10-Q 1 tse-20160930x10q.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 September 30, 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 November 1, 2016, there were 44,653,235 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 September 30, 2016 and December 31, 2015 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2016 and 2015 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

Item 2. 

 

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

 

31 

 

 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

47 

 

 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

47 

 

 

 

 

 

 

 

Part II 

 

Other Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

47 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

47 

 

 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

48 

 

 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

48 

 

 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

48 

 

 

 

 

 

 

 

Item 5. 

 

Other Information

 

48 

 

 

 

 

 

 

 

Item 6. 

 

Exhibits

 

48 

 

 

 

 

 

 

 

Signatures 

 

 

 

 

 

 

 

 

 

 

 

Exhibit Index 

 

 

 

 

 

 

 

2


 

Trinseo S.A.

Quarterly Report on Form 10-Q

For the quarterly period ended September 30, 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)

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

 

2016

 

2015

    

Assets

    

 

 

 

 

    

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

466,287

 

$

431,261

 

Accounts receivable, net of allowance for doubtful accounts (September 30, 2016: $3,459; December 31, 2015: $2,417)

 

 

511,624

 

 

494,556

 

Inventories

 

 

375,747

 

 

353,097

 

Other current assets

 

 

37,832

 

 

10,120

 

Total current assets

 

 

1,391,490

 

 

1,289,034

 

Investments in unconsolidated affiliates

 

 

186,999

 

 

182,836

 

Property, plant and equipment, net of accumulated depreciation (September 30, 2016: $421,608; December 31, 2015: $375,315)

 

 

494,927

 

 

518,751

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

31,382

 

 

31,064

 

Other intangible assets, net

 

 

177,743

 

 

158,218

 

Deferred income tax assets—noncurrent

 

 

40,936

 

 

51,395

 

Deferred charges and other assets

 

 

29,300

 

 

27,596

 

Total other assets

 

 

279,361

 

 

268,273

 

Total assets

 

$

2,352,777

 

$

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

 

 

331,887

 

 

324,629

 

Income taxes payable

 

 

25,185

 

 

20,804

 

Accrued expenses and other current liabilities

 

 

130,867

 

 

98,836

 

Total current liabilities

 

 

492,939

 

 

449,269

 

Noncurrent liabilities

 

 

 

 

 

 

 

Long-term debt, net of unamortized deferred financing fees

 

 

1,185,873

 

 

1,177,120

 

Deferred income tax liabilities—noncurrent

 

 

25,789

 

 

25,764

 

Other noncurrent obligations

 

 

224,739

 

 

217,727

 

Total noncurrent liabilities

 

 

1,436,401

 

 

1,420,611

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Ordinary shares, $0.01 nominal value, 50,000,000 shares authorized (September 30, 2016: 48,778 shares issued and 44,653 shares outstanding; December 31, 2015: 48,778 shares issued and outstanding)

 

 

488

 

 

488

 

Additional paid-in-capital

 

 

571,504

 

 

556,532

 

Treasury shares, at cost (September 30, 2016: 4,125 shares; December 31, 2015: zero shares)

 

 

(193,165)

 

 

 —

 

Retained earnings (accumulated deficit)

 

 

193,285

 

 

(18,289)

 

Accumulated other comprehensive loss

 

 

(148,675)

 

 

(149,717)

 

Total shareholders’ equity

 

 

423,437

 

 

389,014

 

Total liabilities and shareholders’ equity

 

$

2,352,777

 

$

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

    

Net sales

    

$

935,410

    

$

1,027,952

    

$

2,799,188

    

$

3,074,890

 

Cost of sales

 

 

795,026

 

 

916,390

 

 

2,349,392

 

 

2,718,112

 

Gross profit

 

 

140,384

 

 

111,562

 

 

449,796

 

 

356,778

 

Selling, general and administrative expenses

 

 

73,900

 

 

51,093

 

 

180,635

 

 

153,607

 

Equity in earnings of unconsolidated affiliates

 

 

36,686

 

 

33,489

 

 

110,314

 

 

111,037

 

Operating income

 

 

103,170

 

 

93,958

 

 

379,475

 

 

314,208

 

Interest expense, net

 

 

18,832

 

