10-Q 1 tse-20180331x10q.htm 10-Q tse_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

 

(Mark One)                                                                                                                                                                                         

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

For the quarterly period ended March 31, 2018

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

As of May 1, 2018, there were 43,177,966 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 March 31, 2018 and December 31, 2017 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2018 and 2017 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2018 and 2017 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

Item 2. 

 

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

 

26 

 

 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

37 

 

 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

37 

 

 

 

 

 

 

 

Part II 

 

Other Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

37 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

38 

 

 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38 

 

 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

38 

 

 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

38 

 

 

 

 

 

 

 

Item 5. 

 

Other Information

 

38 

 

 

 

 

 

 

 

Item 6. 

 

Exhibits

 

38 

 

 

 

 

 

 

 

Exhibit Index 

 

 

 

 

 

 

 

 

 

 

 

Signatures 

 

 

 

 

 

 

 

2


 

Trinseo S.A.

Quarterly Report on Form 10-Q

For the quarterly period ended March 31, 2018

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, LP (“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, divested its entire ownership interest in the Company in a series of secondary offerings to the market.

Definitions of capitalized terms not defined herein appear within our Annual Report on Form 10-K for the year ended December 31, 2017 (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2018. 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 filed with the SEC on March 1, 2018 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 millions, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

 

2018

 

2017

    

Assets

    

 

 

 

 

    

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

398.9

 

$

432.8

 

Accounts receivable, net of allowance for doubtful accounts
(March 31, 2018: $5.1; December 31, 2017: $5.6)

 

 

728.7

 

 

685.5

 

Inventories

 

 

588.3

 

 

510.4

 

Other current assets

 

 

18.7

 

 

17.5

 

Total current assets

 

 

1,734.6

 

 

1,646.2

 

Investments in unconsolidated affiliates

 

 

168.1

 

 

152.5

 

Property, plant and equipment, net of accumulated depreciation (March 31, 2018: $556.5; December 31, 2017: $523.7)

 

 

635.2

 

 

627.0

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

74.2

 

 

72.5

 

Other intangible assets, net

 

 

206.9

 

 

207.5

 

Deferred income tax assets

 

 

34.7

 

 

35.5

 

Deferred charges and other assets

 

 

32.7

 

 

30.8

 

Total other assets

 

 

348.5

 

 

346.3

 

Total assets

 

$

2,886.4

 

$

2,772.0

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

7.0

 

$

7.0

 

Accounts payable

 

 

454.2

 

 

436.8

 

Income taxes payable

 

 

36.9

 

 

35.9

 

Accrued expenses and other current liabilities

 

 

135.3

 

 

146.9

 

Total current liabilities

 

 

633.4

 

 

626.6

 

Noncurrent liabilities

 

 

 

 

 

 

 

Long-term debt, net of unamortized deferred financing fees

 

 

1,164.0

 

 

1,165.0

 

Deferred income tax liabilities

 

 

51.4

 

 

49.2

 

Other noncurrent obligations

 

 

281.9

 

 

256.4

 

Total noncurrent liabilities

 

 

1,497.3

 

 

1,470.6

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (March 31, 2018: 48.8 shares issued and 43.4 shares outstanding; December 31, 2017: 48.8 shares issued and 43.4 shares outstanding)

 

 

0.5

 

 

0.5

 

Additional paid-in-capital

 

 

566.6

 

 

578.8

 

Treasury shares, at cost (March 31, 2018: 5.4 shares; December 31, 2017: 5.4 shares)

 

 

(299.5)

 

 

(286.8)

 

Retained earnings

 

 

632.4

 

 

527.9

 

Accumulated other comprehensive loss

 

 

(144.3)

 

 

(145.6)

 

Total shareholders’ equity

 

 

755.7

 

 

674.8

 

Total liabilities and shareholders’ equity

 

$

2,886.4

 

$

2,772.0

 

 

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

4


 

TRINSEO S.A.

