TRINSEO S.A., 10-Q filed on 5/5/2016
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2016
May 2, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Mar. 31, 2016 
 
Document Fiscal Year Focus
2016 
 
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
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
47,140,870 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Current assets
 
 
Cash and cash equivalents
$ 438,389 
$ 431,261 
Accounts receivable, net of allowance for doubtful accounts (March 31, 2016 -- $2,259; December 31, 2015 -- $2,417)
535,095 
494,556 
Inventories
367,159 
353,097 
Other current assets
13,300 
10,120 
Total current assets
1,353,943 
1,289,034 
Investments in unconsolidated affiliates
181,711 
182,836 
Property, plant and equipment, net of accumulated depreciation (March 31, 2016 -- $402,712; December 31, 2015 -- $375,315)
522,145 
518,751 
Other assets
 
 
Goodwill
32,255 
31,064 
Other intangible assets, net
168,013 
158,218 
Deferred income tax assets-noncurrent
46,564 
51,395 
Deferred charges and other assets
27,004 
27,596 
Total other assets
273,836 
268,273 
Total assets
2,331,635 
2,258,894 
Current liabilities
 
 
Short-term borrowings and current portion of long-term debt
5,000 
5,000 
Accounts payable
340,803 
324,629 
Income taxes payable
28,223 
20,804 
Accrued expenses and other current liabilities
91,229 
98,836 
Total current liabilities
465,255 
449,269 
Noncurrent liabilities
 
 
Long-term debt
1,192,500 
1,177,120 
Deferred income tax liabilities-noncurrent
27,480 
25,764 
Other noncurrent obligations
226,316 
217,727 
Total noncurrent liabilities
1,446,296 
1,420,611 
Shareholders' equity
 
 
Ordinary shares, $0.01 nominal value, 50,000,000 shares authorized (March 31, 2016: 48,778 shares issued and 47,178 shares outstanding; December 31, 2015, 48,778 shares issued and outstanding)
488 
488 
Additional paid-in-capital
562,125 
556,532 
Treasury shares, at cost (March 31, 2016: 1,600 shares; December 31, 2015: zero shares)
(57,008)
 
Accumulated deficit
58,458 
(18,289)
Accumulated other comprehensive loss
(143,979)
(149,717)
Total shareholders' equity
420,084 
389,014 
Total liabilities and shareholders' equity
$ 2,331,635 
$ 2,258,894 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Condensed Consolidated Balance Sheets
 
 
Allowance for doubtful accounts
$ 2,259 
$ 2,417 
Accumulated depreciation
$ 402,712 
$ 375,315 
Ordinary shares, nominal value
$ 0.01 
$ 0.01 
Ordinary shares, shares authorized
50,000,000,000 
50,000,000,000 
Ordinary shares, shares issued
48,778,000 
48,778,000 
Ordinary shares, shares outstanding
47,178,000 
48,778,000 
Treasury stock, shares
1,600,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Condensed Consolidated Statements of Operations
 
 
Net sales
$ 894,084 
$ 1,018,265 
Cost of sales
754,412 
915,186 
Gross profit
139,672 
103,079 
Selling, general and administrative expenses
54,486 
51,775 
Equity in earnings of unconsolidated affiliates
35,026 
36,707 
Operating income
120,212 
88,011 
Interest expense, net
18,896 
28,856 
Other expense, net
2,669 
3,551 
Income (loss) before income taxes
98,647 
55,604 
Provision for income taxes
21,900 
17,900 
Net income (loss)
$ 76,747 
$ 37,704 
Weighted average shares- basic
48,655 
48,770 
Net income (loss) per share- basic
$ 1.58 
$ 0.77 
Weighted average shares- diluted
49,086 
48,851 
Net income (loss) per share- diluted
$ 1.56 
$ 0.77 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
Net income
$ 76,747 
$ 37,704 
Other comprehensive income (loss), net of tax (tax amounts shown in millions below for the three months ended March 31, 2016 and 2015, respectively):
 
 
Cumulative translation adjustments
13,423 
(114,155)
Net gain (loss) on foreign exchange cash flow hedges
(7,425)
1,035 
Pension and other postretirement benefit plans:
 
 
Net gain (loss) arising during period (net of tax of ($0.5) and $0)
(800)
 
Amounts reclassified from accumulated other comprehensive income (loss)
540 
837 
Total other comprehensive income (loss), net of tax
5,738 
(112,283)
Comprehensive income (loss)
$ 82,485 
$ (74,579)
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
Net gain (loss) arising during period, tax (benefit) expense
$ (0.5)
$ 0 
Condensed Consolidated Statements of Shareholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Ordinary Shares
Additional Paid-In Capital [Member]
Treasury Stock [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Accumulated Deficit [Member]
Total
Balance at Dec. 31, 2014
$ 488 
$ 547,530 
 
$ (75,217)
$ (151,936)
$ 320,865 
Balance, Shares at Dec. 31, 2014
48,770,000 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Net income
 
 
 
 
37,704 
37,704 
Other comprehensive income (loss)
 
 
 
(112,283)
 
(112,283)
Stock-based compensation
 
2,622 
 
 
 
2,622 
Balance at Mar. 31, 2015
488 
550,152 
 
(187,500)
(114,232)
248,908 
Balance, Shares at Mar. 31, 2015
48,770,000 
 
 
 
 
 
Balance at Dec. 31, 2015
488 
556,532 
 
(149,717)
(18,289)
389,014 
Balance, Shares at Dec. 31, 2015
48,778,000 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
Net income
 
 
 
 
76,747 
76,747 
Other comprehensive income (loss)
 
 
 
5,738 
 
5,738 
Stock-based compensation
 
5,593 
 
 
 
5,593 
Purchase of treasury shares
 
 
(57,008)
 
 
(57,008)
Purchase of treasury shares, shares
(1,600,000)
 
 
 
