10-Q 1 tse-20190331x10q.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, 2019

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  ☒ 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of Each Class

Trading symbol

Name of Exchange on which registered

Ordinary Shares, par value $0.01 per share

TSE

New York Stock Exchange

As of April 30, 2019, there were 40,831,125 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, 2019 and December 31, 2018 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (Unaudited)

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

Item 2. 

 

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

 

27 

 

 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

 

37 

 

 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

37 

 

 

 

 

 

 

 

Part II 

 

Other Information

 

 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

38 

 

 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

38 

 

 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38 

 

 

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

39 

 

 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

39 

 

 

 

 

 

 

 

Item 5. 

 

Other Information

 

39 

 

 

 

 

 

 

 

Item 6. 

 

Exhibits

 

39 

 

 

 

 

 

 

 

Exhibit Index 

 

 

 

 

 

 

 

 

 

 

 

Signatures 

 

 

 

 

 

 

 

2


 

Trinseo S.A.

Quarterly Report on Form 10-Q

For the quarterly period ended March 31, 2019

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, 2018 (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019. 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 our Annual Report filed with the SEC on February 28, 2019 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 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)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

 

2018

    

Assets

    

 

 

 

 

    

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

516.4

 

$

452.3

 

Accounts receivable, net of allowance for doubtful accounts (March 31, 2019: $4.9; December 31, 2018: $6.1)

 

 

650.4

 

 

648.1

 

Inventories

 

 

447.9

 

 

510.4

 

Other current assets

 

 

25.4

 

 

20.5

 

Total current assets

 

 

1,640.1

 

 

1,631.3

 

Investments in unconsolidated affiliates

 

 

198.9

 

 

179.1

 

Property, plant and equipment, net of accumulated depreciation (March 31, 2019: $605.5; December 31, 2018: $590.6)

 

 

575.0

 

 

592.1

 

Other assets

 

 

 

 

 

 

 

Goodwill

 

 

67.8

 

 

69.0

 

Other intangible assets, net

 

 

187.1

 

 

191.1

 

Right-of-use assets - operating

 

 

68.1

 

 

 —

 

Deferred income tax assets

 

 

27.9

 

 

26.7

 

Deferred charges and other assets

 

 

41.6

 

 

37.5

 

Total other assets

 

 

392.5

 

 

324.3

 

Total assets

 

$

2,806.5

 

$

2,726.8

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

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

 

$

7.1

 

$

7.0

 

Accounts payable

 

 

391.4

 

 

354.2

 

Current lease liabilities - operating

 

 

15.2

 

 

 —

 

Income taxes payable

 

 

13.8

 

 

16.0

 

Accrued expenses and other current liabilities

 

 

155.3

 

 

159.8

 

Total current liabilities

 

 

582.8

 

 

537.0

 

Noncurrent liabilities

 

 

 

 

 

 

 

Long-term debt, net of unamortized deferred financing fees

 

 

1,160.4

 

 

1,160.8

 

Noncurrent lease liabilities - operating

 

 

53.2

 

 

 —

 

Deferred income tax liabilities

 

 

46.4

 

 

45.4

 

Other noncurrent obligations

 

 

210.6

 

 

214.9

 

Total noncurrent liabilities

 

 

1,470.6

 

 

1,421.1

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (March 31, 2019: 48.8 shares issued and 41.0 shares outstanding; December 31, 2018: 48.8 shares issued and 41.6 shares outstanding)

 

 

0.5

 

 

0.5

 

Additional paid-in-capital

 

 

568.8

 

 

575.4

 

Treasury shares, at cost (March 31, 2019: 7.8 shares; December 31, 2018: 7.2 shares)

 

 

(445.1)

 

 

(418.1)

 

Retained earnings

 

 

772.4

 

 

753.2

 

Accumulated other comprehensive loss

 

 

(143.5)

 

 

(142.3)

 

Total shareholders’ equity

 

 

753.1

 

 

768.7

 

Total liabilities and shareholders’ equity

 

$

2,806.5

 

$

2,726.8

 

 

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, 

 

 

 

2019

    

2018

    

 

Net sales

$

1,013.1

    

$

1,121.6

 

 

Cost of sales

 

915.7

 

 

946.4

 

 

Gross profit

 

97.4

 

 

175.2

 

 

Selling, general and administrative expenses

 

68.8

 

 

64.4

 

 

Equity in earnings of unconsolidated affiliates

 

32.2

 

 

45.5

 

 

Operating income

 

60.8

 

 

156.3

 

 

Interest expense, net

 

10.2

 

 

14.9

 

 

Other expense (income), net

 

4.0

 

 

(3.8)

 

 

Income before income taxes

 

