TRINSEO S.A., 10-Q filed on 5/3/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
Apr. 30, 2019
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Entity Registrant Name Trinseo S.A.  
Entity Central Index Key 0001519061  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Ex Transition Period false  
Entity Common Stock, Shares Outstanding   40,831,125
v3.19.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Millions
Mar. 31, 2019
Dec. 31, 2018
Current assets    
Cash and cash equivalents $ 516.4 $ 452.3
Accounts receivable, net of allowance for doubtful accounts (March 31, 2019: $4.9; December 31, 2018: $6.1) 650.4 648.1
Inventories 447.9 510.4
Other current assets 25.4 20.5
Total current assets 1,640.1 1,631.3
Investments in unconsolidated affiliates 198.9 179.1
Property, plant and equipment, net of accumulated depreciation (March 31, 2019: $605.5; December 31, 2018: $590.6) 575.0 592.1
Other assets    
Goodwill 67.8 69.0
Other intangible assets, net 187.1 191.1
Deferred income tax assets 27.9 26.7
Deferred charges and other assets 41.6 37.5
Right of use assets - operating 68.1  
Total other assets 392.5 324.3
Total assets 2,806.5 2,726.8
Current liabilities    
Short-term borrowings and current portion of long-term debt 7.1 7.0
Accounts payable 391.4 354.2
Income taxes payable 13.8 16.0
Accrued expenses and other current liabilities 155.3 159.8
Current lease liabilities - operating 15.2  
Total current liabilities 582.8 537.0
Noncurrent liabilities    
Long-term debt, net of unamortized deferred financing fees 1,160.4 1,160.8
Deferred income tax liabilities 46.4 45.4
Other noncurrent obligations 210.6 214.9
Noncurrent lease liabilities - operating 53.2  
Total noncurrent liabilities 1,470.6 1,421.1
Commitments and contingencies (Note 11)
Shareholders' equity    
Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (March 31, 2019: 48.8 shares issued and 41.0 shares outstanding; December 31, 2018: 48.8 shares issued and 41.6 shares outstanding) 0.5 0.5
Additional paid-in-capital 568.8 575.4
Treasury shares, at cost (March 31, 2019: 7.8 shares; December 31, 2018: 7.2 shares) (445.1) (418.1)
Retained earnings 772.4 753.2
Accumulated other comprehensive loss (143.5) (142.3)
Total shareholders' equity 753.1 768.7
Total liabilities and shareholders' equity $ 2,806.5 $ 2,726.8
v3.19.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2019
Dec. 31, 2018
Condensed Consolidated Balance Sheets    
Allowance for doubtful accounts $ 4.9 $ 6.1
Accumulated depreciation $ 605.5 $ 590.6
Ordinary shares, nominal value $ 0.01 $ 0.01
Ordinary shares, shares authorized 50,000,000,000 50,000,000,000
Ordinary shares, shares issued 48,800,000 48,800,000
Ordinary shares, shares outstanding 41,000,000 41,600,000
Treasury stock, shares 7,800,000 7,200,000
v3.19.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Condensed Consolidated Statements of Operations    
Net sales $ 1,013.1 $ 1,121.6
Cost of sales 915.7 946.4
Gross profit 97.4 175.2
Selling, general and administrative expenses 68.8 64.4
Equity in earnings of unconsolidated affiliates 32.2 45.5
Operating income 60.8 156.3
Interest expense, net 10.2 14.9
Other expense (income), net 4.0 (3.8)
Income before income taxes 46.6 145.2
Provision for income taxes 10.8 24.9
Net income $ 35.8 $ 120.3
Weighted average shares- basic 41.3 43.4
Net income (loss) per share- basic $ 0.87 $ 2.77
Weighted average shares- diluted 41.8 44.4
Net income (loss) per share- diluted $ 0.86 $ 2.71
Dividends on ordinary shares $ 0.4 $ 0.36
v3.19.1
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Condensed Consolidated Statements of Comprehensive Income (Loss)    
Net income $ 35.8 $ 120.3
Other comprehensive income (loss), net of tax    
Cumulative translation adjustments (0.3) (2.1)
Net gain on cash flow hedges 0.1 2.8
Pension and other postretirement benefit plans:    
Net loss arising during period (net of tax of: $0.2 and $0.0) (2.0)  
Amounts reclassified from accumulated other comprehensive income 1.0 0.6
Total other comprehensive income (loss), net of tax (1.2) 1.3
Comprehensive income $ 34.6 $ 121.6
v3.19.1
Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Condensed Consolidated Statements of Comprehensive Income (Loss)    
