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, 20172022
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 PLC
Trinseo S.A.
(Exact name of registrant as specified in its charter)
| |
Ireland | N/A |
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
440 East Swedesford Road
1000 Chesterbrook BoulevardSuite 301
Suite 300Wayne, PA19087
Berwyn, PA 19312
(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,October 28, 2022, there were 43,704,68934,973,747 of the registrant’s ordinary shares outstanding.
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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2
Trinseo PLC
Trinseo S.A.
Quarterly Report on Form 10-Q
For the quarterly period ended September 30, 20172022
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.PLC (NYSE: TSE), a public limited liability company (société anonyme) existing under the laws of Luxembourg,Ireland, and not its subsidiaries. The terms “Company,” “we,” “us” and “our” refer to Trinseo and its consolidated subsidiaries, taken as a consolidated entity. Trinseo PLC is the surviving entity of a cross-border merger with our predecessor company, Trinseo S.A., which merger was approved by shareholders in June 2021 and completed in October 2021. All financial data provided in this Quarterly Report is the financial data of the Company,Trinseo PLC, 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 The Company may distribute cash to shareholders under Irish law via dividends or managed by affiliatesdistributions made out of Bain Capital Partners, LLCdistributable profits.
Definitions of capitalized terms not defined herein appear within our Annual Report on Form 10-K for the year ended December 31, 2021 (“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”). on February 23, 2022.
Definitions of capitalized terms not defined herein appear in the notes to our condensed consolidated financial statements.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, all distributions have 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, forecasts, 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,” “believe,” “intend,” “forecast,” ”estimate,” “see,” “outlook,” “will,” “may,” “might,” “potential,” “likely,” “target,” “plan,” “contemplate,” “seek,” “attempt,” “should,” “could,” “would”“would,” or expressions of similar meaning. Forward-looking statements reflect management’s evaluation of information currently available and are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.
Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. Factors that might cause such a difference include, but are not limited to, our ability to successfully execute our transformation strategy and business strategy; our ability to integrate acquired businesses; global supply chain volatility, increased costs or disruption in the supply of raw materials; increased energy costs or costs for transportation of our products; the outcome of the European Commission request for information; the nature of investment opportunities presented to the Company from time to time; and 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 23, 2022 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 SEC from time to time.
As a result of these or other factors, our actual results, performance or achievements 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.PLC
Condensed Consolidated Balance Sheets
(In thousands,millions, except per share data)
(Unaudited)
| | | | | | | |
| | September 30, | | December 31, | | ||
|
| 2022 | | 2021 | | ||
Assets |
| | | | |
| |
Current assets | | | | | | | |
Cash and cash equivalents | | $ | 242.8 | | $ | 573.0 | |
Accounts receivable, net of allowance for doubtful accounts (September 30, 2022: $6.0; December 31, 2021: $4.1) | | | 673.7 | | | 740.2 | |
Inventories | |
| 614.0 | |
| 621.0 | |
Other current assets | |
| 40.5 | |
| 44.3 | |
Total current assets | |
| 1,571.0 | |
| 1,978.5 | |
Investments in unconsolidated affiliates | |
| 269.2 | |
| 247.8 | |
Property, plant and equipment, net of accumulated depreciation (September 30, 2022: $579.3; December 31, 2021: $556.5) | |
| 638.3 | | | 719.0 | |
Other assets | | | | | | | |
Goodwill | |
| 691.9 | |
| 710.1 | |
Other intangible assets, net | |
| 764.7 | |
| 823.8 | |
Right-of-use assets - operating, net | | | 74.8 | | | 85.3 | |
Deferred income tax assets | |
| 62.6 | |
| 77.6 | |
Deferred charges and other assets | |
| 59.4 | |
| 70.1 | |
Total other assets | |
| 1,653.4 | |
| 1,766.9 | |
Total assets | | $ | 4,131.9 | | $ | 4,712.2 | |
Liabilities and shareholders’ equity | | | | | | | |
Current liabilities | | | | | | | |
Short-term borrowings and current portion of long-term debt | | $ | 16.7 | | $ | 18.5 | |
Accounts payable | |
| 442.2 | |
| 590.3 | |
Current lease liabilities - operating | | | 17.9 | | | 18.4 | |
Income taxes payable | |
| 25.4 | |
| 52.1 | |
Accrued expenses and other current liabilities | |
| 215.4 | |
| 235.1 | |
Total current liabilities | |
| 717.6 | |
| 914.4 | |
Noncurrent liabilities | | | | | | | |
Long-term debt, net of unamortized deferred financing fees | |
| 2,297.8 | |
| 2,305.6 | |
Noncurrent lease liabilities - operating | | | 59.3 | | | 69.2 | |
Deferred income tax liabilities | |
| 91.5 | |
| 103.2 | |
Other noncurrent obligations | |
| 267.6 | |
| 306.7 | |
Total noncurrent liabilities | |
| 2,716.2 | |
| 2,784.7 | |
Commitments and contingencies (Note 13) | | | | | | | |
Shareholders’ equity | | | | | | | |
Ordinary shares, $0.01 nominal value, 4,000.0 shares authorized (September 30, 2022: 39.2 shares issued and 35.1 shares outstanding; December 31, 2021: 38.9 shares issued and 37.9 shares outstanding) | | | 0.4 | | | 0.4 | |
Preferred shares, €0.01 nominal value, 1,000.0 shares authorized (no shares issued or outstanding) | | | — | | | — | |
Deferred ordinary shares, €1.00 nominal value, 0.025 shares authorized (September 30, 2022: 0.025 shares issued and outstanding; December 31, 2021: 0.025 shares issued and outstanding) | | | — | | | — | |
Additional paid-in-capital | |
| 483.7 | |
| 468.1 | |
Treasury shares, at cost (September 30, 2022: 4.1 shares; December 31, 2021: 1.0 shares) | | | (200.0) | | | (50.0) | |
Retained earnings | |
| 641.0 | |
| 741.8 | |
Accumulated other comprehensive loss | |
| (227.0) | |
| (147.2) | |
Total shareholders’ equity | |
| 698.1 | |
| 1,013.1 | |
Total liabilities and shareholders’ equity | | $ | 4,131.9 | | $ | 4,712.2 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
| 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 PLC
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(Unaudited)
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | ||||||||
| | September 30, | | September 30, | |
| ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| ||||
Net sales |
| $ | 1,178.1 |
| $ | 1,269.3 |
| $ | 3,990.3 |
| $ | 3,529.0 | | |
Cost of sales | |
| 1,217.6 | |
| 1,101.0 | |
| 3,714.8 | |
| 2,951.7 | | |
Gross profit (loss) | |
| (39.5) | |
| 168.3 | |
| 275.5 | |
| 577.3 | | |
Selling, general and administrative expenses | |
| 80.5 | |
| 76.4 | |
| 262.8 | |
| 230.4 | | |
Equity in earnings of unconsolidated affiliates | |
| 22.8 | |
| 17.1 | |
| 83.8 | |
| 70.2 | | |
Other charges | | | 1.9 | | | 1.2 | | | 39.5 | | | 3.0 | | |
Operating income (loss) | |
| (99.1) | |
| 107.8 | |
| 57.0 | |
| 414.1 | | |
Interest expense, net | |
| 30.4 | |
| 23.0 | |
| 77.7 | |
| 56.6 | | |
Acquisition purchase price hedge loss | | | — | | | — | |
| — | |
| 22.0 | | |
Other expense (income), net | |
| 0.5 | |
| (0.1) | | | 1.6 | | | 8.4 | | |
Income (loss) from continuing operations before income taxes | |
| (130.0) | |
| 84.9 | |
| (22.3) | |
| 327.1 | | |
Provision for (benefit from) income taxes | |
| (12.1) | |
| 5.5 | |
| 41.4 | |
| 48.9 | | |
Net income (loss) from continuing operations | | | (117.9) | | | 79.4 | | | (63.7) | | | 278.2 | | |
Net income (loss) from discontinued operations, net of income taxes | | | (1.9) | | | 13.7 | | | (1.9) | | | 38.0 | | |
Net income (loss) | | $ | (119.8) | | $ | 93.1 | | $ | (65.6) | | $ | 316.2 | | |
Weighted average shares- basic | | | 35.2 | | | 38.8 | | | 36.3 | | | 38.7 | | |
Net income (loss) per share- basic: | | | | | | | | | | | | | | |
Continuing operations | | $ | (3.35) | | $ | 2.04 | | $ | (1.76) | | $ | 7.19 | | |
Discontinued operations | | | (0.06) | | | 0.35 | | | (0.05) | | | 0.98 | | |
Net income (loss) per share- basic | | $ | (3.41) | | $ | 2.39 | | $ | (1.81) | | $ | 8.17 | | |
Weighted average shares- diluted | |
| 35.2 | |
| 39.5 | |
| 36.3 | |
| 39.6 | | |
Net income (loss) per share- diluted: | | | | | | | | | | | | | | |
Continuing operations | | $ | (3.35) | | $ | 2.01 | | $ | (1.76) | | $ | 7.03 | | |
Discontinued operations | | | (0.06) | | | 0.35 | | | (0.05) | | | 0.96 | | |
Net income (loss) per share- diluted | | $ | (3.41) | | $ | 2.36 | | $ | (1.81) | | $ | 7.99 | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
5
TRINSEO S.A.PLC
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 | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | | ||||
Net income (loss) |
| $ | (119.8) | | $ | 93.1 |
| $ | (65.6) |
| $ | 316.2 |
|
Other comprehensive income (loss), net of tax: | |
| | | | | | | | | | | |
Cumulative translation adjustments (net of tax of $0.0, $0.0, $3.9, $0.0) | | | (45.0) | | | (1.7) | | | (84.1) | |
| (2.0) | |
Net gain (loss) on cash flow hedges (net of tax of $0.0, $0.0, $0.6, $0.0) | | | (5.6) | | | 1.2 | | | (3.8) | | | 5.6 | |
Pension and other postretirement benefit plans: | | | | | | | | | | | | | |
Net gain arising during period (net of tax of $0.8, $1.0, $1.6, $1.0) | | | 2.4 | | | 9.3 | | | 10.0 | | | 9.3 | |
