Item 2. Management’s Discussio
n and Analysis of Financial Condition and Results of Operations
2018 Year-to-Date Highlights
During the three and six months ended June 30, 2018, Trinseo recognized net income of $98.3 million and $218.6 million, respectively, and Adjusted EBITDA of $170.2 million and $365.1 million, respectively. Refer to “Non-GAAP Performance Measures” below for further discussion of our use of non-GAAP measures in evaluating our performance and a reconciliation of these measures. Other highlights for the year are described below.
Term Loan Repricing
During the three months ended June 30, 2018, the Company executed a repricing of its 2024 Term Loan B, thereby reducing the stated interest rate on this facility from LIBOR plus 2.50% to LIBOR plus 2.00% (subject to a 0.00% LIBOR floor in both instances). At current LIBO rates, the Company expects an aggregate cash interest savings from this repricing of $3.5 million annually.
New Segmentation
Through December 31, 2017, the Company operated under six reporting segments: Latex Binders, Synthetic Rubber, Performance Plastics, Basic Plastics, Feedstocks, and Americas Styrenics. Effective January 1, 2018, the Company realigned its reporting segments to reflect the new model under which the business will be managed and results will be reviewed by the chief executive officer, who is the Company’s chief operating decision maker.
Under this new segmentation, we will continue to report operating results for six segments, four of which will remain unchanged from the Company’s prior segmentation: Latex Binders, Synthetic Rubber, Feedstocks, and Americas Styrenics.
The results of our Polystyrene business, which was previously included within the results of the Basic Plastics segment, is now reported as a stand-alone segment. Performance Plastics, which previously consisted of compounds, blends, and ABS products sold to the automotive market, now includes the remaining portion of our ABS business, as well as the results of our SAN and PC businesses. This segmentation change will provide enhanced clarity to investors by concentrating the Company’s more specialized plastics into a single reporting segment, while also reducing complexity as PC and ABS are the primary inputs into the downstream production of our compounds and blends.
Prior period financial information included within this Quarterly Report has been recast from its previous presentation to reflect the Company’s new organizational structure.
SSBR Capacity Expansion and Pilot Plant
During the first quarter of 2018, the Company completed the initial phase of its 50kT SSBR capacity expansion at its Schkopau, Germany facility, and also opened a new SSBR pilot plant at this same facility which will expedite the product development process from lab sample to commercialization by delivering sufficient quantities of new formulations without the need to interrupt production in our industrial lines.
Share Repurchases and Dividends
During the six months ended June 30, 2018, under existing authority from its board of directors, the Company purchased approximately 0.8 million ordinary shares from its shareholders through open market transactions for an aggregate purchase price of $60.5 million. Additionally, during the six months ended June 30, 2018, the Company’s board of directors declared quarterly dividends for an aggregate value of $0.76 per ordinary share, or $33.1 million.
Results of Operations
Results of Operations for the Three and Six Months Ended June 30, 2018 and 2017
The table below sets forth our historical results of operations, and these results as a percentage of net sales for the periods indicated. As a result of accounting guidance adopted in 2018 related to pension accounting, certain prior period financial information included in the sections below has been recast to conform to the current year presentation. Refer to Note 2 in the condensed consolidated financial statements for further information.
References to portfolio adjustments below represent the impacts of the Company’s acquisition and divestiture activity, including the sale of our joint venture Sumika Styron Polycarbonate and the acquisition of API Plastics, both of which occurred during 2017. Refer to the condensed consolidated financial statements for further information.
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|
|
|
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Three Months Ended
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Six Months Ended
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June 30,
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|
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June 30,
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|
|
(in millions)
|
|
2018
|
|
%
|
|
|
2017
|
|
%
|
|
|
2018
|
|
%
|
|
|
2017
|
|
%
|
|
|
Net sales
|
|
$
|
1,236.6
|
|
100
|
%
|
|
$
|
1,145.2
|
|
100
|
%
|
|
$
|
2,358.1
|
|
100
|
%
|
|
$
|
2,249.7
|
|
100
|
%
|
|
Cost of sales
|
|
|
1,073.9
|
|
87
|
%
|
|
|
1,018.7
|
|
89
|
%
|
|
|
2,020.2
|
|
86
|
%
|
|
|
1,924.2
|
|
86
|
%
|
|
Gross profit
|
|
|
162.7
|
|
13
|
%
|
|
|
126.5
|
|
11
|
%
|
|
|
337.9
|
|
14
|
%
|
|
|
325.5
|
|
14
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%
|
|
Selling, general and administrative expenses
|
|
|
61.7
|
|
5
|
%
|
|
|
54.7
|
|
5
|
%
|
|
|
126.1
|
|
5
|
%
|
|
|
114.3
|
|
5
|
%
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
33.2
|
|
3
|
%
|
|
|
29.9
|
|
3
|
%
|
|
|
78.8
|
|
3
|
%
|
|
|
49.2
|
|
2
|
%
|
|
Operating income
|
|
|
134.2
|
|
11
|
%
|
|
|
101.7
|
|
9
|
%
|
|
|
290.6
|
|
12
|
%
|
|
|
260.4
|
|
11
|
%
|
|
Interest expense, net
|
|
|
10.8
|
|
1
|
%
|
|
|
18.7
|
|
2
|
%
|
|
|
25.7
|
|
1
|
%
|
|
|
36.9
|
|
2
|
%
|
|
Loss on extinguishment of long-term debt
|
|
|
0.2
|
|
—
|
%
|
|
|
—
|
|
—
|
%
|
|
|
0.2
|
|
—
|
%
|
|
|
—
|
|
—
|
%
|
|
Other expense (income), net
|
|
|
4.5
|
|
—
|
%
|
|
|
4.0
|
|
—
|
%
|
|
|
0.8
|
|
—
|
%
|
|
|
(2.1)
|
|
—
|
%
|
|
Income before income taxes
|
|
|
118.7
|
|
10
|
%
|
|
|
79.0
|
|
7
|
%
|
|
|
263.9
|
|
11
|
%
|
|
|
225.6
|
|
9
|
%
|
|
Provision for income taxes
|
|
|
20.4
|
|
2
|
%
|
|
|
18.8
|
|
2
|
%
|
|
|
45.3
|
|
2
|
%
|
|
|
48.1
|
|
2
|
%
|
|
Net income
|
|
$
|
98.3
|
|
8
|
%
|
|
$
|
60.2
|
|
5
|
%
|
|
$
|
218.6
|
|
9
|
%
|
|
$
|
177.5
|
|
7
|
%
|
|
Three Months Ended – June 30, 2018 vs. June 30, 2017
Net Sales
Of the 8% increase, a 3% increase was due to higher sales volume across all segments, with the exception of Feedstocks, and a 7% increase was due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis. Portfolio adjustments, which includes the acquisition of API Plastics during the third quarter of 2017, increased net sales by 1%. These increases were partially offset by a 3% decrease due to the pass through of lower raw material costs, primarily lower butadiene cost which was partially offset by higher styrene cost.
