UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q/A
Amendment No. 1
(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, 2019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36473
Trinseo S.A.
(Exact name of registrant as specified in its charter)
| |
Luxembourg | N/A |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
1000 Chesterbrook Boulevard
Suite 300
Berwyn, PA 19312
(Address of Principal Executive Offices)
(610) 240-3200
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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.
| | | | | |
| | | | | |
| | | | | |
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 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 October 31, 2019, there were 48,777,93439,179,801 of the registrant’s ordinary shares outstanding.
TABLE OF CONTENTSEXPLANATORY NOTE
Trinseo S.A. (the “Company”) is filing this amendment (this “Form 10-Q/A”) to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (the “Form 10-Q”), filed with the U.S. Securities and Exchange Commission (“the Commission”) on November 5, 2019, solely to correct a typographical error on the cover page of the Form 10-Q with respect to the number of ordinary shares outstanding. The corrected language reads as follows: “As of October 31, 2019, there were 39,179,801 of the registrant’s ordinary shares outstanding.” The incorrect number of ordinary shares outstanding as of October 31, 2019 was also included in Exhibit 101 to the Form 10-Q, which contains the Company’s Extensible Business Reporting Language materials for the nine-month period ended September 30, 2019. This Form 10-Q/A also amends Item 6. Exhibits, by including Exhibit 101, which now states the correct number of ordinary shares outstanding as of October 31, 2019. In connection with the filing of this Form 10-Q/A and pursuant to the rules of the Commission, the Company is including with this Form 10-Q/A new certifications by its Chief Executive Officer and Chief Financial Officer. This Form 10-Q/A should be read in conjunction with the Form 10-Q, which remains in effect as of its date. Except as specifically noted above, this Form 10-Q/A does not modify or update disclosures in the Form 10-Q. Accordingly, this Form 10-Q/A does not reflect events occurring after the filing of the Form 10-Q or modify or update any related or other disclosures. | |||||
|---|---|---|---|---|---|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
2
Trinseo S.A.
Quarterly Report on Form 10-Q
For the quarterly period ended September 30, 2019
Unless otherwise indicated or required by context, as used in this Quarterly Report on Form 10-Q (“Quarterly Report”), the term “Trinseo” refers to Trinseo S.A. (NYSE: TSE), a public limited liability company (société anonyme) existing under the laws of Luxembourg, and not its subsidiaries. The terms “Company,” “we,” “us” and “our” refer to Trinseo and its consolidated subsidiaries, taken as a consolidated entity. All financial data provided in this Quarterly Report is the financial data of the Company, unless otherwise indicated. Prior to the formation of the Company, our business was wholly owned by The Dow Chemical Company (together with other affiliates, “Dow”).
Definitions of capitalized terms not defined herein appear within our Annual Report on Form 10-K for the year ended December 31, 2018 (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019.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, strategies, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. Forward-looking statements may be identified by the use of words like “expect,” “anticipate,” “intend,” “forecast,” ”estimate,” “see,” “outlook,” “will,” “may,” “might,” “potential,” “likely,” “target,” “plan,” “contemplate,” “seek,” “attempt,” “should,” “could,” “would” or expressions of similar meaning. Forward-looking statements reflect management’s evaluation of information currently available and are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in our Annual Report filed with the SEC on February 28, 2019 under Part I, Item IA— “Risk Factors,” and elsewhere within this Quarterly Report.
As a result of these or other factors, our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. 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 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.6. Exhibits
3
PART I —FINANCIAL INFORMATION
Item 1. Financial Statements
TRINSEO S.A.
Condensed Consolidated Balance Sheets
(In millions, except per share data)
(Unaudited)
| | | | | | | |
| | September 30, | | December 31, | | ||
|
| 2019 | | 2018 |
| ||
Assets |
| | | | |
| |
Current assets | | | | | | | |
Cash and cash equivalents | | $ | 483.3 | | $ | 452.3 | |
Accounts receivable, net of allowance for doubtful accounts (September 30, 2019: $5.1; December 31, 2018: $6.1) | | | 598.2 | | | 648.1 | |
Inventories | |
| 446.7 | |
| 510.4 | |
Other current assets | |
| 26.6 | |
| 20.5 | |
Total current assets | |
| 1,554.8 | |
| 1,631.3 | |
Investments in unconsolidated affiliates | |
| 199.8 | |
| 179.1 | |
Property, plant and equipment, net of accumulated depreciation (September 30, 2019: $629.0; December 31, 2018: $590.6) | | | 559.9 | | | 592.1 | |
Other assets | | | | | | | |
Goodwill | |
| 66.0 | |
| 69.0 | |
Other intangible assets, net | |
| 185.5 | |
| 191.1 | |
Right-of-use assets - operating | | | 67.1 | | | — | |
Deferred income tax assets | |
| 28.6 | |
| 26.7 | |
Deferred charges and other assets | |
| 63.7 | |
| 37.5 | |
Total other assets | |
| 410.9 | |
| 324.3 | |
Total assets | | $ | 2,725.4 | | $ | 2,726.8 | |
Liabilities and shareholders’ equity | | | | | | | |
Current liabilities | | | | | | | |
Short-term borrowings and current portion of long-term debt | | $ | 11.5 | | $ | 7.0 | |
Accounts payable | |
| 351.1 | |
| 354.2 | |
Current lease liabilities - operating | | | 14.2 | | | — | |
Income taxes payable | |
| 6.5 | |
| 16.0 | |
Accrued expenses and other current liabilities | |
| 155.6 | |
| 159.8 | |
Total current liabilities | |
| 538.9 | |
| 537.0 | |
Noncurrent liabilities | | | | | | | |
Long-term debt, net of unamortized deferred financing fees | |
| 1,162.6 | |
| 1,160.8 | |
Noncurrent lease liabilities - operating | | | 53.2 | | | — | |
Deferred income tax liabilities | |
| 43.1 | |
| 45.4 | |
Other noncurrent obligations | |
| 212.6 | |
| 214.9 | |
Total noncurrent liabilities | |
| 1,471.5 | |
| 1,421.1 | |
Commitments and contingencies (Note 11) | | | | | | | |
Shareholders’ equity | | | | | | | |
Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (September 30, 2019: 48.8 shares issued and 39.5 shares outstanding; December 31, 2018: 48.8 shares issued and 41.6 shares outstanding) | | | 0.5 | | | 0.5 | |
Additional paid-in-capital | |
| 574.2 | |
| 575.4 | |
Treasury shares, at cost (September 30, 2019: 9.3 shares; December 31, 2018: 7.2 shares) | | | (505.8) | | | (418.1) | |
Retained earnings | |
| 791.0 | |
| 753.2 | |
Accumulated other comprehensive loss | |
| (144.9) | |
| (142.3) | |
Total shareholders’ equity | |
| 715.0 | |
| 768.7 | |
Total liabilities and shareholders’ equity | | $ | 2,725.4 | | $ | 2,726.8 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
TRINSEO S.A.
Condensed Consolidated Statements of Operations
(In millions, except per share data)
(Unaudited)
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | ||||||||
| | September 30, | | September 30, | |
| ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| ||||
Net sales |
| $ | 922.1 |
| $ | 1,199.7 |
| $ | 2,887.0 |
| $ | 3,557.8 | | |
Cost of sales | |
| 836.9 | |
| 1,068.1 | |
| 2,618.1 | |
| 3,088.3 | | |
Gross profit | |
| 85.2 | |
| 131.6 | |
| 268.9 | |
| 469.5 | | |
Selling, general and administrative expenses | |
| 67.6 | |
| 60.0 | |
| 208.0 | |
| 186.1 | | |
Equity in earnings of unconsolidated affiliates | |
| 25.7 | |
| 34.5 | |
| 98.2 | |
| 113.3 | | |
Operating income | |
| 43.3 | |
| 106.1 | |
| 159.1 | |
| 396.7 | | |
Interest expense, net | |
| 9.2 | |
| 10.1 | |
| 29.3 | |
| 35.8 | | |
Loss on extinguishment of long-term debt | |
| — | | | — | | | — | | | 0.2 | | |
Other expense, net | |
| 2.3 | |
| 2.1 | |
| 7.7 | |
| 2.9 | | |
Income before income taxes | |
| 31.8 | |
| 93.9 | |
| 122.1 | |
| 357.8 | | |
Provision for income taxes | |
| 9.3 | |
| 19.2 | |
| 35.8 | |
| 64.5 | | |
Net income | | $ | 22.5 | | $ | 74.7 | | $ | 86.3 | | $ | 293.3 | | |
Weighted average shares- basic | | | 40.1 | | | 42.6 | | | 40.7 | | | 43.0 | | |
Net income per share- basic | | $ | 0.56 | | $ | 1.75 | | $ | 2.12 | | $ | 6.82 | | |
Weighted average shares- diluted | |
| 40.4 | |
| 43.3 | |
| 41.2 | |
| 43.9 | | |
Net income per share- diluted | | $ | 0.56 | | $ | 1.72 | | $ | 2.09 | | $ | 6.68 | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
See Exhibit Index.
TRINSEO S.A.EXHIBIT INDEX
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | | ||||
Net income |
| $ | 22.5 | | $ | 74.7 |
| $ | 86.3 |
| $ | 293.3 |
|
Other comprehensive income (loss), net of tax: | |
| | | | | | | | | | | |
Cumulative translation adjustments | | | 0.5 | | | (4.6) | | | 3.2 | |
| (22.8) | |
Net gain (loss) on cash flow hedges | | | 0.2 | | | 2.1 | | | (5.1) | | | 16.8 | |
Pension and other postretirement benefit plans: | | | | | | | | | | | | | |
Net loss arising during period (net of tax of: $0.1, $0.0, $0.3, and $0.0) | | | (0.7) | | | — | | | (2.7) | | | — | |
Amounts reclassified from accumulated other comprehensive income | | | 0.7 | | | 0.6 | | | 2.0 | | | 1.8 | |
Total other comprehensive income (loss), net of tax | |
| 0.7 | |
| (1.9) | |
| (2.6) | |
| (4.2) | |
Comprehensive income | | $ | 23.2 | | $ | 72.8 | | $ | 83.7 | | $ | 289.1 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
TRINSEO S.A.
Condensed Consolidated Statements of Shareholders’ Equity
(In millions, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
|
| Shares |
| Shareholders' Equity | ||||||||||||||||||
|
| Ordinary Shares Outstanding | | Treasury Shares |
| Ordinary Shares |
| Additional |
| Treasury Shares |
| Accumulated Other Comprehensive Income (Loss) |
| Retained Earnings |
| Total | ||||||
Balance at December 31, 2018 |
| 41.6 | | 7.2 | | $ | 0.5 | | $ | 575.4 | | $ | (418.1) | | $ | (142.3) | | $ | 753.2 | | $ | 768.7 |
Net income |
| — | | — | | | — | | | — | | | — | | | — | | | 35.8 | |
| 35.8 |
Other comprehensive loss |
| — | | — | | | — | | | — | | | — | | | (1.2) | | | — | |
| (1.2) |
Share-based compensation activity |
| 0.1 | | (0.1) | | | — | | | (6.6) | | | 7.0 | | | — | | | — | |
| 0.4 |
Purchase of treasury shares | | (0.7) | | 0.7 | | | — | | | — | | | (34.0) | | | — | | | — | | | (34.0) |
Dividends on ordinary shares ($0.40 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (16.6) | | | (16.6) |
Balance at March 31, 2019 |
| 41.0 | | 7.8 | | $ | 0.5 | | $ | 568.8 | | $ | (445.1) | | $ | (143.5) | | $ | 772.4 | | $ | 753.1 |
Net income |
| — | | — | | | — | | | — | | | — | | | — | | | 28.0 | |
| 28.0 |
Other comprehensive income |
| — | | — | | | — | | | — | | | — | | | (2.1) | | | — | |
| (2.1) |
Share-based compensation activity |
| 0.1 | | (0.1) | | | — | | | 2.4 | | | 1.7 | | | — | | | — | |
| 4.1 |
Purchase of treasury shares | | (0.5) | | 0.5 | | | — | | | — | | | (21.7) | | | — | | | — | | | (21.7) |
Dividends on ordinary shares ($0.40 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (16.3) | | | (16.3) |
Balance at June 30, 2019 |
| 40.6 | | 8.2 | | $ | 0.5 | | $ | 571.2 | | $ | (465.1) | | $ | (145.6) | | $ | 784.1 | | $ | 745.1 |
Net income |
| — | | — | | | — | | | — | | | — | | | — | | | 22.5 | |
| 22.5 |
Other comprehensive income |
| — | | — | | | — | | | — | | | — | | | 0.7 | | | — | |
| 0.7 |
Share-based compensation activity |
| — | | — | | | — | | | 3.0 | | | 0.2 | | | — | | | — | |
| 3.2 |
Purchase of treasury shares | | (1.1) | | 1.1 | | | — | | | — | | | (40.9) | | | — | | | — | | | (40.9) |
Dividends on ordinary shares ($0.40 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (15.6) | | | (15.6) |
Balance at September 30, 2019 |
| 39.5 | | 9.3 | | $ | 0.5 | | $ | 574.2 | | $ | (505.8) | | $ | (144.9) | | $ | 791.0 | | $ | 715.0 |
| | | | | | | | | | | | | | | | | | | | | | |
|
| Shares |
| Shareholders' Equity | ||||||||||||||||||
|
| Ordinary Shares Outstanding | | Treasury Shares |
| Ordinary Shares |
| Additional |
| Treasury Shares |
| Accumulated Other Comprehensive Income (Loss) |
| Retained Earnings |
| Total | ||||||
Balance at December 31, 2017 |
| 43.4 | | 5.4 | | $ | 0.5 | | $ | 578.8 | | $ | (286.8) | | $ | (145.6) | | $ | 527.9 | | $ | 674.8 |
Net income |
| — | | — | |
| — | |
| — | |
| — | |
| — | |
| 120.3 | |
| 120.3 |
Other comprehensive income |
| — | | — | |
| — | |
| — | |
| — | |
| 1.3 | |
| — | |
| 1.3 |
Share-based compensation activity |
| 0.3 | | (0.3) | |
| — | |
| (12.2) | |
| 11.5 | |
| — | |
| — | |
| (0.7) |
Purchase of treasury shares | | (0.3) | | 0.3 | | | — | | | — | | | (24.2) | | | — | | | — | | | (24.2) |
Dividends on ordinary shares ($0.36 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (15.8) | | | (15.8) |
Balance at March 31, 2018 |
| 43.4 | | 5.4 | | $ | 0.5 | | $ | 566.6 | | $ | (299.5) | | $ | (144.3) | | $ | 632.4 | | $ | 755.7 |
Net income |
| — | | — | |
| — | |
| — | |
| — | |
| — | |
| 98.3 | |
| 98.3 |
Other comprehensive loss |
| — | | — | |
| — | |
| — | |
| — | |
| (3.6) | |
| — | |
| (3.6) |
Share-based compensation activity |
| 0.1 | | (0.1) | |
| — | |
| 2.5 | |
| 1.2 | |
| — | |
| — | |
| 3.7 |
Purchase of treasury shares | | (0.5) | | 0.5 | | | — | | | — | | | (35.0) | | | — | | | — | | | (35.0) |
Dividends on ordinary shares ($0.40 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (17.3) | | | (17.3) |
Balance at June 30, 2018 |
| 43.0 | | 5.8 | | $ | 0.5 | | $ | 569.1 | | $ | (333.3) | | $ | (147.9) | | $ | 713.4 | | $ | 801.8 |
Net income |
| — | | — | |
| — | |
| — | |
| — | |
| — | |
| 74.7 | |
| 74.7 |
Other comprehensive loss |
| — | | — | |
| — | |
| — | |
| — | |
| (1.9) | |
| — | |
| (1.9) |
Share-based compensation activity |
| — | | — | |
| — | |
| 3.1 | |
| 0.7 | |
| — | |
| — | |
| 3.8 |
Purchase of treasury shares | | (0.5) | | 0.5 | | | — | | | — | | | (35.0) | | | — | | | — | | | (35.0) |
