UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2020
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, PA19312
(Address of Principal Executive Offices)
(610) (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 ☒ No ◻ ☐
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 ☒ No ◻ ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | |
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| | | | | |
Large accelerated filer | ☒ | Accelerated filer | ◻ |
| |
| | | | | |
Non-accelerated filer | ◻ | Smaller reporting company |
| Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻☐
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of Each Class | Trading symbol | Name of Exchange on which registered |
Ordinary Shares, par value $0.01 per share | TSE | New York Stock Exchange |
As of November 1, 2017,May 4, 2020, there were 43,704,68938,238,977 of the registrant’s ordinary shares outstanding.
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| | Notes to Condensed Consolidated Financial Statements (Unaudited) | | 9 | |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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2
Trinseo S.A.
Quarterly Report on Form 10-Q
For the quarterly period ended September 30, 2017March 31, 2020
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 consolidated entity. All financial data provided in this Quarterly Report is the financial data of the Company, unless otherwise indicated.
Prior to the formation of the Company, our business was wholly owned by The Dow Chemical Company (together with other affiliates, “Dow”). In June 2010, investment funds advised or managed by affiliates
Definitions of Bain Capital Partners, LLCcapitalized terms not defined herein appear within our Annual Report on Form 10-K for the year ended December 31, 2019 (“Bain Capital”Annual Report”) acquired an ownership interest in our business through an indirect ownership interest in us. During 2016, Bain Capital Everest Manager Holding SCA (“the former Parent”), an affiliate of Bain Capital, sold its entire ownership interest in the Company pursuant to the Company’s shelf registration statement filed with the Securities and Exchange Commission (“SEC”).
Definitions of capitalized terms not defined herein appear in the notes to our condensed consolidated financial statements. on February 28, 2020.The Company may distribute cash to shareholders under Luxembourg law via repayments of equity or an allocation of statutory profits. Since the Company began paying dividends,Until 2020, all distributions havehad been considered repayments of equity under Luxembourg law.
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,” ”estimate,” “see,” “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 the impact from the COVID-19 pandemic, 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 our Annual Report on Form 10-K for the year ended December 31, 2016 (“Annual Report”) filed with the SEC on March 1, 2017February 28, 2020 under Part I, Item IA— “Risk Factors”, and elsewhereFactors,” within this Quarterly Report.Report and in other filings and furnishings made by the Company with the Securities and Exchange Commission from time to time.
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. Therefore, we caution you against relying on 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.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge through the Investor Relations section of our website, www.trinseo.com, as soon as reasonably practicable after the reports are electronically filed or furnished with the U.S. Securities and Exchange Commission.SEC. We provide this website and information contained in or connected to it for informational purposes only. That information is not a part of this Quarterly Report.
3
PART I —FINANCIAL INFORMATION
TRINSEO S.A.
Condensed Consolidated Balance Sheets
(In thousands,millions, except per share data)
(Unaudited)
| | | | | | | |
| | March 31, | | December 31, | | ||
|
| 2020 | | 2019 |
| ||
Assets |
| | | | |
| |
Current assets | | | | | | | |
Cash and cash equivalents | | $ | 440.1 | | $ | 456.2 | |
Accounts receivable, net of allowance for doubtful accounts (March 31, 2020: $6.7 ; December 31, 2019: $5.3) | | | 576.0 | | | 570.8 | |
Inventories | |
| 405.5 | |
| 438.2 | |
Other current assets | |
| 16.6 | |
| 25.9 | |
Total current assets | |
| 1,438.2 | |
| 1,491.1 | |
Investments in unconsolidated affiliates | |
| 197.9 | |
| 188.1 | |
Property, plant and equipment, net of accumulated depreciation (March 31, 2020: $702.9; December 31, 2019: $665.7) | | | 572.4 | | | 625.8 | |
Other assets | | | | | | | |
Goodwill | |
| 66.2 | |
| 67.7 | |
Other intangible assets, net | |
| 188.1 | |
| 191.5 | |
Right-of-use assets - operating | | | 77.2 | | | 71.4 | |
Deferred income tax assets | |
| 78.7 | |
| 67.5 | |
Deferred charges and other assets | |
| 38.7 | |
| 55.7 | |
Total other assets | |
| 448.9 | |
| 453.8 | |
Total assets | | $ | 2,657.4 | | $ | 2,758.8 | |
Liabilities and shareholders’ equity | | | | | | | |
Current liabilities | | | | | | | |
Short-term borrowings and current portion of long-term debt | | $ | 11.5 | | $ | 11.1 | |
Accounts payable | |
| 301.9 | |
| 343.0 | |
Current lease liabilities - operating | | | 14.8 | | | 14.1 | |
Income taxes payable | |
| 1.9 | |
| 5.0 | |
Accrued expenses and other current liabilities | |
| 151.4 | |
| 154.4 | |
Total current liabilities | |
| 481.5 | |
| 527.6 | |
Noncurrent liabilities | | | | | | | |
Long-term debt, net of unamortized deferred financing fees | |
| 1,162.2 | |
| 1,162.6 | |
Noncurrent lease liabilities - operating | | | 64.1 | | | 58.0 | |
Deferred income tax liabilities | |
| 45.9 | |
| 41.5 | |
Other noncurrent obligations | |
| 300.7 | |
| 300.2 | |
Total noncurrent liabilities | |
| 1,572.9 | |
| 1,562.3 | |
Commitments and contingencies (Note 11) | | | | | | | |
Shareholders’ equity | | | | | | | |
Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (March 31, 2020: 48.8 shares issued and 38.2 shares outstanding; December 31, 2019: 48.8 shares issued and 39.0 shares outstanding) | | | 0.5 | | | 0.5 | |
Additional paid-in-capital | |
| 575.7 | |
| 574.7 | |
Treasury shares, at cost (March 31, 2020: 10.6 shares; December 31, 2019: 9.8 shares) | | | (548.2) | | | (524.9) | |
Retained earnings | |
| 729.2 | |
| 781.0 | |
Accumulated other comprehensive loss | |
| (154.2) | |
| (162.4) | |
Total shareholders’ equity | |
| 603.0 | |
| 668.9 | |
Total liabilities and shareholders’ equity | | $ | 2,657.4 | | $ | 2,758.8 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
|
|
|
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|
| September 30, |
| December 31, |
| |
|
|
| 2017 |
| 2016 |
| |
Assets |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 318,703 |
| $ | 465,114 |
|
Accounts receivable, net of allowance for doubtful accounts (September 30, 2017: $6,045; December 31, 2016: $3,138) |
|
| 719,094 |
|
| 564,428 |
|
Inventories |
|
| 483,158 |
|
| 385,345 |
|
Other current assets |
|
| 24,591 |
|
| 17,999 |
|
Total current assets |
|
| 1,545,546 |
|
| 1,432,886 |
|
Investments in unconsolidated affiliates |
|
| 161,883 |
|
| 191,418 |
|
Property, plant and equipment, net of accumulated depreciation (September 30, 2017: $505,100; December 31, 2016: $420,343) |
|
| 600,067 |
|
| 513,757 |
|
Other assets |
|
|
|
|
|
|
|
Goodwill |
|
| 62,774 |
|
| 29,485 |
|
Other intangible assets, net |
|
| 207,819 |
|
| 177,345 |
|
Deferred income tax assets—noncurrent |
|
| 46,942 |
|
| 40,187 |
|
Deferred charges and other assets |
|
| 31,521 |
|
| 24,412 |
|
Total other assets |
|
| 349,056 |
|
| 271,429 |
|
Total assets |
| $ | 2,656,552 |
| $ | 2,409,490 |
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Short-term borrowings and current portion of long-term debt |
| $ | 7,000 |
| $ | 5,000 |
|
Accounts payable |
|
| 415,709 |
|
| 378,029 |
|
Income taxes payable |
|
| 32,006 |
|
| 23,784 |
|
Accrued expenses and other current liabilities |
|
| 140,988 |
|
| 135,357 |
|
Total current liabilities |
|
| 595,703 |
|
| 542,170 |
|
Noncurrent liabilities |
|
|
|
|
|
|
|
Long-term debt, net of unamortized deferred financing fees |
|
| 1,165,924 |
|
| 1,160,369 |
|
Deferred income tax liabilities—noncurrent |
|
| 40,332 |
|
| 24,844 |
|
Other noncurrent obligations |
|
| 284,551 |
|
| 237,054 |
|
Total noncurrent liabilities |
|
| 1,490,807 |
|
| 1,422,267 |
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
Ordinary shares, $0.01 nominal value, 50,000,000 shares authorized (September 30, 2017: 48,778 shares issued and 43,703 shares outstanding; December 31, 2016: 48,778 shares issued and 44,301 shares outstanding) |
|
| 488 |
|
| 488 |
|
Additional paid-in-capital |
|
| 576,790 |
|
| 573,662 |
|
Treasury shares, at cost (September 30, 2017: 5,075 shares; December 31, 2016: 4,477 shares) |
|
| (263,673) |
|
| (217,483) |
|
Retained earnings |
|
| 423,456 |
|
| 258,540 |
|
Accumulated other comprehensive loss |
|
| (167,019) |
|
| (170,154) |
|
Total shareholders’ equity |
|
| 570,042 |
|
| 445,053 |
|
Total liabilities and shareholders’ equity |
| $ | 2,656,552 |
| $ | 2,409,490 |
|
4
TRINSEO S.A.
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(Unaudited)
| | | | | | | |
| Three Months Ended | | | ||||
| March 31, | |
| ||||
| 2020 |
| 2019 |
|
| ||
Net sales | $ | 853.5 |
| $ | 1,013.1 | | |
Cost of sales |
| 783.8 | |
| 915.7 | | |
Gross profit |
| 69.7 | |
| 97.4 | | |
Selling, general and administrative expenses |
| 77.5 | |
| 68.8 | | |
Equity in earnings of unconsolidated affiliates |
| 9.8 | |
| 32.2 | | |
Impairment charges | | 38.3 | | | — | | |
Operating income (loss) |
| (36.3) | |
| 60.8 | | |
Interest expense, net |
| 10.3 | |
| 10.2 | | |
Other expense, net |
| 1.6 | |
| 4.0 | | |
Income (loss) before income taxes |
| (48.2) | |
| 46.6 | | |
Provision for (benefit from) income taxes |
| (11.9) | |
| 10.8 | | |
Net income (loss) | $ | (36.3) | | $ | 35.8 | | |
Weighted average shares- basic | | 38.5 | | | 41.3 | | |
Net income (loss) per share- basic | $ | (0.94) | | $ | 0.87 | | |
Weighted average shares- diluted |
| 38.5 | |
| 41.8 | | |
Net income (loss) per share- diluted | $ | (0.94) | | $ | 0.86 | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
5
TRINSEO S.A.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net sales |
| $ | 1,096,582 |
| $ | 935,410 |
| $ | 3,346,271 |
| $ | 2,799,188 |
|
Cost of sales |
|
| 949,457 |
|
| 795,026 |
|
| 2,876,137 |
|
| 2,349,392 |
|
Gross profit |
|
| 147,125 |
|
| 140,384 |
|
| 470,134 |
|
| 449,796 |
|
Selling, general and administrative expenses |
|
| 65,732 |
|
| 73,900 |
|
| 181,552 |
|
| 180,635 |
|
Equity in earnings of unconsolidated affiliates |
|
| 43,807 |
|
| 36,686 |
|
| 93,029 |
|
| 110,314 |
|
Operating income |
|
| 125,200 |
|
| 103,170 |
|
| 381,611 |
|
| 379,475 |
|
Interest expense, net |
|
| 18,436 |
|
| 18,832 |
|
| 55,355 |
|
| 56,542 |
|
Loss on extinguishment of long-term debt |
|
| 65,260 |
|
| — |
|
| 65,260 |
|
| — |
|
Other expense (income), net |
|
| (11) |
|
| 1,084 |
|
| (6,072) |
|
| 16,628 |
|
Income before income taxes |
|
| 41,515 |
|
| 83,254 |
|
| 267,068 |
|
| 306,305 |
|
Provision for income taxes |
|
| 8,300 |
|
| 16,000 |
|
| 56,400 |
|
| 66,500 |
|
Net income |
| $ | 33,215 |
| $ | 67,254 |
| $ | 210,668 |
| $ | 239,805 |
|
Weighted average shares- basic |
|
| 43,745 |
|
| 45,865 |
|
| 43,900 |
|
| 47,152 |
|
Net income per share- basic |
| $ | 0.76 |
| $ | 1.47 |
| $ | 4.80 |
| $ | 5.09 |
|
Weighted average shares- diluted |
|
| 44,782 |
|
| 46,961 |
|
| 45,046 |
|
| 48,041 |
|
Net income per share- diluted |
| $ | 0.74 |
| $ | 1.43 |
| $ | 4.68 |
| $ | 4.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
| $ | 0.36 |
| $ | 0.30 |
| $ | 1.02 |
| $ | 0.60 |
|
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
|
| 2020 |
| 2019 | | ||
Net income (loss) |
| $ | (36.3) |
| $ | 35.8 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Cumulative translation adjustments | | | 10.7 | |
| (0.3) | |
Net gain (loss) on cash flow hedges | | | (3.7) | | | 0.1 | |
Pension and other postretirement benefit plans: | | | | | | | |
Net gain (loss) during period (net of tax of: $0.1 and $(0.2)) | | | 0.6 | | | (2.0) | |
Amounts reclassified from accumulated other comprehensive income | | | 0.6 | | | 1.0 | |
Total other comprehensive income (loss), net of tax | |
| 8.2 | |
| (1.2) | |
Comprehensive income (loss) | | $ | (28.1) | | $ | 34.6 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
56
TRINSEO S.A.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands, unless otherwise stated)millions, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
|
| Shares |
| Shareholders' Equity | ||||||||||||||||||
|
| Ordinary Shares Outstanding | | Treasury Shares |
| Ordinary Shares |
| Additional |
| Treasury Shares |
| Accumulated Other Comprehensive Income (Loss) |
| Retained Earnings |
| Total | ||||||
Balance at December 31, 2019 |
| 39.0 | | 9.8 | | $ | 0.5 | | $ | 574.7 | | $ | (524.9) | | $ | (162.4) | | $ | 781.0 | | $ | 668.9 |
Net loss |
| — | | — | | | — | | | — | | | — | | | — | | | (36.3) | |
| (36.3) |
Other comprehensive income |
| — | | — | | | — | | | — | | | — | | | 8.2 | | | — | |
| 8.2 |
Share-based compensation activity |
| — | | — | | | — | | | 1.0 | | | 1.7 | | | — | | | — | |
| 2.7 |
Purchase of treasury shares | | (0.8) | | 0.8 | | | — | | | — | | | (25.0) | | | — | | | — | | | (25.0) |
Dividends on ordinary shares ($0.40 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (15.5) | | | (15.5) |
Balance at March 31, 2020 |
| 38.2 | | 10.6 | | $ | 0.5 | | $ | 575.7 | | $ | (548.2) | | $ | (154.2) | | $ | 729.2 | | $ | 603.0 |
Balance at December 31, 2018 | | 41.6 | | 7.2 | | $ | 0.5 | | $ | 575.4 | | $ | (418.1) | | $ | (142.3) | | $ | 753.2 | | | 768.7 |
Net income |
| — | | — | |
| — | |
| — | |
| — | |
| — | |
| 35.8 | |
| 35.8 |
Other comprehensive loss |
| — | | — | |
| — | |
| — | |
| — | |
| (1.2) | |
| — | |
| (1.2) |
Share-based compensation activity |
| 0.1 | | (0.1) | |
| — | |
| (6.6) | |
| 7.0 | |
| — | |
| — | |
| 0.4 |
Purchase of treasury shares | | (0.7) | | 0.7 | | | — | | | — | | | (34.0) | | | — | | | — | | | (34.0) |
Dividends on ordinary shares ($0.40 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (16.6) | | | (16.6) |
Balance at March 31, 2019 |
| 41.0 | | 7.8 | | $ | 0.5 | | $ | 568.8 | | $ | (445.1) | | $ | (143.5) | | $ | 772.4 | | $ | 753.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income |
| $ | 33,215 |
| $ | 67,254 |
| $ | 210,668 |
| $ | 239,805 |
|
Other comprehensive income (loss), net of tax (tax amounts shown in millions below for the three and nine months ended September 30, 2017 and 2016, respectively): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustments |
|
| (1,561) |
|
| 1,488 |
|
| 21,614 |
|
| 3,906 |
|
Net loss on cash flow hedges |
|
| (3,715) |
|
| (2,280) |
|
| (21,491) |
|
| (3,676) |
|
Pension and other postretirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss arising during period (net of tax of: 2017—$0 and $0; 2016—$0 and ($0.5)) |
|
| — |
|
| — |
|
| — |
|
| (800) |
|
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| 840 |
|
| 533 |
|
| 3,012 |
|
| 1,612 |
|
Total other comprehensive income (loss), net of tax |
|
| (4,436) |
|
| (259) |
|
| 3,135 |
|
| 1,042 |
|
Comprehensive income |
| $ | 28,779 |
| $ | 66,995 |
| $ | 213,803 |
| $ | 240,847 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
67
TRINSEO S.A.
Condensed Consolidated Statements of Shareholders’ Equity
(In thousands, except per share data)millions)
(Unaudited)
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
|
| 2020 |
| 2019 | | ||
Cash flows from operating activities |
| |
|
| |
|
|
Net income (loss) | | $ | (36.3) | | $ | 35.8 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | | | | | | | |
Depreciation and amortization | |
| 36.4 | |
| 33.9 | |
Amortization of deferred financing fees, issuance discount, and excluded component of hedging instruments | |
| 0.4 | |
| (0.1) | |
Deferred income tax | |
| (11.5) | |
| (0.1) | |
Share-based compensation expense | |
| 3.2 | |
| 4.1 | |
Earnings of unconsolidated affiliates, net of dividends | |
| (9.8) | |
| (19.7) | |
Unrealized net gain on foreign exchange forward contracts | |
| (11.5) | |
| (6.6) | |
Gain on sale of businesses and other assets | |
| (0.4) | | | (0.2) | |
Impairment charges | |
| 38.3 | | | — | |
Pension settlement loss | | | — | | | 0.7 | |
Changes in assets and liabilities | | | | | | | |
Accounts receivable | |
| (12.7) | |
| (4.8) | |
Inventories | |
| 26.8 | |
| 57.7 | |
Accounts payable and other current liabilities | |
| (28.9) | |
| 49.4 | |
Income taxes payable | |
| (3.3) | |
| (2.0) | |
Other assets, net | |
| (6.9) | |
| 2.8 | |
Other liabilities, net | |
| 10.4 | |
| 2.3 | |
Cash provided by (used in) operating activities | |
| (5.8) | |
| 153.2 | |
Cash flows from investing activities | | | | | | | |
Capital expenditures | |
| (24.3) | |
| (25.0) | |
Net cash received for asset and business acquisitions, net of cash acquired | | | 0.2 | | | — | |
Proceeds from capital expenditures subsidy | |
| — | |
| 0.7 | |
Proceeds from the sale of businesses and other assets | |
| 11.6 | |
| — | |
Proceeds from the settlement of hedging instruments | | | 51.6 | | | — | |
Cash provided by (used in) investing activities | |
| 39.1 | |
| (24.3) | |
Cash flows from financing activities | | | | | | | |
Short-term borrowings, net | |
| (3.5) | |
| (0.1) | |
Purchase of treasury shares | | | (25.0) | | | (37.4) | |
Dividends paid | | | (15.9) | | | (17.4) | |
Proceeds from exercise of option awards | | | — | | | 0.1 | |
Withholding taxes paid on restricted share units | | | (0.6) | | | (3.8) | |
Repayments of 2024 Term Loan B | | | (1.7) | | | (1.8) | |
Cash used in financing activities | |
| (46.7) | |
| (60.4) | |
Effect of exchange rates on cash | |
| (2.7) | |
| (1.6) | |
Net change in cash, cash equivalents, and restricted cash | |
| (16.1) | |
| 66.9 | |
Cash, cash equivalents, and restricted cash—beginning of period | |
| 457.4 | |
| 452.3 | |
Cash, cash equivalents, and restricted cash—end of period | | $ | 441.3 | | $ | 519.2 | |
Less: Restricted cash, included in "Other current assets" | | | (1.2) | | | (2.8) | |
Cash and cash equivalents—end of period | | $ | 440.1 | | $ | 516.4 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares |
| Shareholders' Equity |
| ||||||||||||||||||
|
| Ordinary Shares Outstanding |
| Treasury Shares |
| Ordinary Shares |
| Additional |
| Treasury Shares |
| Accumulated Other Comprehensive Income (Loss) |
| Retained Earnings (Accumulated Deficit) |
| Total |
| ||||||
Balance at December 31, 2016 |
| 44,301 |
| 4,477 |
| $ | 488 |
| $ | 573,662 |
| $ | (217,483) |
| $ | (170,154) |
| $ | 258,540 |
| $ | 445,053 |
|
Net income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 210,668 |
|
| 210,668 |
|
Other comprehensive income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 3,135 |
|
| — |
|
| 3,135 |
|
Stock-based compensation activity |
| 440 |
| (440) |
|
| — |
|
| 3,128 |
|
| 15,674 |
|
| — |
|
| — |
|
| 18,802 |
|
Purchase of treasury shares |
| (1,038) |
| 1,038 |
|
| — |
|
| — |
|
| (61,864) |
|
| — |
|
| — |
|
| (61,864) |
|
Dividends on ordinary shares ($1.02 per share) |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (45,752) |
|
| (45,752) |
|
Balance at September 30, 2017 |
| 43,703 |
| 5,075 |
| $ | 488 |
| $ | 576,790 |
| $ | (263,673) |
| $ | (167,019) |
| $ | 423,456 |
| $ | 570,042 |
|
Balance at December 31, 2015 |
| 48,778 |
| — |
| $ | 488 |
| $ | 556,532 |
| $ | — |
| $ | (149,717) |
| $ | (18,289) |
| $ | 389,014 |
|
Adoption of new accounting standard |
| — |
| — |
|
| — |
|
| 915 |
|
| — |
|
| — |
|
| (915) |
|
| — |
|
Net income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 239,805 |
|
| 239,805 |
|
Other comprehensive income |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 1,042 |
|
| — |
|
| 1,042 |
|
Stock-based compensation activity |
| 25 |
| (25) |
|
| — |
|
| 14,057 |
|
| 914 |
|
| — |
|
| — |
|
| 14,971 |
|
Purchase of treasury shares |
| (4,150) |
| 4,150 |
|
| — |
|
| — |
|
| (194,079) |
|
| — |
|
| — |
|
| (194,079) |
|
Dividends on ordinary shares ($0.60 per share) |
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (27,316) |
|
| (27,316) |
|
Balance at September 30, 2016 |
| 44,653 |
| 4,125 |
| $ | 488 |
| $ | 571,504 |
| $ | (193,165) |
| $ | (148,675) |
| $ | 193,285 |
| $ | 423,437 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
TRINSEO S.A.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
|
Net income |
| $ | 210,668 |
| $ | 239,805 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 80,220 |
|
| 71,744 |
|
Amortization of deferred financing fees and issuance discount |
|
| 3,968 |
|
| 4,469 |
|
Deferred income tax |
|
| (2,636) |
|
| 9,895 |
|
Stock-based compensation expense |
|
| 10,752 |
|
| 14,842 |
|
Earnings of unconsolidated affiliates, net of dividends |
|
| (4,097) |
|
| (8,972) |
|
Unrealized net losses (gains) on foreign exchange forward contracts |
|
| (2,804) |
|
| 3,533 |
|
Loss on extinguishment of long-term debt |
|
| 65,260 |
|
| — |
|
Loss (gain) on sale of businesses and other assets |
|
| (10,473) |
|
| 13,091 |
|
Impairment charges |
|
| 4,293 |
|
| 14,310 |
|
Changes in assets and liabilities |
|
|
|
|
|
|
|
Accounts receivable |
|
| (92,776) |
|
| (30,229) |
|
Inventories |
|
| (57,315) |
|
| (27,605) |
|
Accounts payable and other current liabilities |
|
| (989) |
|
| 23,138 |
|
Income taxes payable |
|
| 6,297 |
|
| 3,973 |
|
Other assets, net |
|
| (14,407) |
|
| (18,426) |
|
Other liabilities, net |
|
| (1,116) |
|
| 11,130 |
|
Cash provided by operating activities |
|
| 194,845 |
|
| 324,698 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
Capital expenditures |
|
| (108,875) |
|
| (82,678) |
|
Cash paid to acquire a business, net of cash acquired |
|
| (79,650) |
|
| — |
|
Proceeds from the sale of businesses and other assets |
|
| 46,166 |
|
| 174 |
|
Distributions from unconsolidated affiliates |
|
| 857 |
|
| 4,809 |
|
Cash used in investing activities |
|
| (141,502) |
|
| (77,695) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
Deferred financing fees |
|
| (19,175) |
|
| — |
|
Short-term borrowings, net |
|
| (191) |
|
| (126) |
|
Purchase of treasury shares |
|
| (65,225) |
|
| (194,079) |
|
Dividends paid |
|
| (42,231) |
|
| (13,920) |
|
Proceeds from exercise of option awards |
|
| 8,349 |
|
| 203 |
|
Withholding taxes paid on restricted share units |
|
| (302) |
|
| (74) |
|
Net proceeds from issuance of 2024 Term Loan B |
|
| 700,000 |
|
| — |
|
Repayments of 2021 Term Loan B |
|
| (492,500) |
|
| (3,750) |
|
Net proceeds from issuance of 2025 Senior Notes |
|
| 500,000 |
|
| — |
|
Repayments of 2022 Senior Notes |
|
| (745,950) |
|
| — |
|
Prepayment penalty on long-term debt |
|
| (52,978) |
|
| — |
|
Cash used in financing activities |
|
| (210,203) |
|
| (211,746) |
|
Effect of exchange rates on cash |
|
| 10,449 |
|
| (231) |
|
Net change in cash and cash equivalents |
|
| (146,411) |
|
| 35,026 |
|
Cash and cash equivalents—beginning of period |
|
| 465,114 |
|
| 431,261 |
|
Cash and cash equivalents—end of period |
| $ | 318,703 |
| $ | 466,287 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands,millions, unless otherwise stated)
(Unaudited)
NOTE 1—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 September 30, 2017March 31, 2020 and 20162019 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 20162019 audited consolidated financial statements included within the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 28, 2020. The Company expects the effects of the COVID-19 pandemic to negatively impact its results of operations, cash flows and financial position, which impact could be material, and dependent on numerous factors that are highly uncertain, for which the ultimate impact cannot be predicted at this time, including the duration and scope of the COVID-19 pandemic. The Company’s condensed consolidated financial statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts and related disclosures as of and for the period ended March 1, 2017.31, 2020. However, actual results could differ from these estimates and assumptions.