 

19,489

 

 

56,542

 

 

73,945

 

Loss on extinguishment of long-term debt

 

 

 —

 

 

 —

 

 

 —

 

 

95,150

 

Other expense, net

 

 

1,084

 

 

1,214

 

 

16,628

 

 

7,998

 

Income before income taxes

 

 

83,254

 

 

73,255

 

 

306,305

 

 

137,115

 

Provision for income taxes

 

 

16,000

 

 

21,200

 

 

66,500

 

 

46,600

 

Net income

 

$

67,254

 

$

52,055

 

$

239,805

 

$

90,515

 

Weighted average shares- basic

 

 

45,865

 

 

48,778

 

 

47,152

 

 

48,773

 

Net income per share- basic

 

$

1.47

 

$

1.07

 

$

5.09

 

$

1.86

 

Weighted average shares- diluted

 

 

46,961

 

 

48,989

 

 

48,041

 

 

48,936

 

Net income per share- diluted

 

$

1.43

 

$

1.06

 

$

4.99

 

$

1.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repayments of equity per share

 

$

0.30

 

$

 —

 

$

0.60

 

$

 —

 

 

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Net income

    

$

67,254

    

$

52,055

    

$

239,805

    

$

90,515

    

Other comprehensive income (loss), net of tax (tax amounts shown in millions below for the three and nine months ended September 30, 2016 and 2015, respectively):

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

1,488

 

 

1,234

 

 

3,906

 

 

(77,680)

 

Net gain (loss) on foreign exchange cash flow hedges

 

 

(2,280)

 

 

97

 

 

(3,676)

 

 

(308)

 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) arising during period (net of tax of: 2016—$0 and ($0.5); 2015—$0 and $0)

 

 

 —

 

 

 —

 

 

(800)

 

 

 —

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

533

 

 

797

 

 

1,612

 

 

2,425

 

Total other comprehensive income (loss), net of tax

 

 

(259)

 

 

2,128

 

 

1,042

 

 

(75,563)

 

Comprehensive income

 

$

66,995

 

$

54,183

 

$

240,847

 

$

14,952

 

 

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

 

Adoption of new accounting standard(1)

 

 —

 

 

 —

 

 

915

 

 

 —

 

 

 —

 

 

(915)

 

 

 —

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

239,805

 

 

239,805

 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,042

 

 

 —

 

 

1,042

 

Stock-based compensation activity

 

25

 

 

 —

 

 

14,057

 

 

914

 

 

 —

 

 

 —

 

 

14,971

 

Purchase of treasury shares

 

(4,150)

 

 

 —

 

 

 —

 

 

(194,079)

 

 

 —

 

 

 —

 

 

(194,079)

 

Repayments of equity on ordinary shares

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(27,316)

 

 

(27,316)

 

Balance at September 30, 2016

 

44,653

 

$

488

 

$

571,504

 

$

(193,165)

 

$

(148,675)

 

$

193,285

 

$

423,437

 

Balance at December 31, 2014

 

48,770

 

$

488

 

$

547,530

 

$

 —

 

$

(75,217)

 

$

(151,936)

 

$

320,865

 

Net income

 

 

 

 

 

 

 

 —

 

 

 

 

90,515

 

 

90,515

 

Other comprehensive loss

 

 

 

 

 

 

 

 —

 

 

(75,563)

 

 

 

 

(75,563)

 

Stock-based compensation activity

 

8

 

 

 

 

9,434

 

 

 —

 

 

 

 

 

 

9,434

 

Balance at September 30, 2015

 

48,778

 

$

488

 

$

556,964

 

$

 —

 

$

(150,780)

 

$

(61,421)

 

$

345,251

 


(1)

See Notes 2 and 12 for discussion of adoption of Accounting Standards Update 2016-09.

 

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

 

 

 

7


 

TRINSEO S.A.