Amounts reclassified from accumulated other comprehensive income | | | (0.9) | | | (1.2) | | | (1.9) | | | 0.9 | |
Total other comprehensive income (loss), net of tax | |
| (49.1) | |
| 7.6 | |
| (79.8) | |
| 13.8 | |
Comprehensive income (loss) | | $ | (168.9) | | $ | 100.7 | | $ | (145.4) | | $ | 330.0 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
6
TRINSEO S.A.PLC
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 | | Deferred Ordinary Shares |
| Ordinary Shares | | Deferred Ordinary Shares | | Additional |
| Treasury Shares |
| Accumulated Other Comprehensive Income (Loss) |
| Retained Earnings |
| Total | |||||||
Balance at December 31, 2021 |
| 37.9 | | 1.0 | | — | | $ | 0.4 | | $ | — | | $ | 468.1 | | $ | (50.0) | | $ | (147.2) | | $ | 741.8 | | $ | 1,013.1 |
Net income |
| — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 16.7 | |
| 16.7 |
Other comprehensive loss |
| — | | — | | — | | | — | | | — | | | — | | | — | | | (2.5) | | | — | |
| (2.5) |
Share-based compensation activity |
| 0.2 | | — | | — | | | — | | | — | | | 7.6 | | | — | | | — | | | — | |
| 7.6 |
Purchase of treasury shares | | (0.9) | | 0.9 | | | | | — | | | | | | — | | | (50.0) | | | — | | | — | | | (50.0) |
Dividends on ordinary shares ($0.32 per share) | | — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (12.1) | | | (12.1) |
Balance at March 31, 2022 |
| 37.2 | | 1.9 | | — | | $ | 0.4 | | $ | — | | $ | 475.7 | | $ | (100.0) | | $ | (149.7) | | $ | 746.4 | | $ | 972.8 |
Net income |
| — | | — | | — | |
| — | | | — | |
| — | |
| — | |
| — | |
| 37.4 | |
| 37.4 |
Other comprehensive loss |
| — | | — | | — | |
| — | | | — | |
| — | |
| — | |
| (28.2) | |
| — | |
| (28.2) |
Share-based compensation activity |
| 0.1 | | — | | — | |
| — | | | — | |
| 4.4 | |
| — | |
| — | |
| — | |
| 4.4 |
Purchase of treasury shares | | (1.0) | | 1.0 | | | | | — | | | | | | — | | | (50.0) | | | — | | | — | | | (50.0) |
Dividends on ordinary shares ($0.32 per share) | | — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (11.8) | | | (11.8) |
Balance at June 30, 2022 |
| 36.3 | | 2.9 | | — | | $ | 0.4 | | $ | — | | $ | 480.1 | | $ | (150.0) | | $ | (177.9) | | $ | 772.0 | | $ | 924.6 |
Net loss |
| — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (119.8) | |
| (119.8) |
Other comprehensive loss |
| — | | — | | — | | | — | | | — | | | — | | | — | | | (49.1) | | | — | |
| (49.1) |
Share-based compensation activity |
| — | | — | | — | | | — | | | — | | | 3.6 | | | — | | | — | | | — | |
| 3.6 |
Purchase of treasury shares | | (1.2) | | 1.2 | | — | | | — | | | — | | | — | | | (50.0) | | | — | | | — | | | (50.0) |
Dividends on ordinary shares ($0.32 per share) | | — | | — | | | | | — | | | — | | | — | | | — | | | — | | | (11.2) | | | (11.2) |
Balance at September 30, 2022 |
| 35.1 | | 4.1 | | — | | $ | 0.4 | | $ | — | | $ | 483.7 | | $ | (200.0) | | $ | (227.0) | | $ | 641.0 | | $ | 698.1 |
7
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Shares |
| Shareholders' Equity | |||||||||||||||||||||||
|
| Ordinary Shares Outstanding | | Treasury Shares | | Deferred Ordinary Shares |
| Ordinary Shares | | Deferred Ordinary Shares | | Additional |
| Treasury Shares |
| Accumulated Other Comprehensive Income (Loss) |
| Retained Earnings |
| Total | |||||||
Balance at December 31, 2020 |
| 38.4 | | 10.4 | | — | | $ | 0.5 | | | — | | $ | 579.6 | | $ | (542.9) | | $ | (186.1) | | $ | 739.2 | | $ | 590.3 |
Net income |
| — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 71.5 | |
| 71.5 |
Other comprehensive income |
| — | | — | | — | | | — | | | — | | | — | | | — | | | 6.1 | | | — | |
| 6.1 |
Share-based compensation activity |
| 0.3 | | (0.3) | | — | | | — | | | — | | | (1.1) | | | 12.9 | | | — | | | — | |
| 11.8 |
Dividends on ordinary shares ($0.08 per share) | | — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (3.4) | | | (3.4) |
Balance at March 31, 2021 |
| 38.7 | | 10.1 | | — | | $ | 0.5 | | | — | | $ | 578.5 | | $ | (530.0) | | $ | (180.0) | | $ | 807.3 | | $ | 676.3 |
Net income |
| — | | — | | — | |
| — | | | — | |
| — | |
| — | |
| — | |
| 151.6 | |
| 151.6 |
Other comprehensive income |
| — | | — | | — | |
| — | | | — | |
| — | |
| — | |
| 0.1 | |
| — | |
| 0.1 |
Share-based compensation activity |
| 0.1 | | (0.1) | | — | |
| — | | | — | |
| 0.2 | |
| 4.7 | |
| — | |
| — | |
| 4.9 |
Dividends on ordinary shares ($0.08 per share) | | — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (3.1) | | | (3.1) |
Balance at June 30, 2021 |
| 38.8 | | 10.0 | | — | | $ | 0.5 | | | — | | $ | 578.7 | | $ | (525.3) | | $ | (179.9) | | $ | 955.8 | | $ | 829.8 |
Net income |
| — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | 93.1 | |
| 93.1 |
Other comprehensive income |
| — | | — | | — | | | — | | | — | | | — | | | — | | | 7.6 | | | — | |
| 7.6 |
Share-based compensation activity |
| — | | — | | — | | | — | | | — | | | 3.5 | | | 0.5 | | | — | | | — | |
| 4.0 |
Dividends on ordinary shares ($0.32 per share) | | — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (12.5) | | | (12.5) |
Balance at September 30, 2021 |
| 38.8 | | 10.0 | | — | | $ | 0.5 | | | — | | $ | 582.2 | | $ | (524.8) | | $ | (172.3) | | $ | 1,036.4 | | $ | 922.0 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
|
8
TRINSEO PLC
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
| | | | | | | |
| | Nine Months Ended | | ||||
| | September 30, | | ||||
|
| 2022 |
| 2021 | | ||
Cash flows from operating activities |
| |
|
| |
|
|
Net income (loss) | | $ | (65.6) | | $ | 316.2 | |
Less: Net income (loss) from discontinued operations | | | (1.9) | | | 38.0 | |
Net income (loss) from continuing operations | | | (63.7) | | | 278.2 | |
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities - continuing operations | | | | | | | |
Depreciation and amortization | |
| 147.1 | |
| 111.0 | |
Amortization of deferred financing fees and issuance discount | |
| 6.9 | |
| 5.5 | |
Deferred income tax | |
| (8.0) | |
| 0.2 | |
Share-based compensation expense | |
| 15.6 | |
| 11.0 | |
Earnings of unconsolidated affiliates, net of dividends | |
| (21.3) | |
| (10.2) | |
Unrealized net gain (loss) on foreign exchange forward contracts | |
| 1.6 | |
| (25.2) | |
Acquisition purchase price hedge loss | | | — | | | 22.0 | |
Pension curtailment and settlement gain | | | (3.0) | | | (2.1) | |
Asset impairment charges or write-offs | |
| 3.9 | | | 3.0 | |
Changes in assets and liabilities | | | | | | | |
Accounts receivable | |
| 5.1 | |
| (280.8) | |
Inventories | |
| (43.1) | |
| (196.7) | |
Accounts payable and other current liabilities | |
| (81.9) | |
| 248.7 | |
Income taxes payable | |
| (23.7) | |
| 22.3 | |
Other assets, net | |
| 13.5 | |
| (9.2) | |
Other liabilities, net | |
| 61.8 | |
| 41.0 | |
Cash provided by operating activities - continuing operations | |
| 10.8 | |
| 218.7 | |
Cash provided by (used in) operating activities - discontinued operations | | | (1.4) | | | 19.5 | |
Cash provided by operating activities | | | 9.4 | | | 238.2 | |
Cash flows from investing activities | | | | | | | |
Capital expenditures | |
| (94.0) | |
| (64.7) | |
Cash paid for asset or business acquisitions, net of cash acquired ($1.0 and $12.1) | | | (22.2) | | | (1,806.6) | |
Proceeds from the sale of businesses and other assets | |
| 5.3 | |
| 0.2 | |
Proceeds from (payments for) the settlement of hedging instruments | | | 1.9 | | | (14.7) | |
Cash used in investing activities - continuing operations | |
| (109.0) | |
| (1,885.8) | |
Cash used in investing activities - discontinued operations | | | (0.8) | | | (3.3) | |
Cash used in investing activities | | | (109.8) | | | (1,889.1) | |
Cash flows from financing activities | | | | | | | |
Deferred financing fees | |
| — | |
| (35.0) | |
Short-term borrowings, net | |
| (12.2) | |
| (11.6) | |
Purchase of treasury shares | | | (151.9) | | | — | |
Dividends paid | | | (36.3) | | | (9.5) | |
Proceeds from exercise of option awards | | | 2.9 | | | 10.5 | |
Withholding taxes paid on restricted share units | | | (3.1) | | | (0.8) | |
Repurchases and repayments of long-term debt | | | (12.9) | | | (7.1) | |
Net proceeds from issuance of 2028 Term Loan B | | | — | | | 746.3 | |
Net proceeds from issuance of 2029 Senior Notes | | | — | | | 450.0 | |
Proceeds from draw on Accounts Receivable Securitization Facility | |
| — | |
| 150.0 | |
Repayments of Accounts Receivable Securitization Facility | |
| — | |
| (20.0) | |
Cash provided by (used in) financing activities | |
| (213.5) | |
| 1,272.8 | |
Effect of exchange rates on cash | |
| (16.3) | |
| (3.1) | |
Net change in cash, cash equivalents, and restricted cash | |
| (330.2) | |
| (381.2) | |
Cash, cash equivalents, and restricted cash—beginning of period | |
| 573.0 | |
| 588.7 | |
Cash, cash equivalents, and restricted cash—end of period | | $ | 242.8 | | $ | 207.5 | |
Less: Restricted cash | | | — | | | — | |
Cash and cash equivalents—end of period | | $ | 242.8 | | $ | 207.5 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
9
TRINSEO S.A.PLC
Condensed Consolidated Statements of Shareholders’ Equity
(In thousands, 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 (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 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.PLC and its subsidiaries (the “Company”) as of and for the periods ended September 30, 20172022 and 20162021 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 20162021 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 March 1, 2017.February 23, 2022. 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 September 30, 2022. However, actual results could differ from these estimates and assumptions.