The December 31, 20162019 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 20162019 audited consolidated financial statements, but does not include all disclosures required by GAAP for annual periods.
Certain prior year amounts have been reclassified
NOTE 2—RECENT ACCOUNTING GUIDANCE
In August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to conform to the current period presentation. These reclassificationsdevelop or obtain internal-use software. The Company adopted this standard prospectively, effective January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial position or results. Refer to Note 14 for further information.
NOTE 2—RECENT ACCOUNTING GUIDANCEstatements.
In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued guidance which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the FASB has issued certain clarifying updates to this guidance, which the Company will consider as part of our adoption, which will be effective as of January 1, 2018. The Company has completed its scoping assessment for the adoption of this guidance by conducting surveys with relevant stakeholders in the business, including commercial and finance leadership, reviewing a representative sample of revenue arrangements across all businesses, and identifying a set of applicable qualitative revenue recognition changes related to the new standard update. In completing this phase, the Company has identified its major revenue streams, which are concentrated within individual product sales within each of our reportable segments. As a result of this work, the Company has concluded that it will adopt this new guidance applying the modified retrospective approach. The Company remains in the process of establishing and documenting key accounting policies, assessing new disclosure requirements, and evaluating impacts on business processes, information technology, and controls resulting from the adoption of this new standard. Additionally, while our final assessment has not been completed, we continue to progress in the quantification of the impacts that this standard will have on our consolidated financial statements and are refining certain estimates that will be used in order to calculate such impacts.
In July 2015,December 2019, the FASB issued guidance whichthat simplifies the subsequent measurementaccounting for income taxes. The amended guidance includes removal of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value (“NRV”) test. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation. The Company adopted this guidance effective January 1, 2017, and the adoption did not have a material impactcertain exceptions to the Company’s financial position or resultsgeneral principles of operations.
In February 2016, the FASB issued guidance related to leasesAccounting Standards Codification 740, Income Taxes, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognizeis partially based on the consolidated balance sheets lease liabilities and corresponding right-of-use assets for all leases with terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements.income. This new guidance is effective for public companiesbusiness entities for interim and annual and interimreporting periods beginning after December 15, 2018, with early adoption permitted. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. The Company is in the process of assessing the impact on its consolidated financial
9
statements from the adoption of the new guidance. However, as we are the lessee under various real estate, railcar, and other equipment leases, which we currently account for as operating leases, we anticipate an increase in the recognition of right-of-use assets and lease liabilities as a result of this adoption.
In August 2016, the FASB issued guidance that aims to eliminate diversity in practice for how certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. Additionally, the FASB has issued further guidance related to the presentation of restricted cash on the consolidated statements of cash flows. The Company adopted this guidance effective September 30, 2017. The most significant impact of this adoption to the Company was the requirement to classify debt prepayment or extinguishment costs, which the Company had historically classified within cash flows from operating activities, as financing cash outflows. This change is reflected in the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2017, including the impacts of the Company’s debt refinancing during the third quarter of 2017 (refer to Note 5 for further information). While this adoption was applied using the retrospective approach, there were no transactions during the nine months ended September 30, 2016 that required the condensed consolidated statement of cash flows for that period to be recast.
In January 2017, the FASB issued guidance that revises the definition of a business in order to assist in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, fewer transactions are expected to be accounted for as business combinations. The Company adopted this guidance effective January 1, 2017. We expect this adoption could affect conclusions reached for future transactions in several areas, including acquisitions and disposals.
In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment by removing Step 2 of the test, which requires a hypothetical purchase price allocation. As a result, a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted this guidance effective January 1, 2017, which did not have a material impact to the Company’s financial position or results of operations.
In March 2017, the FASB issued guidance that requires employers to present the service cost component of net periodic benefit cost in the same statement of operations line item as other employee compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are to be presented outside of any subtotal of operating income. This presentation amendment is relevant to the Company and will be applied on a retrospective basis. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently assessing the impact of adopting this guidance on its results of operations.
In August 2017, the FASB issued significant amendments to existing hedge accounting guidance. Among other things, this guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting, amend presentation and disclosure requirements, and change how companies assess effectiveness. This guidance is required for public companies for annual and interim periods beginning after December 15, 2018,2020, with early adoption permitted. The Company is currently assessing the timing and related impactimpacts of adopting this guidance on its consolidated financial positionstatements.
In March 2020, the FASB issued optional guidance for a limited period of time to ease the potential burden in accounting for the effects of the transition away from London Interbank Offered Rate (“LIBOR”) and results of operations.other reference rates. The Company adopted this guidance upon issuance, noting that it did not have a material impact on the Company’s condensed consolidated financial statements.
NOTE 3—NET SALES
Refer to the Annual Report for information on the Company's accounting policies and further background related to its net sales.
9
The following table provides disclosure of net sales to external customers by primary geographical market (based on the location where sales originated), by segment for the three months ended March 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | |
| | Latex | | Synthetic | | Performance | | | | | | | |
| |||||
Three Months Ended | | Binders | | Rubber | | Plastics | | Polystyrene | | Feedstocks | | Total |
| ||||||
March 31, 2020 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 62.2 | | $ | — | | $ | 70.6 | | $ | — | | $ | 2.6 | | $ | 135.4 | |
Europe | |
| 101.9 | |
| 99.8 | |
| 165.0 | |
| 109.8 | |
| 29.1 | |
| 505.6 | |
Asia-Pacific | |
| 52.3 | |
| 1.9 | |
| 49.7 | |
| 73.0 | |
| 13.1 | | | 190.0 | |
Rest of World | |
| 2.7 | | | — | |
| 19.8 | |
| — | |
| — | |
| 22.5 | |
Total | | $ | 219.1 | | $ | 101.7 | | $ | 305.1 | | $ | 182.8 | | $ | 44.8 | | $ | 853.5 | |
March 31, 2019 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 63.3 | | $ | — | | $ | 81.8 | | $ | — | | $ | 2.7 | | $ | 147.8 | |
Europe | |
| 101.4 | |
| 124.6 | |
| 213.3 | |
| 138.2 | |
| 40.5 | |
| 618.0 | |
Asia-Pacific | |
| 56.5 | |
| — | |
| 51.6 | |
| 90.3 | |
| 23.6 | | | 222.0 | |
Rest of World | |
| 2.7 | | | — | |
| 22.6 | |
| — | |
| — | |
| 25.3 | |
Total | | $ | 223.9 | | $ | 124.6 | | $ | 369.3 | | $ | 228.5 | | $ | 66.8 | | $ | 1,013.1 | |
NOTE 4—INVESTMENTS IN UNCONSOLIDATED AFFILIATES
DuringThe Company’s investments held in unconsolidated affiliates are accounted for by the nine months ended September 30, 2017, theequity method. The Company had twois currently supplemented by 1 joint ventures:venture, Americas Styrenics LLC (“Americas Styrenics”,Styrenics,” a styrene and polystyrene joint venture with Chevron Phillips Chemical Company LP) and Sumika Styron Polycarbonate Limited (“Sumika Styron Polycarbonate”, a polycarbonate joint venture with Sumitomo Chemical Company Limited). Investments held in the unconsolidated affiliates are accounted for by the equity method. The results of Americas Styrenics are included within its own reporting segment, and the results of Sumika Styron Polycarbonate were included within the Basic Plastics reporting segment until the Company sold its 50% share of the entity in January 2017. Refer to the discussion below for further information about the sale of the Company’s share in Sumika Styron Polycarbonate during the first quarter of 2017.segment.
Both of the unconsolidated affiliates areAmericas Styrenics is a privately held companies;company; therefore, a quoted market pricesprice for their stock areits equity interests is not available. The summarized financial information of the Company’s unconsolidated affiliatesaffiliate is shown below. This table includes summarized financial information for Sumika Styron Polycarbonate through the date of sale in January 2017.
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
|
| 2020 |
| 2019 |
| ||
Sales |
| $ | 322.2 |
| $ | 369.2 | |
Gross profit | | $ | 7.2 | | $ | 54.2 | |
Net income (loss) | | $ | (8.3) | | $ | 42.9 | |
|
| ||||||||||||
|
|
10
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Sales |
| $ | 458,744 |
| $ | 460,305 |
| $ | 1,369,572 |
| $ | 1,241,908 |
|
Gross profit |
| $ | 90,594 |
| $ | 84,095 |
| $ | 176,352 |
| $ | 240,366 |
|
Net income |
| $ | 81,059 |
| $ | 65,041 |
| $ | 141,508 |
| $ | 188,853 |
|
Americas Styrenics
As of September 30, 2017March 31, 2020 and December 31, 2016, respectively,2019, the Company’s investment in Americas Styrenics was $161.9$197.9 million and $149.7$188.1 million, respectively, which was $49.1$3.5 million and $71.2$10.3 million less than the Company’s 50% share of the underlying net assets of Americas Styrenics,. respectively. 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 athe weighted average remaining useful life of the contributed assets of approximately 3.11.9 years as of September 30, 2017.March 31, 2020. The Company receiveddid not receive dividends from Americas Styrenics of $35.0 million and $80.0 million during the three and nine months ended September 30, 2017, respectively, compared to $40.0March 31, 2020 and received dividends of $12.5 million and $100.0 millionfrom Americas Styrenics during the three and nine months ended September 30, 2016, respectively.March 31, 2019.
Sumika Styron Polycarbonate
On January 31, 2017, the Company completed the sale10
As of December 31, 2016, the Company’s investment in Sumika Styron Polycarbonate was $41.8 million. Due to the sale in January 2017, the Company no longer has an investment in Sumika Styron Polycarbonate as of September 30, 2017. The Company received dividends from Sumika Styron Polycarbonate of zero and $9.8 million during the three and nine months ended September 30, 2017, respectively, compared to zero and $6.2 million during the three and nine months ended September 30, 2016, respectively. The dividend received during the nine months ended September 30, 2017 from Sumika Styron Polycarbonate related to the Company’s proportionate share of earnings for the year ended December 31, 2016.
NOTE 4—5—INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Finished goods |
| $ | 239,663 |
| $ | 187,577 |
|
Raw materials and semi-finished goods |
|
| 211,186 |
|
| 168,804 |
|
Supplies |
|
| 32,309 |
|
| 28,964 |
|
Total |
| $ | 483,158 |
| $ | 385,345 |
|
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2020 | | 2019 | ||
Finished goods |
| $ | 200.2 |
| $ | 210.8 |
Raw materials and semi-finished goods | |
| 168.5 | |
| 190.1 |
Supplies | |
| 36.8 | |
| 37.3 |
Total | | $ | 405.5 | | $ | 438.2 |
NOTE 5—6—DEBT
Refer to discussion belowthe Annual Report for details of the Company’s debt refinancing that occurred during the third quarter of 2017. For definitions of capitalized terms not included herein refer toand further background on the Annual Report.Company’s debt structure discussed below. The Company was in compliance with all debt related covenants as of September 30, 2017March 31, 2020 and December 31, 2016.
11
2019.
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| |||||||
|
| Interest Rate as of September 30, 2017 |
| Maturity |
| Carrying |
| Unamortized |
| Total Debt, |
| |||
Senior Credit Facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 Revolving Facility(2) |
| Various |
| September 2022 |
| $ | — |
| $ | — |
| $ | — |
|
2024 Term Loan B(3) |
| 3.735% |
| September 2024 |
|
| 700,000 |
|
| (18,957) |
|
| 681,043 |
|
2025 Senior Notes |
| 5.375% |
| September 2025 |
|
| 500,000 |
|
| (9,600) |
|
| 490,400 |
|
Accounts Receivable Securitization Facility(4) |
| Various |
| May 2019 |
|
| — |
|
| — |
|
| — |
|
Other indebtedness |
| Various |
| Various |
|
| 1,481 |
|
| — |
|
| 1,481 |
|
Total debt |
|
|
|
|
| $ | 1,201,481 |
| $ | (28,557) |
| $ | 1,172,924 |
|
Less: current portion |
|
|
|
|
|
|
|
|
|
|
|
| (7,000) |
|
Total long-term debt, net of unamortized deferred financing fees |
|
|
|
|
|
|
|
|
|
|
| $ | 1,165,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 |
| |||||||
|
| Interest Rate as of December 31, 2016 |
| Maturity |
| Carrying |
| Unamortized |
| Total Debt, |
| |||
2020 Senior Credit Facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Revolving Facility |
| Various |
| May 2020 |
| $ | — |
| $ | — |
| $ | — |
|
2021 Term Loan B |
| 4.250% |
| November 2021 |
|
| 491,545 |
|
| (9,159) |
|
| 482,386 |
|
2022 Senior Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD Notes |
| 6.750% |
| May 2022 |
|
| 300,000 |
|
| (5,726) |
|
| 294,274 |
|
Euro Notes |
| 6.375% |
| May 2022 |
|
| 394,275 |
|
| (7,157) |
|
| 387,118 |
|
Accounts Receivable Securitization Facility |
| Various |
| May 2019 |
|
| — |
|
| — |
|
| — |
|
Other indebtedness |
| Various |
| Various |
|
| 1,591 |
|
| — |
|
| 1,591 |
|
Total debt |
|
|
|
|
| $ | 1,187,411 |
| $ | (22,042) |
| $ | 1,165,369 |
|
Less: current portion |
|
|
|
|
|
|
|
|
|
|
|
| (5,000) |
|
Total long-term debt, net of unamortized deferred financing fees |
|
|
|
|
|
|
|
|
|
|
| $ | 1,160,369 |
|
|
|
|
|
|
|
|
|
2020 Senior Credit Facility
On May 5, 2015, the Company entered into a credit agreement which included $825.0 million of senior secured financing (the “2020 Senior Credit Facility”), inclusive of a $325.0 million revolving credit facility maturing in May 2020 (the “2020 Revolving Facility”) and a $500.0 million senior secured term loan B facility maturing in November 2021 (the “2021 Term Loan B”).
In September 2017, upon completion of the refinancing transactions discussed below, the Company terminated the 2020 Senior Credit Facility. Prior to this termination, the Company had no outstanding borrowings under the 2020 Revolving Facility and had $490.0 million outstanding under the 2021 Term Loan B, excluding unamortized original
12
issue discount. As a result of this termination, the Company recognized a $0.8 million loss on extinguishment of long-term debt, comprised entirely of the write-off of a portion of the existing unamortized deferred financing fees and unamortized original issue discount related to the 2021 Term Loan B. The remaining unamortized deferred financing fees and unamortized original issue discount for both the 2020 Revolving Facility and 2021 Term Loan B remain capitalized and will be amortized along with new deferred financing fees over the life of the new facilities, discussed in further detail below.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | March 31, 2020 | | December 31, 2019 | | ||||||||||||||
|
| Interest Rate as of |
| Maturity Date |
| Carrying Amount |
| Unamortized Deferred Financing Fees(1) |
| Total Debt, Less Unamortized Deferred Financing Fees |
| Carrying Amount |
| Unamortized Deferred Financing Fees(1) |
| Total Debt, Less | | ||||||
Senior Credit Facility |
|
| | | | | | | | | | | | | | | | | | | | | |
2024 Term Loan B | | 2.989% | | September 2024 |
| $ | 682.6 | | $ | (12.9) | | $ | 669.7 | | $ | 684.3 | | $ | (13.7) | | $ | 670.6 | |
2022 Revolving Facility |
| Various | | September 2022 | | | — | | | — | | | — | | | — | | | — | | | — | |
2025 Senior | | 5.375% | | September 2025 | | | 500.0 | | | (7.0) | | | 493.0 | | | 500.0 | | | (7.3) | | | 492.7 | |
Accounts Receivable Securitization Facility |
|
| | September | | | — | | | — | | | — | | | — | | | — | | | — | |
Other indebtedness | | Various | | Various | | | 11.0 | | | — | | | 11.0 | | | 10.4 | | | — | | | 10.4 | |
Total debt |
| | | | | $ | 1,193.6 | | $ | (19.9) | | $ | 1,173.7 | | $ | 1,194.7 | | $ | (21.0) | | $ | 1,173.7 | |
Less: current portion | | | | | | | | | | | | | (11.5) | | | | | | | | | (11.1) | |
Total long-term debt, net of unamortized deferred financing | | | | | | | | | | | | $ | 1,162.2 | | | | | | | | $ | 1,162.6 | |
(1) | This caption does not include deferred financing
|
(2) | Under the 2022 Revolving Facility, |
(3) | This facility had a borrowing capacity of $150.0 million as of March 31, 2020. As of March 31, 2020, the Company had approximately $135.6 million of |
(4) | As of March 31, 2020
|
11
NOTE 7—GOODWILL
The following table shows changes in the carrying amount of goodwill, by segment, from December 31, 2019 to March 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | |
| | Latex | | Synthetic | | Performance | | | | | | Americas | | | |
| ||||||
|
| Binders |
| Rubber |
| Plastics |
| Polystyrene |
| Feedstocks |
| Styrenics |
| Total |
| |||||||
Balance at December 31, 2019 | | $ | 15.6 | | $ | 11.0 | | $ | 36.7 | | $ | 4.4 | | $ | — | | $ | — | | $ | 67.7 | |
Foreign currency impact | |
| (0.3) | | | (0.2) | | | (0.9) | | | (0.1) | | | — | | | — | |
| (1.5) | |
Balance at March 31, 2020 | | $ | 15.3 | | $ | 10.8 | | $ | 35.8 | | $ | 4.3 | | $ | — | | $ | — | | $ | 66.2 | |
NOTE 8—DERIVATIVE INSTRUMENTS
The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. The Company does not hold or enter into financial instruments for trading or speculative purposes. All derivatives are recorded on the condensed consolidated balance sheets at fair value.