Condensed Consolidated Statements of Cash Flows  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2016

    

2015

 

Cash flows from operating activities

    

 

    

    

 

    

    

Net income

 

$

239,805

 

$

90,515

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

71,744

 

 

67,287

 

Amortization of deferred financing fees and issuance discount

 

 

4,469

 

 

6,075

 

Deferred income tax

 

 

9,895

 

 

(13,815)

 

Stock-based compensation expense

 

 

14,842

 

 

9,434

 

Earnings of unconsolidated affiliates, net of dividends

 

 

(8,972)

 

 

(23,540)

 

Unrealized net losses (gains) on foreign exchange forward contracts

 

 

3,533

 

 

(4,435)

 

Loss on extinguishment of debt

 

 

 —

 

 

95,150

 

Prepayment penalty on long-term debt

 

 

 —

 

 

(68,603)

 

Loss on sale of businesses and other assets

 

 

13,091

 

 

 —

 

Impairment charges

 

 

14,310

 

 

 —

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(30,229)

 

 

11,726

 

Inventories

 

 

(27,605)

 

 

63,117

 

Accounts payable and other current liabilities

 

 

23,138

 

 

(47,861)

 

Income taxes payable

 

 

3,973

 

 

26,780

 

Other assets, net

 

 

(18,426)

 

 

(7,119)

 

Other liabilities, net

 

 

11,130

 

 

994

 

Cash provided by operating activities

 

 

324,698

 

 

205,705

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(82,678)

 

 

(79,088)

 

Proceeds from capital expenditures subsidy

 

 

 —

 

 

2,191

 

Proceeds from the sale of businesses and other assets

 

 

174

 

 

689

 

Distributions from unconsolidated affiliates

 

 

4,809

 

 

 —

 

Increase in restricted cash

 

 

 —

 

 

(413)

 

Cash used in investing activities

 

 

(77,695)

 

 

(76,621)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Deferred financing fees

 

 

 —

 

 

(28,033)

 

Short-term borrowings, net

 

 

(126)

 

 

(17,703)

 

Repayments of term loans

 

 

(3,750)

 

 

(1,250)

 

Purchase of treasury shares

 

 

(194,079)

 

 

 —

 

Repayments of equity on ordinary shares

 

 

(13,920)

 

 

 —

 

Stock-based compensation activity, net

 

 

129

 

 

 —

 

Net proceeds from issuance of 2021 Term Loan B

 

 

 —

 

 

498,750

 

Net proceeds from issuance of 2022 Senior Notes

 

 

 —

 

 

716,625

 

Repayments of 2019 Senior Notes

 

 

 —

 

 

(1,192,500)

 

Proceeds from Accounts Receivable Securitization Facility

 

 

 —

 

 

25,000

 

Repayments of Accounts Receivable Securitization Facility

 

 

 —

 

 

(25,000)

 

Cash used in financing activities

 

 

(211,746)

 

 

(24,111)

 

Effect of exchange rates on cash

 

 

(231)

 

 

(4,988)

 

Net change in cash and cash equivalents

 

 

35,026

 

 

99,985

 

Cash and cash equivalents—beginning of period

 

 

431,261

 

 

220,786

 

Cash and cash equivalents—end of period

 

$

466,287

 

$

320,771

 

 

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 September 30, 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 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

9


 

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. The Company adopted this guidance effective April 1, 2016.  Under this guidance, excess tax benefits associated with share-based payment awards are recognized in the statement of operations when the awards vest or settle, rather than in shareholders’ equity, and all tax-related cash flows resulting from share-based payments are reported as operating activities on the statement of cash flows.  In addition, this guidance modified the minimum statutory withholding requirements to allow entities to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without triggering liability classification of the award, while also clarifying that all cash payments made to taxing authorities on employees’ behalf for withheld shares are to be reported as financing activities on the statement of cash flows.  The adoption of these changes did not materially impact the Company’s financial position and result of operations. Additionally, as part of this adoption, the Company made an accounting policy election to recognize forfeitures as incurred, rather than estimating the forfeitures in advance.  The impact of this change was applied utilizing a modified retrospective approach, with an adjustment of $0.9 million recorded during the nine months ended September 30, 2016 to decrease opening retained earnings and increase opening additional paid-in-capital.

In August 2016, the FASB issued new guidance that aims to eliminate diversity in practice for how certain cash receipts and payments are presented and classified in the statement 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. The Company is currently assessing the timing and related impact of adopting this guidance on its statement of cash flows.

 

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 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.

