TRINSEO S.A., 10-Q filed on 5/7/2021
Quarterly Report
v3.21.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2021
May 03, 2021
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2021  
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 $0.01 per share  
Trading Symbol TSE  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   38,739,042
Document Fiscal Year Focus 2021  
Document Fiscal Period Focus Q1  
Entity Central Index Key 0001519061  
Current Fiscal Year End Date --12-31  
Amendment Flag false  
v3.21.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Millions
Mar. 31, 2021
Dec. 31, 2020
Current assets    
Cash and cash equivalents $ 618.4 $ 588.7
Restricted cash 450.0  
Accounts receivable, net of allowance for doubtful accounts (March 31, 2021: $4.9; December 31, 2020: $5.8) 657.8 529.2
Inventories 463.0 384.1
Other current assets 15.8 15.1
Total current assets 2,205.0 1,517.1
Investments in unconsolidated affiliates 248.1 240.1
Property, plant and equipment, net of accumulated depreciation (March 31, 2021: $823.5; December 31, 2020: $831.5) 570.2 601.4
Other assets    
Goodwill 70.9 74.2
Other intangible assets, net 171.5 182.8
Right of use assets - operating, net 76.6 78.3
Deferred income tax assets 81.2 90.2
Deferred charges and other assets 56.6 61.1
Total other assets 456.8 486.6
Total assets 3,480.1 2,845.2
Current liabilities    
Short-term borrowings and current portion of long-term debt 13.7 12.3
Accounts payable 482.5 355.4
Current lease liabilities - operating 16.3 15.8
Income taxes payable 15.4 10.0
Accrued expenses and other current liabilities 149.7 139.8
Total current liabilities 677.6 533.3
Noncurrent liabilities    
Long-term debt, net of unamortized deferred financing fees 1,605.1 1,158.7
Noncurrent lease liabilities - operating 62.8 65.7
Deferred income tax liabilities 62.8 60.7
Other noncurrent obligations 395.5 436.5
Total noncurrent liabilities 2,126.2 1,721.6
Shareholders' equity    
Ordinary shares, $0.01 nominal value, 50,000.0 shares authorized (March 31, 2021: 48.8 shares issued and 38.7 shares outstanding; December 31, 2020: 48.8 shares issued and 38.4 shares outstanding) 0.5 0.5
Additional paid-in-capital 578.5 579.6
Treasury shares, at cost (March 31, 2021: 10.1 shares; December 31, 2020: 10.4 shares) (530.0) (542.9)
Retained earnings 807.3 739.2
Accumulated other comprehensive loss (180.0) (186.1)
Total shareholders' equity 676.3 590.3
Total liabilities and shareholders' equity $ 3,480.1 $ 2,845.2
v3.21.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2021
Dec. 31, 2020
Condensed Consolidated Balance Sheets    
Allowance for doubtful accounts $ 4.9 $ 5.8
Accumulated depreciation $ 823.5 $ 831.5
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 38,700,000 38,400,000
Treasury stock, shares 10,100,000 10,400,000
v3.21.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Condensed Consolidated Statements of Operations    
Net sales $ 1,092.6 $ 853.5
Cost of sales 890.6 783.8
Gross profit (loss) 202.0 69.7
Selling, general and administrative expenses 62.6 77.5
Equity in earnings of unconsolidated affiliates 22.9 9.8
Impairment charges   38.3
Operating income (loss) 162.3 (36.3)
Interest expense, net 12.0 10.3
Acquisition purchase price hedge loss 55.0  
Other expense, net 2.7 1.6
Income (loss) before income taxes 92.6 (48.2)
Provision for (benefit from) income taxes 21.1 (11.9)
Net income (loss) $ 71.5 $ (36.3)
Weighted average shares- basic 38.5 38.5
Net income (loss) per share- basic $ 1.86 $ (0.94)
Weighted average shares- diluted 39.5 38.5
Net income (loss) per share- diluted $ 1.81 $ (0.94)
v3.21.1
Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Condensed Consolidated Statements of Comprehensive Income (Loss)    
Net income (loss) $ 71.5 $ (36.3)
Other comprehensive income (loss), net of tax    
Cumulative translation adjustments 0.4 10.7
Net gain (loss) on cash flow hedges 4.6 (3.7)
Pension and other postretirement benefit plans:    
Net gain arising during period (net of tax of $0.0 and $0.1)   0.6
