TRINSEO PLC 2020 Year-to-Date Highlights
During the three and six months endedJune 30, 2020 , Trinseo recognized net loss of$128.4 million and$164.7 million , respectively, and Adjusted EBITDA of$(8.3) million and$48.7 million , respectively. These results were significantly impacted by the negative effects of the COVID-19 pandemic as well as unfavorable net raw material timing, discussed in detail below. Refer to "Non-GAAP Performance Measures" below for further discussion of our use of non-GAAP measures in evaluating our performance and a reconciliation of these measures. Other highlights for the year are described below.
COVID-19 Pandemic
The Company noted adverse market and industry conditions beginning to emerge inmid-March 2020 stemming from the COVID-19 pandemic. This pandemic has created an environment with historically-low demand, mainly in our Performance Plastics and Synthetic Rubber segments, resulting from reduced sales to automotive and tire applications. Management estimates that the COVID-19 pre-tax impact on profitability was approximately$60.0 million to$65.0 million during the three months endedJune 30, 2020 , and approximately$65.0 million to$70.0 million year-to-date. These impacts are partially offset by management actions taken to reduce and control operating costs, and lower utility costs. Through the second quarter, the Company has continued operations at the majority of our manufacturing locations and has not experienced any material disruptions in our supply chain, which has allowed us to continue meeting customer demand. Our procurement and supply chain teams continue to update contingency plans in the event of a significant disruption or shutdown so that future customer demand can continue to be met with timeliness and quality. The Company has been actively responding to this situation to adjust our business operations, and will continue to monitor developments and take action as needed. Refer to the "Outlook" section below for further information on the ongoing and potential impacts of COVID-19 to the Company's operations and results in future periods. With regard to capital resources and liquidity, the Company has continued to implement liquidity-focused actions in response to COVID-19, including reduced capital spending, operating expenses, and working capital. As a result of these actions, the Company achieved strong cash generation and quarter-end liquidity. The Company continues to maintain a strong balance sheet, has substantial sources of liquidity available, no maintenance covenants on our debt agreements, and no significant debt maturing untilSeptember 2024 . Refer to the "Capital Resources and Liquidity" section below for further information.
Impairment of Boehlen styrene monomer and Schkopau PBR Assets
In 2020, the Company continued our strategy, as described in the Company's
Annual Report for 2019, to focus efforts and increase investments in certain
product offerings serving the following applications, which are less cyclical
and offer significantly higher growth and margin potential: coatings, adhesives,
sealants, and elastomers ("CASE") applications within the Latex Binders segment;
engineered materials ("Engineered Materials") applications within the
Performance Plastics segment, which includes consumer electronics, medical, and
thermoplastic elastomers ("TPEs") applications; and solution styrene butadiene
rubber ("SSBR") within the Synthetic Rubber segment. As a result of continuing
this strategy and other management considerations, in March 2020 , the Company
initiated a consultation process with the Economic Council and Works Councils of
Trinseo Deutschland regarding the disposition of our styrene monomer assets in
Boehlen, Germany and our polybutadiene rubber ("PBR," specifically nickel and
neodymium-PBR) assets in Schkopau, Germany . Based on the Company's evaluation of
these assets, we determined that their full carrying value was not recoverable
and, as a result, we recorded an impairment charge on the assets of
approximately $38.3 million in March 2020 . This impairment charge is recorded
within "Impairment charges" on the condensed consolidated statements of
operations for the six months ended June 30, 2020 . In May 2020 , the Company made
the determination to mothball our PBR production assets in Schkopau, Germany .
The impacts of this decision and the resulting measures taken by the Company are
not material to our financial statements.
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Results of Operations
Results of Operations for the Three and Six Months Ended June 30, 2020 and 2019
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2020 % 2019 % 2020 % 2019 %
Net sales $ 569.7 100 % $ 951.8 100 % $ 1,423.2 100 % $ 1,964.9 100 %
Cost of sales 576.8 101 % 865.6 91 % 1,360.6 96 % 1,781.2 91 %
Gross profit (loss) (7.1) (1) % 86.2 9 % 62.6 4 % 183.7 9 %
Selling, general and
administrative
expenses 58.3 10 % 71.4 8 % 135.8 10 % 140.3 7 %
Equity in earnings of
unconsolidated
affiliates 14.4 3 % 40.3 4 % 24.2 2 % 72.5 4 %
Impairment charges - - % - - 38.3 3 % - - %
Operating income
(loss) (51.0) (9) % 55.1 6 % (87.3) (6) % 115.9 6 %Interest expense, net 11.7 2 % 9.9 1 % 22.0 2 % 20.1 1 % Other expense, net 1.0 - % 1.5 - % 2.6 - % 5.5 - % Income (loss) before income taxes (63.7) (11) % 43.7 5 % (111.9) (8) % 90.3 5 % Provision for income taxes 64.7 11 % 15.7 2 %
52.8 4 % 26.5 1 %
Net income (loss)
Three Months Ended -
Of the 40% decrease in net sales, 18% was due to lower sales volume. These lower sales volumes were primarily within the Performance Plastics and Synthetic Rubber segments, resulting from reduced sales to automotive and tire applications as a result of COVID-19. There were also lower sales volumes in the Latex Binders segment, especially within graphical paper and textile applications, and the Feedstocks segment, partially offset by higher sales volume within the Polystyrene segment, including higher demand to essential applications such as packaging and appliances. An additional 21% decrease was attributable to lower selling prices mainly due to the pass through of lower raw material costs. Cost of Sales Of the 33% decrease in cost of sales, 19% was due to lower raw material costs, and 14% was due to the aforementioned lower sales volume within the Synthetic Rubber, Performance Plastics, Feedstocks, and Latex Binders segments, partially offset by higher sales volume within the Polystyrene segment.