As of September 30, 2016 and December 31, 2015, respectively, the Company’s investment in Americas Styrenics was $148.8 million and $143.9 million, which was $75.3 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 4.1 years as of September 30, 2016. The Company received dividends from Americas Styrenics of $40.0 million and $100.0 million during the three and nine months ended September 30, 2016, respectively, compared to $42.5 million and $87.5 million during the three and nine months ended September 30, 2015, respectively.

As of September 30, 2016 and December 31, 2015, respectively, the Company’s investment in Sumika Styron Polycarbonate was $38.2 million and $39.0 million, which was $15.6 million and $19.8 million greater than the Company’s 50% share of the underlying net assets of Sumika Styron Polycarbonate. This amount primarily 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 9.0 years as of September 30, 2016. The Company received dividends from Sumika Styron Polycarbonate of zero and $6.2 million during the three and nine months ended September 30, 2016, respectively. The Company received no dividends from Sumika Styron Polycarbonate during the three and nine months ended September 30, 2015.

10


 

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

    

Sales

    

$

460,305

    

$

447,712

    

$

1,241,908

    

$

1,388,085

 

Gross profit

 

$

84,095

 

$

79,972

 

$

240,366

 

$

249,334

 

Net income

 

$

65,041

 

$

61,018

 

$

188,853

 

$

201,498

 

 

NOTE 4—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

 

    

2016

    

2015

 

Finished goods

    

$

194,361

    

$

170,380

 

Raw materials and semi-finished goods

 

 

150,928

 

 

151,444

 

Supplies

 

 

30,458

 

 

31,273

 

Total

 

$

375,747

 

$

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 September 30, 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

 

Divestiture (Note 15)

 

 

(421)

 

 

 —

 

 

 —

 

 

 —

 

 

(421)

 

Foreign currency impact

 

 

296

 

 

202

 

 

69

 

 

172

 

 

739

 

Balance at September 30, 2016

 

$

12,287

 

$

8,703

 

$

2,983

 

$

7,409

 

$

31,382

 

Other Intangible Assets

The following table provides information regarding the Company’s other intangible assets as of September 30, 2016 and December 31, 2015, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

Estimated

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Useful Life

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

   

(Years)

   

Amount

   

Amortization

   

Net

   

Amount

   

Amortization

   

Net

 

Developed technology

 

15

 

$

176,776

 

$

(73,638)

 

$

103,138

 

$

172,675

 

$

(62,870)

 

$

109,805

 

Manufacturing Capacity Rights

 

6

 

 

21,244

 

 

(8,612)

 

 

12,632

 

 

20,750

 

 

(5,888)

 

 

14,862

 

Software

 

5 - 10

 

 

62,285

 

 

(12,911)

 

 

49,374

 

 

18,006

 

 

(9,494)

 

 

8,512

 

Software in development

 

N/A

 

 

12,366

 

 

 —

 

 

12,366

 

 

24,516

 

 

 —

 

 

24,516

 

Other

 

N/A

 

 

233

 

 

 —

 

 

233

 

 

523

 

 

 —

 

 

523

 

Total

 

 

 

$

272,904

 

$

(95,161)

 

$

177,743

 

$

236,470

 

$

(78,252)

 

$

158,218

 

As of September 30, 2016, the Company had $12.4 million capitalized as software in development, primarily

11


 

related to our project to upgrade our legacy enterprise resource planning (“ERP”) environment to the latest version of SAP. During the second quarter of 2016, we began a phased implementation of this ERP environment by geographic region, which we anticipate will be completed by the end of 2016.

Amortization expense on other intangible assets totaled $5.0 million and $15.2 million for the three and nine months ended September 30, 2016, respectively, and $4.8 million and $13.7 million for the three and nine months ended September 30, 2015, respectively.

