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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)                                                                                                                                                                                         

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

For the quarterly period ended June 30, 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 August 5, 2019, there were 40,200,697 of the registrant’s ordinary shares outstanding.

 

 

Table of Contents

 

TABLE OF CONTENTS

    

    

    

    

 

    

    

Page

Part I

Financial Information

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (Unaudited)

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (Unaudited)

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018 (Unaudited)

Condensed Consolidated Statements of Shareholders’ Equity for the three and six months ended June 30, 2019 and 2018 (Unaudited)

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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

31 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

44 

Item 4.

Controls and Procedures

44 

Part II

Other Information

Item 1.

Legal Proceedings

44 

Item 1A.

Risk Factors

44 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44 

Item 3.

Defaults Upon Senior Securities

45 

Item 4.

Mine Safety Disclosures

45 

Item 5.

Other Information

45 

Item 6.

Exhibits

45 

Exhibit Index

Signatures

2

Table of Contents

Trinseo S.A.

Quarterly Report on Form 10-Q

For the quarterly period ended June 30, 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”).

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,” ”estimate,” “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

Table of Contents

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

TRINSEO S.A.

Condensed Consolidated Balance Sheets

(In millions, except per share data)

(Unaudited)

June 30, 

December 31, 

    

2019

2018

    

Assets

    

    

Current assets

Cash and cash equivalents

$

534.9

$

452.3

Accounts receivable, net of allowance for doubtful accounts (June 30, 2019: $5.1; December 31, 2018: $6.1)

619.8

648.1

Inventories

 

458.5

 

510.4

Other current assets

 

25.3

 

20.5

Total current assets

 

1,638.5

 

1,631.3

Investments in unconsolidated affiliates

 

199.1

 

179.1

Property, plant and equipment, net of accumulated depreciation (June 30, 2019: $632.7; December 31, 2018: $590.6)

574.3

592.1

Other assets

Goodwill

 

68.7

 

69.0

Other intangible assets, net

 

185.2

 

191.1

Right-of-use assets - operating

70.8

Deferred income tax assets

 

29.3

 

26.7

Deferred charges and other assets

 

38.3

 

37.5

Total other assets

 

392.3

 

324.3

Total assets

$

2,804.2

$

2,726.8

Liabilities and shareholders’ equity

Current liabilities

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

$

8.7

$

7.0

Accounts payable

 

394.9

 

354.2

Current lease liabilities - operating

15.5

Income taxes payable

 

4.5

 

16.0

Accrued expenses and other current liabilities

 

155.5

 

159.8

Total current liabilities

 

579.1

 

537.0

Noncurrent liabilities

Long-term debt, net of unamortized deferred financing fees

 

1,160.5

 

1,160.8

Noncurrent lease liabilities - operating

55.6

Deferred income tax liabilities

 

49.2

 

45.4

Other noncurrent obligations

 

214.7

 

214.9

Total noncurrent liabilities

 

1,480.0

 

1,421.1

Commitments and contingencies (Note 11)

Shareholders’ equity

Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (June 30, 2019: 48.8 shares issued and 40.6 shares outstanding; December 31, 2018: 48.8 shares issued and 41.6 shares outstanding)

0.5

0.5

Additional paid-in-capital

 

571.2

 

575.4

Treasury shares, at cost (June 30, 2019: 8.2 shares; December 31, 2018: 7.2 shares)

(465.1)

(418.1)

Retained earnings

 

784.1

 

753.2

Accumulated other comprehensive loss

 

(145.6)

 

(142.3)

Total shareholders’ equity

 

745.1

 

768.7

Total liabilities and shareholders’ equity

$

2,804.2

$

2,726.8

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

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TRINSEO S.A.

Condensed Consolidated Statements of Operations

(In millions, except per share data)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

 

    

2019

    

2018

    

2019

    

2018

    

 

Net sales

    

$

951.8

    

$

1,236.6

    

$

1,964.9

    

$

2,358.1

Cost of sales

 

865.6

 

1,073.9

 

1,781.2

 

2,020.2

Gross profit

 

86.2

 

162.7

 

183.7

 

337.9

Selling, general and administrative expenses

 

71.4

 

61.7

 

140.3

 

126.1

Equity in earnings of unconsolidated affiliates

 

40.3

 

33.2

 

72.5

 

78.8

Operating income

 

55.1

 

134.2

 

115.9

 

290.6

Interest expense, net

 

9.9

 

10.8

 

20.1

 

25.7

Loss on extinguishment of long-term debt

 

0.2

0.2

Other expense, net

 

1.5

 

4.5

 

5.5

 

0.8

Income before income taxes

 

43.7

 

118.7

 

90.3

 

263.9

Provision for income taxes

 

15.7

 

20.4

 

26.5

 

45.3

Net income

$

28.0

$

98.3

$

63.8

$

218.6

Weighted average shares- basic

40.8

43.1

41.0

43.3

Net income per share- basic

$

0.69

$

2.28

$

1.56

$

5.05

Weighted average shares- diluted

 

41.1

 

43.8

 

41.5

 

44.2

Net income per share- diluted

$

0.68

$

2.24

$

1.54

$

4.95

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

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TRINSEO S.A.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In millions)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Net income

    

$

28.0

$

98.3

    

$

63.8

    

$

218.6

    

Other comprehensive income (loss), net of tax:

 

Cumulative translation adjustments

3.0

(16.1)

2.7

 

