TRINSEO PLC
The following discussion summarizes the significant factors affecting the
operating results, financial condition, liquidity and cash flows of our Company
as of and for the periods presented below. The following discussion and analysis
should be read in conjunction with the audited consolidated financial statements
and the accompanying notes thereto, included elsewhere within this Annual
Report. The statements in this discussion regarding industry outlook, our
expectations regarding our future performance, liquidity and capital resources
and all other non-historical statements in this discussion are forward-looking
statements and are based on the beliefs of our management, as well as
assumptions made by, and information currently available to, our management and
are made as of the date of this Annual Report. See "Cautionary Note Regarding
Forward-Looking Statements." Actual results could differ materially from those
discussed in or implied by forward-looking statements as a result of various
factors, including those discussed below and elsewhere within this Annual
Report, particularly in Item 1A-"Risk Factors." Definitions of capitalized terms
not defined herein appear in the notes to our consolidated financial statements.
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2021 Highlights
For the year ended December 31, 2021 , we had net income from continuing
operations of $279.6 million and Adjusted EBITDA of $729.4 million . The
Company's legacy businesses performed very well throughout 2021, and were
further supplemented by our acquisitions in the Engineered Materials segment.
These very strong results were achieved, despite challenging industry operating
conditions that arose during the second half of the year, including high utility
costs and constraints in material, labor and energy. Additionally, the Company
delivered strong cash generation during 2021 and returned significant cash to
our shareholders, purchasing approximately 1.0 million ordinary shares for total
value of $50.0 million and declaring quarterly dividends for an aggregate value
of $0.80 per ordinary share, or $31.4 million . Refer to the discussion below for
further information and refer to "Non-GAAP Performance Measures" for discussion
of our use of non-GAAP measures in evaluating our performance and a
reconciliation of these measures. Highlights for the year are described below.
Portfolio Transformation: In 2021, we made significant strides in the Company's
strategy to transform into a higher growth, higher margin and less cyclical
specialty and sustainable materials provider. Key achievements in this
transformation during the year include the following (refer to Note 4 and 5 in
the consolidated financial statements for further information):
Acquisition of the PMMA Business - On
PMMA Acquisition for a purchase price of
using proceeds from new debt financing arrangements, as described below. PMMA
1. is a transparent and rigid plastic with a wide range of end uses, and
complements Trinseo's existing offerings across several end markets including
automotive, building & construction, medical and consumer electronics. The
results of this business are included within the Company's Engineered
Materials segment.
Acquisition of
the Aristech Surfaces Acquisition for a purchase price of
funded with cash on hand and existing credit facilities.
a leading
2. cast and solid surface sheets, serving the wellness, architectural,
transportation and industrial markets. Its products are used for a variety of
applications, including the construction of hot tubs, swim spas, counter-tops,
signage, bath products and recreational vehicles. The results of this business
are included within the Company's Engineered Materials segment.
Divestiture of Synthetic Rubber Business - On
completed the divestiture of our Synthetic Rubber business to
certain of its subsidiaries (together, "Synthos") for a purchase price of
3. the assumption of pension liabilities by Synthos, and
working capital (excluding inventory) retained by Trinseo. The sale resulted
in the recognition of an after-tax gain of
during the fourth quarter of 2021. At closing, Trinseo and Synthos executed a
long-term supply agreement, under which we will supply Synthos with certain
raw materials used in the Synthetic Rubber business subsequent to the sale.
The assets and liabilities of our Synthetic Rubber business are classified as held-for-sale in our prior period balance sheet and the associated operating results of the Synthetic Rubber business are classified as discontinued operations for all periods presented.
Exploration of Divestiture of Styrenics Businesses - In the fourth quarter of
2021, Trinseo announced that we have begun work to explore the divesture of
4. the Company's styrenics businesses, for which we launched a formal sales
process in
to include the Feedstocks and Polystyrene reporting segments as well as our
50% ownership of
Acquisition of Heathland - On
definitive agreement to acquire Heathland, a leading collector and recycler of
5. post-consumer and post-industrial plastic wastes in
closed on
million, subject to customary working capital and other closing adjustments,
and up to €10.0 million contingent payments to be
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paid based on criteria as defined in the agreement. Heathland is based in
Utrecht, the Netherlands , and is focused on converting post-consumer andpost-industrial PMMA, PC, ABS, polystyrene, and other thermoplastic waste for
use in a wide range of high-end applications. The acquisition of Heathland
aligns with Trinseo's strategy to transform into specialty materials and
sustainable solutions provider.
Capital Structure and Shareholder Return: In 2021, we executed transactions and took steps to improve and streamline the Company's infrastructure, adjust our capital structure to support strategic initiatives, and return value to our shareholders. The key specific actions we took during the year in this pursuit include:
Redomiciliation to
merger transaction, as approved by our shareholders at our annual meeting,
pursuant to which our former publicly-traded parent company,
Luxembourg limited liability company, was merged with and into Trinseo PLC, an
Irish public limited company, as successor issuer to
1. "Redomiciliation"). The Redomiciliation is expected to provide Trinseo with a
favorable legal and regulatory infrastructure, simplify regulatory
requirements, provide dividend withholding tax benefits to shareholders and
provide operational efficiencies and reductions in its operating and
administrative costs. Refer to Item 1 - Business and Note 1 in the
consolidated financial statements for more information on the Redomiciliation.
Entry into New Financing Arrangements - On
"2029 Senior Notes"). Further, on
of the PMMA Acquisition, the Company entered into
2. incremental term loan borrowings (the "2028 Term Loan B") under our existing
senior secured credit facility. The net proceeds from the 2029 Senior Notes
and the 2028 Term Loan B, as well as available cash, were used to fund the
PMMA Acquisition. Refer to Note 12 in the consolidated financial statements
for further information.
Share Repurchases - In December 2021 , the Company's board of directors
authorized the repurchase of up to
shares. Under this authority, the Company purchased approximately 1.0 million
3. ordinary shares from our shareholders through open market transactions for an
aggregate purchase price of
repurchases were not yet settled but were accrued on the consolidated balance
sheet as of December 31, 2021 ).
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Results of Operations
Results of Operations for the Years Ended
The table below sets forth our historical results of operations, and these
results as a percentage of net sales for the periods indicated. Prior period
amounts herein have been recast in conjunction with adjustments made for the
Company's classification of the Synthetic Rubber business as discontinued
operations.
Year Ended
December 31,
(in millions) 2021 % 2020 % 2019 %
Net sales $ 4,827.5 100 % $ 2,744.6 100 % $ 3,373.9 100 %
Cost of sales 4,128.6 86 % 2,423.5 88 % 3,073.5 91 %
Gross profit 698.9 14 % 321.1 12 % 300.4 9 %
Selling, general and
administrative expenses 323.4 7 % 227.5 8 % 276.9 8 %
Equity in earnings of
unconsolidated affiliates 92.7 2 % 67.0 2 % 119.0 4 %
Impairment charges 6.8 - % 11.0 - % - - %
Operating income 461.4 9 % 149.6 6 % 142.5 5 %
Interest expense, net 79.4 2 % 43.6 2 % 39.3 1 %
Acquisition purchase price
hedge loss (gain) 22.0 - % (7.3) - % - - %
Other expense, net 9.5 - % 7.9 - % 3.4 - %
Income from continuing
operations before income
taxes 350.5 7 % 105.4 4 % 99.8 4 %
Provision for income taxes 70.9 1 % 42.7 2 % 12.7 - %
Net income from continuing
operations $ 279.6 6 % $ 62.7 2 % $ 87.1 4 %
Net income (loss) from
discontinued operations,
net of income taxes 160.4 3 % (54.8) (2) % 4.9 - %
Net income $ 440.0 9 % $ 7.9 - % $ 92.0 4 %
2021 vs. 2020
Net Sales
Of the 76% increase in net sales, 53% was due to higher selling prices resulting
mainly from the pass through of higher raw material costs. An additional 17%
increase was due to the contribution from our acquisitions in 2021, including
the PMMA Acquisition, which closed on May 3, 2021 and the Aristech Surfaces
Acquisition, which closed on September 1, 2021 . Higher sales volume increased
net sales by 4%.