The December 31, 20162021 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 20162021 audited consolidated financial statements, but does not include all disclosures required by GAAP for annual periods.
Certain prior year amounts have been reclassified to conform to the current periodyear presentation. These reclassifications did not haveThroughout this Quarterly Report, unless otherwise indicated, amounts and activity are presented on a material impact on the Company’s financial position or results. Refer to Note 14 for further information.continuing operations basis.
NOTE 2—RECENT ACCOUNTING GUIDANCE
In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointlyAs of September 30, 2022, there was no recently issued guidanceaccounting standards 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, the FASB issued guidance which simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value (“NRV”) test. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation. The Company adopted this guidance effective January 1, 2017, and the adoption did notwould have a material impact to the Company’s financial position or results of operations.
In February 2016, the FASB issued guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognizeeffect on the consolidated balance sheets lease liabilities and corresponding right-of-use assets for all leases with terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. This new guidance is effective for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. The Company is in the process of assessing the impact on its consolidated financial
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 statementfinancial statements.
NOTE 3—ACQUISITIONS
Acquisition of Heathland B.V.
On January 3, 2022, the Company completed the acquisition of Heathland B.V. (“Heathland”) from Heathland Holding B.V. (“Heathland Holding”), through the purchase of all issued and outstanding shares (the “Heathland Acquisition”). The Heathland Acquisition was completed pursuant to the Sale and Purchase Agreement dated December 3, 2021 (“Heathland Agreement”), by and between the Company and Heathland Holding. Heathland is a leading collector and recycler of post-consumer and post-industrial plastic wastes in Europe. The total purchase price consideration is estimated to be $29.3 million, including an initial cash flowspurchase price of $22.9 million, as well as $6.4 million of contingent cash consideration, representing the fair value of certain earn-out payments. The maximum amount of potential earn-out payments is $6.8 million, which amounts will become payable to Heathland Holding as and when the related performance milestones or thresholds are achieved over the three-year period following the date of acquisition. The Heathland Acquisition was funded through existing cash on hand.
10
Additionally, the Heathland Agreement includes a service fee of approximately $4.5 million, payable to Heathland Holdings contingent upon the continued employment of certain Heathland employees for three years following the acquisition date. The Company has not included this service fee as part of the estimated purchase price and instead will accrue for the service fee as compensation expense over the three-year period in which it is earned.
The Company accounted for the acquisition as a business combination pursuant to ASC 805. In accordance with ASC 805, fair values are assigned to tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date based on the information that was available as of the acquisition date.
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. During the third quarter of 2022, there were no changes to the purchase price allocation for the Heathland Acquisition.
The table below summarizes the purchase price allocation for the assets acquired and liabilities assumed, based on their relative fair values, which have been assessed as of the January 3, 2022 acquisition date:
| | | |
| | January 3, | |
|
| 2022 | |
Cash and cash equivalents | | $ | 1.0 |
Other current assets | | | 1.2 |
Other intangible assets (1) | | | |
Customer relationships | |
| 5.1 |
Tradenames | |
| 0.9 |
Developed technology | | | 0.2 |
Other assets | | | 1.0 |
Total fair value of assets acquired | | | 9.4 |
| | | |
Current liabilities | |
| (1.3) |
Noncurrent liabilities | | | (1.6) |
Total fair value of liabilities assumed | | | (2.9) |
Net identifiable assets acquired | | | 6.5 |
Purchase price consideration | | | 29.3 |
Goodwill (2) | | $ | 22.8 |
(1) | The expected weighted average useful life of the acquired intangible assets are 7 years for customer relationships, tradenames and developed technology. |
(2) | Goodwill largely consists of strategic and synergistic opportunities resulting from combining Heathland with the Company’s existing businesses and is allocated entirely to the Base Plastics segment. No goodwill related to this acquisition is expected to be deductible for income tax purposes. |
Pro forma results of operations information have not been presented as the effect of the acquisition is not material. The operating results of the Heathland acquisition are included within the Company's condensed consolidated statements of operations since the acquisition date of January 3, 2022 and were not material for the three and nine months ended September 30, 2017, including2022. Pursuant to GAAP, costs incurred to complete the impacts ofHeathland Acquisition as well as costs incurred to integrate into the Company’s debt refinancingoperations are expensed as incurred. Transaction-related costs incurred, which are included within “Selling, general, and administrative expenses” in the condensed consolidated statements of operations, were not material for the three and nine months ended September 30, 2022.
Acquisition of Aristech Surfaces
On September 1, 2021, the Company completed its previously announced acquisition of Aristech Surfaces LLC (“Aristech Surfaces”) from SK AA Holdings LLC (“SK AA Holdings”), the sole member of Aristech Surfaces, through purchase of 100% membership interest and intellectual property (the “Aristech Surfaces Acquisition”). The purchase
11
price consideration for the Aristech Surfaces Acquisition was $449.5 million, all of which was paid during the third quarter of 2017 (refer to Note 5 for further information). While this adoptionyear ended December 31, 2021 (of which $448.0 million was applied using the retrospective approach, there were no transactionspaid during the nine months ended September 30, 2016 that required2021). Aristech Surfaces is a leading North America manufacturer and global provider of PMMA continuous cast and solid surface sheets, serving the condensed consolidated statementwellness, architectural, transportation and industrial markets, whose results are included within the Engineered Materials segment. Aristech Surfaces’ products are used for a variety of cash flows for that period to be recast.applications, including the construction of hot tubs, swim spas, counter tops, signage, bath products and recreational vehicles.
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,allocated the FASB issued guidance to simplify the accounting for goodwill impairment by removing Step 2purchase price of the test, which requires a hypothetical purchase price allocation. As a result, a goodwill impairment will now beacquisition to identifiable assets acquired and liabilities assumed based on their estimated fair values as of 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 impactacquisition date. Refer 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 effectiveAnnual Report 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, with early adoption permitted. The Company is currently assessing the timing and related impact of adopting this guidance on its financial position and results of operations.
NOTE 3—INVESTMENTS IN UNCONSOLIDATED AFFILIATES
further information. During the nine months ended September 30, 2017,2022, there were no changes to the purchase price allocation for the acquisition of the Aristech Surfaces business. As of September 1, 2022, the acquisition measurement period for the Aristech Surfaces business has ended and the values assigned to the assets acquired and liabilities assumed are final.
Acquisition of the PMMA Business
On May 3, 2021, the Company completed its previously-announced acquisition of the polymethyl methacrylates (“PMMA”) and activated methyl methacrylates (“MMA”) business (together, the “PMMA business”) from Arkema S.A., (“Arkema”) through the purchase of 100% of the shares of certain subsidiaries of Arkema (the “PMMA Acquisition”). The purchase price consideration for the PMMA Acquisition was $1,364.9 million, all of which was paid during the year ended December 31, 2021 (of which $1,358.6 million was paid during the nine months ended September 30, 2021). PMMA is a transparent and rigid plastic with a wide range of end uses, and is an attractive adjacent chemistry which complements Trinseo’s offerings across several end markets including automotive, building & construction, medical and consumer electronics. PMMA results are included within the Engineered Materials segment.
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. Refer to the Annual Report for further information. As of May 3, 2022, the acquisition measurement period for the PMMA business has ended and the values assigned to the assets acquired and liabilities assumed are final.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the consolidated results of operations of the Company with the PMMA business and Aristech Surfaces for the three and nine months ended September 30, 2021 as if these acquisitions had twooccurred on January l, 2021. The pro forma results were calculated by combining the results of Trinseo with the PMMA business and Aristech Surfaces but do not include adjustments related to cost savings or other synergies that are anticipated as a result of these acquisitions. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations would have been if the acquisitions had occurred as of January 1, 2021, nor are they indicative of future results of operations.
| | | | | | |
| | Three Months Ended | | Nine Months Ended | ||
| | September 30, | | September 30, | ||
|
| 2021 |
| 2021 | ||
Net sales |
| $ | 1,300.2 |
| $ | 3,863.8 |
Net income | | $ | 94.1 | | $ | 355.1 |
Income from continuing operations | | $ | 80.4 | | $ | 317.1 |
NOTE 4—DIVESTITURES AND DISCONTINUED OPERATIONS
On December 1, 2021, the Company completed the divestiture of its Synthetic Rubber business to Synthos S.A. and certain of its subsidiaries (together, “Synthos”) for a purchase price of $402.4 million, which reflected a reduction of approximately $41.6 million for the assumption of pension liabilities by Synthos and $47.0 million for net working capital (excluding inventory) retained by Trinseo. Refer to the Annual Report for further information. At closing, the Company and Synthos executed a long-term supply agreement, in which Trinseo will supply Synthos certain raw
12
materials used in the Synthetic Rubber business subsequent to the sale. For the three and nine months ended September 30, 2022, the Company recorded $13.8 million and $55.6 million, respectively, in net sales, and $14.5 million and $46.3 million, respectively, in cost of sales related to the supply agreement, which is recorded in continuing operations.