Condensed Consolidated Statements of Operations  

(In millions, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

    

Net sales

    

$

1,121.6

    

$

1,104.5

 

Cost of sales

 

 

946.4

 

 

905.5

 

Gross profit

 

 

175.2

 

 

199.0

 

Selling, general and administrative expenses

 

 

64.4

 

 

59.6

 

Equity in earnings of unconsolidated affiliates

 

 

45.5

 

 

19.3

 

Operating income

 

 

156.3

 

 

158.7

 

Interest expense, net

 

 

14.9

 

 

18.2

 

Other income, net

 

 

(3.8)

 

 

(6.1)

 

Income before income taxes

 

 

145.2

 

 

146.6

 

Provision for income taxes

 

 

24.9

 

 

29.3

 

Net income

 

$

120.3

 

$

117.3

 

Weighted average shares- basic

 

 

43.4

 

 

44.1

 

Net income per share- basic

 

$

2.77

 

$

2.66

 

Weighted average shares- diluted

 

 

44.4

 

 

45.3

 

Net income per share- diluted

 

$

2.71

 

$

2.59

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.36

 

$

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 millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Net income

    

$

120.3

    

$

117.3

    

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

(2.1)

 

 

4.2

 

Net gain (loss) on cash flow hedges

 

 

2.8

 

 

(4.8)

 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

0.6

 

 

1.4

 

Total other comprehensive income, net of tax

 

 

1.3

 

 

0.8

 

Comprehensive income

 

$

121.6

 

$

118.1

 

 

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

6


 

TRINSEO S.A.

Condensed Consolidated Statements of Shareholders’ Equity  

(In millions, 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

    

Total

 

Balance at December 31, 2017

 

43.4

 

5.4

 

$

0.5

 

$

578.8

 

$

(286.8)

 

$

(145.6)

 

$

527.9

 

$

674.8

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

120.3

 

 

120.3

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1.3

 

 

 —

 

 

1.3

 

Stock-based compensation activity

 

0.3

 

(0.3)

 

 

 —

 

 

(12.2)

 

 

11.5

 

 

 —

 

 

 —

 

 

(0.7)

 

Purchase of treasury shares

 

(0.3)

 

0.3

 

 

 —

 

 

 —

 

 

(24.2)

 

 

 —

 

 

 —

 

 

(24.2)

 

Dividends on ordinary shares ($0.36 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(15.8)

 

 

(15.8)

 

Balance at March 31, 2018

 

43.4

 

5.4

 

$

0.5

 

$

566.6

 

$

(299.5)

 

$

(144.3)

 

$

632.4

 

$

755.7

 

Balance at December 31, 2016

 

44.3

 

4.5

 

$

0.5

 

$

573.7

 

$

(217.5)

 

$

(170.2)

 

$

261.2

 

$

447.7

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

117.3

 

 

117.3

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

0.8

 

 

 —

 

 

0.8

 

Stock-based compensation activity

 

0.2

 

(0.2)

 

 

 —

 

 

1.0

 

 

6.9

 

 

 —

 

 

 —

 

 

7.9

 

Purchase of treasury shares

 

(0.4)

 

0.4

 

 

 —

 

 

 —

 

 

(23.3)

 

 

 —

 

 

 —

 

 

(23.3)

 

Dividends on ordinary shares ($0.30 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(13.7)

 

 

(13.7)

 

Balance at March 31, 2017

 

44.1

 

4.7

 

$

0.5

 

$

574.7

 

$

(233.9)

 

$

(169.4)

 

$

364.8

 

$

536.7

 

 

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

 

 

 

7


 

TRINSEO S.A.

