TRINSEO S.A., 10-Q filed on 5/8/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
May 04, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2020  
Document Transition Report false  
Entity File Number 001-36473  
Entity Registrant Name Trinseo S.A.  
Entity Incorporation, State or Country Code N4  
Entity Tax Identification Number 00-0000000  
Entity Address, Address Line One 1000 Chesterbrook Boulevard  
Entity Address, Address Line Two Suite 300  
Entity Address, Address Line Three Berwyn  
Entity Address, City or Town Berwyn, PA 19312  
Entity Address, State or Province PA  
Entity Address, Postal Zip Code 19312  
City Area Code 610  
Local Phone Number 240-3200  
Title of 12(b) Security Ordinary Shares, par value $0.01 per share  
Trading Symbol TSE  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   38,238,977
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Entity Central Index Key 0001519061  
Current Fiscal Year End Date --12-31  
Amendment Flag false  
v3.20.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Millions
Mar. 31, 2020
Dec. 31, 2019
Current assets    
Cash and cash equivalents $ 440.1 $ 456.2
Accounts receivable, net of allowance for doubtful accounts (March 31, 2020: $6.7; December 31, 2019: $5.3) 576.0 570.8
Inventories 405.5 438.2
Other current assets 16.6 25.9
Total current assets 1,438.2 1,491.1
Investments in unconsolidated affiliates 197.9 188.1
Property, plant and equipment, net of accumulated depreciation (March 31, 2020: $702.9; December 31, 2019: $665.7) 572.4 625.8
Other assets    
Goodwill 66.2 67.7
Other intangible assets, net 188.1 191.5
Right of use assets - operating 77.2 71.4
Deferred income tax assets 78.7 67.5
Deferred charges and other assets 38.7 55.7
Total other assets 448.9 453.8
Total assets 2,657.4 2,758.8
Current liabilities    
Short-term borrowings and current portion of long-term debt 11.5 11.1
Accounts payable 301.9 343.0
Current lease liabilities - operating 14.8 14.1
Income taxes payable 1.9 5.0
Accrued expenses and other current liabilities 151.4 154.4
Total current liabilities 481.5 527.6
Noncurrent liabilities    
Long-term debt, net of unamortized deferred financing fees 1,162.2 1,162.6
Noncurrent lease liabilities - operating 64.1 58.0
Deferred income tax liabilities 45.9 41.5
Other noncurrent obligations 300.7 300.2
Total noncurrent liabilities 1,572.9 1,562.3
Commitments and contingencies (Note 15)
Shareholders' equity    
Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (March 31, 2020: 48.8 shares issued and 38.2 shares outstanding; December 31, 2019: 48.8 shares issued and 39.0 shares outstanding) 0.5 0.5
Additional paid-in-capital 575.7 574.7
Treasury shares, at cost (March 31, 2020: 10.68 shares; December 31, 2019: 9.8 shares) (548.2) (524.9)
Retained earnings 729.2 781.0
Accumulated other comprehensive loss (154.2) (162.4)
Total shareholders' equity 603.0 668.9
Total liabilities and shareholders' equity $ 2,657.4 $ 2,758.8
v3.20.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2020
Dec. 31, 2019
Condensed Consolidated Balance Sheets    
Allowance for doubtful accounts $ 6.7 $ 5.3
Accumulated depreciation $ 702.9 $ 665.7
Ordinary shares, nominal value $ 0.01 $ 0.01
Ordinary shares, shares authorized 50,000,000,000.0 50,000,000,000.0
Ordinary shares, shares issued 48,800,000 48,800,000
Ordinary shares, shares outstanding 38,200,000 39,000,000.0
Treasury stock, shares 10,600,000 9,800,000
v3.20.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Condensed Consolidated Statements of Operations    
Net sales $ 853.5 $ 1,013.1
Cost of sales 783.8 915.7
Gross profit 69.7 97.4
Selling, general and administrative expenses 77.5 68.8
Equity in earnings of unconsolidated affiliates 9.8 32.2
Impairment charges 38.3  
Operating income (loss) (36.3) 60.8
Interest expense, net 10.3 10.2
Other expense (income), net 1.6 4.0
Income (loss) before income taxes (48.2) 46.6
Provision for (benefit from) income taxes (11.9) 10.8
Net income (loss) $ (36.3) $ 35.8
Weighted average shares- basic 38.5 41.3
Net income (loss) per share- basic $ (0.94) $ 0.87
Weighted average shares- diluted 38.5 41.8
Net income (loss) per share- diluted $ (0.94) $ 0.86
v3.20.1
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Condensed Consolidated Statements of Comprehensive Income (Loss)    
Net income (loss) $ (36.3) $ 35.8
Other comprehensive income (loss), net of tax    
Cumulative translation adjustments 10.7 (0.3)
Net gain (loss) on cash flow hedges (3.7) 0.1
Pension and other postretirement benefit plans:    
Net gain (loss) arising during period (net of tax of: $0.1 and $(0.2)) 0.6 (2.0)
