10-Q 1 tse-20170630x10q.htm 10-Q tse_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

 

(Mark One)                                                                                                                                                                                         

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No   ◻ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

◻  (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ◻    No  ☒ 

 

As of August 1, 2017, there were 43,772,953 of the registrant’s ordinary shares outstanding.

 

 

 


 

 

TABLE OF CONTENTS

 

 

    

    

    

    

 

 

    

 

    

Page

 

 

 

 

 

 

 

Part I 

 

Financial Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2017 and 2016 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25 

 

 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

39 

 

 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

40 

 

 

 

 

 

 

 

Part II 

 

Other Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

40 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

41 

 

 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41 

 

 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

41 

 

 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

42 

 

 

 

 

 

 

 

Item 5. 

 

Other Information

 

42 

 

 

 

 

 

 

 

Item 6. 

 

Exhibits

 

42 

 

 

 

 

 

 

 

Signatures 

 

 

 

 

 

 

 

 

 

 

 

Exhibit Index 

 

 

 

 

 

 

 

2


 

Trinseo S.A.

Quarterly Report on Form 10-Q

For the quarterly period ended June 30, 2017

Unless otherwise indicated or required by context, as used in this Quarterly Report on Form 10-Q (“Quarterly Report”), the term “Trinseo” refers to Trinseo S.A. (NYSE: TSE), a public limited liability company (société anonyme) existing under the laws of Luxembourg, and not its subsidiaries. The terms “Company,” “we,” “us” and “our” refer to Trinseo and its consolidated subsidiaries, taken as a consolidated entity. All financial data provided in this Quarterly Report is the financial data of the Company, unless otherwise indicated.

Prior to the formation of the Company, our business was wholly owned by The Dow Chemical Company (together with other affiliates, “Dow”). In June 2010, investment funds advised or managed by affiliates of Bain Capital Partners, LLC (“Bain Capital”) acquired an ownership interest in our business through an indirect ownership interest in us. During 2016, Bain Capital Everest Manager Holding SCA (“the former Parent”), an affiliate of Bain Capital, sold its entire ownership interest in the Company pursuant to the Company’s shelf registration statement filed with the SEC.

Definitions of capitalized terms not defined herein appear in the notes to our condensed consolidated financial statements. The Company may distribute cash to shareholders under Luxembourg law via repayments of equity or an allocation of statutory profits. Since the Company began paying dividends, all distributions have been considered repayments of equity under Luxembourg law.    

Cautionary Note on Forward-Looking Statements

This Quarterly Report contains forward-looking statements including, without limitation, statements concerning plans, objectives, goals, projections, strategies, future events or performance, and underlying assumptions and other statements, which are not statements of historical facts. Forward-looking statements may be identified by the use of words like “expect,” “anticipate,” “intend,” “forecast,” “outlook,” “will,” “may,” “might,” “potential,” “likely,” “target,” “plan,” “contemplate,” “seek,” “attempt,” “should,” “could,” “would” or expressions of similar meaning. Forward-looking statements reflect management’s evaluation of information currently available and are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Specific factors that may impact performance or other predictions of future actions have, in many but not all cases, been identified in connection with specific forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016 (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017 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 U.S. Securities and Exchange Commission. We provide this website and information contained in or connected to it for informational purposes only. That information is not a part of this Quarterly Report.

 

 

3


 

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements 

TRINSEO S.A.

Condensed Consolidated Balance Sheets  

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

 

2017

 

2016

    

Assets

    

 

 

 

 

    

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

399,928

 

$

465,114

 

Accounts receivable, net of allowance for doubtful accounts (June 30, 2017: $3,670; December 31, 2016: $3,138)

 

 

723,264

 

 

564,428

 

Inventories

 

 

473,936

 

 

385,345

 

Other current assets

 

 

14,366

 

 

17,999

 

Total current assets

 

 

1,611,494

 

 

1,432,886

 

Investments in unconsolidated affiliates

 

 

153,077

 

 

191,418

 

Property, plant and equipment, net of accumulated depreciation (June 30, 2017: $479,983; December 31, 2016: $420,343)

 

 

556,481

 

 

513,757

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

31,990

 

 

29,485

 

Other intangible assets, net

 

 

178,270

 

 

177,345

 

Deferred income tax assets—noncurrent

 

 

37,095

 

 

40,187

 

Deferred charges and other assets

 

 

32,847

 

 

24,412

 

Total other assets

 

 

280,202

 

 

271,429

 

Total assets

 

$

2,601,254

 

$

2,409,490

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Short-term borrowings and current portion of long-term debt

 

$

5,000

 

$

5,000

 

Accounts payable

 

 

394,033

 

 

378,029

 

Income taxes payable

 

 

34,066

 

 

23,784

 

Accrued expenses and other current liabilities

 

 

127,322

 

 

135,357

 

Total current liabilities

 

 

560,421

 

 

542,170

 

Noncurrent liabilities

 

 

 

 

 

 

 

Long-term debt, net of unamortized deferred financing fees

 

 

1,192,844

 

 

1,160,369

 

Deferred income tax liabilities—noncurrent

 

 

30,325

 

 

24,844

 

Other noncurrent obligations

 

 

257,391

 

 

237,054

 

Total noncurrent liabilities

 

 

1,480,560

 

 

1,422,267

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Ordinary shares, $0.01 nominal value, 50,000,000 shares authorized (June 30, 2017: 48,778 shares issued and 43,733 shares outstanding; December 31, 2016: 48,778 shares issued and 44,301 shares outstanding)

 

 

488

 

 

488

 

Additional paid-in-capital

 

 

575,011

 

 

573,662

 

Treasury shares, at cost (June 30, 2017: 5,045 shares; December 31, 2016: 4,477 shares)

 

 

(258,913)

 

 

(217,483)

 

Retained earnings

 

 

406,270

 

 

258,540

 

Accumulated other comprehensive loss

 

 

(162,583)

 

 

(170,154)

 

Total shareholders’ equity

 

 

560,273

 

 

445,053

 

Total liabilities and shareholders’ equity

 

$

2,601,254

 

$

2,409,490

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

TRINSEO S.A.

Condensed Consolidated Statements of Operations  

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Net sales

    

$

1,145,199

    

$

969,694

    

$

2,249,689

    

$

1,863,778

 

Cost of sales

 

 

1,019,992

 

 

799,954

 

 

1,926,680

 

 

1,554,366

 

Gross profit

 

 

125,207

 

 

169,740

 

 

323,009

 

 

309,412

 

Selling, general and administrative expenses

 

 

55,384

 

 

52,249

 

 

115,820

 

 

106,735

 

Equity in earnings of unconsolidated affiliates

 

 

29,927

 

 

38,602

 

 

49,222

 

 

73,628

 

Operating income

 

 

99,750

 

 

156,093

 

 

256,411

 

 

276,305

 

Interest expense, net

 

 

18,719

 

 

18,814

 

 

36,919

 

 

37,710

 

Other expense (income), net

 

 

2,072

 

 

12,875

 

 

(6,061)

 

 

15,544

 

Income before income taxes

 

 

78,959

 

 

124,404

 

 

225,553

 

 

223,051

 

Provision for income taxes

 

 

18,800

 

 

28,600

 

 

48,100

 

 

50,500

 

Net income

 

$

60,159

 

$

95,804

 

$

177,453

 

$

172,551

 

Weighted average shares- basic

 

 

43,902

 

 

46,952

 

 

43,979

 

 

47,803

 

Net income per share- basic

 

$

1.37

 

$

2.04

 

$

4.03

 

$

3.61

 

Weighted average shares- diluted

 

 

44,995

 

 

47,857

 

 

45,165

 

 

48,554

 

Net income per share- diluted

 

$

1.34

 

$

2.00

 

$

3.93

 

$

3.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.36

 

$

0.30

 

$

0.66

 

$

0.30

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

 

TRINSEO S.A.

Condensed Consolidated Statements of Comprehensive Income (Loss)  

(In thousands, unless otherwise stated)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Net income

    

$

60,159

    

$

95,804

    

$

177,453

    

$

172,551

    

Other comprehensive income (loss), net of tax (tax amounts shown in millions below for the three and six months ended June 30, 2017 and 2016, respectively):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

18,974

 

 

(11,005)

 

 

23,175

 

 

2,418

 

Net gain (loss) on foreign exchange cash flow hedges

 

 

(12,966)

 

 

6,029

 

 

(17,776)

 

 

(1,396)

 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss arising during period (net of tax of: 2017—$0 and $0; 2016—$0 and ($0.5))

 

 

 —

 

 

 —

 

 

 —

 

 

(800)

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

796

 

 

539

 

 

2,172

 

 

1,079

 

Total other comprehensive income (loss), net of tax

 

 

6,804

 

 

(4,437)

 

 

7,571

 

 

1,301

 

Comprehensive income

 

$

66,963

 

$

91,367

 

$

185,024

 

$

173,852

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


 

TRINSEO S.A.

Condensed Consolidated Statements of Shareholders’ Equity  

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Shares

    

Shareholders' Equity

 

 

    

Ordinary Shares Outstanding

 

Treasury Shares

    

Ordinary Shares

    

Additional
Paid-In Capital

    

Treasury Shares

    

Accumulated Other Comprehensive Income (Loss)

    

Retained Earnings (Accumulated Deficit)

    

Total

 

Balance at December 31, 2016

 

44,301

 

4,477

 

$

488

 

$

573,662

 

$

(217,483)

 

$

(170,154)

 

$

258,540

 

$

445,053

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

177,453

 

 

177,453

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,571

 

 

 —

 

 

7,571

 

Stock-based compensation activity

 

327

 

(327)

 

 

 —

 

 

1,349

 

 

11,624

 

 

 —

 

 

 —

 

 

12,973

 

Purchase of treasury shares

 

(895)

 

895

 

 

 —

 

 

 —

 

 

(53,054)

 

 

 —

 

 

 —

 

 

(53,054)

 

Dividends on ordinary shares ($0.66 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(29,723)

 

 

(29,723)

 

Balance at June 30, 2017

 

43,733

 

5,045

 

$

488

 

$

575,011

 

$

(258,913)

 

$

(162,583)

 

$

406,270

 

$

560,273

 

Balance at December 31, 2015

 

48,778

 

 —

 

$

488

 

$

556,532

 

$

 —

 

$

(149,717)

 

$

(18,289)

 

$

389,014

 

Adoption of new accounting standard

 

 —

 

 —

 

 

 —

 

 

915

 

 

 —

 

 

 —

 

 

(915)

 

 

 —

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

172,551

 

 

172,551

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,301

 

 

 —

 

 

1,301

 

Stock-based compensation activity

 

16

 

(16)

 

 

 —

 

 

8,143

 

 

686

 

 

 —

 

 

 —

 

 

8,829

 

Purchase of treasury shares

 

(2,391)

 

2,391

 

 

 —

 

 

 —

 

 

(94,362)

 

 

 —

 

 

 —

 

 

(94,362)

 

Dividends on ordinary shares ($0.30 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13,920)

 

 

(13,920)

 

Balance at June 30, 2016

 

46,403

 

2,375

 

$

488

 

$

565,590

 

$

(93,676)

 

$

(148,416)

 

$

139,427

 

$

463,413

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

7


 

TRINSEO S.A.

Condensed Consolidated Statements of Cash Flows  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

    

 

    

    

 

    

    

Net income

 

$

177,453

 

$

172,551

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

 

 

Depreciation and amortization

 

 

51,044

 

 

47,973

 

Amortization of deferred financing fees and issuance discount

 

 

2,719

 

 

3,134

 

Deferred income tax

 

 

8,862

 

 

10,684

 

Stock-based compensation expense

 

 

7,687

 

 

8,816

 

Earnings of unconsolidated affiliates, net of dividends

 

 

4,709

 

 

(12,287)

 

Unrealized net losses on foreign exchange forward contracts

 

 

5,011

 

 

3,965

 

Loss (gain) on sale of businesses and other assets

 

 

(10,275)

 

 

12,915

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(137,696)

 

 

(52,954)

 

Inventories

 

 

(66,802)

 

 

(16,685)

 

Accounts payable and other current liabilities

 

 

(9,779)

 

 

(1,098)

 

Income taxes payable

 

 

9,089

 

 

(1,005)

 

Other assets, net

 

 

(6,215)

 

 

(7,060)

 

Other liabilities, net

 

 

781

 

 

10,758

 

Cash provided by operating activities

 

 

36,588

 

 

179,707

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(74,286)

 

 

(53,153)

 

Proceeds from the sale of businesses and other assets

 

 

43,680

 

 

129

 

Distributions from unconsolidated affiliates

 

 

857

 

 

4,809

 

Cash used in investing activities

 

 

(29,749)

 

 

(48,215)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Short-term borrowings, net

 

 

(126)

 

 

(126)

 

Repayments of term loans

 

 

(2,500)

 

 

(2,500)

 

Purchase of treasury shares

 

 

(56,415)

 

 

(94,362)

 

Dividends paid

 

 

(26,473)

 

 

 —

 

Proceeds from exercise of option awards

 

 

5,984

 

 

87

 

Withholding taxes paid on restricted share units

 

 

(288)

 

 

(74)

 

Cash used in financing activities

 

 

(79,818)

 

 

(96,975)

 

Effect of exchange rates on cash

 

 

7,793

 

 

(565)

 

Net change in cash and cash equivalents

 

 

(65,186)

 

 

33,952

 

Cash and cash equivalents—beginning of period

 

 

465,114

 

 

431,261

 

Cash and cash equivalents—end of period

 

$

399,928

 

$

465,213

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

8


 

TRINSEO S.A.