Foreign Exchange Forward Contracts
Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company’s principal strategy in managing its exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on its balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce this exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.
As of March 31, 2020, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $455.4 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of March 31, 2020:
| | | | |
| | March 31, | | |
Buy / (Sell) |
| 2020 | | |
Euro | | $ | (325.1) | |
Chinese Yuan | | $ | (43.7) | |
Swiss Franc | | $ | 26.3 | |
Indonesian Rupiah | | $ | (16.3) | |
Korean Won | | $ | (13.1) | |
Open foreign exchange forward contracts as of March 31, 2020 had maturities occurring over a period of two months.
Foreign Exchange Cash Flow Hedges
The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by 1 of its subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in Accumulated Other Comprehensive Income (“AOCI”) to the extent effective, and reclassified to cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
12
Open foreign exchange cash flow hedges as of March 31, 2020 had maturities occurring over a period of nine months, and had a net notional U.S. dollar equivalent of $63.0 million.
Interest Rate Swaps
On September 6, 2017, the Company issued the 2024 Term Loan B, which currently bears an interest rate of LIBOR plus 2.00%, subject to a 0.00% LIBOR floor. In order to reduce the variability in interest payments associated with the Company’s variable rate debt, during 2017 the Company entered into certain interest rate swap agreements to convert a portion of these variable rate borrowings into a fixed rate obligation. These interest rate swap agreements are designated as cash flow hedges, and as such, the contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to interest expense in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
As of March 31, 2020, the Company had open interest rate swap agreements with a net notional U.S. dollar equivalent of $200.0 million which had an effective date of September 29, 2017 and mature in September 2022. Under the terms of the swap agreements, the Company is required to pay the counterparties a stream of fixed interest payments at a rate of 1.81%, and in turn, receives variable interest payments based on 1-month LIBOR (0.99% as of March 31, 2020) from the counterparties.
Net Investment Hedge
On September 1, 2017, the Company entered into certain fixed-for-fixed cross currency swaps (“CCS”), swapping USD principal and interest payments on its 2025 Senior Notes for euro-denominated payments. Under the terms of this CCS (the “2017 CCS”), the Company notionally exchanged $500.0 million at an interest rate of 5.375% for €420.0 million at a weighted average interest rate of 3.45% for approximately five years. On September 1, 2017, the Company designated the full notional amount of the 2017 CCS (€420.0 million) as a hedge of its net investment in certain European subsidiaries under the forward method, with all changes in the fair value of the 2017 CCS recorded as a component of AOCI, as the 2017 CCS were deemed to be highly effective hedges. A cumulative foreign currency translation loss of $38.0 million was recorded within AOCI related to the 2017 CCS through March 31, 2018.
Effective April 1, 2018, the Company elected as an accounting policy to re-designate the 2017 CCS as a net investment hedge (and any future similar hedges) under the spot method. As such, changes in the fair value of the 2017 CCS included in the assessment of effectiveness (changes due to spot foreign exchange rates) were recorded as cumulative foreign currency translation within OCI, and will remain in AOCI until either the sale or substantially complete liquidation of the subsidiary. As of March 31, 2020, 0 gains or losses have been reclassified from AOCI into income related to the sale or substantially complete liquidation of the relevant subsidiaries. As an additional accounting policy election applied to similar hedges under this new standard, the initial value of any component excluded from the assessment of effectiveness is recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in the fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI. Prior to April 1, 2018, no components were excluded from the assessment of effectiveness for any of the Company’s existing net investment hedges.
As of April 1, 2018, the initial excluded component value related to the 2017 CCS was $23.6 million, which the Company elected to amortize as a reduction of “Interest expense, net” in the condensed consolidated statements of operations using the straight-line method over the remaining term of the 2017 CCS. Additionally, the accrual of periodic USD and euro-denominated interest receipts and payments under the terms of the 2017 CCS were recognized within “Interest expense, net” in the condensed consolidated statements of operations.
On February 26, 2020, the Company settled its 2017 CCS and replaced it with a new CCS arrangement (the “2020 CCS”) that carried substantially the same terms as the 2017 CCS. Upon settlement of the 2017 CCS, the Company realized net cash proceeds of $51.6 million. The remaining $13.8 million unamortized balance of the initial excluded component related to the 2017 CCS at the time of settlement is no longer being amortized following the settlement and will remain in AOCI until either the sale or substantially complete liquidation of the relevant subsidiaries. Under the 2020 CCS, the Company notionally exchanged $500.0 million at an interest rate of 5.375% for €459.3 million at a weighted average interest rate of 3.672% for approximately 2.7 years, with a final maturity of November 3, 2022. The cash flows under the 2020 CCS are aligned with the Company’s principal and interest obligations on its 5.375% 2025 Senior Notes.
13
Summary of Derivative Instruments
The following table presents the effect of the Company’s derivative instruments, including those not designated for hedge accounting treatment, on the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gain (Loss) Recognized in | | ||||||||||||||||
| | Three Months Ended | | Three Months Ended | | ||||||||||||||
| | March 31, 2020 | | March 31, 2019 | | ||||||||||||||
|
| Cost of | | Interest expense, net | | Other expense, net | | Cost of | | Interest expense, net | | Other expense, net |
| ||||||
Total amount of income and expense line items presented in the statements of operations in which the effects of derivative instruments are recorded | | $ | 783.8 | | $ | 10.3 | | $ | 1.6 | | $ | 915.7 | | $ | 10.2 | | $ | 4.0 | |
| | | | | | | | | | | | | | | | | | | |
The effects of cash flow hedge instruments: | | | | | | | | | | | | | | | | | | | |
Foreign exchange cash flow hedges | | | | | | | | | | | | | | | | | | | |
Amount of gain reclassified from AOCI into income | | $ | 0.2 | | $ | — | | $ | — | | $ | 0.6 | | $ | — | | $ | — | |
Interest rate swaps | | | | | | | | | | | | | | | | | | | |
Amount of gain (loss) reclassified from AOCI into income | | $ | — | | $ | (0.1) | | $ | — | | $ | — | | $ | 0.3 | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
The effects of net investment hedge instruments: | | | | | | | | | | | | | | | | | | | |
Cross currency swaps (CCS) | | | | | | | | | | | | | | | | | | | |
Amount of gain excluded from effectiveness testing (1) | | $ | — | | $ | 3.4 | | $ | — | | $ | — | | $ | 4.0 | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
The effects of derivatives not designated as hedge instruments: | | | | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | | | | | | | | | | | | | | | | | | |
Amount of gain recognized in income | | $ | — | | $ | — | | $ | 13.8 | | $ | — | | $ | — | | $ | 2.7 | |
(1) | Amount for the three months ended
|
The following table presents the effect of cash flow and net investment hedge accounting on AOCI for the three months ended March 31, 2020 and 2019:
| | | | | | |
| | Gain (Loss) Recognized in AOCI on Balance Sheet | ||||
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2020 | | 2019 | ||
Designated as Cash Flow Hedges | | | | | | |
Foreign exchange cash flow hedges |
| $ | 2.1 |
| $ | 2.3 |
Interest rate swaps | | | (5.8) | | | (2.2) |
Total | | $ | (3.7) | | $ | 0.1 |
Designated as Net Investment Hedges | | | | | | |
Cross currency swaps (CCS) (1) | | $ | 22.9 | | $ | 11.5 |
Total | | $ | 22.9 | | $ | 11.5 |
(1) | Amount for the
|
The Company recorded gains of $13.8 million and $2.7 million during the three months ended March 31, 2020 and 2019, respectively, from settlements and changes in the fair value of outstanding forward contracts (not designated as Unrestricted Subsidiaries (as defined in the Indenture); and consolidate, merge, or transfer all or substantially all of the Issuers’ assets. The covenants are subject to a number of exceptions and qualifications. Certain of these covenants will be suspended during any period of time that (1) the 2025 Senior Notes have investment grade ratings (as defined in the Indenture) and (2) no default has occurred and is continuing under the Indenture. In the event that the 2025 Senior Notes are downgraded to below an investment grade rating, the Issuers and certain subsidiaries will again be subject to the suspended covenants with respect to future events. As of September 30, 2017, the Company was in compliance with all debt covenant requirements under the Indenture.
14
hedges). The gains from these forward contracts offset net foreign exchange transaction losses of $14.0 million and $3.1 million during the three months ended March 31, 2020 and 2019, respectively, which resulted from the re-measurement of the Company’s foreign currency denominated assets and liabilities. The cash settlements of these foreign exchange forward contracts are included within operating activities in the condensed consolidated statements of cash flows.
The Company expects to reclassify in the next twelve months an approximate $1.3 million net loss from AOCI into earnings related to the Company’s outstanding foreign exchange cash flow hedges and interest rate swaps as of March 31, 2020 based on current foreign exchange rates.
The following tables summarize the gross and net unrealized gains and losses, as well as the balance sheet classification, of outstanding derivatives recorded in the condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | |
| | March 31, 2020 |
| |||||||||||||
| | Foreign | | Foreign | | | | | | | | | | |||
| | Exchange | | Exchange | | Interest | | Cross | | | | | ||||
Balance Sheet | | Forward | | Cash Flow | | Rate | | Currency | | | | |||||
Classification |
| Contracts | | Hedges | | Swaps | | Swaps | | Total | | |||||
Asset Derivatives: | | | | | | | | | | | | | | | | |
Accounts receivable, net of allowance | | $ | 7.0 | | $ | 1.6 | | $ | — | | $ | 4.8 | | $ | 13.4 | |
Gross derivative asset position | | | 7.0 | | | 1.6 | | | — | | | 4.8 | | | 13.4 | |
Less: Counterparty netting | | | (0.1) | | | — | | | — | | | — | | | (0.1) | |
Net derivative asset position | | $ | 6.9 | | $ | 1.6 | | $ | — | | $ | 4.8 | | $ | 13.3 | |
Liability Derivatives: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | (0.1) | | $ | — | | $ | (2.9) | | $ | — | | $ | (3.0) | |
Other noncurrent obligations | | | — | | | — | | | (4.3) | | | (1.4) | | | (5.7) | |
Gross derivative liability position | | | (0.1) | | | — | | | (7.2) | | | (1.4) | | | (8.7) | |
Less: Counterparty netting | | | 0.1 | | | — | | | — | | | — | | | 0.1 | |
Net derivative liability position | | $ | — | | $ | — | | $ | (7.2) | | $ | (1.4) | | $ | (8.6) | |
Total net derivative position | | $ | 6.9 | | $ | 1.6 | | $ | (7.2) | | $ | 3.4 | | $ | 4.7 | |
| | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| |||||||||||||
| | Foreign | | Foreign | | | | | | |
| |||||
| | Exchange | | Exchange | | Interest | | Cross | | | | | ||||
Balance Sheet | | Forward | | Cash Flow | | Rate | | Currency | | |
| |||||
Classification |
| Contracts |
| Hedges |
| Swaps |
| Swaps |
| Total |
| |||||
Asset Derivatives: | | | | | | | | | | | | | | | | |
Accounts receivable, net of allowance | | $ | 1.1 | | $ | — | | $ | — | | $ | 8.6 | | $ | 9.7 | |
Deferred charges and other assets | | | — | | | — | | | — | | | 19.2 | | | 19.2 | |
Gross derivative asset position | | | 1.1 | | | — | | | — | | | 27.8 | | | 28.9 | |
Less: Counterparty netting | | | (0.4) | | | — | | | — | | | — | | | (0.4) | |
Net derivative asset position | | $ | 0.7 | | $ | — | | $ | — | | $ | 27.8 | | $ | 28.5 | |
Liability Derivatives: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | (5.7) | | $ | (0.5) | | $ | (0.4) | | $ | — | | $ | (6.6) | |
Other noncurrent obligations | | | — | | | — | | | (1.0) | | | — | | | (1.0) | |
Gross derivative liability position | | | (5.7) | | | (0.5) | | | (1.4) | | | — | | | (7.6) | |
Less: Counterparty netting | | | 0.5 | | | — | | | — | | | — | | | 0.5 | |
Net derivative liability position | | $ | (5.2) | | $ | (0.5) | | $ | (1.4) | | $ | — | | $ | (7.1) | |
Total net derivative position | | $ | (4.5) | | $ | (0.5) | | $ | (1.4) | | $ | 27.8 | | $ | 21.4 | |
Forward contracts, interest rate swaps, and cross currency swaps are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in a single currency in the event of a default on or termination of any one contract. As such, in accordance with the Company’s accounting policy, these derivative instruments are recorded on a net basis by counterparty within the condensed consolidated balance sheets.
15
Refer to Notes 9 and 17 of the condensed consolidated financial statements for further information regarding the fair value of the Company’s derivative instruments and the related changes in AOCI.
NOTE 9—FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.
Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019:
| | | | | | | | | | | | | |
| | March 31, 2020 |
| ||||||||||
| | Quoted Prices in Active Markets for Identical Items | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | |
| |||
Assets (Liabilities) at Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total |
| ||||
Foreign exchange forward contracts—Assets |
| $ | — |
| $ | 6.9 |
| $ | — |
| $ | 6.9 | |
Foreign exchange cash flow hedges—Assets | | | — | | | 1.6 | | | — | | | 1.6 | |
Interest rate swaps—(Liabilities) | | | — | | | (7.2) | | | — | | | (7.2) | |
Cross currency swaps—Assets | | | — | | | 4.8 | | | — | | | 4.8 | |
Cross currency swaps—(Liabilities) | | | — | | | (1.4) | | | — | | | (1.4) | |
Total fair value | | $ | — | | $ | 4.7 | | $ | — | | $ | 4.7 | |
| | | | | | | | | | | | | |
| | December 31, 2019 |
| ||||||||||
| | Quoted Prices in Active Markets for Identical Items | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | |
| |||
Assets (Liabilities) at Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total |
| ||||
Foreign exchange forward contracts—Assets | | $ | — |
| $ | 0.7 |
| $ | — |
| $ | 0.7 | |
Foreign exchange forward contracts—(Liabilities) | | | — | | | (5.2) | | | — | | | (5.2) | |
Foreign exchange cash flow hedges—(Liabilities) | | | — | | | (0.5) | | | — | | | (0.5) | |
Interest rate swaps—(Liabilities) | | | — | | | (1.4) | | | — | | | (1.4) | |
Cross currency swaps—Assets | | | — | | | 27.8 | | | — | | | 27.8 | |
Total fair value | | $ | — | | $ | 21.4 | | $ | — | | $ | 21.4 | |
The Company uses an income approach to value its derivative instruments, utilizing discounted cash flow techniques, considering the terms of the contract and observable market information available as of the reporting date, such as interest rate yield curves and currency spot and forward rates. Significant inputs to the valuation for these derivative instruments are obtained from broker quotations or from listed or over-the-counter market data, and are classified as Level 2 in the fair value hierarchy.
16
Nonrecurring Fair Value Measurements
The Company’s financial assets measured at fair value on a nonrecurring basis as of March 31, 2020 were as follows:
| | | | | | | | | | | | | |
| | March 31, 2020 | | ||||||||||
| | Quoted Prices in Active Markets for Identical Items | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | | | |||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | | ||||
Assets: |
| | |
| | | | | |
| | | |
Boehlen styrene monomer property, plant and equipment | | $ | — | | $ | — | | $ | 3.4 | | $ | 3.4 | |
Schkopau PBR property, plant and equipment | | | — | | | — | | | 1.5 | | | 1.5 | |
Total fair value | | $ | — | | $ | — | | $ | 4.9 | | $ | 4.9 | |
In 2020, the Company continued its strategy to focus efforts and increase investments in certain product offerings serving the following applications, which are less cyclical and offer significantly higher growth and margin potential: coatings, adhesives, sealants, and elastomers applications (“CASE”) within the Latex Binders segment; engineered materials applications within the Performance Plastics segment; and solution styrene butadiene rubber (“SSBR”) within the Synthetic Rubber segment.
As a result of continuing this strategy and other management considerations, in March of 2020, the Company initiated a consultation process with the Economic Council and Works Councils of Trinseo Deutschland regarding the disposition of its styrene monomer assets in Boehlen, Germany and its polybutadiene rubber (“PBR,” specifically nickel and neodymium-PBR) assets in Schkopau, Germany.
Based on the Company’s evaluation of these asset groups, it determined that the long-lived assets at both locations should be assessed for impairment during the three months ended March 31, 2020. These assessments indicated that the carrying values of the asset groups at each location were not recoverable when compared to the expected undiscounted future cash flows from the operation and potential disposition of these assets. Based upon the Company’s assessment, it concluded that the fair value of the Boehlen styrene monomer and Schkopau PBR asset groups totaled $3.4 million and $1.5 million, respectively, as of March 31, 2020. Therefore, the Company recorded impairment charges on the Boehlen styrene monomer assets and the Schkopau PBR assets of $10.3 million and $28.0 million, respectively, during the three months ended March 31, 2020, which are included within “Impairment charges” on the condensed consolidated statements of operations. The fair value of the depreciable assets at each location was determined through an analysis of the underlying fixed asset records in conjunction with the use of industry experience and available market data.
There were no other financial assets and no financial liabilities measured at fair value on a nonrecurring basis as of March 31, 2020 and there were no financial assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2019.
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 March 31, 2020 and December 31, 2019:
| | | | | | | |
|
| As of | | As of |
| ||
|
| March 31, 2020 |
| December 31, 2019 |
| ||
2025 Senior Notes | | $ | 419.8 | | $ | 503.7 | |
2024 Term Loan B | | | 578.9 | | | 686.4 | |
Total fair value | | $ | 998.7 | | $ | 1,190.1 | |
The fair value of the Company’s debt facilities above (each Level 2 securities) is determined using over-the-counter market quotes and benchmark yields received from independent vendors.
There were no other significant financial instruments outstanding as of March 31, 2020 and December 31, 2019.
17
NOTE 10—PROVISION FOR INCOME TAXES
| | | | | | | | |
| | Three Months Ended | | | ||||
| | March 31, | | | ||||
|
| 2020 |
| 2019 |
| | ||
Effective income tax rate | | | 24.6 | % | | 23.1 | % | |
Benefit from income taxes for the three months ended March 31, 2020 totaled $11.9 million, resulting in an effective tax rate of 24.6%. Provision for income taxes for the three months ended March 31, 2019 totaled $10.8 million, resulting in an effective tax rate of 23.1%.
The effective tax rate for 2020 was impacted by the jurisdictional mix of income before income taxes compared to the prior year, partially offset by the tax benefit related to the impairment charges recorded during the period related to the Company’s assets in Boehlen and Schkopau, Germany. Refer to Note 9 for further information.
NOTE 11—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. Pursuant to the terms of the agreement associated with the Company’s formation, the pre-closing environmental liabilities were retained by Dow, and Dow agreed, subject to temporal, monetary, and other limitations to indemnify the Company from and against environmental liabilities incurred or relating to the predecessor periods. NaN environmental claims have been asserted or threatened against the Company, and the Company is not a potentially responsible party at any Superfund Sites. As of March 31, 2020 and December 31, 2019, the Company had 0 accrued obligations for environmental remediation or restoration costs.
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 condensed consolidated financial statements over the next 12 months.
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 one to three 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 Notes to Consolidated Financial Statements included in the Annual Report.
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 employees, 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. Legal costs, including those legal costs expected to be incurred in connection with a loss contingency, are expensed as incurred.
European Commission Request for Information
On June 6, 2018, Trinseo Europe GmbH, a subsidiary of the Company, received a Request for Information in the form of a letter from the European Commission Directorate General for Competition (the “European Commission”) related to styrene monomer commercial activity in the European Economic Area. The Company subsequently commenced an internal investigation into these commercial activities and discovered instances of inappropriate activity.
18
On October 28, 2019, a supplemental request for information was received from the European Commission. This request was limited to historical employment, entity, and organizational structures, along with certain financial, styrene purchasing, and styrene market information, as well as certain spot styrene purchase contracts. The Company has provided this information and continues to fully cooperate with the European Commission.
Notwithstanding the delivery of the Company’s response to the European Commission, this matter remains open with the European Commission. Based on its findings, the European Commission may decide to: (i) require further information; (ii) conduct unannounced raids of the Company’s premises; (iii) adopt decisions imposing fines, interim measures to halt immediately any anti-competitive behavior, orders for the Company to cease anti-competitive activities, and/or certain behavioral or structural commitments from the Company; or (iv) take no further action. As a result of the above factors, the Company is unable to predict the ultimate outcome of this matter or estimate the range of reasonably possible losses that could be incurred. However, any potential losses incurred could be material to the Company’s results of operations, balance sheet, and cash flows for the period in which they are resolved or become probable and reasonably estimable.
NOTE 12—PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic benefit costs for all significant plans were as follows:
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
|
| 2020 |
| 2019 |
| ||
Defined Benefit Pension Plans | | | | | | | |
Service cost |
| $ | 4.3 | | $ | 3.2 | |
Interest cost | |
| 0.8 | |
| 1.3 | |
Expected return on plan assets | |
| (0.3) | |
| (0.5) | |
Amortization of prior service credit | |
| (0.3) | |
| (0.3) | |
Amortization of net loss | |
| 1.2 | |
| 0.8 | |
Net settlement loss | |
| — | |
| 0.7 | |
Net periodic benefit cost | | $ | 5.7 | | $ | 5.2 | |
The Company had less than $0.1 million of net periodic benefit costs for its other postretirement plans for the three months ended March 31, 2020. Net periodic benefit costs for the Company’s other postretirement plans were comprised of $0.1 million in interest cost and $(0.1) million in amortization of net gain for the three months ended March 31, 2019.
