TRINSEO PLC 2022 Year-to-Date Highlights
During the three and six months endedJune 30, 2022 , Trinseo recognized net income from continuing operations of$37.1 million and$54.2 million , respectively and Adjusted EBITDA of$164.5 million and$342.1 million , respectively. These solid results were achieved despite an increasingly challenging operating environment that is forcing both Trinseo and our customers to contend with issues including COVID-19 lockdowns inChina , cautious spending and softening demand inEurope from an uncertain geopolitical situation, high raw material and energy costs, and persistent supply chain constraints. 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. Other highlights for the year are described below.
European Commission Request for Information
In 2018, Trinseo received a request for information from theEuropean Commission Directorate General for Competition (the "European Commission ") related to styrene monomer commercial activity in the European Economic Area, as well as subsequent requests for information. Trinseo has fully responded to all information requests from theEuropean Commission and continues to fully cooperate on this matter, which remains ongoing. As a result of further developments in this matter, during the first quarter of 2022, Trinseo recorded a charge of$35.6 million which is included within "Other charges" on the condensed consolidated statements of operations. Refer to Note 13 in the condensed consolidated financial statements for more information.
Acquisition of Heathland
OnJanuary 3, 2022 , the Company closed on the previously-announced acquisition ofHeathland B.V. ("Heathland") for an estimated purchase price of$29.3 million , including an initial cash purchase price of$22.9 million , as well as$6.4 million of contingent cash consideration, representing the fair value of certain earn-out payments (the "Heathland Acquisition"). Heathland is based inUtrecht, the Netherlands , and is focused on converting post-consumer and post-industrial PMMA, PC, ABS, polystyrene, and other thermoplastic waste for use in a wide range of high-end applications. The acquisition of Heathland is consistent with Trinseo's strategy and enhances our footprint as a sustainable solutions provider. Refer to Note 3 in the condensed consolidated financial statements for more information.
Process Pause for Divestiture of Styrenics Business
InNovember 2021 , the Company announced that it had begun work to explore the divestiture of our styrenics business and subsequently launched a formal sales process in the first quarter of 2022. The scope of the potential divestiture was expected to include the Feedstocks and Polystyrene reporting segments as well as our 50% ownership ofAmericas Styrenics . While this process generated broad and significant interest from both strategic and financial parties, the deterioration of financing markets and the economic uncertainty created by the war inUkraine , particularly in European energy markets, has impeded the Company's ability to obtain full value for the styrenics business. As a result, the Company has decided to pause the sale process. This pause does not change the Company's transformation strategy of becoming a higher growth, higher margin, and less volatile specialty material and sustainable solutions provider. The Company intends to reevaluate a potential sale of the styrenics business when macroeconomic conditions improve. 32 Table of Contents Results of Operations Results of Operations for the Three and Six Months EndedJune 30, 2022 and 2021 Three Months Ended Six Months Ended June 30, June 30, (in millions) 2022 % 2021 % 2022 % 2021 % Net sales$ 1,425.5 100 %$ 1,273.7 100 %$ 2,812.2 100 %$ 2,259.7 100 % Cost of sales 1,286.4 90 % 1,053.7 83 % 2,497.1 89 % 1,850.8 82 % Gross profit 139.1 10 % 220.0 17 % 315.1 11 % 408.9 18 % Selling, general and administrative expenses 85.6 6 % 97.3 8 % 182.3 6 % 153.8 7 % Equity in earnings of unconsolidated affiliates 39.4 3 % 30.1 2 % 61.0 2 % 53.0 2 % Other charges 1.3 - % 1.8 - % 37.6 1 % 1.8 - % Operating income 91.6 7 % 151.0 11 % 156.2 6 % 306.3 13 % Interest expense, net 25.4 2 % 21.6 2 % 47.3 2 % 33.6 1 % Acquisition purchase price hedge (gain) loss - - % (33.0) (3) % - - % 22.0 1 % Other expense (income), net (1.7) - % 6.1 - % 1.3 - % 8.5 - % Income from continuing operations before income taxes 67.9 5 % 156.3 12 % 107.6 4 % 242.2 11 % Provision for income taxes 30.8 2 % 23.3 2 % 53.4 2 % 43.4 2 % Net income from continuing operations$ 37.1 3 %$ 133.0 10 %$ 54.2 2 %$ 198.8 9 % Net income from discontinued operations, net of income taxes 0.3 - % 18.6 2 % - - % 24.3 1 % Net income$ 37.4 3 %$ 151.6 12 %$ 54.2 2 %$ 223.1 10 %
Three Months Ended -
Of the 12% increase in net sales, 14% was attributable to increased selling prices, mainly due to the pass through of higher raw material costs, such as styrene, along with higher energy costs. Also contributing to the increase was the contributions from our acquisitions in 2021, including the PMMA Acquisition, which closed onMay 3, 2021 , and the Aristech Surfaces Acquisition, which closed onSeptember 1, 2021 . These increases were partially offset by lower volumes across several segments mainly from less demand to building & construction, automotive, appliance and consumer electronics applications, including the impact of COVID-19 lockdowns inChina .