Notes to Condensed Consolidated Financial Statements  

(Dollars in thousands, 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 June 30, 2017 and 2016 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 2016 audited consolidated financial statements included within the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017.

The December 31, 2016 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 2016 audited consolidated financial statements, but does not include all disclosures required by GAAP for annual periods.

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications did not have a material impact on the Company’s financial position or results. Refer to Note 12 for further information.

 

NOTE 2—RECENT ACCOUNTING GUIDANCE

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued guidance which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the FASB has issued certain clarifying updates to this guidance, which the Company will consider as part of our adoption, which will be effective as of January 1, 2018. The Company has completed its scoping assessment for the adoption of this guidance by conducting surveys with relevant stakeholders in the business, including commercial and finance leadership, reviewing a representative sample of revenue arrangements across all businesses, and identifying a set of applicable qualitative revenue recognition changes related to the new standard update.  In completing this phase, the Company has concluded that it will adopt this new guidance applying the modified retrospective approach.  The Company remains in the process of establishing and documenting key accounting policies, assessing new disclosure requirements, and evaluating impacts on business process, information technology, and controls, and determining the quantitative impact resulting from the adoption of this new standard. 

In July 2015, the FASB issued guidance which simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value (“NRV”) test. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation. The Company adopted this guidance effective January 1, 2017, and the adoption did not have a material impact to the Company’s financial position or results of operations.

In February 2016, the FASB issued guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize on the consolidated balance sheets lease liabilities and corresponding right-of-use assets for all leases with terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. This new guidance is effective for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients. The Company is in the process of assessing the impact on its consolidated financial statements from the adoption of the new guidance. However, as we are the lessee under various real estate, railcar, and other equipment leases, which we currently account for as operating leases, we anticipate an increase in the recognition of right-of-use assets and lease liabilities as a result of this adoption.  

In August 2016, the FASB issued guidance that aims to eliminate diversity in practice for how certain cash

9


 

receipts and payments are presented and classified in the consolidated statements of cash flows. This guidance is effective for public companies for annual and interim periods beginning after December 15, 2017, with early adoption permitted. This guidance must be adopted using a retrospective approach, and provides for certain practical expedients. Additionally, the FASB has issued further guidance related to the presentation of restricted cash on the consolidated statements of cash flows. While the Company continues to assess the timing and related impact of adopting this guidance on its consolidated statement of cash flows, the most significant expected impact on the Company’s financial statements will be the requirement to classify debt prepayment or extinguishment costs as financing cash outflows, as opposed to the Company’s prior classification of these types of costs within operating activities.

In January 2017, the FASB issued guidance that revises the definition of a business in order to assist in determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the new guidance, fewer transactions are expected to be accounted for as business combinations. The Company adopted this guidance effective January 1, 2017. We expect this adoption could affect conclusions reached for future transactions in several areas, including acquisitions and disposals.

In January 2017, the FASB issued guidance to simplify the accounting for goodwill impairment by removing Step 2 of the test, which requires a hypothetical purchase price allocation. As a result, a goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted this guidance effective January 1, 2017, which did not have a material impact to the Company’s financial position or results of operations.

In March 2017, the FASB issued guidance that requires employers to present the service cost component of net periodic benefit cost in the same statement of operations line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost are to be presented outside of any subtotal of operating income. This presentation amendment is relevant to the Company and will be applied on a retrospective basis. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently assessing the impact of adopting this guidance on its results of operations.

NOTE 3—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

During the six months ended June 30, 2017, the Company had two joint ventures: Americas Styrenics LLC (“Americas Styrenics”, a styrene and polystyrene joint venture with Chevron Phillips Chemical Company LP) and Sumika Styron Polycarbonate Limited (“Sumika Styron Polycarbonate”, a polycarbonate joint venture with Sumitomo Chemical Company Limited). Investments held in the unconsolidated affiliates are accounted for by the equity method. The results of Americas Styrenics are included within its own reporting segment, and the results of Sumika Styron Polycarbonate were included within the Basic Plastics reporting segment until the Company sold its 50% share of the entity in January 2017. Refer to the discussion below for further information about the sale of the Company’s share in Sumika Styron Polycarbonate during the first quarter of 2017.

Both of the unconsolidated affiliates are privately held companies; therefore, quoted market prices for their stock are not available. The summarized financial information of the Company’s unconsolidated affiliates is shown below. This table includes summarized financial information for Sumika Styron Polycarbonate through the date of sale in January 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Sales

    

$

476,882

    

$

405,351

    

$

910,828

    

$

781,603

 

Gross profit

 

$

65,170

 

$

87,867

 

$

85,758

 

$

156,271

 

Net income

 

$

54,121

 

$

71,015

 

$

60,449

 

$

123,812

 

Americas Styrenics

As of June 30, 2017 and December 31, 2016, respectively, the Company’s investment in Americas Styrenics was $153.1 million and $149.7 million, which was $52.3 million and $71.2 million less than the Company’s 50% share of the underlying net assets of Americas Styrenics. This amount represents the difference between the book value of assets contributed to the joint venture at the time of formation (May 1, 2008) and the Company’s 50% share of the total recorded value of the joint venture’s assets and certain adjustments to conform with the Company’s accounting policies. This difference is being amortized over a weighted average remaining useful life of the contributed assets of approximately 3.3 years as of June 30, 2017. The Company received dividends from Americas Styrenics of $37.5 

10


 

million and $45.0 million during the three and six months ended June 30, 2017, respectively, compared to $30.0 million and $60.0 million during the three and six months ended June 30, 2016, respectively.

Sumika Styron Polycarbonate

On January 31, 2017, the Company completed the sale of its 50% share in Sumika Styron Polycarbonate to Sumitomo Chemical Company Limited for total sales proceeds of approximately $42.1 million. As a result, the Company recorded a gain on sale of $9.3 million during the six months ended June 30, 2017, which was included within “Other expense (income), net” in the condensed consolidated statement of operations and was allocated entirely to the Basic Plastics segment. In addition, the parties have entered into a long-term agreement to continue sourcing polycarbonate resin from Sumika Styron Polycarbonate to the Company’s Performance Plastics segment.

As of December 31, 2016, the Company’s investment in Sumika Styron Polycarbonate was $41.8 million. Due to the sale in January 2017, the Company no longer has an investment in Sumika Styron Polycarbonate as of June 30, 2017. The Company received dividends from Sumika Styron Polycarbonate of zero and $9.8 million during the three and six months ended June 30, 2017,  respectively, compared to  zero and $6.2 million during the three and six months ended June 30, 2016, respectively. The dividend received during the six months ended June 30, 2017 from Sumika Styron Polycarbonate related to the Company’s proportionate share of earnings for the year ended December 31, 2016.

 

NOTE 4—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31,

 

 

    

2017

    

2016

 

Finished goods

    

$

242,824

    

$

187,577

 

Raw materials and semi-finished goods

 

 

199,324

 

 

168,804

 

Supplies

 

 

31,788

 

 

28,964

 

Total

 

$

473,936

 

$

385,345

 

 

 

 

NOTE 5—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 June 30, 2017 and December 31, 2016.

11


 

As of June 30, 2017 and December 31, 2016, debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

Interest Rate as of June 30, 2017

    

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
Unamortized
Deferred
Financing
Fees

 

Senior Credit Facility

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

    

 

 

2020 Revolving Facility(2)

 

Various

 

May 2020

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

2021 Term Loan B(3)

 

4.476%

 

November 2021

 

 

489,136

 

 

(8,292)

 

 

480,844

 

 

491,545

 

 

(9,159)

 

 

482,386

 

2022 Senior Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD Notes

 

6.750%

 

May 2022

 

 

300,000

 

 

(5,277)

 

 

294,723

 

 

300,000

 

 

(5,726)

 

 

294,274

 

Euro Notes

 

6.375%

 

May 2022

 

 

427,301

 

 

(6,590)

 

 

420,711

 

 

394,275

 

 

(7,157)

 

 

387,118

 

Accounts Receivable Securitization Facility(4)

 

Various

 

May 2019

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other indebtedness

 

Various

 

Various

 

 

1,566

 

 

 —

 

 

1,566

 

 

1,591

 

 

 —

 

 

1,591

 

Total debt

 

 

 

 

 

$

1,218,003

 

$

(20,159)

 

$

1,197,844

 

$

1,187,411

 

$

(22,042)

 

$

1,165,369

 

Less: current portion

 

 

 

 

 

 

 

 

 

 

 

 

(5,000)

 

 

 

 

 

 

 

 

(5,000)

 

Total long-term debt, net of unamortized deferred financing fees

 

 

 

 

 

 

 

 

 

 

 

$

1,192,844

 

 

 

 

 

 

 

$

1,160,369

 


(1)

This caption does not include deferred financing fees related to the Company’s revolving facilities, which are included within “Deferred charges and other assets” on the condensed consolidated balance sheets.

(2)

The Company had $308.1 million (net of $16.9 million outstanding letters of credit) of funds available for borrowing under this facility as of June 30, 2017. Additionally, the Borrowers were required to pay a quarterly commitment fee in respect of any unused commitments under this facility equal to 0.375% per annum.

(3)

Carrying amounts presented above are net of an original issue discount, which was 0.25% of the original $500.0 million facility. This facility bears an interest rate of LIBOR plus 3.25%, subject to a 1.00% LIBOR floor. As of June 30, 2017, $5.0 million of the scheduled future payments related to this facility were classified as current debt on the Company’s condensed consolidated balance sheet.

(4)

This facility has a borrowing capacity of $200.0 million. As of June 30, 2017, the Company had approximately $151.3 million of accounts receivable available to support this facility, based on the pool of eligible accounts receivable. In regards to outstanding borrowings, fixed interest charges are 2.6% plus variable commercial paper rates, while for available, but undrawn commitments, fixed interest charges are 1.4%.

 

NOTE 6—DERIVATIVE INSTRUMENTS

The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates. To manage these risks, the Company periodically enters into derivative financial instruments such as foreign exchange forward contracts. The Company does not hold or enter into financial instruments for trading or speculative purposes. All derivatives are recorded on the condensed consolidated balance sheets at fair value.

Foreign Exchange Forward Contracts

Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company’s principal strategy in managing its exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on our balance sheet against corresponding assets of the same currency such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce its exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on our assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.

12


 

As of June 30, 2017, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $302.1 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of June 30, 2017.

 

 

 

 

 

 

 

 

June 30, 

 

Buy / (Sell) 

    

2017

 

Euro

 

$

(146,217)

 

Chinese Yuan

 

$

(74,647)

 

Indonesian Rupiah

 

$

(33,617)

 

Swiss Franc

 

$

18,686

 

Japanese Yen

 

$

(7,706)

 

Foreign Exchange Cash Flow Hedges

The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by one of its subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive income/loss (“AOCI”) to the extent effective, and reclassified to cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.

Open foreign exchange cash flow hedges as of June 30, 2017 have maturities occurring over a period of 18 months, and have a net notional U.S. dollar equivalent of $255.0 million.

Net Investment Hedge

The Company’s outstanding debt includes €375.0 million of Euro Notes (refer to Note 5 for details). As of June 30, 2017, the Company has designated a portion (€280 million) of the principal amount of these Euro Notes as a hedge of the foreign currency exposure of the Issuers’ net investment in certain European subsidiaries. As this debt was deemed to be a highly effective hedge, changes in the Euro Notes’ carrying value resulting from fluctuations in the euro exchange rate were recorded as cumulative foreign currency translation loss of $10.2 million within AOCI as of June 30, 2017.

Summary of Derivative Instruments

Information regarding changes in the fair value of the Company’s derivative instruments, net of tax, including those not designated for hedge accounting treatment, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

Gain (Loss) Recognized in

 

 

 

 

AOCI on Balance Sheet

 

Statement of Operations

 

 

 

 

Three Months Ended June 30, 

 

Statement of Operations

 

 

2017

 

2016

 

2017

 

2016

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(12,966)

    

$

6,029

    

$

1,009

    

$

(735)

    

Cost of sales

Total

 

$

(12,966)

 

$

6,029

 

$

1,009

 

$

(735)

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

(19,670)

 

$

3,798

 

$

 —

 

$

 —

 

Other expense (income), net

Total

 

$

(19,670)

 

$

3,798

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

(8,835)

 

$

(2,138)

 

Other expense (income), net

Total

 

$

 —

 

$

 —

 

$

(8,835)

 

$

(2,138)

 

 

13


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

Gain (Loss) Recognized in

 

 

 

 

AOCI on Balance Sheet

 

Statement of Operations

 

 

 

 

Six Months Ended June 30, 

 

Statement of Operations

 

 

2017

 

2016

 

2017

 

2016

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(17,776)

    

$

(1,396)

    

$

3,460

    

$

370

    

Cost of sales

Total

 

$

(17,776)

 

$

(1,396)

 

$

3,460

 

$

370

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

(24,660)

 

$

(2,487)

 

$

 —

 

$

 —

 

Other expense (income), net

Total

 

$

(24,660)

 

$

(2,487)

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

(10,510)

 

$

995

 

Other expense (income), net

Total

 

$

 —

 

$

 —

 

$

(10,510)

 

$

995

 

 

The Company recorded losses of $8.8 million and $10.5 million during the three and six months ended June 30, 2017, respectively, and losses of $2.1 million and gains of $1.0 million during the three and six months ended June 30, 2016, respectively, from settlements and changes in the fair value of outstanding forward contracts (not designated as hedges). The gains and losses from these forward contracts offset net foreign exchange transaction gains of $7.3 million and $7.9 million during the three and six months ended June 30, 2017, respectively, and gains of $2.3 million and losses of $2.6 million during the three and six months ended June 30, 2016, respectively, which resulted from the remeasurement of the Company’s foreign currency denominated assets and liabilities. The cash settlements of these foreign exchange forward contracts are included within operating activities in the condensed consolidated statement of cash flows.

