10-Q 1 tse-20170930x10q.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, 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 November 1, 2017, there were 43,704,689 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, 2017 and December 31, 2016 (Unaudited)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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

 

32 

 

 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

49 

 

 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

49 

 

 

 

 

 

 

 

Part II 

 

Other Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

49 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

50 

 

 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

50 

 

 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

50 

 

 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

50 

 

 

 

 

 

 

 

Item 5. 

 

Other Information

 

50 

 

 

 

 

 

 

 

Item 6. 

 

Exhibits

 

50 

 

 

 

 

 

 

 

Exhibit Index 

 

 

 

 

 

 

 

 

 

 

 

Signatures 

 

 

 

 

 

 

 

2


 

Trinseo S.A.

Quarterly Report on Form 10-Q

For the quarterly period ended September 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 Securities and Exchange Commission (“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 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)

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

 

2017

 

2016

    

Assets

    

 

 

 

 

    

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

318,703

 

$

465,114

 

Accounts receivable, net of allowance for doubtful accounts (September 30, 2017: $6,045; December 31, 2016: $3,138)

 

 

719,094

 

 

564,428

 

Inventories

 

 

483,158

 

 

385,345

 

Other current assets

 

 

24,591

 

 

17,999

 

Total current assets

 

 

1,545,546

 

 

1,432,886

 

Investments in unconsolidated affiliates

 

 

161,883

 

 

191,418

 

Property, plant and equipment, net of accumulated depreciation (September 30, 2017: $505,100; December 31, 2016: $420,343)

 

 

600,067

 

 

513,757

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

62,774

 

 

29,485

 

Other intangible assets, net

 

 

207,819

 

 

177,345

 

Deferred income tax assets—noncurrent

 

 

46,942

 

 

40,187

 

Deferred charges and other assets

 

 

31,521

 

 

24,412

 

Total other assets

 

 

349,056

 

 

271,429

 

Total assets

 

$

2,656,552

 

$

2,409,490

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

7,000

 

$

5,000

 

Accounts payable

 

 

415,709

 

 

378,029

 

Income taxes payable

 

 

32,006

 

 

23,784

 

Accrued expenses and other current liabilities

 

 

140,988

 

 

135,357

 

Total current liabilities

 

 

595,703

 

 

542,170

 

Noncurrent liabilities

 

 

 

 

 

 

 

Long-term debt, net of unamortized deferred financing fees

 

 

1,165,924

 

 

1,160,369

 

Deferred income tax liabilities—noncurrent

 

 

40,332

 

 

24,844

 

Other noncurrent obligations

 

 

284,551

 

 

237,054

 

Total noncurrent liabilities

 

 

1,490,807

 

 

1,422,267

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Ordinary shares, $0.01 nominal value, 50,000,000 shares authorized (September 30, 2017: 48,778 shares issued and 43,703 shares outstanding; December 31, 2016: 48,778 shares issued and 44,301 shares outstanding)

 

 

488

 

 

488

 

Additional paid-in-capital

 

 

576,790

 

 

573,662

 

Treasury shares, at cost (September 30, 2017: 5,075 shares; December 31, 2016: 4,477 shares)

 

 

(263,673)

 

 

(217,483)

 

Retained earnings

 

 

423,456

 

 

258,540

 

Accumulated other comprehensive loss

 

 

(167,019)

 

 

(170,154)

 

Total shareholders’ equity

 

 

570,042

 

 

445,053

 

Total liabilities and shareholders’ equity

 

$

2,656,552

 

$

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Net sales

    

$

1,096,582

    

$

935,410

    

$

3,346,271

    

$

2,799,188

 

Cost of sales

 

 

949,457

 

 

795,026

 

 

2,876,137

 

 

2,349,392

 

Gross profit

 

 

147,125

 

 

140,384

 

 

470,134

 

 

449,796

 

Selling, general and administrative expenses

 

 

65,732

 

 

73,900

 

 

181,552

 

 

180,635

 

Equity in earnings of unconsolidated affiliates

 

 

43,807

 

 

36,686

 

 

93,029

 

 

110,314

 

Operating income

 

 

125,200

 

 

103,170

 

 

381,611

 

 

379,475

 

Interest expense, net

 

 

18,436

 

 

18,832

 

 

55,355

 

 

56,542

 

Loss on extinguishment of long-term debt

 

 

65,260

 

 

 —

 

 

65,260

 

 

 —

 

Other expense (income), net

 

 

(11)

 

 