Cost of Sales
The 22% increase in cost of sales was primarily attributable to a 20% increase in raw material costs and a 9% increase related to the PMMA Acquisition and Aristech Surfaces Acquisition. Partially offsetting these increases was a decrease of 7% due to lower volumes.
Gross Profit
The decrease in gross profit of 37% was primarily attributable to lower margins
compared to the very high levels observed in the second quarter of 2021 in
Feedstocks and Polystyrene, as well as lower sales volume. These impacts were
partially offset by additional gross profit from the 2021 acquisitions. See the
segment discussion below for further information.
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Selling, General and Administrative Expenses (SG&A)
The$11.7 million , or 12%, decrease in SG&A was primarily due to a decrease of$40.5 million related to acquisition transaction and integration costs incurred, primarily in connection with the PMMA Acquisition. Offsetting these costs was an$18.1 million increase in costs associated with the Company's strategic initiatives, including the exploration of a potential divestiture of our styrenics business, a$4.9 million increase in employee compensation, particularly from newly acquired businesses, and$0.9 million of costs incurred in connection with the Company's enterprise resource planning system upgrade.
Equity in Earnings of Unconsolidated Affiliates
The increase in equity earnings of$9.3 million was due to higher equity earnings fromAmericas Styrenics due to higher styrene profitability, which was partially offset by lower sales volume that resulted from the styrene production outages in the current period.
Other Charges
During the three months endedJune 30, 2022 and 2021, the Company recorded impairment charges of$1.3 million and$1.8 million , respectively, related to our Boehlen styrene monomer assets, as described within Note 11 in the condensed consolidated financial statements.
Interest Expense, Net
The increase in interest expense, net of$3.8 million , or 18%, was primarily attributable to the Company's issuance of the 2028 Term Loan B, issued in the second quarter of 2021. Refer to Note 8 in the condensed consolidated financial statements for further information.
Acquisition Purchase Price Hedge (Gain) Loss
The$33.0 million acquisition purchase price hedge gain for the three months endedJune 30, 2021 was 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 (Income), Net Other income, net for the three months endedJune 30, 2022 was$1.7 million , which included a$1.0 million of income related to the non-service cost components of net periodic benefit cost, as well as foreign exchange transaction gains of$1.3 million . These net foreign exchange transaction gains included$37.8 million of 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$39.1 million of gains from our foreign exchange forward contracts. Other expense, net for the three months endedJune 30, 2021 was$6.1 million , which included$1.6 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$1.0 million , which included$0.6 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, in addition to$0.4 million of gains from our foreign exchange forward contracts, excluding the acquisition purchase price hedge.
Provision for Income Taxes
Despite a year-over-year decrease of$88.4 million in income from continuing operations before income taxes, the provision for income taxes increased from$23.3 million in the prior year to$30.8 million in the three months endedJune 30, 2022 . The most significant driver of this increase in provision for income taxes was the change in 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. 34
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Also increasing the provision for income taxes in the current year was the revaluation of the Company's net deferred tax assets inSwitzerland , which were originally established as part of the Swiss cantonal tax reform measures enacted in 2019. This revaluation resulted in a one-time deferred tax expense of$15.3 million recorded in the second quarter of 2022. This expense was partially offset by the release of a valuation allowance of$8.5 million during the second quarter of 2022, as a result of improvements in actual and projected future results in one of the Company's subsidiaries in Luxembourg.
Net Income from Discontinued Operations, Net of Income Taxes
Net income from discontinued operations, net of income taxes during the three months endedJune 30, 2022 and 2021 was$0.3 million and$18.6 million , respectively, and was related the results and sale of our Synthetic Rubber business. Refer to Note 4 in the condensed consolidated financial statements for further information.