 
(1,600,000)
Balance at Mar. 31, 2016
$ 488 
$ 562,125 
$ (57,008)
$ (143,979)
$ 58,458 
$ 420,084 
Balance, Shares at Mar. 31, 2016
47,178,000 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Cash flows from operating activities
 
 
Net income
$ 76,747 
$ 37,704 
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
Depreciation and amortization
23,120 
22,554 
Amortization of deferred financing costs and issuance discount
1,608 
2,446 
Deferred income tax
6,418 
3,775 
Stock-based compensation
5,593 
2,622 
Earnings of unconsolidated affiliates, net of dividends
(3,684)
(21,707)
Unrealized net losses (gains) on foreign exchange forward contracts
(447)
2,815 
Changes in assets and liabilities
 
 
Accounts receivable
(33,732)
(42,091)
Inventories
(7,162)
53,722 
Accounts payable and other current liabilities
4,344 
(11,944)
Income taxes payable
6,486 
7,074 
Other assets, net
(3,452)
3,892 
Other liabilities, net
9,046 
(17,948)
Cash provided by operating activities
84,885 
42,914 
Cash flows from investing activities
 
 
Capital expenditures
(26,437)
(27,670)
Proceeds from the sale of businesses and other assets
 
560 
Distributions from unconsolidated affiliates
4,809 
 
Cash used in investing activities
(21,628)
(27,110)
Cash flows from financing activities
 
 
Short term borrowings, net
(63)
(9,487)
Repayments of term loans
(1,250)
 
Purchase of treasury shares
(57,008)
 
Cash provided by (used in) financing activities
(58,321)
(9,487)
Effect of exchange rates on cash
2,192 
(8,406)
Net change in cash and cash equivalents
7,128 
(2,089)
Cash and cash equivalents-beginning of period
431,261 
220,786 
Cash and cash equivalents-end of period
$ 438,389 
$ 218,697 
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, 2016 and 2015 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 2015 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 March 11, 2016.

The December 31, 2015 condensed consolidated balance sheet data presented herein was derived from the Company’s December 31, 2015 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 period presentation. These reclassifications did not have a material impact on the Company’s financial position.  Refer to Note 2 for further discussion.

 

Recent Accounting Guidance
Recent Accounting Guidance

NOTE 2—RECENT ACCOUNTING GUIDANCE

In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued new guidance which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the FASB has issued certain clarifying updates to this guidance, which the Company will consider as part of our adoption. This guidance is effective for public entities for annual and interim periods beginning after December 15, 2017.  The Company is currently assessing the impact of adopting this guidance on its financial position and results of operations.

In April 2015, the FASB issued guidance that requires deferred financing fees related to a recognized debt liability be presented in the balance sheet as a direct reduction of the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for deferred financing fees are not affected. The Company adopted this guidance effective January 1, 2016. Balances as of December 31, 2015 presented herein have been retrospectively adjusted, with $25.7 million of unamortized deferred financing fees being reclassified from “Deferred charges and other assets” and netted against “Long-term debt, net of unamortized deferred financing fees” on the condensed consolidated balance sheet. In accordance with this guidance, unamortized deferred financing fees related to the Company’s revolving debt facilities were not reclassified as a reduction of long-term debt, and remain included within “Deferred charges and other assets” on the condensed consolidated balance sheets.

In July 2015, the FASB issued guidance which simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value (“NRV”) test. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation.  This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, and prospective adoption is required.  The Company does not expect the impact of adopting this guidance to be material to its financial position and results of operations.

In February 2016, the FASB issued new 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 balance sheet lease liabilities and corresponding right-of-use 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. This new guidance is effective for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The new guidance must be adopted using a modified retrospective transition, and provides for certain practical expedients.  The Company is currently assessing the impact of adopting this guidance on its financial position and results of operations. 

In March 2016, the FASB issued new guidance that simplifies several aspects of accounting for share-based payments. Under the new guidance, excess tax benefits associated with share-based payment awards will be recognized in the statement of operations when the awards vest or settle, rather than in shareholders’ equity. In addition, it will increase the number of shares an employer can withhold to cover income taxes on share-based payment awards and still qualify for the exemption to liability classification.  Also under this guidance, entities are permitted to make an accounting policy election regarding the impact of forfeitures on expense recognition, wherein forfeitures can either be estimated, as required under current GAAP, or recognized as incurred. This new guidance is effective for public companies for annual and interim periods beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the impact of adopting this guidance on its financial position and results of operations as well as the timing of such adoption.

 

Investments in Unconsolidated Affiliates
Investments in Unconsolidated Affiliates

NOTE 3—INVESTMENTS IN UNCONSOLIDATED AFFILIATES

The Company is supplemented by two strategic joint ventures, the results of which are included within the Basic Plastics & Feedstocks reporting segment: Americas Styrenics LLC (“Americas Styrenics”, a polystyrene joint venture with Chevron Phillips Chemical Company LP) and Sumika Styron Polycarbonate Limited (“Sumika Styron Polycarbonate”, a polycarbonate joint venture with Sumitomo Chemical Company, Limited). Investments held in the unconsolidated affiliates are accounted for by the equity method.

As of March 31, 2016 and December 31, 2015, respectively, the Company’s investment in Americas Styrenics was $146.8 million and $143.9 million, which was $83.1 million and $91.9 million less than the Company’s 50% share of the underlying net assets of Americas Styrenics. 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 4.5 years as of March 31, 2016. The Company received dividends from Americas Styrenics of $30.0 million and $15.0 million during the three months ended March 31, 2016 and 2015, respectively. 

As of March 31, 2016 and December 31, 2015, respectively, the Company’s investment in Sumika Styron Polycarbonate was $34.9 million and $39.0 million, which was $18.1 million and $19.8 million greater than the Company’s 50% share of the underlying net assets of Sumika Styron Polycarbonate. This amount represents the fair value of certain identifiable assets which have not been recorded on the historical financial statements of Sumika Styron Polycarbonate. This difference is being amortized over the remaining useful life of the contributed assets of 9.5 years as of March 31, 2016. The Company received dividends from Sumika Styron Polycarbonate of $6.2 million and zero during the three months ended March 31, 2016 and 2015, respectively.