1,084

 

 

(6,072)

 

 

16,628

 

Income before income taxes

 

 

41,515

 

 

83,254

 

 

267,068

 

 

306,305

 

Provision for income taxes

 

 

8,300

 

 

16,000

 

 

56,400

 

 

66,500

 

Net income

 

$

33,215

 

$

67,254

 

$

210,668

 

$

239,805

 

Weighted average shares- basic

 

 

43,745

 

 

45,865

 

 

43,900

 

 

47,152

 

Net income per share- basic

 

$

0.76

 

$

1.47

 

$

4.80

 

$

5.09

 

Weighted average shares- diluted

 

 

44,782

 

 

46,961

 

 

45,046

 

 

48,041

 

Net income per share- diluted

 

$

0.74

 

$

1.43

 

$

4.68

 

$

4.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.36

 

$

0.30

 

$

1.02

 

$

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, 

 

 

    

2017

    

2016

    

2017

    

2016

 

Net income

    

$

33,215

    

$

67,254

    

$

210,668

    

$

239,805

    

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

(1,561)

 

 

1,488

 

 

21,614

 

 

3,906

 

Net loss on cash flow hedges

 

 

(3,715)

 

 

(2,280)

 

 

(21,491)

 

 

(3,676)

 

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)

 

 

840

 

 

533

 

 

3,012

 

 

1,612

 

Total other comprehensive income (loss), net of tax

 

 

(4,436)

 

 

(259)

 

 

3,135

 

 

1,042

 

Comprehensive income

 

$

28,779

 

$

66,995

 

$

213,803

 

$

240,847

 

 

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

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

210,668

 

 

210,668

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,135

 

 

 —

 

 

3,135

 

Stock-based compensation activity

 

440

 

(440)

 

 

 —

 

 

3,128

 

 

15,674

 

 

 —

 

 

 —

 

 

18,802

 

Purchase of treasury shares

 

(1,038)

 

1,038

 

 

 —

 

 

 —

 

 

(61,864)

 

 

 —

 

 

 —

 

 

(61,864)

 

Dividends on ordinary shares

($1.02 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(45,752)

 

 

(45,752)

 

Balance at September 30, 2017

 

43,703

 

5,075

 

$

488

 

$

576,790

 

$

(263,673)

 

$

(167,019)

 

$

423,456

 

$

570,042

 

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

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

239,805

 

 

239,805

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,042

 

 

 —

 

 

1,042

 

Stock-based compensation activity

 

25

 

(25)

 

 

 —

 

 

14,057

 

 

914

 

 

 —

 

 

 —

 

 

14,971

 

Purchase of treasury shares

 

(4,150)

 

4,150

 

 

 —

 

 

 —

 

 

(194,079)

 

 

 —

 

 

 —

 

 

(194,079)

 

Dividends on ordinary shares

($0.60 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(27,316)

 

 

(27,316)

 

Balance at September 30, 2016

 

44,653

 

4,125

 

$

488

 

$

571,504

 

$

(193,165)

 

$

(148,675)

 

$

193,285

 

$

423,437

 

 

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, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

    

 

    

    

 

    

    

Net income

 

$

210,668

 

$

239,805

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

80,220

 

 

71,744

 

Amortization of deferred financing fees and issuance discount

 

 

3,968

 

 

4,469

 

Deferred income tax

 

 

(2,636)

 

 

9,895

 

Stock-based compensation expense

 

 

10,752

 

 

14,842

 

Earnings of unconsolidated affiliates, net of dividends

 

 

(4,097)

 

 

(8,972)

 

Unrealized net losses (gains) on foreign exchange forward contracts

 

 

(2,804)

 

 

3,533

 

Loss on extinguishment of long-term debt

 

 

65,260

 

 

 —

 

Loss (gain) on sale of businesses and other assets

 

 

(10,473)

 

 

13,091

 

Impairment charges

 

 

4,293

 

 

14,310

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(92,776)

 

 

(30,229)

 

Inventories

 

 

(57,315)

 

 

(27,605)

 

Accounts payable and other current liabilities

 

 

(989)

 

 

23,138

 

Income taxes payable

 

 

6,297

 

 

3,973

 

Other assets, net

 

 

(14,407)

 

 

(18,426)

 

Other liabilities, net

 

 

(1,116)

 

 

11,130

 

Cash provided by operating activities

 

 

194,845

 

 

324,698

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(108,875)

 

 

(82,678)

 

Cash paid to acquire a business, net of cash acquired

 