Service cost related to the Company’s defined benefit pension plans and other postretirement plans is included within “Cost of sales” and “Selling, general and administrative expenses” whereas all other components of net periodic benefit cost are included within “Other expense, net” in the condensed consolidated statements of operations. As of March 31, 2020 and December 31, 2019, the Company’s benefit obligations included primarily in “Other noncurrent obligations” in the condensed consolidated balance sheets were $267.7 million and $270.6 million, respectively.
The Company made cash contributions and benefit payments to unfunded plans of approximately $1.9 million during the three months ended March 31, 2020. The Company expects to make additional cash contributions, including benefit payments to unfunded plans, of approximately $5.8 million to its defined benefit plans for the remainder of 2020.
NOTE 13—SHARE-BASED COMPENSATION
Refer to the Annual Report for definitions of capitalized terms not included herein and further background on the Company’s share-based compensation programs included in the tables below.
19
The following table summarizes the Company’s share-based compensation expense for the three months ended March 31, 2020 and 2019, as well as unrecognized compensation cost as of March 31, 2020:
| | | | | | | | | | | |
| | | | | | | As of | | |||
| | Three Months Ended | March 31, 2020 | | |||||||
| | March 31, | Unrecognized | | Weighted | | |||||
|
| 2020 |
| 2019 | Compensation Cost |
| Average Years | | |||
RSUs | | $ | 1.7 | | $ | 2.1 | $ | 13.0 | | 2.3 | |
Options | | | 1.0 | | | 1.1 | | 3.7 | | 1.6 | |
PSUs | | | 0.5 | | | 0.9 | | 5.2 | | 2.3 | |
Total share-based compensation expense | | $ | 3.2 | | $ | 4.1 | | | | | |
The following table summarizes awards granted and the respective weighted average grant date fair value for the three months ended March 31, 2020:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, 2020 | ||||
| | Awards Granted | | Weighted Average Grant Date Fair Value per Award | ||
RSUs | | | 264,604 | | $ | 24.30 |
Options | | | 503,824 | | | 6.57 |
PSUs | | | 102,545 | | | 24.54 |
Option Awards
The following are the weighted average assumptions used within the Black-Scholes pricing model for the Company’s option awards granted during the three months ended March 31, 2020:
| | | |
| | Three Months Ended | |
|
| March 31, 2020 | |
Expected term (in years) | 5.50 | | |
Expected volatility | 39.70 | % | |
Risk-free interest rate | 1.24 | % | |
Dividend yield | | 3.25 | % |
The expected volatility assumption is predominantly determined based on the historical volatility of the Company’s publicly traded ordinary shares. The expected term of option awards represents the period of time that option awards granted are expected to be outstanding. For the option awards granted during the three months ended March 31, 2020, the simplified method was used to calculate the expected term, given the Company’s limited historical exercise data. The risk-free interest rate for the periods within the expected term of option awards is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is estimated based on historical and expected dividend activity.
20
Performance Share Units (PSUs)
The following are the weighted average assumptions used within the Monte Carlo valuation model for PSUs granted during the three months ended March 31, 2020:
| | | |
| | Three Months Ended | |
| | March 31, 2020 | |
Expected term (in years) | | 3.00 | |
Expected volatility |
| 40.50 | % |
Risk-free interest rate |
| 1.16 | % |
Share Price | $ | 24.30 | |
Determining the fair value of PSUs requires considerable judgment, including estimating the expected volatility of the price of the Company’s ordinary shares, the correlation between the Company’s share price and that of its peer companies, and the expected rate of interest. The expected volatility for each grant is determined based on the historical volatility of the Company’s ordinary shares. The expected term of PSUs represents the length of the performance period. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a duration equivalent to the performance period. The share price is the closing price of the Company’s ordinary shares on the grant date.
NOTE 14—ACQUISITIONS AND DIVESTITURES
Acquisition of Latex Binders Assets in Germany
On October 1, 2019, the Company completed the acquisition from Dow of its latex binder production facilities and related infrastructure in Rheinmünster, Germany. The transaction included full ownership and operational control of latex production facilities, site infrastructure, and service contracts, as well as certain employees transferring from Dow to Trinseo. This acquisition provided Trinseo with manufacturing assets supporting its strategy to grow its Latex Binders business in applications serving the coatings, adhesives, specialty paper, and sealants markets. The transaction was accounted for as a business combination and did not require any upfront cash outlay from Trinseo. The Company assumed net liabilities of $2.0 million as well as employees transferred in connection with the acquisition during the year ended December 31, 2019. In exchange for the net liabilities assumed, Trinseo received net cash of $6.7 million during the year ended December 31, 2019, and an additional $0.2 million during the three months ended March 31, 2020.
The Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. During the first quarter of 2020, there were no changes to the purchase price allocation for the acquisition. However, further adjustments may be necessary as a result of the Company’s ongoing assessment of additional information related to the fair value of assets acquired and liabilities assumed during the measurement period. Refer to the Annual Report for further information.
NOTE 15—SEGMENTS
The Company operates under 6 segments: Latex Binders, Synthetic Rubber, Performance Plastics, Polystyrene, Feedstocks, and Americas Styrenics. The Latex Binders segment produces styrene-butadiene latex (“SB latex”) and other latex polymers and binders, primarily for coated paper and packaging board, carpet and artificial turf backings, as well as a broad range of performance latex binders products, including SB latex, SA latex, and vinylidene chloride latex for CASE applications. The Synthetic Rubber segment produces synthetic rubber products, including SSBR, used predominantly in high-performance tires, impact modifiers and technical rubber products, such as conveyer belts, hoses, seals and gaskets. The Performance Plastics segment includes a variety of highly engineered compounds and blends, the Company’s acrylonitrile-butadiene-styrene (“ABS”), styrene-acrylonitrile (“SAN”), and polycarbonate (“PC”) businesses, and engineered materials applications, which includes consumer electronics, medical, and thermoplastic elastomers (“TPEs”) applications. The Polystyrene segment includes a variety of general purpose polystyrenes (“GPPS”) and polystyrene that has been modified with polybutadiene rubber to increase its impact resistant properties (“HIPS”). The Feedstocks segment includes the Company’s production and procurement of styrene monomer outside of North America, which is used as a key raw material in many of the Company’s products, including polystyrene, SB latex, ABS resins, and SSBR. Lastly, the Americas Styrenics segment consists solely of the operations of the Company’s 50%-owned joint venture, Americas Styrenics, a producer of both styrene monomer and polystyrene in North America.
21
The following table provides disclosure of the Company’s segment Adjusted EBITDA, which is used to measure segment operating performance and is defined below, for the three months ended March 31, 2020 and 2019. Asset and intersegment sales information by reporting segment is not regularly reviewed or included with the Company’s reporting to the chief operating decision maker. Therefore, this information has not been disclosed below. Refer to Note 3 for the Company’s net sales to external customers by segment for the three months ended March 31, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | |
| | Latex | | Synthetic | | Performance | | | | | | Americas |
| ||||||
Three Months Ended (1) | | Binders | | Rubber | | Plastics | | Polystyrene | | Feedstocks | | Styrenics |
| ||||||
March 31, 2020 |
| $ | 21.5 |
| $ | 15.3 |
| $ | 36.7 | | $ | 11.8 |
| $ | (16.2) |
| $ | 9.8 | |
March 31, 2019 | | $ | 17.5 | | $ | 8.8 | | $ | 35.5 | | $ | 16.8 | | $ | 17.2 | | $ | 32.2 | |
Fees and expenses incurred in connection with the issuance of the 2025 Senior Notes were $9.7 million, which were capitalized and recorded within “Long-term debt, net of unamortized deferred financing fees” on the condensed consolidated balance sheet, and are being amortized into “Interest expense, net” in the condensed consolidated statements of operations over their 8.0 year term using the effective interest method.
NOTE 6—GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table shows changes in the carrying amount of goodwill by segment from December 31, 2016 to September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Performance Materials |
| Basic Plastics & Feedstocks |
|
|
|
| ||||||||||||||
|
| Latex |
| Synthetic |
| Performance |
| Basic |
|
|
| Americas |
|
|
|
| ||||||
|
| Binders |
| Rubber |
| Plastics |
| Plastics |
| Feedstocks |
| Styrenics |
| Total |
| |||||||
Balance at December 31, 2016 |
| $ | 11,544 |
| $ | 8,177 |
| $ | 4,210 |
| $ | 5,554 |
| $ | — |
| $ | — |
| $ | 29,485 |
|
Acquisition (Note 13) |
|
| — |
|
| — |
|
| 28,598 |
|
| — |
|
| — |
|
| — |
|
| 28,598 |
|
Foreign currency impact |
|
| 1,415 |
|
| 1,002 |
|
| 1,592 |
|
| 682 |
|
| — |
|
| — |
|
| 4,691 |
|
Balance at September 30, 2017 |
| $ | 12,959 |
| $ | 9,179 |
| $ | 34,400 |
| $ | 6,236 |
| $ | — |
| $ | — |
| $ | 62,774 |
|
Other Intangible Assets
The following table provides information regarding the Company’s other intangible assets as of September 30, 2017 and December 31, 2016, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||||||||||||||
|
| Estimated |
| Gross |
|
|
|
|
|
|
| Gross |
|
|
|
|
|
|
| ||
|
| Useful Life |
| Carrying |
| Accumulated |
|
|
|
| Carrying |
| Accumulated |
|
|
|
| ||||
|
| (Years) |
| Amount |
| Amortization |
| Net |
| Amount |
| Amortization |
| Net |
| ||||||
Developed technology(1) |
| 9 - 15 |
| $ | 198,535 |
| $ | (91,078) |
| $ | 107,457 |
| $ | 166,230 |
| $ | (72,159) |
| $ | 94,071 |
|
Customer Relationships(1) |
| 19 |
|
| 14,520 |
|
| (171) |
|
| 14,349 |
|
| — |
|
| — |
|
| — |
|
Manufacturing Capacity Rights |
| 6 |
|
| 22,426 |
|
| (12,728) |
|
| 9,698 |
|
| 19,977 |
|
| (8,908) |
|
| 11,069 |
|
Software |
| 5 - 10 |
|
| 87,412 |
|
| (22,617) |
|
| 64,795 |
|
| 82,275 |
|
| (15,095) |
|
| 67,180 |
|
Software in development |
| N/A |
|
| 8,617 |
|
| — |
|
| 8,617 |
|
| 4,751 |
|
| — |
|
| 4,751 |
|
Other(1) |
| 3 |
|
| 3,056 |
|
| (153) |
|
| 2,903 |
|
| 274 |
|
| — |
|
| 274 |
|
Total |
|
|
| $ | 334,566 |
| $ | (126,747) |
| $ | 207,819 |
| $ | 273,507 |
| $ | (96,162) |
| $ | 177,345 |
|
(1) |
|
Amortization expense on other intangible assets totaled $7.2 million and $19.6 million for the three and nine months ended September 30, 2017, respectively, and $5.0 million and $15.2 million for the three and nine months ended September 30, 2016.
15
In addition to the significant accounting policies disclosed in Note 2 in our Annual Report, Basis of Presentation and Summary of Significant Accounting Policies, the Company notes the following significant accounting policies related to certain definite-lived intangible assets, for which we had substantial activity during the quarter ended September 30, 2017 as a result of the API Plastics acquisition.
Developed Technology
Acquired developed technology is recorded at fair value upon acquisition and is amortized using the straight-line method over the estimated useful life ranging from 9 years to 15 years. We determine amortization periods for developed technology based on our assessment of various factors impacting estimated useful lives and timing and extent of estimated cash flows of the acquired assets. This includes estimates of expected period of future economic benefit and competitive advantage related to existing processes and procedures at the date of acquisition. Significant changes to any of these factors may result in a reduction in the useful life of these assets.
Customer Relationships
Customer relationships are recorded at fair value upon acquisition and are amortized using the straight-line method over the estimated useful life of 19 years. We determine amortization periods for customer relationships based on our assessment of various factors impacting estimated useful lives and timing and extent of estimated cash flows of the acquired assets. This includes estimates of expected period of future economic benefit and customer retention rates. Significant changes to any of these factors may result in a reduction in the useful life of these assets.
NOTE 7—DERIVATIVE INSTRUMENTS
The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. The Company does not hold or enter into financial instruments for trading or speculative purposes. All derivatives are recorded on the condensed consolidated balance sheets at fair value.
Foreign Exchange Forward Contracts
Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company’s principal strategy in managing its exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on our balance sheet against corresponding assets of the same currency such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce its exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on our assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.
As of September 30, 2017, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $327.9 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of September 30, 2017.
|
|
|
|
|
|
| September 30, |
| |
Buy / (Sell) |
| 2017 |
| |
Euro |
| $ | (161,885) |
|
Chinese Yuan |
| $ | (58,335) |
|
Indonesian Rupiah |
| $ | (29,493) |
|
Swiss Franc |
| $ | 16,762 |
|
Korean Won |
| $ | (10,983) |
|
Foreign Exchange Cash Flow Hedges
The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by one of its subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the
16
fluctuations in the euro-to-U.S. dollar foreign currency exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive income/loss (“AOCI”) to the extent effective, and reclassified to cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
Open foreign exchange cash flow hedges as of September 30, 2017 have maturities occurring over a period of 15 months, and have a net notional U.S. dollar equivalent of $196.5 million.
Interest Rate Swaps
As discussed in Note 5, on September 6, 2017, the Company issued the 2024 Term Loan B, which bears an interest rate of LIBOR plus 2.50%, subject to a 0.00% LIBOR floor. In order to reduce the variability in interest payments associated with the Company’s variable rate debt, during the third quarter of 2017, the Company entered into certain interest rate swap agreements to convert a portion of these variable rate borrowings into a fixed rate obligation. These interest rate swap agreements are designated as cash flow hedges, and as such, the contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to interest expense in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
As of September 30, 2017, the Company had open interest rate swap agreements with a net notional U.S. dollar equivalent of $200.0 million which had an effective date of September 29, 2017 and mature over a period of five years.
Net Investment Hedge
Through August 31, 2017, the Company had designated a portion (€280 million) of the original principal amount of the Company’s previous €375.0 million Euro Notes as a hedge of the foreign currency exposure of the Issuers’ net investment in certain European subsidiaries. Effective September 1, 2017, the Company de-designated the Euro Notes as a net investment hedge of the Issuers’ net investment in certain European subsidiaries, as the Euro Notes were redeemed on September 7, 2017 (refer to Note 5 for further information). Through the date of de-designation, this hedge was deemed to be highly effective, and changes in the Euro Notes’ carrying value resulting from fluctuations in the euro exchange rate were recorded as cumulative foreign currency translation loss of $24.1 million within AOCI as of September 30, 2017.
On August 29, 2017, the Issuers executed an indenture pursuant to which they issued the $500.0 million 5.375% 2025 Senior Notes (refer to Note 5 for further information). Subsequently, on September 1, 2017, the Company entered into certain fixed-for-fixed cross currency swaps (“CCS”), swapping USD principal and interest payments on the newly issued 2025 Senior Notes for euro-denominated payments. Under the terms of the CCS, the Company has notionally exchanged $500.0 million at an interest rate of 5.375% for €420 million at a weighted-average interest rate of 3.45% for approximately five years.
Effective September 1, 2017, the Company designated the full notional amount of the CCS (€420 million) as a hedge of the Issuers’ net investment in certain European subsidiaries. As the CCS were deemed to be highly effective hedges, changes in the fair value of the CCS were recorded as cumulative foreign currency translation loss of $7.1 million within AOCI as of September 30, 2017.
17
Summary of Derivative Instruments
Information regarding changes in the fair value of the Company’s derivative instruments, net of tax, including those not designated for hedge accounting treatment, is as follows:
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| Gain (Loss) Recognized in |
| Gain (Loss) Recognized in |
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| ||||||||
|
| AOCI on Balance Sheet |
| Statement of Operations |
|
| ||||||||
|
| Three Months Ended September 30, |
| Statement of Operations | ||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| Classification | ||||
Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange cash flow hedges |
| $ | (4,458) |
| $ | (2,280) |
| $ | (2,666) |
| $ | 245 |
| Cost of sales |
Interest rate swaps |
|
| 743 |
|
| — |
|
| (6) |
|
| — |
| Interest expense, net |
Total |
| $ | (3,715) |
| $ | (2,280) |
| $ | (2,672) |
| $ | 245 |
|
|
Net Investment Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Notes |
| $ | (13,924) |
| $ | (2,128) |
| $ | — |
| $ | — |
|
|
Cross-currency swaps (CCS) |
|
| (7,112) |
|
| — |
|
| — |
|
| — |
|
|
Total |
| $ | (21,036) |
| $ | (2,128) |
| $ | — |
| $ | — |
|
|
Not Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
| $ | — |
| $ | — |
| $ | (6,526) |
| $ | 1,060 |
| Other expense (income), net |
Total |
| $ | — |
| $ | — |
| $ | (6,526) |
| $ | 1,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain (Loss) Recognized in |
| Gain (Loss) Recognized in |
|
| ||||||||
|
| AOCI on Balance Sheet |
| Statement of Operations |
|
| ||||||||
|
| Nine Months Ended September 30, |
| Statement of Operations | ||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| Classification | ||||
Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange cash flow hedges |
| $ | (22,234) |
| $ | (3,676) |
| $ | 794 |
| $ | 616 |
| Cost of sales |
Interest rate swaps |
|
| 743 |
|
| — |
|
| (6) |
|
| — |
| Interest expense, net |
Total |
| $ | (21,491) |
| $ | (3,676) |
| $ | 788 |
| $ | 616 |
|
|
Net Investment Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro Notes |
| $ | (38,584) |
| $ | (4,615) |
| $ | — |
| $ | — |
|
|
Cross-currency swaps (CCS) |
|
| (7,112) |
|
| — |
|
| — |
|
| — |
|
|
Total |
| $ | (45,696) |
| $ | (4,615) |
| $ | — |
| $ | — |
|
|
Not Designated as Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
| $ | — |
| $ | — |
| $ | (17,036) |
| $ | 2,054 |
| Other expense (income), net |
Total |
| $ | — |
| $ | — |
| $ | (17,036) |
| $ | 2,054 |
|
|
The Company recorded losses of $6.5 million and $17.0 million during the three and nine months ended September 30, 2017, respectively, and gains of $1.1 million and $2.1 million during the three and nine months ended September 30, 2016, respectively, from settlements and changes in the fair value of outstanding forward contracts (not designated as hedges). The gains and losses from these forward contracts offset net foreign exchange transaction gains of $8.2 million and $16.1 million during the three and nine months ended September 30, 2017, respectively, and losses of $1.5 million and $4.1 million during the three and nine months ended September 30, 2016, respectively, which resulted from the remeasurement of the Company’s foreign currency denominated assets and liabilities. The cash settlements of these foreign exchange forward contracts are included within operating activities in the condensed consolidated statement of cash flows.
As of September 30, 2017, the Company had no ineffectiveness related to its derivatives designated as hedging instruments. Further, the Company expects to reclassify in the next twelve months an approximate $10.3 million net loss from AOCI into earnings related to the Company’s outstanding foreign exchange cash flow hedges and interest rate swaps as of September 30, 2017 based on current foreign exchange rates.
18
The following table summarizes the net unrealized gains and losses and balance sheet classification of outstanding derivatives recorded in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||||||||||||||||||||
|
| Foreign |
| Foreign |
| Interest |
| Cross- |
|
|
| Foreign |
| Foreign |
|
|
| ||||||||
|
| Forward |
| Cash Flow |
| Rate |
| Currency |
|
|
| Forward |
| Cash Flow |
|
|
| ||||||||
Balance Sheet Classification |
| Contracts |
| Hedges |
| Swaps |
| Swaps |
| Total |
| Contracts |
| Hedges |
| Total |
| ||||||||
Asset Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance |
| $ | 3,368 |
| $ | — |
| $ | — |
| $ | 6,420 |
| $ | 9,788 |
| $ | 1,664 |
| $ | 11,018 |
| $ | 12,682 |
|
Deferred charges and other assets |
|
| — |
|
| — |
|
| 1,432 |
|
| — |
|
| 1,432 |
|
| — |
|
| — |
|
| — |
|
Total asset derivatives |
| $ | 3,368 |
| $ | — |
| $ | 1,432 |
| $ | 6,420 |
| $ | 11,220 |
| $ | 1,664 |
| $ | 11,018 |
| $ | 12,682 |
|
Liability Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 117 |
| $ | 9,612 |
| $ | 688 |
| $ | — |
| $ | 10,417 |
| $ | 511 |
| $ | — |
| $ | 511 |
|
Other noncurrent obligations |
|
| — |
|
| 2,148 |
|
| — |
|
| 13,531 |
|
| 15,679 |
|
| — |
|
| — |
|
| — |
|
Total liability derivatives |
| $ | 117 |
| $ | 11,760 |
| $ | 688 |
| $ | 13,531 |
| $ | 26,096 |
| $ | 511 |
| $ | — |
| $ | 511 |
|
Forward contracts, interest rate swaps, and cross currency swaps are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in a single currency in the event of a default on or termination of any one contract. As such, in accordance with the Company’s accounting policy, we record these derivative instruments on a net basis by counterparty within the condensed consolidated balance sheet. Information regarding the gross amounts of the Company’s derivative instruments and the amounts offset in the condensed consolidated balance sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Amounts |
| Gross Amounts |
| Net Amounts |
| |||
|
| Recognized in the |
| Offset in the |
| Presented in the |
| |||
|
| Balance Sheet |
| Balance Sheet |
| Balance Sheet |
| |||
Balance at September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
Derivative assets |
| $ | 12,793 |
| $ | (1,573) |
| $ | 11,220 |
|
Derivative liabilities |
|
| 27,669 |
|
| (1,573) |
|
| 26,096 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
Derivative assets |
| $ | 23,401 |
| $ | (10,719) |
| $ | 12,682 |
|
Derivative liabilities |
|
| 11,230 |
|
| (10,719) |
|
| 511 |
|
Refer to Notes 8 and 16 of the condensed consolidated financial statements for further information regarding the fair value of the Company’s derivative instruments and the related changes in AOCI.
NOTE 8—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.