46.6

 

 

145.2

 

 

Provision for income taxes

 

10.8

 

 

24.9

 

 

Net income

$

35.8

 

$

120.3

 

 

Weighted average shares- basic

 

41.3

 

 

43.4

 

 

Net income per share- basic

$

0.87

 

$

2.77

 

 

Weighted average shares- diluted

 

41.8

 

 

44.4

 

 

Net income per share- diluted

$

0.86

 

$

2.71

 

 

 

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, 

 

 

    

2019

    

2018

 

Net income

    

$

35.8

    

$

120.3

    

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

(0.3)

 

 

(2.1)

 

Net gain on cash flow hedges

 

 

0.1

 

 

2.8

 

Pension and other postretirement benefit plans:

 

 

 

 

 

 

 

Net loss arising during period (net of tax of: $0.2 and $0.0)

 

 

(2.0)

 

 

 —

 

Amounts reclassified from accumulated other comprehensive income

 

 

1.0

 

 

0.6

 

Total other comprehensive income (loss), net of tax

 

 

(1.2)

 

 

1.3

 

Comprehensive income

 

$

34.6

 

$

121.6

 

 

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, 2018

 

41.6

 

7.2

 

$

0.5

 

$

575.4

 

$

(418.1)

 

$

(142.3)

 

$

753.2

 

$

768.7

 

Net income

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

35.8

 

 

35.8

 

Other comprehensive loss

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1.2)

 

 

 —

 

 

(1.2)

 

Share-based compensation activity

 

0.1

 

(0.1)

 

 

 —

 

 

(6.6)

 

 

7.0

 

 

 —

 

 

 —

 

 

0.4

 

Purchase of treasury shares

 

(0.7)

 

0.7

 

 

 —

 

 

 —

 

 

(34.0)

 

 

 —

 

 

 —

 

 

(34.0)

 

Dividends on ordinary shares ($0.40 per share)

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(16.6)

 

 

(16.6)

 

Balance at March 31, 2019

 

41.0

 

7.8

 

$

0.5

 

$

568.8

 

$

(445.1)

 

$

(143.5)

 

$

772.4

 

$

753.1

 

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

 

Share-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

 

 

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, 

 

 

    

2019

    

2018

 

Cash flows from operating activities

    

 

    

    

 

    

    

Net income

 

$

35.8

 

$

120.3

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

33.9

 

 

31.9

 

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

 

 

(0.1)

 

 

1.1

 

Deferred income tax

 

 

(0.1)

 

 

2.5

 

Share-based compensation expense

 

 

4.1

 

 

5.5

 

Earnings of unconsolidated affiliates, net of dividends

 

 

(19.7)

 

 

(15.5)

 

Unrealized net (gain) loss on foreign exchange forward contracts

 

 

(6.6)

 

 

0.1

 

Gain on sale of businesses and other assets

 

 

(0.2)

 

 

(0.5)

 

Pension curtailment and settlement loss

 

 

0.7

 

 

 —

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Accounts receivable

 

 

(4.8)

 

 

(32.7)

 

Inventories

 

 

57.7

 

 

(70.3)

 

Accounts payable and other current liabilities

 

 

49.4

 

 

3.0

 

Income taxes payable

 

 

(2.0)

 

 

0.8

 

Other assets, net

 

 

2.8

 

 

(1.3)

 

Other liabilities, net

 

 

2.3

 

 

(4.1)

 

Cash provided by operating activities

 

 

153.2

 

 

40.8

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

 

(25.0)

 

 

(30.6)

 

Proceeds from the sale of businesses and other assets

 

 

0.7

 

 

0.5

 

Cash used in investing activities

 

 

(24.3)

 

 

(30.1)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Short-term borrowings, net

 

 

(0.1)

 

 

(0.1)

 

Purchase of treasury shares

 

 

(37.4)

 

 

(23.8)

 

Dividends paid

 

 

(17.4)

 

 

(16.2)

 

Proceeds from exercise of option awards

 

 

0.1

 

 

1.9

 

Withholding taxes paid on restricted share units

 

 

(3.8)

 

 

(8.0)

 

Repayments of 2024 Term Loan B

 

 

(1.8)

 

 

(1.8)

 

Cash used in financing activities

 

 

(60.4)

 

 

(48.0)

 

Effect of exchange rates on cash

 

 

(1.6)

 

 

3.4

 

Net change in cash, cash equivalents, and restricted cash

 

 

66.9

 

 

(33.9)

 

Cash, cash equivalents, and restricted cash—beginning of period

 

 

452.3

 

 

432.8

 

Cash, cash equivalents, and restricted cash—end of period

 

$

519.2

 

$

398.9

 

Less: Restricted cash, included in "Other current assets"

 

 

(2.8)

 

 

 —

 

Cash and cash equivalents—end of period

 

$

516.4

 

$

398.9

 

 

 

 

 

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, 2019 and 2018 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 2018 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 February 28, 2019.