 

(79,650)

 

 

 —

 

Proceeds from the sale of businesses and other assets

 

 

46,166

 

 

174

 

Distributions from unconsolidated affiliates

 

 

857

 

 

4,809

 

Cash used in investing activities

 

 

(141,502)

 

 

(77,695)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Deferred financing fees

 

 

(19,175)

 

 

 —

 

Short-term borrowings, net

 

 

(191)

 

 

(126)

 

Purchase of treasury shares

 

 

(65,225)

 

 

(194,079)

 

Dividends paid

 

 

(42,231)

 

 

(13,920)

 

Proceeds from exercise of option awards

 

 

8,349

 

 

203

 

Withholding taxes paid on restricted share units

 

 

(302)

 

 

(74)

 

Net proceeds from issuance of 2024 Term Loan B

 

 

700,000

 

 

 —

 

Repayments of 2021 Term Loan B

 

 

(492,500)

 

 

(3,750)

 

Net proceeds from issuance of 2025 Senior Notes

 

 

500,000

 

 

 —

 

Repayments of 2022 Senior Notes

 

 

(745,950)

 

 

 —

 

Prepayment penalty on long-term debt

 

 

(52,978)

 

 

 —

 

Cash used in financing activities

 

 

(210,203)

 

 

(211,746)

 

Effect of exchange rates on cash

 

 

10,449

 

 

(231)

 

Net change in cash and cash equivalents

 

 

(146,411)

 

 

35,026

 

Cash and cash equivalents—beginning of period

 

 

465,114

 

 

431,261

 

Cash and cash equivalents—end of period

 

$

318,703

 

$

466,287

 

 

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, 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 14 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 identified its major revenue streams, which are concentrated within individual product sales within each of our reportable segments. As a result of this work, 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 processes, information technology, and controls resulting from the adoption of this new standard. Additionally, while our final assessment has not been completed, we continue to progress in the quantification of the impacts that this standard will have on our consolidated financial statements and are refining certain estimates that will be used in order to calculate such impacts.

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

9


 

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. Additionally, the FASB has issued further guidance related to the presentation of restricted cash on the consolidated statements of cash flows. The Company adopted this guidance effective September 30, 2017. The most significant impact of this adoption to the Company was the requirement to classify debt prepayment or extinguishment costs, which the Company had historically classified within cash flows from operating activities, as financing cash outflows. This change is reflected in the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2017, including the impacts of the Company’s debt refinancing during the third quarter of 2017 (refer to Note 5 for further information). While this adoption was applied using the retrospective approach, there were no transactions during the nine months ended September 30, 2016 that required the condensed consolidated statement of cash flows for that period to be recast.

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 periodic 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.

In August 2017, the FASB issued significant amendments to existing hedge accounting guidance. Among other things, this guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting, amend presentation and disclosure requirements, and change how companies assess effectiveness. This guidance is required for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the timing and related impact of adopting this guidance on its financial position and results of operations.

NOTE 3—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

During the nine months ended September 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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

10


 

 

    

2017

    

2016

    

2017

    

2016

    

Sales

    

$

458,744

    

$

460,305

    

$

1,369,572

    

$

1,241,908

 

Gross profit

 

$

90,594

 

$

84,095

 

$

176,352

 

$

240,366

 

Net income

 

$

81,059

 

$

65,041

 

$

141,508

 

$

188,853

 

Americas Styrenics

As of September 30, 2017 and December 31, 2016, respectively, the Company’s investment in Americas Styrenics was $161.9 million and $149.7 million, which was $49.1 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 3.1 years as of September 30, 2017. The Company received dividends from Americas Styrenics of $35.0 million and $80.0 million during the three and nine months ended September 30, 2017, respectively, compared to $40.0 million and $100.0 million during the three and nine months ended September 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 nine months ended September 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 September 30, 2017. The Company received dividends from Sumika Styron Polycarbonate of zero and $9.8 million during the three and nine months ended September 30, 2017,  respectively, compared to  zero and $6.2 million during the three and nine months ended September 30, 2016, respectively. The dividend received during the nine months ended September 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:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

 

    

2017

    

2016

 

Finished goods

    

$

239,663

    

$

187,577

 

Raw materials and semi-finished goods

 

 

211,186

 

 

168,804

 

Supplies

 

 

32,309

 

 

28,964

 

Total

 

$

483,158

 

$

385,345

 

 

 

 

NOTE 5—DEBT

Refer to discussion below for details of the Company’s debt refinancing that occurred during the third quarter of 2017. For definitions of capitalized terms not included herein, refer to the Annual Report. The Company was in compliance with all debt related covenants as of September 30, 2017 and December 31, 2016.

