10-Q 1 tse-20160331x10q.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 March 31, 2016

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 Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

As of May 2, 2016, there were 47,140,870 of the registrant’s ordinary shares outstanding.

 

 

 


 

 

TABLE OF CONTENTS

 

 

    

    

    

    

 

 

    

 

    

Page

 

 

 

 

 

 

 

Part I 

 

Financial Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements

 

4 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015 (Unaudited)

 

4 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 (Unaudited)

 

5 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2016 and 2015 (Unaudited)

 

6 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2016 and 2015 (Unaudited)

 

7 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (Unaudited)

 

8 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9 

 

 

 

 

 

 

 

Item 2. 

 

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

 

27 

 

 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

40 

 

 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

40 

 

 

 

 

 

 

 

Part II 

 

Other Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

41 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

41 

 

 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41 

 

 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

42 

 

 

 

 

 

 

 

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 March 31, 2016

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 and as required by context, may also include our business as owned by our predecessor, The Dow Chemical Company, for any dates prior to June 17, 2010. The terms “Trinseo Materials Operating S.C.A.” and “Trinseo Materials Finance, Inc.” refer to Trinseo’s indirect subsidiaries, Trinseo Materials Operating S.C.A., a Luxembourg partnership limited by shares incorporated under the laws of Luxembourg, and Trinseo Materials Finance, Inc., a Delaware corporation, and not their subsidiaries. All financial data provided in this Quarterly Report is the financial data of the Company, unless otherwise indicated.

Prior to our formation, our business was wholly owned by The Dow Chemical Company. We refer to our predecessor business as “the Styron business.” On June 17, 2010, investment funds advised or managed by affiliates of Bain Capital Partners, LLC (“Bain Capital”) acquired the Styron business and Dow Europe Holding B.V., which we refer to as “Dow Europe,” or, together with other affiliates of The Dow Chemical Company, “Dow,” retained an ownership interest in the Styron business through an indirect ownership interest in us. We refer to our acquisition by Bain Capital as the “Acquisition.”

Definitions of capitalized terms not defined herein appear in the notes to our condensed consolidated financial statements.

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, 2015 (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 11, 2016 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)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

    

2016

 

2015

 

Assets

    

 

 

 

 

    

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

438,389

 

$

431,261

 

Accounts receivable, net of allowance for doubtful accounts (March 31, 2016: $2,259; December 31, 2015: $2,417)

 

 

535,095

 

 

494,556

 

Inventories

 

 

367,159

 

 

353,097

 

Other current assets

 

 

13,300

 

 

10,120

 

Total current assets

 

 

1,353,943

 

 

1,289,034

 

Investments in unconsolidated affiliates

 

 

181,711

 

 

182,836

 

Property, plant and equipment, net of accumulated depreciation (March 31, 2016: $402,712; December 31, 2015: $375,315)

 

 

522,145

 

 

518,751

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

32,255

 

 

31,064

 

Other intangible assets, net

 

 

168,013

 

 

158,218

 

Deferred income tax assets—noncurrent

 

 

46,564

 

 

51,395

 

Deferred charges and other assets

 

 

27,004

 

 

27,596

 

Total other assets

 

 

273,836

 

 

268,273

 

Total assets

 

$

2,331,635

 

$

2,258,894

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

5,000

 

$

5,000

 

Accounts payable

 

 

340,803

 

 

324,629

 

Income taxes payable

 

 

28,223

 

 

20,804

 

Accrued expenses and other current liabilities

 

 

91,229

 

 

98,836

 

Total current liabilities

 

 

465,255

 

 

449,269

 

Noncurrent liabilities

 

 

 

 

 

 

 

Long-term debt, net of unamortized deferred financing fees

 

 

1,192,500

 

 

1,177,120

 

Deferred income tax liabilities—noncurrent

 

 

27,480

 

 

25,764

 

Other noncurrent obligations

 

 

226,316

 

 

217,727

 

Total noncurrent liabilities

 

 

1,446,296

 

 