(18.2)

Net gain (loss) on cash flow hedges

(5.4)

11.9

(5.3)

14.7

Pension and other postretirement benefit plans:

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

(2.0)

Amounts reclassified from accumulated other comprehensive income

0.3

0.6

1.3

1.2

Total other comprehensive loss, net of tax

 

(2.1)

 

(3.6)

 

(3.3)

 

(2.3)

Comprehensive income

$

25.9

$

94.7

$

60.5

$

216.3

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

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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

Net income

 

28.0

 

28.0

Other comprehensive income

 

(2.1)

 

(2.1)

Share-based compensation activity

 

0.1

(0.1)

2.4

1.7

 

4.1

Purchase of treasury shares

(0.5)

0.5

(21.7)

(21.7)

Dividends on ordinary shares ($0.40 per share)

(16.3)

(16.3)

Balance at June 30, 2019

 

40.6

8.2

$

0.5

$

571.2

$

(465.1)

$

(145.6)

$

784.1

$

745.1

    

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

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

Net income

 

 

 

 

 

 

98.3

 

98.3

Other comprehensive loss

 

 

 

 

 

(3.6)

 

 

(3.6)

Share-based compensation activity

 

0.1

(0.1)

 

 

2.5

 

1.2

 

 

 

3.7

Purchase of treasury shares

(0.5)

0.5

(35.0)

(35.0)

Dividends on ordinary shares ($0.36 per share)

(17.3)

(17.3)

Balance at June 30, 2018

 

43.0

5.8

$

0.5

$

569.1

$

(333.3)

$

(147.9)

$

713.4

$

801.8

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

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TRINSEO S.A.

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

Six Months Ended

June 30, 

    

2019

    

2018

Cash flows from operating activities

    

    

    

    

    

Net income

$

63.8

$

218.6

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

Depreciation and amortization

 

68.7

 

64.3

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

 

(0.2)

 

0.9

Deferred income tax

 

0.3

 

0.4

Share-based compensation expense

 

7.7

 

8.9

Earnings of unconsolidated affiliates, net of dividends

 

(20.0)

 

(11.3)

Unrealized net (gain) loss on foreign exchange forward contracts

 

5.5

 

(7.7)

Loss on extinguishment of long-term debt

 

0.2

Gain on sale of businesses and other assets

 

(0.2)

(0.5)

Impairment charges

 

0.4

Pension curtailment and settlement loss

0.7

Changes in assets and liabilities

Accounts receivable

 

24.1

 

(83.0)

Inventories

 

50.7

 

(31.0)

Accounts payable and other current liabilities

 

45.1

 

31.8

Income taxes payable

 

(11.2)

 

(20.2)

Other assets, net

 

1.0

 

(3.7)

Other liabilities, net

 

(2.0)

 

14.3

Cash provided by operating activities

 

234.0

 

182.4

Cash flows from investing activities

Capital expenditures

 

(47.6)

 

(59.5)

Proceeds from capital expenditures subsidy

 

 

1.0

Proceeds from the sale of businesses and other assets

 

0.7

 

1.8

Cash used in investing activities

 

(46.9)

 

(56.7)

Cash flows from financing activities

Deferred financing fees

 

 

(0.6)

Short-term borrowings, net

 

(2.3)

 

(0.1)

Purchase of treasury shares

(59.1)

(60.5)

Dividends paid

(33.8)

(31.8)

Proceeds from exercise of option awards

0.8

2.3

Withholding taxes paid on restricted share units

(4.0)

(8.3)

Net proceeds from issuance of 2024 Term Loan B

696.5

Repayments of 2024 Term Loan B

(3.5)

(700.0)

Cash used in financing activities

 

(101.9)

 

(102.5)

Effect of exchange rates on cash

 

(1.6)

 

(4.6)

Net change in cash, cash equivalents, and restricted cash

 

83.6

 

18.6

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

 

452.3

 

432.8

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

$

535.9

$

451.4

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

(1.0)

Cash and cash equivalents—end of period

$

534.9

$

451.4

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

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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 June 30, 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. The presentation of prior year amounts in the condensed consolidated statements of shareholders’ equity have been updated to conform to the current year presentation.

NOTE 2—RECENT ACCOUNTING GUIDANCE

In February 2016, the FASB issued guidance related to leases that outlines a comprehensive lease accounting model and supersedes prior 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. The Company does not anticipate that adoption of the new guidance will have a material impact 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. The Company will adopt the new guidance prospectively to eligible costs incurred on or after the date first applied. The Company does not anticipate that adoption of this guidance will have a material impact on its consolidated financial statements, barring significant future cloud computing transactions.

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 delivery are included in contracts of sale, order confirmation documents, and invoices. Sales and other taxes that the

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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 and six months ended June 30, 2019 and 2018:

Latex

Synthetic

Performance

 

Three Months Ended

Binders

Rubber

Plastics

Polystyrene

Feedstocks

Total

 

June 30, 2019

United States

$

67.2

$

$

78.4

$

$

2.4

$

148.0

Europe

 

99.2

 

112.1

 

187.3

 

115.9

 

33.2

 

547.7

Asia-Pacific

 

60.8

 

 

59.7

 

91.2

 

19.3

231.0

Rest of World

 

3.0

 

22.1

 

 

 

25.1

Total

$

230.2

$

112.1

$

347.5

$

207.1

$

54.9

$

951.8

June 30, 2018