11


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

Interest Rate as of September 30, 2017

    

Maturity
Date

    

Carrying
Amount

    

Unamortized
Deferred
Financing
Fees
(1)

    

Total Debt,
Less
Unamortized
Deferred
Financing
Fees

    

Senior Credit Facility

 

 

 

 

 

 

 

 

 

 

 

    

 

 

2022 Revolving Facility(2)

 

Various

 

September 2022

 

$

 —

 

$

 —

 

$

 —

 

2024 Term Loan B(3)

 

3.735%

 

September 2024

 

 

700,000

 

 

(18,957)

 

 

681,043

 

2025 Senior Notes

 

5.375%

 

September 2025

 

 

500,000

 

 

(9,600)

 

 

490,400

 

Accounts Receivable Securitization Facility(4)

 

Various

 

May 2019

 

 

 —

 

 

 —

 

 

 —

 

Other indebtedness

 

Various

 

Various

 

 

1,481

 

 

 —

 

 

1,481

 

Total debt

 

 

 

 

 

$

1,201,481

 

$

(28,557)

 

$

1,172,924

 

Less: current portion

 

 

 

 

 

 

 

 

 

 

 

 

(7,000)

 

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

 

 

 

 

 

 

 

 

 

 

 

$

1,165,924

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

Interest Rate as of December 31, 2016

    

Maturity
Date

    

Carrying
Amount

    

Unamortized
Deferred
Financing
Fees
(1)

    

Total Debt,
Less
Unamortized
Deferred
Financing
Fees

    

2020 Senior Credit Facility

 

 

 

 

 

 

 

 

 

 

 

    

 

 

2020 Revolving Facility

 

Various

 

May 2020

 

$

 —

 

$

 —

 

$

 —

 

2021 Term Loan B

 

4.250%

 

November 2021

 

 

491,545

 

 

(9,159)

 

 

482,386

 

2022 Senior Notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD Notes

 

6.750%

 

May 2022

 

 

300,000

 

 

(5,726)

 

 

294,274

 

Euro Notes

 

6.375%

 

May 2022

 

 

394,275

 

 

(7,157)

 

 

387,118

 

Accounts Receivable Securitization Facility

 

Various

 

May 2019

 

 

 —

 

 

 —

 

 

 —

 

Other indebtedness

 

Various

 

Various

 

 

1,591

 

 

 —

 

 

1,591

 

Total debt

 

 

 

 

 

$

1,187,411

 

$

(22,042)

 

$

1,165,369

 

Less: current portion

 

 

 

 

 

 

 

 

 

 

 

 

(5,000)

 

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

 

 

 

 

 

 

 

 

 

 

 

$

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 $357.2 million (net of $17.8 million outstanding letters of credit) of funds available for borrowing under this facility as of September 30, 2017. Additionally, the Company is required to pay a quarterly commitment fee in respect of any unused commitments under this facility equal to 0.375% per annum.

(3)

The 2024 Term Loan B bears an interest rate of LIBOR plus 2.50%, subject to a 0.00% LIBOR floor. As of September 30, 2017, $7.0 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 September 30, 2017, the Company had approximately $148.8 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%.

 

2020 Senior Credit Facility

On May 5, 2015, the Company entered into a credit agreement which included $825.0 million of senior secured financing (the “2020 Senior Credit Facility”), inclusive of a $325.0 million revolving credit facility maturing in May 2020 (the “2020 Revolving Facility”) and a $500.0 million senior secured term loan B facility maturing in November 2021 (the “2021 Term Loan B”).

In September 2017, upon completion of the refinancing transactions discussed below, the Company terminated the 2020 Senior Credit Facility. Prior to this termination, the Company had no outstanding borrowings under the 2020 Revolving Facility and had $490.0 million outstanding under the 2021 Term Loan B, excluding unamortized original

12


 

issue discount. As a result of this termination, the Company recognized a $0.8 million loss on extinguishment of long-term debt, comprised entirely of the write-off of a portion of the existing unamortized deferred financing fees and unamortized original issue discount related to the 2021 Term Loan B. The remaining unamortized deferred financing fees and unamortized original issue discount for both the 2020 Revolving Facility and 2021 Term Loan B remain capitalized and will be amortized along with new deferred financing fees over the life of the new facilities, discussed in further detail below.

