |
(c) | Net loss on disposition of businesses or assets for the three and |
(d) | Restructuring and other charges for the three and |
(e) | Represents fees paid under the terms of our Advisory Agreement with Bain Capital. For the |
(f) | Other non-recurring items incurred for the |
(g) | See the discussion above this table for a description of Adjusted EBITDA, excluding inventory revaluation. |
Liquidity and Capital Resources
Cash Flows
The table below summarizes our primary sources and uses of cash for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. We have derived the summarized cash flow information from our unaudited financial statements.
Six Months Ended June 30, | ||||||||
(in millions) | 2014 | 2013 | ||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 7.8 | $ | (6.5 | ) | |||
Investing activities | (50.0 | ) | (16.3 | ) | ||||
Financing activities | 169.2 | (41.4 | ) | |||||
Effect of exchange rates on cash* | — | (1.5 | ) | |||||
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Net change in cash and cash equivalents | $ | 127.0 | $ | (65.7 | ) | |||
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(in millions) | 2014 | 2013 | ||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 1.7 | $ | 93.6 | ||||
Investing activities | (62.7 | ) | (24.3 | ) | ||||
Financing activities | 21.6 | (153.1 | ) | |||||
Effect of exchange rates on cash | (5.0 | ) | 1.2 | |||||
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Net change in cash and cash equivalents | $ | (44.4 | ) | $ | (82.6 | ) | ||
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Operating Activities
Net cash provided by operating activities during the sixnine months ended JuneSeptember 30, 2014 totaled $7.8$1.7 million, with net cash used in operating assets and liabilities totaling $25.2$66.5 million. The most significant components of the changes in operating assets and liabilities for the sixnine months ended JuneSeptember 30, 2014 of $25.2$66.5 million was an increase in accounts receivable of $59.9$42.0 million, offset by an increaseand a decrease in accounts payable and other current liabilities of $34.0$19.2 million. The increase in accounts receivable is primarily due to higher sales during the secondthird quarter of 2014, compared to the fourth quarter of 2013. Our accounts payable and other current liabilities increaseddecreased mainly due to the purchase of raw materials and the timing of payments.reductions in normal operating costs. Our operating cash flow for the sixnine months ended JuneSeptember 30, 2014 was negatively impacted by two significant one-time cash payments in the second quarter of 2014 totaling approximately $55.8 million related to the termination of our Latex JV Option Agreement with Dow and our Advisory Agreement with Bain Capital. Refer to Note N of the condensed consolidated financial statements for further details.
Net cash used inprovided by operating activities during the sixnine months ended JuneSeptember 30, 2013 totaled $6.5$93.6 million, with net cash used inprovided by operating assets and liabilities totaling $40.0$26.5 million. The most significant components of the changes in operating assets and liabilities for the sixnine months ended JuneSeptember 30, 2013 of $40.0$26.5 million were decreases in inventories of $93.9 million offset by increases in accounts receivable of $109.9$41.5 million offset by an increaseand decreases in accounts payable and other current liabilities of $21.3 million and a decrease in inventory of $53.8$31.7 million. The increase in accounts receivable reflects an increase in sales during the period ended June 30, 2013, when compared to the sales in the period ended December 31, 2012, driven by higher sales volume. Inventory decreased due to lower raw materials prices in the third quarter of 2013, as well as a decrease in volumes on hand compared to the fourth quarter of 2012, due to unusually higher inventory volumes on hand at the end of 2012 as a result ofresulting from our rubber capacity expansion project placed in operation in the fourth quarter of 2012. The increase in accounts receivable reflects an increase in sales in September 2013, when compared to sales in December 2012, driven primarily by higher sales volume . Increase in accounts receivable was also due to extended credit terms to certain customers, and higher volume sold during the first halfaccelerated collection of 2013. Our accountsreceivables in December 2012. Accounts payable and other current liabilities increaseddecreased mainly due to timing of payments.payments in normal course of business, lower production volumes, and lower raw materials prices in the third quarter of 2013.
Investing Activities
Net cash used in investing activities for the sixnine months ended JuneSeptember 30, 2014 totaled $50.0$62.7 million consisting primarily of capital expenditures of $55.7$69.3 million, of which approximately $26.1 million (€19.0 million) was related to the Company’s acquisition of production capacity rights from JSR at its rubber production facility in Schkopau, Germany. These investing activities were partially offset by cash proceeds of $5.4$6.3 million from the sale of a portion of land at our manufacturing site in Livorno, Italy.