Dividends on ordinary shares ($0.40 per share) | | — | | — | | | — | | | — | | | — | | | — | | | (17.2) | | | (17.2) |
Balance at September 30, 2018 |
| 42.5 | | 6.3 | | $ | 0.5 | | $ | 572.2 | | $ | (367.6) | | $ | (149.8) | | $ | 770.9 | | $ | 826.2 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
TRINSEO S.A.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
| | | | | | | |
| | Nine Months Ended | | ||||
| | September 30, | | ||||
|
| 2019 |
| 2018 | | ||
Cash flows from operating activities |
| |
|
| |
|
|
Net income | | $ | 86.3 | | $ | 293.3 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | |
Depreciation and amortization | |
| 101.7 | |
| 96.0 | |
Amortization of deferred financing fees, issuance discount, and excluded component of hedging instruments | |
| (0.4) | |
| 0.8 | |
Deferred income tax | |
| (4.5) | |
| 2.1 | |
Share-based compensation expense | |
| 10.8 | |
| 12.3 | |
Earnings of unconsolidated affiliates, net of dividends | |
| (20.7) | |
| (28.3) | |
Unrealized gain on foreign exchange forward contracts | |
| (4.6) | |
| (5.4) | |
Loss on extinguishment of long-term debt | |
| — | | | 0.2 | |
Gain on sale of businesses and other assets | |
| (0.2) | | | (0.5) | |
Impairment charges | |
| — | | | 0.4 | |
Pension settlement loss | | | 1.2 | | | — | |
Changes in assets and liabilities | | | | | | | |
Accounts receivable | |
| 34.7 | |
| (77.8) | |
Inventories | |
| 51.6 | |
| (86.1) | |
Accounts payable and other current liabilities | |
| 16.1 | |
| 46.4 | |
Income taxes payable | |
| (9.6) | |
| (16.3) | |
Other assets, net | |
| 0.6 | |
| (17.2) | |
Other liabilities, net | |
| 11.9 | |
| 18.6 | |
Cash provided by operating activities | |
| 274.9 | |
| 238.5 | |
Cash flows from investing activities | | | | | | | |
Capital expenditures | |
| (71.2) | |
| (90.9) | |
Cash paid for asset or business acquisitions, net of cash acquired | | | (6.4) | | | — | |
Proceeds from capital expenditures subsidy | |
| — | |
| 1.0 | |
Proceeds from the sale of businesses and other assets | |
| 0.7 | |
| 1.8 | |
Cash used in investing activities | |
| (76.9) | |
| (88.1) | |
Cash flows from financing activities | | | | | | | |
Deferred financing fees | |
| — | |
| (0.6) | |
Short-term borrowings, net | |
| (4.8) | |
| (0.2) | |
Purchase of treasury shares | | | (98.7) | | | (95.5) | |
Dividends paid | | | (50.0) | | | (49.0) | |
Proceeds from exercise of option awards | | | 0.9 | | | 2.6 | |
Withholding taxes paid on restricted share units | | | (3.9) | | | (8.1) | |
Net proceeds from issuance of 2024 Term Loan B | | | — | | | 696.5 | |
Repayments of 2024 Term Loan B | | | (5.3) | | | (701.8) | |
Cash used in financing activities | |
| (161.8) | |
| (156.1) | |
Effect of exchange rates on cash | |
| (4.0) | |
| (5.7) | |
Net change in cash, cash equivalents, and restricted cash | |
| 32.2 | |
| (11.4) | |
Cash, cash equivalents, and restricted cash—beginning of period | |
| 452.3 | |
| 432.8 | |
Cash, cash equivalents, and restricted cash—end of period | | $ | 484.5 | | $ | 421.4 | |
Less: Restricted cash, included in "Other current assets" | | | (1.2) | | | — | |
Cash and cash equivalents—end of period | | $ | 483.3 | | $ | 421.4 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
TRINSEO S.A.
Notes to Condensed Consolidated Financial Statements
(Dollars in millions, unless otherwise stated)
(Unaudited)
NOTE 1—BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements of Trinseo S.A. and its subsidiaries (the “Company”) as of and for the periods ended September 30, 2019 and 2018 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 2018 audited consolidated financial statements included within the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019.
The December 31, 2018 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 2018 audited consolidated financial statements, but does not include all disclosures required by GAAP for annual periods. The presentation of prior year amounts in the condensed consolidated statements of shareholders’ equity have been updated to conform to the current year presentation.
NOTE 2—RECENT ACCOUNTING GUIDANCE
In February 2016, the FASB issued guidance related to leases that outlines a comprehensive lease accounting model and supersedes prior lease guidance. The new guidance requires lessees to recognize on the consolidated balance sheets lease liabilities and corresponding right-of-use (“ROU”) 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. The new guidance must be adopted using a modified retrospective transition, applying the new standard to all leases existing at the date of initial application. The Company adopted the standard effective January 1, 2019, and as a result, the Company recorded ROU assets and lease liabilities of $73.0 million and $72.4 million, respectively, on the condensed consolidated balance sheet as of January 1, 2019. The Company’s adoption of this standard did not result in a cumulative effect adjustment being recorded to opening retained earnings as of January 1, 2019 and did not have a material impact on the Company’s condensed consolidated statements of operations or cash flows. Refer to Note 18 for new disclosure requirements in effect as a result of this adoption.
In August 2018, the FASB issued guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension plans or other postretirement plans. This amendment is effective for public companies for fiscal years ending after December 15, 2020. Early adoption is permitted, and the provisions of the amendment should be applied on a retrospective basis to all periods presented. The Company does not anticipate that adoption of the new guidance will have a material impact on its consolidated financial statements.
In August 2018, the FASB issued guidance which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard update is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company will adopt the new guidance prospectively to eligible costs incurred on or after the date first applied. The Company does not anticipate that adoption of this guidance will have a material impact on its consolidated financial statements, barring significant future cloud computing transactions.
NOTE 3—NET SALES
Sales are recognized at a point when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services, and when the Company’s related performance obligation is satisfied under the terms of the contract. Standard terms of delivery are included in contracts of sale, order confirmation documents, and invoices. Sales and other taxes that the
10
Company collects concurrent with sales-producing activities are excluded from “Net sales” and included as a component of “Cost of sales” in the condensed consolidated statements of operations. Additionally, freight and any directly related costs of transporting finished products to customers are accounted for as fulfilment costs and are also included within “Cost of sales.” The amount of net sales recognized varies with changes in returns, rebates, cash sales incentives, and other allowances offered to customers based on the Company's experience.
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, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | |
| | Latex | | Synthetic | | Performance | | | | | | | |
| |||||
Three Months Ended | | Binders | | Rubber | | Plastics | | Polystyrene | | Feedstocks | | Total |
| ||||||
September 30, 2019 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 69.4 | | $ | — | | $ | 75.0 | | $ | — | | $ | 3.1 | | $ | 147.5 | |
Europe | |
| 94.2 | |
| 104.2 | |
| 170.5 | |
| 109.5 | |
| 37.8 | |
| 516.2 | |
Asia-Pacific | |
| 63.1 | |
| — | |
| 56.4 | |
| 88.1 | |
| 24.9 | | | 232.5 | |
Rest of World | |
| 3.0 | | | — | |
| 22.9 | |
| — | |
| — | |
| 25.9 | |
Total | | $ | 229.7 | | $ | 104.2 | | $ | 324.8 | | $ | 197.6 | | $ | 65.8 | | $ | 922.1 | |
September 30, 2018 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 77.3 | | $ | — | | $ | 87.0 | | $ | — | | $ | 3.0 | | $ | 167.3 | |
Europe | |
| 117.0 | |
| 137.7 | |
| 226.7 | |
| 148.3 | |
| 61.2 | |
| 690.9 | |
Asia-Pacific | |
| 80.0 | |
| — | |
| 62.7 | |
| 104.0 | |
| 66.8 | | | 313.5 | |
Rest of World | |
| 3.7 | | | — | |
| 24.3 | |
| — | |
| — | |
| 28.0 | |
Total | | $ | 278.0 | | $ | 137.7 | | $ | 400.7 | | $ | 252.3 | | $ | 131.0 | | $ | 1,199.7 | |
| | | | | | | | | | | | | | | | | | | |
| | Latex | | Synthetic | | Performance | | | | | | | |
| |||||
Nine Months Ended | | Binders | | Rubber | | Plastics | | Polystyrene | | Feedstocks | | Total |
| ||||||
September 30, 2019 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 199.9 | | $ | — | | $ | 235.3 | | $ | — | | $ | 8.1 | | $ | 443.3 | |
Europe | |
| 294.8 | |
| 340.9 | |
| 571.3 | |
| 363.6 | |
| 111.4 | |
| 1,682.0 | |
Asia-Pacific | |
| 180.4 | |
| — | |
| 167.6 | |
| 269.6 | |
| 67.9 | |
| 685.5 | |
Rest of World | |
| 8.7 | |
| — | |
| 67.5 | |
| — | |
| — | |
| 76.2 | |
Total | | $ | 683.8 | | $ | 340.9 | | $ | 1,041.7 | | $ | 633.2 | | $ | 187.4 | | $ | 2,887.0 | |
September 30, 2018 | | | | | | | | | | | | | | | | | | | |
United States | | $ | 216.3 | | $ | — | | $ | 253.7 | | $ | 0.2 | | $ | 9.6 | | $ | 479.8 | |
Europe | |
| 349.6 | |
| 442.2 | |
| 720.9 | |
| 460.9 | |
| 174.5 | |
| 2,148.1 | |
Asia-Pacific | |
| 236.9 | |
| — | |
| 171.0 | |
| 316.4 | |
| 123.6 | | | 847.9 | |
Rest of World | |
| 11.4 | | | — | |
| 70.6 | |
| — | |
| — | |
| 82.0 | |
Total | | $ | 814.2 | | $ | 442.2 | | $ | 1,216.2 | | $ | 777.5 | | $ | 307.7 | | $ | 3,557.8 | |
11
NOTE 4—INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Company’s investments held in unconsolidated affiliates are accounted for by the equity method. The Company is currently supplemented by 1 joint venture, Americas Styrenics LLC (“Americas Styrenics,” a styrene and polystyrene joint venture with Chevron Phillips Chemical Company LP). The results of Americas Styrenics are included within its own reporting segment.
Americas Styrenics is a privately held company; therefore, a quoted market price for its equity interests are not available. The summarized financial information of the Company’s unconsolidated affiliate is shown below.
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Sales |
| $ | 374.6 |
| $ | 462.1 |
| $ | 1,162.2 |
| $ | 1,430.2 | |
Gross profit | | $ | 59.6 | | $ | 74.1 | | $ | 199.6 | | $ | 242.3 | |
Net income | | $ | 44.6 | | $ | 62.1 | | $ | 160.3 | | $ | 206.4 | |
Americas Styrenics
As of September 30, 2019 and December 31, 2018, the Company’s investment in Americas Styrenics was $199.8 million and $179.1 million, respectively, which was $15.5 million and $46.4 million less than the Company’s 50% share of the underlying net assets of Americas Styrenics, respectively. This amount represents the difference between the book value of assets contributed to the joint venture at the time of formation (May 1, 2008) and the Company’s 50% share of the total recorded value of the joint venture’s assets and certain adjustments to conform with the Company’s accounting policies. This difference is being amortized over the weighted average remaining useful life of the contributed assets of approximately 1.5 years as of September 30, 2019. The Company received dividends from Americas Styrenics of $25.0 million and $77.5 million during the three and nine months ended September 30, 2019, respectively, compared to $17.5 million and $85.0 million during the three and nine months ended September 30, 2018, respectively.
NOTE 5—INVENTORIES
Inventories consisted of the following:
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2019 | | 2018 | ||
Finished goods |
| $ | 208.9 |
| $ | 269.8 |
Raw materials and semi-finished goods | |
| 203.3 | |
| 205.8 |
Supplies | |
| 34.5 | |
| 34.8 |
Total | | $ | 446.7 | | $ | 510.4 |
12
NOTE 6—DEBT
Refer to the Annual Report for definitions of capitalized terms not included herein and further background on the Company’s debt structure discussed below. The Company was in compliance with all debt related covenants as of September 30, 2019 and December 31, 2018.
As of September 30, 2019 and December 31, 2018, debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | September 30, 2019 | | December 31, 2018 | | ||||||||||||||
|
| 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 | | 4.044% | | September 2024 | | $ | 686.0 | | $ | (14.3) | | $ | 671.7 | | $ | 691.3 | | $ | (16.2) | | $ | 675.1 | |
2022 Revolving Facility(2) | | Various | | September 2022 | | | — | | | — | | | — | | | — | | | — | | | — | |
2025 Senior Notes | | 5.375% | | September 2025 | | | 500.0 | | | (7.6) | | | 492.4 | | | 500.0 | | | (8.4) | | | 491.6 | |
Accounts Receivable Securitization Facility(3) | | Various | | September 2021 | | | — | | | — | | | — | | | — | | | — | | | — | |
Other indebtedness | | Various | | Various | | | 10.0 | | | — | | | 10.0 | | | 1.1 | | | — | | | 1.1 | |
Total debt | | | | | | $ | 1,196.0 | | $ | (21.9) | | $ | 1,174.1 | | $ | 1,192.4 | | $ | (24.6) | | $ | 1,167.8 | |
Less: current portion(4) | | | | | | | | | | | | | (11.5) | | | | | | | | | (7.0) | |
Total long-term debt, net of unamortized deferred financing fees | | | | | | | | | | | | $ | 1,162.6 | | | | | | | | $ | 1,160.8 | |
NOTE 7—GOODWILL
The following table shows changes in the carrying amount of goodwill, by segment, from December 31, 2018 to September 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | |
| | Latex | | Synthetic | | Performance | | | | | | Americas | | | |
| ||||||
|
| Binders |
| Rubber |
| Plastics |
| Polystyrene |
| Feedstocks |
| Styrenics |
| Total |
| |||||||
Balance at December 31, 2018 | | $ | 15.9 | | $ | 11.3 | | $ | 37.3 | | $ | 4.5 | | $ | — | | $ | — | | $ | 69.0 | |
Foreign currency impact | |
| (0.7) | | | (0.5) | | | (1.6) | | | (0.2) | | | — | | | — | |
| (3.0) | |
Balance at September 30, 2019 | | $ | 15.2 | | $ | 10.8 | | $ | 35.7 | | $ | 4.3 | | $ | — | | $ | — | | $ | 66.0 | |
13
NOTE 8—DERIVATIVE INSTRUMENTS
The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. The Company does not hold or enter into financial instruments for trading or speculative purposes. All derivatives are recorded on the condensed consolidated balance sheets at fair value.