1,420,611

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Ordinary shares, $0.01 nominal value, 50,000,000 shares authorized (March 31, 2016: 48,778 shares issued and 47,178 shares outstanding; December 31, 2015: 48,778 shares issued and outstanding)

 

 

488

 

 

488

 

Additional paid-in-capital

 

 

562,125

 

 

556,532

 

Treasury shares, at cost (March 31, 2016: 1,600 shares; December 31, 2015: zero shares)

 

 

(57,008)

 

 

 —

 

Retained earnings (accumulated deficit)

 

 

58,458

 

 

(18,289)

 

Accumulated other comprehensive loss

 

 

(143,979)

 

 

(149,717)

 

Total shareholders’ equity

 

 

420,084

 

 

389,014

 

Total liabilities and shareholders’ equity

 

$

2,331,635

 

$

2,258,894

 

 

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

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Net sales

    

$

894,084

    

$

1,018,265

 

Cost of sales

 

 

754,412

 

 

915,186

 

Gross profit

 

 

139,672

 

 

103,079

 

Selling, general and administrative expenses

 

 

54,486

 

 

51,775

 

Equity in earnings of unconsolidated affiliates

 

 

35,026

 

 

36,707

 

Operating income

 

 

120,212

 

 

88,011

 

Interest expense, net

 

 

18,896

 

 

28,856

 

Other expense, net

 

 

2,669

 

 

3,551

 

Income before income taxes

 

 

98,647

 

 

55,604

 

Provision for income taxes

 

 

21,900

 

 

17,900

 

Net income

 

$

76,747

 

$

37,704

 

Weighted average shares- basic

 

 

48,655

 

 

48,770

 

Net income per share- basic

 

$

1.58

 

$

0.77

 

Weighted average shares- diluted

 

 

49,086

 

 

48,851

 

Net income per share- diluted

 

$

1.56

 

$

0.77

 

 

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

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Net income

    

$

76,747

    

$

37,704

 

Other comprehensive income (loss), net of tax (tax amounts shown in millions below for the three months ended March 31, 2016 and 2015, respectively):

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

13,423

 

 

(114,155)

 

Net gain (loss) on foreign exchange cash flow hedges

 

 

(7,425)

 

 

1,035

 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

Net gain (loss) arising during period (net of tax of ($0.5) and $0)

 

 

(800)

 

 

 —

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

540

 

 

837

 

Total other comprehensive income (loss), net of tax

 

 

5,738

 

 

(112,283)

 

Comprehensive income (loss)

 

$

82,485

 

$

(74,579)

 

 

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)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

Shareholders' Equity

 

 

    

Ordinary Shares Outstanding

    

Ordinary Shares

    

Additional
Paid-In Capital

    

Treasury Shares

    

Accumulated Other Comprehensive Income (Loss)

    

Retained Earnings (Accumulated Deficit)

    

Total

 

Balance at December 31, 2015

 

48,778

 

$

488

 

$

556,532

 

$

 —

 

$

(149,717)

 

$

(18,289)

 

$

389,014

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

76,747

 

 

76,747

 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,738

 

 

 —

 

 

5,738

 

Stock-based compensation

 

 —

 

 

 —

 

 

5,593

 

 

 —

 

 

 —

 

 

 —

 

 

5,593

 

Purchase of treasury shares

 

(1,600)

 

 

 —

 

 

 —

 

 

(57,008)

 

 

 —

 

 

 —

 

 

(57,008)

 

Balance at March 31, 2016

 

47,178

 

$

488

 

$

562,125

 

$

(57,008)

 

$

(143,979)

 

$

58,458

 

$

420,084

 

Balance at December 31, 2014

 

48,770

 

$

488

 

$

547,530

 

$

 —

 

$

(75,217)

 

$

(151,936)

 

$

320,865

 

Net income

 

 

 

 

 

 

 

 —

 

 

 

 

37,704

 

 

37,704

 

Other comprehensive loss

 

 

 

 

 

 

 

 —

 

 

(112,283)

 

 

 

 

(112,283)

 