Net loss arising during period, tax (benefit) expense $ 0.2 $ 0.0
v3.19.1
Condensed Consolidated Statements of Shareholders' Equity - USD ($)
shares in Millions, $ in Millions
Ordinary Shares
Additional Paid-In Capital
Treasury Shares
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Total
Balance at beginning of period at Dec. 31, 2017 $ 0.5 $ 578.8 $ (286.8) $ (145.6) $ 527.9 $ 674.8
Balance at beginning of period, shares at Dec. 31, 2017 43.4   5.4      
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income         120.3 120.3
Other comprehensive loss       1.3   1.3
Stock-based compensation   (12.2) $ 11.5     (0.7)
Stock-based compensation, shares 0.3   (0.3)      
Purchase of treasury shares     $ (24.2)     (24.2)
Purchase of treasury shares, shares (0.3)   0.3      
Dividends on ordinary shares         (15.8) (15.8)
Balance at end of period at Mar. 31, 2018 $ 0.5 566.6 $ (299.5) (144.3) 632.4 755.7
Balance at end of period, shares at Mar. 31, 2018 43.4   5.4      
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Adoption of new accounting standard           0.0
Balance at beginning of period at Dec. 31, 2018 $ 0.5 575.4 $ (418.1) (142.3) 753.2 $ 768.7
Balance at beginning of period, shares at Dec. 31, 2018 41.6   7.2     41.6
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income         35.8 $ 35.8
Other comprehensive loss       (1.2)   (1.2)
Stock-based compensation   (6.6) $ 7.0     0.4
Stock-based compensation, shares 0.1   (0.1)      
Purchase of treasury shares     $ (34.0)     (34.0)
Purchase of treasury shares, shares (0.7)   0.7      
Dividends on ordinary shares         (16.6) (16.6)
Balance at end of period at Mar. 31, 2019 $ 0.5 $ 568.8 $ (445.1) $ (143.5) $ 772.4 $ 753.1
Balance at end of period, shares at Mar. 31, 2019 41.0   7.8     41.0
v3.19.1
Condensed Consolidated Statements of Shareholders' Equity (Parenthetical)) - $ / shares
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Condensed Consolidated Statement of Stockholders' Equity    
Dividends on ordinary shares $ 0.4 $ 0.36
v3.19.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Cash flows from operating activities    
Net income $ 35.8 $ 120.3
Adjustments to reconcile net income to net cash provided by operating activities    
Depreciation and amortization 33.9 31.9
Amortization of deferred financing fees, issuance discount, and excluded component of hedging instruments (0.1) 1.1
Deferred income tax (0.1) 2.5
Share-based compensation expense 4.1 5.5
Earnings of unconsolidated affiliates, net of dividends (19.7) (15.5)
Unrealized net (gain) loss on foreign exchange forward contracts (6.6) 0.1
Gain on sale of businesses and other assets (0.2) (0.5)
Pension curtailment and settlement loss 0.7  
Changes in assets and liabilities    
Accounts receivable (4.8) (32.7)
Inventories 57.7 (70.3)
Accounts payable and other current liabilities 49.4 3.0
Income taxes payable (2.0) 0.8
Other assets, net 2.8 (1.3)
Other liabilities, net 2.3 (4.1)
Cash provided by operating activities 153.2 40.8
Cash flows from investing activities    
Capital expenditures (25.0) (30.6)
Proceeds from the sale of businesses and other assets 0.7 0.5
Cash used in investing activities (24.3) (30.1)
Cash flows from financing activities    
Short term borrowings, net (0.1) (0.1)
Purchase of treasury shares (37.4) (23.8)
Dividends paid (17.4) (16.2)
Proceeds from exercise of option awards 0.1 1.9
Withholding taxes paid on restricted share units (3.8) (8.0)
Cash used in financing activities (60.4) (48.0)
Effect of exchange rates on cash (1.6) 3.4
Net change in cash, cash equivalents and restricted cash 66.9 (33.9)
Cash, cash equivalents and restricted cash, beginning of period 452.3 432.8
Cash, cash equivalents and restricted cash, end of period 519.2 $ 398.9
Restricted cash $ (2.8)  
Restricted Cash and Cash Equivalents, Current, Asset, Statement of Financial Position [Extensible List] Other Assets, Current Other Assets, Current
Cash and cash equivalents, end of period $ 516.4 $ 398.9
2024 Term Loan B    
Cash flows from financing activities    
Repayments of Term Loans $ (1.8) $ (1.8)
v3.19.1
Basis of Presentation
3 Months Ended
Mar. 31, 2019
Basis of Presentation  
Basis of Presentation