Amounts reclassified from accumulated other comprehensive income (loss) 0.6 1.0
Total other comprehensive income (loss), net of tax 8.2 (1.2)
Comprehensive income (loss) $ (28.1) $ 34.6
v3.20.1
Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Condensed Consolidated Statements of Comprehensive Income (Loss)    
Net loss arising during period, tax (benefit) expense $ 0.1 $ (0.2)
v3.20.1
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, 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      
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss)         35.8 35.8
Other comprehensive income (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      
Balance at beginning of period at Dec. 31, 2019 $ 0.5 574.7 $ (524.9) (162.4) 781.0 $ 668.9
Balance at beginning of period, shares at Dec. 31, 2019 39.0   9.8     39.0
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss)         (36.3) $ (36.3)
Other comprehensive income (loss)       8.2   8.2
Stock-based compensation   1.0 $ 1.7     2.7
Purchase of treasury shares     $ (25.0)     (25.0)
Purchase of treasury shares, shares (0.8)   0.8      
Dividends on ordinary shares         (15.5) (15.5)
Balance at end of period at Mar. 31, 2020 $ 0.5 $ 575.7 $ (548.2) $ (154.2) $ 729.2 $ 603.0
Balance at end of period, shares at Mar. 31, 2020 38.2   10.6     38.2
v3.20.1
Condensed Consolidated Statements of Shareholders' Equity (Parenthetical)) - $ / shares
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Condensed Consolidated Statement of Stockholders' Equity    
Dividends on ordinary shares $ 0.40 $ 0.40
v3.20.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Cash flows from operating activities    
Net income (loss) $ (36.3) $ 35.8
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities    
Depreciation and amortization 36.4 33.9
Amortization of deferred financing fees, issuance discount, and excluded component of hedging instruments 0.4 (0.1)
Deferred income tax (11.5) (0.1)
Share-based compensation expense 3.2 4.1
Earnings of unconsolidated affiliates, net of dividends (9.8) (19.7)
Unrealized net gain on foreign exchange forward contracts (11.5) (6.6)
Gain on sale of businesses and other assets (0.4) (0.2)
Impairment charges 38.3  
Pension curtailment and settlement (gain) loss   0.7
Changes in assets and liabilities    
Accounts receivable (12.7) (4.8)
Inventories 26.8 57.7
Accounts payable and other current liabilities (28.9) 49.4
Income taxes payable (3.3) (2.0)
Other assets, net (6.9) 2.8
Other liabilities, net 10.4 2.3
Cash provided by operating activities (5.8) 153.2
Cash flows from investing activities    
Capital expenditures (24.3) (25.0)
Net cash received for asset and business acquisitions, net of cash acquired 0.2  
Proceeds from capital expenditures subsidy   0.7
Proceeds from the sale of businesses and other assets 11.6  
Proceeds from the settlement of hedging instruments 51.6  
Cash provided by (used in) investing activities 39.1 (24.3)
Cash flows from financing activities    
Short term borrowings, net (3.5) (0.1)
Purchase of treasury shares (25.0) (37.4)
Dividends paid (15.9) (17.4)
Proceeds from exercise of option awards   0.1
Withholding taxes paid on restricted share units (0.6) (3.8)
Repayments of Term Loans (1.7) (1.8)
Cash used in financing activities (46.7) (60.4)
Effect of exchange rates on cash (2.7) (1.6)
Net change in cash, cash equivalents and restricted cash (16.1) 66.9
Cash, cash equivalents and restricted cash, beginning of period 457.4 452.3
Cash, cash equivalents and restricted cash, end of period 441.3 519.2
Restricted cash $ (1.2) $ (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 $ 440.1 $ 516.4
v3.20.1
Basis of Presentation
3 Months Ended
Mar. 31, 2020
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, 2020 and 2019 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 2019 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, 2020. The Company expects the effects of the COVID-19 pandemic to negatively impact its results of operations, cash flows and financial position, which impact could be material, and dependent on numerous factors that are highly uncertain, for which the ultimate impact cannot be predicted at this time, including the duration and scope of the COVID-19 pandemic. The Company’s condensed consolidated financial statements presented herein reflect the latest estimates and assumptions made by management that affect the reported amounts and related disclosures as of and for the period ended March 31, 2020. However, actual results could differ from these estimates and assumptions.