Stock-based compensation

 

 

 

 

 

2,622

 

 

 —

 

 

 

 

 

 

2,622

 

Balance at March 31, 2015

 

48,770

 

$

488

 

$

550,152

 

$

 —

 

$

(187,500)

 

$

(114,232)

 

$

248,908

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Cash flows from operating activities

    

 

    

    

 

    

 

Net income

 

$

76,747

 

$

37,704

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

23,120

 

 

22,554

 

Amortization of deferred financing fees and issuance discount

 

 

1,608

 

 

2,446

 

Deferred income tax

 

 

6,418

 

 

3,775

 

Stock-based compensation

 

 

5,593

 

 

2,622

 

Earnings of unconsolidated affiliates, net of dividends

 

 

(3,684)

 

 

(21,707)

 

Unrealized net losses (gains) on foreign exchange forward contracts

 

 

(447)

 

 

2,815

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(33,732)

 

 

(42,091)

 

Inventories

 

 

(7,162)

 

 

53,722

 

Accounts payable and other current liabilities

 

 

4,344

 

 

(11,944)

 

Income taxes payable

 

 

6,486

 

 

7,074

 

Other assets, net

 

 

(3,452)

 

 

3,892

 

Other liabilities, net

 

 

9,046

 

 

(17,948)

 

Cash provided by operating activities

 

 

84,885

 

 

42,914

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(26,437)

 

 

(27,670)

 

Proceeds from the sale of businesses and other assets

 

 

 —

 

 

560

 

Distributions from unconsolidated affiliates

 

 

4,809

 

 

 —

 

Cash used in investing activities

 

 

(21,628)

 

 

(27,110)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Short-term borrowings, net

 

 

(63)

 

 

(9,487)

 

Repayments of term loans

 

 

(1,250)

 

 

 —

 

Purchase of treasury shares

 

 

(57,008)

 

 

 —

 

Cash used in financing activities

 

 

(58,321)

 

 

(9,487)

 

Effect of exchange rates on cash

 

 

2,192

 

 

(8,406)

 

Net change in cash and cash equivalents

 

 

7,128

 

 

(2,089)

 

Cash and cash equivalents—beginning of period

 

 

431,261

 

 

220,786

 

Cash and cash equivalents—end of period

 

$

438,389

 

$

218,697

 

 

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 March 31, 2016 and 2015 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 2015 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 11, 2016.

The December 31, 2015 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 2015 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.  Refer to Note 2 for further discussion.

 

NOTE 2—RECENT ACCOUNTING GUIDANCE

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued new guidance which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the FASB has issued certain clarifying updates to this guidance, which the Company will consider as part of our adoption. This guidance is effective for public entities for annual and interim periods beginning after December 15, 2017.  The Company is currently assessing the impact of adopting this guidance on its financial position and results of operations.

In April 2015, the FASB issued guidance that requires deferred financing fees related to a recognized debt liability be presented in the balance sheet as a direct reduction of the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for deferred financing fees are not affected. The Company adopted this guidance effective January 1, 2016. Balances as of December 31, 2015 presented herein have been retrospectively adjusted, with $25.7 million of unamortized deferred financing fees being reclassified from “Deferred charges and other assets” and netted against “Long-term debt, net of unamortized deferred financing fees” on the condensed consolidated balance sheet. In accordance with this guidance, unamortized deferred financing fees related to the Company’s revolving debt facilities were not reclassified as a reduction of long-term debt, and remain included within “Deferred charges and other assets” on the condensed consolidated balance sheets.

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.  This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, and prospective adoption is required.  The Company does not expect the impact of adopting this guidance to be material to its financial position and results of operations.

In February 2016, the FASB issued new 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 balance sheet lease liabilities and corresponding right-of-use assets for all leases with terms of greater than 12 months. It also changes

9


 

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 currently assessing the impact of adopting this guidance on its financial position and results of operations.