Condensed Consolidated Statements of Cash Flows  

(In millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

 

Cash flows from operating activities

    

 

    

    

 

    

    

Net income

 

$

120.3

 

$

117.3

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

31.9

 

 

24.7

 

Amortization of deferred financing fees and issuance discount

 

 

1.1

 

 

1.4

 

Deferred income tax

 

 

2.5

 

 

11.3

 

Stock-based compensation expense

 

 

5.5

 

 

4.7

 

Earnings of unconsolidated affiliates, net of dividends

 

 

(15.5)

 

 

(2.9)

 

Unrealized net losses on foreign exchange forward contracts

 

 

0.1

 

 

0.2

 

Gain on sale of businesses and other assets

 

 

(0.5)

 

 

(9.9)

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(32.7)

 

 

(133.3)

 

Inventories

 

 

(70.3)

 

 

(91.6)

 

Accounts payable and other current liabilities

 

 

3.0

 

 

49.9

 

Income taxes payable

 

 

0.8

 

 

5.6

 

Other assets, net

 

 

(1.3)

 

 

(4.5)

 

Other liabilities, net

 

 

(4.1)

 

 

1.4

 

Cash provided by (used in) operating activities

 

 

40.8

 

 

(25.7)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(30.6)

 

 

(36.0)

 

Proceeds from the sale of businesses and other assets

 

 

0.5

 

 

42.1

 

Distributions from unconsolidated affiliates

 

 

 —

 

 

0.8

 

Cash provided by (used in) investing activities

 

 

(30.1)

 

 

6.9

 

Cash flows from financing activities

 

 

 

 

 

 

 

Short-term borrowings, net

 

 

(0.1)

 

 

(0.1)

 

Purchase of treasury shares

 

 

(23.8)

 

 

(26.6)

 

Dividends paid

 

 

(16.2)

 

 

(13.3)

 

Proceeds from exercise of option awards

 

 

1.9

 

 

3.4

 

Withholding taxes paid on restricted share units

 

 

(8.0)

 

 

(0.1)

 

Repayments of 2024 Term Loan B

 

 

(1.8)

 

 

 —

 

Repayments of 2021 Term Loan B

 

 

 —

 

 

(1.3)

 

Cash used in financing activities

 

 

(48.0)

 

 

(38.0)

 

Effect of exchange rates on cash

 

 

3.4

 

 

1.8

 

Net change in cash and cash equivalents

 

 

(33.9)

 

 

(55.0)

 

Cash and cash equivalents—beginning of period

 

 

432.8

 

 

465.1

 

Cash and cash equivalents—end of period

 

$

398.9

 

$

410.1

 

 

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 millions, unless otherwise stated)

(Unaudited)

NOTE 1—BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Trinseo S.A. and its subsidiaries (the “Company”) as of and for the periods ended March 31, 2018 and 2017 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 2017 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, 2018.

The December 31, 2017 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 2017 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 Notes 2, 7, and 15 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 (“Topic 606”) 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, which the FASB issued certain clarifying updates for, 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. The Company adopted Topic 606 effective January 1, 2018, electing to apply the modified retrospective approach only to contracts that were not completed as of the date of initial application at the individual contract level, rather than applying the portfolio approach. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with historical accounting standards (“Topic 605”). As a result of our implementation procedures, we have determined that the cumulative effect to retained earnings from initially applying Topic 606 was immaterial and therefore, no adjustment was recorded. Furthermore, based on current contracts with customers, we do not expect the adoption of the new revenue standard to have a material impact to our financial statements on an ongoing basis. Refer to Note 3 for new disclosure requirements in effect as a result of this adoption.

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 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 guidance also requires employers to prospectively only consider the service cost component of net periodic benefit cost for potential capitalization into assets, with all other components of net periodic

9


 

benefit cost being ineligible for capitalization. The Company adopted this guidance effective January 1, 2018 on a retrospective basis. As a result of this adoption, for the three months ended March 31, 2017, the Company reclassified net periodic benefit cost of $1.2 million from “Cost of sales” and $0.8 million from “Selling, general and administrative expenses” to “Other income, net” within the condensed consolidated statements of operations. The change related to capitalization guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued significant amendments to its 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 will adopt this guidance effective April 1, 2018, and is in the process of evaluating the ongoing impact to the Company’s consolidated financial statements.

