10-Q 1 tse-20170331x10q.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, 2017

or

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

For the transition period from                      to                     

Commission File Number: 001-36473

 


 

Trinseo S.A.

(Exact name of registrant as specified in its charter)

 


 

 

 

Luxembourg

N/A

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

1000 Chesterbrook Boulevard

Suite 300

Berwyn, PA 19312

(Address of Principal Executive Offices)

(610) 240-3200

(Registrant’s telephone number)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ◻ 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

◻  (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

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

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

 

As of May 1, 2017, there were 43,992,047 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, 2017 and December 31, 2016 (Unaudited)

 

4 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (Unaudited)

 

5 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2017 and 2016 (Unaudited)

 

6 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2017 and 2016 (Unaudited)

 

7 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (Unaudited)

 

8 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

9 

 

 

 

 

 

 

 

Item 2. 

 

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

 

24 

 

 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

35 

 

 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

35 

 

 

 

 

 

 

 

Part II 

 

Other Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

35 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

36 

 

 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36 

 

 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

36 

 

 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

36 

 

 

 

 

 

 

 

Item 5. 

 

Other Information

 

37 

 

 

 

 

 

 

 

Item 6. 

 

Exhibits

 

37 

 

 

 

 

 

 

 

Signatures 

 

 

 

 

 

 

 

 

 

 

 

Exhibit Index 

 

 

 

 

 

 

 

2


 

Trinseo S.A.

Quarterly Report on Form 10-Q

For the quarterly period ended March 31, 2017

Unless otherwise indicated or required by context, as used in this Quarterly Report on Form 10-Q (“Quarterly Report”), the term “Trinseo” refers to Trinseo S.A. (NYSE: TSE), a public limited liability company (société anonyme) existing under the laws of Luxembourg, and not its subsidiaries. The terms “Company,” “we,” “us” and “our” refer to Trinseo and its consolidated subsidiaries, taken as a consolidated entity. 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 the formation of the Company, our business was wholly owned by The Dow Chemical Company (together with other affiliates, “Dow”). In June 2010, investment funds advised or managed by affiliates of Bain Capital Partners, LLC (“Bain Capital”) acquired an ownership interest in our business through an indirect ownership interest in us. During 2016, Bain Capital Everest Manager Holding SCA (“the former Parent”), an affiliate of Bain Capital, sold its entire ownership interest in the Company pursuant to the Company’s shelf registration statement filed with the SEC.

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

Cautionary Note on Forward-Looking Statements

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

As a result of these or other factors, our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Therefore, we caution you against relying on these forward-looking statements. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge through the Investor Relations section of our website, www.trinseo.com, as soon as reasonably practicable after the reports are electronically filed or furnished with the U.S. Securities and Exchange Commission. We provide this website and information contained in or connected to it for informational purposes only. That information is not a part of this Quarterly Report.

 

 

3


 

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements 

TRINSEO S.A.

Condensed Consolidated Balance Sheets  

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

 

2017

 

2016

    

Assets

    

 

 

 

 

    

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

410,137

 

$

465,114

 

Accounts receivable, net of allowance for doubtful accounts (March 31, 2017: $2,979; December 31, 2016: $3,138)

 

 

698,784

 

 

564,428

 

Inventories

 

 

481,112

 

 

385,345

 

Other current assets

 

 

15,613

 

 

17,999

 

Total current assets

 

 

1,605,646

 

 

1,432,886

 

Investments in unconsolidated affiliates

 

 

160,649

 

 

191,418

 

Property, plant and equipment, net of accumulated depreciation (March 31, 2017: $443,120; December 31, 2016: $420,343)

 

 

519,890

 

 

513,757

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

29,992

 

 

29,485

 

Other intangible assets, net

 

 

174,421

 

 

177,345

 

Deferred income tax assets—noncurrent

 

 

32,791

 

 

40,187

 

Deferred charges and other assets

 

 

30,213

 

 

24,412

 

Total other assets

 

 

267,417

 

 

271,429

 

Total assets

 

$

2,553,602

 

$

2,409,490

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

5,000

 

$

5,000

 

Accounts payable

 

 

423,000

 

 

378,029

 

Income taxes payable

 

 

29,640

 

 

23,784

 

Accrued expenses and other current liabilities

 

 

125,330

 

 

135,357

 

Total current liabilities

 

 

582,970

 

 

542,170

 

Noncurrent liabilities

 

 

 

 

 

 

 

Long-term debt, net of unamortized deferred financing fees

 

 

1,166,750

 

 

1,160,369

 