Amounts reclassified from accumulated other comprehensive income 1.1 0.6
Total other comprehensive income (loss), net of tax 6.1 8.2
Comprehensive income (loss) $ 77.6 $ (28.1)
v3.21.1
Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Condensed Consolidated Statements of Comprehensive Income (Loss)    
Net gain (loss) during period, tax (benefit) expense $ 0.0 $ 0.1
v3.21.1
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, 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      
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss)         (36.3) (36.3)
Other comprehensive income (loss)       8.2   8.2
Share-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      
Balance at beginning of period at Dec. 31, 2020 $ 0.5 579.6 $ (542.9) (186.1) 739.2 $ 590.3
Balance at beginning of period, shares at Dec. 31, 2020 38.4   10.4     38.4
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss)         71.5 $ 71.5
Other comprehensive income (loss)       6.1   6.1
Share-based compensation   (1.1) $ 12.9     11.8
Share-based compensation, shares 0.3   (0.3)      
Dividends on ordinary shares         (3.4) (3.4)
Balance at end of period at Mar. 31, 2021 $ 0.5 $ 578.5 $ (530.0) $ (180.0) $ 807.3 $ 676.3
Balance at end of period, shares at Mar. 31, 2021 38.7   10.1     38.7
v3.21.1
Condensed Consolidated Statements of Shareholders' Equity (Parenthetical)) - $ / shares
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Condensed Consolidated Statement of Stockholders' Equity    
Dividends on ordinary shares $ 0.08 $ 0.40
v3.21.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Cash flows from operating activities    
Net income (loss) $ 71.5 $ (36.3)
Adjustments to reconcile net income (loss) to net cash provided by operating activities    
Depreciation and amortization 32.9 36.4
Amortization of deferred financing fees, issuance discount, and excluded component of hedging instruments 1.2 0.4
Deferred income tax 6.6 (11.5)
Share-based compensation expense 3.5 3.2
Earnings of unconsolidated affiliates, net of dividends (7.9) (9.8)
Unrealized net (gain) loss on foreign exchange forward contracts (21.8) (11.5)
Acquisition purchase price hedge loss 55.0  
Gain on sale of businesses and other assets (0.2) (0.4)
Asset impairment charges or write-offs   38.3
Changes in assets and liabilities    
Accounts receivable (138.8) (12.7)
Inventories (89.5) 26.8
Accounts payable and other current liabilities 114.9 (28.9)
Income taxes payable 4.9 (3.3)
Other assets, net 4.1 (6.9)
Other liabilities, net 14.6 10.4
Cash provided by (used in) operating activities 51.0 (5.8)
Cash flows from investing activities    
Capital expenditures (12.6) (24.3)
Net cash received for asset and business acquisitions   0.2
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 (12.6) 39.1
Cash flows from financing activities    
Deferred financing fees (1.3)  
Short-term borrowings, net (2.8) (3.5)
Purchase of treasury shares   (25.0)
Dividends paid (3.3) (15.9)
Proceeds from exercise of option awards 9.0  
Withholding taxes paid on restricted share units (0.8) (0.6)
Repayments of 2024 Term Loan B   (1.7)
Net proceeds from issuance of Senior Notes 450.0  
Cash provided by (used in) financing activities 450.8 (46.7)
Effect of exchange rates on cash (9.5) (2.7)
Net change in cash, cash equivalents and restricted cash 479.7 (16.1)
Cash, cash equivalents and restricted cash, beginning of period 588.7 457.4
Cash, cash equivalents and restricted cash, end of period 1,068.4 441.3
Restricted cash $ (450.0) $ (1.2)
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 $ 618.4 $ 440.1
v3.21.1
Basis of Presentation
3 Months Ended
Mar. 31, 2021
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, 2021 and 2020 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 2020 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 22, 2021. 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, 2021. However, actual results could differ from these estimates and assumptions.

