TRINSEO S.A., 10-Q filed on 8/3/2016
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2016
Aug. 1, 2016
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q2 
 
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
 
46,406,333 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2016
Dec. 31, 2015
Current assets
 
 
Cash and cash equivalents
$ 465,213 
$ 431,261 
Accounts receivable, net of allowance for doubtful accounts (June 30, 2016 -- $2,862; December 31, 2015 -- $2,417)
534,860 
494,556 
Inventories
365,139 
353,097 
Other current assets
27,096 
10,120 
Total current assets
1,392,308 
1,289,034 
Investments in unconsolidated affiliates
190,314 
182,836 
Property, plant and equipment, net of accumulated depreciation (June 30, 2016 -- $410,753; December 31, 2015 -- $375,315)
505,319 
518,751 
Other assets
 
 
Goodwill
31,169 
31,064 
Other intangible assets, net
171,644 
158,218 
Deferred income tax assets-noncurrent
42,705 
51,395 
Deferred charges and other assets
29,168 
27,596 
Total other assets
274,686 
268,273 
Total assets
2,362,627 
2,258,894 
Current liabilities
 
 
Short-term borrowings and current portion of long-term debt
5,000 
5,000 
Accounts payable
330,413 
324,629 
Income taxes payable
20,229 
20,804 
Accrued expenses and other current liabilities
107,828 
98,836 
Total current liabilities
463,470 
449,269 
Noncurrent liabilities
 
 
Long-term debt
1,183,287 
1,177,120 
Deferred income tax liabilities - noncurrent
27,979 
25,764 
Other noncurrent obligations
224,478 
217,727 
Total noncurrent liabilities
1,435,744 
1,420,611 
Shareholders' equity
 
 
Ordinary shares, $0.01 nominal value, 50,000,000 shares authorized (June 30, 2016: 48,778 shares issued and 46,403 shares outstanding; December 31, 2015, 48,778 shares issued and outstanding)
488 
488 
Additional paid-in-capital
565,590 
556,532 
Treasury shares, at cost (June 30, 2016: 2,374 shares; December 31, 2015: zero shares)
(93,676)
 
Accumulated deficit
139,427 
(18,289)
Accumulated other comprehensive loss
(148,416)
(149,717)
Total shareholders' equity
463,413 
389,014 
Total liabilities and shareholders' equity
$ 2,362,627 
$ 2,258,894 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jun. 30, 2016
Dec. 31, 2015
Condensed Consolidated Balance Sheets
 
 
Allowance for doubtful accounts
$ 2,862 
$ 2,417 
Accumulated depreciation
$ 410,753 
$ 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
46,403,000 
48,778,000 
Treasury stock, shares
2,374,000 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Condensed Consolidated Statements of Operations
 
 
 
 
Net sales
$ 969,694 
$ 1,028,673 
$ 1,863,778 
$ 2,046,938 
Cost of sales
799,954 
886,536 
1,554,366 
1,801,722 
Gross profit
169,740 
142,137 
309,412 
245,216 
Selling, general and administrative expenses
52,249 
50,739 
106,735 
102,514 
Equity in earnings of unconsolidated affiliates
38,602 
40,841 
73,628 
77,548 
Operating income
156,093 
132,239 
276,305 
220,250 
Interest expense, net
18,814 
25,600 
37,710 
54,456 
Loss on extinguishment of long-term debt
 
95,150 
 
95,150 
Other expense, net
12,875 
3,233 
15,544 
6,784 
Income (loss) before income taxes
124,404 
8,256 
223,051 
63,860 
Provision for income taxes
28,600 
7,500 
50,500 
25,400 
Net income (loss)
$ 95,804 
$ 756 
$ 172,551 
$ 38,460 
Weighted average shares- basic
46,952 
48,771 
47,803 
48,770 
Net income (loss) per share- basic
$ 2.04 
$ 0.02 
$ 3.61 
$ 0.79 
Weighted average shares- diluted
47,857 
48,907 
48,554 
48,896 
Net income (loss) per share- diluted
$ 2.00 
$ 0.02 
$ 3.55 
$ 0.79 
Repayment of equity per share
$ 0.30 
 
$ 0.30 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
 
 
Net income
$ 95,804 
$ 756 
$ 172,551 
$ 38,460 
Other comprehensive income (loss), net of tax (tax amounts shown in millions below for the three and six months ended June 30, 2016 and 2015, respectively):
 
 
 
 
Cumulative translation adjustments
(11,005)
35,241 
2,418 
(78,914)
Net gain (loss) on foreign exchange cash flow hedges
6,029 
(1,440)
(1,396)
(405)
Pension and other postretirement benefit plans:
 
 
 
 
Net gain (loss) arising during period (net of tax of: 2016 - $0 and ($0.5); 2015 - $0 and $0)
 
 
(800)
 
Amounts reclassified from accumulated other comprehensive income (loss)
539 
791 
1,079 
1,628 
Total other comprehensive income (loss), net of tax
(4,437)
34,592 
1,301 
(77,691)
Comprehensive income (loss)
$ 91,367 
$ 35,348 
$ 173,852 
$ (39,231)
Condensed Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Jun. 30, 2016
Jun. 30, 2015
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
 
 
 
Net gain (loss) arising during period, tax (benefit) expense
$ 0 
$ 0 
$ (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]
Adjustments for New Accounting Principle, Early Adoption
Additional Paid-In Capital [Member]
Treasury Shares
Accumulated Other Comprehensive Income (Loss) [Member]
Retained Earnings (Accumulated Deficit).
Adjustments for New Accounting Principle, Early Adoption
Retained Earnings (Accumulated Deficit).
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
 
 
 
 
 
 
38,460 
38,460 
Other comprehensive income (loss)
 
 
 
 
(77,691)
 
 
(77,691)
Stock-based compensation
 
 
6,219 
 
 
 
 
6,219 
Stock-based compensation, shares
8,000 
 
 
 
 
 
 
 
Balance at Jun. 30, 2015
488 
 
553,749 
 
(152,908)
 
(113,476)
287,853 
Balance, Shares at Jun. 30, 2015
48,778,000 
 
 
 
 
 
 
 
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]
 
 
 
 
 
 
 
 
Adoption of new accounting standard
 
915 
 
 
 
(915)
 
 
Net income
 
 
 
 
 
 
172,551 
172,551 
Other comprehensive income (loss)
 
 
 
 
1,301 
 
 
1,301 
Stock-based compensation
 
 
8,143 
686 
 
 
 
8,829 
Stock-based compensation, shares
16,000 
 
 
 
 
 
 
 
Purchase of treasury shares
 
 
 
(94,362)
 
 
 
(94,362)
Purchase of treasury shares, shares
(2,391,000)
 
 
 
 
 
 
 
Repayment of equity on ordinary shares
 
 
 
 
 
 
(13,920)
(13,920)
Balance at Jun. 30, 2016
$ 488 
 
$ 565,590 
$ (93,676)
$ (148,416)
 
$ 139,427 
$ 463,413 
Balance, Shares at Jun. 30, 2016
46,403,000 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2016
Jun. 30, 2015
Cash flows from operating activities
 
 
Net income
$ 172,551 
$ 38,460 
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
Depreciation and amortization
47,973 
44,281 
Amortization of deferred financing costs and issuance discount
3,134 
4,478 
Deferred income tax
10,684 
(10,617)
Stock-based compensation
8,816 
6,219 
Earnings of unconsolidated affiliates, net of dividends
(12,287)
(32,552)
Unrealized net losses (gains) on foreign exchange forward contracts
3,965 
(7,747)
Loss on extinguishment of debt
 
95,150 
Prepayment penalty on long-term debt
 
(68,603)
Loss on sale of businesses and other assets
12,915 
 
Changes in assets and liabilities
 
 
Accounts receivable
(52,954)
(40,431)
Inventories
(16,685)
45,892 
Accounts payable and other current liabilities
(1,098)
(12,134)
Income taxes payable
(1,005)
17,821 
Other assets, net
(7,060)
(415)
Other liabilities, net
10,758 
(5,056)
Cash provided by operating activities
179,707 
74,746 
Cash flows from investing activities
 
 
Capital expenditures
(53,153)
(43,594)
Proceeds from capital expenditures subsidy
 
2,191 
Proceeds from the sale of businesses and other assets
129 
689 
Distributions from unconsolidated affiliates
4,809 
 
Cash used in investing activities
(48,215)
(40,714)
Cash flows from financing activities
 
 
Deferred financing fees
 
(27,661)
Short term borrowings, net
(126)
(15,823)
Repayments of term loans
(2,500)
 
Purchase of treasury shares
(94,362)
 
Stock-based compensation activity, net
13 
 
Net proceeds from issuance of 2021 Term Loan B
 
498,750 
Net proceeds from issuance of 2022 Senior Notes
 
716,625 
Repayments of 2019 Senior Notes
 
(1,192,500)
Proceeds from Accounts Receivable Securitization Facility
 
25,000 
Repayments of Accounts Receivable Securitization Facility
 
(25,000)
Cash provided by (used in) financing activities
(96,975)
(20,609)
Effect of exchange rates on cash
(565)
(3,104)
Net change in cash and cash equivalents
33,952 
10,319 
Cash and cash equivalents-beginning of period
431,261 
220,786 
Cash and cash equivalents-end of period
$ 465,213 
$ 231,105 
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 June 30, 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. The Company adopted this guidance effective April 1, 2016.  Under this guidance, excess tax benefits associated with share-based payment awards are recognized in the statement of operations when the awards vest or settle, rather than in shareholders’ equity, and all tax-related cash flows resulting from share-based payments are reported as operating activities on the statement of cash flows.  In addition, this guidance modified the minimum statutory withholding requirements to allow entities to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction without triggering liability classification of the award, while also clarifying that all cash payments made to taxing authorities on employees’ behalf for withheld shares are to be reported as financing activities on the statement of cash flows.  The adoption of these changes did not materially impact the Company’s financial position and result of operations. Additionally, as part of this adoption, the Company made an accounting policy election to recognize forfeitures as incurred, rather than estimating the forfeitures in advance.  The impact of this change was applied utilizing a modified retrospective approach, with an adjustment of $0.9 million recorded during the three months ended June 30, 2016 to decrease opening retained earnings and increase opening additional paid-in-capital.

 

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 styrene and 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 June 30, 2016 and December 31, 2015, respectively, the Company’s investment in Americas Styrenics was $154.5 million and $143.9 million, which was $79.7 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 4.3 years as of June 30, 2016. The Company received dividends from Americas Styrenics of $30.0 million and $60.0 million during the three and six months ended June 30, 2016, respectively, compared to $30.0 million and $45.0 million during the three and six months ended June 30, 2015, respectively.

As of June 30, 2016 and December 31, 2015, respectively, the Company’s investment in Sumika Styron Polycarbonate was $35.8 million and $39.0 million, which was $16.2 million and $19.8 million greater than the Company’s 50% share of the underlying net assets of Sumika Styron Polycarbonate. This amount primarily 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 9.3 years as of June 30, 2016. The Company received dividends from Sumika Styron Polycarbonate of zero and $6.2 million during the three and six months ended June 30, 2016, respectively. The Company received no dividends from Sumika Styron Polycarbonate during the three and six months ended June 30, 2015.

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

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Sales

    

$

405,351

    

$

500,803

    

$

781,603

    

$

940,373

 

Gross profit

 

$

87,867

 

$

91,692

 

$

156,271

 

$

169,363

 

Net income

 

$

71,015

 

$

74,461

 

$

123,812

 

$

140,481

 

 

Inventories
Inventories

NOTE 4—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31,

 

 

    

2016

    

2015

 

Finished goods

    

$

178,449

    

$

170,380

 

Raw materials and semi-finished goods

 

 

156,396

 

 

151,444

 

Supplies

 

 

30,294

 

 

31,273

 

Total

 

$

365,139

 

$

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 June 30, 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

 

Divestiture (Note 15)

 

 

(418)

 

 

 —

 

 

 —

 

 

 —

 

 

(418)

 

Foreign currency impact

 

 

209

 

 

143

 

 

49

 

 

122

 

 

523

 

Balance at June 30, 2016

 

$

12,203

 

$

8,644

 

$

2,963

 

$

7,359

 

$

31,169

 

Other Intangible Assets

The following table provides information regarding the Company’s other intangible assets as of June 30, 2016 and December 31, 2015, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016

 

December 31, 2015

 

 

 

Estimated

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Useful Life

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

   

(Years)

   

Amount

   

Amortization

   

Net

   

Amount

   

Amortization

   

Net

 

Developed technology

 

15

 

$

175,574

 

$

(70,067)

 

$

105,507

 

$

172,675

 

$

(62,870)

 

$

109,805

 

Manufacturing Capacity Rights

 

6

 

 

21,100

 

 

(7,698)

 

 

13,402

 

 

20,750

 

 

(5,888)

 

 

14,862

 

Software

 

5 - 10

 

 

49,349

 

 

(11,807)

 

 

37,542

 

 

18,006

 

 

(9,494)

 

 

8,512

 

Software in development

 

N/A

 

 

15,004

 

 

 —

 

 

15,004

 

 

24,516

 

 

 —

 

 

24,516

 

Other

 

N/A

 

 

189

 

 

 —

 

 

189

 

 

523

 

 

 —

 

 

523

 

Total

 

 

 

$

261,216

 

$

(89,572)

 

$

171,644

 

$

236,470

 

$

(78,252)

 

$

158,218

 

As of June 30, 2016, the Company had $15.0 million capitalized as software in development, primarily related to our project to upgrade our legacy enterprise resource planning (“ERP”) environment to the latest version of SAP. During the second quarter of 2016, we began a phased implementation of this ERP environment by geographic region, which we anticipate will be completed by the end of 2016.

Amortization expense on other intangible assets totaled $5.8 million and $10.1 million for the three and six months ended June 30, 2016, respectively, and $4.4 million and $8.9 million for the three and six months ended June 30, 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

   

$

11,935

 

2017

 

 

23,581

 

2018

 

 

22,890

 

2019

 

 

22,706

 

2020

 

 

19,765

 

2021

 

 

14,234

 

 

Debt
Debt

NOTE 6—DEBT

Debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31,

 

 

    

2016

    

2015

 

Senior Credit Facility

    

 

 

    

 

 

 

2020 Revolving Facility

 

$

 —

 

$

 —

 

2021 Term Loan B

 

 

493,954

 

 

496,365

 

2022 Senior Notes

 

 

 

 

 

 

 

USD Notes

 

 

300,000

 

 

300,000

 

Euro Notes

 

 

416,438

 

 

409,538

 

Accounts Receivable Securitization Facility

 

 

 —

 

 

 —

 

Other indebtedness

 

 

1,784

 

 

1,895

 

Total debt

 

 

1,212,176

 

 

1,207,798

 

Less: current portion

 

 

(5,000)

 

 

(5,000)

 

Less: unamortized deferred financing fees(1)

 

 

(23,889)

 

 

(25,678)

 

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

 

$

1,183,287

 

$

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. As a result of this termination, the Company recognized a $0.7 million loss on extinguishment of long-term debt during the three and six months ended June 30, 2015, comprised entirely of the write-off of a portion of the existing unamortized deferred financing fees related to 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 June 30, 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 June 30, 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 June 30, 2016, the Company had no outstanding borrowings, and had $308.9 million (net of $16.1 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 June 30, 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.

As a result of this redemption, during the three and six months ended June 30, 2015, the Company recorded a loss on extinguishment of long-term debt of $94.5 million, which includes the above $68.6 million call premium and $25.9 million write-off of unamortized deferred financing fees related to the 2019 Senior Notes.

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 June 30, 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 June 30, 2016 and December 31, 2015, there were no amounts outstanding under the Accounts Receivable Securitization Facility, with approximately $129.7 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 June 30, 2016, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $155.2 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of June 30, 2016.

 

 

 

 

 

 

 

 

June 30, 

 

Buy / (Sell) 

 

2016

 

Chinese Yuan

 

$

(56,386)

 

Indonesian Rupiah

 

$

(30,436)

 

Swiss Franc

 

$

24,283

 

Japanese Yen

 

$

(10,346)

 

British Pound

 

$

(9,332)

 

Euro

 

$

(6,064)

 

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 June 30, 2016 have maturities occurring over a period of 18 months, and have a net notional U.S. dollar equivalent of $270.0 million.

Net Investment Hedge

The Company’s outstanding debt includes €375.0 million of Euro Notes (see Note 6 for details).  As of June 30, 2016, the Company has designated a portion (€280.0 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 $2.1 million within accumulated other comprehensive loss as of June 30, 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 June 30, 

 

Statement of Operations

 

 

2016

 

2015

 

2016

 

2015

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

6,029

    

$

(1,440)

    

$

(735)

    

$

76

    

Cost of sales

Total

 

$

6,029

 

$

(1,440)

 

$

(735)

 

$

76

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

3,798

 

$

(2,438)

 

$

 —

 

$

 —

 

Other expenses, net

Total

 

$

3,798

 

$

(2,438)

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

(2,138)

 

$

7,264

 

Other expenses, net

Total

 

$

 —

 

$

 —

 

$

(2,138)

 

$

7,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

Gain (Loss) Recognized in

 

 

 

 

AOCI on Balance Sheet

 

Statement of Operations

 

 

 

 

Six Months Ended June 30, 

 

Statement of Operations

 

 

2016

 

2015

 

2016

 

2015

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

(1,396)

    

$

(405)

    

$

370

    

$

76

    

Cost of sales

Total

 

$

(1,396)

 

$

(405)

 

$

370

 

$

76

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

(2,487)

 

$

(2,438)

 

$

 —

 

$

 —

 

Other expenses, net

Total

 

$

(2,487)

 

$

(2,438)

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

995

 

$

(13,698)

 

Other expenses, net

Total

 

$

 —

 

$

 —

 

$

995

 

$

(13,698)

 

 

The Company recorded losses of $2.1 million and gains of $1.0 million during the three and six months ended June 30, 2016, respectively, and gains of $7.3 million and losses of $13.7 million during the three and six months ended June 30, 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 gains of $2.3 million and losses of $2.6 million during the three and six months ended June 30, 2016, respectively, and losses of $10.4 million and gains of $7.6 million during the three and six months ended June 30, 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 June 30, 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 $2.3 million net gain from other comprehensive income (loss) into earnings related to the Company’s outstanding cash flow hedges as of June 30, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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

 

$

1,432

 

$

2,449

    

$

3,881

 

$

4,592

    

$

4,958

    

$

9,550

 

Deferred charges and other assets

 

 

 —

 

 

1,137

 

 

1,137

 

 

 —

 

 

 —

 

 

 —

 

Total asset derivatives

 

$

1,432

 

$

3,586

 

$

5,018

 

$

4,592

 

$

4,958

 

$

9,550

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

    

$

999

    

$

164

    

$

1,163

 

$

194

    

$

 —

    

$

194

 

Other noncurrent obligations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total liability derivatives

 

$

999

 

$

164

 

$

1,163

 

$

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 June 30, 2016

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

6,816

 

$

(1,798)

 

$

5,018

 

Derivative liabilities

 

 

2,961

 

 

(1,798)

 

 

1,163

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 2016 and December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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

    

$

 —

    

$

1,432

    

$

 —

    

$

1,432

 

Foreign exchange forward contracts—(Liabilities)

 

 

 —

 

 

(999)

 

 

 —

 

 

(999)

 

Foreign exchange cash flow hedges—Assets

 

 

 —

 

 

3,586

 

 

 —

 

 

3,586

 

Foreign exchange cash flow hedges—(Liabilities)

 

 

 —

 

 

(164)

 

 

 —

 

 

(164)

 

Total fair value

 

$

 —

 

$

3,855

 

$

 —

 

$

3,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 2016 and December 31, 2015, respectively:

 

 

 

 

 

 

 

 

 

 

 

    

As of

    

As of

 

 

    

June 30, 2016

    

December 31, 2015

 

2022 Senior Notes

 

 

 

 

 

 

 

USD Notes

 

 

301,500

 

 

296,250

 

Euro Notes

 

 

420,914

 

 

410,054

 

2021 Term Loan B

 

 

493,456

 

 

491,401

 

Total fair value

 

$

1,215,870

 

$

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 June 30, 2016 and December 31, 2015.

Provision for Income Taxes
Income Taxes

NOTE 9—PROVISION FOR INCOME TAXES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30, 

 

June 30, 

 

 

 

    

2016

    

2015

    

2016

    

2015

 

 

Effective income tax rate

 

 

23.0

%  

 

90.9

%  

 

22.6

%  

 

39.8

%

 

Provision for income taxes for the three and six months ended June 30, 2016 were $28.6 million, resulting in an effective tax rate of 23.0%, and $50.5 million, resulting in an effective tax rate of 22.6%, respectively. Provision for income taxes for the three and six months ended June 30, 2015 were $7.5 million, resulting in an effective tax rate of 90.9%, and $25.4 million, resulting in an effective tax rate of 39.8%, respectively.  

The effective income tax rate for the three and six months ended June 30, 2016 was impacted by losses generated primarily within our holding companies incorporated in Luxembourg and our primary operating company incorporated in Brazil, which were not anticipated to provide a tax benefit to the Company in the future. For the three and six months ended June 30, 2016, these losses totaled approximately $29.0 million and $41.7 million, respectively. Included in these losses was an impairment charge of $12.9 million for the estimated loss on sale of Trinseo Brazil. Refer to Note 15 for further information.

The effective income tax rate for the three and six months ended June 30, 2015 was impacted by losses generated primarily within our holding companies incorporated in Luxembourg, which were not anticipated to provide a tax benefit to the Company in the future. For the three and six months ended June 30, 2015, these losses totaled approximately $41.2 million and $58.8 million, respectively. Included in these losses were payments made during the three months ended June 30, 2015 of $18.1 million related to a portion of the fees associated with the call premium paid to retire the Company’s 2019 Senior Notes and $4.3 million related to the write-off of the related unamortized deferred financing fees. Refer to Note 6 for further information.

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 June 30, 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; and Terneuzen, The Netherlands. 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

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Defined Benefit Pension Plans

    

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

4,211

 

$

4,075

    

$

8,282

 

$

8,376

 

Interest cost

 

 

1,408

 

 

1,287

 

 

2,768

 

 

2,647

 

Expected return on plan assets

 

 

(499)

 

 

(399)

 

 

(982)

 

 

(820)

 

Amortization of prior service credit

 

 

(493)

 

 

(402)

 

 

(971)

 

 

(825)

 

Amortization of net loss

 

 

1,073

 

 

1,308

 

 

2,111

 

 

2,689

 

Net periodic benefit cost

 

$

5,700

 

$

5,869

 

$

11,208

 

$

12,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Other Postretirement Plans

    

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

65

 

$

86

    

$

128

 

$

174

 

Interest cost

 

 

129

 

 

133

 

 

250

 

 

273

 

Amortization of prior service cost

 

 

26

 

 

26

 

 

52

 

 

52

 

Amortization of net gain

 

 

(43)

 

 

 —

 

 

(86)

 

 

 —

 

Net periodic benefit cost

 

$

177

 

$

245

 

$

344

 

$

499

 

 

As of June 30, 2016 and December 31, 2015, the Company’s benefit obligations included primarily in “Other noncurrent obligations” in the condensed consolidated balance sheets were $181.3 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 $2.4 million and $5.3 million during the three and six months ended June 30, 2016. The Company expects to make additional cash contributions, including benefit payments to unfunded plans, of approximately $11.0 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 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 six months ended June 30, 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 were $15.3 million as of June 30, 2016, 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 six month period ended June 30, 2016, there were no grants of time-based restricted stock awards. Total compensation expense for time-based restricted stock awards was $0.4 million and $0.9 million for the three months ended June 30, 2016 and 2015, respectively, and $0.8 million and $2.1 million for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, there was $0.8 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 1.3 years.

Modified Time-based Restricted Stock Awards

For the six month period ended June 30, 2016, there were no grants of modified time-based restricted stock awards. Total compensation expense recognized for modified time-based restricted stock awards was $0.7 million and $0.9 million for the three months ended June 30, 2016 and 2015, respectively, and $1.5 million and $1.8 million for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, there was $3.0 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 1.1 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. Since that time, the board of directors of the Company has approved equity award grants for certain executives and employees, comprised of restricted share units (or RSUs) and options to purchase shares (“option awards”).

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. RSUs granted to directors of the Company vest in full on the first anniversary of the date of grant.  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 and six months ended June 30, 2016, the Company granted 21,446 and 340,551 RSUs, respectively, at a weighted-average grant date fair value per unit of $47.45 and $28.26, respectively. Total compensation expense recognized for all outstanding RSUs was $1.4 million and $2.5 million for the three and six months ended June 30, 2016, respectively, and $0.5 million and $0.7 million for the three and six months ended June 30, 2015, respectively. As of June 30, 2016, there was $12.4 million of total unrecognized compensation cost related to outstanding RSUs, which is expected to be recognized over a weighted-average period of 2.3 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 and six months ended June 30, 2016, the Company granted 27,404 and 568,981 option awards, respectively, at a weighted-average grant date fair value per option award of $14.16 and $10.10, respectively.

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 and six months ended June 30, 2016, 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 six months ended June 30, 2016:

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2016

 

Expected term (in years)

 

5.50

 

Expected volatility

 

40.00

%  

Risk-free interest rate

 

1.42

%  

Dividend yield

 

0.60

%  

Total compensation expense for the option awards was $0.8 million and $4.1 million for the three and six months ended June 30, 2016, respectively, and $1.2 million and $1.4 million for the three and six mo