Net cash used in investing activities for the sixnine months ended JuneSeptember 30, 2013 totaled $16.3$24.3 million consisting primarily of capital expenditures of $22.5$52.3 million during the period, net ofoffset by proceeds received from a government subsidy of $6.6 million related to our capital expansion project at our rubber facility in Schkopau, Germany. These investing activitiesAlso offsetting these capital expenditures were offset by cash proceeds from the sale of our EPS business of $15.2 million received on September 30, 2013 and cash proceeds of $7.9 million from our accounts receivable securitization facility released from restrictions. Refer to Note P of the condensed consolidated financial statements for details of the EPS business divestiture.
Financing Activities
Net cash provided by financing activities during the sixnine months ended JuneSeptember 30, 2014 totaled $169.2$21.6 million. During the period, the Company completed the IPO of 11,500,000 ordinary shares at a price of $19.00 per share. As a result, the Company received net cash proceeds from the issuance of common stock of $199.2$198.1 million, which is net of underwriting discounts as well as advisory, accounting, and legal expenses directly related to the offering. In July 2014, using proceeds from the Company’s IPO, the Company redeemed $132.5 million in aggregate principal amount of the Senior Notes (see Note L of the condensed consolidated financial statements for further details). In addition, we had net repayments of short-term borrowings of $29.4$43.4 million, which largely consisted of borrowings under our short-term revolving credit facility through our subsidiary in China. We also continue to utilize our Accounts Receivable Securitization Facility to fund our working capital requirements. For the sixnine months ended JuneSeptember 30, 2014, we had borrowings from our Accounts Receivable Securitization Facility of $178.6$283.3 million and repayments of $179.2$283.9 million, resulting in net repayments of $0.6 million due to changes in foreign currency exchange rates, as a portion of our borrowings under the Accounts Receivable Securitization Facility originate in euros.
Net cash used in financing activities during the sixnine months ended JuneSeptember 30, 2013 totaled $41.4$153.1 million. During the period, we repaid our outstanding term loansTerm Loans of $1,239.0 million using the proceeds from the issuance of $1,325.0 million in senior secured notesSenior Notes issued in January 2013. In connection with the issuance of the senior secured notesSenior Notes and amendmentthe amendments to our senior secured credit facility,Senior Secured Credit Facility and our Accounts Receivable Securitization Facility, we paid approximately $46.3$46.8 million of refinancing fees. In addition, during the period, we continued to utilize our revolving credit facilityRevolving Facility and our accounts receivable securitization facilityAccounts Receivable Securitization Facility to fund our working capital requirements. During the sixnine months ended JuneSeptember 30, 2013, our borrowings and repayments to our revolving facilityRevolving Facility were $405.0 million and $525.0 million, respectively, and we had net proceeds fromrepayments to our accounts receivable securitization facilityAccounts Receivable Securitization Facility of $56.7$39.6 million.
Indebtedness and Liquidity
The following table outlines our outstanding indebtedness as of JuneSeptember 30, 2014 and December 31, 2013 and the associated interest expense, including amortization of deferred financing fees and debt discounts, and effective interest rates for such borrowings as of JuneSeptember 30, 2014 and December 31, 2013. Note that the effective interest rates below exclude the impact of deferred financing fee amortization.