As of June 30, 2017, the Company has no ineffectiveness related to its foreign exchange cash flow hedges. Further, the Company expects to reclassify in the next twelve months an approximate $4.7 million net loss from AOCI into earnings related to the Company’s outstanding cash flow hedges as of June 30, 2017 based on current foreign exchange rates.

The following table summarizes the net unrealized gains and losses and balance sheet classification of outstanding derivatives recorded in the condensed consolidated balance sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

   

December 31, 2016

 

 

 

Foreign
Exchange

 

Foreign
Exchange

 

 

 

Foreign
Exchange

 

Foreign
Exchange

 

 

 

 

 

Forward

 

Cash Flow

 

 

 

Forward

 

Cash Flow

 

 

 

Balance Sheet Classification

    

Contracts

   

Hedges

    

Total

 

Contracts

   

Hedges

    

Total

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

$

514

 

$

 —

    

$

514

 

$

1,664

    

$

11,018

    

$

12,682

 

Deferred charges and other assets

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total asset derivatives

 

$

514

 

$

 —

 

$

514

 

$

1,664

 

$

11,018

 

$

12,682

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

    

$

4,830

    

$

4,745

    

$

9,575

 

$

511

    

$

 —

    

$

511

 

Other noncurrent obligations

 

 

 —

 

 

2,069

 

 

2,069

 

 

 —

 

 

 —

 

 

 —

 

Total liability derivatives

 

$

4,830

 

$

6,814

 

$

11,644

 

$

511

 

$

 —

 

$

511

 

14


 

Forward contracts are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in a single currency in the event of a default on or termination of any one contract. As such, in accordance with the Company’s accounting policy, we record these foreign exchange forward contracts on a net basis by counterparty within the condensed consolidated balance sheet. Information regarding the gross amounts of the Company’s derivative instruments and the amounts offset in the condensed consolidated balance sheets is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Gross Amounts

 

Net Amounts

 

 

 

Recognized in the

 

Offset in the

 

Presented in the

 

 

    

Balance Sheet

    

Balance Sheet

    

Balance Sheet

 

Balance at June 30, 2017

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

1,289

 

$

(775)

 

$

514

 

Derivative liabilities

 

 

12,419

 

 

(775)

 

 

11,644

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

23,401

 

$

(10,719)

 

$

12,682

 

Derivative liabilities

 

 

11,230

 

 

(10,719)

 

 

511

 

 

Refer to Notes 7 and 14 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 7—FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.

Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

Quoted Prices in Active Markets for Identical Items

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

 

 

Assets (Liabilities) at Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Foreign exchange forward contracts—Assets

    

$

 —

    

$

514

    

$

 —

    

$

514

 

Foreign exchange forward contracts—(Liabilities)

 

 

 —

 

 

(4,830)

 

 

 —

 

 

(4,830)

 

Foreign exchange cash flow hedges—(Liabilities)

 

 

 —

 

 

(6,814)

 

 

 —

 

 

(6,814)

 

Total fair value

 

$

 —

 

$

(11,130)

 

$

 —

 

$

(11,130)

 

 

15


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Quoted Prices in Active Markets for Identical Items

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

 

 

Assets (Liabilities) at Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Foreign exchange forward contracts—Assets

 

$

 —

    

$

1,664

    

$

 —

    

$

1,664

 

Foreign exchange forward contracts—(Liabilities)

 

 

 —

 

 

(511)

 

 

 —

 

 

(511)

 

Foreign exchange cash flow hedges—Assets

    

 

 —

    

 

11,018

 

 

 —

 

 

11,018

 

Total fair value

 

$

 —

 

$

12,171

 

$

 —

 

$

12,171

 

The Company uses an income approach to value its derivative instruments, utilizing discounted cash flow techniques, considering the terms of the contract and observable market information available as of the reporting date. Significant inputs to the valuation for foreign exchange forward contracts and foreign exchange cash flow hedges are obtained from broker quotations or from listed or over-the-counter market data, and are classified as Level 2 in the fair value hierarchy.

Fair Value of Debt Instruments

The following table presents the estimated fair value of the Company’s outstanding debt not carried at fair value as of June 30, 2017 and December 31, 2016, respectively:

 

 

 

 

 

 

 

 

 

 

 

    

As of

    

As of

 

 

    

June 30, 2017

    

December 31, 2016

 

2022 Senior Notes

 

 

 

 

 

 

 

USD Notes

 

$

318,750

 

$

315,000

 

Euro Notes

 

 

456,187

 

 

424,437

 

2021 Term Loan B

 

 

494,596

 

 

498,041

 

Total fair value

 

$

1,269,533

 

$

1,237,478

 

The fair value of the Company’s Term Loan B, USD Notes, and Euro Notes (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 June 30, 2017 and December 31, 2016.

NOTE 8—COMMITMENTS AND CONTINGENCIES

Environmental Matters

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law, existing technologies and other information. Pursuant to the terms of the agreement associated with the Company’s formation, the pre-closing environmental conditions were retained by Dow and Dow has agreed to indemnify the Company from and against all environmental liabilities incurred or relating to the predecessor periods. No environmental claims have been asserted or threatened against the Company, and the Company is not a potentially responsible party at any Superfund Sites. As of June 30, 2017 and December 31, 2016, the Company had no accrued obligations for environmental remediation and restoration costs.

Inherent uncertainties exist in the Company’s potential environmental liabilities primarily due to unknown conditions, whether future claims may fall outside the scope of the indemnity, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. In connection with the Company’s existing indemnification, the possibility is considered remote that environmental remediation costs will have a material adverse impact on the condensed consolidated financial statements.

Purchase Commitments

In the normal course of business, the Company has certain raw material purchase contracts where it is required to purchase certain minimum volumes at current market prices. These commitments range from 1 to 5 years. In certain raw

16


 

material purchase contracts, the Company has the right to purchase less than the required minimums and pay a liquidated damages fee, or, in case of a permanent plant shutdown, to terminate the contracts. In such cases, these obligations would be less than the annual commitment as disclosed in the consolidated financial statements included in the Annual Report.

Litigation Matters

From time to time, the Company may be subject to various legal claims and proceedings incidental to the normal conduct of business, relating to such matters as product liability, antitrust/competition, past waste disposal practices and release of chemicals into the environment. While it is impossible at this time to determine with certainty the ultimate outcome of these routine claims, the Company does not believe that the ultimate resolution of these claims will have a material adverse effect on the Company’s results of operations, financial condition or cash flow. Legal costs, including those legal costs expected to be incurred in connection with a loss contingency, are expensed as incurred.

NOTE 9—PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

The components of net periodic benefit costs for all significant plans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Defined Benefit Pension Plans

    

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

4,707

 

$

4,211

    

$

9,291

 

$

8,282

 

Interest cost

 

 

1,111

 

 

1,408

 

 

2,192

 

 

2,768

 

Expected return on plan assets

 

 

(423)

 

 

(499)

 

 

(835)

 

 

(982)

 

Amortization of prior service credit

 

 

(482)

 

 

(493)

 

 

(953)

 

 

(971)

 

Amortization of net loss

 

 

1,395

 

 

1,073

 

 

2,753

 

 

2,111

 

Net settlement and curtailment loss(1)

 

 

 —

 

 

 —

 

 

129

 

 

 —

 

Net periodic benefit cost

 

$

6,308

 

$

5,700

 

$

12,577

 

$

11,208

 


(1)

Represents a settlement loss of approximately $0.5 million triggered by benefit payments exceeding the sum of service and interest cost for one of the Company’s pension plans in Switzerland, partially offset by a curtailment gain of approximately $0.4 million related to a reduction in the number of participants in the Company’s pension plan in Japan.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Other Postretirement Plans

    

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

54

 

$

65

    

$

108

 

$

128

 

Interest cost

 

 

63

 

 

129

 

 

126

 

 

250

 

Amortization of prior service cost

 

 

25

 

 

26

 

 

51

 

 

52

 

Amortization of net gain

 

 

(10)

 

 

(43)

 

 

(21)

 

 

(86)

 

Net periodic benefit cost

 

$

132

 

$

177

 

$

264

 

$

344

 

 

As of June 30, 2017 and December 31, 2016, the Company’s benefit obligations included primarily in “Other noncurrent obligations” in the condensed consolidated balance sheets were $211.7 million and $195.8 million, respectively. The net periodic benefit costs are recognized in the condensed consolidated statement of operations as “Cost of sales” and “Selling, general and administrative expenses.”

The Company made cash contributions and benefit payments to unfunded plans of approximately $5.0 million and $10.2 million during the three and six months ended June 30, 2017, respectively. The Company expects to make additional cash contributions, including benefit payments to unfunded plans, of approximately $5.5 million to its defined benefit plans for the remainder of 2017.

17


 

 

NOTE 10—STOCK-BASED COMPENSATION

Refer to the Annual Report for definitions of capitalized terms not included herein and further background on the Company’s stock-based compensation programs included in the tables below.  

The following table summarizes the Company’s stock-based compensation expense for the three and six months ended June 30, 2017 and 2016 as well as unrecognized compensation cost as of June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 2017

 

 

 

June 30, 

 

June 30, 

 

Unrecognized

 

Weighted

 

 

 

2017

 

2016

 

2017

 

2016

 

Compensation Cost

 

Average Years

 

RSUs

 

$

2,135

 

$

1,355

 

$

4,008

 

$

2,349

 

$

12,854

 

2.0

 

Options

 

 

502

 

 

763

 

 

3,207

 

 

4,135

 

 

2,094

 

1.5

 

PSUs

 

 

321

 

 

 —

 

 

472

 

 

 —

 

 

3,386

 

2.6

 

Restricted Stock Awards issued by Former Parent

 

 

 —

 

 

1,104

 

 

 —

 

 

2,332

 

 

 —

 

 —

 

Total Stock-based Compensation Expense

 

$

2,958

 

$

3,222

 

$

7,687

 

$

8,816

 

 

 

 

 

 

The following table summarizes awards granted and the respective weighted-average grant date fair value for the six months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 2017

 

 

 

Awards Granted

 

Weighted Average Grant Date Fair Value per Award

 

RSUs

 

 

110,117

 

$

70.87

 

Options

 

 

191,565

 

 

20.61

 

PSUs

 

 

50,937

 

 

75.74

 

Option Awards

The following are the weighted-average assumptions used within the Black-Scholes pricing model for the Company’s option awards granted during the six months ended June 30, 2017:

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2017

 

Expected term (in years)

 

5.50

 

Expected volatility

 

35.00

%

Risk-free interest rate

 

2.19

%

Dividend yield

 

2.00

%  

Since the Company’s equity interests were privately held prior to its initial public offering (“IPO”) in June 2014, there is limited publicly available trading history of the Company’s ordinary shares. Until such time that the Company can determine expected volatility based solely on the publicly traded history of its ordinary shares, expected volatility used in the Black-Scholes model for option awards granted is based on a combination of the Company’s historical volatility and similar companies’ stock that are publicly traded. The expected term of option awards represents the period of time that option awards granted are expected to be outstanding. For the option awards granted during the six months ended June 30, 2017, the simplified method was used to calculate the expected term, given the Company’s limited historical exercise data. The risk-free interest rate for the periods within the expected term of option awards is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is estimated based on historical and expected dividend activity.

 

 

18


 

Performance Share Units (PSUs)

The Company granted PSUs for the first time during the six months ended June 30, 2017. The PSUs, which are granted to executives, cliff vest on the third anniversary of the date of grant, generally subject to the executive remaining continuously employed by the Company through the vesting date and achieving certain performance conditions. The number of the PSUs that vest upon completion of the service period can range from 0 to 200 percent of the original grant, subject to certain limitations, contingent upon the Company’s total shareholder return (“TSR”) during the performance period relative to a pre-defined set of industry peer companies. Upon a termination of employment due to the executive’s death or retirement, or termination in connection with a change in control or other factors prior to the vesting date, the PSUs will vest in full or in part, depending on the type of termination and the achievement of the performance conditions. Dividend equivalents will accumulate on PSUs during the vesting period, will be paid in cash upon vesting, and do not accrue interest. When PSUs vest, shares will be issued from the existing pool of treasury shares. The fair value for PSU awards is computed using a Monte Carlo valuation model.

 

NOTE 11—DIVESTITURES

During the second quarter of 2016, the Company signed a definitive agreement to sell Trinseo do Brasil Comercio de Produtos Quimicos Ltda. (“Trinseo Brazil”), its primary operating entity in Brazil, including both a latex binders and automotive business. The sale closed on October 1, 2016.