Both of the unconsolidated affiliates are privately held companies; therefore, quoted market prices for their stock are not available. The summarized financial information of the Company’s unconsolidated affiliates is shown below:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Sales

    

$

376,253

    

$

439,570

 

Gross profit

 

$

68,403

 

$

77,670

 

Net income

 

$

52,796

 

$

66,019

 

 

Inventories
Inventories

NOTE 4—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

    

2016

    

2015

 

Finished goods

    

$

176,544

    

$

170,380

 

Raw materials and semi-finished goods

 

 

158,497

 

 

151,444

 

Supplies

 

 

32,118

 

 

31,273

 

Total

 

$

367,159

 

$

353,097

 

 

Goodwill and Intangible Assets
Goodwill and Intangible Assets

NOTE 5—GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table shows changes in the carrying amount of goodwill by segment from December 31, 2015 to March 31, 2016:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Materials

 

 

 

 

 

 

 

 

 

 

 

 

Synthetic

 

Performance

 

Basic Plastics

 

 

 

 

 

    

Latex

    

Rubber

    

Plastics

    

& Feedstocks

    

Total

 

Balance at December 31, 2015

 

$

12,412

 

$

8,501

 

$

2,914

 

$

7,237

 

$

31,064

 

Foreign currency impact

 

 

476

 

 

326

 

 

112

 

 

277

 

 

1,191

 

Balance at March 31, 2016

 

$

12,888

 

$

8,827

 

$

3,026

 

$

7,514

 

$

32,255

 

Other Intangible Assets

The following table provides information regarding the Company’s other intangible assets as of March 31, 2016 and December 31, 2015, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

Estimated

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Useful Life

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

   

(Years)

   

Amount

   

Amortization

   

Net

   

Amount

   

Amortization

   

Net

 

Developed technology

 

15

 

$

179,300

 

$

(68,416)

 

$

110,884

 

$

172,675

 

$

(62,870)

 

$

109,805

 

Manufacturing Capacity Rights

 

6

 

 

21,546

 

 

(6,988)

 

 

14,558

 

 

20,750

 

 

(5,888)

 

 

14,862

 

Software

 

5 - 10

 

 

18,392

 

 

(10,048)

 

 

8,344

 

 

18,006

 

 

(9,494)

 

 

8,512

 

Software in development

 

N/A

 

 

33,760

 

 

 —

 

 

33,760

 

 

24,516

 

 

 —

 

 

24,516

 

Other

 

N/A

 

 

467

 

 

 —

 

 

467

 

 

523

 

 

 —

 

 

523

 

Total

 

 

 

$

253,465

 

$

(85,452)

 

$

168,013

 

$

236,470

 

$

(78,252)

 

$

158,218

 

As of March 31, 2016, the Company had $33.8 million capitalized as software in development, primarily related to our project to upgrade our legacy enterprise resource planning environment to the latest version of SAP. This project is expected to be completed and placed into service in 2016.

Amortization expense on other intangible assets totaled $4.4 million and $4.5 million for the three months ended March 31, 2016 and 2015, respectively.

The following table details the Company’s estimated amortization expense for the next five years, excluding any amortization expense related to software currently in development:

 

 

 

 

 

 

Estimated Amortization Expense for the Next Five Years

 

Remainder of 2016

   

$

13,842

 

2017

 

 

17,800

 

2018

 

 

17,108

 

2019

 

 

16,927

 

2020

 

 

13,894

 

2021

 

 

12,403

 

 

 

 

Debt
Debt

NOTE 6—DEBT

Debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

    

2016

    

2015

 

Senior Credit Facility

    

 

 

    

 

 

 

2020 Revolving Facility

 

$

 —

 

$

 —

 

2021 Term Loan B

 

 

495,160

 

 

496,365

 

2022 Senior Notes

 

 

 

 

 

 

 

USD Notes

 

 

300,000

 

 

300,000

 

Euro Notes

 

 

425,250

 

 

409,538

 

Accounts Receivable Securitization Facility

 

 

 —

 

 

 —

 

Other indebtedness

 

 

1,879

 

 

1,895

 

Total debt

 

 

1,222,289

 

 

1,207,798

 

Less: current portion

 

 

(5,000)

 

 

(5,000)

 

Less: unamortized deferred financing fees(1)

 

 

(24,789)

 

 

(25,678)

 

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

 

$

1,192,500

 

$

1,177,120

 

(1)

As discussed in Note 2, effective January 1, 2016, the Company retroactively adopted new accounting guidance that requires deferred financing fees related to a debt liability be presented in the balance sheet as a direct reduction of the carrying value of that debt liability rather than as deferred assets. This caption reflects this reclassification for both the current and prior periods.  Note that this caption does not include deferred financing fees related to the 2020 Revolving Facility and the Accounts Receivable Securitization Facility, which are included within “Deferred charges and other assets” on the condensed consolidated balance sheets.

2018 Senior Secured Credit Facility

On June 17, 2010, the Company entered into a credit agreement, which was subsequently amended from time to time, and was to mature in January 2018 (“2018 Senior Secured Credit Facility”).  The 2018 Senior Secured Credit Facility included a revolving credit facility (“2018 Revolving Facility”), which, as a result of an amendment in January 2013, included a borrowing capacity of $300.0 million. In May 2015, upon completion of the refinancing transactions discussed below, the Company terminated the 2018 Senior Secured Credit Facility.  Immediately prior to this termination, the Company had no outstanding borrowings under the 2018 Revolving Facility.