The December 31, 2019 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 2019 audited consolidated financial statements, but does not include all disclosures required by GAAP for annual periods.

v3.20.1
Recent Accounting Guidance
3 Months Ended
Mar. 31, 2020
Recent Accounting Guidance  
Recent Accounting Guidance

NOTE 2—RECENT ACCOUNTING GUIDANCE

In August 2018, the Financial Accounting Standards Board (“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. The Company adopted this standard prospectively, effective January 1, 2020. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In December 2019, the FASB issued guidance that simplifies the accounting for income taxes. The amended guidance includes removal of certain exceptions to the general principles of Accounting Standards Codification 740, Income Taxes, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. This guidance is effective for public business entities for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the timing and impacts of adopting this guidance on its consolidated financial statements.

In March 2020, the FASB issued optional guidance for a limited period of time to ease the potential burden in accounting for the effects of the transition away from London Interbank Offered Rate (“LIBOR”) and other reference rates. The Company adopted this guidance upon issuance, noting that it did not have a material impact on the Company’s condensed consolidated financial statements.

v3.20.1
Net Sales
3 Months Ended
Mar. 31, 2020
Revenue from Contract with Customer [Abstract]  
Net Sales

NOTE 3—NET SALES

Refer to the Annual Report for information on the Company's accounting policies and further background related to its net sales.

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, 2020 and 2019:

Latex

Synthetic

Performance

 

Three Months Ended

Binders

Rubber

Plastics

Polystyrene

Feedstocks

Total

 

March 31, 2020

United States

$

62.2

$

$

70.6

$

$

2.6

$

135.4

Europe

 

101.9

 

99.8

 

165.0

 

109.8

 

29.1

 

505.6

Asia-Pacific

 

52.3

 

1.9

 

49.7

 

73.0

 

13.1

190.0

Rest of World

 

2.7

 

19.8

 

 

 

22.5

Total

$

219.1

$

101.7

$

305.1

$

182.8

$

44.8

$

853.5

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

v3.20.1
Investments in Unconsolidated Affiliates
3 Months Ended
Mar. 31, 2020
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 equity interests is not available. The summarized financial information of the Company’s unconsolidated affiliate is shown below.