Foreign Exchange Forward Contracts
Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company’s principal strategy in managing its exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on its balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce this exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.
As of September 30, 2019, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $454.8 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of September 30, 2019:
| | | | |
| | September 30, | | |
Buy / (Sell) |
| 2019 | | |
Euro | | $ | (322.0) | |
Swiss Franc | | $ | 34.7 | |
Chinese Yuan | | $ | (34.0) | |
Indonesian Rupiah | | $ | (18.2) | |
Mexican Peso | | $ | (13.0) | |
Open foreign exchange forward contracts as of September 30, 2019 had maturities occurring over a period of two months.
Foreign Exchange Cash Flow Hedges
The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by 1 of its subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in Accumulated Other Comprehensive Income (“AOCI”) to the extent effective, and reclassified to cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
Open foreign exchange cash flow hedges as of September 30, 2019 had maturities occurring over a period of 15 months, and had a net notional U.S. dollar equivalent of $95.7 million.
Interest Rate Swaps
On September 6, 2017, the Company issued the 2024 Term Loan B, which currently bears an interest rate of the London Interbank Offered Rate (“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.
14
As of September 30, 2019, the Company had open interest rate swap agreements with a net notional U.S. dollar equivalent of $200.0 million which had an effective date of September 29, 2017 and mature in September 2022. Under the terms of the swap agreements, the Company is required to pay the counterparties a stream of fixed interest payments at a rate of 1.81%, and in turn, receives variable interest payments based on 1-month LIBOR (2.04% as of September 30, 2019) from the counterparties.
Net Investment Hedge
On September 1, 2017, the Company entered into certain fixed-for-fixed cross currency swaps (“CCS”), swapping USD principal and interest payments on its 2025 Senior Notes for euro-denominated payments. Under the terms of the CCS, the Company has notionally exchanged $500.0 million at an interest rate of 5.375% for €420.0 million at a weighted average interest rate of 3.45% for approximately five years. On September 1, 2017, the Company designated the full notional amount of the CCS (€420.0 million) as a hedge of its net investment in certain European subsidiaries under the forward method, with all changes in the fair value of the CCS recorded as a component of AOCI, as the CCS were deemed to be highly effective hedges. A cumulative foreign currency translation loss of $38.0 million was recorded within AOCI related to the CCS through March 31, 2018.
Effective April 1, 2018, the Company elected as an accounting policy to re-designate the CCS as a net investment hedge (and any future similar hedges) under the spot method. As such, changes in the fair value of the CCS that are included in the assessment of effectiveness (changes due to spot foreign exchange rates) are recorded as cumulative foreign currency translation within OCI, and will remain in AOCI until either the sale or substantially complete liquidation of the subsidiary. As of September 30, 2019, 0 gains or losses have been reclassified from AOCI into income related to the sale or substantially complete liquidation of the relevant subsidiaries. As an additional accounting policy election applied to similar hedges under this new standard, the initial value of any component excluded from the assessment of effectiveness is recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in the fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI. Prior to April 1, 2018, no components were excluded from the assessment of effectiveness for any of the Company’s existing net investment hedges.
As of April 1, 2018, the initial excluded component value related to the CCS was $23.6 million, which the Company elected to amortize as a reduction of “Interest expense, net” in the condensed consolidated statements of operations using the straight-line method over the remaining term of the CCS. Additionally, the accrual of periodic USD and euro-denominated interest receipts and payments under the terms of the CCS are being recognized within “Interest expense, net” in the condensed consolidated statements of operations.
15
Summary of Derivative Instruments
The following tables present 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, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gain (Loss) Recognized in | | ||||||||||||||||
| | Three Months Ended | | Three Months Ended | | ||||||||||||||
| | September 30, 2019 | | September 30, 2018 | | ||||||||||||||
|
| Cost of | | Interest expense, net | | Other expense, net | | Cost of | | Interest expense, net | | Other expense, net |
| ||||||
Total amount of income and expense line items presented in the statements of operations in which the effects of derivative instruments are recorded | | $ | 836.9 | | $ | 9.2 | | $ | 2.3 | | $ | 1,068.1 | | $ | 10.1 | | $ | 2.1 | |
| | | | | | | | | | | | | | | | | | | |
The effects of cash flow hedge instruments: | | | | | | | | | | | | | | | | | | | |
Foreign exchange cash flow hedges | | | | | | | | | | | | | | | | | | | |
Amount of gain (loss) reclassified from AOCI into income | | $ | 1.9 | | $ | — | | $ | — | | $ | (0.6) | | $ | — | | $ | — | |
Interest rate swaps | | | | | | | | | | | | | | | | | | | |
Amount of gain reclassified from AOCI into income | | $ | — | | $ | 0.2 | | $ | — | | $ | — | | $ | 0.1 | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
The effects of net investment hedge instruments: | | | | | | | | | | | | | | | | | | | |
Cross currency swaps (CCS) | | | | | | | | | | | | | | | | | | | |
Amount of gain excluded from effectiveness testing | | $ | — | | $ | 4.2 | | $ | — | | $ | — | | $ | 3.8 | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
The effects of derivatives not designated as hedge instruments: | | | | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | | | | | | | | | | | | | | | | | | |
Amount of gain recognized in income | | $ | — | | $ | — | | $ | 14.6 | | $ | — | | $ | — | | $ | 8.2 | |
16
| | | | | | | | | | | | | | | | | | | |
| | Location and Amount of Gain (Loss) Recognized in | | ||||||||||||||||
| | Nine Months Ended | | Nine Months Ended | | ||||||||||||||
| | September 30, 2019 | | September 30, 2018 | | ||||||||||||||
|
| Cost of |
| Interest expense, net |
| Other expense, net |
| Cost of |
| Interest expense, net |
| Other expense, net |
| ||||||
Total amount of income and expense line items presented in the statements of operations in which the effects of derivative instruments are recorded | | $ | 2,618.1 | | $ | 29.3 | | $ | 7.7 | | $ | 3,088.3 | | $ | 35.8 | | $ | 2.9 | |
| | | | | | | | | | | | | | | | | | | |
Effects of cash flow hedge instruments: | | | | | | | | | | | | | | | | | | | |
Foreign exchange cash flow hedges | | | | | | | | | | | | | | | | | | | |
Amount of gain (loss) reclassified from AOCI into income | | $ | 4.1 | | $ | — | | $ | — | | $ | (6.8) | | $ | — | | $ | — | |
Interest rate swaps | | | | | | | | | | | | | | | | | | | |
Amount of gain reclassified from AOCI into income | | $ | — | | $ | 0.9 | | $ | — | | $ | — | | $ | 0.1 | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
Effects of net investment hedge instruments: | | | | | | | | | | | | | | | | | | | |
Cross currency swaps (CCS) | | | | | | | | | | | | | | | | | | | |
Amount of gain excluded from effectiveness testing | | $ | — | | $ | 12.0 | | $ | — | | $ | — | | $ | 7.7 | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
Effects of derivatives not designated as hedge instruments: | | | | | | | | | | | | | | | | | | | |
Foreign exchange forward contracts | | | | | | | | | | | | | | | | | | | |
Amount of gain recognized in income | | $ | — | | $ | — | | $ | 14.9 | | $ | — | | $ | — | | $ | 17.0 | |
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, 2019 and 2018:
| | | | | | | | | | | | |
` | | Gain (Loss) Recognized in AOCI on Balance Sheet | ||||||||||
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2019 | | 2018 | | 2019 | | 2018 | ||||
Designated as Cash Flow Hedges | | | | | | | | | | | | |
Foreign exchange cash flow hedges |
| $ | 1.2 |
| $ | 1.2 |
| $ | 1.7 |
| $ | 11.3 |
Interest rate swaps | | | (1.0) | | | 0.9 | | | (6.8) | | | 5.5 |
Total | | $ | 0.2 | | $ | 2.1 | | $ | (5.1) | | $ | 16.8 |
Designated as Net Investment Hedges | | | | | | | | | | | | |
Cross currency swaps (CCS) | | $ | 22.1 | | $ | (0.6) | | $ | 30.0 | | $ | 9.7 |
Total | | $ | 22.1 | | $ | (0.6) | | $ | 30.0 | | $ | 9.7 |
The Company recorded gains of $14.6 million and $14.9 million during the three and nine months ended September 30, 2019, respectively, and gains of $8.2 million and $17.0 million during the three and nine months ended September 30, 2018, respectively, from settlements and changes in the fair value of outstanding forward contracts (not designated as hedges). The gains from these forward contracts offset net foreign exchange transaction losses of $14.8 million and $15.3 million during the three and nine months ended September 30, 2019, respectively, and losses of $6.9 million and $12.6 million during the three and nine months ended September 30, 2018, respectively, which resulted from the re-measurement of the Company’s foreign currency denominated assets and liabilities. The cash settlements of these foreign exchange forward contracts are included within operating activities in the condensed consolidated statements of cash flows.
The Company expects to reclassify in the next twelve months an approximate $3.6 million net gain from AOCI into earnings related to the Company’s outstanding foreign exchange cash flow hedges and interest rate swaps as of
17
September 30, 2019 based on current foreign exchange rates.
The following tables summarize the gross and net unrealized gains and losses, as well as the balance sheet classification, of outstanding derivatives recorded in the condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| |||||||||||||
| | Foreign | | Foreign | | | | | | | | |||||
| | Exchange | | Exchange | | Interest | | Cross | | | | | ||||
Balance Sheet | | Forward | | Cash Flow | | Rate | | Currency | | | | |||||
Classification |
| Contracts | | Hedges | | Swaps | | Swaps | | Total | | |||||
Asset Derivatives: | | | | | | | | | | | | | | | | |
Accounts receivable, net of allowance | | $ | 4.3 | | $ | 3.3 | | $ | — | | $ | 6.3 | | $ | 13.9 | |
Deferred charges and other assets | | | — | | | 0.2 | | | — | | | 32.3 | | | 32.5 | |
Gross derivative asset position | | | 4.3 | | | 3.5 | | | — | | | 38.6 | | | 46.4 | |
Less: Counterparty netting | | | — | | | — | | | — | | | — | | | — | |
Net derivative asset position | | $ | 4.3 | | $ | 3.5 | | $ | — | | $ | 38.6 | | $ | 46.4 | |
Liability Derivatives: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | (1.3) | | $ | — | | $ | (0.3) | | $ | — | | $ | (1.6) | |
Other noncurrent obligations | | | — | | | — | | | (1.9) | | | — | | | (1.9) | |
Gross derivative liability position | | | (1.3) | | | — | | | (2.2) | | | — | | | (3.5) | |
Less: Counterparty netting | | | — | | | — | | | — | | | — | | | — | |
Net derivative liability position | | $ | (1.3) | | $ | — | | $ | (2.2) | | $ | — | | $ | (3.5) | |
Total net derivative position | | $ | 3.0 | | $ | 3.5 | | $ | (2.2) | | $ | 38.6 | | $ | 42.9 | |
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| |||||||||||||
| | Foreign | | Foreign | | | | | | |
| |||||
| | Exchange | | Exchange | | Interest | | Cross | | | | | ||||
Balance Sheet | | Forward | | Cash Flow | | Rate | | Currency | | |
| |||||
Classification |
| Contracts |
| Hedges |
| Swaps |
| Swaps |
| Total |
| |||||
Asset Derivatives: | | | | | | | | | | | | | | | | |
Accounts receivable, net of allowance | | $ | 0.6 | | $ | 1.9 | | $ | 1.5 | | $ | 8.1 | | $ | 12.1 | |
Deferred charges and other assets | | | — | | | — | | | 3.2 | | | — | | | 3.2 | |
Gross derivative asset position | | | 0.6 | | | 1.9 | | | 4.7 | | | 8.1 | | | 15.3 | |
Less: Counterparty netting | | | (0.5) | | | — | | | — | | | — | | | (0.5) | |
Net derivative asset position | | $ | 0.1 | | $ | 1.9 | | $ | 4.7 | | $ | 8.1 | | $ | 14.8 | |
Liability Derivatives: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | (2.1) | | $ | — | | $ | — | | $ | — | | $ | (2.1) | |
Other noncurrent obligations | | | — | | | — | | | — | | | (3.4) | | | (3.4) | |
Gross derivative liability position | | | (2.1) | | | — | | | — | | | (3.4) | | | (5.5) | |
Less: Counterparty netting | | | 0.5 | | | — | | | — | | | — | | | 0.5 | |
Net derivative liability position | | $ | (1.6) | | $ | — | | $ | — | | $ | (3.4) | | $ | (5.0) | |
Total net derivative position | | $ | (1.5) | | $ | 1.9 | | $ | 4.7 | | $ | 4.7 | | $ | 9.8 | |
Forward contracts, interest rate swaps, and cross currency swaps are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in a single currency in the event of a default on or termination of any one contract. As such, in accordance with the Company’s accounting policy, these derivative instruments are recorded on a net basis by counterparty within the condensed consolidated balance sheets.
Refer to Notes 9 and 16 of the condensed consolidated financial statements for further information regarding the fair value of the Company’s derivative instruments and the related changes in AOCI.
NOTE 9—FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are
18
classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.
Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3—Valuation is based upon other unobservable inputs that are significant to the fair value measurement.
The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018:
| | | | | | | | | | | | | |
| | September 30, 2019 |
| ||||||||||
| | Quoted Prices in Active Markets for Identical Items | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | |
| |||
Assets (Liabilities) at Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total |
| ||||
Foreign exchange forward contracts—Assets |
| $ | — |
| $ | 4.3 |
| $ | — |
| $ | 4.3 | |
Foreign exchange forward contracts—(Liabilities) | |
| — | |
| (1.3) | |
| — | |
| (1.3) | |
Foreign exchange cash flow hedges—Assets | | | — | | | 3.5 | | | — | | | 3.5 | |
Interest rate swaps—(Liabilities) | | | — | | | (2.2) | | | — | | | (2.2) | |
Cross currency swaps—Assets | | | — | | | 38.6 | | | — | | | 38.6 | |
Total fair value | | $ | — | | $ | 42.9 | | $ | — | | $ | 42.9 | |
| | | | | | | | | | | | | |
| | December 31, 2018 |
| ||||||||||
| | Quoted Prices in Active Markets for Identical Items | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | |
| |||
Assets (Liabilities) at Fair Value |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total |
| ||||
Foreign exchange forward contracts—Assets | | $ | — |
| $ | 0.1 |
| $ | — |
| $ | 0.1 | |
Foreign exchange forward contracts—(Liabilities) | | | — | | | (1.6) | | | — | | | (1.6) | |
Foreign exchange cash flow hedges—Assets |
| | — |
| | 1.9 | | | — | | | 1.9 | |
Interest rate swaps—Assets | | | — | | | 4.7 | | | — | | | 4.7 | |
Cross currency swaps—Assets | | | — | | | 8.1 | | | — | | | 8.1 | |
Cross currency swaps—(Liabilities) | | | — | | | (3.4) | | | — | | | (3.4) | |
Total fair value | | $ | — | | $ | 9.8 | | $ | — | | $ | 9.8 | |
The Company uses an income approach to value its derivative instruments, utilizing discounted cash flow techniques, considering the terms of the contract and observable market information available as of the reporting date, such as interest rate yield curves and currency spot and forward rates. Significant inputs to the valuation for these derivative instruments are obtained from broker quotations or from listed or over-the-counter market data, and are classified as Level 2 in the fair value hierarchy.