The December 31, 2020 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 2020 audited consolidated financial statements, but does not include all disclosures required by GAAP for annual periods.

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications pertain primarily to the Company’s resegmentation effective October 1, 2020. Refer to Notes 3 and 15 for further information.

v3.21.1
Recent Accounting Guidance
3 Months Ended
Mar. 31, 2021
Recent Accounting Guidance  
Recent Accounting Guidance

NOTE 2—RECENT ACCOUNTING GUIDANCE

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. The Company adopted the guidance effective January 1, 2021, noting that adoption did not have a material impact on its condensed consolidated financial statements.

v3.21.1
Net Sales
3 Months Ended
Mar. 31, 2021
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, 2021 and 2020. Prior period balances in this table have been recast in conjunction with the resegmentation that occurred during the fourth quarter of 2020. Refer to Note 15 for further information.

Latex

Synthetic

Engineered

Base

 

Three Months Ended

Binders

Rubber

Materials

Plastics

Polystyrene

Feedstocks

Total

 

March 31, 2021

United States

$

67.8

$

$

10.3

$

62.5

$

$

3.4

$

144.0

Europe

 

117.5

 

111.5

 

21.0

 

197.9

 

149.3

 

52.5

 

649.7

Asia-Pacific

 

63.8

 

12.7

 

34.2

 

48.8

 

117.6

 

 

277.1

Rest of World

 

1.8

 

0.3

 

19.7

 

 

 

21.8

Total

$

250.9

$

124.2

$

65.8

$

328.9

$

266.9

$

55.9

$

1,092.6

March 31, 2020

United States

$

62.2

$

$

9.9

$

60.7

$

$

2.6

$

135.4

Europe

 

101.9

 

99.8

 

14.9

150.1

 

109.8

 

29.1

 

505.6

Asia-Pacific

 

52.3

 

1.9

 

22.9

26.8

 

73.0

 

13.1

190.0

Rest of World

 

2.7

 

19.8

 

 

 

22.5

Total

$

219.1

$

101.7

$

47.7

$

257.4

$

182.8

$

44.8

$

853.5

placeholder

v3.21.1
Investments in Unconsolidated Affiliates
3 Months Ended
Mar. 31, 2021
Investments in Unconsolidated Affiliates  
Investments in Unconsolidated Affiliates

NOTE 4—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

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), which is accounted for using the equity method. 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, 

    

2021

    

2020

    

Sales

    

$

423.0

    

$

322.2

Gross profit

$

65.4

$

7.2

Net income (loss)

$

51.1

$

(8.3)

As of March 31, 2021 and December 31, 2020, the Company’s investment in Americas Styrenics was $248.1 million and $240.1 million, respectively, which was $13.7 million and $16.3 million greater 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 3.0 years as of March 31, 2021. The Company received dividends of $15.0 million from Americas Styrenics during the three months ended March 31, 2021, while no dividends were received during the three months ended March 31, 2020.

v3.21.1
Inventories
3 Months Ended
Mar. 31, 2021
Inventories  
Inventories

NOTE 5—INVENTORIES

Inventories consisted of the following:

March 31, 

December 31,

    

2021

2020

Finished goods

    

$

193.5

    

$

174.0

Raw materials and semi-finished goods

 

229.5

 

169.1

Supplies

 

40.0

 

41.0

Total

$

463.0

$

384.1

v3.21.1
Debt
3 Months Ended
Mar. 31, 2021
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, 2021 and December 31, 2020.

As of March 31, 2021 and December 31, 2020, debt consisted of the following:

March 31, 2021

December 31, 2020

   

Interest Rate as of
March 31, 2021

   

Maturity Date

   

Carrying Amount

   

Unamortized Deferred Financing Fees

    

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

2.109%

September 2024

$

677.3

$

(10.2)

$

667.1

$

677.3

$

(10.8)

$

666.5

2022 Revolving Facility(2)

Various

September 2022

2029 Senior Notes

5.125%

April 2029

450.0

(2.2)

447.8

2025 Senior Notes

5.375%

September 2025

500.0

(5.9)

494.1

500.0

(6.2)

493.8

Accounts Receivable Securitization Facility(3)

Various

September 2021

Other indebtedness

Various

Various

9.8

9.8

10.7

10.7

Total debt

$

1,637.1

$

(18.3)

$

1,618.8

$

1,188.0

$

(17.0)

$

1,171.0

Less: current portion(4)

(13.7)

(12.3)

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

$

1,605.1

$

1,158.7

(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)As of March 31, 2021, under the 2022 Revolving Facility, the Company had a capacity of $375.0 million and funds available for borrowing of $360.0 million (net of $15.0 million outstanding letters of credit). 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)As of March 31, 2021, this facility had a borrowing capacity of $150.0 million, and the Company had approximately $150.0 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, 2021 and December 31, 2020, the current portion of long-term debt was primarily related to $8.7 million and $7.0 million, respectively, of the scheduled future principal payments on the 2024 Term Loan B.