Six Months Ended -
Of the 24% increase in net sales, 19% was attributable to increased selling prices, mainly due to the pass through of higher raw material costs, such as styrene, along with higher energy costs. An additional 15% increase was due to the contributions from our acquisitions in 2021, including the PMMA Acquisition, which closed onMay 3, 2021 , and the Aristech Surfaces Acquisition, which closed onSeptember 1, 2021 . These increases were partially offset by a 7% decrease due to lower volumes across all segments due to softening demand in several applications as well as the impacts of COVID-19 inChina .
Cost of Sales
The 35% increase in cost of sales was primarily attributable to a 21% increase in raw material costs and a 17% increase related to the PMMA Acquisition and Aristech Surfaces Acquisition. Partially offsetting these increases was a decrease of 7% due to lower volumes.
Gross Profit
The decrease in gross profit of 23% was primarily attributable to lower margins compared to the very high levels observed in the first half of 2021 in Feedstocks and Polystyrene, as well as lower sales volume as described above. These impacts were partially offset by additional gross profit from the 2021 acquisitions. See the segment discussion below for further information.
Selling, General and Administrative Expenses (SG&A)
The$28.5 million , or 19%, increase in SG&A was primarily due to a$37.2 million increase in costs associated with the Company's strategic initiatives, including the exploration of a potential divestiture of our styrenics business, as well as$3.1 million of costs incurred in connection with the Company's enterprise resource planning system upgrade. Also contributing to the increase was an$11.7 million increase in salaries, wages and fringe costs due to the addition of personnel from acquisitions, a$3.7 million increase in additional depreciation and amortization expense from the PMMA Acquisition and theAristech Surfaces Acquisition, a$2.8 million increase in travel, and a$3.0 million increase in bad debt expense. Partially offsetting these increases was a decrease of$43.3 million related to acquisition transaction and integration costs incurred in the prior year, primarily in connection with the PMMA Acquisition.
Equity in Earnings of Unconsolidated Affiliates
The increase in equity earnings of$8.0 million was due to higher equity earnings fromAmericas Styrenics due to higher styrene profitability, which was partially offset by lower sales volume that resulted from the styrene production outages in the current period. 35 Table of Contents Other Charges
During the six months endedJune 30, 2022 , the Company recorded a charge of$35.6 million related to theEuropean Commission request for information, as described within Note 13 in the condensed consolidated financial statements. The Company also recorded impairment charges of$2.0 million and$1.8 million related to our Boehlen styrene monomer assets during the six months endedJune 30, 2022 and 2021, respectively, as described within Note 11 in the condensed consolidated financial statements.
Interest Expense, Net
The increase in interest expense, net of$13.7 million , or 41%, was primarily attributable to the Company's issuance of the 2029 Senior Notes, which were not issued until late in the first quarter of 2021 and the 2028 Term Loan B, issued in the second quarter of 2021. Refer to Note 8 in the condensed consolidated financial statements for further information.
Acquisition Purchase Price Hedge (Gain) Loss
The$22.0 million acquisition purchase price hedge loss for the six months endedJune 30, 2021 was 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 six months endedJune 30, 2022 was$1.3 million , which included$0.2 million of expense related to the non-service cost components of net periodic benefit cost as well as foreign exchange transaction losses of$0.1 million . These net foreign exchange transaction losses included$48.0 million of 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$47.9 million of gains from our foreign exchange forward contracts. Other expense, net for the six months endedJune 30, 2021 was$8.5 million , which included$3.4 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$0.8 million , which included$19.3 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$20.1 million of gains from our foreign exchange forward contracts, excluding the acquisition purchase price hedge.
Provision for Income Taxes
Despite a year-over-year decrease of$134.6 million in income from continuing operations before income taxes, the provision for income taxes increased from$43.4 million in the prior year to$53.4 million in the six months endedJune 30, 2022 . The most significant driver of this increase in provision for income taxes was 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. Also increasing the provision for income taxes in the current year was the revaluation of the Company's net deferred tax assets inSwitzerland , which were originally established as part of the Swiss cantonal tax reform measures enacted in 2019. This revaluation resulted in a one-time deferred tax expense of$15.3 million recorded in the second quarter of 2022. This expense was partially offset by the release of a valuation allowance of$8.5 million during the second quarter of 2022, as a result of improvements in actual and projected future results in one of the Company's subsidiaries in Luxembourg.