NOTE 1—BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Trinseo S.A. and its subsidiaries (the “Company”) as of and for the periods ended March 31, 2019 and 2018 were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are considered necessary for the fair statement of the results for the periods presented. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures normally provided in annual financial statements, and therefore, these statements should be read in conjunction with the 2018 audited consolidated financial statements included within the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019.

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

 

v3.19.1
Recent Accounting Guidance
3 Months Ended
Mar. 31, 2019
Recent Accounting Guidance  
Recent Accounting Guidance

NOTE 2—RECENT ACCOUNTING GUIDANCE

In February 2016, the FASB issued guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize on the consolidated balance sheets lease liabilities and corresponding right-of-use (“ROU”) assets for all leases with terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using a modified retrospective transition, applying the new standard to all leases existing at the date of initial application. The Company adopted the standard effective January 1, 2019, and as a result, the Company recorded ROU assets and lease liabilities of $73.0 million and $72.4 million, respectively, on the condensed consolidated balance sheet as of January 1, 2019. The Company’s adoption of this standard did not result in a cumulative effect adjustment being recorded to opening retained earnings as of January 1, 2019 and did not have a material impact on the Company’s condensed consolidated statements of operations or cash flows. Refer to Note 18 for new disclosure requirements in effect as a result of this adoption.

In August 2018, the FASB issued guidance which modifies the disclosure requirements for employers that sponsor defined benefit pension plans or other postretirement plans. This amendment is effective for public companies for fiscal years ending after December 15, 2020. Early adoption is permitted, and the provisions of the amendment should be applied on a retrospective basis to all periods presented. While the Company is currently assessing the impact of adopting this guidance, it is not anticipated to have a material impact on the consolidated financial statements.

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

v3.19.1
Net Sales
3 Months Ended
Mar. 31, 2019
Revenue from Contract with Customer [Abstract]  
Net Sales

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 Company collects concurrent with sales-producing activities are excluded from “Net sales” and included as a component of “Cost of sales” in the condensed consolidated statements of operations. Additionally, freight and any directly related costs of transporting finished products to customers are accounted for as fulfilment costs and are also included within “Cost of sales.” The amount of net sales recognized varies with changes in returns, rebates, cash sales incentives, and other allowances offered to customers based on the Company's experience.

The following table provides disclosure of net sales to external customers by primary geographical market (based on the location where sales originated), by segment for the three months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

 

 

 

 

 

 

 

Three Months Ended

 

Binders

 

Rubber

 

Plastics

 

Polystyrene

 

Feedstocks

 

Total

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

63.3

 

$

 —

 

$

81.8

 

$

 —

 

$

2.7

 

$

147.8

 

Europe

 

 

101.4

 

 

124.6

 

 

213.3

 

 

138.2

 

 

40.5

 

 

618.0

 

Asia-Pacific

 

 

56.5

 

 

 —

 

 

51.6

 

 

90.3

 

 

23.6

 

 

222.0

 

Rest of World

 

 

2.7

 

 

 —

 

 

22.6

 

 

 —

 

 

 —

 

 

25.3

 

Total

 

$

223.9

 

$

124.6

 

$

369.3

 

$

228.5

 

$

66.8

 

$

1,013.1

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

64.3

 

$

 —

 

$

84.1

 

$

0.2

 

$

3.7

 

$

152.3

 

Europe

 

 

113.3

 

 

149.2

 

 

249.2

 

 

148.2

 

 

57.9

 

 

717.8

 

Asia-Pacific

 

 

74.3

 

 

 —

 

 

47.3

 

 

91.2

 

 

13.0

 

 

225.8

 

Rest of World

 

 

3.4

 

 

 —

 

 

22.3

 

 

 —

 

 

 —

 

 

25.7

 

Total

 

$

255.3

 

$

149.2

 

$

402.9

 

$

239.6

 

$

74.6

 

$

1,121.6

 

 

v3.19.1
Investments in Unconsolidated Affiliates
3 Months Ended
Mar. 31, 2019
Investments in Unconsolidated Affiliates  
Investments in Unconsolidated Affiliates

NOTE 4—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company’s investments held in unconsolidated affiliates are accounted for by the equity method. The Company is currently supplemented by one joint venture, Americas Styrenics LLC (“Americas Styrenics,” a styrene and polystyrene joint venture with Chevron Phillips Chemical Company LP). The results of Americas Styrenics are included within its own reporting segment.