Gross Profit (Loss)
The decrease in gross profit of 108% was primarily attributable to COVID-19 related volume impacts as well as significant unfavorable net raw material timing impact in comparison to the prior year. In addition, as production schedules were adjusted and inventory reduction measures were taken, there was an impact of approximately$10.0 million related to lower production cost absorption in comparison to the prior year. See the segment discussion below for further information.
Selling, General and Administrative Expenses (SG&A)
The$13.1 million , or 18%, decrease in SG&A was due to several factors. Lower advisory and professional fees, mainly related to the Company's transition of business and technical services from Dow, which was largely completed in the first quarter of 2020, resulted in a$10.6 million decrease. Also contributing to the decrease were various management actions taken to control operating costs in response to COVID-19. This includes a decrease of$3.1 million in costs incurred for travel-related expenses, as well as an overall reduction in personnel costs, partially offset by an increase in restructuring costs associated with the corporate restructuring program. 29
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Equity in Earnings of Unconsolidated Affiliates
The decrease in equity earnings of
Other Expense, Net
Other expense, net for the three months endedJune 30, 2020 was$1.0 million , which included$1.4 million of expense related to the non-service cost components of net periodic benefit cost, partially offset by foreign exchange transaction gains of$0.6 million . Net foreign transaction gains included$8.7 million of gains primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between theU.S. dollar and the euro during the period, offset by$8.1 million of losses from our foreign exchange forward contracts. Other expense, net for the three months endedJune 30, 2019 was$1.5 million , which included$1.2 million of expense related to the non-service cost components of net periodic benefit cost. This is partially offset by foreign exchange transaction gains of$0.2 million . Net foreign transaction gains included$2.6 million of foreign exchange transaction gains primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between theU.S. dollar and the euro during the period, offset by$2.4 million of losses from our foreign exchange forward contracts.
Provision for Income Taxes
Provision for income taxes for the three months endedJune 30, 2020 totaled$64.7 million , resulting in an effective tax rate of (101.5)%. Provision for income taxes for the three months endedJune 30, 2019 totaled$15.7 million , resulting in an effective tax rate of 36.0%. The increase in provision for income taxes was primarily driven by the Company's forecasted jurisdictional mix of earnings, where losses expected to be generated in lower rate jurisdictions are being more than offset by income expected to be generated in higher tax jurisdictions, resulting in a negative tax rate based on the overall forecasted loss for the year.
Six Months Ended -
Of the 28% decrease in net sales, 13% was due to lower sales volume within the Synthetic Rubber, Performance Plastics, and Feedstocks segments, due primarily to COVID-19. In particular, we noted significant decreases in sales volumes within our Performance Plastics and Synthetic Rubber segments, resulting from reduced sales to automotive and tire applications. An additional 13% decrease was attributable to lower selling prices mainly due to the pass through of
lower raw material costs. Cost of Sales
Of the 24% decrease in cost of sales, 12% was due to lower raw material costs, primarily from styrene and butadiene, and 10% was due to the aforementioned lower sales volume within the Synthetic Rubber, Performance Plastics, and Feedstocks segments.
Gross Profit (Loss)
The decrease in gross profit of 66% was primarily attributable to lower sales volumes due to COVID-19, and styrene margin compression in the Feedstocks segment, as well as an unfavorable net raw material timing impact in comparison to the prior year. See the segment discussion below for further information.
Selling, General and Administrative Expenses (SG&A)
The$4.5 million , or 3%, decrease in SG&A was due to several factors. Lower advisory and professional fees, mainly related to the Company's transition of business and technical services from Dow, which was largely completed in the first quarter of 2020, resulted in a$4.3 million decrease. Also contributing to the decrease were various management 30
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actions taken to control operating costs in response to COVID-19. This includes a$4.9 million decrease in travel-related expenses. We also noted a$2.1 million decrease due to currency impacts on our euro-based expenses, as the euro weakened in comparison to theU.S. dollar. Partially offsetting these decreases was an increase of$2.9 million related to increased depreciation and an increase in bad debt expense of$1.9 million . The remaining change in overall SG&A is primarily attributable to an increase in restructuring costs from our corporate restructuring program, partially offset by a reduction in personnel costs.
Equity in Earnings of Unconsolidated Affiliates
The decrease in equity earnings of$48.3 million was due to lower equity earnings fromAmericas Styrenics , mainly attributable to lower styrene margins, volume-related impacts from COVID-19, and the impact from the planned turnaround at itsSt. James, Louisiana styrene facility in the first quarter of 2020.