Cost of Sales
The 70% increase in cost of sales was primarily attributable to a 48% increase
in raw material costs, an 18% increase related to our acquisitions, and a 5%
increase from higher utility costs.
Gross Profit
The increase in gross profit of 118% was primarily attributable to higher
margins from strong demand and tight supply mainly in polystyrene, ABS, and PC,
higher volume in Latex Binders, Base Plastics and Engineered Materials, as well
as contributions from our acquisitions. See the segment discussion below for
further information.
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Selling, General and Administrative Expenses
The$95.9 million , or 42%, increase in SG&A was primarily due to an increase in personnel costs of$42.5 million due to the Company's improved performance during 2021 and the addition of personnel from acquisitions, as well as an increase of$44.4 million in acquisition transaction and integration costs, primarily related to the PMMA Acquisition and the Aristech Surfaces Acquisition. There were additional increases of$13.8 million from costs associated with the Company's strategic initiatives and$6.4 million attributable to foreign exchange rate impacts. These increases were partially offset by a decrease of$18.1 million from lower advisory and professional fees, mainly related to the Company's transition of business and technical services from Dow in 2020.
Equity in Earnings of Unconsolidated Affiliates
The increase in equity earnings of
Impairment Charges
During the years ended
Interest Expense, Net
The increase in interest expense, net of$35.8 million , or 82%, was primarily attributable to the Company's issuance of the 2029 Senior Notes in the first quarter of 2021 and the 2028 Term Loan B during the second quarter of 2021. Refer to Note 12 in the consolidated financial statements for further information.
Acquisition purchase price hedge loss (gain)
During the years endedDecember 31, 2021 and 2020, the Company recorded an acquisition purchase price hedge loss (gain) of$22.0 million and$(7.3) million , respectively, due to the change in fair value of the Company's forward currency hedge arrangement on the euro-denominated purchase price of the PMMA business. Other Expense, Net Other expense, net for the year endedDecember 31, 2021 was$9.5 million , which included$5.2 million of expense related to the non-service cost components of net periodic benefit cost and$4.5 million of transfer taxes associated with the PMMA Acquisition. These expense amounts were partially offset by foreign exchange transaction gains of$1.3 million , which included$61.9 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, more than offset by$63.2 million of gains from our foreign exchange forward contracts, excluding the acquisition purchase price hedge. Also included in Other expense, net was$0.5 million of loss on extinguishment of debt related to the Company's new financing arrangements entered into during the year. Other expense, net for the year endedDecember 31, 2020 was$7.9 million , which included$5.5 million of expense related to the non-service cost components of net periodic benefit cost and foreign exchange transaction losses of$1.9 million . Net foreign transaction losses included$24.4 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, which were more than offset by$26.3 million of losses from our foreign exchange forward contracts, excluding the acquisition purchase price hedge.
Provision for Income Taxes
Provision for income taxes was$70.9 million and$42.7 million for the years endedDecember 31, 2021 and 2020, which resulted in an effective tax rate of 20% and 40%, respectively. The increase in provision for income taxes was primarily driven by the$245.1 million increase in income from continuing operations before income taxes, partially offset by a release of a valuation allowance of$16.3 million in 2021, as a result of improvements in business operations and projected future results of the Company's subsidiaries inChina . 43
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Net Income (Loss) from Discontinued Operations, Net of Income Taxes
Net income (loss) from discontinued operations, net of income taxes during the years endedDecember 31, 2021 and 2020 was$160.4 million and$(54.8) million , respectively, and was related to the results of our Synthetic Rubber business, including the divestiture of the business onDecember 1, 2021 . This sale resulted in the recognition of an after-tax gain of$117.8 million , which is reflected in the results for the year endedDecember 31, 2021 . Refer to Note 5 in the consolidated financial statements for further information.
2020 vs. 2019
Of the 19% decrease in net sales, 13% was due to lower selling prices resulting mainly from the pass through of lower raw material costs. An additional 6% decrease was due to lower sales volume, primarily within the Base Plastics and Feedstocks segments, mainly due to the impacts related to the COVID-19 pandemic.
Cost of Sales
Of the 21% decrease in cost of sales, 16% was due to lower raw material costs, primarily from styrene and butadiene, as well as a 5% decrease due to lower sales volume primarily from the Base Plastics and Feedstocks segments.
Gross Profit
The decrease in gross profit of 7% was primarily to lower sales volumes related to COVID-19 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
The$49.4 million , or 18%, decrease in selling, general, and administrative expenses 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$28.2 million decrease. Also contributing to the decrease were various management actions taken to control operating costs in response to COVID-19, including a$9.7 million decrease in travel-related expenses, as well as a decrease in restructuring costs of$12.5 million , primarily related to the Company's corporate restructuring program, which was initiated in the fourth quarter of 2019. Partially offsetting these decreases was an increase in acquisition costs of$7.5 million , which was principally attributable to the costs incurred in 2020 related to the proposed acquisition of the Arkema business.
Equity in Earnings of Unconsolidated Affiliates
The decrease in equity earnings of
Impairment Charges
During the year endedDecember 31, 2020 , the Company recorded impairment charges of$11.0 million related to our Boehlen styrene monomer assets. There were no impairment charges recorded during the year endedDecember 31, 2019 . Refer to Note 14 in the consolidated financial statements for further information. 44 Table of Contents Interest Expense, Net The$4.3 million , or 11%, increase in interest expense, net was primarily attributable to a$7.4 million reduction in interest benefit recorded as a result of the Company's entry into a new CCS arrangement inFebruary 2020 . This was partially offset by the net decrease in interest expense of$2.6 million attributable to lower interest rates during 2020 as compared to 2019.
Acquisition purchase price hedge loss (gain)
During the year endedDecember 31, 2020 , the Company recorded an acquisition purchase price hedge gain of$7.3 million due to the change in fair value of the Company's forward currency hedge arrangement on the euro-denominated purchase price of the PMMA business. No such gains or losses were recognized in 2019.
Other Expense, Net
Other expense, net for the year endedDecember 31, 2020 was$7.9 million , which included$5.5 million of expense related to the non-service cost components of net periodic benefit cost and foreign exchange transaction losses of$1.9 million . Net foreign transaction losses included$24.4 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, which were more than offset by$26.3 million of losses from our foreign exchange forward contracts, excluding the acquisition purchase price hedge. Other expense, net for the year endedDecember 31, 2019 was$3.4 million , which included$5.3 million of expense related to the non-service cost components of net periodic benefit cost and foreign exchange transaction gains of$1.6 million . Net foreign transaction losses included$6.4 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, which were more than offset by$8.0 million of gains from our foreign exchange forward contracts.
Provision for Income Taxes
Provision for income taxes was$42.7 million and$12.7 million for the years endedDecember 31, 2020 and 2019, which resulted in an effective tax rate of 40% and 13%, respectively. The increase in the provision for income taxes was primarily driven by the one-time deferred tax benefit of$65.0 million recorded in 2019 as a result of changes in the Swiss federal and cantonal tax rules. This one-time benefit was partially offset by a$25.3 million valuation allowance for the portion of the cantonal deferred tax asset that more likely than not will expire before utilization. Refer to Note 15 in the consolidated financial statements for further information. Excluding this one-time net benefit of$39.7 million in 2019, the provision for income taxes decreased$9.7 million , due primarily to the decrease in income from continuing operations before income taxes.