Cost of Sales
Of the 5% increase, a 6% increase was due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis, and a 3% increase was due to higher sales volume, primarily within Performance Plastics and Polystyrene. Portfolio adjustments, which includes the acquisition of API Plastics during the third quarter of 2017, and increased fixed costs contributed to a combined 2% increase in cost of sales. Partially offsetting these increases was a 6% decrease due to lower raw materials costs, primarily related to butadiene.
Gross Profit
The increase was primarily attributable to higher styrene margins and favorable currency impacts. Additionally, gross profit increased from favorable net timing impacts in the current year, in comparison to unfavorable net timing impacts in the prior year. Lower margins outside of the Feedstocks segment, including impacts from raw material costs, were more than offset by higher sales volume across nearly all segments, except Feedstocks. See below for detailed segment discussion.
Selling, General and Administrative Expenses
The $7.0 million increase is comprised of several factors. The majority of the increase was due to higher advisory and professional fees, which resulted in an approximate $4.0 million increase, primarily related to fees incurred in conjunction with the Company’s recently initiated project to complete the transition of business and technical services from Dow, as well as fees related to certain growth initiatives. An increase of $0.5 million was due to the acquisition of API Plastics, which did not occur until the third quarter of 2017, with an additional increase of $0.5 million from higher stock-based compensation expense. The majority of the remaining increase was due to currency impacts on our euro based expenses, as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis.
Equity in Earnings of Unconsolidated Affiliates
The increase in equity earnings was due to higher equity earnings from Americas Styrenics, which increased from $29.9 million in 2017 to $33.2 million in 2018, primarily due to lower margins in the prior year on second quarter sales of styrene purchased during an extended outage at its St. James, LA facility.
Interest Expense, Net
The decrease was primarily attributable to a reduction in interest rates from the Company’s debt refinancing during the third quarter of 2017.
Loss on Extinguishment of Long-Term Debt
Loss on extinguishment of long-term debt was $0.2 million for the three months ended June 30, 2018, comprised entirely of the write-off of a portion of the existing unamortized deferred financing fees related to the 2024 Term Loan B repricing.
Other Expense (Income), net
Other expense, net for the three months ended June 30, 2018 was $4.5 million, which included net foreign exchange transaction losses for the period of $2.0 million. Net foreign exchange transaction losses included $16.1 million of foreign exchange transaction losses primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between the U.S. dollar and the euro during the period, partially offset by $14.1 million of gains from our foreign exchange forward contracts. Other expense, net for the period also included $1.6 million of expense related to the non-service cost components of net periodic benefit cost and $0.5 million of fees incurred in conjunction with the repricing of the Company’s 2024 Term Loan B during the second quarter of 2018.
Other expense, net for the three months ended June 30, 2017 was $4.0 million, which included net foreign exchange transaction losses for the period of $1.5 million. Net foreign exchange transaction losses included $7.3 million of foreign exchange transaction gains primarily due to the remeasurement of our euro denominated payables due to the relative changes in rates between the U.S. dollar and the euro during the period, more than offset by $8.8 million of losses from our foreign exchange forward contracts. Other expense, net for the period also included $2.0 million of expense related to the non-service cost components of net periodic benefit cost and other expenses of $0.5 million.
Provision for Income Taxes
Provision for income taxes for the three months ended June 30, 2018 totaled $20.4 million resulting in an effective tax rate of 17.2%. Provision for income taxes for the three months ended June 30, 2017 totaled $18.8 million resulting in an effective tax rate of 23.8%.
The increase in provision for income taxes was primarily driven by the $39.7 million increase in income before income taxes. This increase was partially offset by the impact from the reduction in the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018, in accordance with the enactment of the “Tax Cuts and Jobs Act” signed into law on December 22, 2017.
Six Months Ended – June 30, 2018 vs. June 30, 2017
Net Sales
Of the 5% increase, 8% of the increase was due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis, and 1% of the increase was related to the acquisition of API Plastics, which did not occur until the third quarter of 2017. These increases were partially offset by a 4% decrease due to the pass through of lower raw material costs, primarily related to butadiene cost, and a 1% decrease due to lower sales volume, with decreases in the Feedstocks, Latex Binders, and Synthetic Rubber segments mostly offset by increases in the Company’s remaining segments.
Cost of Sales
Of the 5% increase, 8% of the increase was due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis, and 1% of the increase was related to the acquisition of API Plastics, which did not occur until the third quarter of 2017. Partially offsetting these increases was a 5% decrease due to lower raw materials costs, primarily related to butadiene.
Gross Profit
The increase was due mainly to improved performance in the Feedstocks and Performance Plastics segments, along with favorable currency impacts across all segments, as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis. These increases were partially offset by decreases in the Latex Binders and Synthetic Rubber segments. See below for detailed segment discussion.
Selling, General and Administrative Expenses
The $11.8 million increase is comprised of several offsetting factors. Higher advisory and professional fees resulted in an approximate $6.0 million increase, primarily related to fees incurred in conjunction with the Company’s recently initiated project to complete the transition of business and technical services from Dow, as well as fees related to certain growth initiatives. Additionally, increases of $2.5 million and $1.2 million, respectively, were incurred due to the acquisition of API Plastics, which did not occur until the third quarter of 2017, and higher stock-based compensation expense. Partially offsetting these increases was $2.2 million of lower restructuring charges, noting lower accelerated depreciation and contract termination charges in the current year related to the upgrade and replacement of the Company’s compounding facility in Terneuzen, The Netherlands, as well as lower overall decommissioning and employee termination benefit charges related to our decision to cease manufacturing operations at our latex facility in Livorno, Italy (refer to Note 16 in the condensed consolidated financial statements for further information). The majority of the remaining increase was due to currency impacts on our euro based expenses, as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis.
Equity in Earnings of Unconsolidated Affiliates
The increase in equity earnings primarily resulted from higher equity earnings from Americas Styrenics, which increased from $49.2 million in 2017 to $78.8 million in 2018, primarily due to the impact from an extended prior year styrene outage at its St. James, LA facility.
Interest Expense, Net
The decrease was primarily attributable to a reduction in interest rates from the Company’s debt refinancing during the third quarter of 2017.
Loss on Extinguishment of Long-Term Debt
Loss on extinguishment of long-term debt was $0.2 million for the six months ended June 30, 2018, comprised entirely of the write-off of a portion of the existing unamortized deferred financing fees related to the 2024 Term Loan B repricing.
Other Expense (Income), net
Other expense, net for the six months ended June 30, 2018 was $0.8 million, which included $3.3 million of expense related to the non-service cost components of net periodic benefit cost and $0.5 million of fees incurred in conjunction with the repricing of the Company’s 2024 Term Loan B during the second quarter of 2018. These expenses were partially offset by net foreign exchange transaction gains for the period of $3.1 million. Net foreign exchange transactions gains included $5.7 million of foreign exchange transaction losses primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between the U.S. dollar and the euro during the period, more than offset by $8.8 million of gains from our foreign exchange forward contracts.
