10-Q 1 tse-20180930x10q.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, 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 every Interactive Data File required to be submitted 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 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

◻  

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 November 7, 2018, there were 42,320,717 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, 2018 and December 31, 2017 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2018 and 2017 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2018 and 2017 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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

 

31 

 

 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

45 

 

 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

45 

 

 

 

 

 

 

 

Part II 

 

Other Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

46 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

46 

 

 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46 

 

 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

47 

 

 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

47 

 

 

 

 

 

 

 

Item 5. 

 

Other Information

 

47 

 

 

 

 

 

 

 

Item 6. 

 

Exhibits

 

47 

 

 

 

 

 

 

 

Exhibit Index 

 

 

 

 

 

 

 

 

 

 

 

Signatures 

 

 

 

 

 

 

 

2


 

Trinseo S.A.

Quarterly Report on Form 10-Q

For the quarterly period ended September 30, 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,” “see,” “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 this Quarterly Report under Part II, Item 1A— “Risk Factors”, our Annual Report filed with the SEC on March 1, 2018 under Part I, Item IA— “Risk Factors”, and our Quarterly Report filed with the SEC on August 3, 2018 under Part II, Item 1A – “Risk Factors”.

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 SEC. 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)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

 

2017

    

Assets

    

 

 

 

 

    

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

421.4

 

$

432.8

 

Accounts receivable, net of allowance for doubtful accounts (September 30, 2018: $5.0; December 31, 2017: $5.6)

 

 

753.1

 

 

685.5

 

Inventories

 

 

585.6

 

 

510.4

 

Other current assets

 

 

39.0

 

 

17.5

 

Total current assets

 

 

1,799.1

 

 

1,646.2

 

Investments in unconsolidated affiliates

 

 

180.8

 

 

152.5

 

Property, plant and equipment, net of accumulated depreciation (September 30, 2018: $579.3; December 31, 2017: $523.7)

 

 

594.3

 

 

627.0

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

69.9

 

 

72.5

 

Other intangible assets, net

 

 

195.7

 

 

207.5

 

Deferred income tax assets

 

 

32.5

 

 

35.5

 

Deferred charges and other assets

 

 

37.7

 

 

30.8

 

Total other assets

 

 

335.8

 

 

346.3

 

Total assets

 

$

2,910.0

 

$

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

 

 

459.9

 

 

436.8

 

Income taxes payable

 

 

19.6

 

 

35.9

 

Accrued expenses and other current liabilities

 

 

141.7

 

 

146.9

 

Total current liabilities

 

 

628.2

 

 

626.6

 

Noncurrent liabilities

 

 

 

 

 

 

 

Long-term debt, net of unamortized deferred financing fees

 

 

1,161.7

 

 

1,165.0

 

Deferred income tax liabilities

 

 

46.4

 

 

49.2

 

Other noncurrent obligations

 

 

247.5

 

 

256.4

 

Total noncurrent liabilities

 

 

1,455.6

 

 

1,470.6

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (September 30, 2018: 48.8 shares issued and 42.5 shares outstanding; December 31, 2017: 48.8 shares issued and 43.4 shares outstanding)

 

 

0.5

 

 

0.5

 

Additional paid-in-capital

 

 

572.2

 

 

578.8

 

Treasury shares, at cost (September 30, 2018: 6.3 shares; December 31, 2017: 5.4 shares)

 

 

(367.6)

 

 

(286.8)

 

Retained earnings

 

 

770.9

 

 

527.9

 

Accumulated other comprehensive loss

 

 

(149.8)

 

 

(145.6)

 

Total shareholders’ equity

 

 

826.2

 

 

674.8

 

Total liabilities and shareholders’ equity

 

$

2,910.0

 

$

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Net sales

    

$

1,199.7

    

$

1,096.6

    

$

3,557.8

    

$

3,346.3

 

Cost of sales

 

 

1,068.1

 

 

948.1

 

 

3,088.3

 

 

2,872.3

 

Gross profit

 

 

131.6

 

 

148.5

 

 

469.5

 

 

474.0

 

Selling, general and administrative expenses

 

 

60.0

 

 

65.0

 

 

186.1

 

 

179.3

 

Equity in earnings of unconsolidated affiliates

 

 

34.5

 

 

43.8

 

 

113.3

 

 

93.0

 

Operating income

 

 

106.1

 

 

127.3

 

 

396.7

 

 

387.7

 

Interest expense, net

 

 

10.1

 

 

18.4

 

 

35.8

 

 

55.4

 

Loss on extinguishment of long-term debt

 

 

 —

 

 

65.3

 

 

0.2

 

 

65.3

 

Other expense (income), net

 

 

2.1

 

 

2.1

 

 

2.9

 

 