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Sales

    

$

369.2

    

$

486.6

 

Gross profit

 

$

54.2

 

$

95.2

 

Net income

 

$

42.9

 

$

85.7

 

Americas Styrenics

As of March 31, 2019 and December 31, 2018, the Company’s investment in Americas Styrenics was $198.9 million and $179.1 million, respectively, which was $22.7 million and $46.4 million less than the Company’s 50% share of the underlying net assets of Americas Styrenics, respectively. This amount represents the difference between the book value of assets contributed to the joint venture at the time of formation (May 1, 2008) and the Company’s 50% share of the total recorded value of the joint venture’s assets and certain adjustments to conform with the Company’s accounting policies. This difference is being amortized over a weighted average remaining useful life of the contributed assets of approximately 2.1 years as of March 31, 2019. The Company received dividends from Americas Styrenics of $12.5 million and $30.0 million during the three months ended March 31, 2019 and 2018, respectively.

v3.19.1
Inventories
3 Months Ended
Mar. 31, 2019
Inventories  
Inventories

NOTE 5—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2019

 

2018

Finished goods

    

$

229.1

    

$

269.8

Raw materials and semi-finished goods

 

 

184.3

 

 

205.8

Supplies

 

 

34.5

 

 

34.8

Total

 

$

447.9

 

$

510.4

 

v3.19.1
Debt
3 Months Ended
Mar. 31, 2019
Debt  
Debt

NOTE 6—DEBT

Refer to the Annual Report for definitions of capitalized terms not included herein and further background on the Company’s debt structure discussed below. The Company was in compliance with all debt related covenants as of March 31, 2019 and December 31, 2018.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

   

Interest Rate as of
March 31, 2019

   

Maturity Date

   

Carrying Amount

   

Unamortized Deferred Financing Fees(1)

    

Total Debt, Less Unamortized Deferred Financing Fees

   

Carrying Amount

   

Unamortized Deferred Financing Fees(1)

   

Total Debt, Less
Unamortized Deferred
Financing Fees

 

Senior Credit Facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2024 Term Loan B

 

4.499%

 

September 2024

 

$

689.5

 

$

(15.6)

 

$

673.9

 

$

691.3

 

$

(16.2)

 

$

675.1

 

2022 Revolving Facility(2)

 

Various

 

September 2022

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

2025 Senior Notes

 

5.375%

 

September 2025

 

 

500.0

 

 

(8.1)

 

 

491.9

 

 

500.0

 

 

(8.4)

 

 

491.6

 

Accounts Receivable Securitization Facility(3)

 

Various

 

September 2021

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Other indebtedness

 

Various

 

Various

 

 

1.7

 

 

 —

 

 

1.7

 

 

1.1

 

 

 —

 

 

1.1

 

Total debt

 

 

 

 

 

$

1,191.2

 

$

(23.7)

 

$

1,167.5

 

$

1,192.4

 

$

(24.6)

 

$

1,167.8

 

Less: current portion(4)

 

 

 

 

 

 

 

 

 

 

 

 

(7.1)

 

 

 

 

 

 

 

 

(7.0)

 

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

 

 

 

 

 

 

 

 

 

 

 

$

1,160.4

 

 

 

 

 

 

 

$

1,160.8

 


(1)

This caption does not include deferred financing fees related to the Company’s revolving facilities, which are included within “Deferred charges and other assets” on the condensed consolidated balance sheets.

(2)

Under the 2022 Revolving Facility, the Company had a capacity of $375.0 million and funds available for borrowing of $360.7 million (net of $14.3 million outstanding letters of credit) as of March 31, 2019. Additionally, the Company is required to pay a quarterly commitment fee in respect of any unused commitments under this facility equal to 0.375% per annum.

(3)

This facility had a borrowing capacity of $150.0 million as of March 31, 2019. Additionally, as of March 31, 2019, the Company had accounts receivable available to support this facility in excess of its borrowing capacity, based on the pool of eligible accounts receivable. In regard to outstanding borrowings, fixed interest charges are 1.95% plus variable commercial paper rates, while for available, but undrawn commitments, fixed interest charges are 1.00%.