As of and for the Six Months Ended June 30, 2014 | As of and for the Year Ended December 31, 2013 | As of and for the Nine Months Ended September 30, 2014 | As of and for the Year Ended December 31, 2013 | |||||||||||||||||||||||||||||||||||||||||||||
(dollars in millions) | Balance | Effective Interest Rate | Interest Expense | Balance | Effective Interest Rate | Interest Expense | Balance | Effective Interest Rate | Interest Expense | Balance | Effective Interest Rate | Interest Expense | ||||||||||||||||||||||||||||||||||||
Senior Secured Credit Facility | ||||||||||||||||||||||||||||||||||||||||||||||||
Term Loans | $ | — | n/a | $ | — | $ | — | n/a | $ | 8.0 | $ | — | n/a | $ | — | $ | — | n/a | $ | 8.0 | ||||||||||||||||||||||||||||
Revolving Facility | — | 0 | % | 2.3 | — | 6.6 | % | 5.7 | — | 0 | % | 3.5 | — | 6.6 | % | 5.7 | ||||||||||||||||||||||||||||||||
Senior Notes | 1,325.0 | 8.8 | % | 60.9 | 1,325.0 | 8.8 | % | 111.9 | 1,192.5 | 8.8 | % | 88.7 | 1,325.0 | 8.8 | % | 111.9 | ||||||||||||||||||||||||||||||||
Accounts Receivable Securitization Facility | — | 2.7 | % | 2.1 | — | 3.1 | % | 5.6 | — | 2.7 | % | 3.3 | — | 3.1 | % | 5.6 | ||||||||||||||||||||||||||||||||
Other Indebtedness | 12.1 | 1.2 | % | 0.1 | 11.4 | 1.6 | % | 0.1 | 11.1 | 1.2 | % | 0.1 | 11.4 | 1.6 | % | 0.1 | ||||||||||||||||||||||||||||||||
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Total | $ | 1,337.1 | $ | 65.4 | $ | 1,336.4 | $ | 131.3 | $ | 1,203.6 | $ | 95.6 | $ | 1,336.4 | $ | 131.3 | ||||||||||||||||||||||||||||||||
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Senior Secured Credit Facility
In January 2013, the Company amended its Senior Secured Credit Facility to, among other things, increase its Revolving Facility borrowing capacity from $240.0 million to $300.0 million, decrease the borrowing rate of the Revolving Facility through a decrease in the applicable margin rate from 4.75% to 3.00% as applied to base rate loans (which shall bear interest at a rate per annum
equal to the base rate plus the applicable margin (as defined therein)), or 5.75% to 4.00% as applied to LIBO rate loans (which shall bear interest at a rate per annum equal to the LIBO rate plus the applicable margin and the mandatory cost (as defined therein), if applicable), and extend the maturity date to January 2018. Concurrently, the Company repaid its then outstanding Term Loans of $1,239.0 million using the proceeds from its sale of $1,325.0 million aggregate principal amount of the 8.750% Senior Notes issued in January 2013.
This amendment replaced the Company’s total leverage ratio requirement with a first lien net leverage ratio (as defined under the amended agreement) and removed the interest coverage ratio requirement. If the outstanding balance on the Revolving Facility exceeds 25% of the $300.0 million borrowing capacity (excluding undrawn letters of credit up to $10.0 million) at a quarter end, then the Company’s first lien net leverage ratio may not exceed 5.25 to 1.00 for the quarter ending March 31, 2013, 5.00 to 1.00 for the subsequent quarters through December 31, 2013, 4.50 to 1.00 for each of the quarters ending in 2014 and 4.25 to 1.00 for each of the quarters ending in 2015 and thereafter. As of JuneSeptember 30, 2014, the Company was in compliance with all debt covenant requirements under the Senior Secured Credit Facility.
There were no amounts outstanding under the Revolving Facility as of JuneSeptember 30, 2014. Available borrowings under the Revolving Facility totaled $292.8$293.1 million (net of $7.2$6.9 million of outstanding letters of credit) as of JuneSeptember 30, 2014.
Senior Notes
In January 2013, the Company issued $1,325.0 million 8.750% Senior Notes. Interest on the Senior Notes is payable semi-annually on February 1st and August 1st of each year, which commenced on August 1, 2013. The notes will mature on February 1, 2019, at which time the entire $1,325.0 millionprincipal amounts then outstanding will be due and payable. The proceeds from the issuance of the Senior Notes were used to repay all of the Company’s outstanding Term Loans and related refinancing fees and expenses.
The Company may redeem all or part of the Senior Notes at any time prior to August 1, 2015 by paying a make-wholecall premium, plus accrued and unpaid interest to the redemption date. The Company may redeem all or part of the Senior Notes at any time after August 1, 2015 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 the applicable date of redemption, if redeemed during the twelve-month period beginning on of the year indicated below:
12-month period commencing August 1 in Year | Percentage | |||
2015 | 104.375 | % | ||
2016 | 102.188 | % | ||
2017 and thereafter | 100.000 | % |
In addition, at any time prior to August 1, 2015, the Company may redeem up to 35% of the original principal amount of the notes at a redemption price equal to 108.750% of the face amount thereof plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds that the Company raises in certain equity offerings. The Company may also redeem, during any 12-month period commencing from the issue date until August 1, 2015, up to 10% of the original principal amount of the Senior Notes at a redemption price equal to 103% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of redemption.
