TRINSEO PLC 2022 Year-to-Date Highlights
During the three and nine months endedSeptember 30, 2022 , Trinseo recognized net loss from continuing operations of$117.9 million and$63.7 million , respectively, and Adjusted EBITDA of$(36.6) million and$305.5 million , respectively. The challenging operating conditions experienced in the first half of 2022 continued in the third quarter, including the uncertain geopolitical situation, continued COVID-19 lockdowns inChina , and historically high natural gas and energy prices. These factors led to weaker demand and significant customer destocking which was exacerbated by a steep decline in many raw material prices throughout the third quarter, following very high raw material prices in the first half of 2022. Further, weak demand and ample supply pressured margins. 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. Amid these uncertain market conditions, the Company has continued to implement liquidity-focused actions, including reduced capital spending, operating expenses and working capital. As a result of these actions, the Company achieved positive cash generation from operating activities, and solid quarter-end liquidity. The Company continues to maintain a strong balance sheet, has substantial sources of liquidity available, no maintenance covenants on our debt agreements, and no significant debt maturing untilSeptember 2024 . Refer to the "Capital Resources and Liquidity" section below for further information. Other highlights for the year are described below.
Potential Profitability Improvement Initiatives
In response to the challenging macroeconomic environment that began to emerge in the first quarter of 2022, resulting in historically-low demand and high utility costs, Trinseo is evaluating its asset footprint to improve its economic position and operating flexibility. The potential initiatives under consideration include:
? Closure of our Boehlen,
aid in achieving our 2030 sustainability goals;
Optimization of our production and supply chain for PC and downstream PC
? compounds, including the potential closure of one PC production line at our
the cyclical merchant PC market;
? Restructuring of our PMMA sheets business in
? Capacity reduction at our SB Latex facility in Hamina,
mid-2023 due to the current over-capacity in
These potential initiatives, if approved and implemented, may result in future charges including, but not limited to, impairment or accelerated depreciation of long-lived assets, employee termination benefit charges, contract termination costs, and demolition and decommissioning expenses.
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$6.4 million of contingent cash consideration, representing the fair value of certain earn-out payments (the "Heathland Acquisition"). Heathland is based inUtrecht, the Netherlands , and is focused on converting post-consumer and post-industrial PMMA, PC, ABS, polystyrene, and other thermoplastic waste for use in a wide range of high-end applications. The acquisition of Heathland is consistent with Trinseo's strategy and enhances our footprint as a sustainable solutions provider. Refer to Note 3 in the condensed consolidated financial statements for more information. 33
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Process Pause for Divestiture of Styrenics Business
InNovember 2021 , the Company announced that it had begun work to explore the divestiture of our styrenics business and subsequently launched a formal sales process in the first quarter of 2022. The scope of the potential divestiture was expected to include the Feedstocks and Polystyrene reporting segments as well as our 50% ownership ofAmericas Styrenics . While this process generated broad and significant interest from both strategic and financial parties, the deterioration of financing markets and the economic uncertainty created by the war inUkraine , particularly in European energy markets, has impeded the Company's ability to obtain full value for the styrenics business. As a result, the Company has decided to pause the sale process. This pause does not change the Company's transformation strategy of becoming a higher growth, higher margin, and less volatile specialty material and sustainable solutions provider. The Company intends to reevaluate a potential sale of the styrenics business when macroeconomic conditions improve. Results of Operations Results of Operations for the Three and Nine Months EndedSeptember 30, 2022 and 2021 Three Months Ended Nine Months Ended September 30, September 30, (in millions) 2022 % 2021 % 2022 % 2021 % Net sales$ 1,178.1 100 %$ 1,269.3 100 %$ 3,990.3 100 %$ 3,529.0 100 % Cost of sales 1,217.6 103 % 1,101.0 87 % 3,714.8 93 % 2,951.7 84 % Gross profit (loss) (39.5) (3) % 168.3 13 % 275.5 7 % 577.3 16 % Selling, general and administrative expenses 80.5 7 % 76.4 6 % 262.8 7 % 230.4 7 % Equity in earnings of unconsolidated affiliates 22.8 2 % 17.1 1 % 83.8 2 % 70.2 2 % Other charges 1.9 - % 1.2 - % 39.5 1 % 3.0 - % Operating income (loss) (99.1) (8) % 107.8 8 % 57.0 1 % 414.1 11 % Interest expense, net 30.4 3 % 23.0 2 % 77.7 2 % 56.6 2 % Acquisition purchase price hedge loss - - % - - % - - % 22.0 1 % Other expense (income), net 0.5 - % (0.1) - % 1.6 - % 8.4 - % Income (loss) from continuing operations before income taxes (130.0) (11) % 84.9 6 % (22.3) (1) % 327.1 8 % Provision for (benefit from) income taxes (12.1) (1) % 5.5 - % 41.4 1 % 48.9 1 % Net income (loss) from continuing operations$ (117.9) (10) %$ 79.4 6 %$ (63.7) (2) %$ 278.2 7 % Net income (loss) from discontinued operations, net of income taxes (1.9) - % 13.7 1 %
(1.9) - % 38.0 1 %
Net income (loss)
Three Months Ended -
Net sales decreased 7% year-over-year. Lower sales volumes resulted in an 18%
decrease, as economic uncertainty and falling raw material prices led to a high
level of customer destocking and depressed demand, particularly in applications
supporting building & construction and consumer durables. This decrease was
partially offset by an 11% increase in net sales from higher selling prices,
mainly due to the pass through of higher raw material and utility costs.