Impairment charges
During the six months ended
Other Expense, Net
Other expense, net for the six months endedJune 30, 2020 was$2.6 million , which included$2.8 million of expense related to the non-service cost components of net periodic benefit cost, as well as foreign exchange transaction gains of$0.4 million . Net foreign transaction gains included$5.3 million of foreign exchange transaction losses primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between theU.S. dollar and the euro during the period, offset by$5.7 million of gains from our foreign exchange forward contracts. Other expense, net for the six months endedJune 30, 2019 was$5.5 million , which included$3.5 million of expense related to the non-service cost components of net periodic benefit cost, as well as foreign exchange transaction losses of$0.2 million . Net foreign transaction losses included$0.5 million of foreign exchange transaction losses primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between theU.S. dollar and the euro during the period, partially offset by$0.3 million of gains from our foreign exchange forward contracts. Other expense, net also included$1.9 million of other miscellaneous expenses during the period.
Provision for Income Taxes
Provision for income taxes for the six months endedJune 30, 2020 totaled$52.8 million , resulting in an effective tax rate of (47.2)%. Provision for income taxes for the six months endedJune 30, 2019 totaled$26.5 million , resulting in an effective tax rate of 29.3%. The increase in provision for income taxes was primarily driven by the Company's forecasted jurisdictional mix of earnings, where losses expeceted to be generated in lower rate jurisdictions are being more than offset by income expected to be generated in higher tax jurisdictions, resulting in a negative tax rate based on the overall forecasted loss for the year. The provision for income taxes was also impacted by the tax benefit related to the$38.3 million pre-tax impairment charges recorded during the period related to the Company's assets in Boehlen and Schkopau,Germany . Refer to Note 9 in the condensed consolidated financial statements for further information.
Outlook
As described above in "2020 Year-to-Date Highlights," the COVID-19 pandemic has created significant worldwide volatility, uncertainty and disruption, including impacts to our business and the end markets in which we operate. The Company's actions taken in response to this pandemic, as well as our outlook for operations, demand, and liquidity are described herein. Due to the significant uncertainty underlying the duration, magnitude, long-term economic impact of and expectations for recovery from the COVID-19 pandemic, there are inherent limitations underlying our future projections. Refer to the "Item 1A. Risk Factors" section below for further information regarding the risks related to the pandemic.
The Company has taken proactive steps to minimize the potential impact of the COVID-19 crisis to our stakeholders as well as the financial impacts to the Company. Our primary focus in this environment has been
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maintaining a safe and healthy workplace for our employees and other stakeholders, which led to the formation of a COVID-19 crisis response team and implementation of a pandemic response plan. These actions have allowed us to ensure worker safety, optimize production schedules at our plants, and keep our supply chain intact while also proactively developing and maintaining contingency plans and enabling the safe operation of our plants. We have implemented actions to reduce cost and improve efficiency, including the continuation of our Business Excellence initiatives and the corporate restructuring program announced in the fourth quarter of 2019. InApril 2020 , the reorganization of our executive leadership team was also announced. We have also taken actions to maximize our already strong liquidity position, including the reduction of capital spending, operating expenses, and working capital. Operationally, the Company has continued manufacturing at most of our locations and we have not experienced any material disruptions in our supply chain. We have seen resiliency in a number of our businesses, including sustained demand for polystyrene and latex binders for food packaging, polycarbonate for isolation sheeting, and engineered materials for medical applications. As noted previously, the Company experienced a historically-low demand environment in the second quarter of 2020, especially in our Performance Plastics, Synthetic Rubber, and Latex Binders segments, driven by automotive, tire, graphical paper, and textile applications, which reached a low point in April. However, we saw significant end market improvement as the quarter progressed, particularly in June, and we are hopeful that this momentum will continue through the third quarter. However, we caution that the rate of recovery remains unknown.
Additionally, we have seen styrene margin improvement in
Amid this market volatility and uncertainty, the Company has continued to maintain a strong financial position with ample access to capital resources and liquidity to manage the anticipated impact of the COVID-19 pandemic on our business operations for the foreseeable future. In particular, we note that in April we announced the drawdown of$100.0 million on our 2022 Revolving Facility as a precautionary measure. As noted above, we have increased confidence there will be continued end market improvement in the coming months, as a result of which, we repaid the entire$100.0 million on our 2022 Revolving Facility onJuly 24, 2020 .
Refer to the "Capital Resources and Liquidity" section below for more information.
Selected Segment Information
The following sections describe net sales, Adjusted EBITDA, and Adjusted EBITDA
margin by segment for the three and six months ended June 30, 2020 and 2019.
Inter-segment sales have been eliminated. Refer to Note 15 in the condensed
consolidated financial statements for further information on our segments, as
well as for a detailed definition of Adjusted EBITDA and a reconciliation of
income before income taxes to segment Adjusted EBITDA.
Latex Binders Segment
Our Latex Binders segment produces styrene-butadiene latex ("SB latex") and
other latex polymers and binders primarily for coated paper and packaging board,
carpet and artificial turf backings, as well as a broad range of performance
latex binders products, including SB latex, SA latex, and vinylidene chloride
latex for CASE applications.
Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2020 2019 % Change 2020 2019 % Change
Net sales $ 164.9 $ 230.2 (28) % $ 384.0 $ 454.1 (15) %
Adjusted EBITDA $ 17.0 $ 20.6 (17) % $ 38.6 $ 38.1 1 %
Adjusted EBITDA margin 10 % 9 % 10 % 8 %
Three Months Ended -
Of the 28% decrease in net sales, 20% was due to lower pricing from the pass through of lower raw material costs and 7% due to lower sales volume, primarily from reductions in graphical paper and textile applications sales as demand
was
impacted by COVID-19.