The following table summarizes the results of the Synthetic Rubber business for the three and nine months ended September 30, 2022 and 2021, which are reflected as discontinued operations in the Company’s condensed consolidated statements of operations:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Net sales |
| $ | — |
| $ | 122.3 |
| $ | 0.1 |
| $ | 382.2 |
|
Cost of sales | |
| 2.2 | |
| 101.9 | |
| 3.6 | |
| 321.2 | |
Gross profit (loss) | |
| (2.2) | |
| 20.4 | |
| (3.5) | |
| 61.0 | |
Selling, general and administrative expenses | |
| — | |
| 4.9 | |
| (0.3) | |
| 16.7 | |
Operating income (loss) | |
| (2.2) | |
| 15.5 | |
| (3.2) | |
| 44.3 | |
Gain on sale of businesses and other assets | | | — | | | — | | | 1.2 | | | — | |
Other expense, net | | | — | | | 0.2 | | | — | | | 1.2 | |
Income (loss) from discontinued operations before income taxes | |
| (2.2) | |
| 15.3 | |
| (2.0) | |
| 43.1 | |
Provision for (benefit from) income taxes | |
| (0.3) | |
| 1.6 | |
| (0.1) | |
| 5.1 | |
Net income (loss) from discontinued operations | | $ | (1.9) | | $ | 13.7 | | $ | (1.9) | | $ | 38.0 | |
NOTE 5—NET SALES
Refer to the Annual Report for information on the Company's accounting policies and further background related to its net sales.
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 and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | |
| | Engineered | | Latex | | Base | | | | | | | |
| |||||
Three Months Ended | | Materials | | Binders | | Plastics | | Polystyrene | | Feedstocks | | Total |
| ||||||
September 30, 2022 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 128.9 | | $ | 105.4 | | $ | 73.7 | | $ | — | | $ | 4.5 | | $ | 312.5 | |
Europe | |
| 72.5 | |
| 160.1 | |
| 157.1 | |
| 174.0 | |
| 48.9 | |
| 612.6 | |
Asia-Pacific | |
| 38.9 | |
| 72.9 | |
| 33.3 | |
| 73.7 | |
| — | |
| 218.8 | |
Rest of World | |
| 2.4 | |
| 2.5 | |
| 29.3 | |
| — | |
| — | |
| 34.2 | |
Total | | $ | 242.7 | | $ | 340.9 | | $ | 293.4 | | $ | 247.7 | | $ | 53.4 | | $ | 1,178.1 | |
September 30, 2021 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 102.4 | | $ | 86.3 | | $ | 82.3 | | $ | — | | $ | 4.0 | | $ | 275.0 | |
Europe | |
| 89.6 | |
| 153.5 | | | 247.3 | |
| 162.6 | |
| 50.8 | |
| 703.8 | |
Asia-Pacific | |
| 35.9 | |
| 73.0 | | | 43.9 | |
| 112.2 | |
| — | | | 265.0 | |
Rest of World | |
| 2.9 | |
| 2.8 | | | 19.8 | |
| — | |
| — | |
| 25.5 | |
Total | | $ | 230.8 | | $ | 315.6 | | $ | 393.3 | | $ | 274.8 | | $ | 54.8 | | $ | 1,269.3 | |
13
| | | | | | | | | | | | | | | | | | | |
| | Engineered | | Latex | | Base | | | | | | | |
| |||||
Nine Months Ended | | Materials | | Binders | | Plastics | | Polystyrene | | Feedstocks | | Total |
| ||||||
September 30, 2022 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 418.0 | | $ | 290.1 | | $ | 264.3 | | $ | — | | $ | 13.0 | | $ | 985.4 | |
Europe | |
| 300.1 | |
| 480.4 | |
| 602.2 | |
| 604.5 | |
| 207.3 | |
| 2,194.5 | |
Asia-Pacific | |
| 112.4 | |
| 223.9 | |
| 102.1 | |
| 273.1 | |
| — | |
| 711.5 | |
Rest of World | |
| 8.7 | |
| 6.9 | |
| 83.2 | |
| 0.1 | |
| — | |
| 98.9 | |
Total | | $ | 839.2 | | $ | 1,001.3 | | $ | 1,051.8 | | $ | 877.7 | | $ | 220.3 | | $ | 3,990.3 | |
September 30, 2021 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 174.1 | | $ | 228.2 | | $ | 216.5 | | $ | — | | $ | 10.7 | | $ | 629.5 | |
Europe | |
| 190.8 | |
| 431.4 | | | 699.2 | |
| 511.7 | |
| 188.9 | |
| 2,022.0 | |
Asia-Pacific | |
| 108.1 | |
| 211.1 | | | 144.5 | |
| 343.3 | |
| — | | | 807.0 | |
Rest of World | |
| 4.5 | |
| 6.9 | | | 59.1 | |
| — | |
| — | |
| 70.5 | |
Total | | $ | 477.5 | | $ | 877.6 | | $ | 1,119.3 | | $ | 855.0 | | $ | 199.6 | | $ | 3,529.0 | |
NOTE 6—INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company is currently supplemented by one 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 arewhich is accounted for byusing 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 | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Sales |
| $ | 535.3 |
| $ | 433.4 |
| $ | 1,654.3 |
| $ | 1,351.9 | |
Gross profit | | $ | 70.6 | | $ | 49.3 | | $ | 212.2 | | $ | 189.2 | |
Net income | | $ | 48.3 | | $ | 37.2 | | $ | 164.5 | | $ | 151.8 | |
|
| ||||||||||||
|
|
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, 20172022 and December 31, 2016, respectively,2021, the Company’s investment in Americas Styrenics was $161.9$269.2 million and $149.7$247.8 million, respectively, which was $49.1$11.0 million and $71.2$9.4 million lessgreater 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 toheld by 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, andinclusive of certain adjustments to conform with the Company’s accounting policies. This difference is being amortized over a weighted average remaining useful life of the contributed assets of approximately 3.12.3 years as of September 30, 2017.2022. The Company received dividends from Americas Styrenicsof $35.0$25.0 million and $80.0$62.5 million from Americas Styrenics during the three and nine months ended September 30, 2022, respectively, and $20.0 million and $60.0 million during the three and nine months ended September 30, 2017, respectively, compared to $40.0 million and $100.0 million during the three and nine months ended September 30, 2016,2021, respectively.
Sumika Styron Polycarbonate
On January 31, 2017, the Company completed the sale of its 50% share in Sumika Styron Polycarbonate to Sumitomo Chemical Company Limited for total sales proceeds of approximately $42.1 million. As a result, the Company recorded a gain on sale of $9.3 million during the nine months ended September 30, 2017, which was included within “Other expense (income), net” in the condensed consolidated statement of operations and was allocated entirely to the Basic Plastics segment. In addition, the parties have entered into a long-term agreement to continue sourcing polycarbonate resin from Sumika Styron Polycarbonate to the Company’s Performance Plastics segment.
As of December 31, 2016, the Company’s investment in Sumika Styron Polycarbonate was $41.8 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—7—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 |
|
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2022 | | 2021 | ||
Finished goods |
| $ | 281.7 |
| $ | 279.2 |
Raw materials and semi-finished goods | |
| 297.5 | |
| 303.9 |
Supplies | |
| 34.8 | |
| 37.9 |
Total | | $ | 614.0 | | $ | 621.0 |
14
NOTE 5—8—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, 20172022 and December 31, 2016.
11
2021.
As of September 30, 20172022 and December 31, 2016,2021, 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | September 30, 2022 | | December 31, 2021 | | ||||||||||||||
|
| 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 | | 5.115% | | September 2024 | | $ | 665.2 | | $ | (5.9) | | $ | 659.3 | | $ | 670.4 | | $ | (8.0) | | $ | 662.4 | |
2028 Term Loan B |
| 5.615% | | May 2028 | | | 737.6 | | | (15.1) | | | 722.5 | | | 742.8 | | | (17.0) | | | 725.8 | |
2026 Revolving Facility |
| Various | | May 2026 | | | — | | | — | | | — | | | — | | | — | | | — | |
2029 Senior | | 5.125% | | April 2029 | | | 447.0 | | | (13.3) | | | 433.7 | | | 450.0 | | | (14.7) | | | 435.3 | |
2025 Senior Notes | | 5.375% | | September 2025 | | | 500.0 | | | (4.0) | | | 496.0 | | | 500.0 | | | (5.0) | | | 495.0 | |
Accounts Receivable Securitization Facility |
| Various | | November 2024 | | | — | | | — | | | — | | | — | | | — | | | — | |
Other indebtedness | | Various | | Various | | | 3.0 | | | — | | | 3.0 | | | 5.6 | | | — | | | 5.6 | |
Total debt |
|
| | | | $ | 2,352.8 | | $ | (38.3) | | $ | 2,314.5 | | $ | 2,368.8 | | $ | (44.7) | | $ | 2,324.1 | |
Less: current portion | | | | | | | | | | | | | (16.7) | | | | | | | | | (18.5) | |
Total long-term debt, net of unamortized deferred financing | | | | | | | | | | | | $ | 2,297.8 | | | | | | | | $ | 2,305.6 | |
(1) | This caption does not include deferred financing
|
(2) | As of September 30, 2022, under the 2026 Revolving Facility, the Company had a capacity of $375.0 million and funds available for borrowing of $369.2 million (net of $5.8 million outstanding letters of credit). Additionally, the Company is required to pay a quarterly commitment fee in respect of any unused commitments under this facility equal to 0.375% per annum. |
(3) | As of September 30, 2022, this facility had a borrowing capacity of $150.0 million, and the Company had approximately $150.0 million of accounts receivable available to support this facility, based on the pool of eligible accounts receivable. |
(4) | The
|
NOTE 9—GOODWILL
The following table shows changes in the carrying amount of goodwill, by segment, from December 31, 2021 to September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | |
| | Engineered | | Latex | | Base | | | | | | Americas | | | |
| ||||||
|
| Materials |
| Binders |
| Plastics |
| Polystyrene |
| Feedstocks |
| Styrenics |
| Total |
| |||||||
Balance at December 31, 2021 | | $ | 667.3 | | $ | 15.9 | | $ | 22.4 | | $ | 4.5 | | $ | — | | $ | — | | $ | 710.1 | |
Acquisitions (Note 3) | | | — | | | — | | | 22.8 | | | — | | | — | | | — | | | 22.8 | |
Foreign currency impact | |
| (31.7) | | | (2.3) | | | (6.3) | | | (0.7) | | | — | | | — | |
| (41.0) | |
Balance at September 30, 2022 | | $ | 635.6 | | $ | 13.6 | | $ | 38.9 | | $ | 3.8 | | $ | — | | $ | — | | $ | 691.9 | |
15
The Company tests goodwill for impairment annually as of October 1, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit is more likely than not below carrying value. As noted within Note 3 – Acquisitions and as discussed within the Annual Report, in 2021, the Company completed the PMMA Acquisition and Aristech Surfaces Acquisition, each of which represents a separate reporting unit within the Engineered Materials segment. The Company allocated the purchase price of these acquisitions to identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess of the purchase price over the aggregate fair values recorded as goodwill. As of September 30, 2022, the reporting units for the PMMA business and Aristech Surfaces had goodwill balances of approximately $503.0 million and $120.0 million, respectively.