Other income, net for the six months ended June 30, 2017 was $2.1 million, which included a $9.3 million gain related to the sale of the Company’s 50% share in Sumika Styron Polycarbonate in January 2017 (refer to Note 4 in the condensed consolidated financial statements for further information). Additionally, net foreign exchange transaction losses for the period were $2.6 million, which included $7.9 million of foreign exchange transaction gains primarily due to the remeasurement of our euro denominated payables due to the relative changes in rates between the U.S. dollar and the euro during the period, more than offset by $10.5 million of losses from our foreign exchange forward contracts. Other income, net for the period also included $4.0 million of expense related to the non-service cost components of net periodic benefit cost.
Provision for Income Taxes
Provision for income taxes for the six months ended June 30, 2018 totaled $45.3 million resulting in an effective tax rate of 17.2%. Provision for income taxes for the six months ended June 30, 2017 totaled $48.1million resulting in an effective tax rate of 21.3%.
The decrease in provision for income taxes was primarily driven by the impact from the reduction in the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018, in accordance with the enactment of the “Tax Cuts and Jobs Act” signed into law on December 22, 2017. Also included in income before incomes taxes for the six months ended June 30, 2017 was the $9.3 million gain on sale of our 50% share in Sumika Styron Polycarbonate, which was exempt from tax.
Outlook
Overall, the Company expects continued solid performance and cash generation during the third quarter and throughout the remainder of 2018. For the third quarter, profitability is expected to be sequentially lower due to seasonality, a lower level of planned styrene outages resulting in decreasing styrene margins within our Feedstocks segment, and a somewhat softer tire market demand impacting our Synthetic Rubber segment. The Company continues to expect growth in 2019 within its Latex Binders, Synthetic Rubber, and Performance Plastics segments, stable year-over-year performance within its Polystyrene and Americas Styrenics segments, and continued strong performance in its Feedstocks segment, excluding the approximately $20.0 million of favorable unplanned styrene outage impacts experienced in the first half of 2018.
Selected Segment Information
As discussed above, effective January 1, 2018, the Company realigned its organizational structure to include the following reporting segments: Latex Binders, Synthetic Rubber, Performance Plastics, Polystyrene, Feedstocks, and Americas Styrenics. The following sections describe net sales, Adjusted EBITDA, and Adjusted EBITDA margin by segment for the three and six months ended June 30, 2018 and 2017, which have been recast to reflect the Company’s new organizational structure. Inter-segment sales have been eliminated. Refer to Note 15 in the condensed consolidated financial statements for further information on these changes, as well as for a detailed definition of Adjusted EBITDA and a reconciliation of income before income taxes to segment Adjusted EBITDA.
References to portfolio adjustments below represent the impacts of the Company’s acquisition and divestiture activity, including the sale of our joint venture Sumika Styron Polycarbonate and the acquisition of API Plastics, both of which occurred during 2017. Refer to the condensed consolidated financial statements for further information.
Latex Binders Segment
Our Latex Binders segment produces SB latex and other latex polymers and binders primarily for coated paper and packaging board, carpet and artificial turf backings, as well as a number of performance latex applications, such as adhesive, building and construction, and the technical textile paper market.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
($ in millions)
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
Net sales
|
|
|
$
|
280.8
|
|
|
$
|
291.5
|
|
|
(4)
|
%
|
|
$
|
536.1
|
|
|
$
|
580.5
|
|
|
(8)
|
%
|
Adjusted EBITDA
|
|
|
$
|
36.0
|
|
|
$
|
36.1
|
|
|
(0)
|
%
|
|
$
|
63.5
|
|
|
$
|
72.9
|
|
|
(13)
|
%
|
Adjusted EBITDA margin
|
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
|
Three Months Ended – June 30, 2018 vs. June 30, 2017
Of the 4% decrease in net sales, 9% was due to the pass through of lower raw material costs, particularly butadiene. This decrease was partially offset by a 1% increase due to higher sales volume, primarily related to the carpet and adhesives and construction markets, as well as a 4% increase due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis.
Adjusted EBITDA was flat year over year. Higher sales volume and favorable currency impacts, as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis, resulted in a 5% and 3% increase in Adjusted EBITDA, respectively. These increases were offset by unfavorable raw material impacts, including increasing butadiene cost in Asia, which resulted in a 7% decrease due to lower margins.
Six Months Ended – June 30, 2018 vs. June 30, 2017
Of the 8% decrease in net sales, 9% was due to the pass through of lower raw material costs, particularly butadiene, and 4% was due to lower sales volume, mainly to the Europe paper market, on a year-to-date basis. Partially offsetting these decreases was a 5% increase due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis.
Adjusted EBITDA decreased by 13%, including a 12% decrease due to margins, which was primarily attributable to raw material cost dynamics. Additionally, lower sales volume, primarily to the Europe paper market, resulted in a 7% decrease in Adjusted EBITDA. Partially offsetting these decreases was a 2% increase due to fixed cost improvements as well as a 3% increase due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis.
Synthetic Rubber Segment
Our Synthetic Rubber segment produces styrene-butadiene and polybutadiene-based rubber products used predominantly in high-performance tires, impact modifiers and technical rubber products, such as conveyor belts, hoses, seals and gaskets. We have a broad synthetic rubber technology and product portfolio, focusing on specialty products,
such as SSBR, nickel polybutadiene rubber, or Ni-PBR, and neodymium polybutadiene rubber, or Nd-PBR, while also producing core products, such as emulsion styrene-butadiene rubber, or ESBR.
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
($ in millions)
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
Net sales
|
|
|
$
|
155.3
|
|
|
$
|
174.0
|
|
|
(11)
|
%
|
|
$
|
304.5
|
|
|
$
|
337.4
|
|
|
(10)
|
%
|
|
Adjusted EBITDA
|
|
|
$
|
30.6
|
|
|
$
|
27.7
|
|
|
10
|
%
|
|
$
|
56.2
|
|
|
$
|
74.0
|
|
|
(24)
|
%
|
|
Adjusted EBITDA margin
|
|
|
|
20
|
%
|
|
|
16
|
%
|
|
|
|
|
|
18
|
%
|
|
|
22
|
%
|
|
|
|
|
Three Months Ended – June 30, 2018 vs. June 30, 2017
Net sales decreased 11% from the prior year, primarily due to the pass through of lower raw material cost, particularly butadiene, which resulted in a 21% decrease. This decrease was partially offset by a 2% increase due to higher sales volume, specifically higher SSBR and ESBR sales volume, as well as an 8% increase due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis.
Of the 10% increase in Adjusted EBITDA, 3% was due to favorable net timing impacts, partially offset by lower margins across several products, including impacts from higher raw material and utility costs. Currency impacts resulted in a 6% increase, as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis, and lower fixed costs resulted in a 2% increase in Adjusted EBITDA.