Net Income (Loss) from Discontinued Operations, Net of Income Taxes
Net income (loss) from discontinued operations, net of income taxes during the years endedDecember 31, 2020 and 2019 was$(54.8) million and$4.9 million , respectively, and was related to the results of our Synthetic Rubber business. The results for the year endedDecember 31, 2020 were adversely impacted by significant headwinds to the Synthetic Rubber business from COVID-19 impacts, as well as impairment charges of$28.1 million recorded during the period. Refer to Note 5 in the consolidated financial statements for further information.
Selected Segment Information
The Company's reportable segments are as follows: Engineered Materials, Latex Binders, Base Plastics, Polystyrene, Feedstocks, andAmericas Styrenics . Refer to Item 1-Business for a description of our segments, including a detailed overview, products and end uses, and competition and customers. The following sections present net sales, Adjusted EBITDA, and Adjusted EBITDA margin by segment for the years endedDecember 31, 2021 , 2020, and 2019. Inter-segment sales have been eliminated. Refer to Note 20 in the consolidated financial statements for a detailed definition of Adjusted EBITDA and a reconciliation of income from 45 Table of Contents continuing operations before income taxes to segment Adjusted EBITDA. Beginning in the second quarter of 2021, the Company reported the results of the Synthetic Rubber business, as discontinued operations in the consolidated statement of operations for all periods presented, and therefore, it is no longer presented as a separate reportable segment. Refer to Note 5 in the consolidated financial statements for further information. Engineered Materials Segment Year Ended December 31, Percentage Change ($ in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Net sales$ 755.0 $ 194.9 $ 209.9 287 % (7) % Adjusted EBITDA$ 94.8 $ 34.6 $ 31.4 174 % 10 %
Adjusted EBITDA margin 13 % 18 % 15 %
2021 vs. 2020
Of the$560.1 million , or 287%, increase in net sales,$468.4 million , or 240%, was attributable to the contribution from the acquisitions of the PMMA business andAristech Surfaces . An additional 26% was attributable to increased sales volumes, mostly due to higher sales to consumer electronics customers inAsia , and an additional 19% was due to increased prices primarily from the pass through of higher raw materials. Adjusted EBITDA increased$60.2 million , or 174%, of which$71.0 million , or 206%, was attributable to the contribution from the acquisitions of the PMMA business andAristech Surfaces . Also contributing to the change was an increase of 61% from increased sales volumes, mainly to consumer electronics customers inAsia , offset by a decrease of 78% from lower margins due to higher raw materials costs and a decrease of 12% due to higher fixed costs. During the fourth quarter of 2021, including the acquired businesses, segment results were lower than anticipated due to approximately$25.0 million of higher natural gas, freight, and raw material costs, primarily due to an unprecedented, short-term spike
in natural gas prices inEurope . 2020 vs. 2019
The 7% decrease in net sales was attributable to a 4% decrease in sales volume, due to COVID-19 impacts, as well as a 3% decrease in pricing from the pass through of lower raw material costs.
Adjusted EBITDA increased by$3.2 million , or 10%, compared to the prior year. This increase was primarily due to a$4.2 million , or 13%, increase in margins, primarily due to commercial excellence pricing actions. Also contributing to the increase was a$0.8 million , or 2%, increase due to lower fixed costs. These effects were partially offset by a decrease of$3.0 million , or 10%, from lower sales volume. Latex Binders Segment Year Ended December 31, Percentage Change ($ in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Net sales$ 1,183.4 $ 767.1 $ 902.8 54 % (15) % Adjusted EBITDA$ 106.5 $ 76.6 $ 76.7 39 % (0) % Adjusted EBITDA margin 9 % 10 % 8 %
2021 vs. 2020
The 54% increase in net sales was primarily due to a 46% increase in pricing from the pass through of raw material costs, mainly styrene and butadiene. Additionally, there was an increase of 6% due to increased sales volume for the
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period, which was driven by higher sales to CASE and paper applications, noting that sales volume to CASE applications alone increased 21% in comparison to prior year.
The$29.9 million , or 39%, increase in Adjusted EBITDA was primarily due to an increase of$22.4 million , or 29%, in sales volume as discussed above. The increase was also due to higher margins of$15.4 million , or 20%, including impacts from commercial excellence initiatives. These effects were partially offset by a decrease of$11.4 million , or 15%, due to higher fixed costs.
2020 vs. 2019
Of the 15% decrease in net sales, 15%, or nearly all of the decrease, was due to lower pricing from the pass through of lower raw material costs.
Adjusted EBITDA remained consistent year over year, with a minor decrease of$0.1 million driven by several offsetting factors. There was a decrease of$6.4 million , or 8%, from a negative net timing variance as well as a decrease of$2.0 million , or 3%, from lower volume and a decrease of$1.6 million , or 2%, due to higher fixed costs. These decreases were partially offset by an increase of$6.4 million , or 8%, mainly due to improved portfolio and product mix, as well as commercial excellence actions, and an increase of$4.2 million , or 5%, attributable to lower freight and utility costs. Base Plastics Segment Year Ended December 31, Percentage Change ($ in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Net sales$ 1,497.9 $ 918.2 $ 1,156.3
63 % (21) % Adjusted EBITDA$ 314.2 $ 106.0 $ 98.7 196 % 7 % Adjusted EBITDA margin 21 % 12 % 9 % 2021 vs. 2020 Of the 63% increase in net sales, 53% was due to higher pricing from the pass through of raw material costs, primarily styrene. Additionally, there was a 7% increase due to higher sales volumes, mainly to building and construction applications, and a 3% increase due to favorable foreign exchange rate impacts. The$208.2 million , or 196%, increase in Adjusted EBITDA was primarily due to higher margins, which contributed$167.3 million , or 158%, particularly in ABS and PC products attributable to commercial excellence initiatives as well as tight supply and strong demand. There was an additional increase of$26.0 million , or 25%, due to increased volumes as discussed above as well as an increase of$12.5 million , or 12%, due to foreign exchange rate impacts.
2020 vs. 2019
Of the 21% decrease in net sales, 12% was due to lower sales volume, primarily related to lower sales to automotive applications from COVID-19 impacts, and 10% was due to lower pricing from the pass through of lower raw material costs.
Adjusted EBITDA increased by
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half of the year. An additional $10.4 million , or 11%, increase was due to lower
fixed costs. These effects were partially offset by lower sales volume of $34.3
million , or 35%.
Polystyrene Segment
Year Ended
December 31, Percentage Change
($ in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net sales $ 1,118.8 $ 698.9 $ 809.4 60 % (14) % Adjusted EBITDA$ 183.1 $ 79.4 $ 54.4 131 % 46 % Adjusted EBITDA margin 16 % 11 % 7 % 2021 vs. 2020 Of the 60% increase in net sales, 65% was due to higher pricing primarily from the pass through of higher styrene costs to our customers. This increase was slightly offset by decreased sales volume of 5% caused by raw material constraints and a planned production outage as well as higher demand in the prior year for COVID-19 essential applications such as packaging. The$103.7 million , or 131%, increase was due to higher margins resulting from commercial excellence initiatives and tight market conditions, which resulted in an increase of$119.5 million , or 150%. These effects were partially offset by a decrease of$8.1 million , or 10%, from lower sales volume as noted above as well as higher fixed costs resulting in a decrease of$5.9 million , or 7%.
2020 vs. 2019
Of the 14% decrease in net sales, 19% was due to lower pricing from the pass through of lower styrene costs to our customers. This was partially offset by an increase of 4% due to increased sales volume. Adjusted EBITDA increased by$25.0 million , or 46%, compared to the prior year. Higher margins, primarily from pricing initiatives and tighter market conditions, resulted in a$22.4 million , or 41%, increase. Also contributing to the increase was a$6.3 million , or 12%, increase in sales volume. Feedstocks Segment Year Ended December 31, Percentage Change ($ in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Net sales$ 272.4 $ 165.5 $ 295.5 65 % (44) % Adjusted EBITDA$ 33.7 $ 3.2 $ 6.5
953 % (51) % Adjusted EBITDA margin 12 % 2 % 2 % 2021 vs. 2020
Of the 65% increase in net sales, 74% was due to higher pricing from the pass through of higher styrene prices. This effect was partially offset by a 10% decrease due to lower styrene-related sales volume.