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

   

$

5,736

 

2017

 

 

22,659

 

2018

 

 

21,969

 

2019

 

 

21,784

 

2020

 

 

18,847

 

2021

 

 

17,060

 

 

 

NOTE 6—DEBT

Refer to the Annual Report for further background on the Company’s debt facilities discussed below. As of September 30, 2016 and December 31, 2015, debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

 

    

2016

    

2015

 

Senior Credit Facility

    

 

 

    

 

 

 

2020 Revolving Facility

 

$

 —

 

$

 —

 

2021 Term Loan B

 

 

492,749

 

 

496,365

 

2022 Senior Notes

 

 

 

 

 

 

 

USD Notes

 

 

300,000

 

 

300,000

 

Euro Notes

 

 

419,288

 

 

409,538

 

Accounts Receivable Securitization Facility

 

 

 —

 

 

 —

 

Other indebtedness

 

 

1,807

 

 

1,895

 

Total debt

 

 

1,213,844

 

 

1,207,798

 

Less: current portion

 

 

(5,000)

 

 

(5,000)

 

Less: unamortized deferred financing fees(1)

 

 

(22,971)

 

 

(25,678)

 

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

 

$

1,185,873

 

$

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.

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 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.

12


 

In conjunction with the establishment of the Senior Credit Facility, the Company terminated its previous revolving credit facility and recognized a $0.7 million loss on extinguishment of long-term debt during the nine months ended September 30, 2015 comprised entirely of the write-off of a portion of the related unamortized deferred financing fees.

As of September 30, 2016, $5.0 million of the scheduled future payments related to the 2021 Term Loan B were classified as current debt on the Company’s condensed consolidated balance sheet. In addition, as of September 30, 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.

The Company had no outstanding borrowings, and had $308.4 million (net of $16.6 million outstanding letters of credit) of funds available for borrowing under the 2020 Revolving Facility as of September 30, 2016. The Senior Credit Facility contains certain customary affirmative, negative and financial covenants, which the Company was in compliance with as of September 30, 2016.

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”).

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 and available cash, the Company redeemed all outstanding borrowings under its previously issued Senior Notes (the “2019 Senior Notes”), totaling $1,192.5 million in principal, together with a call premium of $68.6 million and accrued and unpaid interest thereon of $29.6 million. 

As a result of this redemption, during the nine months ended September 30, 2015, the Company recorded a loss on extinguishment of long-term debt of $94.5 million, which includes the above $68.6 million call premium and $25.9 million write-off of unamortized deferred financing fees related to the 2019 Senior Notes.

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 September 30, 2016.

Accounts Receivable Securitization Facility

The Company’s accounts receivable securitization facility (“Accounts Receivable Securitization Facility”) has a borrowing capacity of $200.0 million and is set to mature in May 2019.

As of September 30, 2016 and December 31, 2015, there were no amounts outstanding under the Accounts Receivable Securitization Facility, with approximately $119.1 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 September 30, 2016, the Company had open foreign exchange forward contracts with a notional U.S. dollar

13


 

equivalent absolute value of $183.1 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of September 30, 2016.

 

 

 

 

 

 

 

 

September 30, 

 

Buy / (Sell) 

 

2016

 

Euro

 

$

48,686

 

Chinese Yuan

 

$

(43,982)

 

Indonesian Rupiah

 

$

(28,983)

 

Swiss Franc

 

$

25,189

 

Japanese Yen

 

$

(11,585)

 

British Pound

 

$

(8,831)

 

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 September 30, 2016 have maturities occurring over a period of 15 months, and have a net notional U.S. dollar equivalent of $213.0 million.

Net Investment Hedge

The Company’s outstanding debt includes €375.0 million of Euro Notes (see Note 6 for details).  As of September 30, 2016, the Company has designated a portion (€280.0 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 $4.2 million within accumulated other comprehensive loss as of September 30, 2016.

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 September 30, 

 

Statement of Operations

 

 

2016

 

2015

 

2016

 

2015

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(2,280)

    

$

97

    

$

245

    

$

(17)

    

Cost of sales

Total

 

$

(2,280)

 

$

97

 

$

245

 

$

(17)

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

(2,128)

 

$

(1,635)

 

$

 —

 

$

 —

 

Other expenses, net

Total

 

$

(2,128)

 

$

(1,635)

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

1,060

 

$

4,452

 

Other expenses, net

Total

 

$

 —

 

$

 —

 

$

1,060

 

$

4,452

 

 

14


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

Gain (Loss) Recognized in

 

 

 

 

AOCI on Balance Sheet

 

Statement of Operations

 

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