Senior Credit Facility

On May 5, 2015, Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (together, the “Issuers” or the “Borrowers”), both wholly-owned subsidiaries of the Company, entered into a senior secured credit agreement (the “Credit Agreement”), which provides senior secured financing of up to $825.0 million (the “Senior Credit Facility”).  The Senior Credit Facility provides for senior secured financing consisting of a (i) $325.0 revolving credit facility, with a $25.0 million swingline subfacility and a $35.0 million letter of credit subfacility (the “2020 Revolving Facility”) maturing in May 2020 and (ii) $500.0 million senior secured term loan B facility maturing in November 2021 (the “2021 Term Loan B”). Amounts under the 2020 Revolving Facility are available in U.S. dollars and euros.

The 2021 Term Loan B bears an interest rate of LIBOR plus 3.25%, subject to a 1.00% LIBOR floor, and was issued at a 0.25% original issue discount.  Further, the 2021 Term Loan B requires scheduled quarterly payments in amounts equal to 0.25% of the original principal amount of the 2021 Term Loan B, with the balance to be paid at maturity. As of March  31, 2016,  $5.0 million of these scheduled future payments were classified as current debt on the Company’s condensed consolidated balance sheet.

Loans under the 2020 Revolving Facility, at the Borrowers’ option, may be maintained as (a) LIBO rate loans, which bear interest at a rate per annum equal to the LIBO rate plus the applicable margin (as defined in the Credit Agreement), if applicable, or (b) base rate loans which shall bear interest at a rate per annum equal to the base rate plus the applicable margin (as defined in the Credit Agreement).  As of March 31, 2016, the Borrowers will be required to pay a quarterly commitment fee in respect of any unused commitments under the 2020 Revolving Facility equal to 0.375% per annum.

As of March  31, 2016, the Company had no outstanding borrowings, and had $311.7 million (net of $13.3 million outstanding letters of credit) of funds available for borrowing under the 2020 Revolving Facility. The Senior Credit Facility contains certain customary affirmative, negative and financial covenants. As of March 31, 2016, the Company was in compliance with all debt covenant requirements under the Senior Credit Facility. Refer to the Annual Report for further information.

2019 Senior Notes

In January 2013, the Company issued $1,325.0 million 8.750% senior notes due to mature on February 1, 2019 (the “2019 Senior Notes”). In July 2014, using proceeds from the Company’s initial public offering in June 2014 (the “IPO”), the Company redeemed $132.5 million in aggregate principal amount of the 2019 Senior Notes.

On May 13, 2015, using the net proceeds from the issuance of the 2021 Term Loan B, together with the net proceeds from the issuance of the 2022 Senior Notes (defined and discussed below) and available cash, the Company redeemed all outstanding borrowings under the 2019 Senior Notes, totaling $1,192.5 million in principal, together with a call premium of $68.6 million (with a redemption price of 103% on the first $132.5 million and 106.097% on the remaining balance) and accrued and unpaid interest thereon of $29.6 million.

2022 Senior Notes

On May 5, 2015, the Issuers executed an indenture (the “Indenture”) pursuant to which they issued $300.0 million aggregate principal amount of 6.750% senior notes due May 1, 2022 (the “USD Notes”) and €375.0 million aggregate principal amount of 6.375% senior notes due May 1, 2022 (the “Euro Notes”, and together with the USD Notes, the “2022 Senior Notes”).  Interest on the 2022 Senior Notes is payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 2015.  

The Indenture contains certain provisions allowing the Issuers’ to redeem the 2022 Senior Notes prior to their maturity. Additionally, the Indenture contains certain customary covenants, which the Company was in compliance with as of March 31, 2016. Refer to the Annual Report for further information.  

Accounts Receivable Securitization Facility

The Company’s accounts receivable securitization facility (“Accounts Receivable Securitization Facility”) has a borrowing capacity of $200.0 million and was set to mature in May 2016.  In February 2016, the Company amended the facility to extend the maturity date to May 2019.

The Accounts Receivable Securitization Facility is subject to interest charges against the amount of outstanding borrowings as well as the amount of available, but undrawn commitments.  In regards to outstanding borrowings, fixed interest charges are 2.60% plus variable commercial paper rates, while for available, but undrawn commitments, fixed interest charges are 1.40%.  

As of March  31, 2016 and December 31, 2015, there were no amounts outstanding under the Accounts Receivable Securitization Facility, with approximately $133.3 million and $123.4 million, respectively, of accounts receivable available to support this facility, based on the pool of eligible accounts receivable.

Derivative Instruments
Derivative Instruments

NOTE 7—DERIVATIVE INSTRUMENTS

The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates.  To manage these risks, the Company periodically enters into derivative financial instruments such as foreign exchange forward contracts.  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 our 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 its exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on our assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment.

As of March  31, 2016, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $363.2 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of March 31, 2016.  

 

 

 

 

 

 

 

    

March 31, 

 

Buy / (Sell) 

    

2016

 

Euro

 

$

150,398

 

Chinese Yuan

 

$

(89,613)

 

Indonesian Rupiah

 

$

(48,871)

 

Swiss Franc

 

$

37,705

 

Japanese Yen

 

$

(11,083)

 

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, 2016 have maturities occurring over a period of nine months, and have a net notional U.S. dollar equivalent of $171.0 million.

Net Investment Hedge

The Company’s outstanding debt includes €375.0 million of Euro Notes (see Note 6 for details).  As of March  31, 2016, the Company has designated a portion (€150.0 million) of the principal amount of these Euro Notes as a hedge of the foreign currency exposure of the Issuers’ net investment in certain European subsidiaries. As this debt was deemed to be a highly effective hedge, changes in the Euro Notes’ carrying value resulting from fluctuations in the euro exchange rate were recorded as cumulative foreign currency translation loss of $5.9 million within accumulated other comprehensive loss as of March  31, 2016.