In February 2018, the FASB issued guidance to address certain stranded income tax effects in accumulated other comprehensive income/loss (“AOCI”) resulting from the enactment of the U.S. “Tax Cuts and Jobs Act” signed into law on December 22, 2017. The amendment provides financial statement preparers with an option to reclassify stranded tax effects within AOCI, resulting from the reduction of the U.S. federal corporate income tax rate, to retained earnings. The amendment also includes disclosure requirements regarding the Company’s accounting policy for releasing income tax effects from AOCI. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, and the provisions of the amendment should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. While the Company is still evaluating the provisions of this amendment, should the Company choose to adopt this guidance, it is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3 — NET SALES

As discussed in Note 2, effective January 1, 2018, the Company adopted accounting guidance, Topic 606, issued by the FASB related to the recognition of revenue from contracts with customers. The Company’s accounting policy and practical expedient elections related to revenue recognition, including those elected as a result of the adoption of Topic 606, are summarized as follows.

Sales are recognized at a point when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services, and when the Company’s related performance obligation is satisfied under the terms of the contract. Standard terms of delivery are included in contracts of sale, order confirmation documents, and invoices. Sales and other taxes that the Company collects concurrent with sales-producing activities are excluded from “Net sales” and included as a component of “Cost of sales” in the condensed consolidated statements of operations. Additionally, freight and any directly related costs of transporting finished products to customers are accounted for as fulfilment costs and are also included within “Cost of sales”. The amount of net sales recognized varies with changes in returns, rebates, cash sales incentives, and other allowances offered to customers based on the Company's experience.

The Company has elected to apply the following practical expedients as allowed under Topic 606:

·

The incremental costs of obtaining contracts are expensed as incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less, and are included within “Selling, general and administrative expenses” in the condensed consolidated statements of operations.

·

When the period between customer payment and transfer of goods/services is determined to be one year or less at contract inception, the promised amount of consideration under the contract is not adjusted for the effects of a significant financing component.

·

In consideration of the disclosure requirements regarding the transaction price and expected period of recognition of remaining performance obligations that are unsatisfied as of the end of a reporting period, the Company has elected the following optional exemptions:

o

The Company will not disclose the aggregate amount of the transaction price allocated to remaining performance obligations for its contracts with an original expected duration of one year or less, which applies to the vast majority of the Company’s contracts with customers.

10


 

o

For contracts with customers containing variable consideration (via enforceable minimum volume requirements) and an original expected duration greater than one year, the Company will not disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these contracts with customers, each unit of production generally represents a separate performance obligation, the pricing for which is based on current or forecasted raw material prices, often using formulas that utilize commodity indices. Therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required. The variable consideration in these contracts is resolved typically at the issuance of a purchase order or as of the date of revenue recognition.

The following table provides disclosure of net sales to external customers by primary geographical market (based on the location where sales originated), by segment for the three months ended March 31, 2018 and 2017, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2018

 

 

 

Latex

 

Synthetic

 

Performance

 

 

 

 

 

 

 

 

 

 

Binders

 

Rubber

 

Plastics

 

Polystyrene

 

Feedstocks

 

Total

 

United States

 

$

64.3

 

$

 —

 

$

84.1

 

$

0.2

 

$

3.7

 

$

152.3

 

Europe

 

 

113.3

 

 

149.2

 

 

249.2

 

 

148.2

 

 

57.9

 

 

717.8

 

Asia-Pacific

 

 

74.3

 

 

 —

 

 

47.3

 

 

91.2

 

 

13.0

 

 

225.8

 

Rest of World

 

 

3.4

 

 

 —

 

 

22.3

 

 

 —

 

 

 —

 

 

25.7

 

Total

 

$

 255.3

 

$

149.2

 

$

402.9

 

$

239.6

 

$

74.6

 

$

1,121.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2017(1)

 

 

 

Latex

 

Synthetic

 

Performance

 

 

 

 

 

 

 

 

 

 

Binders

 

Rubber

 

Plastics

 

Polystyrene

 

Feedstocks

 

Total

 

United States

 

$

76.0

 

$

 —

 