(4)

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

. 

v3.19.1
Goodwill
3 Months Ended
Mar. 31, 2019
Goodwill.  
Goodwill

NOTE 7—GOODWILL

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Latex

 

Synthetic

 

Performance

 

 

 

 

 

Americas

 

 

 

 

 

    

Binders

    

Rubber

    

Plastics

    

Polystyrene

    

Feedstocks

    

Styrenics

    

Total

 

Balance at December 31, 2018

 

$

15.9

 

$

11.3

 

$

37.3

 

$

4.5

 

$

 —

 

$

 —

 

$

69.0

 

Foreign currency impact

 

 

(0.3)

 

 

(0.2)

 

 

(0.6)

 

 

(0.1)

 

 

 —

 

 

 —

 

 

(1.2)

 

Balance at March 31, 2019

 

$

15.6

 

$

11.1

 

$

36.7

 

$

4.4

 

$

 —

 

$

 —

 

$

67.8

 

 

v3.19.1
Derivative Instruments
3 Months Ended
Mar. 31, 2019
Derivative Instruments [Abstract]  
Derivative Instruments

NOTE 8—DERIVATIVE INSTRUMENTS

The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. The Company does not hold or enter into financial instruments for trading or speculative purposes. All derivatives are recorded on the condensed consolidated balance sheets at fair value.

Foreign Exchange Forward Contracts

Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company’s principal strategy in managing its exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on its balance sheet against corresponding assets of the same currency such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce this exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.

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

 

 

 

 

 

 

 

 

March 31, 

 

Buy / (Sell) 

    

2019

 

Euro

 

$

(217.8)

 

Chinese Yuan

 

$

(78.2)

 

Swiss Franc

 

$

45.1

 

Indonesian Rupiah

 

$

(18.2)

 

Mexican Peso

 

$

(14.9)

 

Open foreign exchange forward contracts as of March 31, 2019 had maturities occurring over a period of two months.

Foreign Exchange Cash Flow Hedges

The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by one of its subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.

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

Interest Rate Swaps

On September 6, 2017, the Company issued the 2024 Term Loan B, which currently bears an interest rate of the London Interbank Offered Rate (“LIBOR”) plus 2.00%, subject to a 0.00% LIBOR floor. In order to reduce the variability in interest payments associated with the Company’s variable rate debt, during 2017 the Company entered into certain interest rate swap agreements to convert a portion of these variable rate borrowings into a fixed rate obligation. These interest rate swap agreements are designated as cash flow hedges, and as such, the contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to interest expense in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.

As of March 31, 2019, the Company had open interest rate swap agreements with a net notional U.S. dollar equivalent of $200.0 million which had an effective date of September 29, 2017 and mature over a period of five years. Under the terms of the swap agreements, the Company is required to pay the counterparties a stream of fixed interest payments at a rate of 1.81%, and in turn, receives variable interest payments based on 1-month LIBOR (2.50% as of March 31, 2019) from the counterparties.

Net Investment Hedge

On September 1, 2017, the Company entered into certain fixed-for-fixed cross currency swaps (“CCS”), swapping USD principal and interest payments on its 2025 Senior Notes for euro-denominated payments. Under the terms of the CCS, the Company has notionally exchanged $500.0 million at an interest rate of 5.375% for €420.0 million at a weighted average interest rate of 3.45% for approximately five years. On September 1, 2017, the Company designated the full notional amount of the CCS (€420.0 million) as a hedge of its net investment in certain European subsidiaries under the forward method, with all changes in the fair value of the CCS recorded as a component of AOCI, as the CCS were deemed to be highly effective hedges. A cumulative foreign currency translation loss of $38.0 million was recorded within AOCI related to the CCS through March 31, 2018.

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

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

Summary of Derivative Instruments

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

March 31, 2019

 

March 31, 2018

 

 

  

Cost of
sales

 

Interest expense, net

 

Other expense (income), net

 

Cost of
sales

 

Interest expense, net

 

Other expense (income), net

 

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

 

$

915.7

 

$

10.2

 

$

4.0

 

$

946.4

 

$

14.9

 

$

(3.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effects of cash flow hedge instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss) reclassified from AOCI into income

 

$

0.6

 

$

 —

 

$

 —

 

$

(3.7)

 

$

 —

 

$

 —

 

Interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss) reclassified from AOCI into income

 

$

 —

 

$

0.3

 

$

 —

 

$

 —

 

$

(0.1)

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effects of net investment hedge instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cross currency swaps (CCS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain excluded from effectiveness testing

 