The increase of$30.5 million in Adjusted EBITDA was primarily due to higher styrene margins inEurope , despite significantly higher utility costs from high natural gas prices, resulting in an increase of$41.3 million . This effect
was
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partially offset by negative impacts of
2020 vs. 2019
Of the 44% decrease in net sales, 25% was due to lower styrene-related sales volume and 19% was due to lower pricing from the pass through of lower styrene prices. Adjusted EBITDA decreased by$3.3 million , or 51%, compared to the prior year. Lower margins resulted in a$4.8 million , or 74%, decrease due to unfavorable net timing and portfolio mix. An additional 52% decrease was attributable to currency impacts. These decreases were partially offset by lower fixed costs driven by the Company's overall cost reduction initiatives, which resulted
in a
61% increase.
Americas Styrenics Segment
Year Ended
December 31, Percentage Change
($ in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Adjusted EBITDA* $ 92.7 $ 67.0 $ 119.0 38 % (44) %
*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 consolidated statements of operations.
2021 vs. 2020
The increase in Adjusted EBITDA was mainly due to increased polystyrene sales volume and higher styrene and polystyrene margins inNorth America , primarily attributable to COVID-19 related impacts in the prior year as well as tight supply conditions caused by weather related and other events.
2020 vs. 2019
The 44% 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. Outlook Based on the strong demand in many of our end markets, as well as our commercial excellence programs and the synergies from our acquired businesses, we expect that 2022 will be another year of solid earnings and strong cash generation. As discussed above in "2021 Highlights," there were challenges in late 2021 due to high energy prices and adverse supply chain and production conditions, however, we have navigated through these situations and have successfully continued providing unique product solutions to our customers. We will continue to move forward with our transformation strategy, including progressing on our process to divest the styrenics businesses, and achieving our sustainability goals. 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, 49
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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 accounting principles generally accepted inthe United States of America ("GAAP"). Adjusted EBITDA is calculated as follows for the years endedDecember 31, 2021 , 2020, and 2019. Prior period amounts herein have been recast in conjunction with adjustments made for the Company's classification of the Synthetic Rubber business as discontinued operations. Year Ended December 31, (in millions) 2021 2020 2019 Net income$ 440.0 $ 7.9 $ 92.0 Net income (loss) from discontinued operations 160.4 (54.8)
4.9
Net income from continuing operations 279.6 62.7
87.1 Interest expense, net 79.4 43.6 39.3 Provision for income taxes 70.9 42.7 12.7 Depreciation and amortization 167.5 92.6 91.5 EBITDA(a)$ 597.4 $ 241.6 $ 230.6 Net gain on disposition of businesses and assets (0.6) (0.4)
(0.7)
Restructuring and other charges(b) 9.0 5.6
16.8
Acquisition transaction and integration net costs (benefit)(c) 75.3 9.1
(0.9)
Acquisition purchase price hedge loss (gain)(d) 22.0 (7.3)
-
Asset impairment charges or write-offs(e) 6.8 11.0
-
Other items(f) 19.5 25.5 55.4
Adjusted EBITDA $ 729.4 $ 285.1 $ 301.2 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
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 (a) operating performance on a consistent basis. Other 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 years ended
and 2019 primarily relate to employee termination benefit charges as well as
contract termination charges incurred in connection with the Company's
transformational and corporate restructuring programs. Additionally, a
portion of the restructuring and other charges for the years ended December (b) 31, 2019 relate to decommissioning and employee termination benefit charges
incurred in connection with the upgrade and replacement of our compounding
facility in Terneuzen,
manufacturing activities at our latex binders manufacturing facility in
further information regarding restructuring activities.
Note that the accelerated depreciation charges incurred as part of both the Company's corporate restructuring program and the upgrade and replacement of the Company's compounding facility in Terneuzen,The Netherlands are included within the "Depreciation and amortization" caption above, and therefore are not included as a separate adjustment within this caption. 50 Table of Contents
Acquisition transaction and integration net costs (benefit) for the years
ended
Acquisition and the Aristech Surfaces Acquisition. Acquisition transaction
and integration net benefit amounts for the year ended
the Company's acquisition of latex binders production assets and related site
infrastructure in Rheinmünster, Germany , partially offset by certain
jurisdictional asset transfer taxes and advisory and professional fees
incurred related to this acquisition.
The acquisition purchase price hedge loss (gain) for the years ended December
31, 2021 and 2020 relates to the change in fair value of the Company's (d) forward currency hedge arrangement that economically hedged the
euro-denominated purchase price of the PMMA business. Refer to Note 13 in the
consolidated financial statements for further information.
Asset impairment charges or write-offs for the years ended
Germany . Refer to Note 14 in the consolidated financial statements for further information.
Other items for the year ended
incurred in conjunction with certain of the Company's strategic initiatives,
including our ERP upgrade project. Other items for the years ended December
31, 2020 and 2019 primarily relate to advisory and professional fees incurred (f) in conjunction with our initiative to transition business services from Dow,
including certain administrative services such as accounts payable,
logistics, and IT services, which was substantially completed in 2020, as
well as fees incurred in conjunction with certain of the Company's strategic
initiatives.
Liquidity and Capital Resources
Cash Flows
The table below summarizes our primary sources and uses of cash for the years
ended December 31, 2021 , 2020, and 2019. We have derived the summarized cash
flow information from our audited financial statements. Prior period amounts
herein have been recast in conjunction with adjustments made for the Company's
classification of the Synthetic Rubber business as discontinued operations, as
described in Note 5 of the consolidated financial statements and in Item
1-Business.
Year Ended
December 31,
(in millions) 2021 2020 2019
Net cash provided by (used in):
Operating activities - continuing operations $ 456.0 $ 216.8 $ 241.9
Operating activities - discontinued operations (3.3) 38.6 80.6
Operating activities 452.7 255.4 322.5
Investing activities - continuing operations (1,936.2) (3.0) (83.2)
Investing activities - discontinued operations 396.5 (21.2) (26.1) Investing activities (1,539.7) (24.2) (109.3) Financing activities 1,075.7 (104.3) (206.7)
Effect of exchange rates on cash (4.4)
4.4 (1.4)
Net change in cash, cash equivalents, and restricted cash
Operating Activities Net cash provided by operating activities from continuing operations during the year endedDecember 31, 2021 totaled$456.0 million , driven by strong earnings, and inclusive of dividends received fromAmericas Styrenics of$85.0 million . Partially offsetting these factors was a$23.0 million reduction in operating cash from a net working capital use during the period, primarily attributable to increases in raw material costs. Net cash used in operating activities from discontinued operations during the year endedDecember 31, 2021 totaled$3.3 million , and was related to the operations of our Synthetic Rubber business, which was sold during the period. As discussed in Note 5 to the consolidated financial statements, the sale of our Synthetic Rubber business excluded the transfer of net working capital (excluding inventory). 51
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As a result, the release of this working capital, the majority of which will occur in the first quarter of 2022, is or will be included in our continuing operating cash flows. Net cash provided by operating activities from continuing operations during the year endedDecember 31, 2020 totaled$216.8 million . This increase in cash was driven by a$83.6 million increase in operating cash generated from a net working capital release during the period, which was primarily attributable to the Company's liquidity-focused actions during the height of the COVID-19 pandemic, including reduced capital spending, operating expenses, and working capital, as well as the impact of lower raw material prices and sales volumes. Net cash provided by operating activities from discontinued operations during the year endedDecember 31, 2020 totaled$38.6 million , and was also driven by the aforementioned liquidity-focused actions. Net cash provided by operating activities from continuing operations during the year endedDecember 31, 2019 totaled$241.9 million , inclusive of$110.0 million of dividends received fromAmericas Styrenics . This increase in cash was driven by a$98.6 million increase in operating cash generated from a net working capital release during the period, which was primarily attributable to decreases of$66.6 million in accounts receivable and$43.1 million in inventories, due to lower raw material prices and lower sales volumes, as well as lower days sales in inventory. Net cash provided by operating activities from discontinued operations during the year endedDecember 31, 2019 totaled$80.6 million , and was also driven by lower raw material prices and lower sales volumes during
the period. Investing Activities
Net cash used in investing activities from continuing operations during the year endedDecember 31, 2021 totaled$1,936.2 million , which was primarily attributable to net cash paid for asset or business acquisitions of$1,804.0 million (see Note 4), capital expenditures of$117.7 million , and payments for the settlement of hedging instruments of$14.7 million (related to the acquisition purchase price hedge - see Note 13). Net cash provided by investing activities from discontinued operations during the year endedDecember 31, 2021 totaled$396.5 million , which was primarily attributable to cash received from the sale of the Synthetic Rubber business.