19
Fair Value of Debt Instruments
The following table presents the estimated fair value of the Company’s outstanding debt not carried at fair value as of September 30, 2019 and December 31, 2018:
| | | | | | | |
|
| As of | | As of |
| ||
|
| September 30, 2019 |
| December 31, 2018 |
| ||
2025 Senior Notes | | $ | 487.2 | | $ | 438.3 | |
2024 Term Loan B | | | 682.6 | | | 658.9 | |
Total fair value | | $ | 1,169.8 | | $ | 1,097.2 | |
The fair value of the Company’s debt facilities above (each Level 2 securities) is determined using over-the-counter market quotes and benchmark yields received from independent vendors.
There were no other significant financial instruments outstanding as of September 30, 2019 and December 31, 2018.
NOTE 10—PROVISION FOR INCOME TAXES
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | ||||||||
| | September 30, | | September 30, | | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| | ||||
Effective income tax rate | | | 29.3 | % | | 20.5 | % | | 29.3 | % | | 18.0 | % | |
Provision for income taxes for the three and nine months ended September 30, 2019 totaled $9.3 million and $35.8 million, respectively, resulting in an effective tax rate of 29.3% for both periods. Provision for income taxes for the three and nine months ended September 30, 2018 totaled $19.2 million and $64.5 million, respectively, resulting in an effective tax rate of 20.5% and 18.0%, respectively.
The increase in the effective tax rates for the three and nine months ended September 30, 2019 as compared to the same period in 2018 was primarily driven by a lower proportion of income before taxes attributable to non-U.S. jurisdictions, which includes losses not anticipated to provide a tax benefit for the Company in the future. Included in the provision for income taxes for the three and nine months ended September 30, 2019 is a $7.4 million deferred tax benefit related to the re-measurement of the Company’s deferred tax assets and liabilities in Switzerland due to changes in the Swiss Federal tax rules, which were enacted on August 6, 2019. This amount does not include the impact of Swiss cantonal tax law changes, which were enacted on October 25, 2019. Refer to Note 19 for further information regarding the impacts of the new cantonal tax legislation.
NOTE 11—COMMITMENTS AND CONTINGENCIES
Environmental Matters
Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law, existing technologies and other information. Pursuant to the terms of the agreement associated with the Company’s formation, the pre-closing environmental liabilities were retained by Dow, and Dow agreed, subject to temporal, monetary, and other limitations to indemnify the Company from and against environmental liabilities incurred or relating to the predecessor periods. NaN environmental claims have been asserted or threatened against the Company, and the Company is not a potentially responsible party at any Superfund Sites. As of September 30, 2019 and December 31, 2018, the Company had 0 accrued obligations for environmental remediation or restoration costs.
Inherent uncertainties exist in the Company’s potential environmental liabilities primarily due to unknown conditions, whether future claims may fall outside the scope of the indemnity, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. In connection with the Company’s existing indemnification, the possibility is considered remote that environmental remediation costs will have a material adverse impact on the condensed consolidated financial statements over the next 12 months.
20
Purchase Commitments
In the normal course of business, the Company has certain raw material purchase contracts where it is required to purchase certain minimum volumes at current market prices. These commitments range from one to three years. In certain raw material purchase contracts, the Company has the right to purchase less than the required minimums and pay a liquidated damages fee, or, in case of a permanent plant shutdown, to terminate the contracts. In such cases, these obligations would be less than the annual commitment as disclosed in the Notes to Consolidated Financial Statements included in the Annual Report.
Litigation Matters
From time to time, the Company may be subject to various legal claims and proceedings incidental to the normal conduct of business, relating to such matters as employees, product liability, antitrust/competition, past waste disposal practices and release of chemicals into the environment. While it is impossible at this time to determine with certainty the ultimate outcome of these routine claims, the Company does not believe that the ultimate resolution of these claims will have a material adverse effect on the Company’s results of operations, financial condition or cash flow. Legal costs, including those legal costs expected to be incurred in connection with a loss contingency, are expensed as incurred.
European Commission Request for Information
On June 6, 2018, Trinseo Europe GmbH, a subsidiary of the Company, received a Request for Information in the form of a letter from the European Commission Directorate General for Competition (the “European Commission”) related to styrene monomer commercial activity in the European Economic Area. The Company subsequently commenced an internal investigation into these commercial activities and discovered instances of inappropriate activity. On October 28, 2019, a supplemental request for information was received from the European Commission. This request was limited to historical employment, entity, and organizational structures, along with certain financial, styrene purchasing, and styrene market information. After responding to the initial request in 2018, the Company continues to fully cooperate with the European Commission and is now in the process of responding to the most recent request.
Notwithstanding the delivery of the Company’s response to the European Commission, this matter remains open with the European Commission. Based on its findings, the European Commission may decide to: (i) require further information; (ii) conduct unannounced raids of the Company’s premises; (iii) adopt decisions imposing fines, interim measures to halt immediately any anti-competitive behavior, orders for the Company to cease anti-competitive activities, and/or certain behavioral or structural commitments from the Company; or (iv) take no further action. As a result of the above factors, the Company is unable to predict the ultimate outcome of this matter or estimate the range of reasonably possible losses that could be incurred. However, any potential losses incurred could be material to the Company’s results of operations, balance sheet, and cash flows for the period in which they are resolved or become probable and reasonably estimable.
NOTE 12—PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The components of net periodic benefit costs for all significant plans were as follows:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Defined Benefit Pension Plans |
| | | | | | | | | | | | |
Service cost | ��� | $ | 3.1 | | $ | 3.0 |
| $ | 9.4 | | $ | 9.2 | |
Interest cost | |
| 1.2 | |
| 1.2 | |
| 3.8 | |
| 3.7 | |
Expected return on plan assets | |
| (0.5) | |
| (0.5) | |
| (1.6) | |
| (1.6) | |
Amortization of prior service credit | |
| (0.3) | | �� | (0.3) | |
| (0.8) | |
| (0.9) | |
Amortization of net loss | |
| 0.8 | |
| 0.8 | |
| 2.3 | |
| 2.7 | |
Net settlement loss | |
| 0.6 | |
| — | |
| 1.3 | |
| — | |
Net periodic benefit cost | | $ | 4.9 | | $ | 4.2 | | $ | 14.4 | | $ | 13.1 | |
21
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Other Postretirement Plans |
| | | | | | | | | | | | |
Service cost | | $ | — | | $ | — |
| $ | 0.1 | | $ | 0.1 | |
Interest cost | |
| 0.1 | |
| 0.1 | |
| 0.2 | |
| 0.2 | |
Amortization of prior service cost | |
| — | |
| — | |
| — | |
| 0.1 | |
Amortization of net gain | |
| (0.1) | |
| — | |
| (0.3) | |
| — | |
Net periodic benefit cost | | $ | — | | $ | 0.1 | | $ | — | | $ | 0.4 | |
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, 2019 and December 31, 2018, the Company’s benefit obligations included primarily in “Other noncurrent obligations” in the condensed consolidated balance sheets were $193.3 million and $189.2 million, respectively.
The Company made cash contributions and benefit payments to unfunded plans of approximately $1.1 million and $4.0 million during the three and nine months ended September 30, 2019, respectively. The Company expects to make additional cash contributions, including benefit payments to unfunded plans, of approximately $2.1 million to its defined benefit plans for the remainder of 2019.
NOTE 13—SHARE-BASED COMPENSATION
Refer to the Annual Report for definitions of capitalized terms not included herein and further background on the Company’s share-based compensation programs included in the tables below.
The following table summarizes the Company’s share-based compensation expense for the three and nine months ended September 30, 2019 and 2018, as well as unrecognized compensation cost as of September 30, 2019:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | As of | | |||
| | Three Months Ended | | Nine Months Ended | September 30, 2019 | | |||||||||||
| | September 30, | | September 30, | Unrecognized | | Weighted | | |||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | Compensation Cost |
| Average Years | | |||||
RSUs | | $ | 1.9 | | $ | 2.3 | | $ | 5.9 | | $ | 6.6 | $ | 11.4 | | 2.0 | |
Options | | | 0.6 | | | 0.5 | | | 2.6 | | | 3.9 | | 2.2 | | 1.4 | |
PSUs | | | 0.6 | | | 0.6 | | | 2.3 | | | 1.8 | | 4.6 | | 2.1 | |
Total share-based compensation expense | | $ | 3.1 | | $ | 3.4 | | $ | 10.8 | | $ | 12.3 | | | | | |
The following table summarizes awards granted and the respective weighted average grant date fair value for the nine months ended September 30, 2019:
| | | | | | | |
| | Nine Months Ended | | ||||
| | September 30, 2019 | | ||||
| | Awards Granted | | Weighted Average Grant Date Fair Value per Award | | ||
RSUs | | | 236,156 | | $ | 48.63 | |
Options | | | 237,071 | | | 15.40 | |
PSUs | | | 117,053 | | | 54.01 | |
22
Option Awards
The following are the weighted average assumptions used within the Black-Scholes pricing model for the Company’s option awards granted during the nine months ended September 30, 2019:
| |
|
|
|
| |
|
|
|
|
|
| |
|
|
|
|
| ||
|
|
|
|
| ||
|
|
|
|
| ||
|
|
|
|
| ||
|
|
|
|
|
| |
Since the Company’s equity interests were privately held prior to its initial public offering in September 2014, there is limited publicly traded 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’ shares 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, 2019, the simplified method was used to calculate the expected term, given the Company’s limited historical exercise data. The risk-free interest rate for the periods within the expected term of option awards is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is estimated based on historical and expected dividend activity.
Performance Share Units (PSUs)
The following are the weighted average assumptions used within the Monte Carlo valuation model for PSUs granted during the nine months ended September 30, 2019:
| | | |
| | Nine Months Ended | |
| | September 30, 2019 | |
Expected term (in years) | | 3.00 | |
Expected volatility |
| 36.40 | % |
Risk-free interest rate |
| 2.58 | % |
Share Price | $ | 50.95 | |
Determining the fair value of PSUs requires considerable judgment, including estimating the expected volatility of the price of the Company’s ordinary shares, the correlation between the Company’s share price and that of its peer companies, and the expected rate of interest. The expected volatility for each grant is determined based on the historical volatility of the Company’s ordinary shares. The expected term of PSUs represents the length of the performance period. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a duration equivalent to the performance period. The share price is the closing price of the Company’s ordinary shares on the grant date.
NOTE 14—SEGMENTS
The Company operates under 6 segments: Latex Binders, Synthetic Rubber, Performance Plastics, Polystyrene, Feedstocks, and Americas Styrenics. The Latex Binders segment produces styrene-butadiene latex (“SB latex”) and other latex polymers and binders, primarily for coated paper and packaging board, carpet and artificial turf backings, as well as a 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 includes a variety of highly engineered compounds and blends, the Company’s acrylonitrile-butadiene-styrene (“ABS”), styrene-acrylonitrile (“SAN”), and polycarbonate (“PC”) businesses, and the Company’s soft-touch polymers and bioplastics business, which includes thermoplastic elastomers (“TPEs”). The Polystyrene segment includes a variety of general purpose polystyrenes (“GPPS”) and polystyrene that has been modified with polybutadiene rubber to increase its impact resistant properties (“HIPS”). The Feedstocks segment includes the Company’s production and procurement of styrene monomer outside of North America, which is used as a key raw material in many of the Company’s products, including polystyrene, SB latex, ABS resins, and solution styrene-
23
butadiene rubber (“SSBR”). Lastly, the Americas Styrenics segment consists solely of the operations of the Company’s 50%-owned joint venture, Americas Styrenics, a producer of both styrene monomer and polystyrene in North America.
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, 2019 and 2018. Asset and intersegment sales information by reporting segment is not regularly reviewed or included with the Company’s reporting to the chief operating decision maker. Therefore, this information has not been disclosed below. Refer to Note 3 for the Company’s net sales to external customers by segment for the three and nine months ended September 30, 2019 and 2018.