Six Months Ended – June 30, 2018 vs. June 30, 2017
Net sales decreased 10% from the prior year, primarily due to the pass through of lower raw material cost, particularly butadiene, which resulted in an 18% decrease. Additionally, 2% of the decrease resulted from lower sales volume, primarily related to ESBR sales volume as export sales opportunities were more favorable in the prior year. These decreases were partially offset by a 10% increase due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis.
The majority of the decrease in Adjusted EBITDA was due to unfavorable raw material timing, primarily resulting from rapidly increasing butadiene prices in the prior year, higher utility cost, and product mix, as well as lower margins on export sales due to very favorable conditions in the prior year, which resulted in a combined $22.9 million, or 31% decrease. Partially offsetting these decreases were a 5% increase due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis, and a 2% increase from higher sales volume, primarily in SSBR.
Performance Plastics Segment
Our Performance Plastics segment consists of compounds and blends, and also includes our ABS, SAN, and PC businesses. We are a producer of highly engineered compounds and blends for various markets including automotive, consumer electronics, medical, electrical and lighting. In July 2017, the Company completed the acquisition of API Plastics, the results of which are reported within the Performance Plastics segment. Additionally, the Performance Plastics segment, as recast, also includes the results of our previously 50%-owned joint venture Sumika Styron Polycarbonate prior to its sale in January 2017. Refer to Notes 4 and 14 in the condensed consolidated financial statements for further information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
($ in millions)
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
Net sales
|
|
|
$
|
412.8
|
|
|
$
|
339.2
|
|
|
22
|
%
|
|
$
|
815.6
|
|
|
$
|
676.2
|
|
|
21
|
%
|
|
Adjusted EBITDA
|
|
|
$
|
48.9
|
|
|
$
|
48.5
|
|
|
1
|
%
|
|
$
|
114.3
|
|
|
$
|
100.5
|
|
|
14
|
%
|
|
Adjusted EBITDA margin
|
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
|
|
|
14
|
%
|
|
|
15
|
%
|
|
|
|
|
Three Months Ended – June 30, 2018 vs. June 30, 2017
Of the 22% increase in net sales, 9% was due to higher sales volume, mainly from the Company’s ABS expansion in China, as well as an 8% increase due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis. Additionally, API Plastics resulted in a 4% increase and the pass through of higher raw material costs resulted in a 1% increase.
Adjusted EBITDA was relatively flat year over year. Higher sales volume, including the impact of the China ABS expansion, as well as the acquisition of API Plastics resulted in a combined 35% increase in Adjusted EBITDA. Currency impacts resulted in a 7% increase, as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis. These impacts were mostly offset by lower margin, including higher fixed costs, as well as an approximate $10.0 million unfavorable impact from significant planned maintenance activities in the current year, which resulted in a combined 42% decrease in Adjusted EBITDA.
Six Months Ended – June 30, 2018 vs. June 30, 2017
Of the 21% increase in net sales, 4% was due to higher sales volume, mainly from the Company’s ABS expansion in China, and 10% was due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis. Additionally, 2% of the increase was due to price increases, mainly from higher polycarbonate prices, as well as the pass through of higher raw material costs to our customers, and 4% of the increase was due to API Plastics.
The overall 14% increase in Adjusted EBITDA was the result of several factors. Higher sales volume, particularly from the Company’s ABS expansion in China, resulted in a 10% increase, and currency impacts resulted in a 9% increase, as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis. Portfolio adjustments resulted in a combined 3% increase in Adjusted EBITDA. Partially offsetting these increases were a 6% decrease from lower margins, primarily due to end market mix, and a 4% decrease from higher fixed costs, primarily due to significant planned maintenance activities in the current year.
Polystyrene Segment
Our product offerings in our Polystyrene segment include a variety of general purpose polystyrenes, or GPPS, and HIPS, which is polystyrene that has been modified with polybutadiene rubber to increase its impact resistant properties. These products provide customers with performance and aesthetics at a low cost across applications, including appliances, packaging, including food packaging and food service disposables, consumer electronics, and building and construction materials.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
($ in millions)
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
Net sales
|
|
|
$
|
285.6
|
|
|
$
|
233.5
|
|
|
22
|
%
|
|
$
|
525.2
|
|
|
$
|
461.7
|
|
|
14
|
%
|
|
Adjusted EBITDA
|
|
|
$
|
13.7
|
|
|
$
|
6.8
|
|
|
101
|
%
|
|
$
|
23.3
|
|
|
$
|
20.5
|
|
|
14
|
%
|
|
Adjusted EBITDA margin
|
|
|
|
5
|
%
|
|
|
3
|
%
|
|
|
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
Three Months Ended – June 30, 2018 vs. June 30, 2017
Of the 22% increase in net sales, 10% was due to higher sales volume, particularly in Asia, and 7% was due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis. Additionally, the pass through of higher raw material costs to our customers resulted in a 5% increase in net sales.
The increase in Adjusted EBITDA was primarily due to higher margins from favorable net timing impacts, which resulted in a 75% increase, as well as higher sales volume, particularly in Asia, which resulted in a 34% increase in Adjusted EBITDA. Currency impacts resulted in a 17% increase, as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis. These increases were partially offset by increased fixed costs, which decreased Adjusted EBITDA by 25%.
Six Months Ended – June 30, 2018 vs. June 30, 2017
Of the 14% increase in net sales, 5% was due to higher sales volume, particularly in Asia, and 8% was due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis.
The 14% increase in Adjusted EBITDA was primarily due to higher sales volume, particularly in Asia, which resulted in an 11% increase, and currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis, which resulted in an 11% increase. Partially offsetting these increases was a 10% decrease due to increased fixed costs.
Feedstocks Segment
The Feedstocks segment includes the Company’s production and procurement of styrene monomer outside of North America, which is used as a key raw material in many of the Company’s products, including, but not limited to, polystyrene, SB latex, ABS resins, and SSBR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
($ in millions)
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
Net sales
|
|
|
$
|
102.1
|
|
|
$
|
107.0
|
|
|
(5)
|
%
|
|
$
|
176.7
|
|
|
$
|
193.9
|
|
|
(9)
|
%
|
|
Adjusted EBITDA
|
|
|
$
|
32.4
|
|
|
$
|
(1.2)
|
|
|
2,800
|
%
|
|
$
|
73.9
|
|
|
$
|
40.7
|
|
|
82
|
%
|
|
Adjusted EBITDA margin
|
|
|
|
32
|
%
|
|
|
(1)
|
%
|
|
|
|
|
|
42
|
%
|
|
|
21
|
%
|
|
|
|
|
Three Months Ended – June 30, 2018 vs. June 30, 2017
Of the 5% decrease in net sales, lower styrene related sales volume resulted in a 22% decrease. This decrease was partially offset by the pass through of higher styrene prices, which resulted in a 12% increase, as well as a 5% increase due to currency impacts as the euro strengthened in comparison to the U.S. dollar on a quarter-to-date basis.