Capital expenditures for 2022 are expected to be approximately
Net cash used in investing activities from continuing operations during the year endedDecember 31, 2020 totaled$3.0 million . This activity included capital expenditures of$66.6 million , partially offset by proceeds from the settlement of hedging instruments of$51.6 million as well as proceeds of$11.9 million from the sale of our former latex binders manufacturing facility inLivorno, Italy . Net cash used in investing activities from discontinued operations during the year endedDecember 31, 2020 totaled$21.2 million , which was attributable to capital expenditures of$15.7 million as well as cash paid for a cost method investment of$5.5 million . Net cash used in investing activities from continuing operations during the year endedDecember 31, 2019 totaled$83.2 million , primarily resulting from capital expenditures of$84.0 million . Net cash used in investing activities from discontinued operations during the year endedDecember 31, 2019 totaled$26.1 million , which was entirely attributable to capital expenditures.
Financing Activities
Net cash provided by financing activities during the year endedDecember 31, 2021 totaled$1,075.7 million . This activity was primarily due to$746.3 million in proceeds from the issuance of the 2028 Term Loan B,$450.0 million in proceeds from the issuance of the 2029 Senior Notes, and$11.0 million in proceeds from exercise of option awards. This activity was partially offset by$48.1 million of ordinary share repurchases,$35.4 million of deferred financing fees paid,$14.6 million of net repayments of short-term borrowings,$21.9 million of dividend payments, and$10.7 million of net principal payments related to our 2024 Term Loan B and 2028 Term Loan B during the period. Net cash used in financing activities during the year endedDecember 31, 2020 totaled$104.3 million . This activity was primarily due to$61.8 million of dividends paid,$25.0 million of payments related to the repurchase of ordinary shares,$12.6 million net repayments of short-term borrowings, and$6.9 million of net principal payments related to our 2024 Term Loan B during the period. Additionally, net cash used in financing activities included$0.6 million of withholding taxes paid related to the vesting of certain Restricted Share Units ("RSUs") during the period, which was more than offset by$2.6 million of proceeds received from the exercise of option awards. 52
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Net cash used in financing activities during the year endedDecember 31, 2019 totaled$206.7 million . This activity was primarily due to$119.7 million of ordinary shares repurchases,$65.7 million of dividends paid,$7.0 million of net principal payments related to our 2024 Term Loan B during the period, and$10.6 million net repayments of short-term borrowings. Additionally, net cash used in financing activities included$4.6 million of withholding taxes paid related to the vesting of certain RSUs during the period, partially offset by$0.9 million of proceeds received from the exercise of option awards.
Free Cash Flow
We use Free Cash Flow as a non-GAAP measure to evaluate and discuss the
Company's liquidity position and results. Free Cash Flow is defined as cash from
operating activities, less capital expenditures. 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 provides
management and investors with useful analytical indicator of our ability to
service our indebtedness, pay dividends (when declared), and meet our ongoing
cash obligations.
Free Cash Flow is not intended to represent cash flows from operations as
defined by GAAP, and therefore, should not be used as an alternative for that
measure. Other companies in our industry may define Free Cash Flow 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 liquidity and
cash generation of those companies to our own. We compensate for these
limitations by providing a reconciliation to cash provided by operating
activities, which is determined in accordance with GAAP.
Year Ended
December 31,
(in millions) 2021 2020 2019
Cash provided by operating activities
(123.5) (82.3) (110.1)
Free Cash Flow $ 329.2 $ 173.1 $ 212.4
Refer to the discussion above for significant impacts to cash provided by
operating activities for the years ended
Capital Resources, Indebtedness 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 continuing operations, and amounts available under the Senior Credit Facility and the Accounts Receivable Securitization Facility (discussed further below). As ofDecember 31, 2021 and 2020, we had$2,368.8 million and$1,187.3 million , respectively, in outstanding indebtedness and$1,064.1 million and$983.3 million , respectively, in working capital (calculated as current assets from continuing operations less current liabilities from continuing operations). In addition, as ofDecember 31, 2021 and 2020, we had$560.6 million and$172.8 million , respectively, of foreign cash and cash equivalents on our consolidated balance sheets, outside of our country of domicile, which wasIreland as ofDecember 31, 2021 and Luxembourg as ofDecember 31, 2020 , all of which is readily convertible into other foreign currencies, including theU.S. dollar. Our intention is not to permanently reinvest our foreign cash and cash equivalents. Accordingly, we record deferred income tax liabilities related to the unremitted earnings of our subsidiaries. For a detailed description of the Company's debt structure, borrowing rates, and expected future payment obligations, refer to Note 12 in the consolidated financial statements. 53
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The following table outlines our outstanding indebtedness as ofDecember 31, 2021 and 2020 and the associated interest expense, including amortization of deferred financing fees and issuance discounts. Effective interest rates for the borrowings included in the table below exclude the impact of deferred financing fee amortization, certain other fees charged to interest expense (such as fees for unused commitment fees during the period), and the impacts of derivatives designated as hedging instruments. As of and for the Year Ended As of and for the Year Ended December 31, 2021 December 31, 2020 Effective Effective Interest Interest Interest Interest ($ in millions) Balance Rate Expense Balance Rate Expense Senior Credit Facility 2024 Term Loan B$ 670.4 2.1 %$ 20.6 $ 677.3 2.6 %$ 23.3 2028 Term Loan B 742.8 2.6 % 15.2 - - - 2026 Revolving Facility - - % 2.1 - - 3.7 2029 Senior Notes 450.0 5.1 % 19.0 - - - 2025 Senior Notes 500.0 5.4 % 20.7 500.0 5.4 % 19.5 Accounts Receivable Securitization Facility - 2.0 % 1.8 - - 1.5 Other indebtedness* 5.6 2.2 % - 10.0 2.4 % 0.1 Total$ 2,368.8 $ 79.4 $ 1,187.3 $ 48.1
*For the year ended
Our Senior Credit Facility includes the 2026 Revolving Facility, which matures inMay 2026 and has a borrowing capacity of$375.0 million . As ofDecember 31, 2021 , the Company had$368.6 million of funds available for borrowing (net of$6.4 million outstanding letters of credit) under the 2026 Revolving Facility. Further, as ofDecember 31, 2021 , the Company is required to pay a quarterly commitment fee in respect of any unused commitments under the 2026 Revolving Facility equal to 0.375% per annum. Also included in our Senior Credit Facility is our 2024 Term Loan B (with original principal of$700.0 million , maturing inSeptember 2024 ), and our 2028 Term Loan B (with original principal of$750.0 million , maturing inMay 2028 ), each of 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 London Interbank Offered Rate ("LIBOR") plus 2.00% (subject to a 0.00% LIBOR floor). The stated interest rate on our 2028 Term Loan B is LIBOR plus 2.50% (subject to a 0.00% LIBOR floor). The Company made net principal payments of$7.0 million on the 2024 Term Loan B and net principal payments of$3.7 million on the 2028 Term Loan B during the year endedDecember 31, 2021 , with an additional$14.5 million of scheduled future payments classified within current debt on the Company's consolidated balance sheet as ofDecember 31, 2021 related to both the 2024 Term Loan B and 2028 Term Loan B. Our 2025 Senior Notes issued under the indenture executed in 2017 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. These Notes may be redeemed prior to their maturity at the option of the Company under certain circumstances at specific redemption prices. Refer to Note 12 in the consolidated financial statements for further information. Our 2029 Senior Notes, as issued under the indenture executed in 2021, include$450.0 million aggregate principal amount of 5.125% senior notes that mature onApril 1, 2029 . Interest on the 2029 Senior Notes is payable semi-annually onFebruary 15 andAugust 15 of each year, which commenced onAugust 15, 2021 . These Notes may be redeemed prior to their maturity at the option of the Company under certain circumstances at specific redemption prices. Refer to Note 12 in the consolidated financial statements for further information. We also continue to maintain our Accounts Receivable Securitization Facility, which has an outstanding borrowing capacity of$150.0 million . The Accounts Receivable Securitization Facility was amended during 2021, and pursuant to the amended terms, it matures inNovember 2024 and incurs fixed interest charges of 1.65% on outstanding borrowings plus variable commercial paper rates, as well as fixed charges of 0.80% on available, but undrawn commitments. InAugust 2021 , in conjunction with the Aristech Surfaces Acquisition, we drew$150.0 million
on
our
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Accounts Receivable Securitization Facility, which was fully repaid as of
December 31, 2021 . As such, as of December 31, 2021 , there were no amounts
outstanding under this facility and the Company had approximately $150.0 million
of accounts receivable available to support this facility, based on the pool of
eligible accounts receivable. Refer to Note 12 in the consolidated financial
statements for further information on the facility.