Senior Credit Facility

On September 6, 2017, Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (together, the “Borrowers” or “Issuers”), 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 $1,075.0 million (the “Senior Credit Facility”). The Senior Credit Facility provides for senior secured financing consisting of a (i) $375.0 million revolving credit facility, with a $25.0 million swingline subfacility and a $35.0 million letter of credit subfacility maturing in September 2022 (the “2022 Revolving Facility”) and a (ii) $700.0 million senior secured term loan B facility maturing in September 2024 (the “2024 Term Loan B”). Amounts under the 2022 Revolving Facility are available in U.S. dollars and euros.

The 2024 Term Loan B bears an interest rate of LIBOR plus 2.50%, subject to a 0.00% LIBOR floor. Further, the 2024 Term Loan B requires scheduled quarterly payments in amounts equal to 0.25% of the original principal amount of the 2024 Term Loan B, with the balance to be paid at maturity.

Loans under the 2022 Revolving Facility, at the Borrowers’ option, may be maintained as (a) LIBO rate loans, which bear interest at a rate per annum equal to the LIBO rate plus the applicable margin (as defined in the Credit Agreement), if applicable, or (b) base rate loans which shall bear interest at a rate per annum equal to the base rate plus the applicable margin (as defined in the Credit Agreement).

The Senior Credit Facility is collateralized by a security interest in substantially all of the assets of the Borrowers, and the guarantors thereunder, including Trinseo Materials S.à r.l., certain Luxembourg subsidiaries and certain foreign subsidiaries organized in the United States, The Netherlands, Hong Kong, Singapore, Ireland, Germany and Switzerland.

 The Senior Credit Facility requires the Borrowers and their restricted subsidiaries to comply with customary affirmative, negative and financial covenants, including limitations on their abilities to incur liens; make certain loans and investments; incur additional debt (including guarantees or other contingent obligations); merge, consolidate liquidate or dissolve; transfer or sell assets; pay dividends and other distributions to shareholders or make certain other restricted payments; enter into transactions with affiliates; restrict any restricted subsidiary from paying dividends or making other distributions or agree to certain negative pledge clauses; materially alter the business we conduct; prepay certain other indebtedness; amend certain material documents; and change our fiscal year.

The 2022 Revolving Facility contains a financial covenant that requires compliance with a springing first lien net leverage ratio test. If the outstanding balance under the 2022 Revolving Facility exceeds 30% of the $375.0 million borrowing capacity (excluding undrawn letters of credit up to $10.0 million and cash collateralized letters of credit) at a quarter end, then the Borrowers’ first lien net leverage ratio may not exceed 2.00 to 1.00. As of September 30, 2017, the Company was in compliance with all debt covenant requirements under the Senior Credit Facility.

Fees incurred in connection with the issuance of the 2024 Term Loan B were $12.3 million. Due to a portion of the 2024 Term Loan B meeting the criteria for modification accounting, $1.2 million of these fees were expensed and included within “Other expense (income), net” in the condensed consolidated statement of operations for the three and nine months ended September 30, 2017. The remaining $11.1 million of fees were capitalized and recorded within “Long-term debt, net of unamortized deferred financing fees” on the condensed consolidated balance sheet, to be amortized along with the remaining $8.1 million of unamortized deferred financing fees from the 2021 Term Loan B. Capitalized fees related to the 2024 Term Loan B are being amortized over the 7.0 year term of the facility using the effective interest method.

Fees incurred in connection with the issuance of the 2022 Revolving Facility were $0.8 million and were capitalized and recorded within “Deferred charges and other assets” in the condensed consolidated balance sheets. The new capitalized fees related to the 2022 Revolving Facility (along with $4.0 million of unamortized deferred financing fees from the 2020 Revolving Facility) are being amortized over the 5.0 year term of the facility using the straight-line method. Amortization of deferred financing fees are recorded within “Interest expense, net” in the condensed consolidated statements of operations.

13


 

 2022 Senior Notes

In May 2015, the Company 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 September 7, 2017, using the net proceeds from the issuance of the 2024 Term Loan B, together with the net proceeds from the issuance of the 2025 Senior Notes (defined and discussed below), and available cash, the Company redeemed all outstanding borrowings under the 2022 Senior Notes, totaling $746.0 million in USD-equivalent principal, together with a total combined call premium of $53.0 million (with a redemption price of approximately 106.572% on the USD Notes and a redemption price of approximately 107.459% on the Euro Notes), and accrued and unpaid interest thereon of $17.0 million, using applicable foreign exchange rates.