In 2022, historically high natural gas prices and depressed customer demand in Europe, COVID-19 lockdowns in China, global supply chain constraints, weakness in certain end customer applications, and an uncertain geopolitical situation in Europe, created a challenging operating environment for these businesses, negatively impacting their financial performance. In response to these conditions, the Company performed qualitative analyses over these reporting units, including consideration of current and estimated future financial results, general and industry-specific economic conditions, changes in their respective carrying values and potential changes to the assumptions used in previous fair value calculations.
Based on these analyses, the Company has not identified any triggering events indicating that it is more likely than not that goodwill is impaired. However, these reporting units may be at risk for future impairment due to the limited amount of fair value in excess of carrying value as a result of their recent acquisition. Should these conditions persist, or other events occur indicating that the estimated future cash flows of these reporting units have declined, the Company may be required to record future non-cash impairment charges related to goodwill.
NOTE 10—DERIVATIVE INSTRUMENTS
The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates, interest rate risk, and commodity price risk, in particular natural gas. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts, interest rate swap agreements, and commodity swaps, forward contracts, or options. 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. The Company entered into a specific such foreign exchange forward contract in December 2020 in order to economically hedge the euro-denominated purchase price of the PMMA business, which was acquired on May 3, 2021, as discussed in Note 3. These derivative contracts are not designated for hedge accounting treatment.
As of September 30, 2022, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $547.6 million. The following table displays the notional amounts of the most significant
16
net foreign exchange hedge positions outstanding as of September 30, 2022:
| | | | |
| | September 30, | | |
Buy / (Sell) |
| 2022 | | |
Euro | | $ | (411.1) | |
Chinese Yuan | | $ | (46.4) | |
Swedish Krona | | $ | 20.7 | |
South Korean Won | | $ | (18.3) | |
New Taiwan Dollar | | $ | 15.6 | |
Open foreign exchange forward contracts as of September 30, 2022 had maturities occurring over a period of two months.
Foreign Exchange Cash Flow Hedges
The Company also enters into forward contracts, as deemed appropriate, with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by one of its subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in 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.
The Company had no open foreign exchange cash flow hedges as of September 30, 2022.
Commodity Cash Flow Hedges
The Company purchases certain commodities, primarily natural gas, to operate facilities and generate heat and steam for various manufacturing processes, which purchases are subject to price volatility. In order to manage the risk of price fluctuations associated with these commodity purchases, as deemed appropriate, the Company may enter into commodity swaps, forward contracts, or options. These commodity derivatives 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 cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
Open commodity cash flow hedges as of September 30, 2022 had maturities occurring over a period of three months and had a notional value of approximately 63 thousand megawatt hours of natural gas purchases.
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. Under the terms of the swap agreements, with a net notional U.S. dollar equivalent of $200.0 million and an effective date of September 29, 2017, the Company was 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 from the counterparties. These interest rate swap agreements matured in September 2022, and the Company has no remaining open interest rate swap agreements.
Net Investment Hedge
The Company accounts for its cross currency swaps (“CCS”) under the spot method, meaning that changes in the fair value of the hedge included in the assessment of effectiveness (changes due to spot foreign exchange rates) are
17
recorded within AOCI, where they remain until either the sale or substantially complete liquidation of the subsidiary subject to the hedge. Additionally, 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 and 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. When applicable, the Company amortizes any initial excluded component value of a CCS 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 related CCS. Additionally, interest receipts and payments are accrued under the terms of the Company’s CCS and are recognized within “Interest expense, net” in the condensed consolidated statements of operations.
The Company entered into a CCS arrangement (the “2017 CCS”) on September 1, 2017, swapping U.S. dollar principal and interest payments of $500.0 million at an interest rate of 5.375% on its 2025 Senior Notes for euro-denominated payments of €420.0 million at a weighted average interest rate of 3.45% for approximately five years. 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. 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.Refer to the Annual Report for further information.
On April 7, 2022, the Company settled its existing 2020 CCS, which were set to mature in November 2022. Upon settlement of the 2020 CCS, the Company realized net cash proceeds of $1.9 million.
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 and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gain (Loss) Recognized in | ||||||||||||||||
| | Three Months Ended | | Three Months Ended | ||||||||||||||
| | September 30, 2022 | | September 30, 2021 | ||||||||||||||
|
| Cost of | | Interest expense, net | | Other (expense) income, net | | Cost of | | Interest expense, net | | Other (expense) income, net | ||||||
Total amount of income and (expense) line items presented in the statements of operations in which the effects of derivative instruments are recorded | | $ | (1,217.6) | | $ | (30.4) | | $ | (0.5) | | $ | (1,101.0) | | $ | (23.0) | | $ | 0.1 |
| | | | | | | | | | | | | | | | | | |
The effects of cash flow hedge instruments: | | | | | | | | | | | | | | | | | | |
Foreign exchange cash flow hedges | | | | | | | | | | | | | | | | | | |
Amount of gain reclassified from AOCI into income | | $ | — | | $ | — | | $ | — | | $ | 0.3 | | $ | — | | $ | — |
Commodity cash flow hedges | | | | | | | | | | | | | | | | | | |
Amount of gain reclassified from AOCI into income | | $ | 2.0 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Interest rate swaps | | | | | | | | | | | | | | | | | | |
Amount of gain (loss) reclassified from AOCI into income | | $ | — | | $ | 0.2 | | $ | — | | $ | — | | $ | (0.9) | | $ | — |
| | | | | | | | | | | | | | | | | | |
The effects of net investment hedge instruments: | | | | | | | | | | | | | | | | | | |
Cross currency swaps (CCS) | | | | | | | | | | | | | | | | | | |
Amount of gain excluded from effectiveness testing | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1.9 | | $ | — |
| | | | | | | | | | | | | | | | | | |
The effects of derivatives not designated as hedge instruments: | | | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | | | | | | | | | | | | | | | | | |
Amount of gain recognized in income (1) | | $ | — | | $ | — | | $ | 33.7 | | $ | — | | $ | — | | $ | 23.3 |
18
| | | | | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gain (Loss) Recognized in | |||||||||||||||||||
| | Nine Months Ended | | Nine Months Ended | |||||||||||||||||
| | September 30, 2022 | | September 30, 2021 | |||||||||||||||||
|
| Cost of | | Interest expense, net | | Other (expense) income, net | | Cost of | | Interest expense, net | | Acquisition purchase price hedge gain (loss) | | Other (expense) income, net | |||||||
Total amount of income and (expense) line items presented in the statements of operations in which the effects of derivative instruments are recorded | | $ | (3,714.8) | | $ | (77.7) | | $ | (1.6) | | $ | (2,951.7) | | $ | (56.6) | | $ | (22.0) | | $ | (8.4) |
| | | | | | | | | | | | | | | | | | | | | |
The effects of cash flow hedge instruments: | | | | | | | | | | | | | | | | | | | | | |
Commodity cash flow hedges | | | | | | | | | | | | | | | | | | | | | |
Amount of gain reclassified from AOCI into income | | $ | 2.0 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Interest rate swaps | | | | | | | | | | | | | | | | | | | | | |
Amount of loss reclassified from AOCI into income | | $ | — | | $ | (1.2) | | $ | — | | $ | — | | $ | (2.6) | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | |
The effects of net investment hedge instruments: | | | | | | | | | | | | | | | | | | | | | |
Cross currency swaps (CCS) | | | | | | | | | | | | | | | | | | | | | |
Amount of gain excluded from effectiveness testing | | $ | — | | $ | 2.4 | | $ | — | | $ | — | | $ | 5.5 | | $ | — | | $ | — |
| | | | | | | | | | | | | | | | | | | | | |
The effects of derivatives not designated as hedge instruments: | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | | | | | | | | | | | | | | | | | | | | |
Amount of gain (loss) recognized in income (1) | | $ | — | | $ | — | | $ | 81.6 | | $ | — | | $ | — | | $ | (22.0) | | $ | 43.4 |
(1) | The $22.0 million loss incurred from the
|
The following table presents the effect of cash flow and net investment hedge accounting on AOCI for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | |
` | | Gain (Loss) Recognized in AOCI on Balance Sheet | ||||||||||
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | ||||
Designated as Cash Flow Hedges | | | | | | | | | | | | |
Foreign exchange cash flow hedges |
| $ | — |
| $ | 0.4 |
| $ | — |
| $ | 3.1 |
Commodity cash flow hedges | | | (5.4) | | | — | | | (5.4) | | | — |
Interest rate swaps | | | (0.2) | | | 0.8 | | | 2.2 | | | 2.5 |
Total | | $ | (5.6) | | $ | 1.2 | | $ | (3.2) | | $ | 5.6 |
Designated as Net Investment Hedges | | | | | | | | | | | | |
Cross currency swaps (CCS) | | $ | — | | $ | 13.1 | | $ | 15.8 | | $ | 32.1 |
Total | | $ | — | | $ | 13.1 | | $ | 15.8 | | $ | 32.1 |
19
| | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Other expense, net in Statement of Operations | | ||||||||||
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Settlements and changes in the fair value of forward contracts (not designated as hedges) (1) |
| $ | 33.7 |
| $ | 23.3 |
| $ | 81.6 |
| $ | 43.4 |
|
Remeasurement of foreign currency-denominated assets and liabilities | | $ | (35.4) | | $ | (23.7) | | $ | (83.4) | | $ | (43.0) | |
Total | | $ | (1.7) | | $ | (0.4) | | $ | (1.8) | | $ | 0.4 | |
The Company had less than $0.1 million of net periodic benefit costs for its other postretirement plans for the three and nine months ended September 30, 2022 and 2021.
