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

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

 

(Mark One)                                                                                                                                                                                         

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

For the quarterly period ended June 30, 2017

or

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

For the transition period from                      to                     

Commission File Number: 001-36473

 


 

Trinseo S.A.

(Exact name of registrant as specified in its charter)

 


 

 

 

Luxembourg

N/A

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

1000 Chesterbrook Boulevard

Suite 300

Berwyn, PA 19312

(Address of Principal Executive Offices)

(610) 240-3200

(Registrant’s telephone number)

 


 

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

 

 

 

 

 

Non-accelerated filer

◻  (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

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

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

 

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

 

 

 


 

 

TABLE OF CONTENTS

 

 

    

    

    

    

 

 

    

 

    

Page

 

 

 

 

 

 

 

Part I 

 

Financial Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

Item 2. 

 

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

 

25 

 

 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

39 

 

 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

40 

 

 

 

 

 

 

 

Part II 

 

Other Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

40 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

41 

 

 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41 

 

 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

41 

 

 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

42 

 

 

 

 

 

 

 

Item 5. 

 

Other Information

 

42 

 

 

 

 

 

 

 

Item 6. 

 

Exhibits

 

42 

 

 

 

 

 

 

 

Signatures 

 

 

 

 

 

 

 

 

 

 

 

Exhibit Index 

 

 

 

 

 

 

 

2


 

Trinseo S.A.

Quarterly Report on Form 10-Q

For the quarterly period ended June 30, 2017

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

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

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

Cautionary Note on Forward-Looking Statements

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

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

Available Information

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

 

 

3


 

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements 

TRINSEO S.A.

Condensed Consolidated Balance Sheets  

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

 

2017

 

2016

    

Assets

    

 

 

 

 

    

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

399,928

 

$

465,114

 

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

 

 

723,264

 

 

564,428

 

Inventories

 

 

473,936

 

 

385,345

 

Other current assets

 

 

14,366

 

 

17,999

 

Total current assets

 

 

1,611,494

 

 

1,432,886

 

Investments in unconsolidated affiliates

 

 

153,077

 

 

191,418

 

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

 

 

556,481

 

 

513,757

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

31,990

 

 

29,485

 

Other intangible assets, net

 

 

178,270

 

 

177,345

 

Deferred income tax assets—noncurrent

 

 

37,095

 

 

40,187

 

Deferred charges and other assets

 

 

32,847

 

 

24,412

 

Total other assets

 

 

280,202

 

 

271,429

 

Total assets

 

$

2,601,254

 

$

2,409,490

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

5,000

 

$

5,000

 

Accounts payable

 

 

394,033

 

 

378,029

 

Income taxes payable

 

 

34,066

 

 

23,784

 

Accrued expenses and other current liabilities

 

 

127,322

 

 

135,357

 

Total current liabilities

 

 

560,421

 

 

542,170

 

Noncurrent liabilities

 

 

 

 

 

 

 

Long-term debt, net of unamortized deferred financing fees

 

 

1,192,844

 

 

1,160,369

 

Deferred income tax liabilities—noncurrent

 

 

30,325

 

 

24,844

 

Other noncurrent obligations

 

 

257,391

 

 

237,054

 

Total noncurrent liabilities

 

 

1,480,560

 

 

1,422,267

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

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

 

 

488

 

 

488

 

Additional paid-in-capital

 

 

575,011

 

 

573,662

 

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

 

 

(258,913)

 

 

(217,483)

 

Retained earnings

 

 

406,270

 

 

258,540

 

Accumulated other comprehensive loss

 

 

(162,583)

 

 

(170,154)

 

Total shareholders’ equity

 

 

560,273

 

 

445,053

 

Total liabilities and shareholders’ equity

 

$

2,601,254

 

$

2,409,490

 

 

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

4


 

TRINSEO S.A.