In March 2016, the FASB issued new guidance that simplifies several aspects of accounting for share-based payments. Under the new guidance, excess tax benefits associated with share-based payment awards will be recognized in the statement of operations when the awards vest or settle, rather than in shareholders’ equity. In addition, it will increase the number of shares an employer can withhold to cover income taxes on share-based payment awards and still qualify for the exemption to liability classification.  Also under this guidance, entities are permitted to make an accounting policy election regarding the impact of forfeitures on expense recognition, wherein forfeitures can either be estimated, as required under current GAAP, or recognized as incurred. This new guidance is effective for public companies for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the impact of adopting this guidance on its financial position and results of operations as well as the timing of such adoption.

 

NOTE 3—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company is supplemented by two strategic joint ventures, the results of which are included within the Basic Plastics & Feedstocks reporting segment: Americas Styrenics LLC (“Americas Styrenics”, a 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.

As of March 31, 2016 and December 31, 2015, respectively, the Company’s investment in Americas Styrenics was $146.8 million and $143.9 million, which was $83.1 million and $91.9 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 4.5 years as of March 31, 2016. The Company received dividends from Americas Styrenics of $30.0 million and $15.0 million during the three months ended March 31, 2016 and 2015, respectively.

As of March 31, 2016 and December 31, 2015, respectively, the Company’s investment in Sumika Styron Polycarbonate was $34.9 million and $39.0 million, which was $18.1 million and $19.8 million greater than the Company’s 50% share of the underlying net assets of Sumika Styron Polycarbonate. This amount represents the fair value of certain identifiable assets which have not been recorded on the historical financial statements of Sumika Styron Polycarbonate. This difference is being amortized over the remaining useful life of the contributed assets of 9.5 years as of March 31, 2016. The Company received dividends from Sumika Styron Polycarbonate of $6.2 million and zero during the three months ended March 31, 2016 and 2015, respectively.

Both of the unconsolidated affiliates are privately held companies; therefore, quoted market prices for their stock are not available. The summarized financial information of the Company’s unconsolidated affiliates is shown below:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Sales

    

$

376,253

    

$

439,570

 

Gross profit

 

$

68,403

 

$

77,670

 

Net income

 

$

52,796

 

$

66,019

 

 

10


 

NOTE 4—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

    

2016

    

2015

 

Finished goods

    

$

176,544

    

$

170,380

 

Raw materials and semi-finished goods

 

 

158,497

 

 

151,444

 

Supplies

 

 

32,118

 

 

31,273

 

Total

 

$

367,159

 

$

353,097

 

 

 

NOTE 5—GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table shows changes in the carrying amount of goodwill by segment from December 31, 2015 to March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Materials

 

 

 

 

 

 

 

 

 

 

 

 

Synthetic

 

Performance

 

Basic Plastics

 

 

 

 

 

    

Latex

    

Rubber

    

Plastics

    

& Feedstocks

    

Total

 

Balance at December 31, 2015

 

$

12,412

 

$

8,501

 

$

2,914

 

$

7,237

 

$

31,064

 

Foreign currency impact

 

 

476

 

 

326

 

 

112

 

 

277

 

 

1,191

 

Balance at March 31, 2016

 

$

12,888

 

$

8,827

 

$

3,026

 

$

7,514

 

$

32,255

 

Other Intangible Assets

The following table provides information regarding the Company’s other intangible assets as of March 31, 2016 and December 31, 2015, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

Estimated

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Useful Life

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

   

(Years)

   

Amount

   

Amortization

   

Net

   

Amount

   

Amortization

   

Net

 

Developed technology

 

15

 

$

179,300

 

$

(68,416)

 

$

110,884

 

$

172,675

 

$

(62,870)

 

$

109,805

 

Manufacturing Capacity Rights

 

6

 

 

21,546

 

 

(6,988)

 

 

14,558

 

 

20,750

 

 

(5,888)

 

 

14,862

 

Software

 

5 - 10

 

 

18,392

 

 

(10,048)

 

 

8,344

 

 

18,006

 

 

(9,494)

 

 

8,512

 

Software in development

 

N/A

 

 

33,760

 

 

 —

 

 

33,760

 

 

24,516

 

 

 —

 

 

24,516

 

Other

 

N/A

 

 

467

 

 

 —

 

 

467

 

 

523

 

 

 —

 

 

523

 

Total

 

 

 

$

253,465

 

$

(85,452)

 

$

168,013

 

$

236,470

 

$

(78,252)

 

$

158,218

 

As of March 31, 2016, the Company had $33.8 million capitalized as software in development, primarily related to our project to upgrade our legacy enterprise resource planning environment to the latest version of SAP. This project is expected to be completed and placed into service in 2016.