$

82.8

 

$

0.2

 

$

3.8

 

$

162.8

 

Europe

 

 

119.5

 

 

163.4

 

 

199.4

 

 

140.1

 

 

34.7

 

 

657.1

 

Asia-Pacific

 

 

89.0

 

 

 —

 

 

32.7

 

 

88.1

 

 

48.4

 

 

258.2

 

Rest of World

 

 

4.4

 

 

 —

 

 

22.0

 

 

 —

 

 

 —

 

 

26.4

 

Total

 

$

 288.9

 

$

163.4

 

$

336.9

 

$

228.4

 

$

86.9

 

$

1,104.5

 

 


(1)

As the Company has adopted Topic 606 utilizing the modified retrospective approach, amounts for the three months ended March 31, 2017 above are disclosed as recognized under Topic 605.

For all material contracts with customers, control is transferred and sales are recognized at a point in time, when the Company satisfies the performance obligations according to the terms of the contract, and when title and the risk of loss is passed to the customer. Title and risk of loss varies by region and customer and is determined based upon the purchase order received from the customer and the applicable contractual terms or jurisdictional standards. The Company receives cash equal to the invoice price for most product sales, subject to cash sales incentives with certain customers, with payment terms generally ranging from 10 to 90 days (with an approximate weighted average of 50 days as of March 31, 2018), also varying by segment and region.

Certain of the Company’s contracts with customers contain multiple performance obligations, most commonly due to the sale of multiple distinct products. The transaction price within these contracts is allocated between these separate and distinct products based on their stand-alone selling prices, as defined within the contract. The Company’s products are typically sold at observable stand-alone sales values, which are used to determine the estimated stand-alone selling price. The stand-alone selling prices of the Company’s products are generally based, in part, on the current or forecasted costs of key raw materials, but are often subject to a predetermined lag period for the pass through of these costs. As such, contracts with customers typically include provisions that allow for the changes in stand-alone selling prices to reflect the pass through of changes in raw material costs, often using pricing formulas that utilize commodity indices.

In cases where the Company’s transaction price is considered variable at the point of revenue recognition, the ‘most likely amount’ method is used to estimate the effect of any related uncertainty. In formulating this estimate, the

11


 

Company considers all historical, current, and forecasted information that is reasonably available to identify a reasonable number of possible consideration amounts. Once the transaction price, including impacts of variable consideration, is estimated, revenue is recognized only to the extent that it is probable that a subsequent change in the estimate would not result in a significant revenue reversal. Furthermore, if the Company is not able to rely on observable stand-alone selling prices, the ‘expected cost plus a margin approach’ is utilized to estimate the stand-alone selling price of each performance obligation, primarily utilizing historical experience. During the three months ended March 31, 2018, the impact of recognizing changes in selling prices related to prior periods was immaterial.

 

NOTE 4—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company is currently supplemented by one joint venture, Americas Styrenics LLC (“Americas Styrenics”, a styrene and polystyrene joint venture with Chevron Phillips Chemical Company LP). Previously, the Company also had a 50% share in Sumika Styron Polycarbonate Limited (“Sumika Styron Polycarbonate”, a polycarbonate, or PC, joint venture with Sumitomo Chemical Company Limited), until the sale of the Company’s investment in the joint venture during the first quarter of 2017 (refer to discussion below for further information). Investments held in unconsolidated affiliates are accounted for by the equity method. The results of Americas Styrenics are included within its own reporting segment. The results of Sumika Styron Polycarbonate were included within the Performance Plastics reporting segment (as recast due to the segment realignment effective January 1, 2018 discussed further in Note 15) until the Company sold its share of the entity during the first quarter of 2017.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2018

    

2017

    

Sales

    

$

486.6

    

$

433.9

 

Gross profit

 

$

95.2

 

$

20.6

 

Net income

 

$

85.7

 

$

6.3

 

Americas Styrenics

As of March 31, 2018 and December 31, 2017, respectively, the Company’s investment in Americas Styrenics was $168.1 million and $152.5 million, which was $43.8 million and $46.4 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 2.6 years as of March 31, 2018. The Company received dividends from Americas Styrenics of $30.0 million and $7.5 million during the three months ended March 31, 2018 and 2017, 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 three months ended March 31, 2017, which was included within “Other income, net” in the condensed consolidated statement of operations and was allocated entirely to the Performance Plastics segment (as recast under the segment realignment discussed further in Note 15). In addition, the parties entered into a long-term agreement to continue sourcing PC resin from Sumika Styron Polycarbonate to the Company’s Performance Plastics segment.