As a result of this agreement, during the three and six months ended June 30, 2016, the Company recorded impairment charges for the estimated loss on sale of approximately $12.9 million within “Other expense (income), net” in the condensed consolidated statement of operations. These charges, which are subject to certain post-closing settlement activities, were allocated as $8.6 million, $4.0 million, and $0.3 million to the Performance Plastics segment, Latex Binders segment, and Corporate, respectively.  During the year ended December 31, 2016, the Company received $1.8 million in proceeds from the sale of these businesses, with an additional $1.5 million received during the six months ended June 30, 2017.

NOTE 12—SEGMENTS

Effective October 1, 2016, the Company realigned its reporting segments to reflect the new model under which the business is now managed and results are reviewed by the chief executive officer, who is the Company’s chief operating decision maker. This change in segments was made to provide increased clarity and understanding around the indicators of profitability and cash flow of the Company. The previous Basic Plastics & Feedstocks segment was split into three new segments: Basic Plastics, which includes polystyrene, copolymers, and polycarbonate; Feedstocks, which represents the Company’s styrene monomer business; and Americas Styrenics, which reflects the equity earnings from its 50%-owned styrenics joint venture. In addition, certain highly differentiated acrylonitrile-butadiene-styrene, or ABS, supplied into Performance Plastics markets, which was previously included in the results of Basic Plastics & Feedstocks, is now included in Performance Plastics. Finally, the Latex segment was renamed to Latex Binders. In conjunction with the segment realignment, the Company also changed its primary measure of segment operating performance from EBITDA to Adjusted EBITDA. Refer to the discussion below for further information about Adjusted EBITDA.

The information in the tables below has been retroactively adjusted to reflect the changes in reporting segments and segment operating performance.

The Latex Binders segment produces styrene-butadiene latex, or SB latex, and other latex polymers and binders, primarily for coated paper and packaging board, carpet and artificial turf backings, as well as a number of performance latex binders applications, such as adhesive, building and construction and the technical textile paper market. The Synthetic Rubber segment produces synthetic rubber products used predominantly in high-performance tires, impact modifiers and technical rubber products, such as conveyer belts, hoses, seals and gaskets. The Performance Plastics segment produces highly engineered compounds and blends and some specialized ABS grades for automotive end markets, as well as consumer electronics, medical, electrical and lighting, collectively consumer essential markets, or CEM. The Basic Plastics segment produces styrenic polymers, including polystyrene, basic ABS, and styrene-acrylonitrile, or SAN, products, as well as polycarbonate, or PC, all of which are used as inputs in a variety of end use markets. The Basic Plastics segment also included the results of our previously 50%-owned joint venture, Sumika Styron Polycarbonate, until the Company sold its share in the entity in January 2017 (refer to Note 3 for further information). The Feedstocks segment includes the Company’s production and procurement of styrene monomer outside of North America, which is used as a key raw material in many of the Company’s products, including polystyrene, SB latex, ABS resins, solution styrene-butadiene rubber, or SSBR, etc. Lastly, the Americas Styrenics segment consists solely of the

19


 

operations of our 50%-owned joint venture, Americas Styrenics, a producer of both styrene monomer and polystyrene in North America.

Asset, capital expenditure, and intersegment sales information is not reviewed or included with the Company’s reporting to the chief operating decision maker. Therefore, the Company has not disclosed this information for each reportable segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Materials

 

Basic Plastics & Feedstocks

 

 

 

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

Basic

 

 

 

Americas

 

Corporate

 

 

 

 

Three Months Ended

 

Binders

 

Rubber

 

Plastics

 

Plastics

 

Feedstocks

 

Styrenics

 

Unallocated

 

Total

 

June 30, 2017

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sales to external customers

 

$

291,530

 

$

174,009

 

$

190,173

 

$

382,460

 

$

107,027

 

$

 —

 

$

 —

 

$

1,145,199

 

Equity in earnings of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

29,927

 

 

 —

 

 

29,927

 

Adjusted EBITDA(1)

 

 

36,070

 

 

27,689

 

 

23,489

 

 

31,768

 

 

(1,151)

 

 

29,927

 

 

 

 

 

 

 

Investment in unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

153,077

 

 

 —

 

 

153,077

 

Depreciation and amortization

 

 

5,761

 

 

8,688

 

 

2,466

 

 

4,130

 

 

3,092

 

 

 —

 

 

2,187

 

 

26,324

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

232,471

 

$

111,391

 

$

183,891

 

$

363,325

 

$

78,616

 

$

 —

 

$

 —

 

$

969,694

 

Equity in earnings of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

926

 

 

 —

 

 

37,676

 

 

 —

 

 

38,602

 

Adjusted EBITDA(1)

 

 

21,461

 

 

30,216

 

 

38,472

 

 

43,150

 

 

32,548

 

 

37,676

 

 

 

 

 

 

 

Investment in unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

35,842

 

 

 —

 

 

154,472

 

 

 —

 

 

190,314

 

Depreciation and amortization

 

 

5,881

 

 

8,892

 

 

1,589

 

 

3,941

 

 

2,760

 

 

 —

 

 

1,790

 

 

24,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Materials

 

Basic Plastics & Feedstocks

 

 

 

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

Basic

 

 

 

Americas

 

Corporate

 

 

 

 

Six Months Ended

 

Binders

 

Rubber

 

Plastics

 

Plastics

 

Feedstocks

 

Styrenics

 

Unallocated

 

Total

 

June 30, 2017

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Sales to external customers

 

$

580,461

 

$

337,371

 

$

374,724

 

$

763,210

 

$

193,923

 

$

 —

 

$

 —

 

$

2,249,689

 

Equity in earnings (losses) of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

810

 

 

 —

 

 

48,412

 

 

 —

 

 

49,222

 

Adjusted EBITDA(1)

 

 

72,885

 

 

73,959

 

 

50,364

 

 

70,629

 

 

40,745

 

 

48,412

 

 

 

 

 

 

 

Investment in unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

153,077

 

 

 —

 

 

153,077

 

Depreciation and amortization

 

 

11,424

 

 

17,067

 

 

4,844

 

 

7,820

 

 

5,568

 

 

 —

 

 

4,321

 

 

51,044

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

441,952

 

$

213,588

 

$

352,520

 

$

705,954

 

$

149,764

 

$

 —

 

$

 —

 

$

1,863,778

 

Equity in earnings (losses) of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

3,019

 

 

 —

 

 

70,609

 

 

 —

 

 

73,628

 

Adjusted EBITDA(1)

 

 

40,228

 

 

53,295

 

 

73,558

 

 

80,917

 

 

53,358

 

 

70,609

 

 

 

 

 

 

 

Investment in unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

35,842

 

 

 —

 

 

154,472

 

 

 —

 

 

190,314

 

Depreciation and amortization

 

 

12,161

 

 

16,935

 

 

3,133

 

 

7,525

 

 

5,626

 

 

 —

 

 

2,593

 

 

47,973

 


(1)The Company’s primary measure of segment operating performance is Adjusted EBITDA, which is defined as income from continuing operations before interest expense, net; provision for income taxes; depreciation and amortization expense; loss on extinguishment of long-term debt; asset impairment charges; gains or losses on the dispositions of businesses and assets; restructuring; acquisition related costs and other items. Adjusted EBITDA is a key metric that is used by management to evaluate business performance in comparison to budgets, forecasts, and prior year financial results, providing a measure that management believes reflects core operating performance by removing the impact of transactions and events that would not be considered a part of core operations. Adjusted EBITDA is useful for analytical purposes; however, it should not be considered an alternative to the Company’s reported GAAP results, as there are limitations in using such financial measures. Other companies in the industry may define Adjusted EBITDA differently than the Company, and as a result, it may be difficult to use Adjusted EBITDA, or similarly named financial measures, that other companies may use to compare the performance of those companies to the Company’s segment performance.

 

20


 

The reconciliation of income before income taxes to Segment Adjusted EBITDA is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Income before income taxes

 

$

78,959

 

$

124,404

 

$

225,553

 

$

223,051

 

Interest expense, net

 

 

18,719

 

 

18,814

 

 

36,919

 

 

37,710

 

Depreciation and amortization

 

 

26,324

 

 

24,853

 

 

51,044

 

 

47,973

 

Corporate Unallocated(2)

 

 

21,559

 

 

21,153

 

 

49,024

 

 

46,370

 

Adjusted EBITDA Addbacks(3)

 

 

2,231

 

 

14,299

 

 

(5,546)

 

 

16,861

 

Segment Adjusted EBITDA

 

$

147,792

 

$

203,523

 

$

356,994

 

$

371,965

 

(2)Corporate unallocated includes corporate overhead costs and certain other income and expenses.

(3)Adjusted EBITDA addbacks for the three and six months ended June 30, 2017 and 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(in millions)

 

2017

    

2016

    

2017

    

2016

    

Net (gain) loss on disposition of businesses and assets (Notes 3 and 11)

 

$

 —

 

$

12.9

 

$

(9.9)

 

$

12.9

 

Restructuring and other charges (Note 13)

 

 

1.1

 

 

1.1

 

 

3.3

 

 

1.8

 

Acquisition transaction and integration costs(a)

 

 

1.1

 

 

 —

 

 

1.1

 

 

 —

 

Other items(b)

 

 

 —

 

 

0.3

 

 

 —

 

 

2.2

 

Total Adjusted EBITDA Addbacks

 

$

2.2

 

$

14.3

 

$

(5.5)

 

$

16.9

 

(a)

Acquisition transaction and integration costs for the three and six months ended June 30, 2017 relate to advisory and professional fees incurred in conjunction with the Company’s acquisition of API Applicazioni Plastiche Industriali S.p.A (“API Plastics”), which closed on July 10, 2017. Refer to Note 16 for further information.

(b)

Other items for the three and six months ended June 30, 2016 relate to fees incurred in conjunction with the Company’s secondary offerings completed during these periods.

 

 

 

21


 

NOTE 13—RESTRUCTURING

Refer to the Annual Report for details regarding the Company’s previously announced restructuring activities included in the tables below. New restructuring activities are discussed in greater detail below. Restructuring charges are included within “Selling, general and administrative expenses” in the condensed consolidated statement of operations.

The following table provides detail of the Company’s restructuring charges for the three and six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

Cumulative

 

 

 

 

 

June 30, 

 

June 30, 

 

Life-to-date

 

 

 

 

 

2017

    

2016

 

2017

    

2016

 

Charges

    

Segment

 

Terneuzen Compounding Restructuring(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment/accelerated depreciation

 

$

574

 

$

 —

 

$

1,131

 

$

 —

 

$

1,131

 

 

 

Employee termination benefits

 

 

156

 

 

 —

 

 

156

 

 

 —

 

 

156

 

 

 

Contract terminations

 

 

 —

 

 

 —

 

 

590

 

 

 —

 

 

590

 

 

 

Decommissioning and other

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

626

 

 

 

Terneuzen Subtotal

 

$

730

 

$

 —

 

$

1,877

 

$

 —

 

$

2,503

 

Performance Plastics

 

Livorno Plant Restructuring(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset impairment/accelerated depreciation

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

14,345

 

 

 

Employee termination benefits

 

 

206

 

 

 —

 

 

358

 

 

 —

 

 

4,990

 

 

 

Contract terminations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

269

 

 

 

Decommissioning and other

 

 

479

 

 

 —

 

 

1,063

 

 

 —

 

 

1,740

 

 

 

Livorno Subtotal

 

$

685

 

$

 —

 

$

1,421

 

$

 —

 

$

21,344

 

Latex Binders

 

Other Restructurings

 

 

349

 

 

1,101

 

 

1,164

 

 

2,233

 

 

 

 

Various

 

Total Restructuring Charges

 

$

1,764

 

$

1,101

 

$

4,462

 

$

2,233

 

 

 

 

 

 


(1)

In March 2017, the Company announced plans to upgrade its production capability for compounded resins with the construction of a new state-of-the art compounding facility to replace its existing compounding facility in Terneuzen, The Netherlands. The Company expects to incur incremental accelerated depreciation charges of $2.4 million and estimated decommissioning and other charges of approximately $1.3 million throughout 2017 and 2018, the majority of which are expected to be paid in 2018.

(2)

In August 2016, the Company announced its plan to cease manufacturing activities at its latex binders manufacturing facility in Livorno, Italy. The Company expects to incur incremental employee termination benefit charges of $0.4 million throughout 2017, which are expected to be paid in early 2018. The Company also expects to incur additional decommissioning costs associated with this plant shutdown in 2017, the cost of which will be expensed as incurred.

The following table provides a rollforward of the liability balances associated with the Company’s restructuring activities as of June 30, 2017. Employee termination benefit and contract termination charges are recorded within “Accrued expenses and other current liabilities” in the condensed consolidated balance sheet.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance at

    

 

 

    

 

 

    

Balance at

 

 

    

December 31, 2016

    

Expenses 

    

Deductions(1)

    

June 30, 2017

  

Employee termination benefits

 

$

5,021

 

$

2,102

 

$

(5,563)

 

$

1,560

 

Contract terminations

 

 

269

 

 

590

 

 

(127)

 

 

732

 

Decommissioning and other

 

 

 —

 

 

1,360

 

 

(1,360)

 

 

 —

 

Total

 

$

5,290

 

$

4,052

 

$

(7,050)

 

$

2,292

 


(1)

Includes primarily payments made against the existing accrual, as well as immaterial impacts of foreign currency remeasurement.