Deferred income tax liabilities—noncurrent

 

 

28,872

 

 

24,844

 

Other noncurrent obligations

 

 

240,935

 

 

237,054

 

Total noncurrent liabilities

 

 

1,436,557

 

 

1,422,267

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Ordinary shares, $0.01 nominal value, 50,000,000 shares authorized (March 31, 2017: 48,778 shares issued and 44,068 shares outstanding; December 31, 2016: 48,778 shares issued and 44,301 shares outstanding)

 

 

488

 

 

488

 

Additional paid-in-capital

 

 

574,671

 

 

573,662

 

Treasury shares, at cost (March 31, 2017: 4,710 shares; December 31, 2016: 4,477 shares)

 

 

(233,850)

 

 

(217,483)

 

Retained earnings

 

 

362,153

 

 

258,540

 

Accumulated other comprehensive loss

 

 

(169,387)

 

 

(170,154)

 

Total shareholders’ equity

 

 

534,075

 

 

445,053

 

Total liabilities and shareholders’ equity

 

$

2,553,602

 

$

2,409,490

 

 

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

4


 

TRINSEO S.A.

Condensed Consolidated Statements of Operations  

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

Net sales

    

$

1,104,490

    

$

894,084

 

Cost of sales

 

 

906,688

 

 

754,412

 

Gross profit

 

 

197,802

 

 

139,672

 

Selling, general and administrative expenses

 

 

60,436

 

 

54,486

 

Equity in earnings of unconsolidated affiliates

 

 

19,295

 

 

35,026

 

Operating income

 

 

156,661

 

 

120,212

 

Interest expense, net

 

 

18,200

 

 

18,896

 

Other expense (income), net

 

 

(8,133)

 

 

2,669

 

Income before income taxes

 

 

146,594

 

 

98,647

 

Provision for income taxes

 

 

29,300

 

 

21,900

 

Net income

 

$

117,294

 

$

76,747

 

Weighted average shares- basic

 

 

44,057

 

 

48,655

 

Net income per share- basic

 

$

2.66

 

$

1.58

 

Weighted average shares- diluted

 

 

45,313

 

 

49,086

 

Net income per share- diluted

 

$

2.59

 

$

1.56

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.30

 

$

 —

 

 

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

5


 

 

TRINSEO S.A.

Condensed Consolidated Statements of Comprehensive Income (Loss)  

(In thousands, unless otherwise stated)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Net income

    

$

117,294

    

$

76,747

    

Other comprehensive income (loss), net of tax (tax amounts shown in millions below for the three months ended March 31, 2017 and 2016, respectively):

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

4,201

 

 

13,423

 

Net loss on foreign exchange cash flow hedges

 

 

(4,810)

 

 

(7,425)

 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

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

 

 

 —

 

 

(800)

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

1,376

 

 

540

 

Total other comprehensive income, net of tax

 

 

767

 

 

5,738

 

Comprehensive income

 

$

118,061

 

$

82,485

 

 

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

6


 

TRINSEO S.A.

Condensed Consolidated Statements of Shareholders’ Equity  

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Shares

    

Shareholders' Equity

 

 

    

Ordinary Shares Outstanding

 

Treasury Shares

    

Ordinary Shares

    

Additional
Paid-In Capital

    

Treasury Shares

    

Accumulated Other Comprehensive Income (Loss)

    

Retained Earnings (Accumulated Deficit)

    

Total

 

Balance at December 31, 2016

 

44,301

 

4,477

 

$

488

 

$

573,662

 

$

(217,483)

 

$

(170,154)

 

$

258,540

 

$

445,053

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

117,294

 

 

117,294

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

767

 

 

 —

 

 

767

 

Stock-based compensation activity

 

194

 

(194)

 

 

 —

 

 

1,009

 

 

6,920

 

 

 —

 

 

 —

 

 

7,929

 

Purchase of treasury shares

 

(427)

 

427

 

 

 —

 

 

 —

 

 

(23,287)

 

 

 —

 

 

 —

 

 

(23,287)

 

Dividends on ordinary shares ($0.30 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13,681)

 

 

(13,681)

 

Balance at March 31, 2017

 

44,068

 

4,710

 

$

488

 

$

574,671

 

$

(233,850)

 

$

(169,387)

 

$

362,153

 

$

534,075

 

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

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

76,747

 

 

76,747

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,738

 

 

 —

 

 

5,738

 

Stock-based compensation activity

 

 —

 

 —

 

 

 —

 

 

5,593

 

 

 —

 

 

 —

 

 