In July 2014, using proceeds from the Company’s IPO (see Note L to the condensed consolidated financial statements), the Company redeemed $132.5 million in aggregate principal amount of the Senior Notes, including a 103% call premium totaling $4.0 million, together with accrued and unpaid interest thereon of $5.2 million. As a result of this redemption, during the third quarter of 2014 the Company expects to incurincurred a loss on the extinguishment of debt of approximately $7.4 million, which includes the above $4.0 million call premium and approximatelya $3.4 million to write-off of related unamortized debt issuance costs. The $132.5 million in aggregate principal amount of the Senior Notes was classified as a current liability within “Short-term borrowings and current portion of long-term debt” in the condensed consolidated balance sheet as of June 30, 2014. Pursuant to the Indenture, the Company may redeem another 10% of the original principal amount of the Senior Notes prior to August 1, 2015.
The Senior Notes rank equally in right of payment with all of the Company’s existing and future senior secured debt and pari passu with the Company and the Guarantors’ (as defined below) indebtedness that is secured by first-priority liens, including the Company’s Senior Secured Credit Facility (as defined above), to the extent of the value of the collateral securing such indebtedness and ranking senior in right of payment to all of the Company’s existing and future subordinated debt. However, claims under the Senior Notes effectively rank behind the claims of holders of debt, including interest, under our Senior Secured Credit Facility in respect of proceeds from any enforcement action with respect to the collateral or in any bankruptcy, insolvency or liquidation proceeding. The Senior Notes are unconditionally guaranteed on a senior secured basis by each of our existing and future wholly-owned subsidiaries that guarantee our Senior Secured Credit Facility (other than our subsidiaries in France and Spain) (the “Guarantors”). The note guarantees rank equally in right of payment with all of the Guarantors’ existing and future senior secured debt and senior in right of payment to all of the Guarantors’ existing and future subordinated debt. The notes are structurally subordinated to all of the liabilities of each of our subsidiaries that do not guarantee the notes.
The indenture contains covenants that, among other things, limit the Company’s ability and the ability of the Company’s restricted subsidiaries to incur additional indebtedness, pay dividends or make other distributions, subject to certain exceptions. If the Senior Notes are assigned an investment grade by the rating agencies and the Company is not in default, certain covenants will be suspended. If the ratings on the Senior Notes decline to below investment grade, the suspended covenants will be reinstated. As of JuneSeptember 30, 2014, the Company was in compliance with all debt covenant requirements under the indenture.
Accounts Receivable Securitization Facility
In May 2013, the Company amended its existing Accounts Receivable Securitization Facility, which increased its borrowing capacity from $160.0 million to $200.0 million, extended the maturity date to May 2016 and allows for the expansion of the pool of eligible accounts receivable to include previously excluded U.S. and Netherlands subsidiaries. The Accounts Receivable
Securitization Facility is subject to interest charges against the amount of outstanding borrowings as well as the amount of available, but undrawn borrowings. As a result of the amendment to our Accounts Receivable Securitization Facility, in regards to outstanding borrowings, fixed interest charges decreased from 3.25% plus commercial paper rates to 2.60% plus variable commercial paper rates. In regards to available, but undrawn borrowings, fixed interest charges decreased from 1.50% to 1.40%.
As of JuneSeptember 30, 2014, there were no amounts outstanding under the Accounts Receivable Securitization Facility, with approximately $199.8$186.1 million of accounts receivable available to support this facility, based on the pool of eligible accounts receivable.
Other Indebtedness
As of JuneSeptember 30, 2014, we had $9.6$8.8 million of outstanding borrowings under our short-term revolving credit facility through our subsidiary in China that provides for up to $15.0 million of uncommitted funds available for borrowings, subject to the availability of collateral. The facility is subject to annual renewal.
Our Senior Secured Credit Facility limits our foreign working capital facilities to an aggregate principal amount of $75.0 million and further limits our foreign working capital facilities in certain jurisdictions in Asia, including China, to an aggregate principal amount of $25.0 million, except as otherwise permitted by the Senior Secured Credit Facility.
Capital Resources and Liquidity
Our sources of liquidity include cash on hand, cash flow from operations and amounts available under the Senior Secured Credit Facility and the Accounts Receivable Securitization Facility. We believe, based on our current level of operations, that these sources of liquidity will be sufficient to fund our operations, capital expenditures and debt service for at least the next twelve months.