 

 

22


 

NOTE 14—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of AOCI, net of income taxes, consisted of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cumulative

    

Pension & Other

    

 

Foreign Exchange

 

 

 

 

 

 

Translation

 

Postretirement Benefit

 

 

Cash Flow

 

 

 

 

Three Months Ended  June 30, 2017 and 2016

    

Adjustments

    

Plans, Net

    

 

Hedges, Net

    

Total

 

Balance as of March 31, 2017

 

$

(114,721)

 

$

(62,128)

 

$

7,462

 

$

(169,387)

 

Other comprehensive income (loss)

 

 

18,974

 

 

 —

 

 

(11,957)

 

 

7,017

 

Amounts reclassified from AOCI to net income (1)

 

 

 —

 

 

796

 

 

(1,009)

 

 

(213)

 

Balance as of June 30, 2017

 

$

(95,747)

 

$

(61,332)

 

$

(5,504)

 

$

(162,583)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2016

 

$

(95,697)

 

$

(46,426)

 

$

(1,856)

 

$

(143,979)

 

Other comprehensive income (loss)

 

 

(11,005)

 

 

 —

 

 

5,294

 

 

(5,711)

 

Amounts reclassified from AOCI to net income (1)

 

 

 —

 

 

539

 

 

735

 

 

1,274

 

Balance as of June 30, 2016

 

$

(106,702)

 

$

(45,887)

 

$

4,173

 

$

(148,416)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cumulative

    

Pension & Other

    

Foreign Exchange

 

 

 

 

 

 

Translation

 

Postretirement Benefit

 

Cash Flow

 

 

 

 

Six Months Ended  June 30, 2017 and 2016

    

Adjustments

    

Plans, Net

    

Hedges, Net

    

Total

 

Balance as of December 31, 2016

 

$

(118,922)

 

$

(63,504)

 

$

12,272

 

$

(170,154)

 

Other comprehensive income (loss)

 

 

23,175

 

 

 —

 

 

(14,316)

 

 

8,859

 

Amounts reclassified from AOCI to net income (1)

 

 

 —

 

 

2,172

 

 

(3,460)

 

 

(1,288)

 

Balance as of June 30, 2017

 

$

(95,747)

 

$

(61,332)

 

$

(5,504)

 

$

(162,583)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2015

 

$

(109,120)

 

$

(46,166)

 

$

5,569

 

$

(149,717)

 

Other comprehensive income (loss)

 

 

2,418

 

 

(800)

 

 

(1,026)

 

 

592

 

Amounts reclassified from AOCI to net income (1)

 

 

 —

 

 

1,079

 

 

(370)

 

 

709

 

Balance as of June 30, 2016

 

$

(106,702)

 

$

(45,887)

 

$

4,173

 

$

(148,416)

 


(1)

The following is a summary of amounts reclassified from AOCI to net income for the three and six months ended June 30, 2017 and 2016, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified from AOCI

 

Amount Reclassified from AOCI

 

 

 

AOCI Components

 

Three Months Ended  June 30, 

 

Six Months Ended  June 30, 

 

Statement of Operations

 

 

   

2017

   

2016

   

2017

   

2016

   

Classification

 

Cash flow hedging items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

 

$

(1,009)

 

$

735

 

$

(3,460)

 

$

(370)

 

Cost of sales

 

Total before tax

 

 

(1,009)

 

 

735

 

 

(3,460)

 

 

(370)

 

 

 

Tax effect

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Provision for income taxes

 

Total, net of tax

 

$

(1,009)

 

$

735

 

$

(3,460)

 

$

(370)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of pension and other postretirement benefit plan items

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service credit

 

$

(456)

 

$

(467)

 

$

(902)

 

$

(920)

 

(a)

 

Net actuarial loss

 

 

1,613

 

 

1,265

 

 

3,189

 

 

2,519

 

(a)

 

Net settlement and curtailment loss

 

 

 —

 

 

 —

 

 

648

 

 

 —

 

(a)

 

Total before tax

 

 

1,157

 

 

798

 

 

2,935

 

 

1,599

 

 

 

Tax effect

 

 

(361)

 

 

(259)

 

 

(763)

 

 

(520)

 

Provision for income taxes

 

Total, net of tax

 

$

796

 

$

539

 

$

2,172

 

$

1,079

 

 

 


(a)

These AOCI components are included in the computation of net periodic benefit costs (see Note 9).

23


 

 

NOTE 15—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 six months ended June 30, 2017 and 2016, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(in thousands, except per share data)

    

2017

    

2016

    

2017

    

2016

    

Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

60,159

 

$

95,804

 

$

177,453

 

$

172,551

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average ordinary shares outstanding

 

 

43,902

 

 

46,952

 

 

43,979

 

 

47,803

 

Dilutive effect of RSUs, option awards, and PSUs

 

 

1,093

 

 

905

 

 

1,186

 

 

751

 

Diluted weighted-average ordinary shares outstanding

 

 

44,995

 

 

47,857

 

 

45,165

 

 

48,554

 

Income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per share—basic

 

$

1.37

 

$

2.04

 

$

4.03

 

$

3.61

 

Income per share—diluted

 

$

1.34

 

$

2.00

 

$

3.93

 

$

3.55

 


* Refer to Note 10 for discussion of RSUs, option awards, and PSUs granted to certain Company directors and employees.  The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share were 0.3 million and 0.2 million for the three and six months ended June 30, 2017, respectively, and zero million and zero million for the three and six months ended June 30, 2016, respectively.

 

NOTE 16—SUBSEQUENT EVENTS

On July 10, 2017, the Company completed the acquisition of API Applicazioni Plastiche Industriali S.p.A, or API Plastics, for a purchase price of $83.8 million, net of cash acquired, subject to certain customary post-closing adjustments. API Plastics, based in Mussolente, Italy, is a manufacturer of soft-touch polymers and bioplastics, such as thermoplastic elastomers (“TPEs”). TPEs are often molded over rigid plastics such as ABS and PC/ABS, which presents opportunities for complementary technology product offerings within our Performance Plastics segment. The acquisition was funded through existing cash on hand.

 

 

 

 

 

 

24


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

2017 Year-to-Date Highlights

In the second quarter of 2017, Trinseo recognized net income of $60.2 million and Adjusted EBITDA of $126.2 million. On a year-to-date basis, we recognized net income of $177.5 million and Adjusted EBITDA of $308.0 million. Refer to “Non-GAAP Performance Measures” below for further discussion of our use of non-GAAP measures in evaluating our performance and a reconciliation of these measures. Other highlights for the year are described below.

Acquisition of API Plastics

On July 10, 2017, the Company completed the acquisition of API Applicazioni Plastiche Industriali S.p.A, or API Plastics,  for a purchase price of $83.8 million, net of cash acquired,  subject to certain customary post-closing adjustments. API Plastics, based in Mussolente, Italy, is a  manufacturer of soft-touch polymers and bioplastics, such as thermoplastic elastomers, or TPEs. TPEs are often molded over rigid plastics such as ABS and PC/ABS, which presents opportunities for complementary technology product offerings within our Performance Plastics segment.

Sale of Sumika Styron Polycarbonate

On January 31, 2017, the Company completed the sale of its 50% share in Sumika Styron Polycarbonate to Sumitomo Chemical Company Limited for total sales proceeds of approximately $42.1 million. As a result, the Company recorded a gain on sale of $9.3 million during the six months ended June 30, 2017. In addition, the parties have entered into a long-term agreement to continue sourcing polycarbonate resin from Sumika Styron Polycarbonate to the Company’s Performance Plastics segment.

Share Repurchases and Dividends

In June 2017, the Company’s board of directors authorized an increase to our quarterly dividend, from $0.30 per share to $0.36 per share, a 20% increase. In addition, the board of directors authorized the repurchase of up to two million shares of the Company’s ordinary shares.

During the six months ended June 30, 2017, under existing authority from its board of directors, the Company purchased 894,604 ordinary shares from its shareholders through a combination of open market transactions for an aggregate purchase price of $56.4 million. Additionally, during the six months ended June 30, 2017, the Company’s board of directors declared quarterly dividends for an aggregate value of $0.66 per ordinary share, or $29.7 million, $16.5 million of which remained accrued as of June 30, 2017.

25


 

Results of Operations

Results of Operations for the Three and Six Months Ended June 30, 2017 and 2016

The table below sets forth our historical results of operations, and these results as a percentage of net sales for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended 

 

 

 

 

June 30, 

 

 

June 30, 

 

 

(in millions)

    

2017

    

%

 

 

2016

    

%

 

 

2017

    

%

 

 

2016

    

%

 

 

Net sales

 

$

1,145.2

    

100

%

 

$

969.7

    

100

%

 

$

2,249.7

    

100

%

 

$

1,863.8

    

100

%

 

Cost of sales

 

 

1,020.0

 

89

%

 

 

800.0

 

83

%

 

 

1,926.7

 

86

%

 

 

1,554.4

 

83

%

 

Gross profit

 

 

125.2

 

11

%

 

 

169.7

 

18

%

 

 

323.0

 

14

%

 

 

309.4

 

17

%

 

Selling, general and administrative expenses

 

 

55.4

 

 5

%

 

 

52.2

 

 5

%

 

 

115.8

 

 5

%

 

 

106.7

 

 6

%

 

Equity in earnings of unconsolidated affiliates

 

 

29.9

 

 3

%

 

 

38.6

 

 4

%

 

 

49.2

 

 2

%

 

 

73.6

 

 4

%

 

Operating income

 

 

99.7

 

 9

%

 

 

156.1

 

16

%

 

 

256.4

 

12

%

 

 

276.3

 

15

%

 

Interest expense, net

 

 

18.7

 

 2

%

 

 

18.8

 

 2

%

 

 

36.9

 

 2

%

 

 

37.7

 

 2

%

 

Other expense (income), net

 

 

2.0

 

 0

%

 

 

12.9

 

 1

%

 

 

(6.1)

 

(0)

%

 

 

15.5

 

 1

%

 

Income before income taxes

 

 

79.0

 

 7

%

 

 

124.4

 

13

%

 

 

225.6

 

10

%

 

 

223.1

 

12

%

 

Provision for income taxes

 

 

18.8

 

 2

%

 

 

28.6

 

 3

%

 

 

48.1

 

 2

%

 

 

50.5

 

 3

%

 

Net income

 

$

60.2

 

 5

%

 

$

95.8

 

10

%

 

$

177.5

 

 8

%

 

$

172.6

 

 9

%

 

Three Months Ended - June 30, 2017 vs. June 30, 2016

Net Sales

Of the 18% increase, 21% was due to higher selling prices primarily from the pass through of higher raw material costs, including higher styrene and butadiene costs to customers across our segments. Additionally, 1% of the increase was due to slightly higher sales volume, as increases in Synthetic Rubber, Performance Plastics, and Feedstocks sales volume were mostly offset by decreases in Latex Binders and Basic Plastics sales volume. Offsetting these increases in net sales was a 2% decrease related to the prior year divestiture of our business in Brazil, as well as a 2% decrease due to an unfavorable currency impact across our segments, as the euro weakened in comparison to the U.S. dollar.

Cost of Sales

Of the 28% increase, 33% was attributable to higher prices for raw materials, primarily butadiene and styrene monomer. This increase was partially offset by a 1% decrease due to sales volume mix, as well as a 2% decrease due to the prior year divestiture of our business in Brazil. In addition, a decrease of 3% was due to a favorable currency impact across our segments, as the euro weakened in comparison to the U.S. dollar.

Gross Profit

This decrease was primarily due to unfavorable raw material timing impacts, net of a favorable price lag impact, which contributed significantly to lower margins within Feedstocks, Basic Plastics, and Synthetic Rubber.  Partially offsetting these timing impacts were higher sales volume in Synthetic Rubber and Performance Plastics as well as higher margins within Latex Binders. Other contributing factors to the overall decrease were margin compression in Performance Plastics and lower sales volume in Basic Plastics and Latex Binders.  

Selling, General and Administrative Expenses

The majority of the increase is due to costs from additional resources supporting growth initiatives as well as transaction and integration costs incurred in connection with the Company’s acquisition of API Plastics, which closed in July 2017. Additionally, restructuring charges increased $0.7 million, primarily related to the Company’s decision in August 2016 to cease manufacturing activities at our latex facility in Livorno, Italy, as well as charges related to the upgrade and replacement of the Company’s compounding facility in Terneuzen, The Netherlands, which was announced in March 2017. Refer to Notes 16 and 13, respectively, in the condensed consolidated financial statements for further information.

26


 

Equity in Earnings of Unconsolidated Affiliates

Equity earnings decreased in 2017, as equity earnings from Americas Styrenics decreased from $37.7 million in 2016 to $29.9 million in 2017, primarily due to lower margins on second quarter sales of styrene purchased during the first quarter maintenance-related outage at the St. James, LA, facility in a decreasing price environment. Additionally, equity earnings from Sumika Styron Polycarbonate decreased from $0.9 million in 2016 to zero in 2017, as the Company completed the sale of its 50% share in the entity to Sumitomo Chemical Company Limited in January 2017 and therefore did not have an ownership interest in the joint venture during the three months ended June 30, 2017. Refer to Note 3 in the condensed consolidated financial statements for further information.

Interest Expense, Net

The slight decrease in interest expense was primarily attributable to lower deferred financing fee amortization recorded into interest expense from our Accounts Receivable Securitization Facility.