| | | | | | | | | | | | | | | | | | | |
| | Latex | | Synthetic | | Performance | | | | | | Americas |
| ||||||
Three Months Ended (1) | | Binders | | Rubber | | Plastics | | Polystyrene | | Feedstocks | | Styrenics |
| ||||||
September 30, 2019 |
| $ | 21.0 |
| $ | 7.4 |
| $ | 36.3 | | $ | 16.3 |
| $ | 0.1 |
| $ | 25.7 | |
September 30, 2018 | | $ | 24.7 | | $ | 15.5 | | $ | 43.8 | | $ | 5.0 | | $ | 40.3 | | $ | 34.5 | |
| | | | | | | | | | | | | | | | | | | |
| | Latex | | Synthetic | | Performance | | | | | | Americas |
| ||||||
Nine Months Ended (1) | | Binders | | Rubber | | Plastics | | Polystyrene | | Feedstocks | | Styrenics |
| ||||||
September 30, 2019 |
| $ | 59.1 |
| $ | 29.1 |
| $ | 106.1 |
| $ | 49.3 |
| $ | 16.7 |
| $ | 98.2 | |
September 30, 2018 | | $ | 88.2 | | $ | 71.6 | | $ | 158.2 | | $ | 28.0 | | $ | 114.3 | | $ | 113.3 | |
|
|
The reconciliation of income before income taxes to segment Adjusted EBITDA is as follows:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Income before income taxes | | $ | 31.8 | | $ | 93.9 | | $ | 122.1 | | $ | 357.8 | |
Interest expense, net | |
| 9.2 | |
| 10.1 | |
| 29.3 | |
| 35.8 | |
Depreciation and amortization | |
| 33.0 | |
| 31.8 | | | 101.7 | |
| 96.0 | |
Corporate Unallocated(2) | | | 18.7 | | | 20.9 | | | 65.6 | | | 65.6 | |
Adjusted EBITDA Addbacks(3) | |
| 14.1 | |
| 7.1 | |
| 39.8 | |
| 18.4 | |
Segment Adjusted EBITDA | | $ | 106.8 | | $ | 163.8 | | $ | 358.5 | | $ | 573.6 | |
|
|
|
|
24
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
| | 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Loss on extinguishment of long-term debt | | $ | — | | $ | — | | $ | — | | $ | 0.2 | |
Net gain on disposition of businesses and assets | | | — | | | — | | | (0.2) | | | (0.5) | |
Restructuring and other charges (Note 15) | | | 0.2 | | | 0.9 | | | 0.3 | | | 2.6 | |
Acquisition, transaction, and integration costs(a) | | | 0.6 | | | 0.1 | | | 1.3 | | | 0.6 | |
Other items(b) | | | 13.3 | | | 6.1 | | | 38.4 | | | 15.5 | |
Total Adjusted EBITDA Addbacks | | $ | 14.1 | | $ | 7.1 | | $ | 39.8 | | $ | 18.4 | |
NOTE 15—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, 2019 and 2018:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Cumulative | | | | |||||||||
| | September 30, | | September 30, | | Life-to-date | | | | |||||||||
| | 2019 |
| 2018 | | 2019 |
| 2018 | | Charges |
| Segment | | |||||
Terneuzen Compounding Restructuring (1) | | | | | | | | | | | | | | | | | | |
Asset impairment/accelerated depreciation | | $ | — | | $ | 0.3 | | $ | — | | $ | 0.8 | | $ | 3.1 | | | |
Employee termination benefits | | | — | | | 0.1 | | | (0.4) | | | 0.5 | | | 0.6 | | | |
Contract terminations | | | — | | | — | | | — | | | — | | | 0.3 | | | |
Decommissioning and other | | | 0.1 | | | 0.3 | | | 0.3 | | | 0.5 | | | 1.7 | | | |
Terneuzen Subtotal | | $ | 0.1 | | $ | 0.7 | | $ | (0.1) | | $ | 1.8 | | $ | 5.7 | | Performance Plastics | |
Livorno Plant Restructuring (2) | | | | | | | | | | | | | | | | | | |
Asset impairment/accelerated depreciation | | $ | — | | $ | — | | $ | — | | $ | 0.4 | | $ | 14.7 | | | |
Employee termination benefits | | | — | | | — | | | — | | | — | | | 5.4 | | | |
Contract terminations | | | — | | | — | | | — | | | — | | | 0.3 | | | |
Decommissioning and other | | | 0.1 | | | 0.2 | | | 0.4 | | | 0.6 | | | 4.1 | | | |
Livorno Subtotal | | $ | 0.1 | | $ | 0.2 | | $ | 0.4 | | $ | 1.0 | | $ | 24.5 | | Latex Binders | |
Other Restructurings | | | — | | | 0.3 | | | — | | | 0.7 | | | | | Various | |
Total Restructuring Charges | | $ | 0.2 | | $ | 1.2 | | $ | 0.3 | | $ | 3.5 | | | | | | |
25
The following table provides a roll forward of the liability balances associated with the Company’s restructuring activities as of September 30, 2019. Employee termination benefit and contract termination charges are recorded within “Accrued expenses and other current liabilities” in the condensed consolidated balance sheets.
| | | | | | | | | | | | | |
|
| Balance at |
| | |
| | |
| Balance at |
| ||
|
| December 31, 2018 |
| Expenses |
| Deductions(1) |
| September 30, 2019 |
| ||||
Employee termination benefits | | $ | 6.4 | | $ | (0.3) | | $ | (5.9) | | $ | 0.2 | |
Contract terminations | | | 0.3 | | | — | | | — | | | 0.3 | |
Decommissioning and other | |
| — | |
| 0.6 | |
| (0.6) | |
| — | |
Total | | $ | 6.7 | | $ | 0.3 | | $ | (6.5) | | $ | 0.5 | |
.
26
NOTE 16—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of AOCI, net of income taxes, consisted of:
| | | | | | | | | | | | | |
|
| Cumulative |
| Pension & Other |
| | | | | | | ||
| | Translation | | Postretirement Benefit | | | Cash Flow | | | | | ||
Three Months Ended September 30, 2019 and 2018 |
| Adjustments |
| Plans, Net |
| | Hedges, Net |
| Total |
| |||
Balance as of June 30, 2019 | | $ | (109.1) | | $ | (40.1) | | $ | 3.6 | | $ | (145.6) | |
Other comprehensive income (loss) | |
| 0.5 | |
| (0.7) | |
| 2.3 | |
| 2.1 | |
Amounts reclassified from AOCI to net income (1) | | | — | | | 0.7 | | | (2.1) | | | (1.4) | |
Balance as of September 30, 2019 | | $ | (108.6) | | $ | (40.1) | | $ | 3.8 | | $ | (144.9) | |
| | | | | | | | | | | | | |
Balance as of June 30, 2018 | | $ | (112.7) | | $ | (43.8) | | $ | 8.6 | | $ | (147.9) | |
Other comprehensive income (loss) | |
| (4.6) | |
| — | |
| 1.6 | |
| (3.0) | |
Amounts reclassified from AOCI to net income (1) | | | — | | | 0.6 | | | 0.5 | | | 1.1 | |
Balance as of September 30, 2018 | | $ | (117.3) | | $ | (43.2) | | $ | 10.7 | | $ | (149.8) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
| Cumulative |
| Pension & Other |
| | | | | | |||
| | Translation | | Postretirement Benefit | | Cash Flow | | | | | |||
Nine Months Ended September 30, 2019 and 2018 |
| Adjustments |
| Plans, Net |
| Hedges, Net |
| Total |
| ||||
Balance at December 31, 2018 | | $ | (111.8) | | $ | (39.4) | | $ | 8.9 | | $ | (142.3) | |
Other comprehensive income (loss) | |
| 3.2 | |
| (2.7) | |
| (0.1) | |
| 0.4 | |
Amounts reclassified from AOCI to net income(1) | | | — | | | 2.0 | | | (5.0) | | | (3.0) | |
Balance at September 30, 2019 | | $ | (108.6) | | $ | (40.1) | | $ | 3.8 | | $ | (144.9) | |
| | | | | | | | | | | | | |
Balance as of December 31, 2017 | | $ | (94.5) | | $ | (45.0) | | $ | (6.1) | | $ | (145.6) | |
Other comprehensive income (loss) | |
| (22.8) | |
| — | |
| 10.1 | |
| (12.7) | |
Amounts reclassified from AOCI to net income (1) | | | — | | | 1.8 | | | 6.7 | | | 8.5 | |
Balance as of September 30, 2018 | | $ | (117.3) | | $ | (43.2) | | $ | 10.7 | | $ | (149.8) | |
27
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | | | ||||||||
AOCI Components | | September 30, | | September 30, | | Statements of Operations | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| Classification | | ||||
Cash flow hedging items | | | | | | | | | | | | | | | |
Foreign exchange cash flow hedges | | $ | (1.9) | | $ | 0.6 | | $ | (4.1) | | $ | 6.8 | | Cost of sales | |
Interest rate swaps | | | (0.2) | | | (0.1) | | | (0.9) | | | (0.1) | | Interest expense, net | |
Total before tax | | | (2.1) | | | 0.5 | | | (5.0) | | | 6.7 | | | |
Tax effect | | | — | | | — | | | — | | | — | | Provision for income taxes | |
Total, net of tax | | $ | (2.1) | | $ | 0.5 | | $ | (5.0) | | $ | 6.7 | | | |
| | | | | | | | | | | | | | | |
Amortization of pension and other postretirement benefit plan items | | | | | | | | | | | | | | | |
Prior service credit | | $ | (0.3) | | $ | (0.2) | | $ | (0.8) | | $ | (0.7) | | (a) | |
Net actuarial loss | | | 0.7 | | | 1.0 | | | 2.3 | | | 3.2 | | (a) | |
Net settlement loss | | | 0.6 | | | — | | | 1.3 | | | — | | (a) | |
Total before tax | | | 1.0 | | | 0.8 | | | 2.8 | | | 2.5 | | | |
Tax effect | | | (0.3) | | | (0.2) | | | (0.8) | | | (0.7) | | Provision for income taxes | |
Total, net of tax | | $ | 0.7 | | $ | 0.6 | | $ | 2.0 | | $ | 1.8 | | | |
.....
NOTE 17—EARNINGS PER SHARE
Basic earnings per ordinary share (“basic EPS”) is computed by dividing net income available to ordinary shareholders by the weighted average number of the Company’s ordinary shares outstanding for the applicable period. Diluted earnings per ordinary share (“diluted EPS”) is calculated using net income available to ordinary shareholders divided by diluted weighted average ordinary shares outstanding during each period, which includes unvested RSUs, option awards, and PSUs. Diluted EPS considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential ordinary shares would have an anti-dilutive effect.
The following table presents basic EPS and diluted EPS for the three and nine months ended September 30, 2019 and 2018:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
(in millions, except per share data) |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
Earnings: | | | | | | | | | | | | | |
Net income | | $ | 22.5 | | $ | 74.7 | | $ | 86.3 | | $ | 293.3 | |
Shares: | | | | | | | | | | | | | |
Weighted average ordinary shares outstanding | |
| 40.1 | |
| 42.6 | |
| 40.7 | |
| 43.0 | |
Dilutive effect of RSUs, option awards, and PSUs(1) | |
| 0.3 | |
| 0.7 | |
| 0.5 | |
| 0.9 | |
Diluted weighted average ordinary shares outstanding | |
| 40.4 | |
| 43.3 | |
| 41.2 | |
| 43.9 | |
Income per share: | | | | | | | | | | | | | |
Income per share—basic | | $ | 0.56 | | $ | 1.75 | | $ | 2.12 | | $ | 6.82 | |
Income per share—diluted | | $ | 0.56 | | $ | 1.72 | | $ | 2.09 | | $ | 6.68 | |
.
28
NOTE 18—LEASES
As discussed in Note 2, effective January 1, 2019, the Company adopted accounting guidance, Topic 842, issued by the FASB related to leases that outlines a comprehensive lease accounting model and supersedes the prior lease guidance. The Company adopted this guidance using the modified retrospective approach and elected the optional transition method. As a result, comparative prior periods in the Company’s financial statements are not adjusted for the impacts of the new standard. The Company’s accounting policy and practical expedient elections related to accounting for leases, including those elected as a result of the adoption of Topic 842, are summarized as follows:
The Company routinely enters into leasing arrangements for a variety of assets including buildings/offices, warehouses and tanks for product storage, railcars and other vehicles for product transportation, motor vehicles, and other equipment. The Company determines if a contract is or contains a lease based on its relevant terms in accordance with Topic 842, including whether it conveys to the Company the right to obtain substantially all the economic benefits of the identified leased asset and to direct its use.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company’s lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date to determine the appropriate discount rate by multiple asset classes, pursuant to the aforementioned portfolio approach methodology. Variable lease payments that are not based on an index or that result from changes to an index subsequent to the initial measurement of the corresponding lease liability are not included in the measurement of lease ROU assets or liabilities and instead are recognized in earnings in the period in which the obligation for those payments is incurred. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise any such options. Lease expense is recognized on a straight‐line basis over the expected lease term.
29
The Company's ROU assets and lease liabilities are classified on its condensed consolidated balance sheets as follows:
| | | | |
| As of | | | |
| September 30, | | | |
| 2019 | | Location on Balance Sheet | |
Operating lease ROU assets | $ | 67.1 | | Right-of-use assets - operating |
Finance lease ROU assets | | 6.4 | | Property, plant, and equipment, net of accumulated depreciation |
Operating lease liabilities - current portion | | (14.2) | | Current lease liabilities - operating |
Operating lease liabilities - noncurrent portion | | (53.2) | | Noncurrent lease liabilities - operating |
Finance lease liabilities - current portion | | (1.9) | | Short-term borrowings and current portion of long-term debt |
Finance lease liabilities - noncurrent portion | | (4.5) | | Long-term debt, net of unamortized deferred financing fees |
The components of the Company's lease costs are classified on its condensed consolidated statements of operations as follows:
| | | | | |
| Three Months Ended | | Nine Months Ended | ||
| September 30, | | September 30, | ||
| 2019 | | 2019 | ||
Finance lease cost: | | | | | |
Amortization of lease ROU assets | $ | 0.1 | | $ | 0.2 |
Interest on lease liabilities(1) | | — | | | — |
| | | | | |
Operating lease cost | | 4.7 | | | 13.8 |
Variable lease cost | | 0.1 | | | 0.2 |
Total lease cost | $ | 4.9 | | $ | 14.2 |
The table below shows the cash and non-cash activity related to the Company’s lease liabilities during the period:
| | | | | |
| Three Months Ended | | Nine Months Ended | ||
| September 30, | | September 30, | ||
| 2019 | | 2019 | ||
Cash paid related to lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 4.6 | | $ | 12.6 |
Operating cash flows from finance leases(1) | | — | | | — |
Financing cash flows from finance leases | | 0.1 | | | 0.2 |
| | | | | |
Non-cash lease liability activity(2): | | | | | |
ROU assets obtained in exchange for new operating lease liabilities | $ | 2.3 | | $ | 80.5 |
ROU assets obtained in exchange for new finance lease liabilities | | 4.5 | | | 6.6 |
30
As of September 30, 2019, the maturities of the Company's operating and finance lease liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturity of lease liabilities by year | |||||||||||||||||||||||||
| Remainder of 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total Lease Payments | | Less Imputed Interest | | Lease Liability | |||||||||
Operating Leases | $ | 4.9 | | $ | 14.7 | | $ | 9.7 | | $ | 8.2 | | $ | 7.9 | | $ | 37.8 | | $ | 83.2 | | $ | (15.8) | | $ | 67.4 |
Finance Leases | $ | 0.7 | | $ | 2.1 | | $ | 2.1 | | $ | 1.7 | | $ | 0.1 | | $ | 0.2 | | $ | 6.9 | | $ | (0.5) | | $ | 6.4 |
As of September 30, 2019, the weighted average remaining lease term of the Company's operating and finance leases was 8.9 and 5.8 years, respectively, and the weighted average discount rate used to determine the lease liability for operating and finance leases was 4.6% and 4.3%, respectively.
As of September 30, 2019, the Company has additional operating and finance leases that have not yet commenced of $3.2 million and $1.1 million, respectively. These leases are expected to commence in the fourth quarter of 2019 with lease terms of 0.5 to 5.0 years.
Disclosures related to periods prior to adoption of Topic 842
As discussed above, the Company adopted Topic 842 effective January 1, 2019 using a modified retrospective approach. As required, the following disclosure is provided for periods prior to adoption. The Company’s total future minimum annual rentals in effect at December 31, 2018 for noncancelable operating leases, which were accounted for under the previous leasing standard, Accounting Standards Codification 840, were as follows:
| | | | | | | | | | | | | | | | | | | |
Annual Commitment | |||||||||||||||||||
2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total | |||||||
$ | 17.5 | | $ | 14.4 | | $ | 9.0 | | $ | 10.6 | | $ | 5.4 | | $ | 16.0 | | $ | 72.9 |
NOTE 19 – SUBSEQUENT EVENTS
On October 1, 2019, the Company completed the acquisition from Dow of its latex binder production facilities and related infrastructure in Rheinmünster, Germany. The transaction includes full ownership and operational control of latex production facilities, site infrastructure, and service contracts, as well as certain employees transferring from Dow to Trinseo. This acquisition will provide Trinseo with manufacturing assets supporting its strategy to grow its Latex Binders business in applications serving the coatings, adhesives, specialty paper, and sealants markets. The transaction did not require any upfront cash outlay from Trinseo; however, Trinseo expects to assume approximately €40.0 million in pension liabilities, net of cash received, for transferred employees in exchange for the assets acquired.