Our liquidity requirements are significant due to our highly leveraged nature, as well as our working capital requirements. As of JuneSeptember 30, 2014, we had $1,337.1$1,203.6 million in outstanding indebtedness and $859.6$817.3 million in working capital. As of December 31, 2013, we had $1,336.4 million in outstanding indebtedness and $810.2 million in working capital. As of JuneSeptember 30, 2014 and December 31, 2013, we had $86.2$76.8 million and $74.0 million of foreign cash and cash equivalents on our balance sheet, respectively, 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 discussed above, in January 2013, we repaid our outstanding Term Loans of $1,239.0 million through issuance of $1,325.0 million in Senior Notes. Concurrently, with this repayment, we amended our Senior Secured Credit Facility to increase our Revolving Facility borrowing capacity from $240.0 million to $300.0 million. Also, in May 2013, we amended our Accounts Receivable Securitization Facility to increase our borrowing capacity from $160.0 million to $200.0 million, extend the maturity date to May 2016, and expand the pool of eligible accounts receivable to include previously excluded U.S. and Netherlands subsidiaries. These amendments to our facilities provide for additional liquidity resources for us.
Also noted above, in July 2014, using proceeds from the Company’s IPO, the Company redeemed $132.5 million in aggregate principal amount of the Senior Notes, at a 103% call premium totaling $4.0 million, together with accrued and unpaid interest thereon of $5.2 million.
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 on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
We cannot make assurances that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Senior Secured Credit Facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. Further, our highly leveraged nature may limit our ability to procure additional financing in the future. As of JuneSeptember 30, 2014 and December 31, 2013, we were in compliance with all the covenants and default provisions under our credit arrangements.
We believe that funds provided by operations, our existing cash and cash equivalent balances, borrowings available under our Revolving Facility and borrowings available under 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. However, if we were to undertake any significant acquisitions or investments, it may be necessary for us to obtain additional debt or equity financings. We may not be able to obtain such financing on reasonable terms, or at all.
Contractual Obligations and Commercial Commitments
Other than the impact of payments related to the termination of our Advisory Agreement with Bain Capital and the redemption of $132.5 million in Senior Notes in July 2014 in connection with the IPO (discussed in Notes N and F to the condensed consolidated financial statements, respectively), there have been no material revisions outside the ordinary course of business to our contractual obligations as described within “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commercial Commitments” within our Registration Statement.
Critical Accounting Policies and Estimates
Our unaudited interim consolidated financial statements are based on the selection and application of significant accounting policies. The preparation of unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses at the date of and during the reporting period. Actual results could differ from those estimates. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.
We describe our significant accounting policies in Note B, Summary of Accounting Policies, of the Notes to Consolidated Financial Statements included in our Registration Statement, while we discuss our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Registration Statement.
There have been no material revisions to the critical accounting policies as filed in our Registration Statement.
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 B to our condensed consolidated financial statements, included elsewhere within this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Registration Statement, we are exposed to changes in interest rates and foreign currency exchange rates as well as changes in the prices of certain commodities that we use in production. There have been no material changes in our exposure to market risks from the information provided within our Registration Statement.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining internal controls 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, with the participation of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. 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 Quarterly Report on Form 10-Q were effective.
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 JuneSeptember 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
From time to time we may be subject to various legal claims and proceedings incidental to the normal conduct of business, relating to such matters as product liability, antitrust, competition, waste disposal practices, release of chemicals into the environment and other matters that may arise in the ordinary course of our business. We currently believe that there is no litigation pending that is likely to have a material adverse effect on our business. Regardless of the outcome, legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Our business faces various risks. Certain important factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the risk factors disclosed below related to our ordinary shares which have been previously disclosed in Item 1A. of our Quarterly Report on Form 10-Q for the period ended June 30, 2014 as well those risk factors related to our business and industry which have been previously disclosed in our Registration Statement under “Risk Factors- Risks relating to our Business and our Industry”, for which there have been no material changes. We encourage you to consider these risks, in their entirety, in addition to other information contained in or incorporated by reference into this Quarterly Report and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.
Risks Related to Our Ordinary Shares
We are a “controlled company” within the meaning of the New York Stock Exchange listing rules and, as a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.
Bain Capital Everest Manager Holding S.C.A. (our “Parent”) controls a majority of the voting power of our outstanding equity. As a result, we are a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements including:
We intend to utilize these exemptions. As a result, we may not have a majority of independent directors, our compensation committee will not consist entirely of independent directors and the board committees will not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.
Our Parent, however, is not subject to any contractual obligation to retain its controlling interest, except that it has agreed, subject to certain exceptions, not to sell or otherwise dispose of any ordinary shares or other equity securities or other securities exercisable or convertible therefore through December 8, 2014 without the prior written consent of Goldman, Sachs & Co., Deutsche Bank Securities Inc., Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC. Except for this brief period, there can be no assurance as to the period of time during which the Parent will maintain its ownership of our ordinary shares following the offering.