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

 

12


 

NOTE 5—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

    

2018

    

2017

 

Finished goods

    

$

285.6

    

$

250.9

 

Raw materials and semi-finished goods

 

 

265.1

 

 

226.7

 

Supplies

 

 

37.6

 

 

32.8

 

Total

 

$

588.3

 

$

510.4

 

 

 

 

NOTE 6—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 March 31, 2018 and December 31, 2017.

As of March 31, 2018 and December 31, 2017, debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

Interest Rate as of March 31, 2018

    

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

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

    

 

 

2022 Revolving Facility(2)

 

Various

 

September 2022

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

2024 Term Loan B(3)

 

4.377%

 

September 2024

 

 

696.5

 

 

(17.8)

 

 

678.7

 

 

698.3

 

 

(18.3)

 

 

680.0

 

2025 Senior Notes

 

5.375%

 

September 2025

 

 

500.0

 

 

(9.1)

 

 

490.9

 

 

500.0

 

 

(9.4)

 

 

490.6

 

Accounts Receivable Securitization Facility(4)

 

Various

 

May 2019

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other indebtedness

 

Various

 

Various

 

 

1.4

 

 

 —

 

 

1.4

 

 

1.4

 

 

 —

 

 

1.4

 

Total debt

 

 

 

 

 

$

1,197.9

 

$

(26.9)

 

$

1,171.0

 

$

1,199.7

 

$

(27.7)

 

$

1,172.0

 

Less: current portion

 

 

 

 

 

 

 

 

 

 

 

 

(7.0)

 

 

 

 

 

 

 

 

(7.0)

 

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

 

 

 

 

 

 

 

 

 

 

 

$

1,164.0

 

 

 

 

 

 

 

$

1,165.0

 


(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)

Under the 2022 Revolving Facility, the Company had a capacity of $375.0 million and funds available for borrowing of $359.9 million (net of $15.1 million outstanding letters of credit) as of March 31, 2018. 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 March 31, 2018, $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 had a borrowing capacity of $150.0 million as of March 31, 2018. Additionally, as of March 31, 2018, the Company had accounts receivable available to support this facility in excess of its borrowing capacity, based on the pool of eligible accounts receivable. In regard to outstanding borrowings, fixed interest charges are 1.95% plus variable commercial paper rates, while for available, but undrawn commitments, fixed interest charges are 1.0%.

.

13


 

NOTE 7—GOODWILL

The following table shows changes in the carrying amount of goodwill, by segment, from December 31, 2017 to March 31, 2018. Prior period balances in this table have been recast in conjunction with the segment realignment that occurred during the first quarter of 2018. Refer to Note 15 for further information.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

 

 

 

 

Americas

 

 

 

 

 

    

Binders

    

Rubber

    

Plastics

    

Polystyrene

    

Feedstocks

    

Styrenics

    

Total

 

Balance at December 31, 2017

 

$

16.5

 

$

11.7

 

$

39.6

 

$

4.7

 

$

 —

 

$

 —

 

$

72.5

 

Foreign currency impact

 

 

0.4

 

 

0.3

 

 

0.9

 

 

0.1

 

 

 —

 

 

 —

 

 

1.7

 

Balance at March 31, 2018

 

$

16.9

 

$

12.0

 

$

40.5

 

$

4.8

 

$

 —

 

$

 —

 

$

74.2

 

 

NOTE 8—DERIVATIVE INSTRUMENTS

The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. 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. Refer to Note 9 for fair value disclosures related to these instruments.