Net Income from Discontinued Operations, Net of Income Taxes
Net income from discontinued operations, net of income taxes during the six months endedJune 30, 2021 was$24.3 million , and was related to the results and sale of our Synthetic Rubber business. There was no net income from discontinued operations, net of income taxes during the six months endedJune 30, 2022 . Refer to Note 4 in the condensed consolidated financial statements for further information. 36 Table of Contents Outlook
As the second quarter progressed, increased uncertainty due to the ongoing war inUkraine and the associated increase in material and energy prices began to negatively influence demand inEurope . We are assuming this demand slowdown we've observed over the last two months will continue for the duration of the year putting downward pressure on styrene monomer margins in the region. Volume and margins for most of our derivative products will also be impacted by this downward pressure, particularly in building & construction and appliance applications. Therefore, we expect sequentially lower profitability in the second half of 2022. As discussed within Liquidity and Capital Resources below, sharp increases in raw material prices, like benzene, along with record levels of energy prices led to a significant working capital build and cash flow use during the first half of 2022. In the second half of 2022, we expect a significant working capital release and positive cash flow from inventory control, expectations that raw material prices have largely peaked, and seasonally lower sales in the fourth quarter. We also expect to continue returning cash to our shareholders in the second half of 2022 via share repurchases and dividends. Selected Segment Information The following sections describe net sales, Adjusted EBITDA, and Adjusted EBITDA margin by segment for the three and six months endedJune 30, 2022 and 2021. Inter-segment sales have been eliminated. Refer to Note 16 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 from continuing operations before income taxes to segment Adjusted EBITDA.
Engineered Materials Segment
Our Engineered Materials segment consists of rigid thermoplastic compounds and
blends products sold into high growth and high value applications in markets
such as consumer electronics and medical, as well as soft thermoplastic
elastomers ("TPEs") products which are sold into markets such as footwear and
automotive. The Engineered Materials segment also includes polymethyl
methacrylates ("PMMA") and activated methyl methacrylates ("MMA") products,
which are sold into a variety of applications including automotive, building &
construction, medical, consumer electronics, and wellness, among others.
Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2022 2021 % Change 2022 2021 % Change
Net sales $ 301.3 $ 181.0 66 % $ 596.5 $ 246.8 142 %
Adjusted EBITDA $ 34.0 $ 27.8 22 % $ 68.7 $ 35.8 92 %
Adjusted EBITDA margin 11 % 15 % 12 % 15 %
Three Months Ended -
The 66% increase in net sales was primarily attributable to the contribution from the PMMA business and theAristech Surfaces acquisitions, which led to a 57% increase year-over-year. In addition, sales price, primarily from the pass through of higher raw materials and energy costs, increased net sales by 16%. These increases were partially offset by a 5% decrease due to lower sales volumes from reduced demand for products supporting consumer electronics and appliances following the strong demand conditions in the prior year, as well as COVID-19 related lockdowns inChina in the current year.
Adjusted EBITDA increased
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Six Months Ended -
The 142% increase in net sales was primarily attributable to the contribution from the PMMA business and theAristech Surfaces acquisitions, which led to a 135% increase year-over-year. In addition, sales price, primarily from the pass through of higher raw materials and energy costs, increased net sales by 17%. These increases were partially offset by a 9% decrease due to lower sales volumes as demand declined from very high levels in the prior year and also from COVID-19 lockdowns inChina in the current year.
Adjusted EBITDA increased
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, styrene-acrylate latex ("SA latex"),
and vinylidene chloride latex for coatings, adhesives, sealants, and elastomers
("CASE") applications.
Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2022 2021 % Change 2022 2021 % Change
Net sales $ 353.7 $ 311.2 14 % $ 660.4 $ 562.2 17 %
Adjusted EBITDA $ 29.4 $ 32.2 (9) % $ 59.6 $ 49.0 22 %
Adjusted EBITDA margin 8 % 10 % 9 % 9 %
Three Months Ended -
The 14% increase in net sales was primarily due to an 18% increase in pricing from the pass through of raw material costs, mainly styrene and butadiene, as well as pricing actions, slightly offset by a 4% decrease due to foreign exchange rate impacts.