19
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| ||||||||||
|
| Quoted Prices in Active Markets for Identical Items |
| Significant Other Observable Inputs |
| Significant Unobservable Inputs |
|
|
|
| |||
Assets (Liabilities) at Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total |
| ||||
Foreign exchange forward contracts—Assets |
| $ | — |
| $ | 3,368 |
| $ | — |
| $ | 3,368 |
|
Foreign exchange forward contracts—(Liabilities) |
|
| — |
|
| (117) |
|
| — |
|
| (117) |
|
Foreign exchange cash flow hedges—(Liabilities) |
|
| — |
|
| (11,760) |
|
| — |
|
| (11,760) |
|
Interest rate swaps—Assets |
|
| — |
|
| 1,432 |
|
| — |
|
| 1,432 |
|
Interest rate swaps—(Liabilities) |
|
| — |
|
| (688) |
|
| — |
|
| (688) |
|
Cross-currency swaps—Assets |
|
| — |
|
| 6,420 |
|
| — |
|
| 6,420 |
|
Cross-currency swaps—(Liabilities) |
|
| — |
|
| (13,531) |
|
| — |
|
| (13,531) |
|
Total fair value |
| $ | — |
| $ | (14,876) |
| $ | — |
| $ | (14,876) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 |
| ||||||||||
|
| Quoted Prices in Active Markets for Identical Items |
| Significant Other Observable Inputs |
| Significant Unobservable Inputs |
|
|
|
| |||
Assets (Liabilities) at Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total |
| ||||
Foreign exchange forward contracts—Assets |
| $ | — |
| $ | 1,664 |
| $ | — |
| $ | 1,664 |
|
Foreign exchange forward contracts—(Liabilities) |
|
| — |
|
| (511) |
|
| — |
|
| (511) |
|
Foreign exchange cash flow hedges—Assets |
|
| — |
|
| 11,018 |
|
| — |
|
| 11,018 |
|
Total fair value |
| $ | — |
| $ | 12,171 |
| $ | — |
| $ | 12,171 |
|
The Company uses an income approach to value its derivative instruments, utilizing discounted cash flow techniques, considering the terms of the contract and observable market information available as of the reporting date, such as interest rate yield curves and currency spot and forward rates. Significant inputs to the valuation for these derivative instruments are obtained from broker quotations or from listed or over-the-counter market data, and are classified as Level 2 in the fair value hierarchy.
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 September 30, 2017 and December 31, 2016, respectively:
|
|
|
|
|
|
|
|
|
| As of |
| As of |
| ||
|
| September 30, 2017 |
| December 31, 2016 |
| ||
2025 Senior Notes |
| $ | 515,625 |
| $ | — |
|
2022 Senior Notes |
|
|
|
|
|
|
|
USD Notes |
|
| — |
|
| 315,000 |
|
Euro Notes |
|
| — |
|
| 424,437 |
|
2024 Term Loan B |
|
| 707,441 |
|
| — |
|
2021 Term Loan B |
|
| — |
|
| 498,041 |
|
Total fair value |
| $ | 1,223,066 |
| $ | 1,237,478 |
|
The fair value of the Company’s debt facilities above (each Level 2 securities) is determined using over-the-counter market quotes and benchmark yields received from independent vendors.
There were no other significant financial instruments outstanding as of September 30, 2017 and December 31, 2016.
20
NOTE 9—PROVISION FOR INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
| ||||||||
|
| September 30, |
| September 30, |
|
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| ||||
Effective income tax rate |
|
| 20.0 | % |
| 19.2 | % |
| 21.1 | % |
| 21.7 | % |
|
Provision for income taxes for the three and nine months ended September 30, 2017 were $8.3 million, resulting in an effective tax rate of 20.0%, and $56.4 million, resulting in an effective tax rate of 21.1%, respectively. Provision for income taxes for the three and nine months ended September 30, 2016 were $16.0 million, resulting in an effective tax rate of 19.2%, and $66.5 million, resulting in an effective tax rate of 21.7%, respectively.
While the effective tax rate for the three and nine months ended September 30, 2017 and 2016 remained relatively consistent, the rate was impacted by non-recurring items in both periods.
The effective tax rate for the three and nine months ended September 30, 2017 was impacted by payments made of $10.9 million related to a portion of the fees associated with the call premium paid to retire the Company’s 2022 Senior Notes, which are not anticipated to provide a tax benefit to the Company in the future (refer to Note 5 for further information). The effective tax rate for the three and nine months ended September 30, 2016 was impacted by an impairment charge of $0.3 million and $13.2 million, respectively, for the estimated loss on sale of Trinseo Brazil. Refer to Note 13 for further information.
NOTE 10—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. Pursuant to the terms of the agreement associated with the Company’s formation, the pre-closing environmental conditions were retained by Dow and Dow has agreed to indemnify the Company from and against all environmental liabilities incurred or relating to the predecessor periods. No environmental claims have been asserted or threatened against the Company, and the Company is not a potentially responsible party at any Superfund Sites. As of September 30, 2017 and December 31, 2016, the Company had no accrued obligations for environmental remediation and restoration costs.
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 condensed 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 5 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 consolidated financial statements included in the Annual Report.
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. Legal costs, including those legal costs expected to be incurred in connection with a loss contingency, are expensed as incurred.
21
NOTE 11—PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic benefit costs for all significant plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Defined Benefit Pension Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 5,000 |
| $ | 4,156 |
| $ | 14,291 |
| $ | 12,438 |
|
Interest cost |
|
| 1,184 |
|
| 1,391 |
|
| 3,376 |
|
| 4,160 |
|
Expected return on plan assets |
|
| (450) |
|
| (492) |
|
| (1,285) |
|
| (1,474) |
|
Amortization of prior service credit |
|
| (503) |
|
| (488) |
|
| (1,456) |
|
| (1,459) |
|
Amortization of net loss |
|
| 1,479 |
|
| 1,058 |
|
| 4,232 |
|
| 3,169 |
|
Net settlement and curtailment loss(1) |
|
| — |
|
| — |
|
| 129 |
|
| — |
|
Net periodic benefit cost |
| $ | 6,710 |
| $ | 5,625 |
| $ | 19,287 |
| $ | 16,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Other Postretirement Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
| $ | 53 |
| $ | 67 |
| $ | 161 |
| $ | 196 |
|
Interest cost |
|
| 63 |
|
| 135 |
|
| 189 |
|
| 385 |
|
Amortization of prior service cost |
|
| 26 |
|
| 25 |
|
| 77 |
|
| 77 |
|
Amortization of net gain |
|
| (11) |
|
| (43) |
|
| (32) |
|
| (128) |
|
Net periodic benefit cost |
| $ | 131 |
| $ | 184 |
| $ | 395 |
| $ | 530 |
|
As of September 30, 2017 and December 31, 2016, the Company’s benefit obligations included primarily in “Other noncurrent obligations” in the condensed consolidated balance sheets were $221.6 million and $195.8 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 and benefit payments to unfunded plans of approximately $1.7 million and $11.9 million during the three and nine months ended September 30, 2017, respectively. The Company expects to make additional cash contributions, including benefit payments to unfunded plans, of approximately $4.0 million to its defined benefit plans for the remainder of 2017.
NOTE 12—STOCK-BASED COMPENSATION
Refer to the Annual Report for definitions of capitalized terms not included herein and further background on the Company’s stock-based compensation programs included in the tables below.
22
The following table summarizes the Company’s stock-based compensation expense for the three and nine months ended September 30, 2017 and 2016, as well as unrecognized compensation cost as of September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of |
| |||
|
| Three Months Ended |
| Nine Months Ended |
| September 30, 2017 |
| |||||||||||
|
| September 30, |
| September 30, |
| Unrecognized |
| Weighted |
| |||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| Compensation Cost |
| Average Years |
| |||||
RSUs |
| $ | 2,287 |
| $ | 1,476 |
| $ | 6,295 |
| $ | 3,826 |
| $ | 11,682 |
| 1.8 |
|
Options |
|
| 454 |
|
| 733 |
|
| 3,661 |
|
| 4,867 |
|
| 1,659 |
| 1.4 |
|
PSUs |
|
| 324 |
|
| — |
|
| 796 |
|
| — |
|
| 3,062 |
| 2.4 |
|
Restricted Stock Awards issued by Former Parent |
|
| — |
|
| 3,817 |
|
| — |
|
| 6,149 |
|
| — |
| — |
|
Total Stock-based Compensation Expense |
| $ | 3,065 |
| $ | 6,026 |
| $ | 10,752 |
| $ | 14,842 |
|
|
|
|
|
|
The following table summarizes awards granted and the respective weighted-average grant date fair value for the nine months ended September 30, 2017:
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| ||||
|
| September 30, 2017 |
| ||||
|
| Awards Granted |
| Weighted Average Grant Date Fair Value per Award |
| ||
RSUs |
|
| 110,767 |
| $ | 70.85 |
|
Options |
|
| 192,546 |
|
| 20.61 |
|
PSUs |
|
| 50,937 |
|
| 75.74 |
|
Option Awards
The following are the weighted-average assumptions used within the Black-Scholes pricing model for the Company’s option awards granted during the nine months ended September 30, 2017:
| ||||
| ||||
| ||||
|
| |||
|
|
| ||
|
|
| ||
|
|
|
Since the Company’s equity interests were privately held prior to its initial public offering (“IPO”) in June 2014, there is limited publicly available trading history of the Company’s ordinary shares. Until such time that the Company can determine expected volatility based solely on the publicly traded history of its ordinary shares, expected volatility used in the Black-Scholes model for option awards granted is based on a combination of the Company’s historical volatility and similar companies’ stock that are publicly traded. The expected term of option awards represents the period of time that option awards granted are expected to be outstanding. For the option awards granted during the nine months ended September 30, 2017, the simplified method was used to calculate the expected term, given the Company’s limited historical exercise data. The risk-free interest rate for the periods within the expected term of option awards is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is estimated based on historical and expected dividend activity.
Performance Share Units (PSUs)
The Company granted PSUs for the first time during the nine months ended September 30, 2017. The PSUs, which are granted to executives, cliff vest on the third anniversary of the date of grant, generally subject to the executive remaining continuously employed by the Company through the vesting date and achieving certain performance conditions. The number of the PSUs that vest upon completion of the service period can range from 0 to 200 percent of the original grant, subject to certain limitations, contingent upon the Company’s total shareholder return (“TSR”) during the performance period relative to a pre-defined set of industry peer companies. Upon a termination of employment due
23
to the executive’s death or retirement, or termination in connection with a change in control or other factors prior to the vesting date, the PSUs will vest in full or in part, depending on the type of termination and the achievement of the performance conditions. Dividend equivalents will accumulate on PSUs during the vesting period, will be paid in cash upon vesting, and do not accrue interest. When PSUs vest, shares will be issued from the existing pool of treasury shares. The fair value for PSU awards is computed using a Monte Carlo valuation model.
NOTE 13—ACQUISITIONS AND DIVESTITURES
Acquisition of API Plastics
On July 10, 2017, the Company acquired 100% of the equity interests of API Applicazioni Plastiche Industriali S.p.A, or API Plastics, a privately held company. The gross purchase price for the acquisition was $90.5 million, inclusive of $8.4 million of cash acquired, yielding a net purchase price of $82.1 million. These amounts are subject to certain customary post-closing adjustments. During the nine months ended September 30, 2017, the Company paid $79.7 million for this acquisition, leaving an additional $2.4 million of unpaid purchase price accrued, which is expected to be paid during the fourth quarter of 2017. API Plastics, based in Mussolente, Italy, is a manufacturer of soft-touch polymers and bioplastics, such as thermoplastic elastomers (“TPEs”). TPEs can be molded over rigid plastics such as ABS and PC/ABS, which presents opportunities for complementary technology product offerings within our Performance Plastics segment. The acquisition was funded through existing cash on hand.
The Company allocated the purchase price of the acquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The Company calculated the fair value of the assets acquired using the income and cost approaches (or a combination thereof). Fair values were determined based on Level 3 inputs including estimated future cash flows, discount rates, royalty rates, growth rates, sales projections, retention rates and terminal values, all of which require significant management judgment.
The purchase price allocation is based upon preliminary information and is subject to change if additional information about the facts and circumstances that existed at the acquisition date becomes available. Additional information is being gathered to finalize these preliminary measurements, particularly with respect to property, plant and equipment, intangible assets, inventory, deferred income taxes and income taxes payable. Further adjustments may be necessary as a result of the Company’s on-going assessment of additional information related to the fair value of assets acquired and liabilities assumed, including goodwill, during the measurement period.
24
The following table summarizes the preliminary fair value measurement of the assets acquired and liabilities assumed as of the date of acquisition:
|
|
|
|
|
|
| July 10, |
| |
|
| 2017 |
| |
Cash and cash equivalents |
| $ | 8,431 |
|
Accounts receivable |
|
| 16,484 |
|
Inventories |
|
| 10,282 |
|
Other current assets |
|
| 728 |
|
Property, plant, and equipment |
|
| 24,146 |
|
Other intangible assets(1) |
|
|
|
|
Customer relationships |
|
| 14,000 |
|
Developed technology |
|
| 11,500 |
|
Other amortizable intangible assets |
|
| 2,700 |
|
Total fair value of assets acquired |
| $ | 88,271 |
|
|
|
|
|
|
Accounts payable |
| $ | 12,219 |
|
Income taxes payable |
|
| 202 |
|
Accrued expenses and other current liabilities |
|
| 1,416 |
|
Deferred income tax liabilities—noncurrent |
|
| 11,262 |
|
Other noncurrent obligations |
|
| 1,277 |
|
Total fair value of liabilities assumed |
| $ | 26,376 |
|
Net identifiable assets acquired |
| $ | 61,895 |
|
Goodwill(2) |
|
| 28,598 |
|
Net assets acquired |
| $ | 90,493 |
|
|
|
|
|
During the three and nine months ended September 30, 2017, transaction and integration costs related to advisory and professional fees incurred in conjunction with the API Plastics acquisition were $2.4 million and $3.5 million, respectively, and were included within “Selling, general and administrative expenses” in the condensed consolidated statement of operations. Additionally, during the three and nine months ended September 30, 2017, the Company recorded a $1.3 million non-cash fair value inventory adjustment related to the API Plastics acquisition which was included within “Cost of sales” in the condensed consolidated statement of operations.
Pro forma results of operations information has not been presented, as the effect of the API Plastics acquisition is not material. The operating results of API Plastics are included within the Company's condensed consolidated statement of operations since the acquisition date of July 10, 2017 and were not material to the Company's results for the three and nine months ended September 30, 2017.
Divestiture of Brazil Business
During the second quarter of 2016, the Company signed a definitive agreement to sell Trinseo do Brasil Comercio de Produtos Quimicos Ltda. (“Trinseo Brazil”), its primary operating entity in Brazil, including both a latex binders and automotive business. The sale closed on October 1, 2016.
As a result of this agreement, during the three and nine months ended September 30, 2016, the Company recorded impairment charges for the estimated loss on sale of approximately $0.3 million, and $13.2 million, respectively, within “Other expense (income), net” in the condensed consolidated statement of operations. The $13.2 million charge was allocated as $8.4 million, $4.2 million, and $0.6 million to the Performance Plastics segment, Latex Binders segment, and Corporate, respectively. During the year ended December 31, 2016, the Company received $1.8 million in proceeds
25
from the sale of these businesses, with an additional $1.7 million received during the nine months ended September 30, 2017.
NOTE 14—SEGMENTS
Effective October 1, 2016, the Company realigned its reporting segments to reflect the new model under which the business is managed and results are reviewed by the chief executive officer, who is the Company’s chief operating decision maker. This change in segments was made to provide increased clarity and understanding around the indicators of profitability and cash flow of the Company. The previous Basic Plastics & Feedstocks segment was split into three new segments: Basic Plastics, which includes polystyrene, copolymers, and polycarbonate; Feedstocks, which represents the Company’s styrene monomer business; and Americas Styrenics, which reflects the equity earnings from its 50%-owned styrenics joint venture. In addition, certain highly differentiated acrylonitrile-butadiene-styrene, or ABS, supplied into Performance Plastics markets, which was previously included in the results of Basic Plastics & Feedstocks, is now included in Performance Plastics. Finally, the Latex segment was renamed to Latex Binders. In conjunction with the segment realignment, the Company also changed its primary measure of segment operating performance from EBITDA to Adjusted EBITDA. Refer to the discussion below for further information about Adjusted EBITDA.
The information in the tables below has been retroactively adjusted to reflect the changes in reporting segments and segment operating performance.
The Latex Binders segment produces styrene-butadiene latex, or SB latex, and other latex polymers and binders, primarily for coated paper and packaging board, carpet and artificial turf backings, as well as a number of performance latex binders applications, such as adhesive, building and construction and the technical textile paper market. The Synthetic Rubber segment produces synthetic rubber products used predominantly in high-performance tires, impact modifiers and technical rubber products, such as conveyer belts, hoses, seals and gaskets. The Performance Plastics segment produces highly engineered compounds and blends and some specialized ABS grades for automotive end markets, as well as consumer electronics, medical, electrical and lighting, collectively consumer essential markets, or CEM. The Basic Plastics segment produces styrenic polymers, including polystyrene, basic ABS, and styrene-acrylonitrile, or SAN, products, as well as polycarbonate, or PC, all of which are used as inputs in a variety of end use markets. The Basic Plastics segment also included the results of our previously 50%-owned joint venture, Sumika Styron Polycarbonate, until the Company sold its share in the entity in January 2017 (refer to Note 3 for further information). The Feedstocks segment includes the Company’s production and procurement of styrene monomer outside of North America, which is used as a key raw material in many of the Company’s products, including polystyrene, SB latex, ABS resins, solution styrene-butadiene rubber, or SSBR, etc. Lastly, the Americas Styrenics segment consists solely of the operations of our 50%-owned joint venture, Americas Styrenics, a producer of both styrene monomer and polystyrene in North America.
Asset, capital expenditure, and intersegment sales information is not reviewed or included with the Company’s reporting to the chief operating decision maker. Therefore, the Company has not disclosed this information for each reportable segment.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Performance Materials |
| Basic Plastics & Feedstocks |
|
|
|
|
|
|
| ||||||||||||||
|
| Latex |
| Synthetic |
| Performance |
| Basic |
|
|
| Americas |
| Corporate |
|
|
|
| |||||||
Three Months Ended |
| Binders |
| Rubber |
| Plastics |
| Plastics |
| Feedstocks |
| Styrenics |
| Unallocated |
| Total |
| ||||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers |
| $ | 266,260 |
| $ | 118,684 |
| $ | 206,999 |
| $ | 393,622 |
| $ | 111,017 |
| $ | — |
| $ | — |
| $ | 1,096,582 |
|
Equity in earnings of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 43,807 |
|
| — |
|
| 43,807 |
|
Adjusted EBITDA(1) |
|
| 32,343 |
|
| (5,579) |
|
| 29,436 |
|
| 42,062 |
|
| 45,597 |
|
| 43,807 |
|
|
|
|
|
|
|
Investment in unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 161,883 |
|
| — |
|
| 161,883 |
|
Depreciation and amortization |
|
| 6,046 |
|
| 8,960 |
|
| 4,102 |
|
| 4,274 |
|
| 3,603 |
|
| — |
|
| 2,191 |
|
| 29,176 |
|
September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers |
| $ | 242,600 |
| $ | 112,690 |
| $ | 175,355 |
| $ | 323,729 |
| $ | 81,036 |
| $ | — |
| $ | — |
| $ | 935,410 |
|
Equity in earnings of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| 2,356 |
|
| — |
|
| 34,330 |
|
| — |
|
| 36,686 |
|
Adjusted EBITDA(1) |
|
| 29,815 |
|
| 28,491 |
|
| 30,187 |
|
| 34,134 |
|
| 12,729 |
|
| 34,330 |
|
|
|
|
|
|
|
Investment in unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| 38,197 |
|
| — |
|
| 148,802 |
|
| — |
|
| 186,999 |
|
Depreciation and amortization |
|
| 5,742 |
|
| 9,138 |
|
| 1,372 |
|
| 4,057 |
|
| 2,446 |
|
| — |
|
| 1,016 |
|
| 23,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Performance Materials |
| Basic Plastics & Feedstocks |
|
|
|
|
|
|
| ||||||||||||||
|
| Latex |
| Synthetic |
| Performance |
| Basic |
|
|
| Americas |
| Corporate |
|
|
|
| |||||||
Nine Months Ended |
| Binders |
| Rubber |
| Plastics |
| Plastics |
| Feedstocks |
| Styrenics |
| Unallocated |
| Total |
| ||||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers |
| $ | 846,721 |
| $ | 456,055 |
| $ | 581,724 |
| $ | 1,156,831 |
| $ | 304,940 |
| $ | — |
| $ | — |
| $ | 3,346,271 |
|
Equity in earnings (losses) of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| 810 |
|
| — |
|
| 92,219 |
|
| — |
|
| 93,029 |
|
Adjusted EBITDA(1) |
|
| 105,228 |
|
| 68,381 |
|
| 79,799 |
|
| 112,691 |
|
| 86,342 |
|
| 92,219 |
|
|
|
|
|
|
|
Investment in unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 161,883 |
|
| — |
|
| 161,883 |
|
Depreciation and amortization |
|
| 17,469 |
|
| 26,027 |
|
| 8,947 |
|
| 12,094 |
|
| 9,172 |
|
| — |
|
| 6,511 |
|
| 80,220 |
|
September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to external customers |
| $ | 684,552 |
| $ | 326,278 |
| $ | 527,875 |
| $ | 1,029,683 |
| $ | 230,800 |
| $ | — |
| $ | — |
| $ | 2,799,188 |
|
Equity in earnings (losses) of unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| 5,375 |
|
| — |
|
| 104,939 |
|
| — |
|
| 110,314 |
|
Adjusted EBITDA(1) |
|
| 70,042 |
|
| 81,787 |
|
| 103,745 |
|
| 115,050 |
|
| 66,087 |
|
| 104,939 |
|
|
|
|
|
|
|
Investment in unconsolidated affiliates |
|
| — |
|
| — |
|
| — |
|
| 38,197 |
|
| — |
|
| 148,802 |
|
| — |
|
| 186,999 |
|
Depreciation and amortization |
|
| 17,904 |
|
| 26,073 |
|
| 4,505 |
|
| 11,581 |
|
| 8,071 |
|
| — |
|
| 3,610 |
|
| 71,744 |
|
(1)The Company’s primary measure of segment operating performance is Adjusted EBITDA, which is defined as income from continuing operations before interest expense, net; provision for income taxes; depreciation and amortization expense; loss on extinguishment of long-term debt; asset impairment charges; gains or losses on the dispositions of businesses and assets; restructuring;restructuring charges; acquisition related costs and benefits and other items. Segment Adjusted 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 core operating performance by removing the impact of transactions and events that would not be considered a part of core operations. Adjusted EBITDA is useful for analytical 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 segment Adjusted EBITDA differently than the Company, and as a result, it may be difficult to use segment Adjusted EBITDA, or similarly named financial measures, that other companies may use to compare the performance of those companies to the Company’s segment performance.