$

 —

 

$

4.0

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effects of derivatives not designated as hedge instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss) recognized in income

 

$

 —

 

$

 —

 

$

2.7

 

$

 —

 

$

 —

 

$

(5.3)

 

The following table presents the effect of cash flow and net investment hedge accounting on AOCI for the three months ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in AOCI on Balance Sheet

 

 

Three Months Ended

 

 

March 31, 

 

 

2019

 

2018

Designated as Cash Flow Hedges

 

 

 

 

 

 

Foreign exchange cash flow hedges

  

$

2.3

  

$

(0.5)

Interest rate swaps

 

 

(2.2)

 

 

3.3

Total

 

$

0.1

 

$

2.8

Designated as Net Investment Hedges

 

 

 

 

 

 

Cross currency swaps (CCS)

 

$

11.5

 

$

(20.4)

Total

 

$

11.5

 

$

(20.4)

The Company recorded gains of $2.7 million during the three months ended March 31, 2019 and losses of $5.3 million during the three months ended March 31, 2018 from settlements and changes in the fair value of outstanding forward contracts (not designated as hedges). The gains and losses from these forward contracts offset net foreign exchange transaction losses of $3.1 million during the three months ended March 31, 2019 and gains of $10.4 million during the three months ended March 31, 2018, which resulted from the re-measurement of the Company’s foreign currency denominated assets and liabilities. The cash settlements of these foreign exchange forward contracts are included within operating activities in the condensed consolidated statements of cash flows.

The Company expects to reclassify in the next twelve months an approximate $5.4 million net gain from AOCI into earnings related to the Company’s outstanding foreign exchange cash flow hedges and interest rate swaps as of March 31, 2019 based on current foreign exchange rates.

The following tables summarize the gross and net unrealized gains and losses, as well as the balance sheet classification, of outstanding derivatives recorded in the condensed consolidated balance sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

   

 

 

Foreign

 

Foreign

 

 

 

 

 

 

 

 

 

Exchange

 

Exchange

 

Interest

 

Cross

 

 

 

 

Balance Sheet

 

Forward

 

Cash Flow

 

Rate

 

Currency

 

 

 

Classification

   

Contracts

 

Hedges

 

Swaps

 

Swaps

 

Total

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

$

5.2

 

$

4.2

 

$

1.2

 

$

6.0

 

$

16.6

 

Deferred charges and other assets

 

 

 —

 

 

 —

 

 

1.3

 

 

11.5

 

 

12.8

 

Gross derivative asset position

 

 

5.2

 

 

4.2

 

 

2.5

 

 

17.5

 

 

29.4

 

Less: Counterparty netting

 

 

(0.2)

 

 

 —

 

 

 —

 

 

 —

 

 

(0.2)

 

Net derivative asset position

 

$

5.0

 

$

4.2

 

$

2.5

 

$

17.5

 

$

29.2

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

(0.2)

 

$

 —

 

$

 —

 

$

 —

 

$

(0.2)

 

Gross derivative liability position

 

 

(0.2)

 

 

 —

 

 

 —

 

 

 —

 

 

(0.2)

 

Less: Counterparty netting

 

 

0.2

 

 

 —

 

 

 —

 

 

 —

 

 

0.2

 

Net derivative liability position

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Total net derivative position

 

$

5.0

 

$

4.2

 

$

2.5

 

$

17.5

 

$

29.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

   

 

 

Foreign

 

Foreign

 

 

 

 

 

 

 

 

 

Exchange

 

Exchange

 

Interest

 

Cross

 

 

 

 

Balance Sheet

 

Forward

 

Cash Flow

 

Rate

 

Currency

 

 

 

Classification

    

Contracts

    

Hedges

    

Swaps

    

Swaps

    

Total

     

Asset Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

$

0.6

 

$

1.9

 

$

1.5

 

$

8.1

 

$

12.1

 

Deferred charges and other assets

 

 

 —

 

 

 —

 

 

3.2

 

 

 —

 

 

3.2

 

Gross derivative asset position

 

 

0.6

 

 

1.9

 

 

4.7

 

 

8.1

 

 

15.3

 

Less: Counterparty netting

 

 

(0.5)

 

 

 —

 

 

 —

 

 

 —

 

 

(0.5)

 

Net derivative asset position

 

$

0.1

 

$

1.9

 

$

4.7

 

$

8.1

 

$

14.8

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

(2.1)

 

$

 —

 

$

 —

 

$

 —

 

$