Three Months Ended

March 31, 

    

2020

    

2019

    

Sales

    

$

322.2

    

$

369.2

Gross profit

$

7.2

$

54.2

Net income (loss)

$

(8.3)

$

42.9

Americas Styrenics

As of March 31, 2020 and December 31, 2019, the Company’s investment in Americas Styrenics was $197.9 million and $188.1 million, respectively, which was $3.5 million and $10.3 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 the weighted average remaining useful life of the contributed assets of approximately 1.9 years as of March 31, 2020. The Company did not receive dividends from Americas Styrenics during the three months ended March 31, 2020 and received dividends of $12.5 million from Americas Styrenics during the three months ended March 31, 2019.

v3.20.1
Inventories
3 Months Ended
Mar. 31, 2020
Inventories  
Inventories

NOTE 5—INVENTORIES

Inventories consisted of the following:

March 31, 

December 31,

    

2020

2019

Finished goods

    

$

200.2

    

$

210.8

Raw materials and semi-finished goods

 

168.5

 

190.1

Supplies

 

36.8

 

37.3

Total

$

405.5

$

438.2

v3.20.1
Debt
3 Months Ended
Mar. 31, 2020
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, 2020 and December 31, 2019.

As of March 31, 2020 and December 31, 2019, debt consisted of the following:

March 31, 2020

December 31, 2019

   

Interest Rate as of
March 31, 2020

   

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

2.989%

September 2024

$

682.6

$

(12.9)

$

669.7

$

684.3

$

(13.7)

$

670.6

2022 Revolving Facility(2)

Various

September 2022

2025 Senior Notes

5.375%

September 2025

500.0

(7.0)

493.0

500.0

(7.3)

492.7

Accounts Receivable Securitization Facility(3)

Various

September 2021

Other indebtedness

Various

Various

11.0

11.0

10.4

10.4

Total debt

$

1,193.6

$

(19.9)

$

1,173.7

$

1,194.7

$

(21.0)

$

1,173.7

Less: current portion(4)

(11.5)

(11.1)

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

$

1,162.2

$

1,162.6

(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 $360.9 million (net of $14.1 million outstanding letters of credit) as of March 31, 2020. 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. On April 3, 2020, the Company drew down $100.0 million from the 2022 Revolving Facility.
(3)This facility had a borrowing capacity of $150.0 million as of March 31, 2020. As of March 31, 2020, the Company had approximately $135.6 million of accounts receivable available to support this facility, 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, 2020 and December 31, 2019, the current portion of long-term debt primarily related to $7.0 million of the scheduled future principal payments on the 2024 Term Loan B.
v3.20.1
Goodwill
3 Months Ended
Mar. 31, 2020
Goodwill.  
Goodwill

NOTE 7—GOODWILL

The following table shows changes in the carrying amount of goodwill, by segment, from December 31, 2019 to March 31, 2020:

Latex

Synthetic

Performance

Americas

 

    

Binders

    

Rubber

    

Plastics

    

Polystyrene

    

Feedstocks

    

Styrenics

    

Total

 

Balance at December 31, 2019

$

15.6

$

11.0

$

36.7

$

4.4

$

$

$

67.7

Foreign currency impact

 

(0.3)

(0.2)

(0.9)

(0.1)

 

(1.5)

Balance at March 31, 2020

$

15.3

$

10.8

$

35.8

$

4.3

$

$

$

66.2

v3.20.1
Derivative Instruments
3 Months Ended
Mar. 31, 2020
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, 2020, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $455.4 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of March 31, 2020:

March 31, 

Buy / (Sell) 

    

2020

Euro

$

(325.1)

Chinese Yuan

$

(43.7)

Swiss Franc

$

26.3

Indonesian Rupiah

$

(16.3)

Korean Won

$

(13.1)

Open foreign exchange forward contracts as of March 31, 2020 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 Accumulated Other Comprehensive Income (“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, 2020 had maturities occurring over a period of nine months, and had a net notional U.S. dollar equivalent of $63.0 million.

Interest Rate Swaps

On September 6, 2017, the Company issued the 2024 Term Loan B, which currently bears an interest rate of 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, 2020, 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 in September 2022. 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 (0.99% as of March 31, 2020) 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 this CCS (the “2017 CCS”), the Company 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 2017 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 2017 CCS recorded as a component of AOCI, as the 2017 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 2017 CCS through March 31, 2018.