Summary of Derivative Instruments

Information regarding changes in the fair value of the Company’s derivative instruments, net of tax, including those not designated for hedge accounting treatment, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

Gain (Loss) Recognized in

 

 

 

 

AOCI on Balance Sheet

 

Statement of Operations

 

 

 

 

Three Months Ended March 31, 

 

Statement of Operations

 

 

2016

 

2015

 

2016

 

2015

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(7,425)

    

$

1,035

    

$

1,106

    

$

 —

    

Cost of sales

Total

 

$

(7,425)

 

$

1,035

 

$

1,106

 

$

 —

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

(6,285)

 

$

 —

 

$

 —

 

$

 —

 

Other expenses, net

Total

 

$

(6,285)

 

$

 —

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

3,133

 

$

(20,962)

 

Other expenses, net

Total

 

$

 —

 

$

 —

 

$

3,133

 

$

(20,962)

 

 

The Company recorded gains of $3.1 million and losses of $21.0 million during the three months ended March 31, 2016 and 2015, respectively, 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 $5.0 million and gains of $18.0 million during the three months ended March  31, 2016 and 2015, respectively, which resulted from the remeasurement 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 statement of cash flows.

As of March  31, 2016, the Company has no ineffectiveness related to its foreign exchange cash flow hedges. Further, the Company expects to reclassify in the next twelve months an approximate $2.6 million net loss from other comprehensive income (loss) into earnings related to the Company’s outstanding cash flow hedges as of March 31, 2016 based on current foreign exchange rates.

The following table summarizes the net unrealized gains and losses and balance sheet classification of outstanding derivatives recorded in the condensed consolidated balance sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

   

December 31, 2015

 

 

 

Foreign
Exchange

 

Foreign
Exchange

 

 

 

Foreign
Exchange

 

Foreign
Exchange

 

 

 

 

 

Forward

 

Cash Flow

 

 

 

Forward

 

Cash Flow

 

 

 

Balance Sheet Classification

    

Contracts

   

Hedges

    

Total

 

Contracts

   

Hedges

    

Total

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net of allowance

 

$

5,866

 

$

173

    

$

6,039

 

$

4,592

    

$

4,958

    

$

9,550

 

Deferred charges and other assets

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total asset derivatives

 

$

5,866

 

$

173

 

$

6,039

 

$

4,592

 

$

4,958

 

$

9,550

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

    

$

1,021

    

$

2,736

    

$

3,757

 

$

194

    

$

 —

    

$

194

 

Other noncurrent obligations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total liability derivatives

 

$

1,021

 

$

2,736

 

$

3,757

 

$

194

 

$

 —

 

$

194

 

Forward contracts 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, we record these foreign exchange forward contracts on a net basis by counterparty within the condensed consolidated balance sheet. Information regarding the gross amounts of the Company’s derivative instruments and the amounts offset in the condensed consolidated balance sheets is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Gross Amounts

 

Net Amounts

 

 

 

Recognized in the

 

Offset in the

 

Presented in the

 

 

    

Balance Sheet

    

Balance Sheet

    

Balance Sheet

 

Balance at March 31, 2016

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

8,118

 

$

(2,079)

 

$

6,039

 

Derivative liabilities

 

 

5,836

 

 

(2,079)

 

 

3,757

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

10,044

 

$

(494)

 

$

9,550

 

Derivative liabilities

 

 

688

 

 

(494)

 

 

194

 

 

Refer to Notes 8 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 accumulated other comprehensive income.

Fair Value Measurements
Fair Value Measurements

NOTE 8—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, 2016 and December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

 

Identical Items

 

Inputs

 

Inputs

 

 

 

 

Assets (Liabilities) at Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Foreign exchange forward contracts—Assets

    

$

 —

    

$

5,866

    

$

 —

    

$

5,866

 

Foreign exchange forward contracts—(Liabilities)

 

 

 —

 

 

(1,021)

 

 

 —

 

 

(1,021)

 

Foreign exchange cash flow hedges—Assets

 

 

 —

 

 

173

 

 

 —

 

 

173

 

Foreign exchange cash flow hedges—(Liabilities)

 

 

 —

 

 

(2,736)

 

 

 —

 

 

(2,736)

 

Total fair value

 

$

 —

 

$

2,282

 

$

 —

 

$

2,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

 

Identical Items

 

Inputs

 

Inputs

 

 

 

 

Assets (Liabilities) at Fair Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Foreign exchange forward contracts—Assets

 

$

 —

    

$

4,592

    

$

 —

    

$

4,592

 

Foreign exchange forward contracts—(Liabilities)

 

 

 —

 

 

(194)

 

 

 —

 

 

(194)

 

Foreign exchange cash flow hedges—Assets

    

 

 —

    

 

4,958

 

 

 —

 

 

4,958

 

Total fair value

 

$

 —

 

$

9,356

 

$

 —

 

$

9,356

 

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. Significant inputs to the valuation for foreign exchange forward contracts and foreign exchange cash flow hedges 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.

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, 2016 and December 31, 2015, respectively:

 

 

 

 

 

 

 

 

 

 

 

    

As of

    

As of

 

 

    

March 31, 2016

    

December 31, 2015

 

2022 Senior Notes

 

 

 

 

 

 

 

USD Notes

 

 

307,500

 

 

296,250

 

Euro Notes

 

 

431,973

 

 

410,054

 

2021 Term Loan B

 

 

494,081

 

 

491,401

 

Total fair value

 

$

1,233,554

 

$

1,197,705

 

The fair value of the Company’s Term Loan B, USD Notes, and Euro Notes (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, 2016 and December 31, 2015.

Provision for Income Taxes
Income Taxes

NOTE 9—PROVISION FOR INCOME TAXES

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

    

2016

    

2015

 

 

Effective income tax rate

 

 

22.2

%  

 

32.2

%

 

Provision for income taxes for the three months ended March 31, 2016 was $21.9 million, resulting in an effective tax rate of 22.2%.  Provision for income taxes for the three months ended March 31, 2015 was $17.9 million, resulting in an effective tax rate of 32.2%.  