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 2029 Senior Notes and 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 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 Indentures also limit the ability of the
Borrowers and Issuers, respectively, to pay dividends or make other
distributions to Trinseo PLC, which could then be used to make distributions to
shareholders. During the year ended December 31, 2021 , the Company declared
total dividends of $0.80 per ordinary share, or $31.4 million , of which $13.6
million , inclusive of dividend equivalents, remains accrued as of December 31,
2021 and the majority of which was paid in January 2022 . These dividends are
well within the available capacity under the terms of the restrictive covenants
contained in the Senior Credit Facility and Indentures. Further, significant
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, and the
Company generated positive cash flows during the year ended December 31, 2021 .
We believe that funds provided by operations, our existing cash, cash
equivalent, and restricted cash balances, borrowings available under our 2026
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.
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
Item 1A-Risk Factors. As of December 31, 2021 , we were in compliance with all
the covenants and default provisions under our debt agreements. Refer to Note 12
in the consolidated financial statements for further information on the details
of the covenant requirements.
We do not have any off-balance sheet financing arrangements that we believe are
reasonably likely to have a material current or future effect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Contractual Obligations and Commercial Commitments
The Company's primary contractual obligations and commercial commitments consist
of the payments for principal and interest on our outstanding long-term debt,
raw material purchases, funding requirements under our pension and other
postretirement benefits, lease commitments, and obligations under our SAR SSAs.
The Company has both fixed and variable-rate long-term debt arrangements, which
have varying principal and interest payment requirements over their contractual
terms. Refer to the table and section above as well as to Note 12 in the
consolidated financial statements for more information on our debt arrangements.
Additionally, refer to Item 7A-
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Quantitative and Qualitative Disclosures about Market Risk for discussion of our interest rate and foreign currency risks related to our debt and debt-related hedging arrangements. The Company has certain raw material purchase contracts where we are required to purchase certain minimum volumes at the then prevailing market prices. As ofDecember 31, 2021 , the Company had$2,078.2 million of raw material purchase obligations, of which$859.1 million is due within the next twelve months. These commitments have remaining terms ranging from one to five years. Refer to Note 16 in the consolidated financial statements for more information on raw material purchase commitments. Additionally, refer to Item 1 - Business - Sources and Availability of Raw Materials for further description of the sources of our key raw materials. The Company has various pension and other postretirement plans. The Company is required to make minimum contributions to certain of our funded pension plans and is also obligated to make benefit payments to employees for the unfunded pension plans and other postretirement plans. As ofDecember 31, 2021 , the Company's estimated future benefit payments through 2031, reflecting expected future service, as appropriate, was$137.5 million , of which$9.7 million is due within the next twelve months. Refer to the section of our Critical Accounting Policies and Estimates entitled "Pension Plans and Postretirement Benefits" for more information on the factors impacting our pension and postretirement costs. Additionally, refer to Note 17 in the consolidated financial statements for more details on these employee benefit plans and the future payments expected to be made for them through 2031. The Company has operating and finance leases for certain of its plant and warehouse sites, office spaces, rail cars, storage facilities, and equipment. The Company's leases have remaining terms of one month through fourteen years. As ofDecember 31, 2021 , the Company's estimated minimum commitments related to our finance and operating lease obligations was$103.1 million , of which$23.1 million is due within the next twelve months. Refer to Note 24 in the consolidated financial statements for further information on our lease portfolio and future lease obligations. As described in Item 1- Business- Our Relationship with Dow, the Company is party to SAR SSAs with Dow, which are agreements under which Dow provides certain site services to the Company at Dow-owned locations. Based on our current year known costs and assuming that we continue with the SAR SSAs with similar annualized costs going forward, we estimate our contractual obligations under these agreements to be approximately$210.3 million annually for 2022 through 2026, and a total of$2,622.5 million thereafter throughJune 2039 . Refer to the aforementioned section of Item 1 for more information regarding these agreements, including details regarding the rights of the Company and Dow to terminate said agreements.
Derivative Instruments
The Company's ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage this risk, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. A summary of these derivative financial instrument programs is described below; however, refer to Note 13 of the consolidated financial statements for further information. The Company does not hold or enter into financial instruments for trading or speculative purposes.
Foreign Exchange Forward Contracts
Certain subsidiaries have assets and liabilities denominated in currencies other
than their respective functional currencies, which creates foreign exchange
risk. Our principal strategy in managing exposure to changes in foreign currency
exchange rates is to naturally hedge the foreign currency-denominated
liabilities on our consolidated balance sheets 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 our exposure, the Company 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.
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Foreign Exchange Cash Flow Hedges
The Company also enters into forward contracts with the objective of managing the currency risk associated with forecastedU.S. dollar-denominated raw materials purchases by one of our 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 ofU.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 rate.
Interest Rate Swaps
The Company enters into interest rate swap agreements to manage our exposure to
variability in interest payments associated with the Company's variable rate
debt. Under these interest rate swap agreements, which are designated as cash
flow hedges, the Company is effectively converting a portion of our variable
rate borrowings into a fixed rate obligation to mitigate the risk of variability
in interest rates.
Net Investment Hedge
The Company has certain fixed-for-fixed cross currency swaps ("CCS"), swapping
U.S. dollar principal and interest payments on our 2025 Senior Notes for
euro-denominated payments, which were designated as a hedge of the Company's net
investment in certain European subsidiaries under the forward method through
March 31, 2018 through the original CCS agreement entered into on September 1,
2017 ("2017 CCS"). As such, changes in their fair value, to the extent
effective, were recorded within the cumulative translation adjustment account as
a component of accumulated other comprehensive income or loss ("AOCI") through
March 31, 2018 .