On October 25, 2019, new cantonal income tax legislation was enacted in Switzerland, supplemental to the Swiss Federal tax legislation enacted in August 2019 (refer to Note 10). As a result, the Company anticipates a higher effective tax rate in its entities in Switzerland, beginning in 2020. Additionally, a one-time deferred tax benefit is expected to be recorded in the fourth quarter of 2019 related to the re-measurement of the Company’s deferred tax assets and liabilities in Switzerland, which the Company is in the process of quantifying.
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2019 Year-to-Date Highlights
During the three and nine months ended September 30, 2019, Trinseo recognized net income of $22.5 million and $86.3 million, respectively, and Adjusted EBITDA of $88.1 million and $292.9 million, respectively. Refer to “Non-GAAP Performance Measures” below for further discussion of our use of non-GAAP measures in evaluating our performance and a reconciliation of these measures. Other highlights for the year are described below.
Trinseo to Build New TPE Pilot Facility in Taiwan
On October 7, 2019, Trinseo announced its plans to build a thermoplastic elastomers (“TPE”) pilot facility at its existing manufacturing site in Hsinchu, Taiwan, with operations anticipated to begin in 2020. The TPE pilot facility emphasizes Trinseo’s growth strategy for TPEs globally and will serve customers in the automotive, consumer electronics, footwear, and medical markets. This investment, which is expected to total approximately $3.0 million, marks the next step of Trinseo’s TPE growth roadmap, following the acquisition of API Plastics in July 2017.
Acquisition of Latex Binders Assets in Germany
On October 1, 2019, the Company completed the acquisition from Dow of its latex binders production facilities and related infrastructure in Rheinmünster, Germany. The transaction includes full ownership and operational control of latex production facilities, site infrastructure, and service contracts, as well as certain employees transferring from Dow to Trinseo. This acquisition will provide Trinseo with manufacturing assets supporting our strategy to grow our Latex Binders business in applications serving the coatings, adhesives, specialty paper, and sealants markets.
Chief Executive Officer and Chief Financial Officer Transition
On March 4, 2019, Frank Bozich replaced Christopher Pappas as President and Chief Executive Officer. On July 1, 2019, David Stasse replaced Barry Niziolek as Executive Vice President and Chief Financial Officer. Both Messrs. Pappas and Niziolek had each previously announced their plans to retire.
Results of Operations
Results of Operations for the Three and Nine Months Ended September 30, 2019 and 2018
The table below sets forth our historical results of operations and these results as a percentage of net sales for the periods indicated.
32
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | ||||||||||||||||||
| | September 30, | | | September 30, | | ||||||||||||||||||
(in millions) |
| 2019 |
| % | | | 2018 |
| % | | | 2019 |
| % | | | 2018 |
| % | | ||||
Net sales | | $ | 922.1 |
| 100 | % | | $ | 1,199.7 |
| 100 | % | | $ | 2,887.0 |
| 100 | % | | $ | 3,557.8 |
| 100 | % |
Cost of sales | |
| 836.9 | | 91 | % | |
| 1,068.1 | | 89 | % | |
| 2,618.1 | | 91 | % | |
| 3,088.3 | | 87 | % |
Gross profit | |
| 85.2 | | 9 | % | |
| 131.6 | | 11 | % | |
| 268.9 | | 9 | % | |
| 469.5 | | 13 | % |
Selling, general and administrative expenses | |
| 67.6 | | 7 | % | |
| 60.0 | | 5 | % | |
| 208.0 | | 7 | % | |
| 186.1 | | 5 | % |
Equity in earnings of unconsolidated affiliates | |
| 25.7 | | 3 | % | |
| 34.5 | | 3 | % | |
| 98.2 | | 3 | % | |
| 113.3 | | 3 | % |
Operating income | |
| 43.3 | | 5 | % | |
| 106.1 | | 9 | % | |
| 159.1 | | 6 | % | |
| 396.7 | | 11 | % |
Interest expense, net | |
| 9.2 | | 1 | % | |
| 10.1 | | 1 | % | |
| 29.3 | | 1 | % | |
| 35.8 | | 1 | % |
Loss on extinguishment of long-term debt | |
| — | | — | % | |
| — | | — | % | |
| — | | — | % | |
| 0.2 | | — | % |
Other expense, net | |
| 2.3 | | — | % | |
| 2.1 | | — | % | |
| 7.7 | | — | % | |
| 2.9 | | — | % |
Income before income taxes | |
| 31.8 | | 3 | % | |
| 93.9 | | 8 | % | |
| 122.1 | | 4 | % | |
| 357.8 | | 10 | % |
Provision for income taxes | |
| 9.3 | | 1 | % | |
| 19.2 | | 2 | % | |
| 35.8 | | 1 | % | |
| 64.5 | | 2 | % |
Net income | | $ | 22.5 | | 2 | % | | $ | 74.7 | | 6 | % | | $ | 86.3 | | 3 | % | | $ | 293.3 | | 8 | % |
Three Months Ended – September 30, 2019 vs. September 30, 2018
Net Sales
Of the 23% decrease in net sales, 16% was due mainly to lower selling prices resulting from the pass through of lower raw material costs, primarily from styrene and butadiene. There was also a 5% decrease due to lower sales volume within the Feedstocks, Synthetic Rubber, Performance Plastics, and Polystyrene segments, partially offset by higher sales volume within the Latex Binders segment. See segment discussion below for further information. An additional 2% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
Cost of Sales
Of the 22% decrease in cost of sales, 15% was due to lower raw material costs, primarily from styrene and butadiene, as well as a 6% decrease due to lower sales volume within the Feedstocks, Synthetic Rubber, Performance Plastics, and Polystyrene segments, partially offset by higher sales volume within the Latex Binders segment. An additional 2% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
Gross Profit
The decrease in gross profit of 35% was primarily attributable to margin compression in the Feedstocks and Latex Binders segments. The decrease was also due to lower sales volume within the Synthetic Rubber, Performance Plastics, and Polystyrene segments.
Selling, General and Administrative Expenses (SG&A)
The $7.6 million, or 13%, increase in SG&A was due to several factors. Higher advisory and professional fees, as well as higher personnel costs, resulted in a $7.9 million increase. These increases were primarily a result of the Company’s transition of business and technical services from Dow. Additionally, there was an increase of $1.4 million related to increased depreciation. Offsetting these increased costs was a $1.0 million decrease in restructuring charges and a $1.2 million decrease due to currency impacts on our euro-based expenses, as the euro weakened in comparison to the U.S. dollar.
33
Equity in Earnings of Unconsolidated Affiliates
The decrease in equity earnings of $8.8 million was due to lower equity earnings from Americas Styrenics, mainly attributable to lower styrene margins as a result of continued market weakness, which was partially offset by higher polystyrene margins.
Interest Expense, Net
The decrease in interest expense, net of $0.9 million, or 9%, was primarily attributable to an increase in interest income as a result of increased cash on hand at period end when compared to the prior year.
Other Expense, Net
Other expense, net for the three months ended September 30, 2019 was $2.3 million, which included $1.7 million of expense related to the non-service cost components of net periodic benefit cost, as well as foreign exchange transaction losses of $0.2 million. Net foreign transaction losses included $14.8 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 $14.6 million of gains from our foreign exchange forward contracts.
Other expense, net for the three months ended September 30, 2018 was $2.1 million, which included $1.6 million of expense related to the non-service cost components of net periodic benefit cost, as well as other miscellaneous expenses of $1.8 million. Partially offsetting these expenses were net foreign exchange transaction gains for the period of $1.3 million, comprised of $6.9 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, more than offset by $8.2 million of gains from our foreign exchange forward contracts.
Provision for Income Taxes
Provision for income taxes for the three months ended September 30, 2019 totaled $9.3 million, resulting in an effective tax rate of 29.3%. Provision for income taxes for the three months ended September 30, 2018 totaled $19.2 million, resulting in an effective tax rate of 20.5%.
The decrease in provision for income taxes was primarily driven by the $62.1 million decrease in income before income taxes. This decrease was partially offset by a lower proportion of income before taxes attributable to non-U.S. jurisdictions, which includes losses not anticipated to provide a tax benefit to the Company in the future. Also included in the provision for income taxes for the three months ended September 30, 2019 is a $7.4 million deferred tax benefit related to the re-measurement of the Company’s deferred tax assets and liabilities in Switzerland due to changes in the Swiss Federal tax rules, which were enacted on August 6, 2019. This amount does not include the impact of Swiss cantonal tax law changes, which were enacted on October 25, 2019.
Nine Months Ended – September 30, 2019 vs. September 30, 2018
Net Sales
Of the 19% decrease in net sales, 14% was due to lower selling prices resulting from the pass through of lower raw material costs, primarily from styrene and butadiene. There was also a 3% decrease due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period. An additional 2% decrease was due to lower sales volume within the Feedstocks and Synthetic Rubber segments, partially offset by higher sales volume within the Polystyrene, Latex Binders, and Performance Plastics segments. See segment discussion below for further information.
Cost of Sales
Of the 15% decrease in cost of sales, 10% was due to lower raw material costs, primarily from styrene and butadiene, as well as a 3% decrease due to lower sales volume within the Feedstocks, Synthetic Rubber, and Performance Plastics segments, partially offset by higher sales volume within the Polystyrene and Latex Binders segments. An additional 3% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period, which was slightly offset by a 1% increase due to higher fixed costs.
34
Gross Profit
The decrease in gross profit of 43% was primarily attributable to margin compression in the Feedstocks, Latex Binders, Synthetic Rubber, and Performance Plastics segments. Overall performance was impacted by weaker market conditions, including in certain key markets such as automotive, graphical paper, and tires. See the segment discussion below for further information.
Selling, General and Administrative Expenses (SG&A)
The $21.9 million, or 12%, increase in SG&A was due to several factors. Higher advisory and professional fees, as well as higher personnel costs, resulted in a $27.8 million increase. These increases were primarily a result the Company’s transition of business and technical services from Dow. Additionally, there was an increase of $3.8 million related to increased depreciation. Offsetting these increased costs was a $3.2 million decrease in restructuring charges and a $4.8 million decrease due to currency impacts on our euro-based expenses, as the euro weakened in comparison to the U.S. dollar.
Equity in Earnings of Unconsolidated Affiliates
The decrease in equity earnings of $15.1 million was due to lower equity earnings from Americas Styrenics, mainly attributable to less favorable styrene margins in the current year, as prior year results were positively impacted by several industry outages.
Interest Expense, Net
The decrease in interest expense, net of $6.5 million, or 18%, was primarily attributable to the benefits received from the cross currency swaps that the Company entered into in September 2017, which are now recorded as a benefit within interest expense as a result of our adoption of new hedging accounting guidance during the second quarter of 2018.
Other Expense, Net
Other expense, net for the nine months ended September 30, 2019 was $7.7 million, which included $5.2 million of expense related to the non-service cost components of net periodic benefit cost, as well as foreign exchange transaction losses of $0.4 million. Net foreign transaction losses included $15.3 million of foreign exchange transaction losses primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between the U.S. dollar and the euro during the period, partially offset by $14.9 million of gains from our foreign exchange forward contracts. Other expense, net also included $2.3 million of other miscellaneous expenses during the period.
Other expense, net for the nine months ended September 30, 2018 was $2.9 million, which included $4.9 million of expense related to the non-service cost components of net periodic benefit cost and $0.5 million of fees incurred in conjunction with the repricing of the Company’s 2024 Term Loan B during the second quarter of 2018, and other miscellaneous expenses of $1.9 million. These expenses were partially offset by net foreign exchange transaction gains for the period of $4.4 million. Net foreign exchange transactions gains included $12.6 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, more than offset by $17.0 million of gains from our foreign exchange forward contracts.
Provision for Income Taxes
Provision for income taxes for the nine months ended September 30, 2019 totaled $35.8 million, resulting in an effective tax rate of 29.3%. Provision for income taxes for the nine months ended September 30, 2018 totaled $64.5 million, resulting in an effective tax rate of 18.0%.
The decrease in provision for income taxes was primarily driven by the $235.7 million decrease in income before income taxes. This decrease was partially offset by a lower proportion of income before taxes attributable to non-U.S. jurisdictions, which includes losses not anticipated to provide a tax benefit to the Company in the future. Also included in the provision for income taxes for the nine months ended September 30, 2019 is a $7.4 million deferred tax benefit related to the re-measurement of the Company’s deferred tax assets and liabilities in Switzerland due to changes in the
35
Swiss Federal tax rules, which were enacted on August 6, 2019. This amount does not include the impact of Swiss cantonal tax law changes, which were enacted on October 25, 2019.
Outlook
As discussed above, the Company’s results continue to be impacted by difficult global economic conditions. In particular, the third quarter was impacted by lower sequential styrene margins. For the fourth quarter, we expect these challenging market conditions to continue. Amid these conditions, we are constantly assessing our operations and are developing cost saving opportunities that we anticipate will improve our operating results. For example, we expect certain structural and raw material cost savings from the ongoing review of our Stade, Germany polycarbonate facility, which are expected to result in a more sustainable economic future for the site. Also, the Company recently announced its transition to a global functional structure, which we anticipate will result in greater focus and efficiency, enabling future business process improvements once we complete our business services and IT transition from Dow in the first quarter of 2020.
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, 2019 and 2018. Inter-segment sales have been eliminated. Refer to Note 14 in the condensed consolidated financial statements for further information on our segments, as well as for a detailed definition of Adjusted EBITDA and a reconciliation of income before income taxes to segment Adjusted EBITDA.
Latex Binders Segment
Our Latex Binders segment produces styrene-butadiene latex (“SB latex”) and other latex polymers and binders primarily for coated paper and packaging board, carpet and artificial turf backings, as well as a number of performance latex applications, such as adhesive, building and construction, and the technical textile paper market.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | Nine Months Ended | | | | ||||||||||||
| | | September 30, | | | | | | September 30, | | | | | ||||||||||
($ in millions) |
| | 2019 | |
| 2018 | |
| % Change | | | 2019 | |
| 2018 | | | % Change | | ||||
Net sales | | | $ | 229.7 | |
| $ | 278.0 | |
| (17) | % | | $ | 683.8 | |
| $ | 814.2 | |
| (16) | % |
Adjusted EBITDA | | | $ | 21.0 | | | $ | 24.7 | | | (15) | % | | $ | 59.1 | | | $ | 88.2 | |
| (33) | % |
Adjusted EBITDA margin | | |
| 9 | % | |
| 9 | % | | | | |
| 9 | % | |
| 11 | % | | | |
Three Months Ended – September 30, 2019 vs. September 30, 2018
Of the 17% decrease in net sales, 20% was due to lower pricing from the pass through of lower raw material costs, primarily from styrene and butadiene. This decrease was partially offset by a 4% increase due to higher sales volume in the adhesives and construction market as well as the textile market, which were partially offset by lower sales volume in the paper and board markets.