2029 Senior Notes

On March 24, 2021, Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (together, the “Issuers”), each an indirect, wholly-owned subsidiary of the Company, executed an indenture pursuant to which they issued $450.0 million aggregate principal amount of 5.125% senior notes due 2029 (the “2029 Senior Notes”) in a 144A private transaction exempt from the registration requirements of the Securities Act of 1933, as amended. Interest on the 2029 Senior Notes is payable semi-annually on February 15 and August 15 of each year, commencing on August 15, 2021. The 2029 Senior Notes mature on April 1, 2029. The net proceeds from the 2029 Senior Notes offering were used as a portion of the funding needed for the Company’s acquisition (the “Acquisition”) of the Arkema S.A. (“Arkema”) polymethyl methacrylates (“PMMA”) and activated methyl methacrylates (“MMA”) businesses (together, referred to herein as the “PMMA business”), in addition to fees and expenses related to the offering and the Acquisition. Pending consummation of the Acquisition, the $450.0 million gross proceeds from the 2029 Senior Notes offering were deposited into a segregated escrow account for the benefit of the holders of the 2029 Senior Notes, which was included within “Restricted cash” on the condensed consolidated balance sheet as of March 31, 2021. The gross proceeds from the 2029

Senior Notes offering were released upon satisfaction of certain escrow release conditions, including closing of the Acquisition, which was completed on May 3, 2021. 

At any time prior to April 1, 2024, the Issuers may redeem the 2029 Senior Notes in whole or in part, at their option, at a redemption price equal to 100% of the principal amount of such notes plus the relevant applicable premium as of, and accrued and unpaid interest to, but not including, the redemption date. At any time and from time to time after April 1, 2024, the Issuers may redeem the 2029 Senior Notes, in whole or in part, at a redemption price equal to the percentage of principal amount set forth below plus accrued and unpaid interest, if any, on the notes redeemed to, but not including, the redemption date:

12-month period commencing April 1 in Year 

Percentage

2024

 

102.563

%  

2025

 

101.281

%  

2026 and thereafter

 

100.000

%  

At any time prior to April 1, 2024, the Issuers may redeem up to 40% of the aggregate principal amount of the 2029 Senior Notes at a redemption price equal to 105.125%, plus accrued and unpaid interest to, but not including, the redemption date, with the aggregate gross proceeds from certain equity offerings. 

The 2029 Senior Notes are the Issuers’ senior unsecured obligations and rank equally in right of payment with all of the Issuers’ existing and future indebtedness that is not expressly subordinated in right of payment thereto. The 2029 Senior Notes will be senior in right of payment to any future indebtedness that is expressly subordinated in right of payment thereto and effectively junior to (a) the Issuers’ existing and future secured indebtedness, including the Company’s accounts receivable facility and the Issuers’ Credit Facility, to the extent of the value of the collateral securing such indebtedness and (b) all existing and future liabilities of the Issuers’ non-guarantor subsidiaries. 

The Indenture contains customary covenants, including restrictions on the Issuers’ and certain of its subsidiaries’ ability to incur additional indebtedness and guarantee indebtedness; pay dividends on, redeem or repurchase capital stock; make investments; prepay certain indebtedness; create liens; enter into transactions with the Issuers’ affiliates; designate the Issuers’ subsidiaries as Unrestricted Subsidiaries (as defined in the Indenture); and consolidate, merge, or transfer all or substantially all of the Issuers’ assets. The covenants are subject to a number of exceptions and qualifications. Certain of these covenants, excluding without limitation those relating to transactions with the Issuers’ affiliates and consolidation, merger, or transfer of all or substantially all of the Issuers’ assets, will be suspended during any period of time that (1) the 2029 Senior Notes have Investment Grade Status (as defined in the Indenture) and (2) no default has occurred and is continuing under the Indenture. In the event that the 2029 Senior Notes are downgraded to below an Investment Grade Status, the Issuers and certain subsidiaries will again be subject to the suspended covenants with respect to future events. As of March 31, 2021, the Company was in compliance with all debt covenant requirements under the Indenture.

As of March 31, 2021, fees and expenses incurred in connection with the issuance of the 2029 Senior Notes were $2.2 million, which were capitalized and recorded within “Long-term debt, net of unamortized deferred financing fees” on the condensed consolidated balance sheet, and are being amortized into “Interest expense, net” in the condensed consolidated statements of operations over their eight year term using the effective interest method.