Condensed Consolidated Statements of Operations  

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Net sales

    

$

1,145,199

    

$

969,694

    

$

2,249,689

    

$

1,863,778

 

Cost of sales

 

 

1,019,992

 

 

799,954

 

 

1,926,680

 

 

1,554,366

 

Gross profit

 

 

125,207

 

 

169,740

 

 

323,009

 

 

309,412

 

Selling, general and administrative expenses

 

 

55,384

 

 

52,249

 

 

115,820

 

 

106,735

 

Equity in earnings of unconsolidated affiliates

 

 

29,927

 

 

38,602

 

 

49,222

 

 

73,628

 

Operating income

 

 

99,750

 

 

156,093

 

 

256,411

 

 

276,305

 

Interest expense, net

 

 

18,719

 

 

18,814

 

 

36,919

 

 

37,710

 

Other expense (income), net

 

 

2,072

 

 

12,875

 

 

(6,061)

 

 

15,544

 

Income before income taxes

 

 

78,959

 

 

124,404

 

 

225,553

 

 

223,051

 

Provision for income taxes

 

 

18,800

 

 

28,600

 

 

48,100

 

 

50,500

 

Net income

 

$

60,159

 

$

95,804

 

$

177,453

 

$

172,551

 

Weighted average shares- basic

 

 

43,902

 

 

46,952

 

 

43,979

 

 

47,803

 

Net income per share- basic

 

$

1.37

 

$

2.04

 

$

4.03

 

$

3.61

 

Weighted average shares- diluted

 

 

44,995

 

 

47,857

 

 

45,165

 

 

48,554

 

Net income per share- diluted

 

$

1.34

 

$

2.00

 

$

3.93

 

$

3.55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.36

 

$

0.30

 

$

0.66

 

$

0.30

 

 

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

5


 

 

TRINSEO S.A.

Condensed Consolidated Statements of Comprehensive Income (Loss)  

(In thousands, unless otherwise stated)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Net income

    

$

60,159

    

$

95,804

    

$

177,453

    

$

172,551

    

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

18,974

 

 

(11,005)

 

 

23,175

 

 

2,418

 

Net gain (loss) on foreign exchange cash flow hedges

 

 

(12,966)

 

 

6,029

 

 

(17,776)

 

 

(1,396)

 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

 

 —

 

 

(800)

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

796

 

 

539

 

 

2,172

 

 

1,079

 

Total other comprehensive income (loss), net of tax

 

 

6,804

 

 

(4,437)

 

 

7,571

 

 

1,301

 

Comprehensive income

 

$

66,963

 

$

91,367

 

$

185,024

 

$

173,852

 

 

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

6


 

TRINSEO S.A.

Condensed Consolidated Statements of Shareholders’ Equity  

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Shares

    

Shareholders' Equity

 

 

    

Ordinary Shares Outstanding

 

Treasury Shares

    

Ordinary Shares

    

Additional
Paid-In Capital

    

Treasury Shares

    

Accumulated Other Comprehensive Income (Loss)

    

Retained Earnings (Accumulated Deficit)

    

Total

 

Balance at December 31, 2016

 

44,301

 

4,477

 

$

488

 

$

573,662

 

$

(217,483)

 

$

(170,154)

 

$

258,540

 

$

445,053

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

177,453

 

 

177,453

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,571

 

 

 —

 

 

7,571

 

Stock-based compensation activity

 

327

 

(327)

 

 

 —

 

 

1,349

 

 

11,624

 

 

 —

 

 

 —

 

 

12,973

 

Purchase of treasury shares

 

(895)

 

895

 

 

 —

 

 

 —

 

 

(53,054)

 

 

 —

 

 

 —

 

 

(53,054)

 

Dividends on ordinary shares ($0.66 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(29,723)

 

 

(29,723)

 

Balance at June 30, 2017

 

43,733

 

5,045

 

$

488

 

$

575,011

 

$

(258,913)

 

$

(162,583)

 

$

406,270

 

$

560,273

 

Balance at December 31, 2015

 

48,778

 

 —

 

$

488

 

$

556,532

 

$

 —

 

$

(149,717)

 

$

(18,289)

 

$

389,014

 

Adoption of new accounting standard

 

 —

 

 —

 

 

 —

 

 

915

 

 

 —

 

 

 —

 

 

(915)

 

 

 —

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

172,551

 

 

172,551

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,301

 

 

 —

 

 

1,301

 

Stock-based compensation activity

 

16

 

(16)

 

 

 —

 

 

8,143

 

 

686

 

 

 —

 

 

 —

 

 

8,829

 

Purchase of treasury shares

 

(2,391)

 

2,391

 

 

 —

 

 

 —

 

 

(94,362)

 

 

 —

 

 

 —

 

 

(94,362)

 

Dividends on ordinary shares ($0.30 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13,920)

 

 

(13,920)

 

Balance at June 30, 2016

 

46,403

 

2,375

 

$

488

 

$

565,590

 

$

(93,676)

 

$

(148,416)

 

$

139,427

 

$

463,413

 

 

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

 

 

 

7


 

TRINSEO S.A.