Other Expense (Income), net

Other expense, net for the three months ended June 30, 2017 was $2.0 million, which consisted primarily of net foreign exchange transaction losses of approximately $1.5 million and other expenses of $0.5 million. Included in these net losses of $1.5 million were foreign exchange transactions gains of $7.3 million, primarily due to 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 losses of $8.8 million from our foreign exchange forward contracts.

Other expense, net for the three months ended June 30, 2016 was $12.9 million, which includes an impairment charge for the estimated loss on sale of our latex and automotive businesses in Brazil of approximately $12.9 million, as well as other expenses of $0.2 million. Refer to Note 11 in the condensed consolidated financial statements for further information. These losses were slightly offset by net foreign exchange transaction gains of approximately $0.2 million. Included in this net gain of $0.2 million were foreign exchange transactions gains of $2.3 million, primarily due to 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 losses of $2.1 million from our foreign exchange forward contracts.

Provision for Income Taxes

Provision for income taxes for the three months ended June 30, 2017 totaled $18.8 million resulting in an effective tax rate of 23.8%. Provision for income taxes for the three months ended June 30, 2016 totaled $28.6 million resulting in an effective tax rate of 23.0%.

The decrease in provision for income taxes was primarily due to the $45.4 million decrease in income before income taxes.

Six Months Ended - June 30, 2017 vs. June 30, 2016

Net Sales

Of the 21% increase, 24% was due to higher selling prices primarily from the pass through of higher raw material costs, including higher styrene and butadiene costs to customers across our segments. Additionally, 1% of the increase was due to slightly higher sales volume, as increases in Synthetic Rubber, Performance Plastics, and Feedstocks sales volume were mostly offset by a decrease in Basic Plastics sales volume. Offsetting these increases in net sales was a 2% decrease related to the prior year divestiture of our business in Brazil, as well as a 2% decrease due to an unfavorable currency impact across our segments, as the euro weakened in comparison to the U.S. dollar.

Cost of Sales

Of the 24% increase, 28% was attributable to higher prices for raw materials, primarily butadiene and styrene monomer. This increase was partially offset by a 2% decrease due to the prior year divestiture of our business in Brazil

27


 

as well as a 2% decrease due to a favorable currency impact across our segments, as the euro weakened in comparison to the U.S. dollar.

Gross Profit

The increase was primarily attributable to higher year-to-date margins, especially within the Latex Binders and Synthetic Rubber segments. Higher sales volume in Synthetic Rubber and Performance Plastics was partially offset by lower sales volume in Basic Plastics, as well as margin compression in Performance Plastics and lower styrene margins in Feedstocks, in addition to the styrene outage in Americas Styrenics. Also offsetting this net increase was an unfavorable currency impact as the euro weakened in comparison to the U.S. dollar.  

Selling, General and Administrative Expenses

Increased restructuring charges contributed to $2.2 million of this increase, primarily related to the Company’s decision to cease manufacturing activities at our latex facility in Livorno, Italy, as well as charges related to the upgrade and replacement of the Company’s compounding facility in Terneuzen, The Netherlands. Additionally, the increase includes costs from additional resources supporting growth initiatives as well as transaction and integration costs incurred in connection with Company’s acquisition of API Plastics, which closed in July 2017. Refer to Notes 13 and 16, respectively, in the condensed consolidated financial statements for further information.

Equity in Earnings of Unconsolidated Affiliates

Equity earnings decreased in 2017, as equity earnings from Americas Styrenics decreased from $70.6 million in 2016 to $48.4 million in 2017, primarily due to the planned and extended first quarter styrene outage at its St. James, LA, facility, including lower margins on second quarter sales of styrene purchased during the outage. Additionally, equity earnings from Sumika Styron Polycarbonate decreased from $3.0 million in 2016 to $0.8 million in 2017, as the Company completed the sale of its 50% share in the entity to Sumitomo Chemical Company Limited in January 2017 and therefore did not have an ownership interest in the joint venture for the majority of the six months ended June 30, 2017. Refer to Note 3 in the condensed consolidated financial statements for further information.

Interest Expense, Net

The decrease in interest expense was primarily attributable to lower deferred financing fee amortization recorded into interest expense from our Accounts Receivable Securitization Facility and lower interest expense incurred on the Company’s Euro Notes as a result of fluctuations in the euro foreign exchange rate.

Other Expense (Income), net

Other income, net for the six months ended June 30, 2017 was $6.1 million, which primarily includes a $9.3 million gain related to the sale of the Company’s 50% share in Sumika Styron Polycarbonate in January 2017 (refer to Note 3 in the condensed consolidated financial statements for further information). Additionally, net foreign exchange transaction losses for the period were $2.6 million, which included $7.9 million of foreign exchange transaction gains primarily due to 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 $10.5 million of losses from our foreign exchange forward contracts.

Other expense, net for the six months ended June 30, 2016 was $15.5 million, which includes an impairment charge for the estimated loss on sale of our latex and automotive businesses in Brazil of approximately $12.9 million, as well as other expenses of $1.0 million. Refer to Note 11 in the condensed consolidated financial statements for further information. Adding to these losses were net foreign exchange transaction losses of $1.6 million. Included in these net losses of $1.6 million were foreign exchange transactions losses of $2.6 million, primarily due to by 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 gains of $1.0 million from our foreign exchange forward contracts.

28


 

Provision for Income Taxes

Provision for income taxes for the six months ended June 30, 2017 totaled $48.1 million resulting in an effective tax rate of 21.3%. Provision for income taxes for the six months ended June 30, 2016 totaled $50.5 million resulting in an effective tax rate of 22.6%.

The decrease in provision for income taxes was primarily due to a lower amount of income before income taxes subject to tax.  Included in the $225.6 million income before income taxes for the six months ended June 30, 2017 is the $9.3 million gain on sale of our 50% share in Sumika Styron Polycarbonate, which was exempt from tax.  Conversely, included in the $223.1 million income before income taxes for the six months ended June 30, 2016 was an in impairment charge of $12.9 million for the estimated loss on sale of Trinseo Brazil, which did not provide a tax benefit to the Company.

2017 Outlook

We expect continued strong fundamental business performance over the remainder of 2017. However, due to recent sharp volatility in the prices of our key raw materials, we expect our results for the second half of 2017 to be impacted by unfavorable raw material timing, net of favorable price lag. We continue to make strong progress on the growth initiatives within our Performance Materials segments, including our recently completed acquisition of API Plastics, to go along with our other investments such as the SSBR expansion and pilot plant, new ABS capacity in China, and new product and application growth initiatives. Additionally, we expect to continue our strategy of balanced cash deployment and maximizing shareholder value, noting the recent approval from our board of directors of a 20% dividend increase as well as an increased repurchase authorization of 2 million shares.

29


 

Selected Segment Information

Effective October 1, 2016, the Company realigned its reporting segments to reflect the new model under which the business is now managed and results are reviewed by the chief executive officer, who is the Company’s chief operating decision maker. The Company’s reportable segments are now as follows: Latex Binders, Synthetic Rubber, Performance Plastics, Basic Plastics, Feedstocks, and Americas Styrenics. In conjunction with this segment realignment, the Company changed its primary measure of segment operating performance to Adjusted EBITDA. Refer to the Annual Report for a description of our segments, including a detailed overview, products and end uses, and competition and customers.

The following sections describe net sales, Adjusted EBITDA, and Adjusted EBITDA margin by segment for the three and six months ended June 30, 2017 and 2016, which have been recast to reflect the above changes. Inter-segment sales have been eliminated. Refer to Note 12 in the condensed consolidated financial statements for further information on these changes, 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 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

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

(in millions)

    

 

2017

 

    

2016

 

    

% Change

 

 

2017

 

    

2016

 

 

% Change

 

 

 

Net sales

 

 

$

291.5

 

    

$

232.5

 

    

25

%  

 

$

580.5

 

    

$

442.0

 

    

31

%  

 

 

Adjusted EBITDA

 

 

$

36.1

 

 

$

21.5

 

 

68

%  

 

$

72.9

 

 

$

40.2

 

    

81

%  

 

 

Adjusted EBITDA margin

 

 

 

12

%  

 

 

 9

%  

 

 

 

 

 

13

%  

 

 

 9

%  

 

 

 

 

 

Three Months Ended - June 30, 2017 vs. June 30, 2016

Of the 25% increase in net sales, 36% was due to higher selling prices, primarily due to the pass through of higher butadiene and styrene costs to our customers. Offsetting this increase was a 5% decrease due to lower sales volume from North America paper customer destocking and a declining market. Additionally, 4% of the decrease was due to the prior year divestiture of our business in Brazil and 2% of the decrease was due to an unfavorable currency impact as the euro weakened in comparison to the U.S. dollar.

The increase in Adjusted EBITDA was due to margin improvements of $17.7 million, an 82% increase, which included favorable raw material timing, net of price lag, as market conditions have improved, particularly in Asia. Higher margins were also the result of continued diversification of our chemistries and markets as well as higher operating rates. Additionally, fixed cost improvements contributed to 8% of the increase. Lastly, the prior year divestiture of our business in Brazil resulted in a 5% decrease in Adjusted EBITDA.

Six Months Ended - June 30, 2017 vs. June 30, 2016 

Of the 31% increase in net sales, 37% was due to higher selling prices, primarily due to the pass through of higher butadiene and styrene costs to our customers. Offsetting this increase was a 4% decrease due to the prior year divestiture of our business in Brazil as well as a 2% decrease due to an unfavorable currency impact as the euro weakened in comparison to the U.S. dollar.

The increase in Adjusted EBITDA was due to margin improvements of $34.9 million, an 87% increase, primarily due to favorable raw material timing, net of price lag, as market conditions have improved, particularly in Asia. Higher margins were also the result of continued diversification of our chemistries and markets as well as higher operating rates. Additionally, fixed cost improvements contributed to 2% of the increase. Lastly, the prior year divestiture of our business in Brazil resulted in a 3% decrease in Adjusted EBITDA.

30


 

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 SSBR, lithium polybutadiene rubber, or Li-PBR, nickel polybutadiene rubber, or Ni-PBR, and neodymium polybutadiene rubber, or Nd-PBR, while also producing core products, such as emulsion styrene-butadiene rubber, or ESBR.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

(in millions)

    

 

2017

 

    

2016

 

    

% Change

 

 

2017

 

    

2016

 

 

% Change

 

 

 

Net sales

 

 

$

174.0

 

    

$

111.4

 

    

56

%  

 

$

337.4

 

    

$

213.6

 

    

58

%  

 

 

Adjusted EBITDA

 

 

$

27.7

 

 

$

30.2

 

 

(8)

%  

 

$

74.0

 

 

$

53.3

 

    

39

%  

 

 

Adjusted EBITDA margin

 

 

 

16

%  

 

 

27

%  

 

 

 

 

 

22

%  

 

 

25

%  

 

 

 

 

 

Three Months Ended - June 30, 2017 vs. June 30, 2016

Of the 56% increase in net sales, 53% was due to higher selling prices, primarily resulting from the pass through of higher butadiene and styrene costs to customers. Additionally, 8% of the increase was due to higher sales volume which was a result of higher customer demand for SSBR due to the growing performance tire market, as well as higher sales of Ni-PBR, noting decreased production in the prior year to allow for Nd-PBR trials. These increases were partially offset by a 4% decrease due to an unfavorable currency impact as the euro weakened in comparison to the U.S. dollar.

The decrease in Adjusted EBITDA was primarily due to unfavorable raw material timing, partly offset by favorable price lag, which led to a 29% decrease due to margin. Offsetting this decrease was a 25% increase due to higher sales volume and favorable product mix, primarily related to higher demand for SSBR and Ni-PBR.

Six Months Ended - June 30, 2017 vs. June 30, 2016

Of the 58% increase in net sales, 49% was due to higher selling prices, primarily resulting from the pass through of higher butadiene and styrene costs to customers. Additionally, 14% of the increase was due to higher sales volume which was a result of higher customer demand for SSBR and ESBR, as well as higher sales of Ni-PBR, noting decreased production in the prior year to allow for Nd-PBR trials. These increases were partially offset by a 4% decrease due to an unfavorable currency impact as the euro weakened in comparison to the U.S. dollar.

The increase in Adjusted EBITDA was primarily due to improved year-to-date margins, which contributed to 27% of the increase, mainly from favorable raw material timing, net of unfavorable price lag. Higher sales volume contributed to 23% of the increase, primarily related to higher demand for SSBR, ESBR, and Ni-PBR. Partially offsetting these increases was a 10% decrease due to higher production costs.

Performance Plastics Segment

Our Performance Plastics segment consists of compounds and blends and some specialized ABS grades. We are a producer of highly engineered compounds and blends for automotive end markets, as well as consumer electronics, medical, electrical and lighting, collectively referred to as consumer essential markets.

31


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

(in millions)

    

 

2017

 

    

2016

 

    

% Change

 

 

2017

 

    

2016

 

 

% Change

 

 

 

Net sales

 

 

$

190.2

 

    

$

183.9

 

    

 3

%  

 

$

374.7

 

    

$

352.5

 

    

 6

%  

 

 

Adjusted EBITDA

 

 

$

23.5

 

 

$

38.5

 

 

(39)

%  

 

$

50.4

 

 

$

73.6

 

    

(32)

%  

 

 

Adjusted EBITDA margin

 

 

 

12

%  

 

 

21

%  

 

 

 

 

 

13

%  

 

 

21

%  

 

 

 

 

 

Three Months Ended - June 30, 2017 vs. June 30, 2016

Of the 3% increase in net sales, 6% was due to higher selling prices due to the pass through of higher raw material costs to our customers, as well as a 3% increase due to increased sales volume as a result of higher volumes sold to the automotive market in North America and the consumer electronics market in Asia. Partially offsetting these increases was a 4% decrease due to the prior year divestiture of our business in Brazil and a 1% unfavorable currency impact as the euro weakened in comparison to the U.S. dollar.