Effective April 1, 2018 , in conjunction with the adoption of previously issued
hedging accounting guidance, the Company elected as an accounting policy to
re-designate the 2017 CCS as a net investment hedge (and any future similar
hedges) under the spot method. As such, changes in the fair value of the 2017
CCS that were included in the assessment of effectiveness (changes due to spot
foreign exchange rates) were recorded as cumulative foreign currency translation
within AOCI, and will remain in AOCI until either the sale or substantially
complete liquidation of the subsidiary. As an additional accounting policy
election applied to similar hedges under this standard, the initial value of any
component excluded from the assessment of effectiveness is recognized in income
using a systematic and rational method over the life of the hedging instrument.
Any difference between the change in the fair value of the excluded component
and amounts recognized in income under that systematic and rational method is
recognized in AOCI. The Company elected to amortize the initial excluded
component value as a reduction of "Interest expense, net" in the consolidated
statements of operations using the straight-line method over the remaining term
of the 2017 CCS. Additionally, the Company recognizes the accrual of periodic
USD and euro-denominated interest receipts and payments under the terms of CCS
arrangements, including the 2017 CCS, within "Interest expense, net" in the
consolidated statements of operations.
On February 26, 2020 , the Company settled our 2017 CCS and replaced it with a
new CCS arrangement (the "2020 CCS") that carried substantially the same terms
as the 2017 CCS and also is designated as a net investment hedge under the spot
method. Upon settlement of the 2017 CCS, the Company realized net cash proceeds
of $51.6 million . The remaining $13.8 million unamortized balance of the initial
excluded component related to the 2017 CCS at the time of settlement is no
longer being amortized following the settlement and will remain in AOCI until
either the sale or substantially complete liquidation of the relevant
subsidiaries.
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations and financial condition are
based upon our financial statements, which have been prepared in accordance with
GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the amounts reported. We base these
estimates and judgments on historical experiences and assumptions believed to be
reasonable under the circumstances. Actual results could vary from our estimates
under different conditions. Our significant accounting policies, which may be
affected by our estimates and assumptions, are more fully described in Note 2 in
the consolidated financial statements. An accounting policy is deemed to be
critical if it requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate is made, and if
different estimates that reasonably could have been used, or changes in the
accounting estimates that are reasonably likely to occur periodically, could
materially impact the financial
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statements. The following critical accounting policies reflect our most significant estimates and assumptions used in the preparation of the consolidated financial statements.
Business Combinations and Asset Impairments
Business Combinations
Acquisitions that qualify as a business combination are accounted for using the purchase accounting method. Amounts paid for an acquisition are allocated to the assets acquired and liabilities assumed based on their fair value as of the date of acquisition.Goodwill is recorded as the difference between the fair value of the acquired assets and liabilities assumed (net assets acquired) and the purchase price.Goodwill is not amortized, but is reviewed for impairment annually as ofOctober 1 , or when events or changes in the business environment indicate that the carrying value of a reporting unit may exceed its fair value. Refer to the discussion below for further information on asset impairments. Under the purchase accounting method, the Company completes valuation procedures for an acquisition, often with the assistance of third-party valuation specialists, to determine the fair value of the assets acquired and liabilities assumed. These valuation procedures require management to make assumptions and apply significant judgment to estimate the fair value of the assets acquired and liabilities assumed. If the estimates or assumptions used should significantly change, the resulting differences could materially affect the fair value of net assets. Specifically, the calculation of the fair value of tangible assets, including property, plant and equipment, typically utilize the cost approach, which computes the cost to replace the asset, less accrued depreciation resulting from physical deterioration and functional and external obsolescence. The calculation of the fair value of identified intangible assets is determined using cash flow models following the income and cost approaches (or some combination thereof). Significant inputs include estimated future cash flows, discount rates, royalty rates, growth rates, sales projections, customer retention rates, and terminal values, all of which require significant management judgment. Definite-lived intangible assets, which are primarily comprised of customer relationships, developed technology, tradenames, and software, are amortized over their estimated useful lives using the straight-line method and are assessed for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. During the year endedDecember 31, 2021 , the Company completed two significant acquisitions: the PMMA Acquisition, closed onMay 3, 2021 , and the Aristech Surfaces Acquisition, closed onSeptember 1, 2021 . Also, the Company completed the divestiture of our Synthetic Rubber business onDecember 1, 2021 . Refer to Notes 4 and 5 in the consolidated financial statements for further information on these transactions. Asset Impairments As ofDecember 31, 2021 , net property, plant and equipment, net identifiable finite-lived intangible assets, and goodwill totaled$719.0 million ,$823.8 million , and$710.1 million , respectively. Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or impairment may be recorded based on a change in the expected use of the asset or performance of the related asset group. We evaluate long-lived assets and identifiable finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset grouping may not be recoverable. In the event the carrying value of the asset exceeds its undiscounted future cash flows and the carrying value is not considered recoverable, impairment may exist. An impairment loss, if any, is measured as the excess of the asset's carrying value over its fair value, generally based on a discounted future cash flow method, independent appraisals, etc. In connection with our strategy to focus efforts and increase investments in certain product offerings serving specific applications that are less cyclical and offer significantly higher growth and margin potential, and other management considerations, in March of 2020, the Company initiated a consultation process with theEconomic Council and Works Councils ofTrinseo Deutschland regarding the disposition of our styrene monomer assets in Boehlen,Germany and our PBR assets in Schkopau,Germany . The Company's assessments of these long-lived asset groups for impairment indicated that the carrying values of the asset groups at each location were not recoverable when compared to the expected undiscounted future cash flows from the operation and potential disposition of these assets. The fair 58 Table of Contents
value of the depreciable assets at each location was determined through an analysis of the underlying fixed asset records in conjunction with the use of industry experience and available market data. Based on the Company's assessments, for the years endedDecember 31, 2021 and 2020, we recorded impairment charges on the Boehlen styrene monomer assets of$5.8 million and$11.1 million , respectively, which include charges recorded subsequent toMarch 2020 related to capital expenditures at the facility that we determined to be impaired. The amounts are included within "Impairment charges" in the consolidated statements of operations and are all allocated to the Feedstocks segment. During the year endedDecember 31, 2020 , we also recorded impairment charges of$28.0 million on the Schkopau PBR assets which are allocated to the Synthetic Rubber business. As discussed below, during the second quarter of 2021 these assets were classified as held-for-sale and their operating results were classified as discontinued operations for all periods presented, along with the rest of the Synthetic Rubber business. ThroughDecember 31, 2021 , we have continued to assess the recoverability of certain assets, and concluded there are no additional significant events or circumstances identified by management that would indicate these assets are not recoverable. However, the current environment is subject to changing market conditions and requires significant management judgment to identify the potential impact to our assessment. If we are not able to achieve certain actions or our future operating results do not meet our expectations, it is possible that impairment charges may need to be recorded on one or more of our operating facilities. 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. InMay 2021 , the Company entered into an agreement to sell our Synthetic Rubber business, as a result of which the assets and liabilities of the Synthetic Rubber business were classified as held-for-sale in the consolidated balance sheets starting in the second quarter of 2021, and have been reflected as such for all periods presented until their disposal. The sale transaction was completed inDecember 2021 , thus as ofDecember 31, 2021 these assets and liabilities are no longer held-for-sale. Additionally, starting in the second quarter of 2021, the operating results of the Synthetic Rubber business, net of taxes, have been classified as discontinued operations in the consolidated statements of operations for all periods presented. Refer to Note 5 for more information. As noted above, our goodwill impairment testing is performed annually as ofOctober 1 at a reporting unit level. We perform more frequent impairment tests 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. As of our annual assessment date ofOctober 1, 2021 , each of our reporting units had fair values that exceeded the carrying value of their net assets, indicating that no impairment of goodwill is warranted. A goodwill impairment loss generally would be recognized when the carrying amount of the reporting unit's net assets exceeds the estimated fair value of the reporting unit. The estimated fair value of a reporting unit is determined using a market approach and an income approach (under the discounted cash flow method). When supportable, the Company employs the qualitative assessment of goodwill impairment prescribed by Accounting Standards Codification 350. As ofDecember 31, 2021 , our$710.1 million in total goodwill is allocated to our reportable segments as follows:$667.3 million to Engineered Materials,$15.9 million to Latex Binders,$22.4 million to Base Plastics, and$4.5 million to Polystyrene, with no amounts allocated to the Feedstocks orAmericas Styrenics segments. Of the$667.3 million of goodwill allocated to Engineered Materials,$652.6 million was recorded at fair value on the date of acquisition related to the PMMA business andAristech Surfaces business acquired in 2021. Factors which could result in future impairment charges, among others, include changes in worldwide economic conditions, changes in technology, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These factors are discussed in Item 7A-Quantitative and Qualitative Disclosures about Market Risk and Item 1A- Risk Factors included in this Annual Report. Income Taxes We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes
the
enactment date.