 —

 

 

5,593

 

Purchase of treasury shares

 

(1,600)

 

1,600

 

 

 —

 

 

 —

 

 

(57,008)

 

 

 —

 

 

 —

 

 

(57,008)

 

Balance at March 31, 2016

 

47,178

 

1,600

 

$

488

 

$

563,040

 

$

(57,008)

 

$

(143,979)

 

$

57,543

 

$

420,084

 


(1) Refer to Note 11 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)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

    

 

    

    

 

    

    

Net income

 

$

117,294

 

$

76,747

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24,720

 

 

23,120

 

Amortization of deferred financing fees and issuance discount

 

 

1,350

 

 

1,608

 

Deferred income tax

 

 

11,282

 

 

6,418

 

Stock-based compensation expense

 

 

4,730

 

 

5,593

 

Earnings of unconsolidated affiliates, net of dividends

 

 

(2,863)

 

 

(3,684)

 

Unrealized net losses (gains) on foreign exchange forward contracts

 

 

187

 

 

(447)

 

Gain on sale of businesses and other assets

 

 

(9,914)

 

 

 —

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(133,312)

 

 

(33,732)

 

Inventories

 

 

(91,621)

 

 

(7,162)

 

Accounts payable and other current liabilities

 

 

49,895

 

 

4,344

 

Income taxes payable

 

 

5,559

 

 

6,486

 

Other assets, net

 

 

(4,485)

 

 

(3,452)

 

Other liabilities, net

 

 

1,465

 

 

9,046

 

Cash provided by (used in) operating activities

 

 

(25,713)

 

 

84,885

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(36,044)

 

 

(26,437)

 

Proceeds from the sale of businesses and other assets

 

 

42,100

 

 

 —

 

Distributions from unconsolidated affiliates

 

 

857

 

 

4,809

 

Cash provided by (used in) investing activities

 

 

6,913

 

 

(21,628)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Short-term borrowings, net

 

 

(62)

 

 

(63)

 

Repayments of term loans

 

 

(1,250)

 

 

(1,250)

 

Purchase of treasury shares

 

 

(26,648)

 

 

(57,008)

 

Dividends paid

 

 

(13,252)

 

 

 —

 

Proceeds from exercise of option awards

 

 

3,337

 

 

 —

 

Withholding taxes paid on restricted share units

 

 

(138)

 

 

 —

 

Cash used in financing activities

 

 

(38,013)

 

 

(58,321)

 

Effect of exchange rates on cash

 

 

1,836

 

 

2,192

 

Net change in cash and cash equivalents

 

 

(54,977)

 

 

7,128

 

Cash and cash equivalents—beginning of period

 

 

465,114

 

 

431,261

 

Cash and cash equivalents—end of period

 

$

410,137

 

$

438,389

 

 

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, 2017 and 2016 were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are considered necessary for the fair statement of the results for the periods presented. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures normally provided in annual financial statements and, therefore, these statements should be read in conjunction with the 2016 audited consolidated financial statements included within the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017.

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

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications did not have a material impact on the Company’s financial position or results. Refer to Note 11 and Note 13 for further information.

 

NOTE 2—RECENT ACCOUNTING GUIDANCE

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued guidance which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the FASB has issued certain clarifying updates to this guidance, which the Company will consider as part of our adoption. The Company expects to adopt this guidance for annual and interim periods beginning after December 31, 2017 by applying the modified retrospective transition approach. While our adoption efforts have progressed significantly, we have not yet reached a final conclusion on the expected impacts of adopting this new standard on our consolidated financial statements and disclosures, as well as on our underlying business processes and information technology systems.

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

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

In August 2016, the FASB issued guidance that aims to eliminate diversity in practice for how certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. This guidance is effective for public companies for annual and interim periods beginning after December 15, 2017, with early adoption permitted. This guidance must be adopted using a retrospective approach, and provides for certain practical expedients.

9


 

Additionally, the FASB has issued further guidance related to the presentation of restricted cash on the consolidated statements of cash flows. The Company is currently assessing the timing and related impact of adopting this guidance on its consolidated statements of cash flows.