(0.1)

 

Income before income taxes

 

 

93.9

 

 

41.5

 

 

357.8

 

 

267.1

 

Provision for income taxes

 

 

19.2

 

 

8.3

 

 

64.5

 

 

56.4

 

Net income

 

$

74.7

 

$

33.2

 

$

293.3

 

$

210.7

 

Weighted average shares- basic

 

 

42.6

 

 

43.7

 

 

43.0

 

 

43.9

 

Net income per share- basic

 

$

1.75

 

$

0.76

 

$

6.82

 

$

4.80

 

Weighted average shares- diluted

 

 

43.3

 

 

44.8

 

 

43.9

 

 

45.0

 

Net income per share- diluted

 

$

1.72

 

$

0.74

 

$

6.68

 

$

4.68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends per share

 

$

0.40

 

$

0.36

 

$

1.16

 

$

1.02

 

 

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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Net income

    

$

74.7

    

$

33.2

    

$

293.3

    

$

210.7

    

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

(4.6)

 

 

(1.6)

 

 

(22.8)

 

 

21.6

 

Net gain (loss) on cash flow hedges

 

 

2.1

 

 

(3.7)

 

 

16.8

 

 

(21.5)

 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

0.6

 

 

0.8

 

 

1.8

 

 

3.0

 

Total other comprehensive income (loss), net of tax

 

 

(1.9)

 

 

(4.5)

 

 

(4.2)

 

 

3.1

 

Comprehensive income

 

$

72.8

 

$

28.7

 

$

289.1

 

$

213.8

 

 

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

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

293.3

 

 

293.3

 

Other comprehensive loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4.2)

 

 

 —

 

 

(4.2)

 

Stock-based compensation activity

 

0.4

 

(0.4)

 

 

 —

 

 

(6.6)

 

 

13.4

 

 

 —

 

 

 —

 

 

6.8

 

Purchase of treasury shares

 

(1.3)

 

1.3

 

 

 —

 

 

 —

 

 

(94.2)

 

 

 —

 

 

 —

 

 

(94.2)

 

Dividends on ordinary shares ($1.16 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(50.3)

 

 

(50.3)

 

Balance at September 30, 2018

 

42.5

 

6.3

 

$

0.5

 

$

572.2

 

$

(367.6)

 

$

(149.8)

 

$

770.9

 

$

826.2

 

Balance at December 31, 2016

 

44.3

 

4.5

 

$

0.5

 

$

573.7

 

$

(217.5)

 

$

(170.2)

 

$

261.2

 

$

447.7

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

210.7

 

 

210.7

 

Other comprehensive income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3.1

 

 

 —

 

 

3.1

 

Stock-based compensation activity

 

0.4

 

(0.4)

 

 

 —

 

 

3.1

 

 

15.7

 

 

 —

 

 

 —

 

 

18.8

 

Purchase of treasury shares

 

(1.0)

 

1.0

 

 

 —

 

 

 —

 

 

(61.9)

 

 

 —

 

 

 —

 

 

(61.9)

 

Dividends on ordinary shares ($1.02 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(45.8)

 

 

(45.8)

 

Balance at September 30, 2017

 

43.7

 

5.1

 

$

0.5

 

$

576.8

 

$

(263.7)

 

$

(167.1)

 

$

426.1

 

$

572.6

 

 

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)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2018

    

2017

 

Cash flows from operating activities

    

 

    

    

 

    

    

Net income

 

$

293.3

 

$

210.7

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

96.0

 

 

80.1

 

Amortization of deferred financing fees, issuance discount, and excluded component of hedging instruments

 

 

0.8

 

 

4.0

 

Deferred income tax

 

 

2.1

 

 

(2.6)

 

Stock-based compensation expense

 

 

12.3

 

 

10.8

 

Earnings of unconsolidated affiliates, net of dividends

 

 

(28.3)

 

 

(4.1)

 

Unrealized net gains on foreign exchange forward contracts

 

 

(5.4)

 

 

(2.8)

 

Loss on extinguishment of long-term debt

 

 

0.2

 

 

65.3

 

Gain on sale of businesses and other assets

 

 

(0.5)

 

 

(10.5)

 

Impairment charges

 

 

0.4

 

 

4.3

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(77.8)

 

 

(92.8)

 

Inventories

 

 

(86.1)

 

 

(57.3)

 

Accounts payable and other current liabilities

 

 

46.4

 

 

(1.0)

 

Income taxes payable

 

 

(16.3)

 

 

6.3

 

Other assets, net

 

 

(17.2)

 

 

(14.4)

 

Other liabilities, net

 

 

18.6

 

 

(1.2)

 

Cash provided by operating activities

 

 

238.5

 

 

194.8

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(90.9)