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Deferred taxes are provided on the outside basis differences and unremitted earnings of subsidiaries outside ofIreland . All undistributed earnings of foreign subsidiaries and affiliates are expected to be repatriated as ofDecember 31, 2021 . Based on the evaluation of available evidence, both positive and negative, we recognize future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not. As ofDecember 31, 2021 , we had deferred tax assets of$122.6 million , after valuation allowances of$127.7 million . In evaluating the ability to realize the deferred tax assets, we rely on, in order of increasing subjectivity, taxable income in prior carryback years, the future reversals of existing taxable temporary differences, tax planning strategies and forecasted taxable income using historical and projected future operating results. Swiss federal and cantonal tax reform was enacted onAugust 6, 2019 andOctober 25, 2019 , respectively, and includes measures such as, the elimination of certain preferential tax regimes and implementation of new tax rates at both the federal and cantonal levels. It also includes transitional relief measures which may provide for future tax deductions. As a result of both the federal and cantonal law changes, the Company recorded a$65.0 million one-time deferred tax benefit for the year endedDecember 31, 2019 , of which$61.6 million was related to cantonal tax law changes. The Company believes it is more likely than not that a portion of this deferred tax benefit recorded as a result of these cantonal tax law changes will not be realized during the utilization period provided by the legislation, spanning 2025 through 2029. This is based on the Company's estimate of future taxable income inSwitzerland , which was determined using management's judgment and assumptions about various factors, such as: historical experience and results, cyclicality of the business, implications of COVID-19, recent acquisitions and divestitures, and future industry and macroeconomic conditions and trends possible during the aforementioned utilization period. As a result, the Company recorded a$25.3 million valuation allowance as ofDecember 31, 2019 . As ofDecember 31, 2021 , due to foreign exchange translation, the total valuation allowance recorded was$25.8 million . As ofDecember 31, 2021 , we had deferred tax assets for tax loss carryforward of approximately$389.4 million ,$17.4 million of which is subject to expiration in the years between 2022 and 2027. We continue to evaluate our historical and projected operating results for several legal entities for which we maintain valuation allowances on net deferred tax assets. We are subject to income taxes inIreland ,the United States and numerous foreign jurisdictions, and are subject to audit within these jurisdictions. Therefore, in the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. The tax provision includes amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ from the amounts accrued. Since significant judgment is required to assess the future tax consequences of events that have been recognized in our financial statements or tax returns, the ultimate resolution of these events could result in adjustments to our financial statements and such adjustments could be material. Therefore, we consider such estimates to be critical in preparation of our financial statements. The financial statement effect of an uncertain income tax position is recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Accruals are recorded 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. Uncertain income tax positions have been recorded in "Other noncurrent obligations" in the consolidated balance sheets for the periods presented. Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. The valuation allowance is based on our estimates of future taxable income and the period over which we expect the deferred tax assets to be recovered. Our estimate of future taxable income is based on management's judgment and assumptions about various factors including historical experience and results, cyclicality of the business, and future industry and macroeconomic conditions and trends. Changes in these assumptions in future periods may require we adjust our valuation allowance, which could materially impact our financial position and results of operations.
Pension Plans and Postretirement Benefits
We have various company-sponsored retirement plans covering substantially all employees. We also provide certain health care and life insurance benefits to retired employees inthe United States . TheU.S. -based plans provide health care benefits, including hospital, physicians' services, drug and major medical
expense coverage, and life
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insurance benefits. We recognize the underfunded or overfunded status of a defined benefit pension or postretirement plan as an asset or liability in our consolidated balance sheets and recognize changes in the funded status in the year in which the changes occur through AOCI, which is a component of shareholders' equity. 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. 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 benefit cost for the plan in that year. Pension benefits associated with these plans are generally based on each participant's years of service, compensation, and age at retirement or termination. The discount rate is an important element of expense and liability measurement. We evaluate our assumptions at least once each year, or as facts and circumstances dictate, and make changes as conditions warrant. We determine the discount rate used to measure plan liabilities as of theDecember 31 measurement date for the pension and postretirement benefit plans. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. We set our discount rates to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. We use a full yield curve approach in the estimation of the future service and interest cost components of net periodic benefit cost for our defined benefit pension and other postretirement benefit plans by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. Service cost related to our defined benefit pension plans and other postretirement plans is included within "Cost of sales" and "Selling, general and administrative expenses," whereas all other components of net periodic benefit cost are included within "Other expense, net" in the consolidated statements of operations. We determine the expected long-term rate of return on assets by performing an analysis of historical and expected returns based on the underlying assets, which generally are insurance contracts. We also consider our historical experience with the pension fund asset performance. The expected return of each asset class is derived from a forecasted future return confirmed by current and historical experience. Future actual net periodic benefit cost will depend on the performance of the underlying assets and changes in future discount rates, among other factors.
The weighted average assumptions used to determine pension plan obligations and net periodic benefit costs are provided below:
Non-U.S. Defined U.S. Defined Benefit Other Postretirement
Benefit Pension Plans Pension Plans (1) Benefit Plans
December 31, December 31, December 31,
2021 2020 2021 2020 2021 2020Pension and other postretirement plan obligations: Discount rate for projected benefit obligation / accumulated postretirement benefit obligation
1.10 % 0.74 % 2.92 % N/A 2.90 % 3.11 % Net periodic benefit costs: Discount rate for service cost
0.78 % 1.04 % 3.20 % N/A 3.32 % 3.61 % Discount rate for interest cost
0.57 % 0.79 % 2.37 % N/A 2.34 % 3.08 % Expected long-term rate of return on plan assets
0.66 % 0.82 % 5.89 % N/A N/A N/A
The Company's
no assumptions used to determine pension plan obligations or net periodic
benefit costs as of and for the year ended
Holding all other factors constant, a 0.25% increase (decrease) in the discount rate used to determine net periodic benefit cost would decrease (increase) 2022 pension expense for our non-U.S. plans by approximately$1.5 million and$(1.5) million , respectively. Holding all other factors constant, a 0.25% increase (decrease) in the long-term rate of return on assets used to determine net periodic benefit cost for our non-U.S. plans would decrease (increase) 2022 pension expense by approximately$0.1 million and$(0.1) million , respectively. Holding all other factors constant, a 0.25% 61
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increase or decrease in the discount rate, or the long-term rate of return on assets, used to determine net periodic benefit cost for ourU.S. plans would change our 2022 pension expense by less than$0.1 million . Plan assets totaled$157.1 million as ofDecember 31, 2021 and 2020. As noted above, plan assets are invested primarily in insurance contracts that provide for guaranteed returns. Investments in the pension plan insurance contracts are valued utilizing unobservable inputs, which are contractually determined based on returns, fees, and the present value of the future cash flows, or cash surrender values, of the contracts, and are classified as Level 3 investments. The Company presents certain pension plan assets valued at net asset value per share as a practical expedient outside of the fair value hierarchy. Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note 2 of the consolidated financial statements, included elsewhere within this Annual Report.
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