The decrease in Adjusted EBITDA was due to a 39% decrease, primarily due to margin compression from increased costs of raw materials, such as polycarbonate, not all of which was able to be passed through to our customers. Partially offsetting these decreases was a 3% increase due to increased sales volumes to the automotive market in North America and the consumer electronics market in Asia and a 2% increase related to the prior year divestiture of our business in Brazil.

Six Months Ended - June 30, 2017 vs. June 30, 2016

Of the 6% increase in net sales, 3% was due to higher selling prices due to the pass through of higher raw material costs to our customers as well as an 8% increase due to increased sales volume, primarily related to higher sales to the automotive markets in Europe and North America, the electrical and medical markets in Europe, and the consumer electronics market in Asia. Partially offsetting these increases was a 3% decrease due to the prior year divestiture of our business in Brazil and a 1% unfavorable currency impact as the euro weakened in comparison to the U.S. dollar.

The decrease in Adjusted EBITDA was due to a 42% decrease in margins from unfavorable raw material timing, net of price lag unfavorable price lag, as well as margin compression from increased costs of raw materials, such as polycarbonate, not all of which was able to be passed through to our customers. Partially offsetting this decrease was a 13% increase due to increased sales volume growth to the automotive markets in Europe and North America and a 3% increase related to the prior year divestiture of our business in Brazil.

Basic Plastics Segment

The Basic Plastics segment produces styrenic polymers, including polystyrene, basic ABS, and SAN products, as well as PC, all of which are used as inputs in a variety of end use markets. The Basic Plastics segment also included the results of our previously 50%-owned joint venture Sumika Styron Polycarbonate prior to its sale in January 2017. Refer to Note 3 in the condensed consolidated financial statements for further information.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

(in millions)

    

 

2017

 

    

2016

 

    

% Change

 

 

2017

 

    

2016

 

 

% Change

 

 

 

Net sales

 

 

$

382.5

 

    

$

363.3

 

    

 5

%  

 

$

763.2

 

    

$

705.9

 

    

 8

%  

 

 

Adjusted EBITDA

 

 

$

31.8

 

 

$

43.1

 

 

(26)

%  

 

$

70.6

 

 

$

80.9

 

    

(13)

%  

 

 

Adjusted EBITDA margin

 

 

 

 8

%  

 

 

12

%  

 

 

 

 

 

 9

%  

 

 

11

%  

 

 

 

 

 

Three Months Ended - June 30, 2017 vs. June 30, 2016

Of the 5% increase in net sales, 11% was due to higher selling prices due to the pass through of higher styrene costs to customers. This increase was partially offset by a 3% decrease due to lower sales volume, primarily related to lower polystyrene sales volume in Asia, as we have increased our focus on higher margin business, as well as lower

32


 

external polycarbonate sales volume due to higher internal utilization. Additionally, an unfavorable currency impact resulted in a 2% decrease as the euro weakened in comparison to the U.S. dollar.

Adjusted EBITDA decreased 26%, primarily due to unfavorable raw material timing resulting in lower margins, which contributed to a 15% decrease, while lower sales volume contributed to 7% of the decrease. The sale of Sumika Styron Polycarbonate in the current year resulted in a 2% decrease in Adjusted EBITDA.

Six Months Ended - June 30, 2017 vs. June 30, 2016

Of the 8% increase in net sales, 18% was due to higher selling prices due to the pass through of higher styrene costs to customers. This increase was partially offset by a 7% decrease due to lower sales volume, primarily related to lower polystyrene sales in Asia, as we have increased our focus on higher margin business. Additionally, an unfavorable currency impact resulted in a 2% decrease as the euro weakened in comparison to the U.S. dollar.

The decrease in Adjusted EBITDA was due to an 11% decrease related to lower sales volume, primarily related to Europe and Asia polystyrene sales, with competitor supply outages in Europe in the prior year and with an increased focus on higher margins in Asia. Higher fixed costs, including start-up costs incurred related to our new ABS capacity in Asia, contributed to a decrease of 3% while the sale of Sumika Styron Polycarbonate in the current year resulted in a 3% decrease in Adjusted EBITDA. Partially offsetting these decreases was a 5% increase due to higher year-to-date margins, primarily due to favorable raw material timing.

Feedstocks Segment

The Feedstocks segment includes the Company’s production and procurement of styrene monomer outside of North America, which is used as a key raw material in many of the Company’s products, including polystyrene, SB latex, ABS resins, SSBR, etc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

(in millions)

    

 

2017

 

    

2016

 

    

% Change

 

 

2017

 

    

2016

 

 

% Change

 

 

 

Net sales

 

 

$

107.0

 

    

$

78.6

 

    

36

%  

 

$

193.9

 

    

$

149.8

 

    

29

%  

 

 

Adjusted EBITDA

 

 

$

(1.2)

 

 

$

32.5

 

 

(104)

%  

 

$

40.7

 

 

$

53.4

 

    

(24)

%  

 

 

Adjusted EBITDA margin

 

 

 

(1)

%  

 

 

41

%  

 

 

 

 

 

21

%  

 

 

36

%  

 

 

 

 

 

Three Months Ended - June 30, 2017 vs. June 30, 2016

Of the 36% increase in net sales, 16% was due to higher selling prices, primarily due to the pass through of higher styrene costs to customers, as well as a 22% increase due to higher styrene-related sales volume. Partially offsetting these increases was a 2% decrease as a result of an unfavorable currency impact as the euro weakened in comparison to the U.S. dollar.

The decrease in Adjusted EBITDA was due to a 98% decrease as a result of lower styrene margins, including unfavorable raw material timing, as well as a 4% decrease due to higher maintenance-related fixed costs.

Six Months Ended - June 30, 2017 vs. June 30, 2016

Of the 29% increase in net sales, 27% was due to higher selling prices, primarily due to the pass through of higher styrene costs to customers, as well as a 4% increase due to higher styrene-related sales volume. Partially offsetting these increases was a 2% decrease as a result of an unfavorable currency impact as the euro weakened in comparison to the U.S. dollar.

The decrease in Adjusted EBITDA was due to a 16% decrease as a result of lower styrene margins, including unfavorable raw material timing, as well as a 6% decrease due to higher maintenance-related fixed costs.

Americas Styrenics Segment

The Americas Styrenics segment consists solely of the operations of our 50%-owned joint venture, Americas Styrenics, a producer of both styrene monomer and polystyrene in North America. Styrene monomer is a basic building

33


 

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

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

(in millions)

    

 

2017

 

    

2016

 

    

% Change

 

 

2017

 

    

2016

 

 

% Change

 

 

 

Adjusted EBITDA*

 

 

$

29.9

 

 

$

37.7

 

 

(21)

%  

 

$

48.4

 

 

$

70.6

 

    

(31)

%  

 

 

*The results of this segment are comprised entirely of earnings from Americas Styrenics, our equity method investment. As such, Adjusted EBITDA related to this segment is included within “Equity in earnings of unconsolidated affiliates” in the consolidated statements of operations.

Three Months Ended - June 30, 2017 vs. June 30, 2016

The decrease in Adjusted EBITDA was primarily due to lower margins on second quarter sales of styrene purchased during the first quarter maintenance-related outage at the St. James, LA, styrene facility in a decreasing price environment.

Six Months Ended - June 30, 2017 vs. June 30, 2016

The decrease in Adjusted EBITDA was primarily due to the planned first quarter styrene outage at its St. James, LA, facility, which was extended in order to complete repairs on critical equipment. The facility came back online at full production in early April 2017. As a result of this extended outage, the Company incurred an unfavorable impact of approximately $23 million to Adjusted EBITDA through the second quarter of 2017.

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; acquisition related costs and other items. In doing so, we are providing management, investors, and credit rating agencies with an indicator of our ongoing performance and business trends, by removing the impact of transactions and events that we would not consider a part of our core operations.

There are limitations to using the financial performance measures such as Adjusted EBITDA. This performance measure is not intended to represent net income or other measures of financial performance. As such, it should not be used as an alternative to net income as an indicator of operating performance. Other companies in our industry may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use this or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We

34


 

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 six months ended June 30, 2017 and 2016, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(in millions)

    

2017

    

2016

    

2017

    

2016

 

Net income

 

$

60.2

    

$

95.8

    

$

177.5

    

$

172.6

 

Interest expense, net

 

 

18.7

 

 

18.8

 

 

36.9

 

 

37.7

 

Provision for income taxes

 

 

18.8

 

 

28.6

 

 

48.1

 

 

50.5

 

Depreciation and amortization

 

 

26.3

 

 

24.9

 

 

51.0

 

 

47.9

 

EBITDA(a)

 

$

124.0

 

$

168.1

 

$

313.5

 

$

308.7

 

Net loss (gain) on disposition of businesses and assets(b)

 

 

 —

 

 

12.9

 

 

(9.9)

 

 

12.9

 

Restructuring and other charges(c)

 

 

1.1

 

 

1.1

 

 

3.3

 

 

1.8

 

Acquisition transaction and integration costs(d)

 

 

1.1

 

 

 —

 

 

1.1

 

 

 —

 

Other items(e)

 

 

 —

 

 

0.3

 

 

 —

 

 

2.2

 

Adjusted EBITDA

 

$

126.2

 

$

182.4

 

$

308.0

 

$

325.6

 


(a)

EBITDA is a non-GAAP financial performance measure that we refer to in making operating decisions because we believe it provides our management as well as our investors and credit agencies with meaningful information regarding the Company’s operational performance. We believe the use of EBITDA as a metric assists our board of directors, management and investors in comparing our operating performance on a consistent basis. Other companies in our industry may define EBITDA differently than we do. As a result, it may be difficult to use EBITDA, or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing reconciliations of our EBITDA results to our net income, which is determined in accordance with GAAP.

(b)

Net gain on disposition of businesses and assets during the six months ended June 30, 2017 relates primarily to the sale of our 50% share in Sumika Styron Polycarbonate to Sumitomo Chemical Company Limited, for which the Company recorded a gain on sale of $9.3 million during the period. Refer to Note 3 in the condensed consolidated financial statements for further information. During the three and six months ended June 30, 2016, the Company recorded an impairment charge for the estimated loss on sale of our primary operating entity in Brazil, which includes both latex and automotive businesses, of approximately $12.9 million. Refer to Note 11 in the condensed consolidated financial statements for further information.

(c)

Restructuring and other charges for the three and six months ended June 30, 2017 primarily relate to employee termination benefit and decommissioning charges incurred in connection with the decision to cease manufacturing activities at our latex binders manufacturing facility in Livorno, Italy, as well as contract termination charges related to the upgrade and replacement of the Company’s compounding facility in Terneuzen, The Netherlands. Refer to Note 13 in the condensed consolidated financial statements for further information. Restructuring and other charges for the three and six months ended June 30, 2016 primarily relate to employee termination benefit and decommissioning charges incurred in connection with the Allyn’s Point shutdown within our latex binders business, as well as employee termination benefit charges related to the elimination of certain corporate functions as a result of the sale of our latex and automotive businesses in Brazil.

Note that the accelerated depreciation charges incurred as part of both the upgrade and replacement of the Company’s compounding facility in Terneuzen, The Netherlands as well as the Allyn’s Point shutdown are included within the “Depreciation and amortization” caption above, and therefore are not included as a separate adjustment within this caption.

(d)

Acquisition transaction and integration costs for the three and six months ended June 30, 2017 relate to advisory and professional fees incurred in conjunction with the Company’s acquisition of API Plastics, which closed in July 2017. Refer to Note 16 in the condensed consolidated financial statements for further information.

35


 

(e)

Other items for the three and six months ended June 30, 2016 relate to fees incurred in conjunction with the Company’s secondary offerings completed during these periods.

Liquidity and Capital Resources

Cash Flows

The table below summarizes our primary sources and uses of cash for the six months ended June 30, 2017 and 2016, respectively. We have derived the summarized cash flow information from our unaudited financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

(in millions)

    

2017

    

2016

    

Net cash provided by (used in):

 

 

 

    

 

 

 

Operating activities

 

$

36.6

 

$

179.7

 

Investing activities

 

 

(29.7)

 

 

(48.2)

 

Financing activities

 

 

(79.8)

 

 

(97.0)

 

Effect of exchange rates on cash

 

 

7.7

 

 

(0.5)

 

Net change in cash and cash equivalents

 

$

(65.2)

 

$

34.0

 

 

Operating Activities

Net cash provided by operating activities during the six months ended June 30, 2017 totaled $36.6 million, inclusive of $45.0 million in dividends from Americas Styrenics, as well as dividends from Sumika Styron Polycarbonate, $8.9 million of which were classified as operating activities, with the remaining $0.9 million classified as investing activities. Refer to Note 3 in the condensed consolidated financial statements for further information. Net cash used in operating assets and liabilities for the six months ended June 30, 2017 totaled $210.6 million, due primarily to increases in accounts receivable of $137.7 million and inventories of $66.8 million, respectively. The increases in accounts receivable and inventories were primarily due to increased raw material prices.