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Cost of Sales
The 11% increase in cost of sales was primarily attributable to an 18% increase
in raw material costs, which included a one-time charge of $22.5 million related
to raw material contract obligations and inventory writedowns. Also contributing
to the increase was a 6% increase related to higher utility costs. Partially
offsetting these increases was a decrease of 14% due to lower sales volumes.
Gross Profit
The decrease in gross profit of 123% was primarily attributable to lower margins compared to the very high levels observed in the third quarter of 2021 in various segments, as well as lower sales volume and one-time headwinds discussed above. See the segment discussion below for further information.
Selling, General and Administrative Expenses (SG&A)
The$4.1 million , or 5%, increase in SG&A was primarily due to an increase of$12.3 million in costs associated with the Company's strategic initiatives, including the exploration of a potential divestiture of our styrenics business, and a$0.9 million increase in bad debt expense. Offsetting these increased costs was a$9.7 million decrease in acquisition transaction and integration costs compared to the prior year.
Equity in Earnings of Unconsolidated Affiliates
The increase in equity earnings of
Other Charges
During the three months endedSeptember 30, 2022 and 2021, the Company recorded impairment charges of$1.9 million and$0.3 million , respectively, related to our Boehlen styrene monomer assets, as described within Note 11 in the condensed consolidated financial statements. Additionally, during the three months endedSeptember 30, 2021 , the Company recorded impairment charges of$0.9 million related to certain long-lived assets in our Base Plastics segment.
Interest Expense, Net
The increase in interest expense, net of$7.4 million , or 32%, was primarily attributable to the increase in the LIBO rate year-over-year. Refer to Note 8 in the condensed consolidated financial statements for further information.
Other Expense (Income), Net
Other expense, net for the three months endedSeptember 30, 2022 was$0.5 million , which included an$0.8 million gain on extinguishment of debt recorded in relation to the repurchase of$3.0 million of the 2029 Senior Notes in the open market, and a$0.4 million gain related to the non-service cost components of net periodic benefit cost which were more than offset by foreign exchange transaction losses of$1.7 million . These net foreign exchange transaction losses included$35.4 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$33.7 million of gains from our foreign exchange forward contracts. Other income, net for the three months endedSeptember 30, 2021 was$0.1 million , which included a$1.1 million of benefit related to the non-service cost components of net periodic benefit cost, partially offset by foreign exchange transaction losses of$0.4 million . These net foreign exchange transaction losses included$23.7 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, almost entirely offset by$23.3 million of gains from our foreign exchange forward contracts. 35
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Provision for (Benefit from) Income Taxes
Benefit from income taxes for the three months endedSeptember 30, 2022 totaled$12.1 million , resulting in an effective tax rate of 9.3%. Provision for income taxes for the three months endedSeptember 30, 2021 totaled$5.5 million , resulting in an effective tax rate of 6.5%.
The decrease in provision for income taxes is primarily driven by the decrease
of
The provision for income taxes for the three months endedSeptember 30, 2021 was also impacted by the release of a valuation allowance of$16.3 million in the third quarter of 2021, as a result of improvements in actual business operations and projected future results of one of the Company's subsidiaries inChina .
Net Income (Loss) from Discontinued Operations, Net of Income Taxes
Net income (loss) from discontinued operations, net of income taxes during the three months endedSeptember 30, 2022 and 2021 was$(1.9) million and$13.7 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.
Nine Months Ended -
Of the 13% increase in net sales, 16% 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 10% 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 an 11% decrease due to lower volumes across all segments due to weakening demand in several applications, including third quarter customer destocking, particularly inEurope , as well as the impacts of COVID-19 inChina .