Amortization expense on other intangible assets totaled $4.4 million and $4.5 million for the three months ended March 31, 2016 and 2015, respectively.

11


 

The following table details the Company’s estimated amortization expense for the next five years, excluding any amortization expense related to software currently in development:

 

 

 

 

 

 

Estimated Amortization Expense for the Next Five Years

 

Remainder of 2016

   

$

13,842

 

2017

 

 

17,800

 

2018

 

 

17,108

 

2019

 

 

16,927

 

2020

 

 

13,894

 

2021

 

 

12,403

 

 

 

 

 

NOTE 6—DEBT

Debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

    

2016

    

2015

 

Senior Credit Facility

    

 

 

    

 

 

 

2020 Revolving Facility

 

$

 —

 

$

 —

 

2021 Term Loan B

 

 

495,160

 

 

496,365

 

2022 Senior Notes

 

 

 

 

 

 

 

USD Notes

 

 

300,000

 

 

300,000

 

Euro Notes

 

 

425,250

 

 

409,538

 

Accounts Receivable Securitization Facility

 

 

 —

 

 

 —

 

Other indebtedness

 

 

1,879

 

 

1,895

 

Total debt

 

 

1,222,289

 

 

1,207,798

 

Less: current portion

 

 

(5,000)

 

 

(5,000)

 

Less: unamortized deferred financing fees(1)

 

 

(24,789)

 

 

(25,678)

 

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

 

$

1,192,500

 

$

1,177,120

 

(1)

As discussed in Note 2, effective January 1, 2016, the Company retroactively adopted new accounting guidance that requires deferred financing fees related to a debt liability be presented in the balance sheet as a direct reduction of the carrying value of that debt liability rather than as deferred assets. This caption reflects this reclassification for both the current and prior periods.  Note that this caption does not include deferred financing fees related to the 2020 Revolving Facility and the Accounts Receivable Securitization Facility, which are included within “Deferred charges and other assets” on the condensed consolidated balance sheets.

2018 Senior Secured Credit Facility

On June 17, 2010, the Company entered into a credit agreement, which was subsequently amended from time to time, and was to mature in January 2018 (“2018 Senior Secured Credit Facility”).  The 2018 Senior Secured Credit Facility included a revolving credit facility (“2018 Revolving Facility”), which, as a result of an amendment in January 2013, included a borrowing capacity of $300.0 million. In May 2015, upon completion of the refinancing transactions discussed below, the Company terminated the 2018 Senior Secured Credit Facility.  Immediately prior to this termination, the Company had no outstanding borrowings under the 2018 Revolving Facility.

Senior Credit Facility

On May 5, 2015, Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (together, the “Issuers” or the “Borrowers”), both wholly-owned subsidiaries of the Company, entered into a senior secured credit agreement (the “Credit Agreement”), which provides senior secured financing of up to $825.0 million (the “Senior Credit

12


 

Facility”).  The Senior Credit Facility provides for senior secured financing consisting of a (i) $325.0 revolving credit facility, with a $25.0 million swingline subfacility and a $35.0 million letter of credit subfacility (the “2020 Revolving Facility”) maturing in May 2020 and (ii) $500.0 million senior secured term loan B facility maturing in November 2021 (the “2021 Term Loan B”). Amounts under the 2020 Revolving Facility are available in U.S. dollars and euros.