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 September 30, 2022 and December 31, 2021, the Company’s benefit obligations included primarily in “Other noncurrent obligations” in the condensed consolidated balance sheets were $237.8 million and $274.7 million, respectively.
The Company made cash contributions and benefit payments to unfunded plans of approximately $1.4 million and $6.1 million during the three and nine months ended September 30, 2022, respectively. The Company expects to make additional cash contributions, including benefit payments to unfunded plans, of approximately $2.7 million to its defined benefit plans for the remainder of 2022.
25
NOTE 15—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.
The following table summarizes the Company’s share-based compensation expense for the three and nine months ended September 30, 2022 and 2021, as well as unrecognized compensation cost as of September 30, 2022:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | As of | | |||
| | Three Months Ended | | Nine Months Ended | | September 30, 2022 | | |||||||||||
| | September 30, | | September 30, | | Unrecognized | | Weighted | | |||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| Compensation Cost |
| Average Years | | |||||
RSUs | | $ | 2.1 | | $ | 2.1 | | $ | 9.1 | | $ | 5.7 | | $ | 11.3 | | 1.7 | |
Options | | | 0.6 | | | 1.2 | | | 4.4 | | | 3.5 | | | 2.7 | | 1.4 | |
PSUs | | | 0.7 | | | 0.7 | | | 2.1 | | | 1.8 | | | 4.4 | | 2.0 | |
Total share-based compensation expense | | $ | 3.4 | | $ | 4.0 | | $ | 15.6 | | $ | 11.0 | | | | | | |
The following table summarizes awards granted and the respective weighted average grant date fair value for the nine months ended September 30, 2022:
| | | | | | | |
| | Nine Months Ended | | ||||
| | September 30, 2022 | | ||||
| | Awards Granted | | Weighted Average Grant Date Fair Value per Award | | ||
RSUs | | | 197,986 | | $ | 52.10 | |
Options | | | 192,175 | | | 22.52 | |
PSUs | | | 63,317 | | | 57.47 | |
Option Awards
The following are the weighted average assumptions used within the Black-Scholes pricing model for 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, 2022:
| | | |
| | Nine Months Ended | |
| September 30, | ||
Expected term | 5.50 | | |
Expected volatility | 48.72 | % | |
Risk-free interest rate
|
| 1.97 | % |
Dividend yield | | 2.00 | % |
The expected volatility assumption is 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 nine months ended September 30, 2022, 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.
26
Performance Share Units (PSUs)
The following are the weighted average assumptions used within the Monte Carlo valuation model for PSUs granted during the nine months ended September 30, 2022:
| | | |
| | Nine Months Ended | |
| | September 30, 2022 | |
Expected term (in years) | | 3.00 | |
Expected volatility |
| 57.30 | % |
Risk-free interest rate |
| 1.73 | % |
Share price | $ | 58.64 | |
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 16—SEGMENTS
The Company operates under six segments: Engineered Materials, Latex Binders, Base Plastics, Polystyrene, Feedstocks, and Americas Styrenics. The Engineered Materials segment includes the Company’s compounds and blends products sold into higher growth and value applications, such as consumer electronics and medical, as well as soft thermoplastic elastomers (“TPEs”) products which are sold into markets such as footwear and automotive. Additionally, following the PMMA Acquisition on May 3, 2021 and the Aristech Surfaces Acquisition on September 1, 2021, the Engineered Materials segment also includes PMMA and MMA products, which are sold into a variety of applications including automotive, building & construction, medical, consumer electronics, and wellness, among others. 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 number of performance latex binders applications, such as adhesive, building and construction and the technical textile paper market. The Base Plastics segment contains the results of the acrylonitrile-butadiene-styrene (“ABS”), styrene-acrylonitrile (“SAN”), and polycarbonate (“PC”) businesses, as well as compounds and blends for automotive and other applications. The Base Plastics segment also includes the results of Heathland, which was acquired in the first quarter of 2022. 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, and ABS resins. 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.
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 and nine months ended September 30, 2022 and 2021. 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.
27
Refer to Note 5 for the Company’s net sales to external customers by segment for the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | |
| | Engineered | | Latex | | Base | | | | | | Americas |
| ||||||
Three Months Ended (1) | | Materials | | Binders | | Plastics | | Polystyrene | | Feedstocks | | Styrenics |
| ||||||
September 30, 2022 |
| $ | 7.5 |
| $ | 31.0 | | $ | (14.9) | | $ | 18.7 |
| $ | (78.0) |
| $ | 22.8 | |
September 30, 2021 | | $ | 32.7 | | $ | 37.1 | | $ | 87.9 | | $ | 51.2 | | $ | (27.6) | | $ | 17.1 | |
| | | | | | | | | | | | | | | | | | | |
| | Engineered | | Latex | | Base | | | | | | Americas |
| ||||||
Nine Months Ended (1) | | Materials | | Binders | | Plastics | | Polystyrene | | Feedstocks | | Styrenics |
| ||||||
September 30, 2022 | | $ | 76.2 | | $ | 90.6 | | $ | 99.8 | | $ | 87.0 | | $ | (59.8) | | $ | 83.8 | |
September 30, 2021 | | $ | 68.5 | | $ | 86.2 | | $ | 235.0 | | $ | 149.6 | | $ | 58.5 | | $ | 70.2 | |
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 |
|
(1) |
|
|
|
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 from continuing operations before income taxes to segment Adjusted EBITDA is as follows:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Income from continuing operations before income taxes | | $ | (130.0) | | $ | 84.9 | | $ | (22.3) | | $ | 327.1 | |
Interest expense, net | |
| 30.4 | |
| 23.0 | |
| 77.7 | |
| 56.6 | |
Depreciation and amortization | |
| 45.9 | |
| 49.8 | | | 147.1 | |
| 111.0 | |
Corporate Unallocated(2) | | | 23.7 | | | 25.0 | | | 72.1 | | | 71.3 | |
Adjusted EBITDA Addbacks(3) | |
| 17.1 | |
| 15.7 | |
| 103.0 | |
| 102.0 | |
Segment Adjusted EBITDA | | $ | (12.9) | | $ | 198.4 | | $ | 377.6 | | $ | 668.0 | |
27
(2) |
|
(3) | Adjusted EBITDA addbacks for the three and nine months ended September 30,
NOTE 17—RESTRUCTURING Refer to the Annual Report for further details regarding the Company’s previously announced restructuring activities included in the tables 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 and nine months ended September 30, 2022 and 2021:
29 The following table provides a roll forward of the liability balances associated with the Company’s restructuring activities as of September 30, 2022. Employee termination benefit and contract termination charges are primarily recorded within “Accrued expenses and other current liabilities” in the condensed consolidated balance sheets.
NOTE 18—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The components of AOCI, net of income taxes, consisted of:
30
. NOTE 19—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 from continuing operations because the inclusion of the potential ordinary shares would have an anti-dilutive effect. 31 The following table presents basic EPS and diluted EPS for the three and nine months ended September 30, 2022 and 2021.
NOTE 20—OTHER CHARGES Other charges consisted of the following:
t 32 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 2022 Year-to-Date Highlights During the three and nine months ended September 30, 2022, Trinseo recognized net loss from continuing operations of $117.9 million and $63.7 million, respectively, and Adjusted EBITDA of $(36.6) million and $305.5 million, respectively. The challenging operating conditions experienced in the first half of 2022 continued in the third quarter, including the uncertain geopolitical situation, continued COVID-19 lockdowns in China, and historically high natural gas and energy prices. These factors led to weaker demand and significant customer destocking which was exacerbated by a steep decline in many raw material prices throughout the third quarter, following very high raw material prices in the first half of 2022. Further, weak demand and ample supply pressured margins. Refer to the discussion below for further information and refer to “Non-GAAP Performance Measures” for discussion of our use of non-GAAP measures in evaluating our performance and a reconciliation of these measures. Amid these uncertain market conditions, the Company has continued to implement liquidity-focused actions, including reduced capital spending, operating expenses and working capital. As a result of these actions, the Company achieved positive cash generation from operating activities, and solid quarter-end liquidity. The Company continues to maintain a strong balance sheet, has substantial sources of liquidity available, no maintenance covenants on our debt agreements, and no significant debt maturing until September 2024. Refer to the “Capital Resources and Liquidity” section below for further information. Other highlights for the year are described below. Potential Profitability Improvement Initiatives In response to the challenging macroeconomic environment that began to emerge in the first quarter of 2022, resulting in historically-low demand and high utility costs, Trinseo is evaluating its asset footprint to improve its economic position and operating flexibility. The potential initiatives under consideration include:
These potential initiatives, if approved and implemented, may result in future charges including, but not limited to, impairment or accelerated depreciation of long-lived assets, employee termination benefit charges, contract termination costs, and demolition and decommissioning expenses. European Commission Request for Information In 2018, Trinseo received a request for information from the European Commission Directorate General for Competition (the “European Commission”) related to styrene monomer commercial activity in the European Economic Area, as well as subsequent requests for information. Trinseo has fully responded to all information requests from the European Commission and continues to fully cooperate on this matter, which remains ongoing. As a result of further developments in this matter, during the first quarter of 2022, Trinseo recorded a charge of $35.6 million which is included within “Other charges” on the condensed consolidated statements of operations. Refer to Note 13 in the condensed consolidated financial statements for more information. Acquisition of Heathland On January 3, 2022, the Company closed on the previously-announced acquisition of Heathland B.V. (“Heathland”) for an estimated purchase price of $29.3 million, including an initial cash purchase price of $22.9 million, as well as $6.4 million of contingent cash consideration, representing the fair value of certain earn-out payments (the “Heathland Acquisition”). Heathland is based in Utrecht, the Netherlands, and is focused on converting post-consumer and post-industrial PMMA, PC, ABS, polystyrene, and other thermoplastic waste for use in a wide range of high-end applications. The acquisition of Heathland is consistent with Trinseo’s strategy and enhances our footprint as a sustainable solutions provider. Refer to Note 3 in the condensed consolidated financial statements for more information.