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The$3.6 million , or 17%, decrease in Adjusted EBITDA was primarily due to lower sales volume of,$5.3 million , or 26%. This was partially offset by higher margins due to lower raw material and utility costs, which resulted in a$1.1 million , or 5%, increase as well as a$1.1 million , or 5%, increase due to lower fixed costs.
Six Months Ended -
Of the 15% decrease in net sales, 14% was due to lower pricing from the pass through of lower raw material costs, primarily from styrene and butadiene. Lower sales volume to the graphical paper and textile markets were offset by sales from the recently acquired site in Rheinmünster,Germany . The$0.5 million , or 1%, increase in Adjusted EBITDA was primarily due to higher margins attributable mainly to lower utility costs, which resulted in a$2.5 million , or 7%, increase. These impacts were offset by a$1.7 million , or 4%, decrease due to higher fixed costs as well as a$0.3 million , or 1%, decrease due to reduced sales volume. Synthetic Rubber Segment Our Synthetic Rubber segment produces styrene-butadiene and polybutadiene-based rubber products used predominantly in high-performance tires, impact modifiers and technical rubber products, such as conveyor belts, hoses, seals and gaskets. We have a broad synthetic rubber technology and product portfolio, focusing on specialty products, such as solution styrene-butadiene rubber ("SSBR"), while also producing core products, such as emulsion styrene-butadiene rubber ("ESBR"). Three Months Ended Six Months Ended June 30, June 30, ($ in millions) 2020 2019 % Change 2020 2019 % Change Net sales$ 36.4 $ 112.1 (68) %$ 138.0 $ 236.7 (42) % Adjusted EBITDA$ (27.7) $ 12.9 (315) %$ (12.5) $ 21.7 (158) % Adjusted EBITDA margin (76) % 12 % (9) % 9 %
Three Months Ended -
Of the 68% decrease in net sales, 56% was due to decreased sales volumes from weaker demand in the global tire market due to COVID-19. An additional decrease of 11% was due to lower pricing from the pass through of lower raw material costs, mainly from styrene and butadiene. The$40.6 million , or 315%, decrease in Adjusted EBITDA was primarily due to lower sales volume as described above, which resulted in a$27.2 million , or 211%, decrease. An additional$9.8 million , or 76%, decrease was due to lower margins, mainly from net timing impacts, and an additional$3.9 million , or 30%, decrease due to higher fixed costs from a lower level of fixed cost absorption due to a planned maintenance turnaround.
Six Months Ended -
Of the 42% decrease in net sales, 31% was due to decreased sales volume from weaker demand in the global tire market due to COVID-19. An additional decrease of 9% was due to lower pricing from the pass through of lower raw material costs, mainly from styrene and butadiene. The$34.2 million , or 158%, decrease in Adjusted EBITDA was primarily due to lower sales volume as described above, which resulted in a$32.1 million , or 148%, decrease. An additional$7.0 million , or 32%, decrease was due to lower margins, mainly from net raw material timing impacts. These impacts were partially offset by an increase of$5.2 million , or 24%, due to lower fixed costs.
Performance Plastics Segment
Our Performance Plastics segment includes a variety of highly engineered compounds and blends, our acrylonitrile-butadiene-styrene ("ABS"), styrene-acrylonitrile ("SAN"), and polycarbonate ("PC") businesses, and engineered materials applications, which includes consumer electronics, medical, and thermoplastic elastomers ("TPEs") applications.
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Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2020 2019 % Change 2020 2019 % Change
Net sales $ 189.0 $ 347.5 (46) % $ 494.2 $ 716.8 (31) %
Adjusted EBITDA $ (5.6) $ 34.2 (116) % $ 31.2 $ 69.9 (55) %
Adjusted EBITDA margin (3) % 10 % 6 % 10 %
Three Months Ended -
Of the 46% decrease in net sales, 33% was due to lower sales volume, where COVID-19 caused significant headwinds in automotive applications as many customers inEurope andNorth America shut down production in the first half of the quarter. An additional 12% decrease was due to lower pricing from the pass through of lower raw material costs, primarily styrene. The$39.8 million , or 116%, decrease in Adjusted EBITDA was primarily due to the lower sales volume noted above, primarily to automotive applications, which resulted in a$37.0 million , or 108%, decrease. This decrease was also due to lower margins from unfavorable net raw material timing, which resulted in an$8.0 million , or 23% decrease. These impacts were partially offset by a$5.4 million , or 16%, increase due to lower fixed costs.
Six Months Ended -
Of the 31% decrease in net sales, 22% was due to lower sales volume, attributable to weak market conditions driven by COVID-19. An additional 8% decrease was due to lower pricing from the pass through of lower raw material costs, primarily styrene.
The$38.7 million , or 55%, decrease in Adjusted EBITDA was primarily due to the aforementioned lower sales volume, which resulted in a$42.3 million , or 61%, decrease. This was partially offset by a$5.6 million , or 8%, increase due
to
lower fixed costs.
Polystyrene Segment
Our product offerings in our Polystyrene segment include a variety of general
purpose polystyrenes ("GPPS") and polystyrene that has been modified with
polybutadiene rubber to increase its impact resistant properties ("HIPS"). These
products provide customers with performance and aesthetics at a low cost across
applications, including appliances, packaging, including food packaging and food
service disposables, consumer electronics, and building and construction
materials.
Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2020 2019 % Change 2020 2019 % Change
Net sales $ 155.8 $ 207.1 (25) % $ 338.6 $ 435.6 (22) %
Adjusted EBITDA $ 14.8 $ 16.2 (9) % $ 26.6 $ 32.9 (19) %
Adjusted EBITDA margin 9 % 8 % 8 % 8 %
Three Months Ended -
Of the 25% decrease in net sales, 39% was due to lower pricing from the pass through of lower styrene costs to our customers. This was partially offset by an increase of 15% due to increased sales volume, from sales to essential applications such as packaging and appliances as well as the impact of prior year destocking. The$1.4 million , or 9%, decrease in Adjusted EBITDA was primarily due to lower margins as a result of unfavorable net raw material timing, which resulted in a decrease of$4.4 million , or 28%. Additionally, higher fixed costs from lower production cost absorption resulted in a$1.1 million , or 7%, decrease and currency impacts resulted in a$0.3 million , or 2%, decrease as the euro weakened in comparison to theU.S. dollar during the period. These impacts more than offset increased sales volume, which resulted in a$4.5 million , or 28% increase. 34 Table of Contents
Six Months Ended -
Of the 22% decrease in net sales, 21% was due to lower pricing from the pass through of lower styrene costs to our customers.
The$6.3 million , or 19%, decrease in Adjusted EBITDA was primarily due to a$3.6 million , or 11% decrease in margins from unfavorable net raw material timing. Additionally, a decrease of$1.8 million , or 6%, was due to higher fixed costs as a result of lower production cost absorption.
Feedstocks Segment
The Feedstocks segment includes the Company's production and procurement of
styrene monomer outside of
Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2020 2019 % Change 2020 2019 % Change
Net sales $ 23.6 $ 54.9 (57) % $ 68.4 $ 121.7 (44) %
Adjusted EBITDA $ (3.5) $ (0.6) 483 % $ (19.8) $ 16.6 (219) %
Adjusted EBITDA margin (15) % (1) % (29) % 14 %
Three Months Ended -
Of the 57% decrease in net sales, 42% was due to lower pricing from the pass through of lower styrene prices and 15% was due to lower styrene-related sales volume. The decrease of$2.9 million in Adjusted EBITDA was primarily due to a decrease in margins of$5.0 million , mainly from unfavorable net raw material timing. This impact was partially offset by lower fixed costs which resulted in a$2.5 million increase.
Six Months Ended -
Of the 44% decrease in net sales, 23% was due to lower pricing from the pass through of lower styrene prices and 19% was due to lower styrene-related sales volume.
The decrease of$36.4 million in Adjusted EBITDA was primarily due to lower margins inEurope andAsia from weaker market conditions as well as unfavorable net raw material timing, which resulted in a$40.5 million decrease. This was partially offset by lower fixed costs which resulted in an increase of$3.2
million. Americas Styrenics Segment This segment consists solely of the equity earnings from of our 50%-owned joint venture,Americas Styrenics , a producer of both styrene monomer and polystyrene inNorth America . Styrene monomer is a basic building block of plastics and a key input to many of the Company's products, as well as a key raw material for the production of polystyrene. Major applications for the polystyrene productsAmericas Styrenics produces include appliances, food packaging, food service disposables, consumer electronics, and building and construction materials.
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Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2020 2019 % Change 2020 2019 % Change
Adjusted EBITDA* $ 14.4 $ 40.3 (64) % $ 24.2 $ 72.5 (67) %
*The results of this segment are comprised entirely of earnings from Americas
Styrenics , our equity method investment. As such, Adjusted EBITDA related to
this segment is included within "Equity in earnings of unconsolidated
affiliates" in the condensed consolidated statements of operations.
Three Months Ended -
The decrease in Adjusted EBITDA was mainly due to lower styrene margins in
Six Months Ended -
The decrease in Adjusted EBITDA was mainly due to lower styrene margins inNorth America , volume-related impacts from COVID-19, and the impact from the planned turnaround at itsSt. James, Louisiana styrene facility in the first quarter of 2020. Non-GAAP Performance Measures We present Adjusted EBITDA as a non-GAAP financial performance measure, which we define as income from continuing operations before interest expense, net; provision for income taxes; depreciation and amortization expense; loss on extinguishment of long-term debt; asset impairment charges; gains or losses on the dispositions of businesses and assets; restructuring charges; acquisition related costs and other items. In doing so, we are providing management, investors, and credit rating agencies with an indicator of our ongoing performance and business trends, removing the impact of transactions and events that we would not consider a part of our core operations. There are limitations to using the financial performance measures such as Adjusted EBITDA. This performance measure is not intended to represent net income or other measures of financial performance. As such, it should not be used as an alternative to net income as an indicator of operating performance. Other companies in our industry may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use this or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing a reconciliation of this performance measure to our net income, which is determined in accordance with GAAP. Adjusted EBITDA is calculated as follows for the three and six months endedJune 30, 2020 and 2019: Three Months Ended Six Months Ended June 30, June 30, (in millions) 2020 2019 2020 2019 Net income (loss)$ (128.4) $ 28.0 $ (164.7) $ 63.8 Interest expense, net 11.7 9.9 22.0 20.1 Provision for income taxes 64.7 15.7 52.8 26.5
Depreciation and amortization 34.8 34.7 71.1 68.7 EBITDA(a)$ (17.2) $ 88.3 $ (18.8) $ 179.1 Net gain on disposition of businesses and assets - - (0.4) (0.2) Restructuring and other charges(b) 6.3 (0.3) 8.1 0.1 Acquisition transaction and integration net costs (0.4) 0.7 (0.3) 0.7 Asset impairment charges or write-offs(c) - -
38.3 - Other items(d) 3.0 14.1 21.8 25.1 Adjusted EBITDA$ (8.3) $ 102.8 $ 48.7 $ 204.8
EBITDA is a non-GAAP financial performance measure that we refer to in making
operating decisions because we believe it provides our management as well as (a) our investors and credit agencies with meaningful information regarding the
Company's operational performance. We believe the use of EBITDA as a metric
assists our board of directors, management and investors in comparing our
operating performance on a consistent basis. Other
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companies in our industry may define EBITDA differently than we do. As a result,
it may be difficult to use EBITDA, or similarly-named financial measures that
other companies may use, to compare the performance of those companies to our
performance. We compensate for these limitations by providing reconciliations of
our EBITDA results to our net income, which is determined in accordance with
GAAP.