Effective April 1, 2018, the Company elected as an accounting policy to re-designate the 2017 CCS as a net investment hedge (and any future similar hedges) under the spot method. As such, changes in the fair value of the 2017 CCS included in the assessment of effectiveness (changes due to spot foreign exchange rates) were 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, 2020, 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 2017 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 2017 CCS. Additionally, the accrual of periodic USD and euro-denominated interest receipts and payments under the terms of the 2017 CCS were recognized within “Interest expense, net” in the condensed consolidated statements of operations.

On February 26, 2020, the Company settled its 2017 CCS and replaced it with a new CCS arrangement (the “2020 CCS”) that carried substantially the same terms as the 2017 CCS. Upon settlement of the 2017 CCS, the Company realized net cash proceeds of $51.6 million. The remaining $13.8 million unamortized balance of the initial excluded component related to the 2017 CCS at the time of settlement is no longer being amortized following the settlement and will remain in AOCI until either the sale or substantially complete liquidation of the relevant subsidiaries. Under the 2020 CCS, the Company notionally exchanged $500.0 million at an interest rate of 5.375% for €459.3 million at a weighted average interest rate of 3.672% for approximately 2.7 years, with a final maturity of November 3, 2022. The cash flows under the 2020 CCS are aligned with the Company’s principal and interest obligations on its 5.375% 2025 Senior Notes.

Summary of Derivative Instruments

The following table presents 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, 2020 and 2019:

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

Three Months Ended

Three Months Ended

March 31, 2020

March 31, 2019

  

Cost of
sales

Interest expense, net

Other expense, net

Cost of
sales

Interest expense, net

Other expense, net

  

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

$

783.8

$

10.3

$

1.6

$

915.7

$

10.2

$

4.0

The effects of cash flow hedge instruments:

Foreign exchange cash flow hedges

Amount of gain reclassified from AOCI into income

$

0.2

$

$

$

0.6

$

$

Interest rate swaps

Amount of gain (loss) reclassified from AOCI into income

$

$

(0.1)

$

$

$

0.3

$

The effects of net investment hedge instruments:

Cross currency swaps (CCS)

Amount of gain excluded from effectiveness testing (1)

$

$

3.4

$

$

$

4.0

$

The effects of derivatives not designated as hedge instruments:

Foreign exchange forward contracts

Amount of gain recognized in income

$

$

$

13.8

$

$

$

2.7

(1)Amount for the three months ended March 31, 2020 includes the effects of the 2017 CCS through its settlement on February 26, 2020 and the effects of the 2020 CCS from when it was entered into on February 26, 2020 through March 31, 2020.

The following table presents the effect of cash flow and net investment hedge accounting on AOCI for the three months ended March 31, 2020 and 2019:

Gain (Loss) Recognized in AOCI on Balance Sheet

Three Months Ended

March 31, 

2020

2019

Designated as Cash Flow Hedges

Foreign exchange cash flow hedges

  

$

2.1

  

$

2.3

Interest rate swaps

(5.8)

(2.2)

Total

$

(3.7)

$

0.1

Designated as Net Investment Hedges

Cross currency swaps (CCS) (1)

$

22.9

$

11.5

Total

$

22.9

$

11.5

(1)Amount for the three months ended March 31, 2020 includes the effect on AOCI from the 2017 CCS through its settlement on February 26, 2020 and the effect on AOCI from the 2020 CCS from when it was entered into on February 26, 2020 through March 31, 2020.