The
Six Months Ended -
The 17% increase in net sales was primarily due to a 23% increase in pricing from the pass through of raw material costs, mainly styrene and butadiene, as well as pricing actions, slightly offset by a 4% decrease due to foreign exchange rate impacts. The$10.6 million , or 22%, increase in Adjusted EBITDA was primarily due to an increase of$19.2 million , or 39%, attributable to higher margins which was a result of favorable net timing and pricing actions. This increase was partially offset by a$4.9 million , or 10%, decrease due to foreign exchange rate impacts, as well as a$3.6 million , or 7%, decrease due to higher fixed costs. 38 Table of Contents Base Plastics Segment Our Base Plastics segment consists of a variety of compounds and blends, the majority of which are for automotive applications. The segment also includes our acrylonitrile-butadiene-styrene ("ABS"), styrene-acrylonitrile ("SAN"), and polycarbonate ("PC") businesses. The Base Plastics segment also includes the results of Heathland, which was acquired in the first quarter of 2022. However, this did not have a material impact on sales or Adjusted EBITDA for the period. Three Months Ended Six Months Ended June 30, June 30, ($ in millions) 2022 2021 % Change 2022 2021 % Change Net sales$ 361.9 $ 396.9 (9) %$ 758.4 $ 725.8 4 % Adjusted EBITDA$ 46.1 $ 82.0 (44) %$ 114.7 $ 147.5 (22) % Adjusted EBITDA margin 13 % 21 % 15 % 20 %
Three Months Ended -
Net sales decreased by 9% year-over-year, primarily due to lower sales volume, mainly in ABS, from softening demand to building & construction and appliance applications, which contributed to an 18% decrease. This decrease was partially offset by a 12% increase from higher pricing due to the pass through of raw material cost. The$35.9 million , or 44%, decrease in Adjusted EBITDA was primarily due to a$22.5 million , or 27%, decrease from lower sales volumes as described above. In addition to lower sales volumes, Adjusted EBITDA decreased by$7.0 million , or 8%, due to a margin decline from higher raw material and utility costs and a softer demand environment. Foreign exchange rate impacts also contributed to a$4.7 million , or 6%, decrease.
Six Months Ended -
Net sales increased by 4% year-over-year. Higher pricing from the pass through of higher raw material costs led to a 20% increase in net sales from the prior year. This was partially offset by a 12% decrease due to lower sales volume from weaker demand to automotive and building & construction applications, as well as a 4% decrease due to foreign exchange rate impacts. The$32.8 million , or 22%, decrease in Adjusted EBITDA was primarily due to lower sales volume of$28.4 million , or 19%, as described above. Also contributing to the overall decrease was unfavorable foreign exchange rate impacts of$9.1 million , or 6%, and a decrease of$7.0 million , or 5%, due to higher fixed costs. These decreases in Adjusted EBITDA were partially offset by higher margins of$10.9 million , or 7%.
Polystyrene Segment
Our product offerings in our Polystyrene segment include a variety of general
purpose polystyrenes ("GPPS") and polystyrene that has been modified with
polybutadiene rubber to increase its impact resistant properties ("HIPS"). These
products provide customers with performance and aesthetics at a low cost across
applications, including appliances, packaging, including food packaging and food
service disposables, consumer electronics, and building and construction
materials. In April 2021 , the Company announced our plans to build a full
commercial scale polystyrene recycling plant in Tessenderlo, Belgium , which is
expected to be operational in 2023.
Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2022 2021 % Change 2022 2021 % Change
Net sales $ 312.0 $ 313.3 (0) % $ 630.0 $ 580.1 9 %
Adjusted EBITDA $ 23.0 $ 51.1 (55) % $ 68.3 $ 98.4 (31) %
Adjusted EBITDA margin 7 % 16 % 11 % 17 %
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Three Months Ended -
Net sales were essentially flat year-over-year. Higher pricing, primarily from the pass through of higher styrene costs, resulted in a$14.5 million , or 5%, increase in net sales. This increase was offset by lower volumes, caused by lower demand inChina for appliances. The$28.1 million , or 55%, decrease in Adjusted EBITDA was primarily due to a decrease of$28.4 million , or 56%, due to lower margins primarily from raw material volatility inEurope . In addition, a decrease of$4.0 million , or 8%, was due to lower volumes as described above. These effects were partially offset by an increase due to lower fixed costs of$3.5 million , or 7%.
Six Months Ended -
The 9% increase in net sales was due to higher pricing primarily from the pass through of higher styrene costs.
The$30.1 million , or 31%, decrease in Adjusted EBITDA was due to a decrease of$27.9 million , or 28%, from lower margins primarily from raw material volatility inEurope . In addition, a decrease of$5.0 million , or 5%, was due to lower volumes. These effects were partially offset by an increase of$2.0 million , or 2% due to favorable foreign exchange rate impacts.