Net cash provided by operating activities during the six months ended June 30, 2016 totaled $179.7 million, due primarily to earnings for the period. Also impacting cash flows from operating activities for the period was $60.0 million in dividends from Americas Styrenics. Net cash used in operating assets and liabilities for the six months ended June 30, 2016 totaled $68.0 million, due primarily to increases in accounts receivable of $53.0 million and inventories of $16.7 million, respectively. The increase in accounts receivable was primarily due to higher net sales during the second quarter of 2016, compared to the fourth quarter of 2015, due primarily to increasing raw material prices as well as volume increases.  The increase in inventory was primarily due to increasing raw material prices.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2017 totaled $29.7 million, primarily from capital expenditures of $74.3 million during the period, partially offset by proceeds received of $42.1 million from the sale of the Company’s 50% share in Sumika Styron Polycarbonate to Sumitomo Chemical Company Limited.

Net cash used in investing activities for the six months ended June 30, 2016 totaled $48.2 million, primarily from capital expenditures of $53.2 million during the period, a significant portion of which related to our project to upgrade our legacy ERP environment to the latest version of SAP.  Partially offsetting these capital expenditures were dividends received from Sumika Styron Polycarbonate during the period, $4.8 million of which were classified as investing activities on the condensed consolidated statement of cash flows, with the remaining $1.4 million classified as operating activities.

Financing Activities

Net cash used in financing activities during the six months ended June 30, 2017 totaled $79.8 million. This activity was primarily due to $56.4 million of payments related to the repurchase of ordinary shares during the period and $26.5

36


 

million of dividends paid, as well as $2.5 million of principal payments related to our 2021 Term Loan B. Partially offsetting these uses of cash was $6.0 million of proceeds received from the exercise of option awards.

Net cash used in financing activities during the six months ended June 30, 2016 totaled $97.0 million. This activity was primarily due to $94.4 million of payments related to the repurchase of ordinary shares during the period as well as $2.5 million of principal payments related to our 2021 Term Loan B.

 

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.

Prior period information below has been recast from its previous presentation to reflect the Company’s current method for calculating Free Cash Flow. Prior to the third quarter of 2016, we calculated Free Cash Flow as cash from both operating and investing activities less the impact of changes in restricted cash. The Company believes our revised method is more aligned to investors’ common understanding of Free Cash Flow and allows for easier comparisons between the Company and its peers. Additionally, the Company has not reported material restricted cash balances since 2012 and is not expected to do so under its current practices.

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

(in millions)

    

2017

    

2016

    

Cash provided by operating activities

 

$

36.6

 

$

179.7

 

Capital expenditures

 

 

(74.3)

 

 

(53.2)

 

Free Cash Flow

 

$

(37.7)

 

$

126.5

 

Refer to the discussion above for significant impacts to cash provided by operating activities for the six months ended June 30, 2017 and 2016, respectively.

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 dividend payments to our shareholders. Our sources of liquidity include cash on hand, cash flow from operations, and amounts available under the Senior Credit Facility and the Accounts Receivable Securitization Facility.

As of June 30, 2017 and December 31, 2016, we had $1,218.0 million and $1,187.4 million, respectively, in outstanding indebtedness and $1,051.1 million and $890.7 million, respectively, in working capital. In addition, as of June 30, 2017 and December 31, 2016, we had $91.5 million and $88.8 million of foreign cash and cash equivalents on our balance sheet, respectively, all of which is readily convertible into other foreign currencies, including the U.S. dollar. Our intention is not to permanently reinvest our foreign cash and cash equivalents. Accordingly, we record deferred income tax liabilities related to the unremitted earnings of our subsidiaries.

Refer to our Annual Report for a detailed description of the Company’s debt structure, borrowing rates, and expected future payment obligations.

37


 

The following table outlines our outstanding indebtedness as of June 30, 2017 and December 31, 2016 and the associated interest expense, including amortization of deferred financing fees, and effective interest rates for such borrowings as of June 30, 2017 and December 31, 2016. Note that the effective interest rates below exclude the impact of deferred financing fee amortization.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the Six Months Ended

 

As of and for the Year Ended

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

 

 

Effective

 

 

 

 

 

Effective

 

 

 

 

 

 

 

Interest

 

Interest

 

 

 

Interest

 

Interest

 

(dollars in millions)

    

Balance

    

Rate

    

Expense

    

Balance

 

Rate

    

Expense

 

Senior Credit Facility

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

 

2021 Term Loan B

 

$

489.1

 

4.3

%  

$

11.5

 

$

491.5

 

4.3

%  

$

23.3

 

2020 Revolving Facility

 

 

 —

 

 —

 

 

1.7

 

 

 —

 

 —

 

 

3.3

 

2022 Senior Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD Notes

 

 

300.0

 

6.8

%  

 

10.6

 

 

300.0

 

6.8

%  

 

21.1

 

Euro Notes

 

 

427.3

 

6.4

%  

 

13.5

 

 

394.3

 

6.4

%  

 

27.4

 

Accounts Receivable Securitization Facility

 

 

 —

 

 —

 

 

1.4

 

 

 —

 

 —

 

 

3.3

 

Other indebtedness*

 

 

1.6

 

4.8

%  

 

 —

 

 

1.6

 

4.8

%  

 

0.1

 

Total

 

$

1,218.0

 

 

 

$

38.7

 

$

1,187.4

 

 

 

$

78.5

 

*For the six months ended June 30, 2017, interest expense on “Other indebtedness” totaled less than $0.1 million.

Our Senior Credit Facility includes the 2020 Revolving Facility, which matures in May 2020, and has a borrowing capacity of $325.0 million. As of June 30, 2017, the Company had no outstanding borrowings, and had $308.1 million (net of $16.9 million outstanding letters of credit) of funds available for borrowing under the 2020 Revolving Facility.  Further, as of June 30, 2017, the Borrowers are required to pay a quarterly commitment fee in respect of any unused commitments under the 2020 Revolving Facility equal to 0.375% per annum.

We also continue to maintain our Accounts Receivable Securitization Facility set to mature in May 2019, under which our borrowing capacity is $200.0 million. As of June 30, 2017, there were no amounts outstanding under the Accounts Receivable Securitization Facility, with approximately $151.3 million of funds available for borrowing under this facility, based on the pool of eligible accounts receivable.

Our other borrowing arrangements include our $500.0 million 2021 Term Loan B (maturing in November 2021), which requires scheduled quarterly payments in amounts equal to 0.25% of the original principal, and our 2022 Senior Notes (maturing in May 2022), whose U.S. dollar equivalent outstanding amount as of June 30, 2017 totaled $727.3 million.

The Senior Credit Facility and Indenture contain certain customary affirmative, negative and financial covenants. As of June 30, 2017, the Company was in compliance with all of these debt covenant requirements. Refer to the Annual Report for further information on the details of these covenant requirements.

Our ability to raise additional financing and our borrowing costs may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios.

We and our subsidiaries, affiliates or significant 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 2022 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 its subsidiaries will not

38


 

face transfer restrictions in the future due to regulatory or other reasons beyond our control.

The Company’s cash flow generation in recent years has been strong, with positive cash flows expected to continue for full year 2017. However, we can make no assurances that, in the future, our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Senior Credit Facility in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. In addition, our current indebtedness may limit our ability to procure additional financing in the future.

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. In April 2017, the Company paid a dividend of $0.30 per ordinary share (totaling $13.7 million), with an additional dividend to shareholders of $0.36 per ordinary share declared in June 2017 (to be paid in July 2017). 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.

We believe that funds provided by operations, our existing cash and cash equivalent balances, borrowings available under our 2020 Revolving Facility and borrowings available under our Accounts Receivable Securitization Facility will be adequate to meet planned operating and capital expenditures for at least the next 12 months under current operating conditions.

Contractual Obligations and Commercial Commitments

There have been no material revisions outside the ordinary course of business to our contractual obligations as described within “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commercial Commitments” within our Annual Report.

Critical Accounting Policies and Estimates

Our unaudited interim condensed consolidated financial statements are based on the selection and application of significant accounting policies. The preparation of unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses at the date of and during the reporting period. Actual results could differ from those estimates. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.

We describe our significant accounting policies in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, of 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 critical accounting policies as filed in our Annual Report.

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

We describe the impact of recent accounting pronouncements in Note 2 to our condensed consolidated financial statements, included elsewhere within this Quarterly Report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our 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

39


 

exposure to market risks from the information provided within our Annual Report, except to our risks related to changes in the prices of certain commodities that we use in the production of our products.

Commodity Price Risk

We purchase certain raw materials such as benzene, ethylene, butadiene, BPA and styrene primarily under short- and long-term supply contracts. The pricing terms for these raw material purchases are generally determined based on commodity indices and prevailing market conditions within the relevant geography. The selling prices of our products are generally based, in part, on the current or forecasted costs of our key raw materials, but are often subject to a predetermined lag period for the pass through of these costs.  As such, during periods of significant raw material price volatility, the Company may experience material volatility in earnings and cash flows due to the lag in passing through raw material costs, primarily benzene, ethylene, butadiene, and styrene. Assuming no changes in sales price, volume or mix, a hypothetical 10% change in the market price of our raw materials would have impacted cost of sales by $155 million for the six months ended June 30, 2017.

We mitigate the risk of volatility in commodity prices where possible by passing changes in raw material costs through to our customers by adjusting our prices or including provisions in our contracts that allow us to adjust prices in such a circumstance or by including pricing formulas which utilize commodity indices. Nevertheless, we may be subject to the timing differences described above for the pass through of these costs. In addition, even when raw material costs may be passed on to our customers, during periods of high raw material price volatility, customers without minimum purchase requirements with us may choose to delay purchases of our materials or, in some cases, substitute purchases of our materials with less costly products. 

We do not enter into derivative financial instruments for trading or speculative purposes to manage our commodity price risk relating to our raw material contracts.

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 June 30, 2017. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report were effective to provide the reasonable level of assurance described above.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2017 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.

40


 

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 Item 1A of our Annual Report for the year ended December 31, 2016, 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 

(a)Recent sales of unregistered securities

None.

(b)Use of Proceeds from registered securities

None.

(c)Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table contains information regarding purchases of our ordinary shares made during the quarter ended June 30, 2017 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
paid per share

 

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

April 1 - April 30, 2017

 

111,300

 

$

64.34

 

111,300

 

1,849,062

(1)

May 1 - May 31, 2017

 

280,366

 

$

63.25

 

280,366

 

1,568,696

(1)

June 1 - June 30, 2017

 

75,733

 

$

64.35

 

75,733

 

2,000,000

(2)

Total

 

467,399

 

$

63.69

 

467,399

 

 

 


(1)

The general meeting of our shareholders on June 21, 2016 authorized the Company to repurchase up to 4.5 million ordinary shares at a price per share of not less than $1.00 and not more than $1,000. This authorization ends on June 21, 2018 or on the date of its renewal by a subsequent general meeting of shareholders. On November 1, 2016 the Company announced that the board of directors had authorized the Company to repurchase, subject to market and other conditions, the remaining shares left under the 2016 share repurchase authorization.

(2)

The general meeting of our shareholders on June 21, 2017 authorized the Company to sunset the 2016 share repurchase authorization and replace it with a new authorization to repurchase up to 4.0 million ordinary shares at a price per share of not less than $1.00 and not more than $1,000. This authorization ends on June 21, 2020 or on the date of its renewal by a subsequent general meeting of shareholders. On June 22, 2017 the Company announced that the board of directors had authorized the Company to repurchase, subject to market and other conditions, up to 2.0 million shares over the subsequent 18 months under the 2017 share repurchase authorization.

Item 3. Defaults Upon Senior Securities

None.

41


 

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index.

 

 

42


 

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: August 3, 2017

 

 

TRINSEO S.A.

 

 

 

 

By:

/s/ Christopher D. Pappas

 

Name:

Christopher D. Pappas

 

Title:

President, Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

By:

/s/ Barry J. Niziolek

 

Name:

Barry J. Niziolek

 

Title:

Executive Vice President, Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 


 

EXHIBIT INDEX

 

Exhibit

No.

Description

3.1†

Amended and Restated Articles of Association of Trinseo S.A. 

 

 

4.1

Form of Specimen Share Certificate of Trinseo S.A. (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to the Registration Statement filed on Form S-1, File No. 333-194561, filed May 16, 2014)

 

 

4.2

Indenture among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors named therein, and The Bank of New York Mellon, as Trustee, dated as of May 5, 2015 (incorporated herein by reference to Exhibit 4.1 to the Current Report filed on Form 8-K, File No. 001-36473, filed May 11, 2015)

 

 

4.3†

First Supplemental Indenture among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors named therein, and The Bank of New York Mellon, as Trustee, dated as of July 30, 2015

 

 

4.4†

Second Supplemental Indenture among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., the Guarantors named therein, and The Bank of New York Mellon, as Trustee, dated as of June 9, 2017

 

 

10.1†

Form of Indemnification Agreement for Directors and Officers

 

 

31.1†

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2†

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32.1†

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2†

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101.INS†

XBRL Instance Document

 

 

101.SCH†

XBRL Taxonomy Extension Schema Document

 

 

101.CAL†

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF†

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB†

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE†

XBRL Taxonomy Extension Presentation Linkbase Document

 

 


†  Filed herewith.