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

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

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

 

NOTE 3—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

Sales

    

$

433,946

    

$

376,253

 

Gross profit

 

$

20,588

 

$

68,403

 

Net income

 

$

6,328

 

$

52,796

 

Americas Styrenics

As of March 31, 2017 and December 31, 2016, respectively, the Company’s investment in Americas Styrenics was $160.6 million and $149.7 million, which was $55.1 million and $71.2 million less than the Company’s 50% share of the underlying net assets of Americas Styrenics. This amount represents the difference between the book value of assets contributed to the joint venture at the time of formation (May 1, 2008) and the Company’s 50% share of the total recorded value of the joint venture’s assets and certain adjustments to conform with the Company’s accounting policies. This difference is being amortized over a weighted average remaining useful life of the contributed assets of approximately 3.5 years as of March 31, 2017. The Company received dividends from Americas Styrenics of $7.5 million and $30.0 million during the three months ended March 31, 2017 and 2016, respectively.

10


 

Sumika Styron Polycarbonate

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

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

 

NOTE 4—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

    

2017

    

2016

 

Finished goods

    

$

242,108

    

$

187,577

 

Raw materials and semi-finished goods

 

 

209,030

 

 

168,804

 

Supplies

 

 

29,974

 

 

28,964

 

Total

 

$

481,112

 

$

385,345

 

 

 

 

NOTE 5—DEBT

Refer to the Annual Report for definitions of capitalized terms not defined herein and further background on the Company’s debt facilities discussed below. The Company was in compliance with all debt related covenants as of March 31, 2017 and December 31, 2016.

11


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

December 31, 2016

 

 

 

Interest Rate as of March 31, 2017

    

Maturity
Date

    

Carrying
Amount

    

Unamortized
Deferred
Financing
Fees
(1)

    

Total Debt,
Less
Unamortized
Deferred
Financing
Fees

    

Carrying
Amount

    

Unamortized
Deferred
Financing
Fees
(1)

    

Total Debt,
Less
Unamortized
Deferred
Financing
Fees

 

Senior Credit Facility

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

    

 

 

2020 Revolving Facility(2)

 

Various

 

May 2020

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

2021 Term Loan B(3)

 

4.250%

 

November 2021

 

 

490,340

 

 

(8,731)

 

 

481,609

 

 

491,545

 

 

(9,159)

 

 

482,386

 

2022 Senior Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD Notes

 

6.750%

 

May 2022

 

 

300,000

 

 

(5,503)

 

 

294,497

 

 

300,000

 

 

(5,726)

 

 

294,274

 

Euro Notes

 

6.375%

 

May 2022

 

 

400,958

 

 

(6,876)

 

 

394,082

 

 

394,275

 

 

(7,157)

 

 

387,118

 

Accounts Receivable Securitization Facility(4)

 

Various

 

May 2019

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other indebtedness

 

Various

 

Various

 

 

1,562

 

 

 —

 

 

1,562

 

 

1,591

 

 

 —

 

 

1,591

 

Total debt

 

 

 

 

 

$

1,192,860

 

$

(21,110)

 

$

1,171,750

 

$

1,187,411

 

$

(22,042)

 

$

1,165,369

 

Less: current portion

 

 

 

 

 

 

 

 

 

 

 

 

(5,000)

 

 

 

 

 

 

 

 

(5,000)

 

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

 

 

 

 

 

 

 

 

 

 

 

$

1,166,750

 

 

 

 

 

 

 

$

1,160,369

 


(1)

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

(2)

The Company had $309.1 million (net of $15.9 million outstanding letters of credit) of funds available for borrowing under this facility as of March 31, 2017. Additionally, the Borrowers were required to pay a quarterly commitment fee in respect of any unused commitments under this facility equal to 0.375% per annum.

(3)

Carrying amounts presented above are net of an original issue discount, which was 0.25% of the original $500.0 million facility. This facility bears an interest rate of LIBOR plus 3.25%, subject to a 1.00% LIBOR floor. As of March 31, 2017, $5.0 million of the scheduled future payments related to this facility were classified as current debt on the Company’s condensed consolidated balance sheet.

(4)

This facility has a borrowing capacity of $200.0 million. As of March 31, 2017, the Company had approximately $139.2 million of accounts receivable available to support this facility, based on the pool of eligible accounts receivable. In regards to outstanding borrowings, fixed interest charges are 2.6% plus variable commercial paper rates, while for available, but undrawn commitments, fixed interest charges are 1.4%.

NOTE 6—DERIVATIVE INSTRUMENTS

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

Foreign Exchange Forward Contracts

Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company’s principal strategy in managing its exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on our balance sheet against corresponding assets of the same currency such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce its exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange

12


 

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, 2017, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $222.2 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of March 31, 2017.