Feedstocks Segment
The Feedstocks segment includes the Company's production and procurement of styrene monomer outside ofNorth America , which is used as a key raw material for the production of polystyrene, expandable polystyrene, SAN resins, SA latex, SB latex, ABS resins, unsaturated polyethylene resins, and styrene-butadiene rubber. Three Months Ended Six Months Ended June 30, June 30, ($ in millions) 2022 2021 % Change 2022 2021 % Change Net sales$ 96.6 $ 71.3 35 %$ 166.9 $ 144.8 15 % Adjusted EBITDA$ 14.2 $ 39.8 (64) %$ 18.3 $ 86.1 (79) % Adjusted EBITDA margin 15 % 56 % 11 % 59 %
Three Months Ended -
The 35% increase in net sales was driven almost entirely from higher styrene prices.
The decrease of$25.6 million in Adjusted EBITDA was primarily attributed to a$29.6 million , or 74%, decrease due to lower styrene margins including impacts from higher utility costs caused by rise in natural gas prices inEurope . Slightly offsetting this decrease was an increase of$4.7 million , or 12%, due to foreign exchange impacts.
Six Months Ended -
Net sales increased 15% year-over-year. Higher styrene prices resulted in a 31% increase in net sales, which were partially offset by a 16% decrease due to lower styrene-related sales volume.
The decrease of$67.8 million in Adjusted EBITDA was primarily attributed to a$77.6 million , or 90%, decrease due to lower styrene margins including impacts from higher utility costs caused by a rise in natural gas prices inEurope . Slightly offsetting this decrease was an increase of$8.3 million , or 10%, due to foreign exchange rate impacts.
Americas Styrenics Segment
This segment consists solely of the equity earnings from of our 50%-owned joint venture,Americas Styrenics , a producer of both styrene monomer and polystyrene inNorth America . Styrene monomer is a basic building block of plastics and a key input to many of the Company's products, as well as a key raw material for the production of polystyrene. Major applications for the polystyrene productsAmericas Styrenics produces include appliances, food packaging, food service disposables, consumer electronics, and building and construction materials.
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Three Months Ended Six Months Ended
June 30, June 30,
($ in millions) 2022 2021 % Change 2022 2021 % Change
Adjusted EBITDA* $ 39.4 $ 30.1 31 % $ 61.0 $ 53.0 15 %
*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 increase in Adjusted EBITDA was mainly due to higher styrene profitability, which was partially offset by lower sales volume that resulted from the styrene production outages in the current period.
Six Months Ended -
The increase in Adjusted EBITDA was mainly due to higher styrene profitability,
which was partially offset by lower sales volume that resulted from the styrene
production outages in the current period.
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.
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Adjusted EBITDA is calculated as follows for the three and six months endedJune 30, 2022 and 2021: Three Months Ended Six Months Ended June 30, June 30, (in millions) 2022 2021 2022 2021 Net income$ 37.4 $ 151.6 $ 54.2 $ 223.1 Net income from discontinued operations 0.3 18.6 - 24.3 Net income from continuing operations 37.1 133.0 54.2 198.8 Interest expense, net 25.4 21.6 47.3 33.6 Provision for income taxes 30.8 23.3 53.4 43.4 Depreciation and amortization 48.1 38.1 101.1 61.2 EBITDA(a)$ 141.4 $ 216.0 $ 256.0 $ 337.0 Net gain on disposition of businesses and assets (1.5) - (1.8) (0.2) Restructuring and other charges(b) (1.5) 6.3 (1.0) 6.7 Acquisition transaction and integration net costs (c) 2.7 43.2 5.9 49.2 Acquisition purchase price hedge (gain) loss (d) - (33.0) - 22.0 Asset impairment charges or write-offs(e) 1.3 1.8 2.0 1.8European Commission request for information(f) - - 35.6 - Other items(g) 22.1 4.8 45.4 6.9 Adjusted EBITDA$ 164.5 $ 239.1 $ 342.1 $ 423.4
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 three and six months ended
2022 and 2021 primarily relate to charges incurred in connection with the (b) Company's restructuring programs. Refer to Note 17 in the condensed
consolidated financial statements for further information regarding
restructuring activities.
Amounts for the three and six months ended
business and Aristech Surfaces Acquisitions. Refer to Note 3 in the condensed
consolidated financial statements for further information.
Acquisition purchase price hedge (gain) loss for the three and six months
ended
the PMMA business. Refer to Note 10 in the condensed consolidated financial
statements for further information.