The Company recorded gains of $13.8 million and $2.7 million during the three months ended March 31, 2020 and 2019, respectively, from settlements and changes in the fair value of outstanding forward contracts (not designated as

hedges). The gains from these forward contracts offset net foreign exchange transaction losses of $14.0 million and $3.1 million during the three months ended March 31, 2020 and 2019, respectively, 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 $1.3 million net loss from AOCI into earnings related to the Company’s outstanding foreign exchange cash flow hedges and interest rate swaps as of March 31, 2020 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, 2020

   

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

$

7.0

$

1.6

$

$

4.8

$

13.4

Gross derivative asset position

7.0

1.6

4.8

13.4

Less: Counterparty netting

(0.1)

(0.1)

Net derivative asset position

$

6.9

$

1.6

$

$

4.8

$

13.3

Liability Derivatives:

Accounts payable

$

(0.1)

$

$

(2.9)

$

$

(3.0)

Other noncurrent obligations

(4.3)

(1.4)

(5.7)

Gross derivative liability position

(0.1)

(7.2)

(1.4)

(8.7)

Less: Counterparty netting

0.1

0.1

Net derivative liability position

$

$

$

(7.2)

$

(1.4)

$

(8.6)

Total net derivative position

$

6.9

$

1.6

$

(7.2)

$

3.4

$

4.7

December 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

$

1.1

$

$

$

8.6

$

9.7

Deferred charges and other assets

19.2

19.2

Gross derivative asset position

1.1

27.8

28.9

Less: Counterparty netting

(0.4)

(0.4)

Net derivative asset position

$

0.7

$

$

$

27.8

$

28.5

Liability Derivatives:

Accounts payable

$

(5.7)

$

(0.5)

$

(0.4)

$

$

(6.6)

Other noncurrent obligations

(1.0)

(1.0)

Gross derivative liability position

(5.7)

(0.5)

(1.4)

(7.6)

Less: Counterparty netting

0.5

0.5

Net derivative liability position

$

(5.2)

$

(0.5)

$

(1.4)

$

$

(7.1)

Total net derivative position

$

(4.5)

$

(0.5)

$

(1.4)

$

27.8

$

21.4

Forward contracts, interest rate swaps, and cross currency swaps are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in a single currency in the event of a default on or termination of any one contract. As such, in accordance with the Company’s accounting policy, these derivative instruments are recorded on a net basis by counterparty within the condensed consolidated balance sheets.

Refer to Notes 9 and 17 of the condensed consolidated financial statements for further information regarding the fair value of the Company’s derivative instruments and the related changes in AOCI.

v3.20.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2020
Fair Value Measurements  
Fair Value Measurements

NOTE 9—FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date.

Level 1—Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3—Valuation is based upon other unobservable inputs that are significant to the fair value measurement.

The following table summarizes the basis used to measure certain assets and liabilities at fair value on a recurring basis in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019:

March 31, 2020

 

Quoted Prices in Active Markets for Identical Items

Significant Other Observable Inputs

Significant Unobservable Inputs

 

Assets (Liabilities) at Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Foreign exchange forward contracts—Assets

    

$

    

$

6.9

    

$

    

$

6.9

Foreign exchange cash flow hedges—Assets

1.6

1.6

Interest rate swaps—(Liabilities)

(7.2)

(7.2)

Cross currency swaps—Assets

4.8

4.8

Cross currency swaps—(Liabilities)

(1.4)

(1.4)

Total fair value

$

$

4.7

$

$

4.7

December 31, 2019

 

Quoted Prices in Active Markets for Identical Items

Significant Other Observable Inputs

Significant Unobservable Inputs

 

Assets (Liabilities) at Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Foreign exchange forward contracts—Assets

$

    

$

0.7

    

$

    

$

0.7

Foreign exchange forward contracts—(Liabilities)

(5.2)

(5.2)

Foreign exchange cash flow hedges—(Liabilities)

(0.5)

(0.5)

Interest rate swaps—(Liabilities)

(1.4)

(1.4)

Cross currency swaps—Assets

27.8

27.8

Total fair value

$

$

21.4

$

$

21.4

The Company uses an income approach to value its derivative instruments, utilizing discounted cash flow techniques, considering the terms of the contract and observable market information available as of the reporting date, such as interest rate yield curves and currency spot and forward rates. Significant inputs to the valuation for these derivative instruments are obtained from broker quotations or from listed or over-the-counter market data, and are classified as Level 2 in the fair value hierarchy.