The reconciliation of income before income taxes to segment Adjusted EBITDA is as follows:
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
|
| 2020 |
| 2019 |
| ||
Income (loss) before income taxes | | $ | (48.2) | | $ | 46.6 | |
Interest expense, net | |
| 10.3 | |
| 10.2 | |
Depreciation and amortization | | | 36.4 | |
| 33.9 | |
Corporate Unallocated(2) | | | 21.9 | | | 26.0 | |
Adjusted EBITDA Addbacks(3) | |
| 58.5 | |
| 11.3 | |
Segment Adjusted EBITDA | | $ | 78.9 | | $ | 128.0 | |
27
(2) |
|
(3) | Adjusted EBITDA addbacks for the three
|
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
|
| 2020 |
| 2019 |
| ||
Net gain on disposition of businesses and assets | | $ | (0.4) | | $ | (0.2) | |
Restructuring and other charges (Note 16) | | | 1.8 | | | 0.4 | |
Acquisition transaction and integration net costs | | | 0.1 | | | — | |
Asset impairment charges or write-offs (Note 9) | | | 38.3 | | | — | |
Other items(a) | | | 18.7 | | | 11.1 | |
Total Adjusted EBITDA Addbacks | | $ | 58.5 | | $ | 11.3 | |
|
|
|
|
28
NOTE 15—
22
NOTE 16—RESTRUCTURING
Refer to the Annual Report for further details regarding the Company’s previously announced restructuring activities included in the tables below. New restructuring activities are discussed in greater detail below. Restructuring charges are included within “Selling, general and administrative expenses” in the condensed consolidated statements of operations.
The following table provides detail of the Company’s restructuring charges for the three months ended March 31, 2020 and 2019:
| | | | | | | | | | | | |
| | Three Months Ended | | Cumulative | | | | |||||
| | March 31, | | Life-to-date | | | | |||||
| | 2020 |
| 2019 | | Charges |
| Segment | | |||
Corporate Restructuring Program | | | | | | | | | | | | |
Accelerated depreciation | | $ | 1.3 | | $ | — | | $ | 1.7 | | | |
Employee termination benefits | | | 0.3 | | | — | | | 17.3 | | | |
Contract terminations | | | 1.2 | | | — | | | 1.6 | | | |
Corporate Program Subtotal | | $ | 2.8 | | $ | — | | $ | 20.6 | | N/A(1) | |
Terneuzen Compounding Restructuring | | | | | | | | | | | | |
Asset impairment/accelerated depreciation | | $ | — | | $ | — | | $ | 3.1 | | | |
Employee termination benefits | | | — | | | — | | | 0.7 | | | |
Contract terminations | | | — | | | — | | | 0.3 | | | |
Decommissioning and other | | | 0.1 | | | 0.2 | | | 2.1 | | | |
Terneuzen Subtotal | | $ | 0.1 | | $ | 0.2 | | $ | 6.2 | | Performance Plastics(2) | |
Livorno Plant Restructuring | | | | | | | | | | | | |
Asset impairment/accelerated depreciation | | $ | — | | $ | — | | $ | 14.7 | | | |
Employee termination benefits | | | — | | | — | | | 5.4 | | | |
Contract terminations | | | — | | | — | | | 0.3 | | | |
Decommissioning and other | | | 0.2 | | | 0.2 | | | 4.4 | | | |
Livorno Subtotal | | $ | 0.2 | | $ | 0.2 | | $ | 24.8 | | Latex Binders(3) | |
Total Restructuring Charges | | $ | 3.1 | | $ | 0.4 | | | | | | |
(1) | In November 2019, the Company announced a corporate restructuring program associated with the Company’s shift to a global functional structure and business excellence initiatives to drive greater focus on business process optimization and efficiency. The corporate restructuring program is expected to be substantially completed by the end of 2020. In connection with this restructuring plan, during the three months ended March 31, 2020, the Company incurred employee termination benefit charges of $0.3 million, contract termination charges of $1.2 million, and accelerated depreciation charges of $1.3 million. The Company expects to incur incremental employee termination benefit charges of $0.7 million, inclusive of pension charges of approximately $0.4 million, as well as contract termination charges of $1.3 million and accelerated depreciation charges of $1.3 million through the end of 2020, the majority of which are expected to be paid by the end of 2020. As this was identified as a corporate-related activity, the charges related to this restructuring program were not allocated to a specific segment, but rather included within corporate unallocated. |
(2) | In 2017, the Company announced plans to upgrade its production capability for compounded resins with the construction of a new state-of-the art compounding facility to replace its existing compounding facility in Terneuzen, The Netherlands. As of March 31, 2020, the new facility is complete, along with all substantive transition and quality assurance activities. Production at the prior facility ceased and decommissioning activities began in 2019, and are expected to continue through the first half of 2021. The Company estimates it will incur decommissioning and other charges of approximately $0.6 million through 2021, the majority of which are expected to be paid during the remainder of 2020. |
(3) | In 2016, the Company ceased manufacturing activities at its latex binders manufacturing facility in Livorno, Italy and began decommissioning activities. In 2018, the Company entered into an agreement to sell the land where the former facility is located. This land sale closed in January 2020, for a total purchase price of $12.5 million. A prepayment of $1.3 million of this purchase price was received in 2018, and was recorded within “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets as of December |
23
31, 2019. The remaining purchase price was received in January 2020 when the transaction closed. The Company recorded a net gain on sale of $0.6 million during the three months ended March 31, 2020, which was recorded within “Selling, general and administrative expenses” in the condensed consolidated |
The following table provides a roll forward of the liability balances associated with the Company’s restructuring activities as of March 31, 2020. Employee termination benefit and contract termination charges are primarily recorded within “Accrued expenses and other current liabilities” in the condensed consolidated balance sheets. The liability balances as of March 31, 2020 primarily represents activity related to the corporate restructuring program. No other individual restructuring activity had a material liability balance as of March 31, 2020.
| | | | | | | | | | | | | |
|
| Balance at |
| | |
| | |
| Balance at |
| ||
|
| December 31, 2019 |
| Expenses |
| Deductions(1) |
| March 31, 2020 |
| ||||
Employee termination benefits | | $ | 17.2 | | $ | 0.3 | | $ | (3.7) | | $ | 13.8 | |
Contract terminations | | | 0.7 | | | — | | | (0.5) | | | 0.2 | |
Decommissioning and other | |
| — | |
| 0.3 | |
| (0.3) | |
| — | |
Total | | $ | 17.9 | | $ | 0.6 | | $ | (4.5) | | $ | 14.0 | |
(1) | Primarily includes payments made against the existing accrual, as well as immaterial impacts of foreign currency remeasurement. |
NOTE 17—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of AOCI, net of income taxes, consisted of:
| | | | | | | | | | | | | |
|
| Cumulative |
| Pension & Other |
| | | | | | | ||
| | Translation | | Postretirement Benefit | | | Cash Flow | | | | | ||
Three Months Ended March 31, 2020 and 2019 |
| Adjustments |
| Plans, Net |
| | Hedges, Net |
| Total |
| |||
Balance at December 31, 2019 | | $ | (106.7) | | $ | (56.3) | | $ | 0.6 | | $ | (162.4) | |
Other comprehensive income (loss) | |
| 10.7 | |
| 0.6 | |
| (3.6) | |
| 7.7 | |
Amounts reclassified from AOCI to net income (1) | | | — | | | 0.6 | | | (0.1) | | | 0.5 | |
Balance as of March 31, 2020 | | $ | (96.0) | | $ | (55.1) | | $ | (3.1) | | $ | (154.2) | |
| | | | | | | | | | | | | |
Balance at December 31, 2018 | | $ | (111.8) | | $ | (39.4) | | $ | 8.9 | | $ | (142.3) | |
Other comprehensive income (loss) | |
| (0.3) | |
| (2.0) | |
| 1.0 | |
| (1.3) | |
Amounts reclassified from AOCI to net income (loss) (1) | | | — | | | 1.0 | | | (0.9) | | | 0.1 | |
Balance as of March 31, 2019 | | $ | (112.1) | | $ | (40.4) | | $ | 9.0 | | $ | (143.5) | |
(1) | The following |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Cumulative |
|
|
| |||||||||
|
| September 30, |
| September 30, |
| Life-to-date |
|
|
| |||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| Charges |
| Segment |
| |||||
Terneuzen Compounding Restructuring(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment/accelerated depreciation |
| $ | 614 |
| $ | — |
| $ | 1,745 |
| $ | — |
| $ | 1,745 |
|
|
|
Employee termination benefits |
|
| 170 |
|
| — |
|
| 326 |
|
| — |
|
| 326 |
|
|
|
Contract terminations |
|
| — |
|
| — |
|
| 590 |
|
| — |
|
| 590 |
|
|
|
Decommissioning and other |
|
| 192 |
|
| — |
|
| 192 |
|
| — |
|
| 818 |
|
|
|
Terneuzen Subtotal |
| $ | 976 |
| $ | — |
| $ | 2,853 |
| $ | — |
| $ | 3,479 |
| Performance Plastics |
|
Livorno Plant Restructuring(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment/accelerated depreciation |
| $ | — |
| $ | 14,345 |
| $ | — |
| $ | 14,345 |
| $ | 14,345 |
|
|
|
Employee termination benefits |
|
| 220 |
|
| 1,405 |
|
| 579 |
|
| 1,405 |
|
| 5,211 |
|
|
|
Contract terminations |
|
| — |
|
| 269 |
|
| — |
|
| 269 |
|
| 269 |
|
|
|
Decommissioning and other |
|
| 633 |
|
| 64 |
|
| 1,695 |
|
| 64 |
|
| 2,372 |
|
|
|
Livorno Subtotal |
| $ | 853 |
| $ | 16,083 |
| $ | 2,274 |
| $ | 16,083 |
| $ | 22,197 |
| Latex Binders |
|
Other Restructurings |
|
| 288 |
|
| 759 |
|
| 1,453 |
|
| 2,989 |
|
|
|
| Various |
|
Total Restructuring Charges |
| $ | 2,117 |
| $ | 16,842 |
| $ | 6,580 |
| $ | 19,072 |
|
|
|
|
|
|
|
|
24
|
|
| | | | | | | | | |
| | Three Months Ended | | | | ||||
AOCI Components | | March 31, | | Statements of Operations | | ||||
|
| 2020 |
| 2019 |
| Classification | | ||
Cash flow hedging items | | | | | | | | | |
Foreign exchange cash flow hedges | | $ | (0.2) | | $ | (0.6) | | Cost of sales | |
Interest rate swaps | | | 0.1 | | | (0.3) | | Interest expense, net | |
Total before tax | | | (0.1) | | | (0.9) | | | |
Tax effect | | | — | | | — | | Provision for (benefit from) income taxes | |
Total, net of tax | | $ | (0.1) | | $ | (0.9) | | | |
| | | | | | | | | |
Amortization of pension and other postretirement benefit plan items | | | | | | | | | |
Prior service credit | | $ | (0.3) | | $ | (0.3) | | (a) | |
Net actuarial loss | | | 1.2 | | | 0.9 | | (a) | |
Net settlement loss | | | — | | | 0.8 | | (a) | |
Total before tax | | | 0.9 | | | 1.4 | | | |
Tax effect | | | (0.3) | | | (0.4) | | Provision for (benefit from) income taxes | |
Total, net of tax | | $ | 0.6 | | $ | 1.0 | | | |
The following table provides a rollforward of the liability balances associated with the Company’s restructuring activities as of September 30, 2017. Employee termination benefit and contract termination charges
(a) | These AOCI components are |
.....
NOTE 18—EARNINGS PER SHARE
Basic earnings per ordinary share (“basic EPS”) is computed by dividing net income available to ordinary shareholders by the weighted average number of the Company’s ordinary shares outstanding for the applicable period. Diluted earnings per ordinary share (“diluted EPS”) is calculated using net income available to ordinary shareholders divided by diluted weighted average ordinary shares outstanding during each period, which includes unvested RSUs, option awards, and PSUs. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential ordinary shares would have an anti-dilutive effect.
The following table presents basic EPS and diluted EPS for the three months ended March 31, 2020 and 2019:
| | | | | | | |
| | Three Months Ended | | ||||
| | March 31, | | ||||
(in millions, except per share data) |
| 2020 |
| 2019 |
| ||
Earnings: | | | | | | | |
Net income (loss) | | $ | (36.3) | | $ | 35.8 | |
Shares: | | | | | | | |
Weighted average ordinary shares outstanding | |
| 38.5 | |
| 41.3 | |
Dilutive effect of RSUs, option awards, and PSUs(1) | |
| — | |
| 0.5 | |
Diluted weighted average ordinary shares outstanding | |
| 38.5 | |
| 41.8 | |
Income (loss) per share: | | | | | | | |
Income (loss) per share—basic | | $ | (0.94) | | $ | 0.87 | |
Income (loss) per share—diluted | | $ | (0.94) | | $ | 0.86 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at |
|
|
|
|
|
|
| Balance at |
| ||
|
| December 31, 2016 |
| Expenses |
| Deductions(1) |
| September 30, 2017 |
| ||||
Employee termination benefits |
| $ | 5,021 |
| $ | 2,492 |
| $ | (5,674) |
| $ | 1,839 |
|
Contract terminations |
|
| 269 |
|
| 590 |
|
| (122) |
|
| 737 |
|
Decommissioning and other |
|
| — |
|
| 2,474 |
|
| (2,474) |
|
| — |
|
Total |
| $ | 5,290 |
| $ | 5,556 |
| $ | (8,270) |
| $ | 2,576 |
|
|
|
29
NOTE 16—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of AOCI, net of income taxes, consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cumulative |
| Pension & Other |
|
|
|
|
|
|
| ||
|
| Translation |
| Postretirement Benefit |
|
| Cash Flow |
|
|
|
| ||
Three Months Ended September 30, 2017 and 2016 |
| Adjustments |
| Plans, Net |
|
| Hedges, Net |
| Total |
| |||
Balance as of June 30, 2017 |
| $ | (95,747) |
| $ | (61,332) |
| $ | (5,504) |
| $ | (162,583) |
|
Other comprehensive income (loss) |
|
| (1,561) |
|
| — |
|
| (6,387) |
|
| (7,948) |
|
Amounts reclassified from AOCI to net income (1) |
|
| — |
|
| 840 |
|
| 2,672 |
|
| 3,512 |
|
Balance as of September 30, 2017 |
| $ | (97,308) |
| $ | (60,492) |
| $ | (9,219) |
| $ | (167,019) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2016 |
| $ | (106,702) |
| $ | (45,887) |
| $ | 4,173 |
| $ | (148,416) |
|
Other comprehensive income (loss) |
|
| 1,488 |
|
| — |
|
| (2,035) |
|
| (547) |
|
Amounts reclassified from AOCI to net income (1) |
|
| — |
|
| 533 |
|
| (245) |
|
| 288 |
|
Balance as of September 30, 2016 |
| $ | (105,214) |
| $ | (45,354) |
| $ | 1,893 |
| $ | (148,675) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cumulative |
| Pension & Other |
|
|
|
|
|
| |||
|
| Translation |
| Postretirement Benefit |
| Cash Flow |
|
|
|
| |||
Nine Months Ended September 30, 2017 and 2016 |
| Adjustments |
| Plans, Net |
| Hedges, Net |
| Total |
| ||||
Balance as of December 31, 2016 |
| $ | (118,922) |
| $ | (63,504) |
| $ | 12,272 |
| $ | (170,154) |
|
Other comprehensive income (loss) |
|
| 21,614 |
|
| — |
|
| (20,703) |
|
| 911 |
|
Amounts reclassified from AOCI to net income (1) |
|
| — |
|
| 3,012 |
|
| (788) |
|
| 2,224 |
|
Balance as of September 30, 2017 |
| $ | (97,308) |
| $ | (60,492) |
| $ | (9,219) |
| $ | (167,019) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015 |
| $ | (109,120) |
| $ | (46,166) |
| $ | 5,569 |
| $ | (149,717) |
|
Other comprehensive income (loss) |
|
| 3,906 |
|
| (800) |
|
| (3,060) |
|
| 46 |
|
Amounts reclassified from AOCI to net income (1) |
|
| — |
|
| 1,612 |
|
| (616) |
|
| 996 |
|
Balance as of September 30, 2016 |
| $ | (105,214) |
| $ | (45,354) |
| $ | 1,893 |
| $ | (148,675) |
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount Reclassified from AOCI |
| Amount Reclassified from AOCI |
|
|
| ||||||||
AOCI Components |
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| Statement of Operations |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| Classification |
| ||||
Cash flow hedging items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange cash flow hedges |
| $ | 2,666 |
| $ | (245) |
| $ | (794) |
| $ | (616) |
| Cost of sales |
|
Interest rate swaps |
|
| 6 |
|
| — |
|
| 6 |
|
| — |
| Interest expense, net |
|
Total before tax |
|
| 2,672 |
|
| (245) |
|
| (788) |
|
| (616) |
|
|
|
Tax effect |
|
| — |
|
| — |
|
| — |
|
| — |
| Provision for income taxes |
|
Total, net of tax |
| $ | 2,672 |
| $ | (245) |
| $ | (788) |
| $ | (616) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension and other postretirement benefit plan items |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit |
| $ | (477) |
| $ | (461) |
| $ | (1,379) |
| $ | (1,382) |
| (a) |
|
Net actuarial loss |
|
| 1,697 |
|
| 1,250 |
|
| 4,886 |
|
| 3,770 |
| (a) |
|
Net settlement and curtailment loss |
|
| — |
|
| — |
|
| 648 |
|
| — |
| (a) |
|
Total before tax |
|
| 1,220 |
|
| 789 |
|
| 4,155 |
|
| 2,388 |
|
|
|
Tax effect |
|
| (380) |
|
| (256) |
|
| (1,143) |
|
| (776) |
| Provision for income taxes |
|
Total, net of tax |
| $ | 840 |
| $ | 533 |
| $ | 3,012 |
| $ | 1,612 |
|
|
|
|
|
NOTE 17—EARNINGS PER SHARE
Basic earnings per ordinary share (“basic EPS”) is computed by dividing net income available to ordinary shareholders by the weighted average number of the Company’s ordinary shares outstanding for the applicable period. Diluted earnings per ordinary share (“diluted EPS”) is calculated using net income available to ordinary shareholders divided by diluted weighted-average ordinary shares outstanding during each period, which includes unvested RSUs, option awards, and PSUs. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential ordinary shares would have an anti-dilutive effect.
The following table presents basic EPS and diluted EPS for the three and nine months ended September 30, 2017 and 2016, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
(in thousands, except per share data) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 33,215 |
| $ | 67,254 |
| $ | 210,668 |
| $ | 239,805 |
|
Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average ordinary shares outstanding |
|
| 43,745 |
|
| 45,865 |
|
| 43,900 |
|
| 47,152 |
|
Dilutive effect of RSUs, option awards, and PSUs |
|
| 1,037 |
|
| 1,096 |
|
| 1,146 |
|
| 889 |
|
Diluted weighted-average ordinary shares outstanding |
|
| 44,782 |
|
| 46,961 |
|
| 45,046 |
|
| 48,041 |
|
Income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share—basic |
| $ | 0.76 |
| $ | 1.47 |
| $ | 4.80 |
| $ | 5.09 |
|
Income per share—diluted |
| $ | 0.74 |
| $ | 1.43 |
| $ | 4.68 |
| $ | 4.99 |
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Nine Months Ended |
|
|
|
|
| ||||||||||||
|
|
| September 30, |
|
|
|
|
| September 30, |
|
|
|
|
|
| ||||||||||
(in millions) |
|
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
|
|
| ||||
Net sales |
|
| $ | 207.0 |
|
| $ | 175.4 |
|
| 18 | % |
| $ | 581.7 |
|
| $ | 527.9 |
|
| 10 | % |
|
|
Adjusted EBITDA |
|
| $ | 29.4 |
|
| $ | 30.2 |
|
| (3) | % |
| $ | 79.8 |
|
| $ | 103.7 |
|
| (23) | % |
|
|
Adjusted EBITDA margin |
|
|
| 14 | % |
|
| 17 | % |
|
|
|
|
| 14 | % |
|
| 20 | % |
|
|
|
|
|
Three Months Ended - September 30, 2017 vs. September 30, 2016
Of the 18% increase in net sales, 7% was due to higher selling prices due to the pass through of higher raw material costs to our customers, as well as a 7% increase due to increased sales volume as a result of higher volumes sold to the automotive market in North America and the consumer electronics market in Asia. A favorable currency impact increased net sales by 3% as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis with an additional 1% increase due to portfolio adjustments.
The slight decrease in Adjusted EBITDA was due to several offsetting factors. A 14% increase in Adjusted EBITDA was due to increased sales volume to the automotive market in North America and the consumer electronics market in Asia, with an additional 2% net increase due to portfolio adjustments. Offsetting these increases was a 12% decrease due to margin compression from increased costs of raw materials, such as polycarbonate, not all of which were able to be passed through to our customers. Additionally, an inventory build during 2016 resulted in increased fixed cost absorption in the prior year, contributing to an overall 8% decrease in Adjusted EBITDA in the current year related to fixed costs.