The 2021 Term Loan B bears an interest rate of LIBOR plus 3.25%, subject to a 1.00% LIBOR floor, and was issued at a 0.25% original issue discount.  Further, the 2021 Term Loan B requires scheduled quarterly payments in amounts equal to 0.25% of the original principal amount of the 2021 Term Loan B, with the balance to be paid at maturity. As of March 31, 2016, $5.0 million of these scheduled future payments were classified as current debt on the Company’s condensed consolidated balance sheet.

Loans under the 2020 Revolving Facility, at the Borrowers’ option, may be maintained as (a) LIBO rate loans, which bear interest at a rate per annum equal to the LIBO rate plus the applicable margin (as defined in the Credit Agreement), if applicable, or (b) base rate loans which shall bear interest at a rate per annum equal to the base rate plus the applicable margin (as defined in the Credit Agreement).  As of March 31, 2016, the Borrowers will be required to pay a quarterly commitment fee in respect of any unused commitments under the 2020 Revolving Facility equal to 0.375% per annum.

As of March 31, 2016, the Company had no outstanding borrowings, and had $311.7 million (net of $13.3 million outstanding letters of credit) of funds available for borrowing under the 2020 Revolving Facility. The Senior Credit Facility contains certain customary affirmative, negative and financial covenants. As of March 31, 2016, the Company was in compliance with all debt covenant requirements under the Senior Credit Facility. Refer to the Annual Report for further information.

2019 Senior Notes

In January 2013, the Company issued $1,325.0 million 8.750% senior notes due to mature on February 1, 2019 (the “2019 Senior Notes”). In July 2014, using proceeds from the Company’s initial public offering in June 2014 (the “IPO”), the Company redeemed $132.5 million in aggregate principal amount of the 2019 Senior Notes.

On May 13, 2015, using the net proceeds from the issuance of the 2021 Term Loan B, together with the net proceeds from the issuance of the 2022 Senior Notes (defined and discussed below) and available cash, the Company redeemed all outstanding borrowings under the 2019 Senior Notes, totaling $1,192.5 million in principal, together with a call premium of $68.6 million (with a redemption price of 103% on the first $132.5 million and 106.097% on the remaining balance) and accrued and unpaid interest thereon of $29.6 million.

2022 Senior Notes

On May 5, 2015, the Issuers executed an indenture (the “Indenture”) pursuant to which they issued $300.0 million aggregate principal amount of 6.750% senior notes due May 1, 2022 (the “USD Notes”) and €375.0 million aggregate principal amount of 6.375% senior notes due May 1, 2022 (the “Euro Notes”, and together with the USD Notes, the “2022 Senior Notes”).  Interest on the 2022 Senior Notes is payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015.

The Indenture contains certain provisions allowing the Issuers’ to redeem the 2022 Senior Notes prior to their maturity. Additionally, the Indenture contains certain customary covenants, which the Company was in compliance with as of March 31, 2016. Refer to the Annual Report for further information.  

Accounts Receivable Securitization Facility

The Company’s accounts receivable securitization facility (“Accounts Receivable Securitization Facility”) has a borrowing capacity of $200.0 million and was set to mature in May 2016. In February 2016, the Company amended the facility to extend the maturity date to May 2019.

The Accounts Receivable Securitization Facility is subject to interest charges against the amount of outstanding borrowings as well as the amount of available, but undrawn commitments. In regards to outstanding borrowings, fixed interest charges are 2.60% plus variable commercial paper rates, while for available, but undrawn commitments, fixed interest charges are 1.40%.

13


 

As of March 31, 2016 and December 31, 2015, there were no amounts outstanding under the Accounts Receivable Securitization Facility, with approximately $133.3 million and $123.4 million, respectively, of accounts receivable available to support this facility, based on the pool of eligible accounts receivable.

NOTE 7—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.

As of March 31, 2016, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $363.2 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of March 31, 2016.