The increase in Adjusted EBITDA was mainly due to higher styrene margins resulting from continued strong demand which is increasing operating rates alongside limited supply additions, as well as favorable net timing impacts.
Six Months Ended – June 30, 2018 vs. June 30, 2017
Of the 9% decrease in net sales, lower styrene related sales volume resulted in a 19% decrease. The pass through of higher styrene prices resulted in a 2% increase, and currency impacts as the euro strengthened in comparison to the U.S. dollar on a year-to-date basis resulted in a 7% increase.
The increase in Adjusted EBITDA was mainly due to higher styrene margins and production volumes, primarily from continued strong demand which is increasing operating rates alongside limited supply additions.
Americas Styrenics Segment
The Americas Styrenics segment consists solely of the equity earnings from of our 50%-owned joint venture, Americas Styrenics, a producer of both styrene monomer and polystyrene in North America. Styrene monomer is a basic building block of plastics and a key input to many of the Company’s products, as well as a key raw material for the production of polystyrene. Major applications for the polystyrene products Americas Styrenics produces include appliances, food packaging, food service disposables, consumer electronics, and building and construction materials.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
($ in millions)
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
Adjusted EBITDA*
|
|
|
$
|
33.2
|
|
|
$
|
29.9
|
|
|
11
|
%
|
|
$
|
78.8
|
|
|
$
|
48.4
|
|
|
63
|
%
|
|
*
The results of this segment are comprised entirely of earnings from Americas Styrenics, our equity method investment. As such, Adjusted EBITDA related to this segment is included within “Equity in earnings of unconsolidated affiliates” in the consolidated statements of operations.
Three Months Ended – June 30, 2018 vs. June 30, 2017
The increase in Adjusted EBITDA was mainly due to higher styrene margin, including an unfavorable impact in the prior year from lower margin spot sales following a maintenance outage.
Six Months Ended – June 30, 2018 vs. June 30, 2017
The increase in Adjusted EBITDA was mainly due to an extended production outage in the prior year at the Americas Styrenics St. James, LA facility, as well as higher styrene margins in the current year.
Non-GAAP Performance Measures
We present Adjusted EBITDA as a non-GAAP financial performance measure, which we define as income from continuing operations before interest expense, net; provision for income taxes; depreciation and amortization expense; loss on extinguishment of long-term debt; asset impairment charges; gains or losses on the dispositions of businesses and assets; restructuring charges; acquisition related costs and other items. In doing so, we are providing management, investors, and credit rating agencies with an indicator of our ongoing performance and business trends, removing the impact of transactions and events that we would not consider a part of our core operations.
There are limitations to using the financial performance measures such as Adjusted EBITDA. This performance measure is not intended to represent net income or other measures of financial performance. As such, it should not be used as an alternative to net income as an indicator of operating performance. Other companies in our industry may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use this or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing a reconciliation of this performance measure to our net income, which is determined in accordance with GAAP.
Adjusted EBITDA is calculated as follows for the three and six months ended June 30, 2018 and 2017, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
(in millions)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Net income
|
|
$
|
98.3
|
|
$
|
60.2
|
|
$
|
218.6
|
|
$
|
177.5
|
|
Interest expense, net
|
|
|
10.8
|
|
|
18.7
|
|
|
25.7
|
|
|
36.9
|
|
Provision for income taxes
|
|
|
20.4
|
|
|
18.8
|
|
|
45.3
|
|
|
48.1
|
|
Depreciation and amortization
|
|
|
32.3
|
|
|
26.3
|
|
|
64.3
|
|
|
51.0
|
|
EBITDA
(a)
|
|
$
|
161.8
|
|
$
|
124.0
|
|
$
|
353.9
|
|
$
|
313.5
|
|
Loss on extinguishment of long-term debt
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Net gain on disposition of businesses and assets
(b)
|
|
|
—
|
|
|
—
|
|
|
(0.5)
|
|
|
(9.9)
|
|
Restructuring and other charges
(c)
|
|
|
1.2
|
|
|
1.1
|
|
|
1.7
|
|
|
3.3
|
|
Acquisition transaction and integration costs
(d)
|
|
|
0.2
|
|
|
1.1
|
|
|
0.6
|
|
|
1.1
|
|
Other items
(e)
|
|
|
6.8
|
|
|
—
|
|
|
9.2
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
170.2
|
|
$
|
126.2
|
|
$
|
365.1
|
|
$
|
308.0
|
|
|
(a)
|
|
EBITDA is a non-GAAP financial performance measure that we refer to in making operating decisions because
|
we believe it provides our management as well as our investors and credit agencies with meaningful information regarding the Company’s operational performance. We believe the use of EBITDA as a metric assists our board of directors, management and investors in comparing our operating performance on a consistent basis. Other companies in our industry may define EBITDA differently than we do. As a result, it may be difficult to use EBITDA, or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing reconciliations of our EBITDA results to our net income, which is determined in accordance with GAAP.
|
|
(b)
|
|
Net gain on disposition of businesses and assets during the six months ended June 30, 2017 relates to the sale of our 50% share in Sumika Styron Polycarbonate to Sumitomo Chemical Company Limited, for which the Company recorded a gain on sale of $9.3 million. Refer to Note 4 in the condensed consolidated financial statements for further information.
|
|
(c)
|
|
Restructuring and other charges for the periods presented above primarily relate to decommissioning, contract termination, and employee termination benefit charges incurred in connection with the upgrade and replacement of the Company’s compounding facility in Terneuzen, The Netherlands as well as the Company’s decision to cease manufacturing activities at our latex binders manufacturing facility in Livorno, Italy. Refer to Note 16 in the condensed consolidated financial statements for further information.
|
|
(d)
|
|
Acquisition transaction and integration costs for the periods presented above relate to advisory and professional fees incurred in conjunction with the Company’s acquisition of API Plastics. Refer to Note 14 in the condensed consolidated financial statements for further information.
|
|
(e)
|
|
Other items for the three and six months ended June 30, 2018 primarily relate to advisory and professional fees incurred in conjunction with the Company’s initiative to transition business services from Dow, including certain administrative services such as accounts payable, logistics, and IT services, as well as fees incurred in conjunction with the Company’s 2024 Term Loan B repricing which was completed during the second quarter of 2018.
|
Liquidity and Capital Resources
Cash Flows
The table below summarizes our primary sources and uses of cash for the six months ended June 30, 2018 and 2017, respectively. We have derived the summarized cash flow information from our unaudited financial statements.