Condensed Consolidated Statements of Cash Flows  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

    

 

    

    

 

    

    

Net income

 

$

177,453

 

$

172,551

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

51,044

 

 

47,973

 

Amortization of deferred financing fees and issuance discount

 

 

2,719

 

 

3,134

 

Deferred income tax

 

 

8,862

 

 

10,684

 

Stock-based compensation expense

 

 

7,687

 

 

8,816

 

Earnings of unconsolidated affiliates, net of dividends

 

 

4,709

 

 

(12,287)

 

Unrealized net losses on foreign exchange forward contracts

 

 

5,011

 

 

3,965

 

Loss (gain) on sale of businesses and other assets

 

 

(10,275)

 

 

12,915

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(137,696)

 

 

(52,954)

 

Inventories

 

 

(66,802)

 

 

(16,685)

 

Accounts payable and other current liabilities

 

 

(9,779)

 

 

(1,098)

 

Income taxes payable

 

 

9,089

 

 

(1,005)

 

Other assets, net

 

 

(6,215)

 

 

(7,060)

 

Other liabilities, net

 

 

781

 

 

10,758

 

Cash provided by operating activities

 

 

36,588

 

 

179,707

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(74,286)

 

 

(53,153)

 

Proceeds from the sale of businesses and other assets

 

 

43,680

 

 

129

 

Distributions from unconsolidated affiliates

 

 

857

 

 

4,809

 

Cash used in investing activities

 

 

(29,749)

 

 

(48,215)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Short-term borrowings, net

 

 

(126)

 

 

(126)

 

Repayments of term loans

 

 

(2,500)

 

 

(2,500)

 

Purchase of treasury shares

 

 

(56,415)

 

 

(94,362)

 

Dividends paid

 

 

(26,473)

 

 

 —

 

Proceeds from exercise of option awards

 

 

5,984

 

 

87

 

Withholding taxes paid on restricted share units

 

 

(288)

 

 

(74)

 

Cash used in financing activities

 

 

(79,818)

 

 

(96,975)

 

Effect of exchange rates on cash

 

 

7,793

 

 

(565)

 

Net change in cash and cash equivalents

 

 

(65,186)

 

 

33,952

 

Cash and cash equivalents—beginning of period

 

 

465,114

 

 

431,261

 

Cash and cash equivalents—end of period

 

$

399,928

 

$

465,213

 

 

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

 

 

 

8


 

TRINSEO S.A.

Notes to Condensed Consolidated Financial Statements  

(Dollars in thousands, unless otherwise stated)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Trinseo S.A. and its subsidiaries (the “Company”) as of and for the periods ended June 30, 2017 and 2016 were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are considered necessary for the fair statement of the results for the periods presented. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures normally provided in annual financial statements and, therefore, these statements should be read in conjunction with the 2016 audited consolidated financial statements included within the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2017.

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

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

 

NOTE 2—RECENT ACCOUNTING GUIDANCE

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

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

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

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

9


 

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

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

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

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

NOTE 3—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Sales

    

$

476,882

    

$

405,351

    

$

910,828

    

$

781,603

 

Gross profit

 

$

65,170

 

$

87,867

 

$

85,758

 

$

156,271

 

Net income

 

$

54,121

 

$

71,015

 

$

60,449

 

$

123,812

 

Americas Styrenics

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

10


 

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

Sumika Styron Polycarbonate

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

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

 

NOTE 4—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31,

 

 

    

2017

    

2016

 

Finished goods

    

$

242,824

    

$

187,577

 

Raw materials and semi-finished goods

 

 

199,324

 

 

168,804

 

Supplies

 

 

31,788

 

 

28,964

 

Total

 

$

473,936

 

$

385,345

 

 

 

 

NOTE 5—DEBT

Refer to the Annual Report for definitions of capitalized terms not included herein and further background on the Company’s debt structure discussed below. The Company was in compliance with all debt related covenants as of June 30, 2017 and December 31, 2016.