The December 31, 2018 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 2018 audited consolidated financial statements, but does not include all disclosures required by GAAP for annual periods.

 

NOTE 2—RECENT ACCOUNTING GUIDANCE

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 (“ROU”) 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. 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. The Company adopted the standard effective January 1, 2019, and as a result, the Company recorded ROU assets and lease liabilities of $73.0 million and $72.4 million, respectively, on the condensed consolidated balance sheet as of January 1, 2019. The Company’s adoption of this standard did not result in a cumulative effect adjustment being recorded to opening retained earnings as of January 1, 2019 and did not have a material impact on the Company’s condensed consolidated statements of operations or cash flows. Refer to Note 18 for new disclosure requirements in effect as a result of this adoption.

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. While the Company is currently assessing the impact of adopting this guidance, it is not anticipated to have a material impact on the 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

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

9


 

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 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, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

 

 

 

 

 

 

 

Three Months Ended

 

Binders

 

Rubber

 

Plastics

 

Polystyrene

 

Feedstocks

 

Total

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

63.3

 

$

 —

 

$

81.8

 

$

 —

 

$

2.7

 

$

147.8

 

Europe

 

 

101.4

 

 

124.6

 

 

213.3

 

 

138.2

 

 

40.5

 

 

618.0

 

Asia-Pacific

 

 

56.5

 

 

 —

 

 

51.6

 

 

90.3

 

 

23.6

 

 

222.0

 

Rest of World

 

 

2.7

 

 

 —

 

 

22.6

 

 

 —

 

 

 —

 

 

25.3

 

Total

 

$

223.9

 

$

124.6

 

$

369.3

 

$

228.5

 

$

66.8

 

$

1,013.1

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

NOTE 4—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company’s investments held in unconsolidated affiliates are accounted for by the equity method. 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). The results of Americas Styrenics are included within its own reporting segment.

Americas Styrenics is a privately held company; therefore, a quoted market price for its stock is not available. The summarized financial information of the Company’s unconsolidated affiliate is shown below.

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Sales

    

$

369.2

    

$

486.6

 

Gross profit

 

$

54.2

 

$

95.2

 

Net income

 

$

42.9

 

$

85.7

 

Americas Styrenics

As of March 31, 2019 and December 31, 2018, the Company’s investment in Americas Styrenics was $198.9 million and $179.1 million, respectively, which was $22.7 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 March 31, 2019. The Company received dividends from Americas Styrenics of $12.5 million and $30.0 million during the three months ended March 31, 2019 and 2018, respectively.

 

10


 

NOTE 5—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2019

 

2018

Finished goods

    

$

229.1

    

$

269.8

Raw materials and semi-finished goods

 

 

184.3

 

 

205.8

Supplies

 

 

34.5

 

 

34.8

Total

 

$

447.9

 

$

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, 2019 and December 31, 2018.

As of March 31, 2019 and December 31, 2018, debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

   

Interest Rate as of
March 31, 2019

   

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2024 Term Loan B

 

4.499%

 

September 2024

 

$

689.5

 

$

(15.6)

 

$

673.9

 

$

691.3

 

$

(16.2)

 

$

675.1

 

2022 Revolving Facility(2)

 

Various

 

September 2022

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

2025 Senior Notes

 

5.375%

 

September 2025

 

 

500.0

 

 

(8.1)

 

 

491.9

 

 

500.0

 

 

(8.4)

 

 

491.6

 

Accounts Receivable Securitization Facility(3)

 

Various

 

September 2021

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other indebtedness

 

Various

 

Various

 

 

1.7

 

 

 —

 

 

1.7

 

 

1.1

 

 

 —

 

 

1.1

 

Total debt

 

 

 

 

 

$

1,191.2

 

$

(23.7)

 

$

1,167.5

 

$

1,192.4

 

$

(24.6)

 

$

1,167.8

 

Less: current portion(4)

 

 

 

 

 

 

 

 

 

 

 

 

(7.1)

 

 

 

 

 

 

 

 

(7.0)

 

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

 

 

 

 

 

 

 

 

 

 

 

$

1,160.4

 

 

 

 

 

 

 

$

1,160.8

 


(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 $360.7 million (net of $14.3 million outstanding letters of credit) as of March 31, 2019. 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)

This facility had a borrowing capacity of $150.0 million as of March 31, 2019. Additionally, as of March 31, 2019, 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 1.00%.