The effective income tax rate is impacted by losses primarily generated within our holding company subsidiaries incorporated in Luxembourg, which are not anticipated to provide a tax benefit to the Company in the future. For the three months ended March 31, 2016 and 2015, these losses totaled approximately $12.8 million and $18.0 million, respectively.   The decrease in these losses was primarily related to the reduction of non-deductible interest expenses resulting from debt refinancing transactions that occurred after the first quarter of 2015.

Commitments and Contingencies
Commitments and Contingencies

NOTE 10—COMMITMENTS AND CONTINGENCIES

Environmental Matters

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law, existing technologies and other information. As of March 31, 2016 and December 31, 2015, the Company had no accrued obligations for environmental remediation and restoration costs. Pursuant to the terms of the sales and purchase agreement for the Styron business, the pre-closing environmental conditions were retained by Dow and the Company has been indemnified by Dow from and against all environmental liabilities incurred or relating to the predecessor periods. There are several properties which the Company now owns on which Dow has been conducting investigation, monitoring or remediation to address historical contamination. Those properties include Allyn’s Point, Connecticut; Dalton, Georgia; and Livorno, Italy. There are other properties with historical contamination that are owned by Dow that the Company leases for its operations, including its facilities in Midland, Michigan; Schkopau, Germany; Terneuzen, The Netherlands; and Guaruja, Brazil. No environmental claims have been asserted or threatened against the Company, and the Company is not a potentially responsible party at any Superfund Sites.

Inherent uncertainties exist in the Company’s potential environmental liabilities primarily due to unknown conditions, whether future claims may fall outside the scope of the indemnity, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. In connection with the Company’s existing indemnification, the possibility is considered remote that environmental remediation costs will have a material adverse impact on the condensed consolidated financial statements.

Purchase Commitments

In the normal course of business, the Company has certain raw material purchase contracts where it is required to purchase certain minimum volumes at current market prices. These commitments range from 1 to 5 years. In certain raw material purchase contracts, the Company has the right to purchase less than the required minimums and pay a liquidated damages fee, or, in case of a permanent plant shutdown, to terminate the contracts. In such cases, these obligations would be less than the annual commitment as disclosed in the consolidated financial statements included in the Annual Report.  

Litigation Matters

From time to time, the Company may be subject to various legal claims and proceedings incidental to the normal conduct of business, relating to such matters as product liability, antitrust/competition, past waste disposal practices and release of chemicals into the environment. While it is impossible at this time to determine with certainty the ultimate outcome of these routine claims, the Company does not believe that the ultimate resolution of these claims will have a material adverse effect on the Company’s results of operations, financial condition or cash flow. Legal costs, including those legal costs expected to be incurred in connection with a loss contingency, are expensed as incurred.

Pension Plans and Other Postretirement Benefits
Pension Plans and Other Postretirement Benefits

NOTE 11—PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

The components of net periodic benefit costs for all significant plans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Defined Benefit Pension Plans

 

 

 

 

 

 

 

Service cost

    

$

4,071

 

$

4,301

 

Interest cost

 

 

1,360

 

 

1,360

 

Expected return on plan assets

 

 

(483)

 

 

(421)

 

Amortization of prior service credit

 

 

(478)

 

 

(423)

 

Amortization of net loss

 

 

1,038

 

 

1,381

 

Net periodic benefit cost

 

$

5,508

 

$

6,198

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Other Postretirement Plans

 

 

 

 

 

 

 

Service cost

    

$

63

 

$

88

 

Interest cost

 

 

121

 

 

140

 

Amortization of prior service cost

 

 

26

 

 

26

 

Amortization of net gain

 

 

(43)

 

 

 —

 

Net periodic benefit cost

 

$

167

 

$

254

 

 

As of March 31, 2016 and December 31, 2015, the Company’s benefit obligations included primarily in “Other noncurrent obligations” in the condensed consolidated balance sheets were $181.0 million and $172.5 million, respectively. The net periodic benefit costs are recognized in the condensed consolidated statement of operations as “Cost of sales” and “Selling, general and administrative expenses.”

The Company made cash contributions of approximately $2.8 million during the three months ended March 31, 2016. The Company expects to make additional cash contributions, including benefit payments to unfunded plans, of approximately $13.6 million to its defined benefit plans for the remainder of 2016.

Supplemental Employee Retirement Plan

The Company established a non-qualified supplemental employee retirement plan in 2010.  As of December 31, 2015, benefit obligations under this plan were $13.7 million, noting $1.6 million of net loss included in accumulated other comprehensive income (AOCI), of which $1.0 million was expected to be amortized from AOCI into net periodic benefit cost in 2016.  Lastly, as of December 31, 2015, the estimated future benefit payments under this plan were $13.9 million, expected to be paid in 2017.

During the three months ended March 31, 2016, this retirement plan was amended to, among other things, extend the employment period covered by the plan, resulting in an increase to the benefit obligation under this plan of $1.3 million and a corresponding actuarial loss recorded to AOCI.  The amounts expected to be amortized from AOCI into net periodic benefit cost for 2016 remains approximately $1.0 million.  As a result of this amendment, the estimated future benefit payments under this plan are now $15.3 million, and are expected to be paid in 2018.

Stock-Based Compensation
Stock-Based Compensation

NOTE 12—STOCK-BASED COMPENSATION

Restricted Stock Awards issued by the Parent

On June 17, 2010, Bain Capital Everest Manager Holding SCA (“the Parent”), an affiliate of Bain Capital, authorized the issuance of up to 750,000 shares in time-based and performance-based restricted stock to certain key members of management. Any related compensation associated with these awards is allocated to the Company from the Parent. With the adoption of the Trinseo S.A. 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) during 2014, discussed further below, restricted stock awards are no longer issued by the Parent on behalf of the Company.

 Time-based Restricted Stock Awards

For the three month period ended March 31, 2016, there were no grants of time-based restricted stock awards. Total compensation expense for time-based restricted stock awards was $0.5 million and $1.1 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, there was $1.3 million of total unrecognized compensation cost related to time-based restricted stock awards, which is expected to be recognized over a weighted-average period of 1.5 years.

Modified Time-based Restricted Stock Awards

For the three month period ended March 31, 2016, there were no grants of modified time-based restricted stock awards. Total compensation expense recognized for modified time-based restricted stock awards was $0.8 million and $0.9 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, there was $3.7 million of total unrecognized compensation cost related to the modified time-based restricted stock awards, which is expected to be recognized over a weighted-average period of 1.3 years.

2014 Omnibus Incentive Plan

In connection with the IPO, the Company’s board of directors approved the 2014 Omnibus Plan, adopted on May 28, 2014, under which the maximum number of ordinary shares that may be delivered upon satisfaction of awards granted under such plan is 4.5 million shares. During the three months ended March 31, 2016, the board of directors of the Company approved equity award grants for certain executives and employees, comprised of restricted share units (or RSUs) and options to purchase shares (“option awards”).  This grant is in addition to grants of RSUs and option awards that occurred in 2014 and 2015.

Restricted Share Units (RSUs)

The RSUs granted to executives and employees vest in full on the third anniversary of the date of grant, generally subject to the employee remaining continuously employed by the Company on the vesting date. Upon a termination of employment due to the employee’s death or retirement or a termination of employment by the Company without cause in connection with a restructuring or redundancy or due to the employee’s disability prior to the vesting date, the RSUs will vest in full or in part, depending on the type of termination. In the event employment is terminated for cause, all unvested RSUs will be forfeited. Dividends and dividend equivalents will not accumulate on unvested RSUs. Compensation costs for the RSUs are measured at the grant date based on the fair value of the award and are recognized ratably as expense over the applicable vesting term.

The fair value of RSUs is equal to the fair market value of the Company’s ordinary shares based on the closing price on the date of grant. During the three months ended March 31, 2016, the Company granted 319,105 RSUs at a weighted-average grant date fair value of $26.97 per unit. Total compensation expense recognized for all outstanding RSUs was $0.9 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, there was $13.3 million of total unrecognized compensation cost related to outstanding RSUs, which is expected to be recognized over a weighted-average period of 2.5 years.

Option Awards

The option awards, which contain an exercise term of nine years from the date of grant, vest in three equal annual installments beginning on the first anniversary of the date of grant, generally subject to the employee remaining continuously employed on the applicable vesting date. Upon a termination of employment due to the employee’s death or retirement or a termination of employment by the Company without cause in connection with a restructuring or redundancy or due to the employee’s disability prior to a vesting date, the options will vest in full or will continue to vest on the original vesting schedule, depending on the type of termination. In the event employment is terminated for cause, all vested and unvested options will be forfeited. Compensation cost for the option awards is measured at the grant date based on the fair value of the award and is recognized as expense over the appropriate service period utilizing graded vesting.

The fair value for option awards is computed using the Black-Scholes pricing model, whose inputs and assumptions are determined as of the date of grant. Determining the fair value of the option awards requires considerable judgment, including estimating the expected term of stock options and the expected volatility of the price of the Company’s ordinary shares. During the three months ended March 31, 2016, the Company granted 541,877 option awards at a weighted-average grant date fair value of $9.90 per option award.

Since the Company’s equity interests were privately held prior to the IPO in June 2014, there is limited publicly traded history of the Company’s ordinary shares. Until such time that the Company has enough publicly traded history of its ordinary shares to determine expected volatility based solely on its ordinary shares, estimated volatility of options granted will be based on a combination of our historical volatility and similar companies’ stock that are publicly traded. The expected term of options represents the period of time that options granted are expected to be outstanding. For the options granted during the three months ended March 31, 2015, the simplified method was used to calculate the expected term of options, given the Company’s limited historical exercise data. The risk-free interest rate for the periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield is estimated based on historical and expected dividend activity.

The following are the weighted-average assumptions used within the Black-Scholes pricing model for options granted during the three months ended March 31, 2016:

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

Expected term (in years)

 

5.50

 

Expected volatility

 

40.00

%  

Risk-free interest rate

 

1.42

%  

Dividend yield

 

0.50

%  

Total compensation expense for the option awards was $3.4 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, there was $3.3 million of total unrecognized compensation cost related to the option awards, which is expected to be recognized over a weighted-average period of 1.8 years.

Related Party Transactions
Related Party Transactions

NOTE 13—RELATED PARTY TRANSACTIONS

In connection with the Acquisition, the Company entered into a ten year initial term advisory agreement with Bain Capital Partners, LLC and Portfolio Company Advisors Limited (the “Advisory Agreement”) wherein Bain Capital Partners, LLC and Portfolio Company Advisors Limited provides management and consulting services and financial and other advisory services to the Company. The Advisory Agreement terminated upon consummation of the Company’s IPO in June 2014.  Bain Capital will continue to provide an immaterial level of ad hoc advisory services for the Company going forward. In conjunction with the foregoing, we incurred Bain Capital Partners, LLC and Portfolio Company Advisors Limited fees (including out-of-pocket expenses) of zero and $0.1 million for the three months ended March 31, 2016 and 2015, respectively.

 In March 2016, the Company announced that the Parent agreed to sell 10,600,000 ordinary shares pursuant to the Company’s shelf registration statement filed with the SEC (see Note 18 for further details). In connection with this offering, and under the terms of the Acquisition, the Company incurred $1.9 million of advisory, accounting, legal and printing expenses on behalf of the Parent which were expensed within “Selling, general and administrative expenses” on the condensed consolidated statement of operations for the three months ended March 31, 2016.

 

Segments
Segments

NOTE 14—SEGMENTS

The Company operates under two divisions: Performance Materials and Basic Plastics & Feedstocks. The Performance Materials division includes the following reporting segments: Synthetic Rubber, Latex, and Performance Plastics. The Basic Plastics & Feedstocks division represents a separate segment for financial reporting purposes.

The Latex segment produces SB latex primarily for coated paper and packaging board, carpet and artificial turf backings, as well as a number of performance latex applications. The Synthetic Rubber segment produces synthetic rubber products used predominantly in tires, with additional applications in polymer modification and technical rubber goods, including conveyer and fan belts, hoses, seals and gaskets. The Performance Plastics segment produces highly engineered compounds and blends for automotive end markets, as well as consumer electronics, medical, electrical and lighting, collectively consumer essential markets, or CEM. The Basic Plastics & Feedstocks segment includes styrenic polymers, polycarbonate, or PC, and styrene monomer, and also includes the results of the Company’s two 50%-owned joint ventures, Americas Styrenics and Sumika Styron Polycarbonate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Materials

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Synthetic

 

Performance

 

Basic Plastics

 

Corporate

 

 

 

 

Three Months Ended

    

Latex

    

Rubber

    

Plastics

    

& Feedstocks

    

Unallocated

    

Total

 

March 31, 2016

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sales to external customers

 

$

209,481

 

$

102,197

 

$

168,629

 

$

413,777

 

$

 —

 

$

894,084

 

Equity in earnings (losses) of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

35,026

 

 

 —

 

 

35,026

 

EBITDA(1)

 

 

18,104

 

 

23,079

 

 

29,991

 

 

96,605

 

 

 

 

 

 

 

Investment in unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

181,711

 

 

 —

 

 

181,711

 

Depreciation and amortization

 

 

6,280

 

 

8,043

 

 

1,544

 

 

6,449

 

 

804

 

 

23,120

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

238,256

 

$

129,404

 

$

196,944

 

$

453,661

 

$

 —

 

$

1,018,265

 

Equity in earnings (losses) of unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

36,707

 

 

 —

 

 

36,707

 

EBITDA(1)

 

 

21,459

 

 

26,177

 

 

25,097

 

 

59,012

 

 

 

 

 

 

 

Investment in unconsolidated affiliates

 

 

 —

 

 

 —

 

 

 —

 

 

189,364

 

 

 —

 

 

189,364

 

Depreciation and amortization

 

 

6,370

 

 

7,790

 

 

1,413

 

 

6,230

 

 

751

 

 

22,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Reconciliation of EBITDA to net income (loss) is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Total segment EBITDA

 

$

167,779

 

$

131,745

 

Corporate unallocated

 

 

(27,116)

 

 

(24,731)

 

Less: Interest expense, net

 

 

18,896

 

 

28,856

 

Less: Provision for income taxes

 

 

21,900

 

 

17,900

 

Less: Depreciation and amortization

 

 

23,120

 

 

22,554

 

Net income

 

$

76,747

 

$

37,704

 

Corporate unallocated includes corporate overhead costs and certain other income and expenses, as well as loss on extinguishment of long-term debt.  

The primary measure of segment operating performance is EBITDA, which is defined as net income (loss) before interest, income taxes, depreciation and amortization. EBITDA is a key metric that is used by management to evaluate business performance in comparison to budgets, forecasts, and prior year financial results, providing a measure that management believes reflects the Company’s core operating performance. EBITDA is useful for analytical purposes; however, it should not be considered an alternative to the Company’s reported GAAP results, as there are limitations in using such financial measures. Other companies in the industry may define EBITDA differently than the Company, and as a result, it may be difficult to use EBITDA, or similarly-named financial measures, that other companies may use to compare the performance of those companies to the Company’s performance.

 

Asset and capital expenditure information is not accounted for at the segment level and consequently is not reviewed or included with the Company’s internal management reporting.  Therefore, the Company has not disclosed asset and capital expenditure information for each reportable segment.

 

Divestitures
Divestitures

NOTE 15—DIVESTITURES

EPS Divestiture

In June 2013, the Company’s board of directors approved the sale of its expandable polystyrene (“EPS”) business within the Company’s Basic Plastics & Feedstocks segment, under a sale and purchase agreement which was signed in July 2013 and closed on September 30, 2013.

Under the terms of the sale and purchase agreement, should the divested EPS business record EBITDA (as defined therein) greater than zero for fiscal year 2014, the Company would receive an incremental payment of €0.5 million. The EBITDA threshold was met for fiscal year 2014 and the Company received the €0.5 million payment (approximately $0.6 million based upon the applicable foreign exchange rate in the period the payment was received) during the first quarter of 2015, which is reflected within cash flows used in investing activities in the condensed consolidated statement of cash flows for the three months ended March 31, 2015.

 

Restructuring
Restructuring

NOTE 16—RESTRUCTURING

Allyn’s Point Plant Shutdown

In September 2015, the Company approved the plan to close its Allyn’s Point latex manufacturing facility in Gales Ferry, Connecticut. This restructuring plan was a strategic business decision to improve the results of the overall Latex segment due to continuing declines in the coated paper industry in North America. Production at the facility ceased at the end of 2015, followed by decommissioning activities which began in 2016.

For the three months ended March 31, 2016, the Company recorded restructuring charges of $0.5 million relating to the accelerated depreciation of the related assets at the Allyn’s Point facility and $0.7 million of employee termination benefit and decommissioning charges, which are included within “Selling, general and administrative expenses” in the condensed consolidated statements of operations and were allocated entirely to the Latex segment.    No charges were incurred during the three months ended March 31, 2015. Employee termination benefit charges are recorded within “Accrued expenses and other current liabilities” in the condensed consolidated balance sheet, the balances for which are displayed in the below table.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance at

    

 

 

    

 

 

    

Balance at

 

 

    

December 31, 2015

    

Expenses