Restructuring and other charges for the three and six months ended
2020 primarily relate to employee termination benefit charges as well as
contract termination charges incurred in connection with the Company's
corporate restructuring program announced in the fourth quarter of 2019. The
restructuring and other charges for the three and six months ended
charges incurred in connection with the upgrade and replacement of our
compounding facility in Terneuzen,
cease manufacturing activities at our latex binders manufacturing facility in
statements for further information regarding restructuring activities.
Asset impairment charges or write-offs for the six months ended
consolidated financial statements for further information.
Other items for the three and six months ended June 30, 2020 and 2019primarily relate to advisory and professional fees incurred in conjunction
with our initiative to transition business services from Dow, including (d) certain administrative services such as accounts payable, logistics, and IT
services. Also included within other items for the three and six months ended
Company's strategic initiatives.
Liquidity and Capital Resources
Cash Flows
The table below summarizes our primary sources and uses of cash for the six
months ended
Six Months Ended
June 30,
(in millions) 2020 2019
Net cash provided by (used in):
Operating activities $ 75.8 $ 234.0
Investing activities 15.4 (46.9)
Financing activities 34.4 (101.9)Effect of exchange rates on cash (0.5)
(1.6)
Net change in cash, cash equivalents, and restricted cash
83.6 Operating Activities
Net cash provided by operating activities during the six months endedJune 30, 2020 totaled$75.8 million . Net cash provided by operating assets and liabilities for the six months endedJune 30, 2020 totaled$161.8 million , which was driven by the Company's liquidity-focused actions during the period, including reduced capital spending, operating expenses, and working capital. As a result of these initiatives as well as the impact of lower raw material prices and sales volumes, inventories decreased$123.1 million and accounts receivable decreased$129.9 million . Also contributing to the cash provided by operating activities during the period was the increase in income taxes payable of$54.0 million , due to the Company's effective tax rate during the period. These impacts were partially offset by the decrease in accounts payable and other current liabilities, which was attributable to the aforementioned lower raw material prices and sales volumes as well as the timing of vendor payments. Net cash provided by operating activities during the six months endedJune 30, 2019 totaled$234.0 million , inclusive of$52.5 million in dividends fromAmericas Styrenics . Net cash provided by operating assets and liabilities for the six months endedJune 30, 2019 totaled$107.7 million , noting decreases in inventories of$50.7 million and accounts 37
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receivable of$24.1 million , and an increase in accounts payable and other current liabilities of$45.1 million . This activity was partially offset by a decrease in income taxes payable of$11.2 million . The decrease in inventories was primarily due to decreased raw material prices. Accounts receivable at the end of the second quarter decreased relative to the end of 2018 primarily due to decreased raw material prices as well as lower volumes. The increase in accounts payable was due to timing of vendor payments, while the decrease in income taxes payable was primarily due to the overall reduction in earnings before income taxes. Investing Activities
Net cash provided by investing activities during the six months endedJune 30, 2020 totaled$15.4 million , primarily resulting from proceeds from the settlement of hedging instruments of$51.6 million (see Note 8) as well as proceeds from the sale of businesses and other assets (primarily our land inLivorno, Italy - see Note 16) of$11.9 million . These impacts were partially offset by capital expenditures of$48.2 million , which management has taken specific actions to control and reduce in response to COVID-19. Net cash used in investing activities during the six months endedJune 30, 2019 totaled$46.9 million , primarily resulting from capital expenditures of$47.6 million . Financing Activities
Net cash provided by financing activities during the six months endedJune 30, 2020 totaled$34.4 million . This activity was primarily due to proceeds of$100.0 million from the draw on the Company's 2022 Revolving Facility. This was partially offset by$25.0 million of payments related to the repurchase of ordinary shares,$31.2 million of dividends paid,$5.4 million of net repayments of short-term borrowings, and$3.4 million of net principal payments related to our 2024 Term Loan B during the period. Net cash used in financing activities during the six months endedJune 30, 2019 totaled$101.9 million . This activity was primarily due to$59.1 million of payments related to the repurchase of ordinary shares,$33.8 million of dividends paid,$3.5 million of net principal payments related to our 2024 Term Loan B during the period, and$2.3 million of net repayments of short-term borrowings. Additionally, net cash used in financing activities included$4.0 million of withholding taxes paid related to the vesting of certain RSUs during the period, partially offset by$0.8 million of proceeds received from the
exercise of option awards.