(4)

As of March 31, 2019 and December 31, 2018, the current portion of long-term debt primarily related to $7.0 million of the scheduled future principle payments on the 2024 Term Loan B.

. 

11


 

NOTE 7—GOODWILL

The following table shows changes in the carrying amount of goodwill, by segment, from December 31, 2018 to March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

 

 

 

 

Americas

 

 

 

 

 

    

Binders

    

Rubber

    

Plastics

    

Polystyrene

    

Feedstocks

    

Styrenics

    

Total

 

Balance at December 31, 2018

 

$

15.9

 

$

11.3

 

$

37.3

 

$

4.5

 

$

 —

 

$

 —

 

$

69.0

 

Foreign currency impact

 

 

(0.3)

 

 

(0.2)

 

 

(0.6)

 

 

(0.1)

 

 

 —

 

 

 —

 

 

(1.2)

 

Balance at March 31, 2019

 

$

15.6

 

$

11.1

 

$

36.7

 

$

4.4

 

$

 —

 

$

 —

 

$

67.8

 

 

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.

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 its 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, 2019, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $408.9 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of March 31, 2019:

 

 

 

 

 

 

 

 

March 31, 

 

Buy / (Sell) 

    

2019

 

Euro

 

$

(217.8)

 

Chinese Yuan

 

$

(78.2)

 

Swiss Franc

 

$

45.1

 

Indonesian Rupiah

 

$

(18.2)

 

Mexican Peso

 

$

(14.9)

 

Open foreign exchange forward contracts as of March 31, 2019 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, 2019 had maturities occurring over a period of nine months, and had a net notional U.S. dollar equivalent of $107.1 million.

12


 

Interest Rate Swaps

On September 6, 2017, the Company issued the 2024 Term Loan B, which currently bears an interest rate of the London Interbank Offered Rate (“LIBOR”) plus 2.00%, 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 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, 2019, 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 (2.50% as of March 31, 2019) from the counterparties.

Net Investment Hedge

On September 1, 2017, the Company entered into certain fixed-for-fixed cross currency swaps (“CCS”), swapping USD principal and interest payments on its 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 €420.0 million at a weighted average interest rate of 3.45% for approximately five years. On September 1, 2017, the Company designated the full notional amount of the CCS (€420.0 million) as a hedge of its net investment in certain European subsidiaries under the forward method, with all changes in the fair value of the CCS recorded as a component of AOCI, as the CCS were deemed to be highly effective hedges. A cumulative foreign currency translation loss of $38.0 million was recorded within AOCI related to the CCS through March 31, 2018.

Effective April 1, 2018, the Company elected as an accounting policy to re-designate the CCS as a net investment hedge (and any future similar hedges) under the spot method. As such, changes in the fair value of the CCS that are included in the assessment of effectiveness (changes due to spot foreign exchange rates) are recorded as cumulative foreign currency translation within OCI, and will remain in AOCI until either the sale or substantially complete liquidation of the subsidiary. As of March 31, 2019, no gains or losses have been reclassified from AOCI into income related to the sale or substantially complete liquidation of the relevant subsidiaries. As an additional accounting policy election applied to similar hedges under this new standard, the initial value of any component excluded from the assessment of effectiveness is recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in the fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI. Prior to April 1, 2018, no components were excluded from the assessment of effectiveness for any of the Company’s existing net investment hedges.

As of April 1, 2018, the initial excluded component value related to the CCS was $23.6 million, which the Company elected to amortize as a reduction of “Interest expense, net” in the condensed consolidated statements of operations using the straight-line method over the remaining term of the CCS. Additionally, the accrual of periodic USD and euro-denominated interest receipts and payments under the terms of the CCS are being recognized within “Interest expense, net” in the condensed consolidated statements of operations.

13


 

Summary of Derivative Instruments

The following tables present the effect of the Company’s derivative instruments, including those not designated for hedge accounting treatment, on the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018:

The following tables present the effect of the Company’s derivative instruments, including those not designated for hedge accounting treatment, on the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Location and Amount of Gain (Loss) Recognized in Statements of Operations

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2019

 

March 31, 2018

 

 

  

Cost of
sales

 

Interest expense, net

 

Other expense (income), net

 

Cost of
sales

 

Interest expense, net

 

Other expense (income), net

 

Total amount of (income) expense line items presented in the statements of operations in which the effects of derivative instruments are recorded

 

$

915.7

 

$

10.2

 

$

4.0

 

$

946.4

 

$

14.9

 

$

(3.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effects of cash flow hedge instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss) reclassified from AOCI into income

 

$

0.6

 

$

 —

 

$

 —

 

$

(3.7)

 

$

 —

 

$

 —

 

Interest rate swaps