Nine Months Ended - September 30, 2017 vs. September 30, 2016
Of the 10% increase in net sales, 5% was due to higher selling prices due to the pass through of higher raw material costs to our customers, as well as an 8% increase due to increased sales volume, primarily related to higher sales to the automotive markets in Europe and North America and the consumer electronics market in Asia. Portfolio adjustments resulted in a 2% decrease in net sales.
The overall decrease in Adjusted EBITDA of $23.9 million was the result of several factors. Unfavorable raw material timing led to lower margins for the period. In addition, the Company experienced margin compression from increased costs of raw materials, not all of which were able to be passed through to our customers. These two factors contributed to a combined 33% decrease in Adjusted EBITDA compared to the prior year. Additionally, increased fixed costs contributed to a 6% decrease in Adjusted EBITDA. Partially offsetting these decreases was a 13% increase due to increased sales volume growth to the automotive markets in Europe and North America and a 3% increase due to portfolio adjustments.
Basic Plastics Segment
The Basic Plastics segment produces styrenic polymers, including polystyrene, basic ABS, and SAN products, as well as PC, all of which are used as inputs in a variety of end use markets. The Basic Plastics segment also included the results of our previously 50%-owned joint venture Sumika Styron Polycarbonate prior to its sale in January 2017. Refer to Note 3 in the condensed consolidated financial statements for further information.
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Nine Months Ended |
|
|
|
|
| ||||||||||||
|
|
| September 30, |
|
|
|
|
| September 30, |
|
|
|
|
|
| ||||||||||
(in millions) |
|
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
|
|
| ||||
Net sales |
|
| $ | 393.6 |
|
| $ | 323.7 |
|
| 22 | % |
| $ | 1,156.9 |
|
| $ | 1,029.6 |
|
| 12 | % |
|
|
Adjusted EBITDA |
|
| $ | 42.1 |
|
| $ | 34.2 |
|
| 23 | % |
| $ | 112.7 |
|
| $ | 115.1 |
|
| (2) | % |
|
|
Adjusted EBITDA margin |
|
|
| 11 | % |
|
| 11 | % |
|
|
|
|
| 10 | % |
|
| 11 | % |
|
|
|
|
|
Three Months Ended - September 30, 2017 vs. September 30, 2016
Of the 22% increase in net sales, 10% was due to higher selling prices due to the pass through of higher styrene costs to customers and 7% was due to higher polystyrene and copolymer sales volume. Additionally, a favorable currency impact increased net sales by 4% as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis.
Adjusted EBITDA increased 23%, or $7.9 million, of which 21% was due to higher margins, particularly in polycarbonate due to very tight market conditions. An additional 13% increase was due to higher sales volume, particularly in copolymers. Partially offsetting these increases was a 6% decrease due to increased fixed costs, which includes start-up costs incurred related to our new ABS capacity in Asia, and a 7% decrease due to portfolio adjustments, which included the impact of the sale of Sumika Styron Polycarbonate during the first quarter of 2017.
Nine Months Ended - September 30, 2017 vs. September 30, 2016
Of the 12% increase in net sales, 16% was due to higher selling prices due to the pass through of increased raw material costs to customers, primarily styrene. This increase was partially offset by a 3% decrease due to lower sales volume, primarily related to lower polystyrene sales in Asia, as we have increased our focus on higher margin business.
The slight decrease in Adjusted EBITDA was partly due to several offsetting factors. Firstly, an 11% increase in Adjusted EBITDA was due to higher year-to-date margins, primarily within ABS and polycarbonate. However, this increase was offset by lower sales volume, which resulted in a decrease of 4%, primarily related to Europe and Asia polystyrene sales, with competitor supply outages in Europe in the prior year and with an increased focus on higher margins in Asia. Higher fixed costs, including start-up costs incurred related to our new ABS capacity in Asia, contributed to an additional decrease of 4%. Portfolio adjustments resulted in a 4% decrease in Adjusted EBITDA, due to the sale of Sumika Styron Polycarbonate during the first quarter of 2017.
Feedstocks Segment
The Feedstocks segment includes the Company’s production and procurement of styrene monomer outside of North America, which is used as a key raw material in many of the Company’s products, including polystyrene, SB latex, ABS resins, SSBR, etc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Nine Months Ended |
|
|
|
|
| ||||||||||||
|
|
| September 30, |
|
|
|
|
| September 30, |
|
|
|
|
|
| ||||||||||
(in millions) |
|
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
|
|
| ||||
Net sales |
|
| $ | 111.0 |
|
| $ | 81.0 |
|
| 37 | % |
| $ | 304.9 |
|
| $ | 230.8 |
|
| 32 | % |
|
|
Adjusted EBITDA |
|
| $ | 45.6 |
|
| $ | 12.7 |
|
| 259 | % |
| $ | 86.3 |
|
| $ | 66.1 |
|
| 31 | % |
|
|
Adjusted EBITDA margin |
|
|
| 41 | % |
|
| 16 | % |
|
|
|
|
| 28 | % |
|
| 29 | % |
|
|
|
|
|
Three Months Ended - September 30, 2017 vs. September 30, 2016
The 37% increase in net sales was almost entirely due to the pass through of higher styrene prices, which contributed to 33% of the increase. A favorable currency impact increased net sales by 4% as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis.
41
The increase in Adjusted EBITDA was primarily due to higher styrene margin due to unplanned industry production outages, including the impact of Hurricane Harvey, which resulted in a $33.1 million increase in Adjusted EBITDA, slightly offset by a $1.4 million decrease due to higher maintenance-related fixed costs.
Nine Months Ended - September 30, 2017 vs. September 30, 2016
The 32% increase in net sales was almost entirely due to the pass through of higher styrene prices, which contributed to 30% of the increase. Higher styrene-related sales volume also resulted in a 3% increase in net sales.
The increase in Adjusted EBITDA was primarily due to higher margins as a result of favorable market conditions, which resulted in a 38% increase in Adjusted EBITDA, slightly offset by a 7% decrease due to higher maintenance-related fixed costs.
Americas Styrenics Segment
The Americas Styrenics segment consists solely of the operations of our 50%-owned joint venture, Americas Styrenics, a producer of both styrene monomer and polystyrene in North America. Styrene monomer is a basic building block of plastics and a key input to many of the Company’s products, as well as a key raw material for the production of polystyrene. Major applications for the polystyrene products Americas Styrenics produces include appliances, food packaging, food service disposables, consumer electronics and building and construction materials.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Nine Months Ended |
|
|
|
|
| ||||||||||||
|
|
| September 30, |
|
|
|
|
| September 30, |
|
|
|
|
|
| ||||||||||
(in millions) |
|
| 2017 |
|
| 2016 |
|
| % Change |
|
| 2017 |
|
| 2016 |
|
| % Change |
|
|
| ||||
Adjusted EBITDA* |
|
| $ | 43.8 |
|
| $ | 34.3 |
|
| 28 | % |
| $ | 92.2 |
|
| $ | 104.9 |
|
| (12) | % |
|
|
*The results of this segment are comprised entirely of earnings from Americas Styrenics, our equity method investment. As such, Adjusted EBITDA related to this segment is included within “Equity in earnings of unconsolidated affiliates” in the consolidated statements of operations.
Three Months Ended - September 30, 2017 vs. September 30, 2016
The increase in Adjusted EBITDA was primarily due to higher styrene sales volume, including impacts from a stronger export market, as well as higher styrene margin as a result of unplanned industry supply outages, including the impact of Hurricane Harvey, which was offset by lower polystyrene margin.
Nine Months Ended – September 30, 2017 vs. September 30, 2016
The decrease in Adjusted EBITDA was primarily due to the planned first quarter styrene outage at the Americas Styrenics St. James, LA facility, which was extended in order to complete repairs on critical equipment. The facility came back online at full production in early April 2017. As a result of this extended outage, the Company incurred an unfavorable impact of approximately $23 million to Adjusted EBITDA.
Non-GAAP Performance Measures
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2020 Year-to-Date Highlights
During the three months ended March 31, 2020, Trinseo recognized net loss of $36.3 million, and Adjusted EBITDA of $57.0 million. Refer to “Non-GAAP Performance Measures” below for further discussion of our use of non-GAAP measures in evaluating our performance and a reconciliation of these measures. Other highlights for the year are described below.
COVID-19 Pandemic
The Company noted adverse market and industry conditions beginning to emerge in mid-March 2020 stemming from the COVID-19 pandemic, particularly in the automotive and tire markets. As a result, during the three months ended March 31, 2020, the Company noted a negative impact to pre-tax income and Adjusted EBITDA of $6.0 million, driven predominantly from our Synthetic Rubber operations in China. During the first quarter, the Company has continued operations at the majority of its manufacturing locations and has not experienced any material disruptions in our supply chain, which has allowed us to continue meeting customer demand. Our procurement and supply chain teams continue to develop contingency plans in the event of a significant disruption or shutdown so that future customer demand can continue to be met with timeliness and quality. The Company has been actively responding to this situation to adjust its business operations, and will continue to monitor developments and take action as needed. Refer to the “Outlook” section below for further information on the ongoing and potential impacts of COVID-19 to the Company’s operations and results in future periods.
With regard to capital resources and liquidity, the Company continues to maintain a strong balance sheet, has substantial sources of liquidity available, no maintenance covenants on its debt agreements, and no significant debt maturing until September 2024. Refer to the “Capital Resources and Liquidity” section below for further information.
Impairment of Boehlen styrene monomer and Schkopau PBR Assets
In 2020, the Company continued its strategy, as described in the Company’s Annual Report for 2019, to focus efforts and increase investments in certain product offerings serving the following applications, which are less cyclical and offer significantly higher growth and margin potential: coatings, adhesives, sealants, and elastomers (“CASE”) applications within the Latex Binders segment; engineered materials (“Engineered Materials”) applications within the Performance Plastics segment, which includes consumer electronics, medical, and thermoplastic elastomers (“TPEs”) applications; and solution styrene butadiene rubber (“SSBR”) within the Synthetic Rubber segment. As a result of continuing this strategy and other management considerations, in March 2020, the Company initiated a consultation process with the Economic Council and Works Councils of Trinseo Deutschland regarding the disposition of its styrene monomer assets in Boehlen, Germany and its polybutadiene rubber (“PBR,” specifically nickel and neodymium-PBR) assets in Schkopau, Germany. Based on the Company’s evaluation of these assets, we determined that their full carrying value was not recoverable and, as a result, we recorded an impairment charge on the assets of approximately $38.3 million during the three months ended March 31, 2020, which is recorded within “Impairment Charges” on the condensed consolidated statements of operations.
26
Results of Operations
Results of Operations for the Three Months Ended March 31, 2020 and 2019
| | | | | | | | | | | | | | |
| | | Three Months Ended | | | |||||||||
| | | March 31, | | | |||||||||
(in millions) |
| | 2020 |
| % | | | 2019 |
| % | | | ||
Net sales | | | $ | 853.5 |
| 100 | % | | $ | 1,013.1 |
| 100 | % | |
Cost of sales | | |
| 783.8 | | 92 | % | |
| 915.7 | | 90 | % | |
Gross profit | | |
| 69.7 | | 8 | % | |
| 97.4 | | 10 | % | |
Selling, general and administrative expenses | | |
| 77.5 | | 9 | % | |
| 68.8 | | 7 | % | |
Equity in earnings of unconsolidated affiliates | | |
| 9.8 | | 1 | % | |
| 32.2 | | 3 | % | |
Impairment charges | | | | 38.3 | | 4 | % | | | — | | — | | |
Operating income (loss) | | |
| (36.3) | | (4) | % | |
| 60.8 | | 6 | % | |
Interest expense, net | | |
| 10.3 | | 1 | % | |
| 10.2 | | 1 | % | |
Other expense, net | | |
| 1.6 | | — | % | |
| 4.0 | | — | % | |
Income (loss) before income taxes | | |
| (48.2) | | (6) | % | |
| 46.6 | | 5 | % | |
Provision for (benefit from) income taxes | | |
| (11.9) | | (1) | % | |
| 10.8 | | 1 | % | |
Net income (loss) | | | $ | (36.3) | | (4) | % | | $ | 35.8 | | 4 | % | |
Three Months Ended – March 31, 2020 vs. March 31, 2019
Net Sales
Of the 16% decrease in net sales, 8% was due to lower sales volume within the Feedstocks, Synthetic Rubber, Performance Plastics, and Polystyrene segments, partially offset by higher sales volume within the Latex Binders segment. An additional 6% decrease was attributable to lower selling prices mainly due to the pass through of lower raw material costs.
Cost of Sales
Of the 14% decrease in cost of sales, 7% was due to lower sales volume within the Feedstocks, Synthetic Rubber, Performance Plastics, and Polystyrene segments, partially offset by higher sales volume within the Latex Binders segment, and 5% was due to lower raw material costs, primarily from styrene and butadiene, An additional 2% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
Gross Profit
The decrease in gross profit of 28% was primarily attributable to styrene margin compression in the Feedstocks segment, as well as an unfavorable net timing impact in comparison to the prior year. See the segment discussion below for further information.
Selling, General and Administrative Expenses (SG&A)
The $8.7 million, or 13%, increase in SG&A was due to several factors. Higher advisory and professional fees, mainly related to the Company’s transition of business and technical services from Dow, resulted in a $6.3 million increase. Bad debt expense also increased by $2.6 million, and there was an increase of $1.3 million related to increased depreciation. Partially offsetting these increases was a decrease of $1.4 million due to currency impacts on our euro-based expenses, as the euro weakened in comparison to the U.S. dollar.
Impairment charges
Impairment charges for the three months ended March 31, 2020 were related to the impairment charges recorded on the Boehlen styrene monomer assets and Schkopau PBR assets during the period.
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Equity in Earnings of Unconsolidated Affiliates
The decrease in equity earnings of $22.4 million was due to lower equity earnings from Americas Styrenics, mainly attributable to lower styrene margins and the impact from the planned turnaround at its St. James, Louisiana styrene facility.
Other Expense, Net
Other expense, net for the three months ended March 31, 2020 was $1.6 million, which included $1.4 million of expense related to the non-service cost components of net periodic benefit cost, as well as foreign exchange transaction losses of $0.2 million. Net foreign transaction losses included $14.0 million of foreign exchange transaction losses primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between the U.S. dollar and the euro during the period, offset by $13.8 million of gains from our foreign exchange forward contracts.
Other expense, net for the three months ended March 31, 2019 was $4.0 million, which included $2.3 million of expense related to the non-service cost components of net periodic benefit cost, as well as foreign exchange transaction losses of $0.4 million. Net foreign transaction losses included $3.1 million of foreign exchange transaction losses primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between the U.S. dollar and the euro during the period, partially offset by $2.7 million of gains from our foreign exchange forward contracts. Other expense, net also included $1.5 million of other miscellaneous expenses during the period.
Provision for (Benefit from) Income Taxes
Benefit from income taxes for the three months ended March 31, 2020 totaled $11.9 million, resulting in an effective tax rate of 24.6%. Provision for income taxes for the three months ended March 31, 2019 totaled $10.8 million, resulting in an effective tax rate of 23.1%.
The decrease in provision for income taxes was primarily driven by the $94.8 million decrease in income before income taxes. Included in this decrease in income before income taxes were impairment charges of $38.3 million recorded during the period related to our assets in Boehlen and Schkopau, Germany. Refer to Note 9 in the condensed consolidated financial statements for further information.
Outlook
As described above in “2020 Year-to-Date Highlights,” the COVID-19 pandemic has created significant worldwide volatility, uncertainty and disruption, including impacts to our business and the end markets in which we operate. The Company’s actions taken in response to this pandemic, as well as our outlook for operations, demand, and liquidity are described herein. Due to the significant uncertainty underlying the duration, magnitude, long-term economic impact of and expectations for recovery from the COVID-19 pandemic, there are inherent limitations underlying our future projections. Refer to the “Item 1A. Risk Factors” section below for further information regarding the risks related to the pandemic.
The Company has taken proactive steps to minimize the potential impact of the COVID-19 crisis to our stakeholders as well as the financial impacts to the Company. Our primary focus in this environment has been maintaining a safe and healthy workplace for our employees and other stakeholders, which led to the formation of a COVID-19 crisis response team and implementation of a pandemic response plan. These actions have allowed us to ensure worker safety, optimize production schedules at our plants, and keep our supply chain intact while also proactively developing contingency plans and enabling the safe operation of our plants.
We have implemented actions to reduce cost and improve efficiency, including the continuation of our Business Excellence initiatives and the corporate restructuring program announced in the fourth quarter of 2019. In April 2020, the reorganization of our executive leadership team was also announced. We have also taken actions to bolster our already strong liquidity position, including the reduction of capital spending, operating expenses, and working capital. In addition, in April we announced the drawdown of $100.0 million on our 2022 Revolving Credit Facility as a precautionary measure.
Operationally, the Company has continued manufacturing at most of our locations and we have not experienced any material disruptions in our supply chain. We have seen resiliency in a number of our businesses, including sustained
28
demand for polystyrene and latex binders for food packaging, polycarbonate for isolation sheeting, and engineered materials for medical applications. Additionally, despite the decline in demand in Feedstocks in the first quarter, we have begun to see margin improvement in Europe, as lower oil prices have started to impact the styrene cost curve, increasing the competitiveness of our Europe-based assets. However, there has been a substantial decline in demand for a number of our products, especially those serving the automotive, tire, and textiles markets, which we anticipate will have a more pronounced impact on second quarter performance.
We expect this decreased demand will result in modified production schedules at certain of our facilities. Though the overall pandemic has led to travel restrictions and remote working conditions for many of our employees, we do not anticipate that this will have a significant impact on our ability to achieve our desired business goals, or meaningfully impair productivity.
Amid this market volatility and uncertainty, the Company has continued to maintain a strong financial position with ample access to capital resources and liquidity to manage the anticipated impact of the COVID-19 pandemic on our business operations for the foreseeable future. Refer to the “Capital Resources and Liquidity” section below for more information.
Selected Segment Information
The following sections describe net sales, Adjusted EBITDA, and Adjusted EBITDA margin by segment for the three months ended March 31, 2020 and 2019. Inter-segment sales have been eliminated. Refer to Note 15 in the condensed consolidated financial statements for further information on our segments, as well as for a detailed definition of Adjusted EBITDA and a reconciliation of income before income taxes to segment Adjusted EBITDA.
Latex Binders Segment
Our Latex Binders segment produces styrene-butadiene latex (“SB latex”) and other latex polymers and binders primarily for coated paper and packaging board, carpet and artificial turf backings, as well as a broad range of performance latex binders products, including SB latex, SA latex, and vinylidene chloride latex for CASE applications.
| | | | | | | | | | | | |
| | | Three Months Ended | | | | ||||||
| | | March 31, | | | | | |||||
($ in millions) |
| | 2020 | |
| 2019 | | | % Change | | ||
Net sales | | | $ | 219.1 | |
| $ | 223.9 | |
| (2) | % |
Adjusted EBITDA | | | $ | 21.5 | | | $ | 17.5 | |
| 23 | % |
Adjusted EBITDA margin | | |
| 10 | % | |
| 8 | % | | | |
Three Months Ended – March 31, 2020 vs. March 31, 2019
Of the 2% decrease in net sales, 7% was due to lower pricing from the pass through of lower raw material costs, primarily from styrene and butadiene, and an additional 1% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period. These decreases were partially offset by a 7% increase due to higher sales volume to CASE applications as well as from our acquisition in Rheinmünster, Germany (see Note 14 for further information).
The $4.0 million, or 23%, increase in Adjusted EBITDA was primarily due to increased sales volume, which resulted in a $4.8 million, or 28%, increase, as well as higher margins due to improved mix and lower raw material costs, which resulted in a $1.7 million, or 10%, increase. These impacts were partially offset by a $2.8 million, or 16%, decrease due to higher fixed costs.
29
Synthetic Rubber Segment
Our Synthetic Rubber segment produces styrene-butadiene and polybutadiene-based rubber products used predominantly in high-performance tires, impact modifiers and technical rubber products, such as conveyor belts, hoses, seals and gaskets. We have a broad synthetic rubber technology and product portfolio, focusing on specialty products, such as solution styrene-butadiene rubber (“SSBR”), while also producing core products, such as emulsion styrene-butadiene rubber (“ESBR”).
| | | | | | | | | | | | | |
| | | Three Months Ended | | | | | ||||||
| | | March 31, | | | | | | |||||
($ in millions) |
| | 2020 | |
| 2019 | | | % Change | | | ||
Net sales | | | $ | 101.7 | |
| $ | 124.6 | |
| (18) | % | |
Adjusted EBITDA | | | $ | 15.3 | | | $ | 8.8 | |
| 74 | % | |
Adjusted EBITDA margin | | |
| 15 | % | |
| 7 | % | | | | |
Three Months Ended – March 31, 2020 vs. March 31, 2019
Of the 18% decrease in net sales, 7% was due to lower pricing from the pass through of lower raw material costs, mainly from styrene and butadiene, and 8% was due to decreased sales volumes from weak market conditions primarily resulting from the COVID-19 pandemic. An additional 2% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
The $6.5 million, or 74%, increase in Adjusted EBITDA was primarily due to lower fixed costs, from a higher level of fixed cost absorption ahead of the planned second quarter maintenance turnaround, which resulted in a $9.2 million, or 104%, increase. In addition, higher margins, from favorable net timing, resulted in a $2.9 million, or 33%, increase. These impacts were partially offset by lower sales volume as described above, which resulted in a $4.8 million, or 54%, decrease. An additional 5% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
Performance Plastics Segment
Our Performance Plastics segment includes a variety of highly engineered compounds and blends, our acrylonitrile-butadiene-styrene (“ABS”), styrene-acrylonitrile (“SAN”), and polycarbonate (“PC”) businesses, and engineered materials applications, which includes consumer electronics, medical, and thermoplastic elastomers (“TPEs”) applications.
| | | | | | | | | | | | | |
| | | Three Months Ended | | | | | ||||||
| | | March 31, | | | | | | |||||
($ in millions) |
| | 2020 | |
| 2019 | | | % Change | | | ||
Net sales | | | $ | 305.1 | |
| $ | 369.3 | |
| (17) | % | |
Adjusted EBITDA | | | $ | 36.7 | | | $ | 35.5 | |
| 3 | % | |
Adjusted EBITDA margin | | |
| 12 | % | |
| 10 | % | | | | |
Three Months Ended – March 31, 2020 vs. March 31, 2019
Of the 17% decrease in net sales, 12% was due to lower sales volume, due to a delay in our raw material supply chain in PC as well as higher than normal sales volumes in the prior year due to pre-Brexit customer purchases. An additional 4% decrease was due to lower pricing from the pass through of lower raw material costs, primarily styrene.