 

 

(108.9)

 

Cash paid to acquire a business, net of cash acquired

 

 

 —

 

 

(79.7)

 

Proceeds from capital expenditures subsidy

 

 

1.0

 

 

 —

 

Proceeds from the sale of businesses and other assets

 

 

1.8

 

 

46.2

 

Distributions from unconsolidated affiliates

 

 

 —

 

 

0.9

 

Cash used in investing activities

 

 

(88.1)

 

 

(141.5)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Deferred financing fees

 

 

(0.6)

 

 

(19.2)

 

Short-term borrowings, net

 

 

(0.2)

 

 

(0.2)

 

Purchase of treasury shares

 

 

(95.5)

 

 

(65.2)

 

Dividends paid

 

 

(49.0)

 

 

(42.2)

 

Proceeds from exercise of option awards

 

 

2.6

 

 

8.3

 

Withholding taxes paid on restricted share units

 

 

(8.1)

 

 

(0.2)

 

Net proceeds from issuance of 2024 Term Loan B

 

 

696.5

 

 

700.0

 

Repayments of 2024 Term Loan B

 

 

(701.8)

 

 

 —

 

Repayments of 2021 Term Loan B

 

 

 —

 

 

(492.5)

 

Net proceeds from issuance of 2025 Senior Notes

 

 

 —

 

 

500.0

 

Repayments of 2022 Senior Notes

 

 

 —

 

 

(746.0)

 

Prepayment penalty on long-term debt

 

 

 —

 

 

(53.0)

 

Cash used in financing activities

 

 

(156.1)

 

 

(210.2)

 

Effect of exchange rates on cash

 

 

(5.7)

 

 

10.5

 

Net change in cash and cash equivalents

 

 

(11.4)

 

 

(146.4)

 

Cash and cash equivalents—beginning of period

 

 

432.8

 

 

465.1

 

Cash and cash equivalents—end of period

 

$

421.4

 

$

318.7

 

 

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 September 30, 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 the Company’s implementation procedures, the Company has 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, the Company does not expect the adoption of the new revenue standard to have a material impact to its 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. Although early adoption is permitted, the Company will adopt this new guidance on the effective date for public companies of January 1, 2019. The new guidance must be adopted using a modified retrospective transition, applying the new standard to all leases existing at the date of initial application, which will be the effective date of January 1, 2019. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The Company has completed its risk assessment and scoping procedures for the adoption of this guidance through a number of procedures, including conducting surveys with relevant stakeholders in the business, evaluating its known lease population and data constraints, and selecting the leasing software tool that will be utilized in the adoption. The Company remains in the process of implementing this tool, evaluating available practical expedients and accounting policy elections, assessing new disclosure requirements, designing and implementing key controls, and quantifying the expected impact of the adoption on its consolidated financial statements.

9


 

However, as the Company is the lessee under various real estate, railcar, and other equipment leases, which it currently accounts for as operating leases, the Company currently anticipates the most significant impact of this adoption will be the recognition of right-of-use assets and lease liabilities on the consolidated balance sheet.

In March 2017, the FASB issued guidance that requires employers to present the service cost component of net periodic benefit cost in the same line item within the statements of operations 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 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 and nine months ended September 30, 2017, the Company reclassified net periodic benefit cost of $1.4 million and $3.8 million, respectively, from “Cost of sales” and $0.7 million and $2.2 million, respectively, from “Selling, general and administrative expenses” to “Other expense (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 intends to make more financial and nonfinancial hedging strategies eligible for hedge accounting, amend presentation and disclosure requirements, and changes how companies assess effectiveness. Specifically, the guidance eliminates the requirement to separately measure and record ineffectiveness for cash flow and net investment hedges. The Company adopted this guidance effective April 1, 2018. Based upon the Company’s hedging portfolio, this adoption did not result in any cumulative-effect adjustments to retained earnings. The amended presentation and disclosure guidance will be applied prospectively. Refer to Note 8 for further information regarding the impacts of this adoption as well as additional disclosures required by this standard.

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.

In August 2018, the FASB issued guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension plans or other postretirement plans. This amendment is effective for public companies for fiscal years ending after December 15, 2020. Early adoption is permitted, and the provisions of the amendment should be applied on a retrospective basis to all periods presented. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements.

In August 2018, the FASB issued guidance which aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard update is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted.  Entities may choose to adopt the new guidance either retrospectively or prospectively to eligible costs incurred on or after the date first applied. The Company is currently assessing the impact of adopting this guidance on its 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

10


 

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.