 

 

 

 

 

 

 

    

March 31, 

 

Buy / (Sell) 

    

2016

 

Euro

 

$

150,398

 

Chinese Yuan

 

$

(89,613)

 

Indonesian Rupiah

 

$

(48,871)

 

Swiss Franc

 

$

37,705

 

Japanese Yen

 

$

(11,083)

 

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 (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 March 31, 2016 have maturities occurring over a period of nine months, and have a net notional U.S. dollar equivalent of $171.0 million.

Net Investment Hedge

The Company’s outstanding debt includes €375.0 million of Euro Notes (see Note 6 for details).  As of March 31, 2016, the Company has designated a portion (€150.0 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 $5.9 million within accumulated other comprehensive loss as of March 31, 2016.

14


 

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 March 31, 

 

Statement of Operations

 

 

2016

 

2015

 

2016

 

2015

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(7,425)

    

$

1,035

    

$

1,106

    

$

 —

    

Cost of sales

Total

 

$

(7,425)

 

$

1,035

 

$

1,106

 

$

 —

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

(6,285)

 

$

 —

 

$

 —

 

$

 —

 

Other expenses, net

Total

 

$

(6,285)

 

$

 —

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

3,133

 

$

(20,962)

 

Other expenses, net

Total

 

$

 —

 

$

 —

 

$

3,133

 

$

(20,962)

 

 

The Company recorded gains of $3.1 million and losses of $21.0 million during the three months ended March 31, 2016 and 2015, 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 losses of $5.0 million and gains of $18.0 million during the three months ended March 31, 2016 and 2015, 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 March 31, 2016, 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 $2.6 million net loss from other comprehensive income (loss) into earnings related to the Company’s outstanding cash flow hedges as of March 31, 2016 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

   

December 31, 2015

 

 

 

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

 

$

5,866

 

$

173

    

$

6,039

 

$

4,592

    

$

4,958

    

$

9,550

 

Deferred charges and other assets

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total asset derivatives

 

$

5,866

 

$

173

 

$

6,039

 

$

4,592

 

$

4,958

 

$

9,550

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

    

$

1,021

    

$

2,736

    

$

3,757

 

$

194

    

$

 —

    

$

194

 

Other noncurrent obligations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total liability derivatives

 

$

1,021

 

$

2,736

 

$

3,757

 

$

194

 

$

 —

 

$

194

 

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

15


 

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 March 31, 2016

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

8,118

 

$

(2,079)

 

$

6,039

 

Derivative liabilities

 

 

5,836

 

 

(2,079)

 

 

3,757

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

10,044

 

$

(494)

 

$

9,550

 

Derivative liabilities

 

 

688

 

 

(494)

 

 

194

 

 

Refer to Notes 8 and 17 of the condensed consolidated financial statements for further information regarding the fair value of the Company’s derivative instruments and the related changes in accumulated other comprehensive income.

 

NOTE 8—FAIR VALUE MEASUREMENTS

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

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

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

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

The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

 

Identical Items

 

Inputs

 

Inputs

 

 

 

 

Assets (Liabilities) at Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Foreign exchange forward contracts—Assets

    

$

 —

    

$

5,866

    

$

 —

    

$

5,866

 

Foreign exchange forward contracts—(Liabilities)

 

 

 —

 

 

(1,021)

 

 

 —

 

 

(1,021)

 

Foreign exchange cash flow hedges—Assets

 

 

 —

 

 

173

 

 

 —

 

 

173

 

Foreign exchange cash flow hedges—(Liabilities)

 

 

 —

 

 

(2,736)

 

 

 —

 

 

(2,736)

 

Total fair value

 

$

 —

 

$

2,282

 

$

 —

 

$

2,282

 

 

 

16


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

 

Identical Items

 

Inputs

 

Inputs

 

 

 

 

Assets (Liabilities) at Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Foreign exchange forward contracts—Assets

 

$

 —

    

$

4,592

    

$

 —

    

$

4,592

 

Foreign exchange forward contracts—(Liabilities)

 

 

 —

 

 

(194)

 

 

 —

 

 

(194)

 

Foreign exchange cash flow hedges—Assets

    

 

 —

    

 

4,958

 

 

 —

 

 

4,958

 

Total fair value

 

$

 —