The $1.2 million, or 3%, increase in Adjusted EBITDA was primarily due to higher margins of 21% from improved customer mix and lower raw material costs. These impacts were partially offset by a $5.8 million, or 16%, decrease due to lower sales volume as described above.
30
Polystyrene Segment
Our product offerings in our Polystyrene segment include a variety of general purpose polystyrenes (“GPPS”) and polystyrene that has been modified with polybutadiene rubber to increase its impact resistant properties (“HIPS”). These products provide customers with performance and aesthetics at a low cost across applications, including appliances, packaging, including food packaging and food service disposables, consumer electronics, and building and construction materials.
| | | | | | | | | | | | | |
| | | Three Months Ended | | | | | ||||||
| | | March 31, | | | | | | |||||
($ in millions) |
| | 2020 | |
| 2019 | | | % Change | | | ||
Net sales | | | $ | 182.8 | |
| $ | 228.5 | |
| (20) | % | |
Adjusted EBITDA | | | $ | 11.8 | | | $ | 16.8 | |
| (30) | % | |
Adjusted EBITDA margin | | |
| 6 | % | |
| 7 | % | | | | |
Three Months Ended – March 31, 2020 vs. March 31, 2019
Of the 20% decrease in net sales, 13% was due to lower sales volume primarily attributable to re-stocking activity in the prior year. There was an additional 6% decrease due to lower pricing from the pass through of lower styrene costs to our customers.
The $5.0 million, or 30%, decrease in Adjusted EBITDA was primarily due to a 26% decrease in sales volume as well as a 5% decrease due to higher fixed costs.
Feedstocks Segment
The Feedstocks segment includes the Company’s production and procurement of styrene monomer outside of North America, which is used as a key raw material for the production of polystyrene, expandable polystyrene, SAN resins, styrene-acrylate latex (“SA latex”), SB latex, ABS resins, unsaturated polyethylene resins, and styrene-butadiene rubber.
| | | | | | | | | | | | | |
| | | Three Months Ended | | | | | ||||||
| | | March 31, | | | | | | |||||
($ in millions) |
| | 2020 | |
| 2019 | | | % Change | | | ||
Net sales | | | $ | 44.8 | |
| $ | 66.8 | |
| (33) | % | |
Adjusted EBITDA | | | $ | (16.2) | | | $ | 17.2 | |
| (194) | % | |
Adjusted EBITDA margin | | |
| (36) | % | |
| 26 | % | | | | |
Three Months Ended – March 31, 2020 vs. March 31, 2019
Of the 33% decrease in net sales, 23% was due to lower styrene-related sales volume and 9% was due to lower pricing from the pass through of lower styrene prices.
The decrease of $33.4 million, or 194%, in Adjusted EBITDA was primarily due to lower margins in Europe and Asia from weaker market conditions, which resulted in a $35.6 million, or 207%, decrease.
Americas Styrenics Segment
This segment consists solely of the equity earnings from of our 50%-owned joint venture, Americas Styrenics, a producer of both styrene monomer and polystyrene in North America. Styrene monomer is a basic building block of plastics and a key input to many of the Company’s products, as well as a key raw material for the production of polystyrene. Major applications for the polystyrene products Americas Styrenics produces include appliances, food packaging, food service disposables, consumer electronics, and building and construction materials.
31
| | | | | | | | | | | | | |
| | | Three Months Ended | | | | | ||||||
| | | March 31, | | | | | | |||||
($ in millions) |
| | 2020 | |
| 2019 | | | % Change | | | ||
Adjusted EBITDA* | | | $ | 9.8 | | | $ | 32.2 | |
| (70) | % | |
*The results of this segment are comprised entirely of earnings from Americas Styrenics, our equity method investment. As such, Adjusted EBITDA related to this segment is included within “Equity in earnings of unconsolidated affiliates” in the condensed consolidated statements of operations.
Three Months Ended – March 31, 2020 vs. March 31, 2019
The decrease in Adjusted EBITDA was mainly due to lower styrene margins and the impact from the planned styrene turnaround at the St. James, Louisiana styrene facility.
Non-GAAP Performance Measures
We present Adjusted EBITDA as a non-GAAP financial performance measure, which we define as income from continuing operations before interest expense, net; provision for income taxes; depreciation and amortization expense; loss on extinguishment of long-term debt; asset impairment charges; gains or losses on the dispositions of businesses and assets; restructuring charges; gains or losses on the dispositions of businesses and assets; restructuring; acquisition related costs and other items. In doing so, we are providing management, investors, and credit rating agencies with an indicator of our ongoing performance and business trends, by removing the impact of transactions and events that we would not consider a part of our core operations.
There are limitations to using the financial performance measures such as Adjusted EBITDA. This performance measure is not intended to represent net income or other measures of financial performance. As such, it should not be used as an alternative to net income as an indicator of operating performance. Other companies in our industry may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use this 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 a reconciliation of this performance measure to our net income, which is determined in accordance with GAAP.
Adjusted EBITDA is calculated as follows for the three months ended March 31, 2020 and 2019:
| | | | | | | | |
| | Three Months Ended | | | ||||
| | March 31, | |
| ||||
(in millions) |
| 2020 |
| 2019 | |
| ||
Net income (loss) |
| $ | (36.3) |
| $ | 35.8 | | |
Interest expense, net | |
| 10.3 | |
| 10.2 | | |
Provision for (benefit from) income taxes | |
| (11.9) | |
| 10.8 | | |
Depreciation and amortization | |
| 36.4 | |
| 33.9 | | |
EBITDA(a) | | $ | (1.5) | | $ | 90.7 | | |
Net gain on disposition of businesses and assets(b) | | | (0.4) | | | (0.2) | | |
Restructuring and other charges(c) | | | 1.8 | | | 0.4 | | |
Acquisition transaction and integration net costs | | | 0.1 | | | — | | |
Asset impairment charges or write-offs(d) | | | 38.3 | | | — | | |
Other items(e) | | | 18.7 | | | 11.1 | | |
Adjusted EBITDA | | $ | 57.0 | | $ | 102.0 | | |
32
(a) | EBITDA is a non-GAAP financial performance measure that we refer to in making operating decisions because we believe it provides our management as well as our investors and credit agencies with meaningful information regarding the Company’s operational performance. 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. 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
|
(b) | The net gain on disposition of businesses and assets for the three
Liquidity and Capital Resources Cash Flows The table below summarizes our primary sources and uses of cash for the three months ended March 31, 2020 and 2019. We have derived the summarized cash flow information from our unaudited financial statements.
33 Operating Activities Net cash used in operating activities during the three months ended March 31, 2020 totaled $5.8 million. Net cash used in operating assets and liabilities for the three months ended March 31, 2020 totaled $14.6 million, noting an increase in accounts receivable of $12.7 million, a decrease in accounts payable and other current liabilities of $28.9 million, and a decrease in income taxes payable of $3.3 million. This activity was partially offset by a decrease in inventories of $26.8 million. Accounts receivable at the end of the first quarter increased relative to the end of 2019 primarily due to higher selling prices in the Performance Plastics and Polystyrene segments during the period. The decrease in accounts payable and other current liabilities was due to timing of vendor payments, while the decrease in income taxes payable was primarily due to the overall reduction in earnings before income taxes. The decrease in inventories was primarily due to actions taken to reduce inventory levels as well as decreased raw material prices. Net cash provided by operating activities during the three months ended March 31, 2019 totaled $153.2 million, inclusive of $12.5 million in dividends from Americas Styrenics. Net cash provided by operating assets and liabilities for the three months ended March 31, 2019 totaled $105.4 million, noting a decrease in inventories of $57.7 million as well as an increase in accounts payable and other current liabilities of $49.4 million. These fluctuations were partially offset by an increase in accounts receivable of $4.8 million. The decrease in inventories was due to actions taken to reduce inventory levels as well as decreased raw material prices, while the increase in accounts payable and other current liabilities was primarily due to timing of vendor payments. Accounts receivable at the end of the first quarter increased relative to the end of 2018 primarily due to increased sales volume. Investing Activities Net cash provided by investing activities during the three months ended March 31, 2020 totaled $39.1 million, primarily resulting from proceeds from the settlement of hedging instruments of $51.6 million (see Note 8) as well as proceeds from the sale of businesses and other assets (primarily our land in Livorno, Italy – see Note 16) of $11.6 million. These impacts were partially offset by capital expenditures of $24.3 million. Net cash used in investing activities during the three months ended March 31, 2019 totaled $24.3 million, primarily resulting from capital expenditures of $25.0 million. Financing Activities Net cash used in financing activities during the three months ended March 31, 2020 totaled $46.7 million. This activity was primarily due to $25.0 million of payments related to the repurchase of ordinary shares, $15.9 million of dividends paid, $3.5 million of net repayments of short-term borrowings, and $1.7 million of net principal payments related to our 2024 Term Loan B during the period. Net cash used in financing activities during the three months ended March 31, 2019 totaled $60.4 million. This activity was primarily due to $37.4 million of payments related to the repurchase of ordinary shares, $17.4 million of dividends paid, and $1.8 million of net principal payments related to our 2024 Term Loan B during the period. Additionally, net cash used in financing activities included $3.8 million of withholding taxes paid related to the vesting of certain RSUs during the period. Free Cash Flow We use Free Cash Flow as a non-GAAP measure to evaluate and discuss the Company’s liquidity position and results. Free Cash Flow is defined as cash from operating activities, less capital expenditures. We believe that Free Cash Flow provides an indicator of the Company’s ongoing ability to generate cash through core operations, as it excludes the cash impacts of various financing transactions as well as cash flows from business combinations that are not considered organic in nature. We also believe that Free Cash Flow provides management and investors with a useful analytical indicator of our ability to service our indebtedness, pay dividends (when declared), and meet our ongoing cash obligations. 34 Free Cash Flow is not intended to represent cash flows from operations as defined by GAAP, and therefore, should not be used as an alternative for that measure. Other companies in our industry may define Free Cash Flow differently than we do. As a result, it may be difficult to use this or similarly-named financial measures that other companies may use, to compare the liquidity and cash generation of those companies to our own. We compensate for these limitations by providing a reconciliation to cash provided by (used in) operating activities, which is determined in accordance with GAAP.
Refer to the discussion on the previous page for significant impacts to cash provided by operating activities for the three months ended March 31, 2020 and 2019. Capital Resources and Liquidity We require cash principally for day-to-day operations, to finance capital investments and other initiatives, to purchase materials, to service our outstanding indebtedness, and to fund the return of capital to shareholders via dividend payments and ordinary share repurchases, when deemed appropriate. Our sources of liquidity include cash on hand, cash flow from operations, and amounts available under the Senior Credit Facility and the Accounts Receivable Securitization Facility (discussed further below). As of March 31, 2020 and December 31, 2019, we had $1,193.6 million and $1,194.7 million, respectively, in outstanding indebtedness and $956.7 million and $963.5 million, respectively, in working capital. In addition, as of March 31, 2020 and December 31, 2019, we had $69.2 million and $153.5 million, respectively, of foreign cash and cash equivalents on our balance sheet, outside of our country of domicile of Luxembourg, all of which is readily convertible into other foreign currencies, including the U.S. dollar. Our intention is not to permanently reinvest our foreign cash and cash equivalents. Accordingly, we record deferred income tax liabilities related to the unremitted earnings of our subsidiaries. The following table outlines our outstanding indebtedness as of March 31, 2020 and December 31, 2019 and the associated interest expense, including amortization of deferred financing fees and debt discounts. Effective interest rates for the borrowings included in the table below exclude the impact of deferred financing fee amortization, certain other fees charged to interest expense (such as fees for unused commitment fees during the period), and the impacts of derivatives designated as hedging instruments. For definitions of capitalized terms not included herein, refer to our Annual Report.
*For the three months ended March 31, 2020, interest expense on “Other indebtedness” totaled less than $0.1 million. 35 Our Senior Credit Facility includes the 2022 Revolving Facility, which matures in September 2022, and has a borrowing capacity of $375.0 million. As of March 31, 2020, the Company had no outstanding borrowings, and had $360.9 million (net of $14.1 million outstanding letters of credit) of funds available for borrowing under the 2022 Revolving Facility. Further, as of March 31, 2020, the Company is required to pay a quarterly commitment fee in respect of any unused commitments under the 2022 Revolving Facility equal to 0.375% per annum. On April 3, 2020, the Company drew down $100.0 million from the 2022 Revolving Credit Facility as a precautionary measure to secure additional cash and ensure greater financial flexibility in light of the current economic uncertainty resulting from the COVID-19 pandemic. There is a springing covenant on the 2022 Revolving Credit Facility, subject to a first lien net leverage ratio not to exceed 2.0x, which applies when 30% ($112.5 million) or more is drawn from the facility at the end of a financial quarter. As of March 31, 2020 the first lien net leverage ratio (as defined in our secured credit agreement) was 0.7x. Also included in our Senior Credit Facility is our 2024 Term Loan B (with original principal of $700.0 million, maturing in September 2024), which requires scheduled quarterly payments in amounts equal to 0.25% of the original principal. The stated interest rate on our 2024 Term Loan B is LIBOR plus 2.00% (subject to a 0.00% LIBOR floor). The Company made net principal payments of $1.7 million on the 2024 Term Loan B during the three months ended March 31, 2020, with an additional $7.0 million of scheduled future payments classified as current debt on the Company’s condensed consolidated balance sheet as of March 31, 2020. Our 2025 Senior Notes, as issued under the Indenture, include $500.0 million aggregate principal amount of 5.375% senior notes that mature on September 1, 2025. Interest on the 2025 Senior Notes is payable semi-annually on May 3 and November 3 of each year, which commenced on May 3, 2018. These notes may be redeemed prior to their maturity at the option of the Company under certain circumstances at specific redemption prices. Refer to our Annual Report for further information. We continue to maintain our Accounts Receivable Securitization Facility which has a borrowing capacity of $150.0 million and matures in September 2021. As of March 31, 2020, there were no amounts outstanding under this facility, and the Company had approximately $135.6 million of accounts receivable available to support this facility, based on the pool of eligible accounts receivable. 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 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. Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (the “Issuers” of our 2025 Senior Notes and “Borrowers” under our Senior Credit Facility) are dependent upon the cash generation and receipt of distributions and dividends or other payments from our subsidiaries and joint venture in order to satisfy their debt obligations. There are no known significant restrictions by third parties on the ability of subsidiaries of the Company to disburse or dividend funds to the Issuers and the Borrowers in order to satisfy these obligations. However, as the Company’s subsidiaries are located in a variety of jurisdictions, the Company can give no assurances that our subsidiaries will not face transfer restrictions in the future due to regulatory or other reasons beyond our control. The Senior Credit Facility and Indenture also limit the ability of the Borrowers and Issuers, respectively, to pay dividends or make other distributions to Trinseo S.A., which could then be used to make distributions to shareholders. During the three months ended March 31, 2020, the Company declared dividends of $0.40 per ordinary share, totaling $15.5 million, all of which was accrued as of March 31, 2020 and which was paid in April 2020. These dividends are well within the available capacity under the terms of the restrictive covenants contained in the Senior Credit Facility and Indenture. Further, additional capacity continues to be available under the terms of these covenants to support expected future dividends to shareholders, should the Company continue to declare them. 36 The Company’s cash flow generation in recent years has been strong, with positive cash flows expected to continue for full year 2020. During the three months ended March 31, 2020, under authority from our board of directors, the Company purchased approximately 0.8 million ordinary shares from our shareholders through open market transactions for an aggregate purchase price of $25.0 million. We believe that funds provided by operations, our existing cash, cash equivalent, and restricted cash balances, borrowings available under our 2022 Revolving Facility and our Accounts Receivable Securitization Facility will be adequate to meet planned operating and capital expenditures for at least the next 12 months under current operating conditions. Further, we also believe that our financial resources will allow us to manage the anticipated impact of the COVID-19 pandemic on our business operations for the foreseeable future, which could include lower demand, reductions in revenue or delays in payments from customers and other third parties. Our ability to generate cash from operations to pay our indebtedness and meet other liquidity needs is subject to certain risks described herein and under Part I, Item 1A-“Risk Factors” of our Annual Report. As of March 31, 2020, we were in compliance with all the covenants and default provisions under our debt agreements. Refer to our Annual Report for further information on the details of the covenant requirements. Contractual Obligations and Commercial Commitments 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 Annual Report. Critical Accounting Policies and Estimates Our unaudited interim condensed consolidated financial statements are based on the selection and application of significant accounting policies. The preparation of unaudited interim condensed 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 2, Basis of Presentation and Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report, while we discuss our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Annual Report. There have been no material revisions to the significant accounting policies or critical accounting policies and estimates as filed in our Annual Report. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Recent Accounting Pronouncements We describe the impact of recent accounting pronouncements in Note 2 of our condensed consolidated financial statements, included elsewhere within this Quarterly Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk As discussed in “Quantitative and Qualitative Disclosures About Market Risk” within our Annual Report, 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 Annual Report. 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, 37 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. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2020. 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 were effective to provide the reasonable level of assurance described above. 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 March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II — OTHER INFORMATION Item 1. Legal Proceedings 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. Item 1A. Risk 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 related to our ordinary shares as well those risk factors related to our business and industry which have been previously disclosed in Part 1, Item 1A of our Annual Report for the year ended December 31, 2019. We are including the following additional risk factor, which updates the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. 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. The extent to which the novel coronavirus (“COVID-19”) pandemic will adversely impact our business, financial condition and results of operations is highly uncertain and cannot be predicted but could be material. The COVID-19 pandemic has created significant worldwide volatility, uncertainty and disruption, and the situation remains dynamic and subject to rapid and possibly material change. In particular, the COVID-19 pandemic has resulted in a substantial curtailment of business activities, a significant number of business closures, suspensions or delays of production and commercial activity, government-mandated “shelter-in-place” and travel restrictions, and weakened economic conditions in the countries in which we operate. The extent to which the COVID-19 pandemic will ultimately adversely impact our business, liquidity, financial condition and results of operations, which impact could be material, depends on numerous factors that are highly uncertain and cannot be predicted at this time. These factors include the duration and scope of the COVID-19 pandemic, travel restrictions and “shelter-in-place” directives; changes in customer demand; our relationship with, and the financial and operational capacities of, our customers and suppliers; impacts of raw material and feedstock prices affecting the cost competitiveness of our operations relative to similar operations in other regions; the health and safety of our employees and costs incurred to keep our employees safe while maintaining continued operations, including our ability to adjust our production schedules; potential future restructuring, impairment and other charges; and the impact on economic activity generally, including a global or national recession or depression, or other sustained adverse market conditions. 38 Uncertain or depressed economic conditions, increased unemployment or a decline in consumer confidence as a result of the COVID-19 outbreak, could have an adverse effect on demand for our products and our customers’ products or otherwise adversely alter customer demand patterns which may negatively impact our business, liquidity, financial condition and results of operations. The COVID-19 pandemic may also disrupt our supply chain, transportation and logistics networks, including the ability of our third party suppliers’ or logistics and transportation service providers to meet their obligations to us, which may negatively affect our operations. Ports and other channels of entry may be closed or operate at only a portion of capacity, and means of transporting products within regions or countries in which we operate may be limited. In addition, if the COVID-19 crisis persists we face additional risks related to our liquidity and financial results, including risks associated with our indebtedness, including available capacity, compliance with financial covenants; risks related to the adequacy of our cash flow and earnings and other conditions which may affect our liquidity; and risks related to our ongoing ability to pay our quarterly dividend at prior levels. Our efforts to manage and mitigate these factors and risks through cost-savings and other measures may not be successful and are subject to the factors described above, many of which are uncertain or outside of our control. We believe that business disruption relating to the COVID-19 pandemic will continue to negatively impact the global economy and may materially affect our businesses as outlined above, all of which would adversely impact our business and results of operations. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a)
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None.
(b) | Use of Proceeds from registered securities |
None.
(c) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
The following table contains information regarding purchases of our ordinary shares made during the quarter ended March 31, 2020 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934:
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Issuer Purchases of Equity Securities | ||||||||||
Period | | Total number of shares purchased | | Average price | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate number of shares that may yet be purchased under the plans or programs | ||
January 1 - January 31, 2020 | | 365,977 | | $ | 33.05 | | 365,977 | | 2,046,617 | (1) |
February 1 - February 29, 2020 | | 448,157 | | $ | 28.80 | | 448,157 | | 1,598,460 | (1) |
March 1 - March 31, 2020 | | — | | $ | — | | — | | 1,598,460 | (1) |
Total | | 814,134 | | $ | 30.71 | | 814,134 | | | |
(1) | At our annual general meeting held on June 19, 2019, our shareholders authorized the Company to terminate the 2017 share repurchase authorization and replace it with a new authorization to repurchase up to 4.0 million ordinary shares over the next eighteen months at a price per share of not less than $1.00 and not more than $1,000.00. |
Item 3. Defaults Upon Senior Securities
None.
39
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
40
EXHIBIT INDEX
Exhibit No. | Description | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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4.1 | | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
4.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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10.1*† | Agreement between Trinseo, LLC and Angelo Chaclas dated January 1, 2020. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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10.2*† | Agreement between Timothy Stedman and Trinseo Europe GmbH dated January 1, 2020. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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10.3* | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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31.1† | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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31.2† |
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32.2† | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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101.INS† | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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101.SCH† | XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document
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104†
† Filed herewith. * Compensatory plan or arrangement |
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