33
Process Pause for Divestiture of Styrenics Business In November 2021, the Company announced that it had begun work to explore the divestiture of our styrenics business and subsequently launched a formal sales process in the first quarter of 2022. The scope of the potential divestiture was expected to include the Feedstocks and Polystyrene reporting segments as well as our 50% ownership of Americas Styrenics. While this process generated broad and significant interest from both strategic and financial parties, the deterioration of financing markets and the economic uncertainty created by the war in Ukraine, particularly in European energy markets, has impeded the Company’s ability to obtain full value for the styrenics business. As a result, the Company has decided to pause the sale process. This pause does not change the Company’s transformation strategy of becoming a higher growth, higher margin, and less volatile specialty material and sustainable solutions provider. The Company intends to reevaluate a potential sale of the styrenics business when macroeconomic conditions improve. Results of Operations Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021
Three Months Ended – September 30, 2022 vs. September 30, 2021 Net Sales Net sales decreased 7% year-over-year. Lower sales volumes resulted in an 18% decrease, as economic uncertainty and falling raw material prices led to a high level of customer destocking and depressed demand, particularly in applications supporting building & construction and consumer durables. This decrease was partially offset by an 11% increase in net sales from higher selling prices, mainly due to the pass through of higher raw material and utility costs. 34 Cost of Sales The 11% increase in cost of sales was primarily attributable to an 18% increase in raw material costs, which included a one-time charge of $22.5 million related to raw material contract obligations and inventory writedowns. Also contributing to the increase was a 6% increase related to higher utility costs. Partially offsetting these increases was a decrease of 14% due to lower sales volumes. Gross Profit The decrease in gross profit of 123% was primarily attributable to lower margins compared to the very high levels observed in the third quarter of 2021 in various segments, as well as lower sales volume and one-time headwinds discussed above. See the segment discussion below for further information. Selling, General and Administrative Expenses (SG&A) The $4.1 million, or 5%, increase in SG&A was primarily due to an increase of $12.3 million in costs associated with the Company’s strategic initiatives, including the exploration of a potential divestiture of our styrenics business, and a $0.9 million increase in bad debt expense. Offsetting these increased costs was a $9.7 million decrease in acquisition transaction and integration costs compared to the prior year. Equity in Earnings of Unconsolidated Affiliates The increase in equity earnings of $5.7 million was due to higher equity earnings from Americas Styrenics due to stronger polystyrene margins. Equity earnings in the prior year were also negatively impacted by headwinds from production issues caused by Hurricane Ida. Other Charges During the three months ended September 30, 2022 and 2021, the Company recorded impairment charges of $1.9 million and $0.3 million, respectively, related to our Boehlen styrene monomer assets, as described within Note 11 in the condensed consolidated financial statements. Additionally, during the three months ended September 30, 2021, the Company recorded impairment charges of $0.9 million related to certain long-lived assets in our Base Plastics segment. Interest Expense, Net The increase in interest expense, net of $7.4 million, or 32%, was primarily attributable to the increase in the LIBO rate year-over-year. Refer to Note 8 in the condensed consolidated financial statements for further information. Other Expense (Income), Net Other expense, net for the three months ended September 30, 2022 was $0.5 million, which included an $0.8 million gain on extinguishment of debt recorded in relation to the repurchase of $3.0 million of the 2029 Senior Notes in the open market, and a $0.4 million gain related to the non-service cost components of net periodic benefit cost which were more than offset by foreign exchange transaction losses of $1.7 million. These net foreign exchange transaction losses included $35.4 million of 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 $33.7 million of gains from our foreign exchange forward contracts. Other income, net for the three months ended September 30, 2021 was $0.1 million, which included a $1.1 million of benefit related to the non-service cost components of net periodic benefit cost, partially offset by foreign exchange transaction losses of $0.4 million. These net foreign exchange transaction losses included $23.7 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, almost entirely offset by $23.3 million of gains from our foreign exchange forward contracts. 35 Provision for (Benefit from) Income Taxes Benefit from income taxes for the three months ended September 30, 2022 totaled $12.1 million, resulting in an effective tax rate of 9.3%. Provision for income taxes for the three months ended September 30, 2021 totaled $5.5 million, resulting in an effective tax rate of 6.5%. The decrease in provision for income taxes is primarily driven by the decrease of $214.9 million in income from continuing operations before income taxes. The provision for income taxes for the three months ended September 30, 2021 was also impacted by the release of a valuation allowance of $16.3 million in the third quarter of 2021, as a result of improvements in actual business operations and projected future results of one of the Company’s subsidiaries in China. Net Income (Loss) from Discontinued Operations, Net of Income Taxes Net income (loss) from discontinued operations, net of income taxes during the three months ended September 30, 2022 and 2021 was $(1.9) million and $13.7 million, respectively, and was related the results and sale of our Synthetic Rubber business. Refer to Note 4 in the condensed consolidated financial statements for further information. Nine Months Ended – September 30, 2022 vs. September 30, 2021 Net Sales Of the 13% increase in net sales, 16% was attributable to increased selling prices, mainly due to the pass through of higher raw material costs, such as styrene, along with higher energy costs. An additional 10% increase was due to the contributions from our acquisitions in 2021, including the PMMA Acquisition, which closed on May 3, 2021, and the Aristech Surfaces Acquisition, which closed on September 1, 2021. These increases were partially offset by an 11% decrease due to lower volumes across all segments due to weakening demand in several applications, including third quarter customer destocking, particularly in Europe, as well as the impacts of COVID-19 in China. Cost of Sales The 26% increase in cost of sales was primarily attributable to a 21% increase in raw material costs, which included a one-time charge of $22.5 million related to raw material contract obligations and inventory writedowns. Also contributing was an 11% increase related to the PMMA Acquisition and Aristech Surfaces Acquisition. Partially offsetting these increases was a decrease of 9% due to lower volumes. Gross Profit The decrease in gross profit of 52% was primarily attributable to lower margins compared to the very high levels observed in the first three quarters of 2021 in Feedstocks, Base Plastics, and Polystyrene, as well as lower sales volume as described above. These impacts were partially offset by additional gross profit from the 2021 acquisitions. See the segment discussion below for further information. Selling, General and Administrative Expenses (SG&A) The $32.4 million, or 14%, increase in SG&A was primarily due to an increase of $57.0 million in costs associated with the Company’s strategic initiatives, including the exploration of a potential divestiture of our styrenics business, a $3.0 million increase in costs incurred in connection with the Company’s enterprise resource planning system upgrade, a $6.1 million increase in employee compensation, and a $4.0 million increase in bad debt expense. Offsetting these costs was a decrease of $43.0 million related to acquisition transaction and integration costs incurred, primarily in connection with the PMMA Acquisition. Equity in Earnings of Unconsolidated Affiliates The increase in equity earnings of $13.6 million was due to higher equity earnings from Americas Styrenics due mainly to higher styrene profitability, which was partially offset by lower sales volume that resulted from styrene production outages and a weaker demand environment including limited export opportunities. 36 Other Charges During the nine months ended September 30, 2022, the Company recorded a charge of $35.6 million related to the European Commission request for information, as described within Note 13 in the condensed consolidated financial statements. The Company also recorded impairment charges of $3.9 million and $2.1 million related to our Boehlen styrene monomer assets during the nine months ended September 30, 2022 and 2021, respectively, as described within Note 11 in the condensed consolidated financial statements. Additionally, during the nine months ended September 30, 2021, the Company recorded $0.9 million of impairment charges on certain long-lived assets in our Base Plastics segment. Interest Expense, Net The increase in interest expense, net of $21.1 million, or 37%, was primarily attributable to the Company’s issuance of the 2029 Senior Notes, which were not issued until late in the first quarter of 2021 and the 2028 Term Loan B, issued in the second quarter of 2021. Refer to Note 8 in the condensed consolidated financial statements for further information. Acquisition Purchase Price Hedge Loss The $22.0 million acquisition purchase price hedge loss for the nine months ended September 30, 2021 was due to the change in fair value of the Company’s forward currency hedge arrangement on the euro-denominated purchase price of the PMMA business. Other Expense, Net Other expense, net for the nine months ended September 30, 2022 was $1.6 million, which included foreign exchange transaction losses of $1.8 million. These net foreign exchange transaction losses included $83.4 million of 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 $81.6 million of gains from our foreign exchange forward contracts. These losses were partially offset by an $0.8 million gain on extinguishment of debt recorded in relation to the repurchase of $3.0 million of the 2029 Senior Notes in the open market. Other expense, net for the nine months ended September 30, 2021 was $8.4 million, which included $2.3 million of expense related to the non-service cost components of net periodic benefit cost and $4.5 million of transfer taxes associated with the PMMA Acquisition. These expense amounts were partially offset by foreign exchange transaction gains of $0.4 million, which included $43.0 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 $43.4 million of gains from our foreign exchange forward contracts, excluding the acquisition purchase price hedge. Provision for Income Taxes Provision for income taxes for the nine months ended September 30, 2022 totaled $41.4 million, resulting in an effective tax rate of (185.2)%. Provision for income taxes for the nine months ended September 30, 2021 totaled $48.9 million, resulting in an effective tax rate of 14.9%. The decrease in the provision for income taxes is primarily driven by the decrease of $349.4 million in income from continuing operations before income taxes. Also decreasing the provision for income taxes was the release of a valuation allowance of $8.5 million during the second quarter of 2022, as a result of improvements in actual and projected future results in one of the Company’s subsidiaries in Luxembourg. This benefit was more than offset by the revaluation of the Company’s net deferred tax assets in Switzerland, which were originally established as part of the Swiss cantonal tax reform measures enacted in 2019. This revaluation resulted in a one-time deferred tax expense of $15.3 million recorded in the second quarter of 2022. The provision for income taxes for the nine months ended September 30, 2021 was also impacted by the release of a valuation allowance of $16.3 million in the third quarter of 2021, as a result of improvements in actual business operations and projected future results of one of the Company’s subsidiaries in China. 37 Net Income (Loss) from Discontinued Operations, Net of Income Taxes Net income (loss) from discontinued operations, net of income taxes during the nine months ended September 30, 2022 and 2021 was $(1.9) million and $38.0 million, respectively, and was related the results and sale of our Synthetic Rubber business. Refer to Note 4 in the condensed consolidated financial statements for further information. Outlook While customer destocking is expected to continue through the remainder of the year, we expect sequential earnings improvement in the fourth quarter. One-time headwinds from the third quarter, including a large negative net timing impact from falling raw material prices, are not expected to repeat in the fourth quarter. In addition, we are evaluating potential asset optimization initiatives, such as the potential closures of the Boehlen, Germany styrene plant and one production line at the Stade, Germany polycarbonate plant, which would be expected to have a positive financial impact in 2023. Through 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 challenging macroeconomic environment on our business operations for the foreseeable future. We expect to end the year with a strong balance sheet and liquidity position which will enable us to continue investing in sustainability and organic growth opportunities while providing shareholder return. Selected Segment Information The following sections describe net sales, Adjusted EBITDA, and Adjusted EBITDA margin by segment for the three and nine months ended September 30, 2022 and 2021. Inter-segment sales have been eliminated. Refer to Note 16 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 from continuing operations before income taxes to
Engineered Materials Segment Our Engineered Materials segment consists of rigid thermoplastic compounds and blends products sold into high growth and high value applications in markets such as consumer electronics and medical, as well as soft thermoplastic elastomers (“TPEs”) products which are sold into markets such as footwear and automotive. The Engineered Materials segment also includes polymethyl methacrylates (“PMMA”) and activated methyl methacrylates (“MMA”) products, which are sold into a variety of applications including automotive, building & construction, medical, consumer electronics, and wellness, among others.