Amount for the three and six months ended
statements.
Amount for the six months ended
information, as described in Note 13 in the condensed consolidated financial
statements.
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Other items for the three and six months ended June 30, 2022 and 2021
primarily relate to fees incurred in conjunction with certain of the
(g) Company's strategic initiatives. The three and six months ended
also include costs related to our transition to a new enterprise resource
planning system.
Liquidity and Capital Resources
Cash Flows
The table below summarizes our primary sources and uses of cash for the three
and six months ended June 30, 2022 and 2021. We have derived the summarized cash
flow information from our unaudited financial statements.
Six Months Ended
June 30,
(in millions) 2022 2021
Net cash provided by (used in):
Operating activities - continuing operations $ (88.9) $18.1
Operating activities - discontinued operations 0.8
11.9
Operating activities (88.1)
30.0
Investing activities - continuing operations (70.4)
(1,403.1)
Investing activities - discontinued operations (0.8)
(2.4)
Investing activities (71.2) (1,405.5)
Financing activities (140.8) 1,154.9Effect of exchange rates on cash (8.5)
(1.1)
Net change in cash, cash equivalents, and restricted cash
(221.7) Operating Activities
Net cash used in operating activities from continuing operations during the six months endedJune 30, 2022 totaled$88.9 million . Solid earnings, including$37.5 million of dividends received fromAmericas Styrenics , were more than offset by a significant working capital build during the quarter. This working capital build, and resulting negative impact on cash flow, was driven by a rapid and significant increase in raw material prices experienced in the first half of 2022, especially in benzene. Also contributing to the working capital build were historically high energy prices. Net cash provided by operating activities from discontinued operations during the six months endedJune 30, 2022 totaled$0.8 million . Net cash provided by operating activities from continuing operations during the six months endedJune 30, 2021 totaled$18.1 million , driven by very strong earnings, and inclusive of dividends received fromAmericas Styrenics of$40.0 million . Partially offsetting these factors was a$235.2 million reduction in operating cash from net working capital changes during the period, which were primarily attributable to significant increases in raw material costs, including the cost of benzene inEurope nearly doubling from February to May, and an increase in inventory ahead of third quarter planned maintenance activities. Net cash provided by operating activities from discontinued operations during the six months endedJune 30, 2021 totaled$11.9 million , which was also primarily attributable to raw material cost increases and higher inventory related to discontinued operations.
Investing Activities
Net cash used in investing activities from continuing operations during the six months endedJune 30, 2022 totaled$70.4 million , which was primarily attributable to net cash paid for asset or business acquisitions of$22.2 million (see Note 3), and capital expenditures, including cash spent for our ongoing enterprise resource planning system upgrade, of$55.4 million . Net cash used in investing activities from discontinued operations during the six months endedJune 30, 2022 totaled$0.8 million . Net cash used in investing activities from continuing operations during the six months endedJune 30, 2021 totaled$1,403.1 million , which was primarily attributable to net cash paid for asset or business acquisitions of$1,358.6 million , capital expenditures of$30.0 million , and payments for the settlement of hedging instruments of$14.7 million (related 43
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to the acquisition purchase price hedge). Net cash used in investing activities from discontinued operations during the six months endedJune 30, 2021 totaled$2.4 million , which was entirely attributable to capital expenditures.
Financing Activities
Net cash used in financing activities during the six months endedJune 30, 2022 totaled$140.8 million . This activity was primarily due to$101.9 million of payments related to the repurchase of ordinary shares,$24.6 million of dividends paid,$7.5 million of net repayments of short-term borrowings, and$7.2 million of net principal payments related to our 2024 Term Loan B and 2028 Term Loan B during the period. Net cash provided by financing activities during the six months endedJune 30, 2021 totaled$1,154.9 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$10.5 million in proceeds from exercise of option awards. This activity was partially offset by$35.0 million of deferred financing fees primarily related to the issuance of our 2028 Term Loan,$6.4 million of dividend payments,$6.2 million of net repayments of short-term borrowings, and$3.5 million of net principal payments related to our 2024 Term Loan B during the period.
Free Cash Flow
We use Free Cash Flow as a 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. 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 from continuing operations, which is determined in accordance with
GAAP.