Our share price could be extremely volatile, and, as a result, you may not be able to resell your ordinary shares at or above the price you paid for them.
Prior to our initial public offering, there has not been a public market for our ordinary shares. An active public market for our ordinary shares may not develop or be sustained. In addition, the stock market in general has been highly volatile. As a result, the market price of our ordinary shares is likely to be similarly volatile, and investors in our ordinary shares may experience a decrease, which could be substantial, in the value of their ordinary shares, including decreases unrelated to our operating performance or prospects, and could lose part or all of their investment. The price of our ordinary shares could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this Quarterly Report and others such as:
In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
Your percentage ownership in us may be diluted by future equity issuances, which could reduce your influence over matters on which shareholders vote.
Our board of directors, or Board, has the authority, without action or vote of our shareholders, to issue all or any part of our authorized but unissued ordinary shares, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred equity. Issuances of ordinary shares or voting preferred stock would reduce your influence over matters on which our shareholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.
There may be future sales of a substantial amount of our ordinary shares by our current shareholders, and these sales could cause the price of our ordinary shares to fall.
As of August 8, 2014, there were 48,769,567 ordinary shares outstanding. Of our issued and outstanding ordinary shares, all of the ordinary shares sold in our initial public offering are freely transferable, except for any ordinary shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Approximately 76% of our outstanding ordinary shares are held by our Parent.
Each of our directors, executive officers and significant equity holders (including affiliates of our Parent) has entered into a lock-up agreement with Goldman, Sachs & Co., Deutsche Bank Securities Inc., Citigroup Global Markets Inc. and Morgan Stanley & Co. LLC, on behalf of the underwriters, which regulates their sales of our ordinary shares, through December 8, 2014, subject to certain exceptions and automatic extensions in certain circumstances.
Sales of substantial amounts of our ordinary shares in the public market, or the perception that such sales will occur, could adversely affect the market price of our ordinary shares and make it difficult for us to raise funds through securities offerings in the future. The shares offered in our initial public offering became eligible for immediate sale in the public market without restriction by persons other than our affiliates. Our remaining outstanding shares will become available for resale in the public market as shown in the chart below, subject to the provisions of Rule 144.
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Beginning on December 8, 2014, subject to certain exceptions and automatic extensions in certain circumstances, our Parent may require us to register the ordinary shares held by it for resale under the federal securities laws, subject to reduction upon the request of the underwriter of our initial public offering, if any. Registration of those ordinary shares would allow our Parent to immediately resell these ordinary shares in the public market. Any such sales or anticipation thereof could cause the market price of our ordinary shares to decline.
In addition, we have registered ordinary shares that we expect to issue pursuant to our 2014 Omnibus Incentive Plan. Therefore, those shares can be freely sold in the public market upon issuance, subject to any vesting or contractual lock-up agreements.
We are a Luxembourg company and, as a result, shareholders may have difficulty effecting service of process or litigation against us or our officers and directors and will not have the same protections afforded to shareholders of a company incorporated in Delaware.
We are organized under the laws of the Grand Duchy of Luxembourg. Many of our assets are located outside the United States and some of our directors and officers reside outside the United States and most of their assets are located outside the United States. As a result, investors may find it more difficult to effect service of process within the United States upon us or these persons or to enforce outside the United States judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S. federal securities laws. Likewise, it may also be difficult for an investor to enforce in U.S. courts judgments obtained against us or these persons in courts located in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to bring an original action in a Luxembourg court predicated upon the civil liability provisions of the U.S. federal securities laws against us or these persons. Luxembourg law does not recognize a shareholder’s right to bring a derivative action on behalf of a company.
Our corporate affairs are governed by our articles of association and by the laws of the Grand Duchy of Luxembourg. The rights of our shareholders and the responsibilities of our directors and officers under Luxembourg law are different from those applicable to a corporation incorporated in Delaware, or any other state of the United States. Luxembourg law and regulations in respect of corporate governance matters might not be as protective of minority shareholders as the General Corporation Law of the State of Delaware or other state corporation laws. Therefore, our shareholders may have more difficulty in protecting their interests in connection with actions taken by our directors and officers or our principal shareholders than they would as shareholders of a Delaware corporation or a corporation incorporated in another state of the United States.
Provisions in our organizational documents and Luxembourg law may deter takeover efforts or other actions, including share repurchases that could be beneficial to shareholder value.