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(in millions)
|
|
2018
|
|
2017
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
182.4
|
|
$
|
36.6
|
|
Investing activities
|
|
|
(56.7)
|
|
|
(29.7)
|
|
Financing activities
|
|
|
(102.5)
|
|
|
(79.8)
|
|
Effect of exchange rates on cash
|
|
|
(4.6)
|
|
|
7.7
|
|
Net change in cash and cash equivalents
|
|
$
|
18.6
|
|
$
|
(65.2)
|
|
Operating Activities
Net cash provided by operating activities during the six months ended June 30, 2018 totaled $182.4 million, inclusive of $67.5 million in dividends from Americas Styrenics. Net cash used in operating assets and liabilities for the six months ended June 30, 2018 totaled $91.8 million, noting increases in accounts receivable of $83.0 million and inventories of $31.0 million, and decreases in income taxes payable of $20.2 million. This activity was partially offset by an increase in accounts payable and other current liabilities of $31.8 million. Accounts receivable at the end of the second quarter increased relative to the end of 2017 primarily due to the pass through of increased raw material prices to our customers as well as increased sales volume. The increase in inventories was primarily due to increased raw material prices, partially offset by the sale of inventory that had been built in anticipation of planned turnarounds which occurred during the second quarter. The decrease in income taxes payable was a result of payment of certain cash taxes during the
second quarter in our primary operating jurisdictions. The increase in accounts payable was primarily due to increases in raw material prices as well as timing of vendor payments.
Net cash provided by operating activities during the six months ended June 30, 2017 totaled $36.6 million, inclusive of $45.0 million in dividends from Americas Styrenics, as well as dividends from Sumika Styron Polycarbonate, $8.9 million of which were classified as operating activities, with the remaining $0.9 million classified as investing activities. Refer to Note 4 in the condensed consolidated financial statements for further information. Net cash used in operating assets and liabilities for the six months ended June 30, 2017 totaled $210.6 million, due primarily to increases in accounts receivable of $137.7 million and inventories of $66.8 million, respectively. The increases in accounts receivable and inventories were primarily due to increased raw material prices.
Investing Activities
Net cash used in investing activities during the six months ended June 30, 2018 totaled $56.7 million, primarily resulting from capital expenditures of $59.5 million. This was partially offset by proceeds received of $1.8 million from the sale of businesses and other assets, primarily comprised of $1.3 million received as a prepayment in connection with the Company’s preliminary agreement for the sale of certain land in Livorno, Italy (refer to Note 16 within the condensed consolidated financial statements for further information).
Net cash used in investing activities for the six months ended June 30, 2017 totaled $29.7 million, primarily from capital expenditures of $74.3 million during the period, partially offset by proceeds received of $42.1 million from the sale of the Company’s 50% share in Sumika Styron Polycarbonate to Sumitomo Chemical Company Limited.
Financing Activities
Net cash used in financing activities during the six months ended June 30, 2018 totaled $102.5 million. This activity was primarily due to $60.5 million of payments related to the repurchase of ordinary shares, $31.8 million of dividends paid, and $3.5 million of net principal payments related to our 2024 Term Loan B during the period. Additionally, net cash used in financing activities included $8.3 million of withholding taxes paid related to the vesting of certain RSUs during the period, partially offset by $2.3 million of proceeds received from the exercise of option awards.
Net cash used in financing activities during the six months ended June 30, 2017 totaled $79.8 million. This activity was primarily due to $56.4 million of payments related to the repurchase of ordinary shares during the period and $26.5 million of dividends paid, as well as $2.5 million of principal payments related to our 2021 Term Loan B. Partially offsetting these uses of cash was $6.0 million of proceeds received from the exercise of option awards.
Free Cash Flow
We use Free Cash Flow as a non-GAAP measure to evaluate and discuss the Company’s liquidity position and results. Free Cash Flow is defined as cash from operating activities, less capital expenditures. We believe that Free Cash Flow provides an indicator of the Company’s ongoing ability to generate cash through core operations, as it excludes the cash impacts of various financing transactions as well as cash flows from business combinations that are not considered organic in nature. We also believe that Free Cash Flow provides management and investors with a useful analytical indicator of our ability to service our indebtedness, pay dividends (when declared), and meet our ongoing cash obligations.
Free Cash Flow is not intended to represent cash flows from operations as defined by GAAP, and therefore, should not be used as an alternative for that measure. Other companies in our industry may define Free Cash Flow differently than we do. As a result, it may be difficult to use this or similarly-named financial measures that other companies may use, to compare the liquidity and cash generation of those companies to our own. We compensate for these limitations by providing a reconciliation to cash provided by operating activities, which is determined in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(in millions)
|
|
2018
|
|
2017
|
|
Cash provided by operating activities
|
|
$
|
182.4
|
|
$
|
36.6
|
|
Capital expenditures
|
|
|
(59.5)
|
|
|
(74.3)
|
|
Free Cash Flow
|
|
$
|
122.9
|
|
$
|
(37.7)
|
|
Refer to the discussion above for significant impacts to cash provided by operating activities for the six months ended June 30, 2018 and 2017, respectively.
Capital Resources and Liquidity
We require cash principally for day-to-day operations, to finance capital investments and other initiatives, to purchase materials, to service our outstanding indebtedness, and to fund dividend payments to our shareholders. Our sources of liquidity include cash on hand, cash flow from operations, and amounts available under the Senior Credit Facility and the Accounts Receivable Securitization Facility (discussed further below).
As of June 30, 2018 and December 31, 2017, we had $1,196.1 million and $1,199.7 million, respectively, in outstanding indebtedness and $1,157.5 million and $1,019.6 million, respectively, in working capital. In addition, as of June 30, 2018 and December 31, 2017, we had $117.4 million and $128.3 million, respectively, of foreign cash and cash equivalents on our balance sheet, outside of our country of domicile of Luxembourg, all of which is readily convertible into other foreign currencies, including the U.S. dollar. Our intention is not to permanently reinvest our foreign cash and cash equivalents. Accordingly, we record deferred income tax liabilities related to the unremitted earnings of our subsidiaries
.