Three Months Ended – September 30, 2022 vs. September 30, 2021 The 5% increase in net sales was primarily attributable to the contribution from the Aristech Surfaces acquisition, which led to an increase of 11% year-over-year. In addition, sales price, primarily from the pass through of higher raw materials and energy costs, increased net sales by 8%. These increases were partially offset by a 13% decrease due to lower sales volumes from reduced demand primarily in construction, consumer electronics, wellness, and automotive applications. The $25.2 million, or 77%, decrease in Adjusted EBITDA was primarily due to a decrease of $18.3 million, or 56%, due to lower sales volumes from reduced demand, including impacts from geopolitical uncertainty in Europe. In addition to lower sales volume, reduced demand led to lower margins due to weak supply and demand dynamics and the inability 38 to fully pass through significantly higher natural gas costs in Europe. Higher fixed costs also resulted in a $6.9 million, or 21%, decrease in Adjusted EBITDA. Nine Months Ended – September 30, 2022 vs. September 30, 2021 The 76% increase in net sales was primarily attributable to the contribution from the PMMA business and the Aristech Surfaces acquisitions, which led to a 75% increase year-over-year. In addition, sales price, primarily from the pass through of higher raw materials and energy costs, increased net sales by 13%. These increases were partially offset by a decrease of 11% from lower sales volumes, as demand declined from very high levels in the prior year and also from COVID-19 lockdowns in China and geopolitical uncertainty in Europe in the current year. Adjusted EBITDA increased $7.7 million, or 11%, year-over-year. Our recent acquisitions of the PMMA business and Aristech Surfaces contributed a $52.3 million, or 76%, increase from the prior year. This increase was partially offset by a $10.2 million, or 15%, decrease due to lower sales volume as described above. In addition, lower margins contributed a $27.9 million, or 41%, decrease due to lower demand and higher supply. One-time charges also negatively impacted margins, including a $4.0 million charge related to a contract review with a significant supplier. 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, styrene-acrylate latex (“SA latex”), and vinylidene chloride latex for coatings, adhesives, sealants, and elastomers (“CASE”) applications.
Three Months Ended – September 30, 2022 vs. September 30, 2021 The 8% increase in net sales was primarily due to a 19% increase in pricing from the pass through of raw material costs and pricing actions, which more than offset a 4% decrease due to foreign exchange rate impacts and a 6% decrease due to lower sales volumes, mainly in carpet and construction applications. The $6.1 million, or 16%, decrease in Adjusted EBITDA was primarily due to a decrease of $5.4 million, or 15%, from lower sales volumes in carpet and construction applications, in addition to a decrease of $3.9 million, or 10%, due to higher fixed costs. These decreases were partially offset by a $4.2 million, or 11%, increase attributable to higher margins from favorable net timing and pricing actions. Nine Months Ended – September 30, 2022 vs. September 30, 2021 The 14% increase in net sales was primarily due to a 22% increase in pricing from the pass through of raw material costs, slightly offset by a 4% decrease due to foreign exchange rate impacts and a 4% decrease due to lower sales volumes mainly in carpet and construction applications. The $4.4 million, or 5%, increase in Adjusted EBITDA was primarily due to an increase of $23.8 million, or 28%, attributable to higher margins which was a result of favorable net timing and pricing actions. This increase was largely offset by a $6.7 million, or 8%, decrease from lower sales volumes, a $7.2 million, or 8%, decrease due to foreign exchange rate impacts, and a $7.5 million, or 9%, decrease due to higher fixed costs. 39 Base Plastics Segment Our Base Plastics segment consists of a variety of compounds and blends, the majority of which are for automotive applications. The segment also includes our acrylonitrile-butadiene-styrene (“ABS”), styrene-acrylonitrile (“SAN”), and polycarbonate (“PC”) businesses. The Base Plastics segment also includes the results of Heathland, which was acquired in the first quarter of 2022. However, this did not have a material impact on sales or Adjusted EBITDA for the period.
Three Months Ended – September 30, 2022 vs. September 30, 2021 Net sales decreased by 25% year-over-year, primarily due to lower sales volume, mainly in ABS as a result of weaker demand for applications supporting building & construction and consumer durables, which contributed to a 27% decrease. Also contributing to the overall decrease was unfavorable foreign exchange rate impacts of 4%. These decreases were slightly offset by a 5% increase from higher pricing due to the pass through of raw material cost. The $102.8 million, or 117%, decrease in Adjusted EBITDA was primarily due to lower sales volumes and margins. Lower sales volumes, as described above, contributed to a $38.2 million, or 44%, decrease in Adjusted EBITDA. In addition, Adjusted EBITDA decreased by $60.2 million, or 69%, due to a margin decline from higher raw material and utility costs, weaker demand, and increased cost competition from improved supply and lower cost imports of polycarbonate and ABS into Europe. In addition, higher fixed costs also attributed to a $5.2 million, or 6%, decrease in Adjusted EBITDA. Nine Months Ended – September 30, 2022 vs. September 30, 2021 Net sales decreased by 6% year-over-year. Lower sales volume from weaker demand for building & construction and consumer durable applications led to a 17% decrease, as well as a 4% decrease due to foreign exchange rate impacts. These were partially offset by higher pricing from the pass through of higher raw material costs which led to a 15% increase in net sales from the prior year. The $135.2 million, or 58%, decrease in Adjusted EBITDA was primarily due to lower sales volume of $62.9 million, or 27%, and lower margins of $51.0 million, or 22%, as described above. Also contributing to the decrease was unfavorable foreign exchange rate impacts of $10.0 million, or 4%, and a decrease of $12.2 million, or 5%, due to higher fixed costs. 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.
40 Three Months Ended – September 30, 2022 vs. September 30, 2021 Net sales decreased by 10% year-over-year. Lower sales volumes, including customers destocking amid falling raw material prices, led to a 20% decrease in net sales from the prior year. This decrease was offset by 10% increase from higher pricing, primarily from the pass through of higher styrene costs. The $32.5 million, or 63%, decrease in Adjusted EBITDA was primarily due to weaker demand which negatively impacted volumes and margins, particularly in building & construction and appliance applications. This resulted in a decrease of $13.0 million, or 25%, due to lower volumes, and a decrease of $19.3 million, or 38%, due to lower margins. Additionally, a decrease of $3.6 million, or 7%, was due to higher fixed costs. Nine Months Ended – September 30, 2022 vs. September 30, 2021 The 3% increase in net sales was due to higher pricing primarily from the pass through of higher styrene costs, which led to an increase of 10% increase in net sales compared to the prior year. Slightly offsetting this increase was a 7% decrease due to lower sales volume as described above. The $62.6 million, or 42%, decrease in Adjusted EBITDA was due to a decrease of $47.6 million, or 32%, from lower margins primarily from weaker demand as well as new supply in China. In addition, a decrease of $17.3 million, or 12%, was due to lower volumes. 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, SA latex, SB latex, ABS resins, unsaturated polyethylene resins, and styrene-butadiene rubber.
Three Months Ended – September 30, 2022 vs. September 30, 2021 Net sales decreased 3% year-over-year. Lower styrene-related sales volume resulted in a 24% decrease which was partially offset by a 22% increase due to higher styrene prices. The decrease of $50.4 million in Adjusted EBITDA was primarily attributed to a $59.0 million, or 214%, decrease due to lower styrene margins including impacts from elevated utility costs caused by historically high natural gas prices in Europe, weaker demand, and unfavorable net timing. In addition, a decrease of $5.5 million, or 20%, was due to higher fixed costs. Slightly offsetting these decreases was an increase of $14.1 million, or 51%, due to foreign exchange impacts. Nine Months Ended – September 30, 2022 vs. September 30, 2021 Net sales increased 10% year-over-year. Higher styrene prices resulted in a 29% increase in net sales, which was partially offset by an 18% decrease due to lower styrene-related sales volume. The decrease of $118.3 million in Adjusted EBITDA was primarily attributed to a $134.8 million, or 231%, decrease due to lower styrene margins including impacts from higher utility costs caused by a rise in natural gas prices in Europe and weaker demand. Slightly offsetting this decrease was an increase of $20.6 million, or 35%, due to foreign exchange rate impacts. 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 41 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.
*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 – September 30, 2022 vs. September 30, 2021 The increase in Adjusted EBITDA was mainly due to higher margins which were partially offset by lower volumes. Prior period included headwinds from production issues caused by Hurricane Ida. Nine Months Ended – September 30, 2022 vs. September 30, 2021 The increase in Adjusted EBITDA was due to higher margins, including a stronger styrene spot market, which were partially offset by lower volumes. 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; 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. 42 Adjusted EBITDA is calculated as follows for the three and nine months ended September 30, 2022 and 2021:
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