In addition to our Parent’s beneficial ownership of a controlling percentage of our ordinary shares, our articles of association and Luxembourg law contain provisions that could make it harder for a third party to acquire us, even if doing so might be beneficial to our shareholders. These provisions include a staggered board of directors, the ability of the board of directors to approve a merger or other acquisition and to issue additional ordinary shares without shareholder approval that could be used to dilute a potential hostile acquirer. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by shareholders to change the direction or management of the company may be unsuccessful.
Pursuant to Luxembourg corporate law, existing shareholders are generally entitled to preemptive subscription rights in the event of capital increases and issues of shares against cash contributions. However, under our articles of association and shareholder approvals obtained prior to the completion of our initial public offering, our board of directors has been authorized to waive, limit or suppress such pre-emptive subscription rights until the fifth anniversary of such authorization and, in the future at a general meeting of our shareholders, our shareholders may renew, expand or amend such authorization, which could result in the extension of such waiver beyond the initial five year period.
In addition, our board of directors is authorized to acquire and sell issued ordinary shares subject to certain price and ownership restrictions until the fifth anniversary of such authorization and, in the future at a general meeting of our shareholders, our shareholders may renew, expand or amend such authorization. These limitations on share repurchases may have the effect of limiting the terms and duration of any potential share repurchase program or other repurchase transaction.
Our Parent has significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
We are controlled by the Parent. Our Parent beneficially owns 76% of our outstanding ordinary shares. For as long as the Parent continues to beneficially own more than 50% of the voting power of our ordinary shares, it will be able to direct the election of all of the members of our board of directors and could exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional ordinary shares or other equity securities, the repurchase or redemption of ordinary shares and the payment of dividends. Similarly, the Parent will have the power to determine matters submitted to a vote of our shareholders without the consent of our other shareholders, will have the power to prevent a change in our control and could take other actions that might be favorable to it. Even if its ownership falls below 50%, the Parent and its affiliates will continue to be able to strongly influence or effectively control our decisions.
Additionally, certain affiliates of the Parent are in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.
There is no assurance that an active trading market will develop to provide you with adequate liquidity to sell our ordinary shares at prices equal to or greater than the price you paid in the initial public offering.
Prior to our initial public offering in June 2014, there has not been a public market for our ordinary shares. Currently, our ordinary shares are traded on the New York Stock Exchange (“NYSE”). We cannot predict the extent to which an active trading market on NYSE will develop for our ordinary shares. If an active trading market does not develop, you may have difficulty selling any of our ordinary shares that you buy.
Because we have no current plans to pay cash dividends on our ordinary shares for the foreseeable future, you may not receive any return on investment unless you sell your ordinary shares for a price greater than that which you paid for it.
We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our Revolving Facility. As a result, you may not receive any return on an investment in our ordinary shares unless you sell our ordinary shares for a price greater than that which you paid for them.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Recent sales of unregistered securities |
NoneNone.
(b) | Use of Proceeds from registered securities |
On June 11, 2014, our Registration Statement on Form S-1, as amended (File No. 333-194561), relating to our initial public offering of 10,000,000 ordinary shares was declared effective by the SEC. On June 17, 2014, we closed the sale of 11,500,000 of our ordinary shares at a price of $19 per share, which included the sale of an additional 1,500,000 shares of our ordinary shares pursuant to theirunderwriters’ over-allotment option. Goldman, Sachs & Co., Deutsche Bank Securities Inc., Citigroup and Morgan Stanley & Co. LLC served as joint book-running managers and the representatives of the underwriters. Barclays Capital Inc., BofA Merrill Lynch, HSBC Securities (USA) Inc. and Jefferies LLC are also acted as book-running managers. Mizuho Securities USA Inc., Scotia Capital (USA) Inc., SMBC Nikko Securities America, Inc. and Wells Fargo Securities, LLC acted as co-managers of the offering.
We paid to the underwriters underwriting discounts and commissions totaling approximately $15.3 million in connection with the offering. In addition, we incurred additional costs of approximately $4.6$5.1 million in connection with the offering, which when added to the underwriting discounts and commissions paid by us, amounts to total fees and costs of approximately $19.9$20.4 million. We received approximately $198.6$198.1 million of proceeds from the offering, net of underwriting fees and estimated expenses. No offering costs were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.
On July 14, 2014, the net proceeds from the offering were used to redeem $132.5 million in aggregate principal amount of our 8.750% Senior Secured Notes due 2019, at a redemption price equal to 103% of the principal amount plus accrued and unpaid interest through the redemption date. The remaining proceeds were used to pay fees and expenses associated with the offering and for working capital and general corporate purposes.