The following table outlines our outstanding indebtedness as of June 30, 2018 and December 31, 2017 and the associated interest expense, including amortization of deferred financing fees and debt discounts. Effective interest rates for the borrowings included in the table below exclude the impact of deferred financing fee amortization, certain other fees charged to interest expense (such as fees for unused commitment fees during the period), and the impacts of derivatives designating as hedging instruments. For definitions of capitalized terms not included herein, refer to our Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Six Months Ended
|
|
As of and for the Year Ended
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Effective
|
|
|
|
|
|
Effective
|
|
|
|
|
|
|
|
Interest
|
|
Interest
|
|
|
|
Interest
|
|
Interest
|
|
($ in millions)
|
|
Balance
|
|
Rate
|
|
Expense
|
|
Balance
|
|
Rate
|
|
Expense
|
|
Senior Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 Term Loan B
|
|
$
|
694.8
|
|
4.2
|
%
|
$
|
15.9
|
|
$
|
698.3
|
|
3.9
|
%
|
$
|
9.6
|
|
2022 Revolving Facility
|
|
|
—
|
|
—
|
|
|
1.4
|
|
|
—
|
|
—
|
|
|
1.0
|
|
2020 Senior Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 Term Loan B
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
4.3
|
%
|
|
15.9
|
|
2020 Revolving Facility
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
2.3
|
|
2025 Senior Notes
|
|
|
500.0
|
|
5.4
|
%
|
|
10.0
|
|
|
500.0
|
|
5.4
|
%
|
|
9.4
|
|
2022 Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD Notes
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
6.8
|
%
|
|
14.4
|
|
Euro Notes
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
6.4
|
%
|
|
18.8
|
|
Accounts Receivable Securitization Facility
|
|
|
—
|
|
—
|
|
|
0.8
|
|
|
—
|
|
—
|
|
|
2.8
|
|
Other indebtedness*
|
|
|
1.3
|
|
4.8
|
%
|
|
—
|
|
|
1.4
|
|
4.8
|
%
|
|
0.1
|
|
Total
|
|
$
|
1,196.1
|
|
|
|
$
|
28.1
|
|
$
|
1,199.7
|
|
|
|
$
|
74.3
|
|
*For the six months ended June 30, 2018, interest expense on “Other indebtedness” totaled less than $0.1 million.
Our Senior Credit Facility includes the 2022 Revolving Facility, which matures in September 2022, and has a borrowing capacity of $375.0 million. As of June 30, 2018, the Company had no outstanding borrowings, and had
$360.4 million (net of $14.6 million outstanding letters of credit) of funds available for borrowing under the 2022 Revolving Facility. Further, as of June 30, 2018, the Borrowers are required to pay a quarterly commitment fee in respect of any unused commitments under the 2022 Revolving Facility equal to 0.375% per annum.
Also included in our Senior Credit Facility is our 2024 Term Loan B (with original principal of $700.0 million, maturing in September 2024), which requires scheduled quarterly payments in amounts equal to 0.25% of the original principal. During the second quarter of 2018, the Company executed a repricing of its 2024 Term Loan B, thereby reducing the stated interest rate on this facility from LIBOR plus 2.50% to LIBOR plus 2.00% (subject to a 0.00% LIBOR floor in both instances). Additionally, the Company made net principal payments of $3.5 million on the 2024 Term Loan B during the six months ended June 30, 2018, with an additional $7.0 million of scheduled future payments classified as current debt on the Company’s condensed consolidated balance sheet as of June 30, 2018.
Our 2025 Senior Notes, as issued under the Indenture, include $500.0 million aggregate principal amount of 5.375% senior notes that mature on September 1, 2015. Interest on the 2025 Senior Notes is payable semi-annually on May 3 and November 3 of each year, which commenced on May 3, 2018. These notes may be redeemed prior to their maturity at the option of the Company under certain circumstances at specific redemption prices. Refer to our Annual Report for further information.
We also continue to maintain our Accounts Receivable Securitization Facility which matures in May 2019 and contains a borrowing capacity of $150.0 million. As of June 30, 2018, there were no amounts outstanding under this facility, and the Company had accounts receivable available to support this facility in excess of its borrowing capacity, based on the pool of eligible accounts receivable.
The Senior Credit Facility and Indenture contain certain customary affirmative, negative and financial covenants. As of June 30, 2018, the Company was in compliance with all of these debt covenant requirements. Refer to our Annual Report for further information on the details of these covenant requirements.
Our ability to raise additional financing and our borrowing costs may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios.
We and our subsidiaries, affiliates or significant shareholders may from time to time seek to retire or purchase our outstanding debt through cash purchases in the open market, privately negotiated transactions, exchange transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (the “Issuers” of our 2025 Senior Notes and “Borrowers” under our Senior Credit Facility) are dependent upon the cash generation and receipt of distributions and dividends or other payments from our subsidiaries and joint venture in order to satisfy their debt obligations. There are no known significant restrictions by third parties on the ability of subsidiaries of the Company to disburse or dividend funds to the Issuers and the Borrowers in order to satisfy these obligations. However, as the Company’s subsidiaries are located in a variety of jurisdictions, the Company can give no assurances that its subsidiaries will not face transfer restrictions in the future due to regulatory or other reasons beyond our control.
The Senior Credit Facility and Indenture also limit the ability of the Borrowers and Issuers, respectively, to pay dividends or make other distributions to Trinseo S.A., which could then be used to make distributions to shareholders. During the six months ended June 30, 2018, the Company declared total dividends of $0.76 per ordinary share (totaling $33.1 million), $18.3 million of which remains accrued as of June 30, 2018 and the majority of which will be paid in July 2018. These dividends are well within the available capacity under the terms of the restrictive covenants contained in the Senior Credit Facility and Indenture. Further, significant additional capacity continues to be available under the terms of these covenants to support expected future dividends to shareholders, should the Company continue to declare them.
The Company’s cash flow generation in recent years has been strong, with positive cash flows expected to continue for full year 2018. We believe that funds provided by operations, our existing cash and cash equivalent balances, borrowings available under our 2022 Revolving Facility and our Accounts Receivable Securitization Facility will be adequate to meet planned operating and capital expenditures for at least the next 12 months under current operating conditions. Nevertheless, our ability to generate future cash and to pay our indebtedness and fund other liquidation needs is subject to certain risks described under Part I, Item 1A-“Risk Factors” of our Annual Report. As of June 30, 2018, we
were in compliance with all the covenants and default provisions under our debt agreements.
Contractual Obligations and Commercial Commitments
Other than the repricing of the Company’s 2024 Term Loan B, which was completed in May 2018 (refer to Note 6 in the condensed consolidated financial statements), there have been no material revisions outside the ordinary course of business to our contractual obligations as described within “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commercial Commitments” within our Annual Report.
Critical Accounting Policies and Estimates
Our unaudited interim condensed consolidated financial statements are based on the selection and application of significant accounting policies. The preparation of unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses at the date of and during the reporting period. Actual results could differ from those estimates. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.
We describe our significant accounting policies in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report, while we discuss our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Annual Report. There have been no material revisions to the significant accounting policies or critical accounting policies and estimates as filed in our Annual Report, other than the impacts to our significant accounting policies from the adoption of recent revenue accounting guidance adopted January 1, 2018 and recent hedge accounting guidance adopted April 1, 2018, discussed further within Notes 2, 3, and 8 to the condensed consolidated financial statements.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note 2 to our condensed consolidated financial statements, included elsewhere within this Quarterly Report.
Item 3. Quantitative and Qualitativ
e Disclosures About Market Risk
As discussed in “Quantitative and Qualitative Disclosures About Market Risk” within our Annual Report, we are exposed to changes in interest rates and foreign currency exchange rates as well as changes in the prices of certain commodities that we use in production. There have been no material changes in our exposure to market risks from the information provided within our Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining internal controls designed to provide reasonable assurance that information required to be disclosed by us in our reports that we file or submit under the Exchange Act (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2018. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report were effective to provide the reasonable level of assurance described above.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As discussed in Note 14 to the condensed consolidated financial statements, in July 2017, the Company completed the acquisition of API Plastics. As permitted by the SEC, management elected to exclude this acquisition from its assessment of the effectiveness of its internal control over financial reporting as of December 31, 2017. As of June 30, 2018, the Company was in the process of finalizing the integration of API Plastics into its internal control system, which was completed in July 2018.