Adjusted EBITDA decreased by $3.7 million, or 15%, including a 20% decrease due to lower margins from raw material dynamics, competitive market conditions and global market uncertainty, in addition to a 4% decrease due to higher fixed costs as a result of lower fixed cost absorption. These impacts were partially offset by a 10% increase due to higher sales volume as described above.
Nine Months Ended – September 30, 2019 vs. September 30, 2018
The 16% decrease in net sales was primarily due to lower pricing from the pass through of lower raw material costs, primarily from styrene and butadiene.
36
Adjusted EBITDA decreased by $29.1 million, or 33%, primarily due to lower margins from raw material dynamics, competitive market conditions and global market uncertainty.
Synthetic Rubber Segment
Our Synthetic Rubber segment produces styrene-butadiene and polybutadiene-based rubber products used predominantly in high-performance tires, impact modifiers and technical rubber products, such as conveyor belts, hoses, seals and gaskets. We have a broad synthetic rubber technology and product portfolio, focusing on specialty products, such as solution styrene-butadiene rubber (“SSBR”), nickel polybutadiene rubber, and neodymium polybutadiene rubber, while also producing core products, such as emulsion styrene-butadiene rubber (“ESBR”).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | Nine Months Ended | | | | | ||||||||||||
| | | September 30, | | | | | | September 30, | | | | | | ||||||||||
($ in millions) |
| | 2019 | |
| 2018 | |
| % Change | | | 2019 | |
| 2018 | | | % Change | | | ||||
Net sales | | | $ | 104.2 | |
| $ | 137.7 | |
| (24) | % | | $ | 340.9 | |
| $ | 442.2 | |
| (23) | % | |
Adjusted EBITDA | | | $ | 7.4 | | | $ | 15.5 | | | (52) | % | | $ | 29.1 | | | $ | 71.6 | |
| (59) | % | |
Adjusted EBITDA margin | | |
| 7 | % | |
| 11 | % | | | | |
| 9 | % | |
| 16 | % | | | | |
Three Months Ended – September 30, 2019 vs. September 30, 2018
Of the 24% decrease in net sales, 13% was due to lower pricing from the pass through of lower raw material costs, primarily from styrene and butadiene, and 8% was due to decreased sales of ESBR due to weak market conditions and competitive dynamics. An additional 3% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
Adjusted EBITDA decreased by $8.1 million, or 52%. Lower margins resulted in a 22% decrease due to unfavorable net timing impacts, when compared to the prior year. Higher fixed costs, due mainly to lower fixed cost absorption in the current period, resulted in a 19% decrease. In addition, there was a 12% decrease due to lower ESBR sales volume as described above.
Nine Months Ended – September 30, 2019 vs. September 30, 2018
Of the 23% decrease in net sales, 12% was due to lower sales volume, primarily related to SSBR and ESBR as a result of weakness in the global tire market, and 7% was due to lower pricing from the pass through of lower raw material costs, primarily from styrene and butadiene. An additional 4% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
Adjusted EBITDA decreased by $42.5 million, or 59%. Lower margins resulted in a 27% decrease due mainly to unfavorable net timing impacts, and lower sales volume resulted in a 23% decrease primarily as a result of weakness in the global tire market. In addition, higher fixed costs, due mainly to a lower level of fixed cost absorption, resulted in a 12% decrease.
Performance Plastics Segment
Our Performance Plastics segment consists of a variety of compounds and blends, our acrylonitrile-butadiene-styrene (“ABS”), styrene-acrylonitrile (“SAN”), and polycarbonate (“PC”) businesses, and our soft-touch polymers and bioplastics business, which includes TPEs. We are a producer of highly engineered compounds and blends for automotive end markets, as well as consumer electronics, medical, electrical, lighting, building and construction, appliances, and footwear.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | Nine Months Ended | | | | | ||||||||||||
| | | September 30, | | | | | | September 30, | | | | | | ||||||||||
($ in millions) |
| | 2019 | |
| 2018 | |
| % Change | | | 2019 | |
| 2018 | | | % Change | | | ||||
Net sales | | | $ | 324.8 | |
| $ | 400.7 | |
| (19) | % | | $ | 1,041.7 | |
| $ | 1,216.2 | |
| (14) | % | |
Adjusted EBITDA | | | $ | 36.3 | | | $ | 43.8 | | | (17) | % | | $ | 106.1 | | | $ | 158.2 | |
| (33) | % | |
Adjusted EBITDA margin | | |
| 11 | % | |
| 11 | % | | | | |
| 10 | % | |
| 13 | % | | | | |
37
Three Months Ended – September 30, 2019 vs September 30, 2018
Of the 19% decrease in net sales, 13% was due to lower pricing from the pass through of lower styrene costs as well as lower PC prices due to lower industry operating rates. In addition, there was a 4% decrease due to lower PC and ABS sales volume as a result of market weakness and new PC supply. An additional 2% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
Adjusted EBITDA decreased by $7.5 million, or 17%. Higher fixed costs, due mainly to lower fixed cost absorption in the current period, resulted in a 15% decrease. There was a 7% decrease due to lower sales volume as described above. These impacts were partially offset by a 5% increase due to higher margins from pricing initiatives as well as favorable net timing impacts.
Nine Months Ended – September 30, 2019 vs September 30, 2018
Of the 14% decrease in net sales, 12% was due to lower pricing from the pass through of lower styrene costs as well as lower PC prices due to lower industry operating rates. An additional 3% decrease was due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
Adjusted EBITDA decreased by $52.1 million, or 33%. Lower margins, mainly related to ABS and PC, resulted in a $48.8 million, or 31%, decrease, due primarily to general market weakness as well as an increase in supply in the PC market. An additional 5% decrease was due to higher fixed costs from growth investments, including the ramp-up of the new ABS facility in China, as well as lower fixed cost absorption in the current year.
Polystyrene Segment
Our product offerings in our Polystyrene segment include a variety of general purpose polystyrenes (“GPPS”) and polystyrene that has been modified with polybutadiene rubber to increase its impact resistant properties (“HIPS”). These products provide customers with performance and aesthetics at a low cost across applications, including appliances, packaging, including food packaging and food service disposables, consumer electronics, and building and construction materials.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | Nine Months Ended | | | | | ||||||||||||
| | | September 30, | | | | | | September 30, | | | | | | ||||||||||
($ in millions) |
| | 2019 | |
| 2018 | |
| % Change | | | 2019 | |
| 2018 | | | % Change | | | ||||
Net sales | | | $ | 197.6 | |
| $ | 252.3 | |
| (22) | % | | $ | 633.2 | |
| $ | 777.5 | |
| (19) | % | |
Adjusted EBITDA | | | $ | 16.3 | | | $ | 5.0 | | | 226 | % | | $ | 49.3 | | | $ | 28.0 | |
| 76 | % | |
Adjusted EBITDA margin | | |
| 8 | % | |
| 2 | % | | | | |
| 8 | % | |
| 4 | % | | | | |
Three Months Ended – September 30, 2019 vs. September 30, 2018
Of the 22% decrease in net sales, 18% was due to lower pricing from the pass through of lower styrene costs to our customers, as well as a 2% decrease due to lower sales volume in Europe, which was partially offset by higher sales volume in Asia. There was an additional 2% decrease due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period.
The $11.3 million, or 226%, increase in Adjusted EBITDA was primarily due to higher margins, due to weak market conditions in the prior year as well as pricing initiatives in the current year, which resulted in an $11.8 million, or 236%, increase.
Nine Months Ended – September 30, 2019 vs. September 30, 2018
Of the 19% decrease in net sales, 18% was due to lower pricing from the pass through of lower styrene costs to our customers, as well a 3% decrease due to currency impacts as the euro weakened in comparison to the U.S. dollar during the period. These decreases were partially offset by a 2% increase attributable to higher sales volume, primarily from Asia.
38
The $21.3 million, or 76%, increase in Adjusted EBITDA was primarily due to higher margins, primarily from pricing initiatives, which resulted in a $19.8 million, or 71%, increase as well as increased sales volume, which resulted in a $1.1 million, or 4%, increase.
Feedstocks Segment
The Feedstocks segment includes the Company’s production and procurement of styrene monomer outside of North America, which is used as a key raw material for the production of polystyrene, expandable polystyrene, SAN resins, styrene-acrylate latex (“SA latex”), SB latex, ABS resins, unsaturated polyethylene resins, and styrene-butadiene rubber.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | Nine Months Ended | | | | | ||||||||||||
| | | September 30, | | | | | | September 30, | | | | | | ||||||||||
($ in millions) |
| | 2019 | |
| 2018 | |
| % Change | | | 2019 | |
| 2018 | | | % Change | | | ||||
Net sales | | | $ | 65.8 | |
| $ | 131.0 | |
| (50) | % | | $ | 187.4 | |
| $ | 307.7 | |
| (39) | % | |
Adjusted EBITDA | | | $ | 0.1 | | | $ | 40.3 | | | (100) | % | | $ | 16.7 | | | $ | 114.3 | |
| (85) | % | |
Adjusted EBITDA margin | | |
| 0 | % | |
| 31 | % | | | | |
| 9 | % | |
| 37 | % | | | | |
Three Months Ended – September 30, 2019 vs. September 30, 2018
Of the 50% decrease in net sales, 29% was due to lower styrene-related sales volume as well as a 20% decrease due to lower pricing from the pass through of lower styrene prices.
The decrease of $40.2 million, or 100%, in Adjusted EBITDA was primarily due to lower margins from weaker market conditions and lower production, which resulted in a net $39.2 million, or 97%, decrease. The lower production was a result of outages at the Company’s Boehlen, Germany and Terneuzen, The Netherlands styrene production facilities.
Nine Months Ended – September 30, 2019 vs. September 30, 2018
Of the 39% decrease in net sales, 19% was due to lower pricing from the pass through of lower styrene prices and 18% was due to lower styrene-related sales volume.
The decrease of $97.6 million, or 85%, in Adjusted EBITDA was primarily due to lower margins, as there were a significant number of unplanned industry outages which led to higher margins in the prior year, and lower production volume in the current year.
Americas Styrenics Segment
This segment consists solely of the equity earnings from of our 50%-owned joint venture, Americas Styrenics, a producer of both styrene monomer and polystyrene in North America. Styrene monomer is a basic building block of plastics and a key input to many of the Company’s products, as well as a key raw material for the production of polystyrene. Major applications for the polystyrene products Americas Styrenics produces include appliances, food packaging, food service disposables, consumer electronics, and building and construction materials.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | | | Nine Months Ended | | | | | ||||||||||||
| | | September 30, | | | | | | September 30, | | | | | | ||||||||||
($ in millions) |
| | 2019 | |
| 2018 | |
| % Change | | | 2019 | |
| 2018 | | | % Change | | | ||||
Adjusted EBITDA* | | | $ | 25.7 | | | $ | 34.5 | | | (26) | % | | $ | 98.2 | | | $ | 113.3 | |
| (13) | % | |
*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.
39
Three Months Ended – September 30, 2019 vs. September 30, 2018
The decrease in Adjusted EBITDA was mainly due to lower styrene margins as a result of continued market weakness, which were partially offset by higher polystyrene margins.
Nine Months Ended – September 30, 2019 vs. September 30, 2018
The decrease in Adjusted EBITDA was mainly due to less favorable styrene margins in the current year, as prior year results were positively impacted by several industry outages.
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; acquisition related costs and other items. In doing so, we are providing management, investors, and credit rating agencies with an indicator of our ongoing performance and business trends, removing the impact of transactions and events that we would not consider a part of our core operations.
There are limitations to using the financial performance measures such as Adjusted EBITDA. This performance measure is not intended to represent net income or other measures of financial performance. As such, it should not be used as an alternative to net income as an indicator of operating performance. Other companies in our industry may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use this or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing a reconciliation of this performance measure to our net income, which is determined in accordance with GAAP.
Adjusted EBITDA is calculated as follows for the three and nine months ended September 30, 2019 and 2018:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
(in millions) |
| 2019 |
| 2018 |
| 2019 |
| 2018 | | ||||
Net income | | $ | 22.5 |
| $ | 74.7 |
| $ | 86.3 |
| $ | 293.3 | |
Interest expense, net | |
| 9.2 | |
| 10.1 | |
| 29.3 | |
| 35.8 | |
Provision for income taxes | |
| 9.3 | |
| 19.2 | |
| 35.8 | |
| 64.5 | |
Depreciation and amortization | |
| 33.0 | |
| 31.8 | |
| 101.7 | |
| 96.0 | |
EBITDA(a) | | $ | 74.0 | | $ | 135.8 | | $ | 253.1 | | $ | 489.6 | |
Loss on extinguishment of long-term debt | |
| — | |
| — | | | — | | | 0.2 | |
Net gain on disposition of businesses and assets | |
| — | |
| — | | | (0.2) | | | (0.5) | |
Restructuring and other charges(b) | |
| 0.2 | |
| 0.9 | | | 0.3 | | | 2.6 | |
Acquisition transaction and integration costs(c) | | | 0.6 | | | 0.1 | | | 1.3 | | | 0.6 | |
Other items(d) | |
| 13.3 | |
| 6.1 | | | 38.4 | | | 15.5 | |
Adjusted EBITDA | | $ | 88.1 | | $ | 142.9 | | $ | 292.9 | | $ | 508.0 | |
40
Liquidity and Capital Resources
Cash Flows
The table below summarizes our primary sources and uses of cash for the nine months ended September 30, 2019 and 2018. We have derived the summarized cash flow information from our unaudited financial statements.
| | | | | | | |
| | Nine Months Ended | | ||||
| | September 30, | | ||||
(in millions) |
| 2019 |
| 2018 | | ||
Net cash provided by (used in): | | | |
| | | |
Operating activities | | $ | 274.9 | | $ | 238.5 | |
Investing activities | |
| (76.9) | | | (88.1) | |
Financing activities | |
| (161.8) | | | (156.1) | |
Effect of exchange rates on cash | |
| (4.0) | | | (5.7) | |
Net change in cash, cash equivalents, and restricted cash | | $ | 32.2 | | $ | (11.4) | |
Operating Activities
Net cash provided by operating activities during the nine months ended September 30, 2019 totaled $274.9 million, inclusive of $77.5 million in dividends from Americas Styrenics. Net cash provided by operating assets and liabilities for the nine months ended September 30, 2019 totaled $105.3 million, noting decreases in inventories of $51.6 million and accounts receivable of $34.7 million, and an increase in accounts payable and other current liabilities of $16.1 million. This activity was partially offset by a decrease in income taxes payable of $9.6 million. The decrease in inventories was primarily due to decreased raw material prices. Accounts receivable at the end of the third quarter decreased relative to the end of 2018 primarily due to decreased raw material prices as well as lower volumes. The increase in accounts payable was due to timing of vendor payments, while the decrease in income taxes payable was primarily due to the overall reduction in earnings before income taxes.