(c) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
See Exhibit Index.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: August 11,November 14, 2014
TRINSEO S.A. | ||
By: | /s/ Christopher D. Pappas | |
Name: | Christopher D. Pappas | |
Title: | President and Chief Executive Officer (Principal Executive Officer) | |
By: | /s/ John A. Feenan | |
Name: | John A. Feenan | |
Title: | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Exhibit No. | Description | |
3.1 | Amended and Restated Articles of Association of Trinseo S.A. (incorporated herein by reference to Exhibit 3.1 to Amendment No. 4 to the Registration Statement filed on Form S-1, File No. 333-194561, filed June 2, 2014) | |
3.2 | Amendment to the Amended and Restated Articles of Association of Trinseo S.A. (incorporated herein by reference to Exhibit 3.1 to current report on Form 8-K, File No. 001-36473, filed on July 18, 2014) | |
4.1 | Form of Specimen Share Certificate of Trinseo S.A. (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to the Registration Statement filed on Form S-1, File No. 333-194561, filed May 16, 2014) | |
4.2 | Indenture, dated as of January 29, 2013, including Form of 8.750% Senior Secured Notes due 2019, by and among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent. (incorporated herein by reference to Exhibit 4.1 to the Registration Statement filed on Form S-4, File No. 333-191460, filed September 30, 2013) | |
4.3 | First Supplemental Indenture, dated as of March 12, 2013, by and among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent. (incorporated herein by reference to Exhibit 4.2 to the Registration Statement filed on Form S-4, File No. 333-191460, filed September 30, 2013) | |
4.4 | Second Supplemental Indenture, dated as of May 10, 2013, by and among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent. (incorporated herein by reference to Exhibit 4.3 to the Registration Statement filed on Form S-4, File No. 333-191460, filed September 30, 2013) | |
4.5 | Third Supplemental Indenture, dated as of September 16, 2013, by and among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent. (incorporated herein by reference to Exhibit 4.4 to the Registration Statement filed on Form S-4, File No. 333-191460, filed September 30, 2013) | |
4.6 | Fourth Supplemental Indenture, dated as of December 3, 2013, by and among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent. (incorporated herein by reference to Exhibit 4.9 to Amendment No. 1 to the Registration Statement filed on Form S-4, File No. 333-191460, filed December 6, 2013) | |
Fifth Supplemental Indenture, dated as of July 9, 2014, by and among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors named therein and Wilmington Trust, National Association, as trustee. (incorporated herein by reference to Exhibit 4.7 to the quarterly report on Form 10-Q for the quarterly period ended June 30, 2014, File No. 001-36473, filed August 11, 2014) | ||
4.8 | Intercreditor and Collateral Agency Agreement, dated as of January 29, 2013, by and among Trinseo Materials Operating S.C.A., the other Grantors party hereto, Deutsche Bank AG New York Branch, Wilmington Trust, National Association and each Additional Collateral Agent from time to time party hereto. (incorporated herein by reference to Exhibit 4.5 to the Registration Statement filed on Form S-4, File No. 333-191460, filed September 30, 2013) | |
4.9 | Registration Rights Agreement, dated as of January 29, 2013, by and among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors party hereto and Deutsche Bank Securities Inc. (incorporated herein by reference to Exhibit 4.6 to the Registration Statement filed on Form S-4, File No. 333-191460, filed September 30, 2013) | |
4.10 | Purchase Agreement, dated January 24, 2013, by and among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors party hereto and Deutsche Bank Securities Inc. (incorporated herein by reference to Exhibit 4.8 to Amendment No. 1 to the Registration Statement filed on Form S-4, File No. 333-191460, filed December 6, 2013) | |
4.11 | Joinder to Purchase Agreement, dated May 10, 2013, by and among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors party hereto and Deutsche Bank Securities Inc. (incorporated herein by reference to Exhibit 4.7 to the Registration Statement filed on Form S-4, File No. 333-191460, filed September 30, 2013) |
31.1† | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2† | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32.1†† | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32.2†† | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
101* | INS — XBRL Instance Document | ||
101* | SCH — XBRL Taxonomy Extension Schema Document | ||
101* | CAL — XBRL Taxonomy Extension Calculation Linkbase Document | ||
101* | DEF — XBRL Taxonomy Extension Definition Linkbase Document | ||
101* | LAB — XBRL Taxonomy Extension Label Linkbase Document | ||
101* | PRE — XBRL Taxonomy Extension Presentation Linkbase Document |
† | Filed herewith. |
†† | Furnished herewith. |
* | Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. |