PART II — OTHER INFORMATION
Item 1. Legal Proceeding
s
From time to time we may be subject to various legal claims and proceedings incidental to the normal conduct of business, relating to such matters as product liability, antitrust, competition, waste disposal practices, release of chemicals into the environment and other matters that may arise in the ordinary course of our business. We currently believe that there is no litigation pending that is likely to have a material adverse effect on our business. Regardless of the outcome, legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
Our business faces various risks. Certain important factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the risk factors related to our ordinary shares as well those risk factors related to our business and industry which have been previously disclosed in Item 1A of our Annual Report for the year ended December 31, 2017. The information presented below provides an update to, and should be read in conjunction with, the risk factors and information disclosed in our Annual Report. We encourage you to consider these risks, in their entirety, in addition to other information contained in or incorporated by reference into this Quarterly Report and our other public filings with the SEC. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations
.
Trinseo Europe GmbH, one of our subsidiaries, received a Request for Information from the European Commission Directorate General for Competition, involving commercial activity for styrene monomer. To the extent the European Commission’s inquiry would lead to findings that the Company’s subsidiary violated the law, the results of this finding could have a material adverse effect on our business, financial condition and results of operations.
On June 6, 2018, Trinseo Europe GmbH, a subsidiary of the Company, received a Request for Information in the form of a letter from the European Commission Directorate General for Competition (the “European Commission”) related to styrene monomer commercial activity in the European Economic Area. The Company is fully cooperating with the European Commissions’ request and has delivered all requested documents responsive to this request.
Notwithstanding the delivery of our response to the European Commission, this matter remains open with the European Commission. As a result, we are unable to make any predictions regarding the ultimate outcome of our response to the European Commission’s request.
Based on its findings, the European Commission may decide to: (i) require further information; (ii) conduct unannounced raids of the Company’s premises; (iii) adopt decisions imposing fines, interim measures to halt immediately any anti-competitive behavior, orders for the Company to cease anti-competitive activities, and/or certain behavioral or structural commitments from the Company; or (iv) take no further action. If Trinseo Europe GmbH is found to have violated one or more laws, it could also be subject to additional actions by local competition authorities. European Commission inquiries or investigations can continue over a long period of time, which can divert the attention of our management from day-to-day operations and impose significant administrative burdens. Any of these
consequences could damage our reputation and impair our ability to conduct business, which could have a material adverse effect on our business, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Recent sales of unregistered securities
None.
(b)
Use of Proceeds from registered securities
None.
(c)
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table contains information regarding purchases of our ordinary shares made during the quarter ended June 30, 2018 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18(a)(3) of the Securities Exchange Act of 1934:
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities
|
Period
|
|
Total number of shares purchased
|
|
Average price
paid per share
|
|
Total number of shares purchased as part of publicly announced plans or programs
|
|
Approximate number of shares that may yet be purchased under the plans or programs
|
April 1 - April 30, 2018
|
|
261,581
|
|
$
|
74.20
|
|
261,581
|
|
935,527
|
(1)
|
May 1 - May 31, 2018
|
|
209,653
|
|
$
|
74.32
|
|
209,653
|
|
725,874
|
(1)
|
June 1 - June 30, 2018
|
|
—
|
|
$
|
—
|
|
—
|
|
725,874
|
(1)
|
Total
|
|
471,234
|
|
$
|
74.26
|
|
471,234
|
|
|
|
|
(1)
|
|
The general meeting of our shareholders on June 21, 2017 authorized the Company to sunset the 2016 share repurchase authorization and replace it with a new authorization to repurchase up to 4.0 million ordinary shares at a price per share of not less than $1.00 and not more than $1,000. This authorization ends on June 21, 2020 or on the date of its renewal by a subsequent general meeting of shareholders. On June 22, 2017 the Company announced that the board of directors had authorized the Company to repurchase, subject to market and other conditions, up to 2.0 million shares over the subsequent 18 months under the 2017 share repurchase authorization.
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
EXHIBIT INDEX
Exhibit
No.
|
Description
|
3.1†
|
Amended and Restated Articles of Association of Trinseo S.A.
|
|
|
4.1
|
Form of Specimen Share Certificate of Trinseo S.A. (incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to the Registration Statement filed on Form S-1, File No. 333-194561, filed May 16, 2014)
|
|
|
4.2
|
Indenture among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., and The Bank of New York Mellon, as Trustee, dated as of August 29, 2017 (incorporated herein by reference to Exhibit 4.1 to the Current Report filed on Form 8-K, File No. 001-36473, filed September 5, 2017)
|
|
|
10.1
|
Credit Agreement among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., together with Trinseo Holding S.à r.l. and Trinseo Materials S.à r.l., Deutsche Bank AG New York Branch, as administrative agent, collateral agent, L/C issuer and swing line lender, and the guarantors and lenders party thereto from time to time, dated as of September 6, 2017 (incorporated herein by reference to Exhibit 10.1 to the Current Report filed on Form 8-K, File No. 001-36473, filed September 7, 2017)
|
|
|
10.2†
|
Amendment to the Credit Agreement dated September 6, 2017 among Trinseo Materials Operating S.C.A., Trinseo Materials Finance, Inc., together with Trinseo Holding S.à r.l. and Trinseo Materials S.à r.l., Deutsche Bank AG New York Branch, as administrative agent, collateral agent, L/C issuer and swing line lender, and the guarantors and lenders party thereto from time to time, dated as of May 22, 2018
|
|
|
10.3
|
Form of Cross Currency Rate Swap Transaction Confirmation (incorporated herein by reference to Exhibit 10.2 to the Current Report filed on Form 8-K, File No. 001-36473, filed September 7, 2017)
|
|
|
10.4†
|
Letter Agreement, dated June 18, 2018, between Trinseo S.A. and Angelo N. Chaclas, defining retirement for purpose of equity awards
|
|
|
31.1†
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2†
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1†
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32.2†
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
101.INS†
|
XBRL Instance Document
|
|
|
101.SCH†
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL†
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF†
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB†
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE†
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
† Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.
Date: August 3, 2018
|
TRINSEO S.A.
|
|
|
|
|
By:
|
/s/ Christopher D. Pappas
|
|
Name:
|
Christopher D. Pappas
|
|
Title:
|
President, Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
|
By:
|
/s/ Barry J. Niziolek
|
|
Name:
|
Barry J. Niziolek
|
|
Title:
|
Executive Vice President, Chief Financial Officer
|
|
|
(Principal Financial Officer)
|
|
|
|
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