Free Cash Flow and Liquidity
We use Free Cash Flow and Liquidity as non-GAAP measures to evaluate and discuss
the Company's liquidity position and results. Free Cash Flow is defined as cash
from operating activities, less capital expenditures. Liquidity is defined as
total cash and cash equivalents plus unused borrowing capacity on the Company's
existing revolving debt and accounts receivable securitization facilities, as
applicable. We believe that Free Cash Flow provides an indicator of the
Company's ongoing ability to generate cash through core operations, as it
excludes the cash impacts of various financing transactions as well as cash
flows from business combinations that are not considered organic in nature. We
also believe that Free Cash Flow and Liquidity provide management and investors
with useful analytical indicators of our ability to service our indebtedness,
pay dividends (when declared), and meet our ongoing cash obligations.
Free Cash Flow and Liquidity are not intended to represent cash flows from
operations as defined by GAAP, and therefore, should not be used as alternatives
for that measure. Other companies in our industry may define Free Cash Flow and
Liquidity differently than we do. As a result, it may be difficult to use these
or similarly-named financial measures that other companies may use, to compare
the liquidity and cash generation of those companies to our own. We compensate
for these limitations by providing the following detail, which is determined in
accordance with GAAP.
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Free Cash Flow for the six months ended June 30, 2020 and 2019 is as follows:
Six Months Ended
June 30,
(in millions) 2020 2019
Cash provided by operating activities
(48.2) (47.6)
Free Cash Flow $ 27.6 $ 186.4 Refer to the discussion above for significant impacts to cash provided by
operating activities for the six months ended
Liquidity as of
As of
June 30, December 31,
(in millions) 2020 2019
Cash and cash equivalents $ 581.8 $ 456.2
Available borrowings under the Accounts Receivable
Securitization Facility 110.3 137.6
Available borrowings under the 2022 Revolving Facility 261.0
361.0
Liquidity $ 953.1 $ 954.8
Refer to the discussion below for further information on the components of Liquidity.
Capital Resources and Liquidity
We require cash principally for day-to-day operations, to finance capital investments and other initiatives, to purchase materials, to service our outstanding indebtedness, and to fund the return of capital to shareholders via dividend payments and ordinary share repurchases, when deemed appropriate. Our sources of liquidity include cash on hand, cash flow from operations, and amounts available under the Senior Credit Facility and the Accounts Receivable Securitization Facility (discussed further below). As ofJune 30, 2020 andDecember 31, 2019 , we had$1,292.0 million and$1,194.7 million , respectively, in outstanding indebtedness and$903.9 million and$963.5 million , respectively, in working capital. In addition, as ofJune 30, 2020 andDecember 31, 2019 , we had$82.0 million and$153.5 million , respectively, of foreign cash and cash equivalents on our balance sheet, outside of our country of domicile of Luxembourg, all of which is readily convertible into other foreign currencies, including theU.S. dollar. Our intention is not to permanently reinvest our foreign cash and cash equivalents. Accordingly, we record deferred income tax liabilities related to the unremitted earnings of our subsidiaries. The following table outlines our outstanding indebtedness as ofJune 30, 2020 andDecember 31, 2019 and the associated interest expense, including amortization of deferred financing fees and debt discounts. Effective interest rates for the borrowings included in the table below exclude the impact of deferred financing fee amortization, certain other fees charged to interest expense (such as fees for unused commitment fees during the period), and the impacts of derivatives designated as hedging instruments. For definitions of capitalized terms not included herein, refer to our Annual Report. 39 Table of Contents As of and for the Six Months Ended As of and for the Year Ended June 30, 2020 December 31, 2019 Effective Effective Interest Interest Interest Interest ($ in millions) Balance Rate Expense Balance Rate Expense Senior Credit Facility 2024 Term Loan B$ 680.8 2.5 %$ 12.8 $ 684.3 4.3 %$ 31.5 2022 Revolving Facility 100.0 2.8 % 2.0 - - 3.2 2025 Senior Notes 500.0 5.4 % 8.6 500.0 5.4 % 12.1 Accounts Receivable Securitization Facility - - 0.8 - - 1.5 Other indebtedness * 11.2 3.8 % - 10.4 2.1 % 0.1 Total$ 1,292.0 $ 24.2 $ 1,194.7 $ 48.4
*For the six months ended
Our Senior Credit Facility includes the 2022 Revolving Facility, which matures inSeptember 2022 and has a borrowing capacity of$375.0 million . As ofJune 30, 2020 , the Company had$100.0 million of outstanding borrowings and$261.0 million of funds available for borrowing (net of$14.0 million outstanding letters of credit) under the 2022 Revolving Facility. Further, as ofJune 30, 2020 , the Company is required to pay a quarterly commitment fee in respect of any unused commitments under the 2022 Revolving Facility equal to 0.375% per annum. The 2022 Revolving Facility contains a springing covenant which applies when 30% ($112.5 million ) or more is drawn from the facility, and would require the Company to meet a first lien net leverage ratio not to exceed 2.0x at the end of each financial quarter. As ofJune 30, 2020 the first lien net leverage ratio (as defined in our secured credit agreement) was 0.5x.