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 and nine months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

 

 

 

 

 

 

 

Three Months Ended

 

Binders

 

Rubber

 

Plastics

 

Polystyrene

 

Feedstocks

 

Total

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

77.3

 

$

 —

 

$

87.0

 

$

 —

 

$

3.0

 

$

167.3

 

Europe

 

 

117.0

 

 

137.7

 

 

226.7

 

 

148.3

 

 

61.2

 

 

690.9

 

Asia-Pacific

 

 

80.0

 

 

 —

 

 

62.7

 

 

104.0

 

 

66.8

 

 

313.5

 

Rest of World

 

 

3.7

 

 

 —

 

 

24.3

 

 

 —

 

 

 —

 

 

28.0

 

Total

 

$

 278.0

 

$

137.7

 

$

400.7

 

$

252.3

 

$

131.0

 

$

1,199.7

 

September 30, 2017(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

73.7

 

$

 —

 

$

76.8

 

$

0.1

 

$

3.5

 

$

154.1

 

Europe

 

 

113.0

 

 

118.7

 

 

223.6

 

 

144.9

 

 

61.8

 

 

662.0

 

Asia-Pacific

 

 

75.3

 

 

 —

 

 

39.1

 

 

93.4

 

 

45.7

 

 

253.5

 

Rest of World

 

 

4.3

 

 

 —

 

 

22.7

 

 

 —

 

 

 —

 

 

27.0

 

Total

 

$

 266.3

 

$

118.7

 

$

362.2

 

$

238.4

 

$

111.0

 

$

1,096.6

 

 

11


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

 

 

 

 

 

 

 

Nine Months Ended

 

Binders

 

Rubber

 

Plastics

 

Polystyrene

 

Feedstocks

 

Total

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

216.3

 

$

 —

 

$

253.7

 

$

0.2

 

$

9.6

 

$

479.8

 

Europe

 

 

349.6

 

 

442.2

 

 

720.9

 

 

460.9

 

 

174.5

 

 

2,148.1

 

Asia-Pacific

 

 

236.9

 

 

 —

 

 

171.0

 

 

316.4

 

 

123.6

 

 

847.9

 

Rest of World

 

 

11.4

 

 

 —

 

 

70.6

 

 

 —

 

 

 —

 

 

82.0

 

Total

 

$

814.2

 

$

442.2

 

$

1,216.2

 

$

777.5

 

$

307.7

 

$

3,557.8

 

September 30, 2017(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

228.7

 

$

 —

 

$

230.6

 

$

0.8

 

$

10.2

 

$

470.3

 

Europe

 

 

361.2

 

 

456.1

 

 

634.0

 

 

427.9

 

 

145.9

 

 

2,025.1

 

Asia-Pacific

 

 

243.6

 

 

 —

 

 

106.8

 

 

271.5

 

 

148.8

 

 

770.7

 

Rest of World

 

 

13.2

 

 

 —

 

 

67.0

 

 

 —

 

 

 —

 

 

80.2

 

Total

 

$

 846.7

 

$

456.1

 

$

1,038.4

 

$

700.2

 

$

304.9

 

$

3,346.3

 

 


(1)

As the Company has adopted Topic 606 utilizing the modified retrospective approach, amounts for the three and nine months ended September 30, 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 53 days as of September 30, 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 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 and nine months ended September 30, 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

12


 

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, 

 

 

    

2018

    

2017

    

2018

    

2017

    

Sales

    

$

462.1

    

$

458.7

    

$

1,430.2

    

$

1,369.6

 

Gross profit

 

$

74.1

 

$

90.6

 

$

242.3

 

$

176.4

 

Net income

 

$

62.1

 

$

81.1

 

$

206.4

 

$

141.5

 

Americas Styrenics

As of September 30, 2018 and December 31, 2017, the Company’s investment in Americas Styrenics was $180.8 million and $152.5 million, respectively, which was $36.6 million and $46.4 million less than the Company’s 50% share of the underlying net assets of Americas Styrenics, respectively. 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 2.1 years as of September 30, 2018. The Company received dividends from Americas Styrenics of $17.5 million and $85.0 million during the three and nine months ended September 30, 2018, respectively, compared to $35.0 million and $80.0 million during the three and nine months ended September 30, 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 nine months ended September 30, 2017, which was included within “Other expense (income), net” in the condensed consolidated statements 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 zero and $9.8 million during the three and nine months ended September 30, 2017, respectively, related to the Company’s proportionate share of earnings from the year ended December 31, 2016.

 

NOTE 5—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

 

    

2018

    

2017

 

Finished goods

    

$

292.7

    

$

250.9

 

Raw materials and semi-finished goods

 

 

254.9

 

 

226.7

 

Supplies

 

 

38.0

 

 

32.8

 

Total

 

$

585.6

 

$

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 September 30, 2018 and December 31, 2017.

13


 

As of September 30, 2018 and December 31, 2017, debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017