Nonrecurring Fair Value Measurements

The Company’s financial assets measured at fair value on a nonrecurring basis as of March 31, 2020 were as follows:

March 31, 2020

Quoted Prices in Active Markets for Identical Items

Significant Other Observable Inputs

Significant Unobservable Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Assets:

    

    

    

Boehlen styrene monomer property, plant and equipment

$

$

$

3.4

$

3.4

Schkopau PBR property, plant and equipment

1.5

1.5

Total fair value

$

$

$

4.9

$

4.9

In 2020, the Company continued its strategy to focus efforts and increase investments in certain product offerings serving the following applications, which are less cyclical and offer significantly higher growth and margin potential: coatings, adhesives, sealants, and elastomers applications (“CASE”) within the Latex Binders segment; engineered materials applications within the Performance Plastics segment; and solution styrene butadiene rubber (“SSBR”) within the Synthetic Rubber segment.

As a result of continuing this strategy and other management considerations, in March of 2020, the Company initiated a consultation process with the Economic Council and Works Councils of Trinseo Deutschland regarding the disposition of its styrene monomer assets in Boehlen, Germany and its polybutadiene rubber (“PBR,” specifically nickel and neodymium-PBR) assets in Schkopau, Germany.

Based on the Company’s evaluation of these asset groups, it determined that the long-lived assets at both locations should be assessed for impairment during the three months ended March 31, 2020. These assessments indicated that the carrying values of the asset groups at each location were not recoverable when compared to the expected undiscounted future cash flows from the operation and potential disposition of these assets. Based upon the Company’s assessment, it concluded that the fair value of the Boehlen styrene monomer and Schkopau PBR asset groups totaled $3.4 million and $1.5 million, respectively, as of March 31, 2020. Therefore, the Company recorded impairment charges on the Boehlen styrene monomer assets and the Schkopau PBR assets of $10.3 million and $28.0 million, respectively, during the three months ended March 31, 2020, which are included within “Impairment charges” on the condensed consolidated statements of operations. The fair value of the depreciable assets at each location was determined through an analysis of the underlying fixed asset records in conjunction with the use of industry experience and available market data.

There were no other financial assets and no financial liabilities measured at fair value on a nonrecurring basis as of March 31, 2020 and there were no financial assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2019.

Fair Value of Debt Instruments

The following table presents the estimated fair value of the Company’s outstanding debt not carried at fair value as of March 31, 2020 and December 31, 2019:

    

As of

As of

 

    

March 31, 2020

    

December 31, 2019

 

2025 Senior Notes

$

419.8

$

503.7

2024 Term Loan B

578.9

686.4

Total fair value

$

998.7

$

1,190.1

The fair value of the Company’s debt facilities above (each Level 2 securities) is determined using over-the-counter market quotes and benchmark yields received from independent vendors.

There were no other significant financial instruments outstanding as of March 31, 2020 and December 31, 2019.

v3.20.1
Provision for Income Taxes
3 Months Ended
Mar. 31, 2020
Provision for Income Taxes  
Income Taxes

NOTE 10—PROVISION FOR INCOME TAXES

Three Months Ended

March 31, 

    

2020

    

2019

 

Effective income tax rate

24.6

%  

23.1

%

Benefit from income taxes for the three months ended March 31, 2020 totaled $11.9 million, resulting in an effective tax rate of 24.6%. Provision for income taxes for the three months ended March 31, 2019 totaled $10.8 million, resulting in an effective tax rate of 23.1%.

The effective tax rate for 2020 was impacted by the jurisdictional mix of income before income taxes compared to the prior year, partially offset by the tax benefit related to the impairment charges recorded during the period related to the Company’s assets in Boehlen and Schkopau, Germany. Refer to Note 9 for further information.

v3.20.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2020
Commitments and Contingencies Disclosure  
Commitments and Contingencies

NOTE