On
Also included in our Senior Credit Facility is our 2024 Term Loan B (with original principal of$700.0 million , maturing inSeptember 2024 ), which requires scheduled quarterly payments in amounts equal to 0.25% of the original principal. The stated interest rate on our 2024 Term Loan B is LIBOR plus 2.00% (subject to a 0.00% LIBOR floor). The Company made net principal payments of$3.4 million on the 2024 Term Loan B during the six months endedJune 30, 2020 , with an additional$7.0 million of scheduled future payments classified as current debt on the Company's condensed consolidated balance sheet as ofJune 30, 2020 . Our 2025 Senior Notes, as issued under the Indenture, include$500.0 million aggregate principal amount of 5.375% senior notes that mature onSeptember 1, 2025 . Interest on the 2025 Senior Notes is payable semi-annually onMay 3 andNovember 3 of each year, which commenced onMay 3, 2018 . These notes may be redeemed prior to their maturity at the option of the Company under certain circumstances at specific redemption prices. Refer to our Annual Report for further information. We continue to maintain our Accounts Receivable Securitization Facility which has a borrowing capacity of$150.0 million and matures inSeptember 2021 . As ofJune 30, 2020 , there were no amounts outstanding under this facility, and the Company had approximately$110.3 million of accounts receivable available to support this facility, based on the pool of eligible accounts receivable. Our ability to raise additional financing and our borrowing costs may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. We and our subsidiaries, affiliates or significant shareholders may from time to time seek to retire or purchase our outstanding debt through cash purchases in the open market, privately negotiated transactions, exchange transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (the "Issuers" of our 2025 Senior Notes and "Borrowers" under our Senior Credit Facility) are dependent upon the cash generation and receipt of distributions and dividends or other payments from our subsidiaries and joint venture in order to satisfy their debt obligations. There are no known significant restrictions by third parties on the ability of subsidiaries of the Company to disburse or dividend funds to the Issuers and the Borrowers in order to satisfy these obligations. However, as the Company's 40
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subsidiaries are located in a variety of jurisdictions, the Company can give no assurances that our subsidiaries will not face transfer restrictions in the future due to regulatory or other reasons beyond our control.
The Senior Credit Facility and Indenture also limit the ability of the Borrowers and Issuers, respectively, to pay dividends or make other distributions toTrinseo S.A. , which could then be used to make distributions to shareholders. During the six months endedJune 30, 2020 , the Company declared dividends of$0.80 per ordinary share, totaling$30.9 million , of which$16.1 million , inclusive of dividend equivalents, was accrued as ofJune 30, 2020 and the majority of which was paid inJuly 2020 . These dividends are within the available capacity under the terms of the restrictive covenants contained in the Senior Credit Facility and Indenture. Further, additional capacity continues to be available under the terms of these covenants to support expected future dividends to shareholders, should the Company continue to declare them. The Company's cash flow generation in recent years has been strong, with positive cash flows expected to continue for full year 2020, despite the challenges presented by extremely weak economic conditions due to COVID-19. During the six months endedJune 30, 2020 , under authority from our board of directors, the Company purchased approximately 0.8 million ordinary shares from our shareholders through open market transactions for an aggregate purchase price of$25.0 million . We believe that funds provided by operations, our existing cash, cash equivalent, and restricted cash balances, borrowings available under our 2022 Revolving Facility and our Accounts Receivable Securitization Facility will be adequate to meet planned operating and capital expenditures for at least the next 12 months under current operating conditions. Further, we also believe that our financial resources will allow us to manage the anticipated impact of the COVID-19 pandemic on our business operations for the foreseeable future, which could include lower demand, reductions in revenue or delays in payments from customers and other third parties. Our ability to generate cash from operations to pay our indebtedness and meet other liquidity needs is subject to certain risks described herein and under Part I, Item 1A-"Risk Factors" of our Annual Report. As ofJune 30, 2020 , we were in compliance with all the covenants and default provisions under our debt agreements. Refer to our Annual Report for further information on the details of the covenant requirements. Contractual Obligations and Commercial Commitments During the second quarter of 2020, the Company entered into a long-term contract to purchase butadiene directly from Dow's existing butadiene extraction facilities in Boehlen, Terneuzen and other locations. This contract has a five-year term with automatic two-year renewal provisions, and contains annual minimum purchase and maximum sale volume commitments. Other than entry into this contract, there have been no material revisions outside the ordinary course of business to our contractual obligations as described within "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations and Commercial Commitments" within our Annual Report. Critical Accounting Policies and Estimates Our unaudited interim condensed consolidated financial statements are based on the selection and application of significant accounting policies. The preparation of unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses at the date of and during the reporting period. Actual results could differ from those estimates. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results. We describe our significant accounting policies in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in our Annual Report, while we discuss our critical accounting policies and estimates in "Management's Discussion and Analysis of Financial Condition and Results of Operations" within our Annual Report. There have been no material revisions to the significant accounting policies or critical accounting policies and estimates as filed in our Annual Report. Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note 2 of our condensed consolidated financial statements, included elsewhere within this Quarterly Report.
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