 

 

 

 

 

 

 

 

March 31, 

 

Buy / (Sell) 

    

2017

 

Chinese Yuan

 

$

(79,985)

 

Euro

 

$

(63,617)

 

Indonesian Rupiah

 

$

(27,316)

 

Swiss Franc

 

$

19,083

 

Japanese Yen

 

$

(10,163)

 

Turkish Lira

 

$

(7,349)

 

Foreign Exchange Cash Flow Hedges

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

Open foreign exchange cash flow hedges as of March 31, 2017 have maturities occurring over a period of 9 months, and have a net notional U.S. dollar equivalent of $175.5 million.

Net Investment Hedge

The Company’s outstanding debt includes €375.0 million of Euro Notes (refer to Note 5 for details). As of March 31, 2017, the Company has designated a portion (€280 million) of the principal amount of these Euro Notes as a hedge of the foreign currency exposure of the Issuers’ net investment in certain European subsidiaries. As this debt was deemed to be a highly effective hedge, changes in the Euro Notes’ carrying value resulting from fluctuations in the euro exchange rate were recorded as cumulative foreign currency translation gain of $9.5 million within AOCI as of March 31, 2017.

Summary of Derivative Instruments

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

Gain (Loss) Recognized in

 

 

 

 

AOCI on Balance Sheet

 

Statement of Operations

 

 

 

 

Three Months Ended March 31, 

 

Statement of Operations

 

 

2017

 

2016

 

2017

 

2016

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(4,810)

    

$

(7,425)

    

$

2,451

    

$

1,106

    

Cost of sales

Total

 

$

(4,810)

 

$

(7,425)

 

$

2,451

 

$

1,106

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

(4,990)

 

$

(6,285)

 

$

 —

 

$

 —

 

Other expense (income), net

Total

 

$

(4,990)

 

$

(6,285)

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

(1,675)

 

$

3,133

 

Other expense (income), net

Total

 

$

 —

 

$

 —

 

$

(1,675)

 

$

3,133

 

 

The Company recorded losses of $1.7 million and gains of $3.1 million during the three months ended March 31,

13


 

2017 and 2016, respectively, from settlements and changes in the fair value of outstanding forward contracts (not designated as hedges). The losses and gains from these forward contracts offset net foreign exchange transaction gains of $0.6 million and losses of $5.0 million, respectively, during the three months ended March 31, 2017 and 2016 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, 2017, the Company has no ineffectiveness related to its foreign exchange cash flow hedges. Further, the Company expects to reclassify in the next twelve months an approximate $6.3 million net gain from AOCI into earnings related to the Company’s outstanding cash flow hedges as of March 31, 2017 based on current foreign exchange rates.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

   

December 31, 2016

 

 

 

Foreign
Exchange

 

Foreign
Exchange

 

 

 

Foreign
Exchange

 

Foreign
Exchange

 

 

 

 

 

Forward

 

Cash Flow

 

 

 

Forward

 

Cash Flow

 

 

 

Balance Sheet Classification

    

Contracts

   

Hedges

    

Total

 

Contracts

   

Hedges

    

Total

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

$

1,236

 

$

6,302

    

$

7,538

 

$

1,664

    

$

11,018

    

$

12,682

 

Deferred charges and other assets

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total asset derivatives

 

$

1,236

 

$

6,302

 

$

7,538

 

$

1,664

 

$

11,018

 

$

12,682

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

    

$

512

    

$

 —

    

$

512

 

$

511

    

$

 —

    

$

511

 

Other noncurrent obligations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total liability derivatives

 

$

512

 

$

 —

 

$

512

 

$

511

 

$

 —

 

$

511

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Gross Amounts

 

Net Amounts

 

 

 

Recognized in the

 

Offset in the

 

Presented in the

 

 

    

Balance Sheet

    

Balance Sheet

    

Balance Sheet

 

Balance at March 31, 2017

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

14,511

 

$

(6,973)

 

$

7,538

 

Derivative liabilities

 

 

7,485

 

 

(6,973)

 

 

512

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

23,401

 

$

(10,719)

 

$

12,682

 

Derivative liabilities

 

 

11,230

 

 

(10,719)

 

 

511

 

 

Refer to Notes 7 and 15 of the condensed consolidated financial statements for further information regarding the fair value of the Company’s derivative instruments and the related changes in AOCI.

 

NOTE 7—FAIR VALUE MEASUREMENTS

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

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

14


 

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, 2017 and December 31, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

Quoted Prices in Active Markets for Identical Items

 

Significant Other Observable Inputs

 

Significant Unobservable Inputs

 

 

 

 

Assets (Liabilities) at Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Foreign exchange forward contracts—Assets

    

$

 —

    

$

1,236

    

$

 —

    

$