Six Months Ended
June 30,
(in millions) 2022 2021
Cash provided by (used in) operating activities
(56.2) (32.4)
Free Cash Flow $ (144.3) $ (2.4) Refer to the discussion above for significant impacts to cash provided by
operating activities for the six months ended
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 from continuing operations, and amounts available under the Senior Credit Facility and the Accounts Receivable Securitization Facility (discussed further below). AtJune 30, 2022 andDecember 31, 2021 , we had$2,360.5 million and$2,368.8 million , respectively, in outstanding indebtedness and$1,050.5 million and$1,064.1 million , respectively, in working capital (calculated as current assets from continuing operations less current liabilities from continuing operations). In addition, as ofJune 30, 2022 andDecember 31, 2021 , we had$262.7 million and$560.6 million , respectively, of foreign cash and cash equivalents on our balance sheet, outside ofIreland , our country of domicile, all of which is
readily convertible into
44
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other foreign currencies, including the U.S. dollar. Our intention is not to
permanently reinvest our foreign cash and cash equivalents. Accordingly, we
record deferred income tax liabilities related to the unremitted earnings of our
subsidiaries.
The following table outlines our outstanding indebtedness as of June 30, 2022
and December 31, 2021 and the associated interest expense, including
amortization of deferred financing fees and debt discounts. Effective interest
rates for the borrowings included in the table below exclude the impact of
deferred financing fee amortization, certain other fees charged to interest
expense (such as fees for unused commitment fees during the period), and the
impacts of derivatives designated as hedging instruments. For definitions of
capitalized terms not included herein, refer to our Annual Report on Form 10-K
("Annual Report").
As of and for the Six Months Ended As of and for the Year Ended
June 30, 2022 December 31, 2021
Effective Effective
Interest Interest Interest Interest
($ in millions) Balance Rate Expense Balance Rate Expense
Senior Credit Facility
2024 Term Loan B $ 666.9 2.5 % $ 11.0 $ 670.4 2.1 % $ 20.6
2028 Term Loan B 739.3 3.0 % 12.6 742.8 2.6 % 15.2
2026 Revolving Facility - - % 0.9 - - % 2.1
2029 Senior Notes 450.0 5.1 % 12.4 450.0 5.1 % 19.0
2025 Senior Notes 500.0 5.4 % 11.7 500.0 5.4 % 20.7
Accounts Receivable
Securitization Facility - - % 0.7 - 2.0 % 1.8
Other indebtedness* 4.3 0.8 % - 5.6 2.2 % -
Total $ 2,360.5 $ 49.3 $ 2,368.8 $ 79.4 *For the six months ended
As ofJune 30, 2022 , our Senior Credit Facility included the 2026 Revolving Facility, which is scheduled to mature inMay 2026 and had a borrowing capacity of$375.0 million . As ofJune 30, 2022 , the Company had$368.9 million of funds available for borrowing (net of$6.1 million outstanding letters of credit) under the 2026 Revolving Facility. Further, as ofJune 30, 2022 , 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
Our 2025 Senior Notes, as issued under the Indenture executed in 2017, include$500.0 million aggregate principal amount of 5.375% senior notes that mature onSeptember 1, 2025 . 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 . We also continue to maintain our Accounts Receivable Securitization Facility, which matures inNovember 2024 and has an outstanding borrowing capacity of$150.0 million . As ofJune 30, 2022 , 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 8 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 45 Table of Contents
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 . andTrinseo 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 six months endedJune 30, 2022 , the Company declared dividends of$0.64 per ordinary share, totaling$23.9 million , of which$12.8 million was accrued as ofJune 30, 2022 , the majority of which was paid inJuly 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, 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. 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 well as the risk factors included in Part II, Item 1A herein. As ofJune 30, 2022 , 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. The ongoing war inUkraine and the corresponding sanctions and other measures being imposed by various governments have impacted global markets, particularly inEurope , leading to: (i) high volatility and increasing prices for natural gas and other energy supplies, (ii) changing trade flow patterns, and (iii) increasing levels of economic and geopolitical uncertainty globally. We do not have manufacturing operations inUkraine ,Russia orBelarus , and we have temporarily suspended sales and deliveries toRussia andBelarus , which sales do not constitute a material portion of our business. However, a significant escalation or expansion of economic disruption caused by this conflict, including supply disruptions, higher costs of raw materials or energy could have a material adverse effect on our results of operations, financial condition and cash flows. We are actively monitoring the broader economic impact from the crisis, in particular on the price and availability of raw materials and energy. Contractual Obligations and Commercial Commitments 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. 46 Table of Contents Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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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