As a result of this redemption, during the three months ended September 30, 2017, the Company recorded a loss on extinguishment of long-term debt of $64.5 million, which includes the above $53.0 million call premium and an $11.5 million write-off of unamortized deferred financing fees related to the 2022 Senior Notes.

2025 Senior Notes

On August 29, 2017, the Issuers executed an indenture pursuant to which they issued $500.0 million aggregate principal amount of 5.375% senior notes due 2025 (the “2025 Senior Notes”) in a 144A private transaction exempt from the registration requirements of the Securities Act of 1933, as amended. Interest on the 2025 Senior Notes is payable semi-annually on May 3 and November 3 of each year, commencing on May 3, 2018. The 2025 Senior Notes mature on September 1, 2025.

At any time prior to September 1, 2020, the Issuers may redeem the 2025 Senior Notes in whole or in part, at their option, at a redemption price equal to 100% of the principal amount of such notes plus the relevant applicable premium as of, and accrued and unpaid interest to, but not including, the redemption date. At any time and from time to time after September 1, 2020, the Issuers may redeem the 2025 Senior Notes, in whole or in part, at a redemption price equal to the percentage of principal amount set forth below plus accrued and unpaid interest, if any, on the notes redeemed to, but not including, the redemption date:

 

 

 

 

 

12-month period commencing September 1 in Year 

 

Percentage

 

2020

 

102.688

%  

2021

 

101.792

%  

2022

 

100.896

%  

2023 and thereafter

 

100.000

%  

At any time prior to September 1, 2020, the Issuers may redeem up to 40% of the aggregate principal amount of the 2025 Senior Notes at a redemption price equal to 105.375%, plus accrued and unpaid interest to, but not including, the redemption date, with the aggregate gross proceeds from certain equity offerings.

The 2025 Senior Notes are the Issuers’ senior unsecured obligations and rank equally in right of payment with all of the Issuers’ existing and future indebtedness that is not expressly subordinated in right of payment thereto. The 2025 Senior Notes will be senior in right of payment to any future indebtedness that is expressly subordinated in right of payment thereto and effectively junior to (a) the Issuers’ existing and future secured indebtedness, including the Company’s accounts receivable facility and the Issuers’ Senior Credit Facility (discussed above), to the extent of the value of the collateral securing such indebtedness and (b) all existing and future liabilities of the Issuers’ non-guarantor subsidiaries.

The Indenture contains customary covenants that, among other things, limit the Issuers’ and certain of their subsidiaries’ ability to incur additional indebtedness and guarantee indebtedness; pay dividends on, redeem or repurchase capital stock; make investments; prepay certain indebtedness; create liens; enter into transactions with the Issuers’ affiliates; designate the Issuers’ subsidiaries as Unrestricted Subsidiaries (as defined in the Indenture); and consolidate, merge, or transfer all or substantially all of the Issuers’ assets. The covenants are subject to a number of exceptions and qualifications. Certain of these covenants will be suspended during any period of time that (1) the 2025 Senior Notes have investment grade ratings (as defined in the Indenture) and (2) no default has occurred and is continuing under the Indenture. In the event that the 2025 Senior Notes are downgraded to below an investment grade rating, the Issuers and certain subsidiaries will again be subject to the suspended covenants with respect to future events. As of September 30, 2017, the Company was in compliance with all debt covenant requirements under the Indenture.

14


 

Fees and expenses incurred in connection with the issuance of the 2025 Senior Notes were $9.7 million, which were capitalized and recorded within “Long-term debt, net of unamortized deferred financing fees” on the condensed consolidated balance sheet, and are being amortized into “Interest expense, net” in the condensed consolidated statements of operations over their 8.0 year term using the effective interest method.

NOTE 6—GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table shows changes in the carrying amount of goodwill by segment from December 31, 2016 to September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Materials

 

Basic Plastics & Feedstocks

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

Basic

 

 

 

Americas

 

 

 

 

 

    

Binders

    

Rubber

    

Plastics

    

Plastics

    

Feedstocks

    

Styrenics

    

Total

 

Balance at December 31, 2016

 

$

11,544

 

$

8,177

 

$

4,210

 

$

5,554

 

$

 —

 

$

 —

 

$

29,485

 

Acquisition (Note 13)

 

 

 —

 

 

 —

 

 

28,598

 

 

 —

 

 

 —

 

 

 —