11


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

Interest Rate as of June 30, 2017

    

Maturity
Date

    

Carrying
Amount

    

Unamortized
Deferred
Financing
Fees
(1)

    

Total Debt,
Less
Unamortized
Deferred
Financing
Fees

    

Carrying
Amount

    

Unamortized
Deferred
Financing
Fees
(1)

    

Total Debt,
Less
Unamortized
Deferred
Financing
Fees

 

Senior Credit Facility

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

    

 

 

2020 Revolving Facility(2)

 

Various

 

May 2020

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

2021 Term Loan B(3)

 

4.476%

 

November 2021

 

 

489,136

 

 

(8,292)

 

 

480,844

 

 

491,545

 

 

(9,159)

 

 

482,386

 

2022 Senior Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD Notes

 

6.750%

 

May 2022

 

 

300,000

 

 

(5,277)

 

 

294,723

 

 

300,000

 

 

(5,726)

 

 

294,274

 

Euro Notes

 

6.375%

 

May 2022

 

 

427,301

 

 

(6,590)

 

 

420,711

 

 

394,275

 

 

(7,157)

 

 

387,118

 

Accounts Receivable Securitization Facility(4)

 

Various

 

May 2019

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other indebtedness

 

Various

 

Various

 

 

1,566

 

 

 —

 

 

1,566

 

 

1,591

 

 

 —

 

 

1,591

 

Total debt

 

 

 

 

 

$

1,218,003

 

$

(20,159)

 

$

1,197,844

 

$

1,187,411

 

$

(22,042)

 

$

1,165,369

 

Less: current portion

 

 

 

 

 

 

 

 

 

 

 

 

(5,000)

 

 

 

 

 

 

 

 

(5,000)

 

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

 

 

 

 

 

 

 

 

 

 

 

$

1,192,844

 

 

 

 

 

 

 

$

1,160,369

 


(1)

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

(2)

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

(3)

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

(4)

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

 

NOTE 6—DERIVATIVE INSTRUMENTS

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

Foreign Exchange Forward Contracts

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

12


 

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

 

 

 

 

 

 

 

 

June 30, 

 

Buy / (Sell) 

    

2017

 

Euro

 

$

(146,217)

 

Chinese Yuan

 

$

(74,647)

 

Indonesian Rupiah

 

$

(33,617)

 

Swiss Franc

 

$

18,686

 

Japanese Yen

 

$

(7,706)

 

Foreign Exchange Cash Flow Hedges

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

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

Net Investment Hedge

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

Summary of Derivative Instruments

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

Gain (Loss) Recognized in

 

 

 

 

AOCI on Balance Sheet

 

Statement of Operations

 

 

 

 

Three Months Ended June 30, 

 

Statement of Operations

 

 

2017

 

2016

 

2017

 

2016

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(12,966)

    

$

6,029

    

$

1,009

    

$

(735)

    

Cost of sales

Total

 

$

(12,966)

 

$

6,029

 

$

1,009

 

$

(735)

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

(19,670)

 

$

3,798

 

$

 —

 

$

 —

 

Other expense (income), net

Total

 

$

(19,670)

 

$

3,798

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

(8,835)

 

$

(2,138)

 

Other expense (income), net

Total

 

$

 —

 

$

 —

 

$

(8,835)

 

$

(2,138)

 

 

13


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

Gain (Loss) Recognized in

 

 

 

 

AOCI on Balance Sheet

 

Statement of Operations

 

 

 

 

Six Months Ended June 30, 

 

Statement of Operations

 

 

2017

 

2016

 

2017

 

2016

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(17,776)

    

$

(1,396)

    

$

3,460

    

$

370

    

Cost of sales

Total

 

$

(17,776)

 

$

(1,396)

 

$

3,460

 

$

370

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

(24,660)

 

$

(2,487)

 

$

 —

 

$

 —

 

Other expense (income), net

Total

 

$

(24,660)

 

$

(2,487)

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

(10,510)

 

$

995

 

Other expense (income), net

Total

 

$

 —

 

$

 —

 

$

(10,510)

 

$

995

 

 

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

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