Net cash provided by operating activities during the nine months ended September 30, 2018 totaled $238.5 million, inclusive of $85.0 million in dividends from Americas Styrenics. Net cash used in operating assets and liabilities for the nine months ended September 30, 2018 totaled $132.4 million, noting increases in accounts receivable of $77.8 million and inventories of $86.1 million, and a decrease in income taxes payable of $16.3 million. This activity was partially offset by an increase in accounts payable and other current liabilities of $46.4 million. Accounts receivable at the end of the third quarter increased relative to the end of 2017 primarily due to the pass through of increased raw material prices to our customers as well as increases sales volume, particularly within the Performance Plastics and Synthetic Rubber segments. The increase in inventories was primarily due to increased raw material prices as well as an increase in volumes, as during the third quarter, the Company experienced significant customer destocking in certain businesses, in anticipation of lower fourth quarter raw material prices. The decrease in income taxes payable was a result
41
of payment of certain cash taxes during the second quarter in our primary operating jurisdictions. The increase in accounts payable was primarily due to increases in raw material prices as well as timing of vendor payments.
Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2019 totaled $76.9 million, primarily resulting from capital expenditures of $71.2 million and cash paid for an asset acquisition of $6.4 million.
Net cash used in investing activities during the nine months ended September 30, 2018 totaled $88.1 million, primarily resulting from capital expenditures of $90.9 million. This was partially offset by proceeds received of $1.8 million from the sale of businesses and other assets, primarily comprised of $1.3 million received as a prepayment in connection with the Company’s preliminary agreement for the sale of certain land in Livorno, Italy (refer to Note 15 within the condensed consolidated financial statements for further information).
Financing Activities
Net cash used in financing activities during the nine months ended September 30, 2019 totaled $161.8 million. This activity was primarily due to $98.7 million of payments related to the repurchase of ordinary shares, $50.0 million of dividends paid, $5.3 million of net principal payments related to our 2024 Term Loan B during the period, and $4.8 million net repayments of short-term borrowings. Additionally, net cash used in financing activities included $3.9 million of withholding taxes paid related to the vesting of certain RSUs during the period, partially offset by $0.9 million of proceeds received from the exercise of option awards.
Net cash used in financing activities during the nine months ended September 30, 2018 totaled $156.1 million. This activity was primarily due to $95.5 million of payments related to the repurchase of ordinary shares, $49.0 million of dividends paid, and $5.3 million of net principal payments related to our 2024 Term Loan B during the period. Additionally, net cash used in financing activities included $8.1 million of withholding taxes paid related to the vesting of certain RSUs during the period, partially offset by $2.6 million of proceeds received from the exercise of option awards.
Free Cash Flow
We use Free Cash Flow as a non-GAAP measure to evaluate and discuss the Company’s liquidity position and results. Free Cash Flow is defined as cash from operating activities, less capital expenditures. We believe that Free Cash Flow provides an indicator of the Company’s ongoing ability to generate cash through core operations, as it excludes the cash impacts of various financing transactions as well as cash flows from business combinations that are not considered organic in nature. We also believe that Free Cash Flow provides management and investors with a useful analytical indicator of our ability to service our indebtedness, pay dividends (when declared), and meet our ongoing cash obligations.
Free Cash Flow is not intended to represent cash flows from operations as defined by GAAP, and therefore, should not be used as an alternative for that measure. Other companies in our industry may define Free Cash Flow differently than we do. As a result, it may be difficult to use this or similarly-named financial measures that other companies may use, to compare the liquidity and cash generation of those companies to our own. We compensate for these limitations by providing a reconciliation to cash provided by operating activities, which is determined in accordance with GAAP.
42
| | | | | | | |
| | Nine Months Ended | | ||||
| | September 30, | | ||||
(in millions) |
| 2019 |
| 2018 |
| ||
Cash provided by operating activities | | $ | 274.9 | | $ | 238.5 | |
Capital expenditures | | | (71.2) | | | (90.9) | |
Free Cash Flow | | $ | 203.7 | | $ | 147.6 | |
Refer to the discussion above for significant impacts to cash provided by operating activities for the nine months ended September 30, 2019 and 2018.
Capital Resources and Liquidity
We require cash principally for day-to-day operations, to finance capital investments and other initiatives, to purchase materials, to service our outstanding indebtedness, and to fund the return of capital to shareholders via dividend payments and ordinary share repurchases, when deemed appropriate. Our sources of liquidity include cash on hand, cash flow from operations, and amounts available under the Senior Credit Facility and the Accounts Receivable Securitization Facility (discussed further below).
As of September 30, 2019 and December 31, 2018, we had $1,196.0 million and $1,192.4 million, respectively, in outstanding indebtedness and $1,015.9 million and $1,094.3 million, respectively, in working capital. In addition, as of September 30, 2019 and December 31, 2018, we had $70.7 million and $113.7 million, respectively, of foreign cash and cash equivalents on our balance sheet, outside of our country of domicile of Luxembourg, all of which is readily convertible into other foreign currencies, including the U.S. dollar. Our intention is not to permanently reinvest our foreign cash and cash equivalents. Accordingly, we record deferred income tax liabilities related to the unremitted earnings of our subsidiaries.
The following table outlines our outstanding indebtedness as of September 30, 2019 and December 31, 2018 and the associated interest expense, including amortization of deferred financing fees and debt discounts. Effective interest rates for the borrowings included in the table below exclude the impact of deferred financing fee amortization, certain other fees charged to interest expense (such as fees for unused commitment fees during the period), and the impacts of derivatives designated as hedging instruments. For definitions of capitalized terms not included herein, refer to our Annual Report.
| | | | | | | | | | | | | | | | | |
| | As of and for the Nine Months Ended | | As of and for the Year Ended |
| ||||||||||||
| | September 30, 2019 | | December 31, 2018 |
| ||||||||||||
| | | | Effective | | | | | | Effective | | |
| ||||
| | | | Interest | | Interest | | | | Interest | | Interest |
| ||||
($ in millions) |
| Balance |
| Rate |
| Expense |
| Balance | | Rate |
| Expense |
| ||||
Senior Credit Facility | | | | | | | | | | | | | | | | | |
2024 Term Loan B | | $ | 686.0 | | 4.4 | % | $ | 24.1 | | $ | 691.3 | | 4.1 | % | $ | 31.6 | |
2022 Revolving Facility | | | — | | — | | | 2.5 | | | — | | — | | | 2.9 | |
2025 Senior Notes | | | 500.0 | | 5.4 | % | | 8.9 | | | 500.0 | | 5.4 | % | | 16.1 | |
Accounts Receivable Securitization Facility | |
| — | | — | |
| 1.2 | |
| — | | — | |
| 1.5 | |
Other indebtedness* | |
| 10.0 | | 2.8 | % |
| — | |
| 1.1 | | 4.8 | % |
| 0.1 | |
Total | | $ | 1,196.0 | | | | $ | 36.7 | | $ | 1,192.4 | | | | $ | 52.2 | |
*For the nine months ended September 30, 2019, interest expense on “Other indebtedness” totaled less than $0.1 million.
Our Senior Credit Facility includes the 2022 Revolving Facility, which matures in September 2022, and has a borrowing capacity of $375.0 million. As of September 30, 2019, the Company had no outstanding borrowings, and had $361.1 million (net of $13.9 million outstanding letters of credit) of funds available for borrowing under the 2022 Revolving Facility. Further, as of September 30, 2019, the Company is required to pay a quarterly commitment fee in respect of any unused commitments under the 2022 Revolving Facility equal to 0.375% per annum.
Also included in our Senior Credit Facility is our 2024 Term Loan B (with original principal of $700.0 million, maturing in September 2024), which requires scheduled quarterly payments in amounts equal to 0.25% of the original principal. The stated interest rate on our 2024 Term Loan B is LIBOR plus 2.00% (subject to a 0.00% LIBOR floor).
43
The Company made net principal payments of $5.3 million on the 2024 Term Loan B during the nine months ended September 30, 2019, with an additional $7.0 million of scheduled future payments classified as current debt on the Company’s condensed consolidated balance sheet as of September 30, 2019.
Our 2025 Senior Notes, as issued under the Indenture, include $500.0 million aggregate principal amount of 5.375% senior notes that mature on September 1, 2025. Interest on the 2025 Senior Notes is payable semi-annually on May 3 and November 3 of each year, which commenced on May 3, 2018. These notes may be redeemed prior to their maturity at the option of the Company under certain circumstances at specific redemption prices. Refer to our Annual Report for further information.
We continue to maintain our Accounts Receivable Securitization Facility which has a borrowing capacity of $150.0 million and matures in September 2021. As of September 30, 2019, there were no amounts outstanding under this facility, and the Company had approximately $128.5 million of accounts receivable available to support this facility, based on the pool of eligible accounts receivable.
Our ability to raise additional financing and our borrowing costs may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios.
We and our subsidiaries, affiliates or significant shareholders may from time to time seek to retire or purchase our outstanding debt through cash purchases in the open market, privately negotiated transactions, exchange transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (the “Issuers” of our 2025 Senior Notes and “Borrowers” under our Senior Credit Facility) are dependent upon the cash generation and receipt of distributions and dividends or other payments from our subsidiaries and joint venture in order to satisfy their debt obligations. There are no known significant restrictions by third parties on the ability of subsidiaries of the Company to disburse or dividend funds to the Issuers and the Borrowers in order to satisfy these obligations. However, as the Company’s subsidiaries are located in a variety of jurisdictions, the Company can give no assurances that our subsidiaries will not face transfer restrictions in the future due to regulatory or other reasons beyond our control.
The Senior Credit Facility and Indenture also limit the ability of the Borrowers and Issuers, respectively, to pay dividends or make other distributions to Trinseo S.A., which could then be used to make distributions to shareholders. During the nine months ended September 30, 2019, the Company declared dividends of $1.20 per ordinary share, totaling $48.5 million, of which $16.6 million, inclusive of dividend equivalents, remains accrued as of September 30, 2019 and the majority of which will be paid in October 2019. These dividends are well within the available capacity under the terms of the restrictive covenants contained in the Senior Credit Facility and Indenture. Further, significant additional capacity continues to be available under the terms of these covenants to support expected future dividends to shareholders, should the Company continue to declare them.
The Company’s cash flow generation in recent years has been strong, with positive cash flows expected to continue for full year 2019. During the nine months ended September 30, 2019, under authority from our board of directors, the Company purchased approximately 2.4 million ordinary shares from our shareholders through open market transactions for an aggregate purchase price of $100.0 million. We believe that funds provided by operations, our existing cash, cash equivalent, and restricted cash balances, borrowings available under our 2022 Revolving Facility and our Accounts Receivable Securitization Facility will be adequate to meet planned operating and capital expenditures for at least the next 12 months under current operating conditions, while also providing the Company the ability to return capital to our shareholders via dividend payments and share repurchases. Nevertheless, our ability to generate future cash and to pay our indebtedness and fund other liquidation needs is subject to certain risks described under Part I, Item 1A-“Risk Factors” of our Annual Report. As of September 30, 2019, we were in compliance with all the covenants and default provisions under our debt agreements. Refer to our Annual Report for further information on the details of the covenant requirements.
44
Contractual Obligations and Commercial Commitments
There have been no material revisions outside the ordinary course of business to our contractual obligations as described within “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commercial Commitments” within ourAnnual Report.
Critical Accounting Policies and Estimates
Our unaudited interim condensed consolidated financial statements are based on the selection and application of significant accounting policies. The preparation of unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses at the date of and during the reporting period. Actual results could differ from those estimates. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.
We describe our significant accounting policies in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report, while we discuss our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Annual Report. There have been no material revisions to the significant accounting policies or critical accounting policies and estimates as filed in our Annual Report, other than the impacts to our significant accounting policies from the adoption of lease accounting guidance adopted January 1, 2019, discussed further within Notes 2 and 18 to the condensed consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note 2 to our condensed consolidated financial statements, included elsewhere within this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As discussed in “Quantitative and Qualitative Disclosures About Market Risk” within our Annual Report, we are exposed to changes in interest rates and foreign currency exchange rates as well as changes in the prices of certain commodities that we use in production. There have been no material changes in our exposure to market risks from the information provided within our Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining internal controls designed to provide reasonable assurance that information required to be disclosed by us in our reports that we file or submit under the Exchange Act (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2019. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report were effective to provide the reasonable level of assurance described above.
45
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we may be subject to various legal claims and proceedings incidental to the normal conduct of business, relating to such matters as product liability, antitrust, competition, waste disposal practices, release of chemicals into the environment and other matters that may arise in the ordinary course of our business. We currently believe that there is no litigation pending that is likely to have a material adverse effect on our business. Regardless of the outcome, legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
Our business faces various risks. Certain important factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the risk factors related to our ordinary shares as well those risk factors related to our business and industry which have been previously disclosed in Part 1, Item 1A of our Annual Report for the year ended December 31, 2018, for which there have been no material changes. We encourage you to consider these risks, in their entirety, in addition to other information contained in or incorporated by reference into this Quarterly Report and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
|
None.
|
|
None.
|
|
46
The following table contains information regarding purchases of our ordinary shares made during the quarter ended September 30, 2019 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934:
| | | | | | | | | | |
Issuer Purchases of Equity Securities | ||||||||||
Period | | Total number of shares purchased | | Average price | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate number of shares that may yet be purchased under the plans or programs | ||
July 1 - July 31, 2019 | | 352,000 | | $ | 39.20 | | 352,000 | | 3,648,000 | (1) |
August 1 - August 31, 2019 | | 443,668 | | $ | 31.64 | | 443,668 | | 3,204,332 | (1) |
September 1 - September 30, 2019 | | 318,365 | | $ | 40.98 | | 318,365 | | 2,885,967 | (1) |
Total | | 1,114,033 | | $ | 36.69 | | 1,114,033 | | | |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
47
EXHIBIT INDEX
Exhibit No. | Description | |
3.1 | ||
| | |
4.1 | | |
4.2 | ||
| | |
10.1 | ||
| | |
10.2 | Letter Agreement Amendment to the Employment Agreement between Timothy Stedman and Trinseo Europe GmbH, dated October 2, 2019 (incorporated herein by reference to Exhibit 10.2 to the Current Report filed on Form 8-K, File No. 001-36473, filed October 3, | |
| | |
10.3 | ||
| | |
31.1† | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| | |
31.2† | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| | |
32.1† | ||
| | |
32.2† | ||
| | |
101.INS† | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
| | |
101.SCH† | XBRL Taxonomy Extension Schema Document | |
| | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | |
| | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | |
| | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | |
| | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | |
104† | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | |
† Filed herewith.
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: November 5,12, 2019
| TRINSEO S.A. | |
| | |
| By: | /s/ Frank Bozich |
| Name: | Frank Bozich |
| Title: | President, Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| By: | /s/ David Stasse |
| Name: | David Stasse |
| Title: | Executive Vice President, Chief Financial Officer |
| | (Principal Financial Officer) |
| | |