In addition to proceeds from the 2029 Senior Notes, the remainder of the purchase price of the Acquisition was funded with $750.0 million in incremental term loan borrowings (“2028 Term Loan B”) entered into on May 3, 2021 under the Company’s existing senior secured credit facility, and available cash. The 2028 Term Loan B bears an interest rate of the London Interbank Offered Rate (“LIBOR”) plus 2.50%, subject to a 0.00% LIBOR floor, and matures in May 2028. Concurrent with the closing of the Acquisition on May 3, 2021, the Company also extended the term of its 2022 Revolving Facility through May 2026.

v3.21.1
Goodwill
3 Months Ended
Mar. 31, 2021
Goodwill.  
Goodwill

NOTE 7—GOODWILL

The following table shows changes in the carrying amount of goodwill, by segment, from December 31, 2020 to March 31, 2021:

Latex

Synthetic

Engineered

Base

Americas

 

    

Binders

    

Rubber

Materials

    

Plastics

    

Polystyrene

    

Feedstocks

    

Styrenics

    

Total

 

Balance at December 31, 2020

$

17.1

$

12.1

$

16.0

$

24.2

$

4.8

$

$

$

74.2

Foreign currency impact

 

(0.8)

(0.5)

(0.7)

(1.1)

(0.2)

 

(3.3)

Balance at March 31, 2021

$

16.3

$

11.6

$

15.3

$

23.1

$

4.6

$

$

$

70.9

v3.21.1
Derivative Instruments
3 Months Ended
Mar. 31, 2021
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. The Company entered into a specific such foreign exchange forward contract in December 2020 in order to economically hedge the euro-denominated purchase price of the Arkema PMMA business, which was acquired on May 3, 2021, as discussed in Note 14. These derivative contracts are not designated for hedge accounting treatment.

As of March 31, 2021, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $819.0 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of March 31, 2021:

March 31, 

Buy / (Sell) 

    

2021

Euro (1)

$

665.2

Chinese Yuan

$

(53.9)

Swiss Franc

$

27.9

New Taiwan Dollar

$

20.4

Indonesian Rupiah

$

(12.6)

(1)Amount includes $1.2 billion of notional for the forward currency hedge arrangement on the euro-denominated purchase price of the Arkema PMMA business, offset by $0.5 billion of notional for foreign currency hedges to sell euros.

Open foreign exchange forward contracts as of March 31, 2021 had maturities occurring over a period of three

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, 2021 had maturities occurring over a period of nine months, and had a net notional U.S. dollar equivalent of $72.0 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, 2021, 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 (0.11% as of March 31, 2021) from the counterparties.

Net Investment Hedge

The Company accounts for its cross currency swaps (“CCS”) under the spot method, meaning that changes in the fair value of the hedge included in the assessment of effectiveness (changes due to spot foreign exchange rates) are recorded within AOCI, where they remain until either the sale or substantially complete liquidation of the subsidiary subject to the hedge. Additionally, 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 and 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. The Company amortizes any initial excluded component value of a CCS 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 related CCS. Additionally, interest receipts and payments are accrued under the terms of the Company’s CCS and are recognized within “Interest expense, net” in the condensed consolidated statements of operations.

The Company entered into a CCS arrangement (the “2017 CCS”) on September 1, 2017, swapping U.S. dollar principal and interest payments of $500.0 million at an interest rate of 5.375% on its 2025 Senior Notes for euro-denominated payments of €420.0 million at a weighted average interest rate of 3.45% for approximately five years. The 2017 CCS was initially designated under the forward method and then redesignated under the spot method effective April 1, 2018. At the time of redesignation, the 2017 CCS had a cumulative foreign currency translation loss in AOCI of $38.0 million. The excluded component value related to the 2017 CCS at April 1, 2018 was $23.6 million, which was being amortized over its remaining term. 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 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, 2021 and 2020:

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

Three Months Ended

Three Months Ended

March 31, 2021

March 31, 2020

  

Cost of
sales

  

Interest expense, net

Acquisition purchase price hedge loss

Other expense, net

  

Cost of
sales

  

Interest expense, net

Acquisition purchase price hedge loss

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

$

(890.6)

$

(12.0)

$

(55.0)

$

(2.7)

$

(783.8)

$

(10.3)

$

$

(1.6)

Effects of cash flow hedge instruments:

Foreign exchange cash flow hedges

Amount of gain (loss) reclassified from AOCI into income

$

(0.3)

$

$

$

$

0.2

$

$

$

Interest rate swaps

Amount of loss reclassified from AOCI into income

$

$

(0.8)

$

$

$

$

(0.1)

$

$

Effects of net investment hedge instruments:

Cross currency swaps

Amount of gain excluded from effectiveness testing (1)

$

$

1.9

$

$

$

$

3.4

$

$

Effects of derivatives not designated as hedge instruments:

Foreign exchange forward contracts

Amount of gain (loss) recognized in income (2)

$

$

$

(55.0)

$

19.7

$

$

$

$

13.8

(1)Amount for the three months ended March 31, 2020 represents both the 2017 CCS through its settlement on February 26, 2020 and the 2020 CCS from when it was entered into on February 26, 2020 through March 31, 2021.
(2)The $55.0 million loss incurred from the change in fair value of the forward currency hedge arrangement on the euro-denominated purchase price of the Arkema PMMA business during the three months ended March 31, 2021 is presented separately in the condensed consolidated statements of operations from the gains recorded on the Company’s other foreign exchange forward contracts.

The following table presents the effect of cash flow and net investment hedge accounting on AOCI for the three months ended March 31, 2021 and 2020:

`

Gain (Loss) Recognized in AOCI on Balance Sheet

Three Months Ended

March 31, 

2021

2020

Designated as Cash Flow Hedges

Foreign exchange cash flow hedges

  

$

3.7

  

$

2.1

Interest rate swaps

0.9

(5.8)

Total

$

4.6

$

(3.7)

Designated as Net Investment Hedges

Cross currency swaps (CCS) (1)

$

26.2

$

22.9

Total

$

26.2

$

22.9

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

The Company recorded gains of $19.7 million and $13.8 million during the three months ended March 31, 2021 and 2020, respectively, from settlements and changes in the fair value of outstanding forward contracts (not designated as hedges), not including the loss of $55.0 million recorded from the change in fair value of the forward currency hedge arrangement on the euro-denominated purchase price of the Arkema PMMA business during the three months ended March 31, 2021. The gains from the Company’s forward contracts offset net foreign exchange transaction losses of $19.9 million and $14.0 million during the three months ended March 31, 2021 and 2020, 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 $1.7 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, 2021 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, 2021

   

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

$

16.1

$

1.6

$

$

4.1

$

21.8

Deferred charges and other assets

Gross derivative asset position

16.1

1.6

4.1

21.8

Less: Counterparty netting

(7.3)

(7.3)

Net derivative asset position

$

8.8

$

1.6

$

$

4.1

$

14.5

Liability Derivatives:

Accounts payable (1)

$

(49.5)

$

$

(3.3)

$

$

(52.8)

Other noncurrent obligations

(1.6)

(39.4)

(41.0)

Gross derivative liability position

(49.5)

(4.9)

(39.4)

(93.8)

Less: Counterparty netting

7.3

7.3

Net derivative liability position

$

(42.2)

$

$

(4.9)

$

(39.4)

$

(86.5)

Total net derivative position

$

(33.4)

$

1.6

$

(4.9)

$

(35.3)

$

(72.0)

December 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 (1)

$

8.2

$

$

$

5.0

$

13.2

Deferred charges and other assets

Gross derivative asset position

8.2

5.0

13.2

Less: Counterparty netting

(6.5)

(6.5)

Net derivative asset position

$

1.7

$

$

$

5.0

$

6.7

Liability Derivatives:

Accounts payable

$

(8.3)

$

(2.1)

$

(3.4)

$

$

(13.8)

Other noncurrent obligations

(2.5)

(66.5)

(69.0)

Gross derivative liability position

(8.3)

(2.1)

(5.9)

(66.5)

(82.8)

Less: Counterparty netting

6.5

6.5

Net derivative liability position

$

(1.8)

$

(2.1)

$

(5.9)

$

(66.5)

$

(76.3)

Total net derivative position

$

(0.1)

$

(2.1)

$

(5.9)

$

(61.5)

$

(69.6)

(1)Balances as of March 31, 2021 and December 31, 2020 include a $47.7 million payable and a $7.3 million receivable, respectively, representing the fair value of the forward currency hedge arrangement on the euro-denominated purchase price of the Arkema PMMA business.

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.

v3.21.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2021
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, 2021 and December 31, 2020: