TRINSEO S.A., 10-K filed on 3/11/2016
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2015
Mar. 9, 2016
Jun. 30, 2015
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2015 
 
 
Document Fiscal Year Focus
2015 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Registrant Name
Trinseo S.A. 
 
 
Entity Central Index Key
0001519061 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
48,777,934 
 
Entity Public Float
 
 
$ 307,559,560 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Current assets
 
 
Cash and cash equivalents
$ 431,261 
$ 220,786 
Accounts receivable, net of allowance
494,556 
601,066 
Inventories
353,097 
473,861 
Deferred income tax assets
 
11,786 
Other current assets
10,120 
15,164 
Total current assets
1,289,034 
1,322,663 
Investments in unconsolidated affiliates
182,836 
167,658 
Property, plant and equipment, net
518,751 
556,697 
Other assets
 
 
Goodwill
31,064 
34,574 
Other intangible assets, net
158,218 
165,358 
Deferred income tax assets-noncurrent
51,395 
46,812 
Deferred charges and other assets
53,274 
62,354 
Total other assets
293,951 
309,098 
Total assets
2,284,572 
2,356,116 
Current liabilities
 
 
Short-term borrowings and current portion of long-term debt
5,000 
7,559 
Accounts payable
324,629 
434,692 
Income taxes payable
20,804 
9,413 
Deferred income tax liabilities
 
1,413 
Accrued expenses and other current liabilities
98,836 
120,928 
Total current liabilities
449,269 
574,005 
Noncurrent liabilities
 
 
Long-term debt
1,202,798 
1,194,648 
Deferred income tax liabilities-noncurrent
25,764 
27,311 
Other noncurrent obligations
217,727 
239,287 
Total noncurrent liabilities
1,446,289 
1,461,246 
Shareholders' equity
 
 
Ordinary shares, $0.01 nominal value, 50,000,000 shares authorized at December 31, 2015 and 2014, 48,778 shares and 48,770 shares issued and outstanding as of December 31, 2015 and 2014, respectively
488 
488 
Additional paid-in-capital
556,532 
547,530 
Accumulated deficit
(18,289)
(151,936)
Accumulated other comprehensive loss
(149,717)
(75,217)
Total shareholders' equity
389,014 
320,865 
Total liabilities and shareholders' equity
$ 2,284,572 
$ 2,356,116 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Consolidated Balance Sheets
 
 
Ordinary shares, nominal value
$ 0.01 
$ 0.01 
Ordinary shares, shares authorized
50,000,000 
50,000,000 
Ordinary shares, shares issued
48,778 
48,770 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Consolidated Statements of Operations
 
 
 
Net sales
$ 3,971,902 
$ 5,127,961 
$ 5,307,414 
Cost of sales
3,502,800 
4,830,640 
4,949,404 
Gross profit
469,102 
297,321 
358,010 
Selling, general and administrative expenses
207,964 
232,586 
216,858 
Equity in earnings of unconsolidated affiliates
140,178 
47,749 
39,138 
Operating income
401,316 
112,484 
180,290 
Interest expense, net
93,197 
124,923 
132,038 
Loss on extinguishment of long-term debt
95,150 
7,390 
20,744 
Other expense, net
9,113 
27,784 
27,877 
Income (loss) before income taxes
203,856 
(47,613)
(369)
Provision for income taxes
70,209 
19,719 
21,849 
Net income (loss)
$ 133,647 
$ (67,332)
$ (22,218)
Weighted average shares- basic
48,774,000 
43,476,000 
37,270,000 
Net income (loss) per share- basic
$ 2.74 
$ (1.55)
$ (0.60)
Weighted average shares- diluted
48,970,000 
43,476,000 
37,270,000 
Net income (loss) per share- diluted
$ 2.73 
$ (1.55)
$ (0.60)
Consolidated Statements of Comprehensive Income (Loss) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Net income (loss)
$ 133,647 
$ (67,332)
$ (22,218)
Other comprehensive income (loss), net of tax (tax amounts shown in millions below for 2015, 2014, and 2013, respectively)
 
 
 
Cumulative translation adjustments
(91,365)
(133,901)
53,339 
Net gain (loss) on foreign exchange cash flow hedges
5,569 
 
 
Pension and other postretirement benefit plans:
 
 
 
Prior service credit (cost) arising during period (net of tax of $0.2, $3.2, and $1.7)
3,222 
9,529 
10,548 
Net gain (loss) arising during period (net of tax of $2.8, $(15.1), and $(1.3))
4,716 
(42,442)
(3,545)
Amounts reclassified from accumulated other comprehensive income (loss)
3,358 
3,219 
3,463 
Total other comprehensive income (loss), net of tax
(74,500)
(163,595)
63,805 
Comprehensive income (loss)
$ 59,147 
$ (230,927)
$ 41,587 
Consolidated Statements of Comprehensive Income (Loss) (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
Prior service credit (cost) arising during period, tax
$ 0.2 
$ 3.2 
$ 1.7 
Net gain (loss) arising during period, tax
$ 2.8 
$ (15.1)
$ (1.3)
Consolidated Statements of Shareholders' Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Ordinary Shares
Additional Paid-In Capital [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Accumulated Deficit [Member]
Total
Balance at Dec. 31, 2012
$ 373 
$ 329,105 
$ 24,573 
$ (62,386)
$ 291,665 
Balance, Shares at Dec. 31, 2012
37,270,000 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Net income (loss)
 
 
 
(22,218)
(22,218)
Other comprehensive income (loss)
 
 
63,805 
 
63,805 
Stock-based compensation
 
9,950 
 
 
9,950 
Balance at Dec. 31, 2013
373 
339,055 
88,378 
(84,604)
343,202 
Balance, Shares at Dec. 31, 2013
37,270,000 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Issuance of ordinary shares
115 
197,974 
 
 
198,089 
Issuance of ordinary shares, shares
11,500,000 
 
 
 
 
Net income (loss)
 
 
 
(67,332)
(67,332)
Other comprehensive income (loss)
 
 
(163,595)
 
(163,595)
Stock-based compensation
 
10,501 
 
 
10,501 
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 (loss)
 
 
 
133,647 
133,647 
Other comprehensive income (loss)
 
 
(74,500)
 
(74,500)
Stock-based compensation
 
9,002 
 
 
9,002 
Stock-based compensation, shares
8,000 
 
 
 
 
Balance at Dec. 31, 2015
$ 488 
$ 556,532 
$ (149,717)
$ (18,289)
$ 389,014 
Balance, Shares at Dec. 31, 2015
48,778,000 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Cash flows from operating activities
 
 
 
Net income (loss)
$ 133,647 
$ (67,332)
$ (22,218)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Depreciation and amortization
96,752 
103,706 
95,196 
Amortization of deferred financing costs and issuance discount
7,662 
9,937 
9,547 
Deferred income tax
(77)
4,833 
4,215 
Stock-based compensation
9,002 
10,501 
9,950 
Earnings of unconsolidated affiliates, net of dividends
(15,182)
(12,750)
(16,638)
Unrealized net losses (gains) on foreign exchange forward contracts
(8,953)
4,554 
 
Contingent gain on sale of business
 
(623)
 
Loss on extinguishment of debt
95,150 
7,390 
20,744 
Prepayment penalty on long-term debt
(68,603)
(3,975)
 
Loss (gain) on sale of businesses and other assets
 
(116)
4,186 
Impairment charges
 
 
13,851 
Changes in assets and liabilities
 
 
 
Accounts receivable
65,123 
68,483 
(5,643)
Inventories
97,151 
22,605 
55,369 
Accounts payable and other current liabilities
(71,907)
(5,697)
15,001 
Income taxes payable
12,019 
259 
(1,241)
Other assets, net
3,166 
(2,527)
2,384 
Other liabilities, net
(1,701)
(22,027)
26,632 
Cash provided by operating activities
353,249 
117,221 
211,335 
Cash flows from investing activities
 
 
 
Capital expenditures
(109,267)
(98,606)
(73,544)
Proceeds from capital expenditures subsidy
2,191 
 
18,769 
Proceeds from the sale of businesses and other assets
818 
6,257 
15,221 
Payment for working capital adjustment from sale of business
 
(700)
 
Advance payment refunded
 
 
(2,711)
Distributions from unconsolidated affiliates
 
978 
1,055 
(Increase)/decrease in restricted cash
(413)
(533)
7,852 
Cash used in investing activities
(106,671)
(92,604)
(33,358)
Cash flows from financing activities
 
 
 
Proceeds from initial public offering, net of offering costs
 
198,087 
 
Deferred financing fees
(28,197)
 
(48,255)
Short term borrowings, net
(18,396)
(56,901)
(42,877)
Repayments of term loans
(2,500)
 
(1,239,000)
Proceeds from issuance of 2019 Senior Notes
 
 
1,325,000 
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)
(132,500)
 
Proceeds from Revolving Facility
 
 
405,000 
Repayments of Revolving Facility
 
 
(525,000)
Proceeds from Accounts Receivable Securitization Facility
25,000 
308,638 
376,630 
Repayments of Accounts Receivable Securitization Facility
(25,000)
(309,205)
(471,696)
Cash provided by (used in) financing activities
(26,218)
8,119 
(220,198)
Effect of exchange rates on cash
(9,885)
(8,453)
2,367 
Net change in cash and cash equivalents
210,475 
24,283 
(39,854)
Cash and cash equivalents-beginning of period
220,786 
196,503 
236,357 
Cash and cash equivalents-end of period
431,261 
220,786 
196,503 
Supplemental disclosure of cash flow information
 
 
 
Cash paid for income taxes, net of refunds
58,151 
5,097 
24,779 
Cash paid for interest, net of amounts capitalized
121,229 
119,820 
83,509 
Accrual for property, plant and equipment
$ 14,205 
$ 18,245 
$ 11,156 
Organization and Business Activities
Organization and Business Activities

NOTE 1—ORGANIZATION AND BUSINESS ACTIVITIES

Organization

On June 3, 2010, Bain Capital Everest Manager Holding SCA (the “Parent”), an affiliate of Bain Capital Partners, LP (“Bain Capital”), was formed through investment funds advised or managed by Bain Capital. Dow Europe Holding B.V. (together with The Dow Chemical Company, “Dow”) retained an indirect ownership interest in the Parent. Trinseo S.A. (“Trinseo”, and together with its subsidiaries, the “Company”) was also formed on June 3, 2010, incorporated under the existing laws of the Grand Duchy of Luxembourg. At that time, all ordinary shares of Trinseo were owned by the Parent. On June 17, 2010, Trinseo acquired 100% of the former Styron business from Dow (the “Acquisition”), at which time, the Company commenced operations.

On May 30, 2014, the Company amended its Articles of Association to effect a 1-for-436.69219 reverse split of its issued and outstanding ordinary shares (“reverse split”) and to increase its authorized shares to 50.0 billion. All share and per share data were retroactively adjusted in the accompanying financial statements to give effect to the reverse split.

On June 17, 2014, Trinseo completed an initial public offering (the “IPO”) of 11,500,000 ordinary shares at a price of $19.00 per share, which included 1,500,000 shares sold pursuant to the underwriters’ exercise of their over-allotment option. The Company received cash proceeds of $203.2 million from this transaction, net of underwriting discounts. See Note 12 for more information.

Business Activities

The Company is a leading global materials company engaged in the manufacturing and marketing of synthetic rubber, latex, and plastics, including various specialty and technologically differentiated products. The Company develops emulsion polymers and plastics products that are incorporated into a wide range of products throughout the world, including tires and other products for automotive applications, carpet and artificial turf backing, coated paper and packaging board, food service packaging, appliances, medical devices, consumer electronics and construction applications, among others.

The Company’s operations are located in Europe and the Middle East, North America, Latin America, and Asia Pacific, supplemented by two strategic joint ventures, Americas Styrenics LLC (“Americas Styrenics”), a polystyrene joint venture with Chevron Phillips Chemical Company LP, and Sumika Styron Polycarbonate Limited (“Sumika Styron Polycarbonate”). Refer to Note 4 for further information regarding our investments in these unconsolidated affiliates.

The Company has significant manufacturing and production operations around the world, which allow service to its global customer base. As of December 31, 2015, the Company’s production facilities included 34 manufacturing plants (which included a total of 80 production units) at 26 sites across 14 countries, including joint ventures and contract manufacturers. The Company’s manufacturing locations include sites in emerging markets such as China and Indonesia. Additionally, as of December 31, 2015, the Company operated 11 research and development (R&D) facilities globally, including mini plants, development centers and pilot coaters.

 

The Company is operated in 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.

Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies

NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements of the Company contain the accounts of all entities that are controlled and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. A VIE is defined as a legal entity that has equity investors that do not have sufficient equity at risk for the entity to support its activities without additional subordinated financial support or, as a group, the holders of the equity at risk lack (i) the power to direct the entity’s activities or (ii) the obligation to absorb the expected losses or the right to receive the expected residual returns of the entity. A VIE is required to be consolidated by a company if that company is the primary beneficiary. Refer to Note 10 for further discussion of the Company’s accounts receivable securitization facility, which qualifies as a VIE and is consolidated within the Company’s financial statements.

All intercompany balances and transactions are eliminated. Joint ventures over which the Company has the ability to exercise significant influence that are not consolidated are accounted for by the equity method. 

Use of Estimates in Financial Statement Preparation

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual amounts could differ from these estimates. 

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivables. The Company uses major financial institutions with high credit ratings to engage in transactions involving cash equivalents. The Company minimizes credit risk in its receivables by selling products to a diversified portfolio of customers in a variety of markets located throughout the world.

The Company performs ongoing evaluations of its customers’ credit and generally does not require collateral. The Company maintains an allowance for doubtful accounts for losses resulting from the inability of specific customers to meet their financial obligations, representing our best estimate of probable credit losses in existing trade accounts receivable. A specific reserve for doubtful receivables is recorded against the amount due from these customers. For all other customers, the Company recognizes reserves for doubtful receivables based on historical experience. 

Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued and other current liabilities, approximate fair value due to their generally short maturities.

The estimated fair value of the Company’s 2021 Term Loan B, 2022 Senior Notes, and 2019 Senior Notes (all of which are defined in Note 10) are determined using level 2 inputs within the fair value hierarchy. Refer to Note 13 for the fair value of these debt instruments. When outstanding, the estimated fair values of borrowings under the Company’s 2020 Revolving Facility and Accounts Receivable Securitization Facility (both of which are defined in Note 10) are determined using level 2 inputs within the fair value hierarchy. The carrying amounts of borrowings under the 2020 Revolving Facility and Accounts Receivable Securitization Facility approximate fair value as these borrowings bear interest based on prevailing variable market rates.

At times, the Company manages its exposure to changes in foreign currency exchange rates, where possible, by entering into foreign exchange forward contracts. When outstanding, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. The fair value of the derivatives is determined from sources independent of the Company, including the financial institutions which are party to the derivative instruments. The fair value of derivatives also considers the credit default risk of the paying party. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item will be recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative will be recorded in other comprehensive income and will be recognized in the consolidated statements of operations when the hedged item affects earnings.

As of December 31, 2015 and 2014, the Company had certain foreign exchange forward contracts outstanding that were not designated for hedge accounting treatment. As such, the settlements and changes in fair value of underlying instruments are recognized in “Other expense, net” in the consolidated statements of operations. For the years ended December 31, 2015, 2014, and 2013, the Company recognized losses related to these forward contracts of $16.5 million, $28.2 million, and $0.6 million, respectively.

As of December 31, 2015, the Company also had foreign exchange forward contracts which are designated as cash flow hedges. As such, 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 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. No such contracts were outstanding as of December 31, 2014.

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. The Company records these foreign exchange forward contracts on a net basis, by counterparty within the consolidated balance sheets.

The Company presents the cash receipts and payments from hedging activities in the same category as the cash flows from the items subject to hedging relationships. As the items subject to economic hedging relationships are the Company’s operating assets and liabilities, the related cash flows are classified within operating activities in the consolidated statements of cash flows. 

Foreign Currency Translation

For the majority of the Company’s subsidiaries, the local currency has been identified as the functional currency. For remaining subsidiaries, the U.S. dollar has been identified as the functional currency due to the significant influence of the U.S. dollar on their operations. Gains and losses resulting from the translation of various functional currencies into U.S. dollars are not recorded within the consolidated statements of operations. Rather, they are recorded within the cumulative translation adjustment account as a separate component of shareholders’ equity (accumulated other comprehensive income) on the consolidated balance sheets. The Company translates asset and liability balances at exchange rates in effect at the end of the period and income and expense transactions at the average exchange rates in effect during the period. Gains and losses resulting from foreign currency transactions are recorded within the consolidated statements of operations.

For the year ended December 31, 2015 and 2014, the Company recognized net foreign exchange transaction gains of $6.1 million and $32.4 million, respectively. For the year ended December 31, 2013, the Company recognized net foreign exchange transaction losses of $18.3 million. These amounts exclude the impacts of foreign exchange forward contracts discussed above. Gains and losses on net foreign exchange transactions are recorded within “Other expense, net” in the consolidated statements of operations. 

Environmental Matters

Accruals for environmental matters are recorded when it is considered probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information become available. Accruals for environmental liabilities are recorded within “Other noncurrent obligations” in the consolidated balance sheets at undiscounted amounts. As of December 31, 2015 and 2014, there were no accruals for environmental liabilities recorded.

Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, or mitigate or prevent contamination from future operations. Environmental costs are also capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction or normal operation of a long-lived asset. Any costs related to environmental contamination treatment and clean-ups are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable. 

Cash and Cash Equivalents

Cash and cash equivalents generally include time deposits or highly liquid investments with original maturities of three months or less. 

Inventories

Inventories are stated at the lower of cost or market, with cost being determined on the first-in, first-out (“FIFO”) method. The Company periodically reviews its inventory for excess or obsolete inventory, and will write-down the excess or obsolete inventory value to its net realizable value, if applicable. 

Property, Plant and Equipment

Property, plant and equipment are carried at cost less accumulated depreciation and less impairment, if applicable, and are depreciated over their estimated useful lives using the straight-line method. Capitalized costs associated with computer software for internal use are amortized on a straight-line basis over their estimated useful life.

Expenditures for maintenance and repairs are charged against income as incurred. Expenditures that significantly increase asset value, extend useful asset lives or adapt property to a new or different use are capitalized. These expenditures include planned major maintenance activity or turnaround activities that increase our manufacturing plants’ output and improve production efficiency as compared to pre-turnaround operations. As of December 31, 2015 and 2014, $7.6 million and $9.2 million, respectively, of the Company’s net costs related to turnaround activities were capitalized within “Deferred charges and other assets” in the consolidated balance sheets, and are being amortized over the period until the next scheduled turnaround.

The Company periodically evaluates actual experience to determine whether events and circumstances have occurred that may warrant revision of the estimated useful lives of property, plant and equipment. Engineering and other costs directly related to the construction of property, plant and equipment are capitalized as construction in progress until construction is complete and such property, plant and equipment is ready and available to perform its specifically assigned function. Upon retirement or other disposal, the asset cost and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds, is charged or credited to income. The Company also capitalizes interest as a component of the cost of capital assets constructed for its own use. 

Impairment and Disposal of Long-Lived Assets

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value based on a discounted cash flow analysis utilizing market participant assumptions.

Long-lived assets to be disposed of by sale are classified as held-for-sale and are reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of in a manner other than by sale are classified as held-and-used until they are disposed. 

Goodwill and Other Intangible Assets

The Company records goodwill when the purchase price of a business acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level annually, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. The Company utilizes a market approach and an income approach (under the discounted cash flow method) to calculate the fair value of its reporting units. The annual impairment assessment is completed using a measurement date of October 1st.  No goodwill impairment losses were recorded in the years ended December 31, 2015, 2014 and 2013.

Finite-lived intangible assets, such as our intellectual property and manufacturing capacity rights, are amortized on a straight-line basis and are reviewed for impairment or obsolescence if events or changes in circumstances indicate that their carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows. No intangible asset impairment losses were recorded in the years ended December 31, 2015, 2014 and 2013.

Deferred Financing Fees

Capitalized fees and costs incurred in connection with the Company’s financing arrangements are recorded in “Deferred charges and other assets” within the consolidated balance sheets. For the 2021 Term Loan B and 2022 Senior Notes (and the 2019 Senior Notes, prior to their repayment in May 2015), deferred financing fees are amortized over the term of the agreement using the effective interest method, while for the 2020 Revolving Facility and the Accounts Receivable Securitization Facility, deferred financing fees are amortized using the straight-line method over the term of the respective facility. Amortization of deferred financing fees is recorded in “Interest expense, net” within the consolidated statements of operations. 

Investments in Unconsolidated Affiliates

Investments in unconsolidated affiliates in which the Company has the ability to exercise significant influence (generally, 20% to 50% owned companies) are accounted for using the equity method. Investments are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. An impairment loss is recorded whenever a decline in fair value of an investment in an unconsolidated affiliate below its carrying amount is determined to be other-than-temporary. 

Sales

Sales are recognized when the revenue is realized or realizable and the earnings process is complete, which occurs when risk and title to the product transfers to the customer, typically at the time shipment is made. As such, title to the product generally passes when the product is delivered to the freight carrier. Standard terms of delivery are included in contracts of sale, order confirmation documents and invoices. Freight costs and any directly related costs of transporting finished product to customers are recorded as “Cost of sales” in the consolidated statements of operations. Taxes on sales are excluded from net sales.

Sales are recorded net of estimates for returns and price allowances, including discounts for prompt payment and volume-based incentives. 

Cost of Sales

The Company classifies the costs of manufacturing and distributing its products as cost of sales. Manufacturing costs include raw materials, utilities, packaging and fixed manufacturing costs associated with production. Fixed manufacturing costs include such items as plant site operating costs and overhead, production planning, depreciation and amortization, repairs and maintenance, environmental, and engineering costs. Distribution costs include shipping and handling costs. 

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses are charged to expense as incurred. SG&A expenses are the cost of services performed by the marketing and sales functions (including sales managers, field sellers, marketing research, marketing communications and promotion and advertising materials) and by administrative functions (including product management, R&D, business management, customer invoicing, and human resources). R&D expenses include the cost of services performed by the R&D function, including technical service and development, process research including pilot plant operations, and product development.

Total R&D costs included in SG&A expenses were approximately $51.9 million, $53.4 million and $49.7 million for the years ended December 31, 2015, 2014 and 2013, respectively.

The Company expenses promotional and advertising costs as incurred to SG&A expenses. Total promotional and advertising expenses were approximately $3.5 million, $2.9 million and $3.0 million for the years ended December 31, 2015, 2014 and 2013, respectively. 

Pension and Postretirement Benefits Plans

The Company has several defined benefit plans, under which participants earn a retirement benefit based upon a formula set forth in the plan. The Company also provides certain health care and life insurance benefits to retired employees mainly in the United States and Brazil. The plans provide health care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits.

Accounting for defined benefit pension plans and other postretirement benefit plans, and any curtailments and settlements thereof, requires various assumptions, including, but not limited to, discount rates, expected rates of return on plan assets and future compensation growth rates. The Company evaluates these assumptions at least once each year, or as facts and circumstances dictate, and makes changes as conditions warrant.

A settlement is a transaction that is an irrevocable action that relieves the employer (or the plan) of primary responsibility for a pension or postretirement benefit obligation, and that eliminates significant risks related to the obligation and the assets used to effect the settlement. When a settlement occurs, the Company does not record settlement gains or losses during interim periods when the cost of all settlements in a year is less than or equal to the sum of the service cost and interest cost components of net periodic pension cost for the plan in that year. 

Income Taxes

The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. With the adoption of new guidance from the Financial Accounting Standards Board (“FASB”) as of December 31, 2015, for each tax jurisdiction in which the Company operates, deferred tax assets and liabilities are offset against one another and are presented as a single noncurrent amount within the consolidated balance sheets.  See “- Recent Accounting Guidance” below for further discussion of the impact of adopting this guidance.

Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates, except for subsidiaries in which earnings are deemed to be indefinitely invested.

The Company recognizes the financial statement effects of uncertain income tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accrues for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. Interest accrued related to unrecognized tax and income tax related penalties are included in the provision for income taxes. The current portion of uncertain income taxes positions is recorded in “Income taxes payable” while the long-term portion is recorded in “Other noncurrent obligations” in the consolidated balance sheets.

Stock-based Compensation

Refer to Note 17 to the consolidated financial statements for detailed discussion regarding the Company’s stock-based compensation award programs.  The following provides a brief summary of the key accounting policy elections related to these awards.

On all awards, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in our consolidated financial statements is based on awards that are ultimately expected to vest.

Restricted Stock Awards issued by the Parent

From 2010 through 2013, our Parent granted various time-based and performance-based restricted stock awards to certain key members of management. Any related compensation associated with these awards is allocated to the Company from the Parent.

Stock-based compensation expense for these awards is measured at the grant date, based on the fair value of the award. Time-based and modified time-based restricted stock awards are generally recognized as expense on a graded vesting basis over the related service period. Prior to their modification in June 2014, the Company recognized compensation cost related to performance-based restricted stock awards if and when it was deemed probable that the related performance condition would be achieved. When applicable, the Company calculated the fair value of its performance-based restricted stock awards using a combination of a call option and digital option model.

2014 Omnibus Incentive Plan

In connection with the IPO, the Company’s board of directors approved the 2014 Omnibus Plan. Since that time, certain equity grants have been awarded, comprised of RSUs and options awards (defined in Note 17 to the consolidated financial statements). 

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.

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.

Recent Accounting Guidance

In April 2014, the FASB issued amendments to guidance for reporting discontinued operations and disposals of components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held-for-sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The Company adopted this guidance effective January 1, 2015, and the adoption did not have a significant impact on the Company’s financial position, results of operations, or disclosures.

In May 2014, the 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. 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 statements and results of operations.

In January 2015, the FASB issued guidance to simplify income statement classification by removing the concept of extraordinary items from GAAP. The Company adopted this guidance effective January 1, 2015 and the adoption did not have an impact on the Company’s financial position or 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 deduction from the carrying value of that debt liability, consistent with debt discounts. The recognition and measurement guidance for deferred financing fees are not affected. This new guidance, which is to be applied on a retrospective basis, is effective for public companies for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company will adopt this guidance effective January 1, 2016.  As of December 31, 2015, the Company had $32.7 million of unamortized deferred financing fees classified as noncurrent assets within “Deferred charges and other assets” on the consolidated balance sheet, of which approximately $25.7 million will be reclassified as a reduction of “Long-term debt” on the consolidated balance sheet upon adoption.

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 is currently assessing the impact of adopting this guidance on its financial position and results of operations.

In November 2015, the FASB issued guidance which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and may be applied either prospectively or retrospectively, with early adoption permitted. The Company adopted this guidance effective December 31, 2015 on a prospective basis, noting that prior periods were not retrospectively adjusted. If the Company had retrospectively adopted this guidance, $11.8 million and $1.4 million of current deferred tax assets and liabilities, respectively, would have been reclassified, resulting in a total of $57.1 million and $27.2 million of noncurrent deferred tax assets and liabilities, respectively, on the consolidated balance sheet as of December 31, 2014.

 

Acquisitions and Divestitures
Acquisitions and Divestitures

NOTE 3—ACQUISITIONS AND DIVESTITURES

The Acquisition

The Company accounted for the Acquisition (as discussed in Note 1) under the purchase method of accounting, whereby the purchase price paid, net of working capital adjustments, was allocated to the acquired assets and liabilities at fair value. As of June 17, 2011, the one-year measurement period surrounding the Acquisition ended. During 2014, an adjustment was identified related to one of our postretirement benefit plans, which dated back to the initial Acquisition accounting. As such, the Company recorded a $1.7 million increase to goodwill to correct our final purchase price allocation, with the offset recorded to postretirement benefit liabilities. The Company does not believe this adjustment was material to our prior period financial statements. Refer to Note 16 for further discussion.

As part of the Acquisition, the Company has been indemnified for various tax matters, including income tax and value add taxes, as well as legal liabilities which have been incurred prior to the Acquisition. Conversely, certain tax matters which the Company has benefitted from are subject to reimbursement by Trinseo to Dow. These amounts have been estimated and provisional amounts have been recorded based on the information known during the measurement period; however, these amounts remain subject to change based on the completion of our annual statutory filings, tax authority review as well as a final resolution with Dow on amounts due to and due from the Company. Management believes the Company’s estimates and assumptions are reasonable under the circumstances, however, settlement negotiations or changes in estimates around pre-acquisition indemnifications could result in a material impact on the consolidated financial statements.

During 2013, the Company received $6.7 million, net of tax indemnity from Dow for income taxes paid to the taxing authorities relating to the period prior to the Acquisition. This indemnity amount was previously recorded within “Accounts receivable, net of allowance” in the consolidated balance sheets. There were no other significant indemnity payments received from Dow or indemnity payments to Dow during the years ended December 31, 2015, 2014, and 2013, respectively.

Divestiture of Expandable Polystyrene Business

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. The sale closed on September 30, 2013 and the Company received $15.2 million of sales proceeds during the third quarter of 2013, subject to a $0.7 million working capital adjustment which was paid by the Company during the first quarter of 2014 and is reflected within investing activities in the consolidated statement of cash flows for the year ended December 31, 2014. The Company recognized a loss from the sale of $4.2 million recorded in “Other expense, net” in the consolidated statement of operations for the year ended December 31, 2013. The loss calculation is as follows:

 

 

 

 

 

 

 

Assets

    

 

    

 

Inventories

 

$

8,135

 

Property, plant and equipment, net

 

 

9,401

 

Other intangibles assets, net

 

 

1,624

 

Goodwill

 

 

383

 

Total assets sold

 

$

19,543

 

Liabilities

 

 

 

 

Pension and other benefits

 

$

791

 

Total liabilities sold

 

$

791

 

Net assets sold

 

$

18,752

 

Sales proceeds, net of amount paid to buyer of $0.7 million

 

 

14,566

 

Loss on sale

 

$

4,186

 

 

EPS business results of operations were not classified as discontinued operations as the Company will have significant continuing cash flows as a result of a long-term supply agreement of styrene monomer to the EPS business, which was entered into contemporaneously with the sale and purchase agreement.

Further, 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 recorded the contingent gain on sale of €0.5 million (approximately $0.6 million) related to this incremental payment for the year ended December 31, 2014. The payment was received during the first quarter of 2015 and is reflected within cash flows used in investing activities in the consolidated statement of cash flows for the year ended December 31, 2015.

 

Livorno Land Sale

In April 2014, the Company completed the sale of a portion of land at its manufacturing site in Livorno, Italy for a purchase price of €4.95 million (approximately $6.8 million). As a result, the Company recorded a gain on sale of $0.1 million within “Other expense, net” in the consolidated statements of operations for the year ended December 31, 2014.

Investments in Unconsolidated Affiliates
Investments in Unconsolidated Affiliates

NOTE 4—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 (a polystyrene joint venture with Chevron Phillips Chemical Company LP) and Sumika Styron Polycarbonate (a polycarbonate joint venture with Sumitomo Chemical Company Limited).

As of December 31, 2015 and 2014, respectively, the Company’s investment in Americas Styrenics was $143.9 million and $133.5 million, which was $91.9 million and $108.4 million less than the Company’s 50% share of Americas Styrenics’ underlying net assets. These amounts represent 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 4.8 years as of December 31, 2015. The Company received dividends from Americas Styrenics of $125.0 million, $35.0 million, and $22.5 million for the years ended December 31, 2015, 2014, and 2013, respectively.

As of December 31, 2015 and 2014, respectively, the Company’s investment in Sumika Styron Polycarbonate was $39.0 million and $34.1 million, which was $19.8 million and $21.3 million greater than the Company’s 50% share of Sumika Styron Polycarbonate’s underlying net assets. These amounts represent 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 9.8 years as of December 31, 2015. The Company received no dividends from Sumika Styron Polycarbonate for the year ended December 31, 2015, and received dividends of $1.0 million and $1.1 million for the years ended December 31, 2014 and 2013, respectively.

Equity in earnings from unconsolidated affiliates was $140.2 million,  $47.7 million and $39.1 million for the years ended December 31, 2015, 2014, and 2013, respectively.

Both Americas Styrenics and Sumika Styron Polycarbonate 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:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2015

 

2014

 

Current assets

    

$

455,186

    

$

498,516

 

Noncurrent assets

 

 

293,322

 

 

313,648

 

Total assets

 

$

748,508

 

$

812,164

 

Current liabilities

 

$

188,874

 

$

253,507

 

Noncurrent liabilities

 

 

49,841

 

 

49,084

 

Total liabilities

 

$

238,715

 

$

302,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

December 31,

 

 

    

2015

    

2014

 

2013

 

Sales

    

$

1,753,511

    

$

2,161,232

    

$

2,281,045

 

Gross profit

 

$

318,073

 

$

117,667

 

$

94,148

 

Net income

 

$

250,113

 

$

52,957

 

$

38,504

 

 

Sales to unconsolidated affiliates for the years ended December 31, 2015, 2014, and 2013 were $2.5 million, $6.5 million and $8.2 million, respectively. Purchases from unconsolidated affiliates were $178.4 million, $290.3 million and $274.4 million for the years ended December 31, 2015, 2014 and 2013, respectively.

As of December 31, 2015 and 2014, respectively, $1.0 million and $2.0 million due from unconsolidated affiliates was included in “Accounts receivable, net of allowance” and $15.4 million and $28.6 million due to unconsolidated affiliates was included in “Accounts payable” in the consolidated balance sheets.

Accounts Receivable
Accounts Receivable

NOTE 5—ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2015

 

2014

 

Trade receivables

    

$

407,535

    

$

497,538

 

Non-income tax receivables

 

 

61,990

 

 

75,083

 

Other receivables

 

 

27,448

 

 

34,713

 

Less: allowance for doubtful accounts

 

 

(2,417)

 

 

(6,268)

 

Total

 

$

494,556

 

$

601,066

 

 

The allowance for doubtful accounts was approximately $2.4 million and $6.3 million as of December 31, 2015 and 2014, respectively. For the years ended December 31, 2015 and 2014, respectively, the Company recognized bad debt expense of $0.3 million and $1.1 million. As a result of changes in the estimate of allowance for doubtful accounts, for the year ended December 31, 2013 the Company recognized a benefit of $3.0 million. 

Inventories
Inventories

NOTE 6—INVENTORIES

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2015

    

2014

 

Finished goods

    

$

170,380

    

$

235,949

 

Raw materials and semi-finished goods

 

 

151,444

 

 

205,061

 

Supplies

 

 

31,273

 

 

32,851

 

Total

 

$

353,097

 

$

473,861

 

 

 

 

 

 

 

Property, Plant and Equipment
Property, Plant and Equipment

NOTE 7—PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Useful

 

December 31,

 

 

 

Lives (Years)

 

2015

 

2014

 

Land

    

Not applicable

    

$

44,167

    

$

47,196

 

Land and waterway improvements

 

1

-

20

 

 

13,151

 

 

13,139

 

Buildings

 

2

-

40

 

 

57,389

 

 

55,693

 

Machinery and equipment(1)

 

1

-

20

 

 

654,670

 

 

640,861

 

Utility and supply lines

 

1

-

10

 

 

7,081

 

 

7,679

 

Leasehold interests

 

1

-

45

 

 

43,421

 

 

45,759

 

Other property

 

1

-

 8

 

 

23,043

 

 

24,560

 

Construction in process

 

Not applicable

 

 

51,144

 

 

46,193

 

Property, plant and equipment

 

 

 

 

 

 

894,066

 

 

881,080

 

Less: accumulated depreciation

 

 

 

 

 

 

(375,315)

 

 

(324,383)

 

Property, plant and equipment, net

 

 

 

 

 

$

518,751

 

$

556,697

 

 

(1)

Approximately 94.0% of our machinery and equipment had a useful life of three to ten years as of December 31, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

December 31,

 

 

 

2015

 

2014

 

2013

 

Depreciation expense

    

$

74,938

    

$

75,286

    

$

75,401

 

Capitalized interest

 

$

3,892

 

$

4,192

 

$

3,142

 

 

During the year ended December 31, 2013, the Company determined that the long-lived assets at our polycarbonate manufacturing facility in Stade, Germany should be assessed for impairment driven primarily by continued losses experienced in the Company’s polycarbonate business. This assessment indicated that the carrying amount of the long-lived assets at this facility were not recoverable when compared to the expected undiscounted cash flows of the polycarbonate business. Based upon the assessment of fair value of this asset group, the Company concluded these assets were fully impaired as of December 31, 2013. The fair value of the asset group was determined under the income approach utilizing a discounted cash flow (“DCF”) model. The key assumptions used in the DCF model included growth rates and cash flow projections, discount rate, tax rate and an estimated terminal value.

As a result, the Company recorded an impairment loss on these assets of approximately $9.2 million for the year ended December 31, 2013. The amount was recorded within “Selling, general and administrative expenses” in the consolidated statements of operations and allocated entirely to the Basic Plastics & Feedstocks segment.

Goodwill and Intangible Assets
Goodwill and Intangible Assets

NOTE 8—GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table shows changes in the carrying amount of goodwill, by segment, from December 31, 2013 to December 31, 2014 and from December 31, 2014 to December 31, 2015, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Materials

 

 

 

 

 

 

 

 

 

 

 

 

Synthetic

 

Performance

 

Basic Plastics

 

 

 

 

 

    

Latex

    

Rubber

    

Plastics

    

& Feedstocks

    

Total

 

Balance at December 31, 2013

    

$

14,901

    

$

10,205

    

$

3,498

    

$

8,669

    

$

37,273

 

Purchase accounting adjustment (Note 16)*

 

 

664

 

 

455

 

 

156

 

 

404

 

 

1,679

 

Foreign currency impact

 

 

(1,750)

 

 

(1,199)

 

 

(411)

 

 

(1,018)

 

 

(4,378)

 

Balance at December 31, 2014

 

$

13,815

 

$

9,461

 

$

3,243

 

$

8,055

 

$

34,574

 

Foreign currency impact

 

 

(1,403)

 

 

(960)

 

 

(329)

 

 

(818)

 

 

(3,510)

 

Balance at December 31, 2015

 

$

12,412

 

$

8,501

 

$

2,914

 

$

7,237

 

$

31,064

 

 

*The purchase price adjustment for the year ended December 31, 2014 relates to the Company’s other postretirement benefit obligations provided to its employees in Brazil. Refer to Note 16 to the consolidated financial statements for a detailed discussion of this adjustment.

Goodwill impairment testing is performed annually as of October 1st. In 2015, the Company performed its annual impairment test for goodwill and determined that the estimated fair value of each reporting unit was substantially in excess of the carrying value indicating that none of the Company’s goodwill was impaired. The Company concluded there were no goodwill impairments or triggering events for the years ended December 31, 2015, 2014, and 2013.

 

Other Intangible Assets

The following table provides information regarding the Company’s other intangible assets as of December 31, 2015 and 2014, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

December 31, 2014

 

 

 

Estimated

 

Gross

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Useful Life

 

Carrying

 

Accumulated

 

 

 

 

Carrying

 

Accumulated

 

 

 

 

 

 

(Years)

 

Amount

 

Amortization

 

Net

 

Amount

 

Amortization

 

Net

 

Developed technology

    

15

    

$

172,675

    

$

(62,870)

    

$

109,805

    

$

188,854

    

$

(56,782)

    

$

132,072

 

Manufacturing Capacity Rights

 

6

 

 

20,750

 

 

(5,888)

 

 

14,862

 

 

23,095

 

 

(2,809)

 

 

20,286

 

Software

 

5

 

 

18,006

 

 

(9,494)

 

 

8,512

 

 

13,177

 

 

(6,441)

 

 

6,736

 

Software in development

 

N/A

 

 

24,516

 

 

 —

 

 

24,516

 

 

6,000

 

 

 

 

6,000

 

Other

 

N/A

 

 

523

 

 

 —

 

 

523

 

 

264

 

 

 

 

264

 

Total

 

 

 

$

236,470

 

$

(78,252)

 

$

158,218

 

$

231,390

 

$

(66,032)

 

$

165,358

 

 

As of December 31, 2015, the Company had $24.5 million capitalized as software in development, primarily related to our project to upgrade our legacy ERP environment to the latest version of SAP.  This project is expected to be completed and placed into service in 2016.

In March 2014, the Company entered into an agreement with material supplier JSR Corporation, Tokyo (“JSR”) to acquire its current production capacity rights at the Company’s rubber production facility in Schkopau, Germany for a purchase price of €19.0 million (approximately $26.1 million based upon the acquisition date foreign exchange rate). Prior to this agreement, JSR held 50% of the capacity rights of one of the Company’s three solution styrene-butadiene rubber (“SSBR”) production trains in Schkopau. As a result, effective March 31, 2014, the Company had full capacity rights to this production train. The €19.0 million purchase price was recorded in “Other intangible assets, net” in the consolidated balance sheets, and is being amortized over its estimated useful life of approximately 6.0 years. Further, the purchase price was recorded within capital expenditures in investing activities in the consolidated statement of cash flows for the year ended December 31, 2014.

Amortization expense related to finite-lived intangible assets totaled $18.5 million, $19.6 million, and $15.7 million, for the years ended December 31, 2015, 2014 and 2013, 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

 

2016

 

2017

 

2018

 

2019

 

2020

 

$

18,555

    

$

17,720

    

$

17,031

    

$

16,788

    

$

13,169

 

 

Accounts Payable
Accounts Payable

NOTE 9—ACCOUNTS PAYABLE

Accounts payable consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2015

 

2014

 

Trade payables

    

$

296,045

    

$

383,297

 

Other payables

 

 

28,584

 

 

51,395

 

Total

 

$

324,629

 

$

434,692

 

 

Debt
Debt

NOTE 10—DEBT

Debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2015

    

2014

 

Senior Credit Facility

    

 

 

    

 

 

 

2020 Revolving Facility

 

$

 —

 

$

 —

 

2021 Term Loan B

 

 

496,365

 

 

 —

 

2022 Senior Notes

 

 

 

 

 

 

 

USD Notes

 

 

300,000

 

 

 —

 

Euro Notes

 

 

409,538

 

 

 —

 

2019 Senior Notes

 

 

 —

 

 

1,192,500

 

Accounts Receivable Securitization Facility

 

 

 —

 

 

 —

 

Other indebtedness

 

 

1,895

 

 

9,707

 

Total debt

 

 

1,207,798

 

 

1,202,207

 

Less: current portion

 

 

(5,000)

 

 

(7,559)

 

Total long-term debt

 

$

1,202,798

 

$

1,194,648

 

 

The Company was in compliance with all debt covenant requirements as of December 31, 2015. Total accrued interest on outstanding debt as of December 31, 2015 and 2014 was $7.8 million and $43.5 million, respectively. Accrued interest is recorded in “Accrued expenses and other current liabilities” within the consolidated balance sheets.

2018 Senior Secured Credit Facility

In June 2010, the Company entered into a credit agreement, which was subsequently amended on February 2, 2011, July 28, 2011, February 13, 2012, August 9, 2012, January 19, 2013, and December 3, 2013 and was set to mature in January 2018 (“2018 Senior Secured Credit Facility”).  Under the 2018 Senior Secured Credit Facility, the Company had certain term loan borrowings outstanding through the end of 2012 (the “Term Loans”). 

In January 2013, the Company amended the 2018 Senior Secured Credit Facility (the “2013 Amendment”) to, among other things, repay its then outstanding Term Loans of $1,239.0 million using the proceeds from its sale of its 2019 Senior Notes (discussed below). As a result, the Company recognized a $20.7 million loss on extinguishment of debt during the year ended December 31, 2013, which consisted of the write-off of existing unamortized deferred financing fees and debt discount attributable to the Term Loans. Fees and expenses incurred in connection with the 2013 Amendment were $5.5 million, which were capitalized.

The 2018 Senior Secured Credit Facility also included a revolving credit facility (“2018 Revolving Facility”), which, as a result of the 2013 Amendment, included a borrowing capacity of $300.0 million, with an applicable margin rate of 3.00% as applied to base rate loans (which shall bear interest at a rate per annum equal to the base rate plus the applicable margin (as defined therein)), or 4.00% as applied to LIBO rate loans (which shall bear interest at a rate per annum equal to the LIBO rate plus the applicable margin and the mandatory cost (as defined therein), if applicable), and a maturity date of January 2018. As of December 31, 2014, there were no amounts outstanding under the 2018 Revolving Facility, while available borrowings under the facility were $293.3 million (net of $6.7 million outstanding letters of credit).

Capitalized fees and costs incurred in connection with the Company’s 2018 Revolving Facility were recorded in “Deferred charges and other assets” within the consolidated balance sheets and were amortized using a straight-line method over the term of the facility. Amortization of deferred financing fees are recorded in “Interest expense, net” in the consolidated statements of operations.  Unamortized deferred financing fees related to the 2018 Revolving Facility were $8.8 million as of December 31, 2014.

The Company recorded interest expense relating to the amortization of deferred financing fees and debt discounts related to the entire 2018 Senior Secured Credit Facility, respectively, of $1.0 million and zero for the year ended December 31, 2015; $2.9 million and zero for the year ended December 31, 2014; and $3.1 million and $0.1 million for the year ended December 31, 2013.

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, comprised entirely of the write-off of a portion of the existing unamortized deferred financing fees related to the 2018 Revolving Facility.  The remaining unamortized deferred financing fees under the 2018 Revolving Facility totaled $7.2 million, which remained capitalized and are being amortized along with the new deferred financing fees over the life of the new revolving credit facility, discussed in further detail below.

Interest charges, excluding interest expense relating to the amortization of deferred financing fees and debt discounts, incurred on the Term Loans and 2018 Revolving Facility, respectively, were zero and $0.6 million for the year ended December 31, 2015, zero and $1.8 million for the year ended December 31, 2014, and $7.7 million and $2.8 million for the year ended December 31, 2013. Cash paid related to interest incurred on the Term Loans and 2018 Revolving Facility, respectively, was zero and $0.6 million for the year ended December 31, 2015, zero and $1.9 million for the year ended December 31, 2014, and $16.5 million and $2.8 million for the year ended December 31, 2013.

 

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. During the year ended December 31, 2015, the Company made principal payments of $2.5 million related to the 2021 Term Loan B. As of December 31, 2015, $5.0 million of these scheduled future payments were classified as current debt on the Company’s consolidated balance sheets.

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 December 31, 2015, 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 December 31, 2015, the Company had no outstanding borrowings, and had $311.5 million (net of $13.5 million outstanding letters of credit) of funds available for borrowing under the 2020 Revolving Facility.

The Senior Credit Facility is collateralized by a security interest in substantially all of the assets of Trinseo Materials Operating S.C.A., as lead borrower, Trinseo Materials Finance, Inc., as co-borrower, and the guarantors thereunder including Trinseo Materials S.à r.l., certain U.S. subsidiaries and certain foreign subsidiaries organized in Luxembourg, The Netherlands, Hong Kong, Singapore, Ireland, Germany and Switzerland.

The Senior Credit Facility requires the Borrowers and their restricted subsidiaries to comply with customary affirmative and negative covenants, including limitations on their abilities to incur liens; make certain loans and investments; incur additional debt; merge, consolidate liquidate or dissolve; transfer or sell assets; pay dividends and other distributions to shareholders or make certain other restricted payments; enter into transactions with affiliates; restrict any restricted subsidiary from paying dividends or making other distributions or agree to certain negative pledge clauses; materially alter the business they conduct; prepay certain other indebtedness; amend certain material documents; and change our fiscal year.

The 2020 Revolving Facility contains a financial covenant that requires compliance with a springing first lien net leverage ratio test. If the outstanding balance under the 2020 Revolving Facility exceeds 30% of the $325.0 million borrowing capacity (excluding undrawn letters of credit up to $10.0 million and cash collateralized letters of credit) at a quarter-end, then the Company’s first lien net leverage ratio may not exceed 2.00 to 1.00.  As of December 31, 2015, the Company was in compliance with all debt covenant requirements under the Senior Credit Facility.

Fees and expenses incurred in connection with the issuance of the 2021 Term Loan B and the 2020 Revolving Facility were $12.0 million and $0.3 million, respectively, which were capitalized and recorded in “Deferred charges and other assets” in the consolidated balance sheets.

For the 2021 Term Loan B, deferred financing fees and the 0.25% debt discount are being amortized over its 6.5 year term using the effective interest method.  For the 2020 Revolving Facility, deferred financing fees (along with an additional $7.2 million of unamortized deferred financing fees from the 2018 Revolving Facility) are being amortized over its 5.0 year term using the straight-line method.  Amortization of deferred financing fees and debt discounts are recorded in “Interest expense, net” in the consolidated statements of operations.

Unamortized deferred financing fees and debt discount related to the 2021 Term Loan B were $10.9 million and $1.1 million, respectively, as of December 31, 2015. Unamortized deferred financing fees related to the 2020 Revolving Facility were $6.5 million as of December 31, 2015. The Company recorded interest expense relating to the amortization of deferred financing fees and debt discounts related to the entire Senior Credit Facility, respectively, of $2.1 million and $0.1 million for the year ended December 31, 2015.

Interest charges, excluding interest expense relating to the amortization of deferred financing fees and debt discounts, incurred on the 2021 Term Loan B and 2020 Revolving Facility, respectively, were $14.2 million and $1.3 million for the year ended December 31, 2015. Cash paid related to interest incurred on the 2021 Term Loan B and 2020 Revolving Facility, respectively, was $14.2 million and $1.3 million during the year ended December 31, 2015.

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”). The proceeds from the issuance of the 2019 Senior Notes were used to repay all of the Company’s then outstanding Term Loans and related refinancing fees and expenses.

In July 2014, using proceeds from the Company’s IPO (see Note 12), the Company redeemed $132.5 million in aggregate principal amount of the 2019 Senior Notes, together with a 103% call premium totaling $4.0 million and accrued and unpaid interest thereon of $5.2 million. As a result of this redemption, during the year ended December 31, 2014 the Company incurred a loss on the extinguishment of debt of approximately $7.4 million, which includes the above $4.0 million call premium and an approximately $3.4 million write-off of related unamortized deferred financing fees.

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 year ended December 31, 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 a $25.9 million write-off of unamortized deferred financing fees related to the 2019 Senior Notes.

Fees and expenses incurred in connection with the issuance of 2019 Senior Notes were capitalized and recorded in “Deferred charges and other assets” in the consolidated balance sheets and were being amortized into “Interest expense, net” in the consolidated statements of operations over the term of the 2019 Senior Notes using the effective interest rate method.

For the year ended December 31, 2015, the Company recorded $2.1 million in amortization of deferred financing fees on the 2019 Senior Notes, noting no unamortized deferred financing fees remained on the consolidated balance sheet as of December 31, 2015 due to the redemption in May 2015. For the year ended December 31, 2014, the Company recorded $5.7 million in amortization of deferred financing fees, leaving $28.0 million of unamortized deferred financing fees related to the 2019 Senior Notes on the consolidated balance sheet as of December 31, 2014. For the year ended December 31, 2013, the Company recorded $4.9 million in amortization of deferred financing fees.

Interest expense on the 2019 Senior Notes, excluding expense relating to the amortization of deferred financing fees, was $38.3 million, $110.6 million, and $106.9 million for the years ended December 31, 2015, 2014, and 2013, respectively. Cash paid for interest on the 2019 Senior Notes was $81.7 million, $115.4 million, and $58.6 million for the years ended December 31, 2015, 2014, and 2013, respectively.

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.

At any time prior to May 1, 2018, the Issuers may redeem the Euro Notes and/or the USD Notes in whole or in part, at their option at a redemption price equal to 100% of the principal amount of such notes plus the relevant applicable premium as of, and accrued and unpaid interest to, but not including, the redemption date. At any time and from time to time after May 1, 2018, the Issuers may redeem the Euro Notes and/or the USD Notes, in whole or in part, at a redemption price equal to the percentage of principal amount set forth below plus accrued and unpaid interest, if any, on the notes redeemed to, but not including, the redemption date:  

 

 

 

 

 

 

 

 

    

Euro Notes

 

    

USD Notes

 

12-month period commencing May 1 in Year 

 

Percentage

 

 

Percentage

 

2018

 

103.188

%  

 

103.375

%

2019

 

101.594

%  

 

101.688

%

2020 and thereafter

 

100.000

%  

 

100.000

%

In addition, at any time prior to May 1, 2018, the Issuers may redeem up to 40% of the aggregate principal amount of each of the USD Notes and the Euro Notes, either together or separately, at a redemption price equal to 106.750% of the principal amount thereof for the USD Notes and 106.375% of the principal amount thereof for the Euro Notes plus, in each case, accrued and unpaid interest to, but not including, the redemption date, in an amount equal to the aggregate gross proceeds from certain equity offerings.

The 2022 Senior Notes are the Issuers’ senior unsecured obligations and rank equally in right of payment with all of the Issuers’ existing and future indebtedness that is not expressly subordinated in right of payment thereto. The 2022 Senior Notes will be senior in right of payment to any future indebtedness that is expressly subordinated in right of payment thereto and effectively junior to (a) the Issuers’ existing and future secured indebtedness, including the Company’s accounts receivable facility and the Issuers’ Senior Credit Facility (discussed above), to the extent of the value of the collateral securing such indebtedness and (b) all existing and future liabilities of the Issuers’ non-guarantor subsidiaries.

The Indenture contains customary covenants that, among other things, limit the Issuers’ and certain of their subsidiaries’ ability to incur additional indebtedness and guarantee indebtedness, pay dividends or make other distributions, make investments, or prepay certain indebtedness, each subject to a number of exceptions and qualifications. Certain of these covenants, will be suspended during any period of time that (1) the 2022 Notes have investment grade ratings (as defined in the Indenture) and (2) no default has occurred and is continuing under the Indenture. In the event that the 2022 Senior Notes are downgraded to below an investment grade rating, the Issuers and certain subsidiaries will again be subject to the suspended covenants with respect to future events. As of December 31, 2015, the Company was in compliance with all debt covenant requirements under the Indenture.

Fees and expenses incurred in connection with the issuance of the 2022 Senior Notes were $16.0 million, which were capitalized and recorded in “Deferred charges and other assets” in the consolidated balance sheets, and are being amortized into “Interest expense, net” in the consolidated statements of operations over their 7.0 year term using the effective interest method.

For the year ended December 31, 2015, the Company recorded $1.2 million in amortization of deferred financing fees, leaving $14.8 million of unamortized deferred financing fees on the consolidated balance sheet as of December 31, 2015.

Interest expense on the 2022 Senior Notes, excluding expense relating to the amortization of deferred financing fees, was $30.5 million for the year ended December 31, 2015. Cash paid for interest on the 2022 Senior Notes was $22.8 million for the year ended December 31, 2015.

Accounts Receivable Securitization Facility

In 2010, Styron Receivable Funding Ltd. (“SRF”), a VIE in which the Company is the primary beneficiary, executed an agreement for an accounts receivable securitization facility (“Accounts Receivable Securitization Facility”). As of December 31, 2015, the facility, as previously amended in May 2013, permitted borrowings by one of the Company’s subsidiaries, Trinseo Europe GmbH (“TE”), up to a total of $200.0 million and had a maturity date of May 2016.  In February 2016, the facility was again amended, extending the maturity date to May 2019.

Under the facility, TE sells its accounts receivable from time to time to SRF. In turn, SRF may sell undivided ownership interests in such receivables to commercial paper conduits in exchange for cash. The Company has agreed to continue servicing the receivables for SRF. Upon the sale of the interests in the accounts receivable by SRF, the conduits have a first priority perfected security interest in such receivables and, as a result, the receivables will not be available to the creditors of the Company or its other subsidiaries.

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 2.6% plus variable commercial paper rates, while for available, but undrawn commitments, fixed interest charges are 1.40%.  

As of December 31, 2015 and 2014, there were no amounts outstanding under the Accounts Receivable Securitization Facility, with approximately $123.4 million and $136.1 million, respectively, of funds available for borrowing under this facility, based on the pool of eligible accounts receivable. Interest expense on the Accounts Receivable Securitization Facility, excluding interest expense relating to the amortization of deferred financing fees, for the years ended December 31, 2015, 2014 and 2013 was $2.8 million, $2.9 million and $4.2 million, respectively, and was recorded in “Interest expense, net” in the consolidated statements of operations.

Unamortized deferred financing fees related to the Accounts Receivable Securitization Facility were $0.5 million and $1.9 million as of December 31, 2015 and 2014, respectively, recorded in “Deferred charges and other assets” within the consolidated balance sheets. These charges are being amortized on a straight-line basis over the term of the facility. The Company recorded $1.2 million, $1.4 million and $1.4 million in amortization of deferred financing fees related to the Accounts Receivable Securitization Facility in “Interest expense, net” within the consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013, respectively.

Other Indebtedness

The Company has a short-term revolving facility through our subsidiary in China that provides uncommitted funds available for borrowing, subject to the availability of collateral. The facility is subject to annual renewal.

Outstanding borrowings under this revolving facility were zero and $7.6 million as of December 31, 2015 and 2014, respectively. The revolving facility is guaranteed by the Company’s holding company, Trinseo Materials Operating S.C.A. or secured by pledge of certain of the Company’s assets in China. As of December 31, 2015 and 2014, the weighted average interest rate of the facility was approximately zero and 0.1%, respectively.

Derivative Instruments
Derivative Instruments

NOTE 11—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 consolidated balance sheets at fair value. For fair value disclosures related to these instruments refer to Note 13.

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 December 31, 2015, the Company had open foreign exchange forward contracts with a net notional U.S. dollar equivalent absolute value of $371.8 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of December 31, 2015.

 

 

 

 

 

 

 

 

    

December 31,

 

Buy / (Sell) 

 

2015

 

Chinese Yuan

 

$

(122,907)

 

Euro

 

$

109,049

 

Indonesian Rupiah

 

$

(58,212)

 

Swiss Franc

 

$

36,856

 

British Pound

 

$

(16,124)

 

 

Open foreign exchange forward contracts as of December 31, 2015 have maturities of less than three months.

Foreign Exchange Cash Flow Hedges

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

Open foreign exchange cash flow hedges as of December 31, 2015 have maturities occurring over a period of 12 months, and have a net notional U.S. dollar equivalent of $168.0 million.

Net Investment Hedge

The Company’s outstanding debt includes €375.0 million of Euro Notes (see Note 10 for details).  As of December 31, 2015, 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 gain of $0.4 million within accumulated other comprehensive loss as of December 31, 2015.

Summary of Derivative Instruments

Information regarding changes in the fair value of the Company’s derivative instruments, 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

 

 

 

 

Year Ended December 31, 

 

Statement of Operations

 

 

2015

 

2014

 

2013

 

2015

 

2014

 

2013

 

Classification

Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange cash flow hedges

    

$

5,569

    

$

 —

 

$

 —

    

$

512

    

$

 —

 

$

 —

 

Cost of sales

Total

 

$

5,569

 

$

 —

 

$

 —

 

$

512

 

$

 —

 

$

 —

 

 

Net Investment Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Euro Notes

 

$

427

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Other expense, net

Total

 

$

427

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

 

Not Designated as Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

 —

 

$

 —

 

$

 —

 

$

(16,526)

 

$

(28,164)

 

$

(621)

 

Other expense, net

Total

 

$

 —

 

$

 —

 

$

 —

 

$

(16,526)

 

$

(28,164)

 

$

(621)

 

 

The Company recorded losses of $16.5 million, $28.2 million and $0.6 million during the years ended December 31, 2015, 2014, and 2013, respectively, from settlements and changes in the fair value of outstanding forward contracts (not designated as hedges) which are recognized in “Other expense, net” in the consolidated statements of operations. The losses from these forward contracts offset net foreign exchange transaction gains of $6.1 million and $32.4 million during the years ended December 31, 2015 and 2014, respectively, and were incremental to net foreign exchange transaction losses of $18.3 million during the year ended December 31, 2013, 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 consolidated statements of cash flows.

As of December 31, 2015, the Company has no ineffectiveness related to its foreign exchange cash flow hedges. In the next twelve months, the Company expects to reclassify an approximate $5.0 million net gain from other comprehensive income (loss) into earnings related to the Company’s outstanding cash flow hedges as of December 31, 2015, 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 consolidated balance sheets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

   

December 31, 2014

 

 

 

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

 

$

4,592

 

$

4,958

    

$

9,550

 

$

298

    

$

 —

    

$

298

 

Deferred charges and other assets

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total asset derivatives

 

$

4,592

 

$

4,958

 

$

9,550

 

$

298

 

$

 —

 

$

298

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

    

$

194

    

$

 —

    

$

194

 

$

4,850

    

$

 —

    

$

4,850

 

Other noncurrent obligations

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total liability derivatives

 

$

194

 

$

 —

 

$

194

 

$

4,850

 

$

 —

 

$

4,850

 

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 consolidated balance sheet. Information regarding the gross amounts of the Company’s derivative instruments and the amounts offset in the 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 December 31, 2015

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

10,044

 

$

(494)

 

$

9,550

 

Derivative liabilities

 

 

688

 

 

(494)

 

 

194

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

2,037

 

$

(1,739)

 

$

298

 

Derivative liabilities

 

 

6,589

 

 

(1,739)

 

 

4,850

 

Refer to Notes 13 and 21 for further information regarding the fair value of the Company’s derivative instruments and the related changes in accumulated other comprehensive income.

Stockholders' Equity
Stockholders' Equity

NOTE 12—SHAREHOLDERS’ EQUITY

Ordinary Shares

 

On May 30, 2014, the Company amended its Articles of Association to effect a 1-for-436.69219 reverse split of its issued and outstanding ordinary shares and to increase its authorized ordinary shares to 50.0 billion. Pursuant to the reverse split, every 436.69219 shares of the Company’s then issued and outstanding ordinary shares was converted into one ordinary share. The reverse split did not change the par value of the Company’s ordinary shares. These consolidated financial statements and accompanying footnotes have been retroactively adjusted to give effect to the reverse split.

 

On June 17, 2014, the Company completed the IPO of 11,500,000 ordinary shares at a price of $19.00 per share. The number of ordinary shares at closing included 1,500,000 of shares sold pursuant to the underwriters’ over-allotment option. The Company received cash proceeds of $203.2 million from this transaction, net of underwriting discounts. These net proceeds were used by the Company for: i) the July 2014 repayment of $132.5 million in aggregate principal amount of the 8.750% Senior Notes due 2019, together with accrued and unpaid interest thereon of $5.2 million and a call premium of $4.0 million (see Note 10); ii) the payment of approximately $23.3 million in connection with the termination of the Advisory Agreement with Bain Capital (see Note 18); iii) the payment of approximately $5.1 million of advisory, accounting, legal and printing expenses directly related to the offering which were recorded as a reduction to additional paid-in capital in the consolidated balance sheets; and iv) general corporate purposes.

Fair Value Measurements
Fair Value Measurements

NOTE 13—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 consolidated balance sheets at December 31, 2015 and 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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