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 this exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.

As of March 31, 2018, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $334.7 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of March 31, 2018:

 

 

 

 

 

 

 

 

March 31, 

 

Buy / (Sell) 

    

2018

 

Euro

 

$

(129.4)

 

Chinese Yuan

 

$

(78.2)

 

Swiss Franc

 

$

54.6

 

Taiwan Dollar

 

$

14.4

 

Indonesian Rupiah

 

$

(14.0)

 

Open foreign exchange forward contracts as of March 31, 2018 had maturities occurring over a period of two months.

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 AOCI to the extent effective, and reclassified to cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.

Open foreign exchange cash flow hedges as of March 31, 2018 had maturities occurring over a period of nine months, and had a net notional U.S. dollar equivalent of $162.0 million.

14


 

Interest Rate Swaps

On September 6, 2017, the Company issued the 2024 Term Loan B, which bears an interest rate of LIBOR plus 2.50%, subject to a 0.00% LIBOR floor. In order to reduce the variability in interest payments associated with the Company’s variable rate debt, during the third quarter of 2017, the Company entered into certain interest rate swap agreements to convert a portion of these variable rate borrowings into a fixed rate obligation. These interest rate swap agreements are designated as cash flow hedges, and as such, the contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to interest expense in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.

As of March 31, 2018, the Company had open interest rate swap agreements with a net notional U.S. dollar equivalent of $200.0 million which had an effective date of September 29, 2017 and mature over a period of five years. Under the terms of the swap agreements, the Company is required to pay the counterparties a stream of fixed interest payments at a rate of 1.81%, and in turn, receives variable interest payments based on 1-month LIBOR (1.88% as of March 31, 2018) from the counterparties.

Net Investment Hedge

Through August 31, 2017, the Company had designated a portion (€280 million) of the original principal amount of the Company’s previous €375.0 million Euro Notes as a hedge of the foreign currency exposure of the Issuers’ net investment in certain European subsidiaries. Effective September 1, 2017, the Company de-designated the Euro Notes as a net investment hedge of the Issuers’ net investment in certain European subsidiaries, as the Euro Notes were redeemed on September 7, 2017. Through the date of de-designation, this hedge was deemed to be highly effective, and changes in the Euro Notes’ carrying value resulting from fluctuations in the euro exchange rate were recorded as cumulative foreign currency translation loss of $24.1 million within AOCI as of December 31, 2017.

On August 29, 2017, the Issuers executed an indenture pursuant to which they issued the $500.0 million 5.375% 2025 Senior Notes. Subsequently, on September 1, 2017, the Company entered into certain fixed-for-fixed cross currency swaps (“CCS”), swapping USD principal and interest payments on the newly issued 2025 Senior Notes for euro-denominated payments. Under the terms of the CCS, the Company has notionally exchanged $500.0 million at an interest rate of 5.375% for €420 million at a weighted average interest rate of 3.45% for approximately five years.

Effective September 1, 2017, the Company designated the full notional amount of the CCS (€420 million) as a hedge of the Issuers’ net investment in certain European subsidiaries. As the CCS were deemed to be highly effective hedges, changes in the fair value of the CCS were recorded as cumulative foreign currency translation loss of $38.0 million within AOCI as of March 31, 2018.

Summary of Derivative Instruments

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

Gain (Loss) Recognized in

 

 

 

 

AOCI on Balance Sheet

 

Statement of Operations

 

 

 

 

Three Months Ended March 31, 

 

Statement of Operations

 

 

2018

 

2017

 

2018

 

2017

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(0.5)

    

$

(4.8)

    

$

(3.7)

    

$

2.5

    

Cost of sales

Interest rate swaps

 

 

3.3

 

 

 —

 

 

(0.1)

 

 

 —

 

Interest expense, net

Total

 

$

2.8

 

$

(4.8)

 

$

(3.8)

 

$

2.5

 

 

Net Investment Hedges

<