Cost of Sales
The 26% increase in cost of sales was primarily attributable to a 21% increase in raw material costs, which included a one-time charge of$22.5 million related to raw material contract obligations and inventory writedowns. Also contributing was an 11% increase related to the PMMA Acquisition andAristech Surfaces Acquisition. Partially offsetting these increases was a decrease of 9% due
to lower volumes. Gross Profit The decrease in gross profit of 52% was primarily attributable to lower margins compared to the very high levels observed in the first three quarters of 2021 in Feedstocks, Base Plastics, 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$32.4 million , or 14%, increase in SG&A was primarily due to an increase of$57.0 million in costs associated with the Company's strategic initiatives, including the exploration of a potential divestiture of our styrenics business, a$3.0 million increase in costs incurred in connection with the Company's enterprise resource planning system upgrade, a$6.1 million increase in employee compensation, and a$4.0 million increase in bad debt expense. Offsetting these costs was a decrease of$43.0 million related to acquisition transaction and integration costs incurred, primarily in connection with the PMMA Acquisition.
Equity in Earnings of Unconsolidated Affiliates
The increase in equity earnings of
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Other Charges
During the nine months ended September 30, 2022 , the Company recorded a charge
of $35.6 million related to the European Commission request for information, as
described within Note 13 in the condensed consolidated financial statements. The
Company also recorded impairment charges of $3.9 million and $2.1 million
related to our Boehlen styrene monomer assets during the nine months ended
September 30, 2022 and 2021, respectively, as described within Note 11 in the
condensed consolidated financial statements. Additionally, during the nine
months ended September 30, 2021 , the Company recorded $0.9 million of impairment
charges on certain long-lived assets in our Base Plastics segment.
Interest Expense, Net
The increase in interest expense, net of$21.1 million , or 37%, 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 Loss
The$22.0 million acquisition purchase price hedge loss for the nine months endedSeptember 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 nine months endedSeptember 30, 2022 was$1.6 million , which included foreign exchange transaction losses of$1.8 million . These net foreign exchange transaction losses included$83.4 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$81.6 million of gains from our foreign exchange forward contracts. These losses were partially offset by an$0.8 million gain on extinguishment of debt recorded in relation to the repurchase of$3.0 million of the 2029 Senior Notes in the open market. Other expense, net for the nine months endedSeptember 30, 2021 was$8.4 million , which included$2.3 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$0.4 million , which included$43.0 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$43.4 million of gains from our foreign exchange forward contracts, excluding the acquisition purchase price hedge.
Provision for Income Taxes
Provision for income taxes for the nine months endedSeptember 30, 2022 totaled$41.4 million , resulting in an effective tax rate of (185.2)%. Provision for income taxes for the nine months endedSeptember 30, 2021 totaled$48.9 million , resulting in an effective tax rate of 14.9%. The decrease in the provision for income taxes is primarily driven by the decrease of$349.4 million in income from continuing operations before income taxes. Also decreasing the provision for income taxes was 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. This benefit was more than offset by 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. The provision for income taxes for the nine months endedSeptember 30, 2021 was also impacted by the release of a valuation allowance of$16.3 million in the third quarter of 2021, as a result of improvements in actual business operations and projected future results of one of the Company's subsidiaries inChina . 37
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Net Income (Loss) from Discontinued Operations, Net of Income Taxes
Net income (loss) from discontinued operations, net of income taxes during the nine months endedSeptember 30, 2022 and 2021 was$(1.9) million and$38.0 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.
Outlook
While customer destocking is expected to continue through the remainder of the year, we expect sequential earnings improvement in the fourth quarter. One-time headwinds from the third quarter, including a large negative net timing impact from falling raw material prices, are not expected to repeat in the fourth quarter. In addition, we are evaluating potential asset optimization initiatives, such as the potential closures of the Boehlen,Germany styrene plant and one production line at theStade, Germany polycarbonate plant, which would be expected to have a positive financial impact in 2023. Through this market volatility and uncertainty, the Company has continued to maintain a strong financial position with ample access to capital resources and liquidity to manage the anticipated impact of the challenging macroeconomic environment on our business operations for the foreseeable future. We expect to end the year with a strong balance sheet and liquidity position which will enable us to continue investing in sustainability and organic growth opportunities while providing shareholder return. Selected Segment Information The following sections describe net sales, Adjusted EBITDA, and Adjusted EBITDA margin by segment for the three and nine months endedSeptember 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 Nine Months Ended
September 30, September 30,
($ in millions) 2022 2021 % Change 2022 2021 % Change
Net sales $ 242.7 $ 230.8 5 % $ 839.2 $ 477.5 76 %
Adjusted EBITDA $ 7.5 $ 32.7 (77) % $ 76.2 $ 68.5 11 %
Adjusted EBITDA margin 3 % 14 % 9 % 14 %
Three Months Ended -
The 5% increase in net sales was primarily attributable to the contribution from theAristech Surfaces acquisition, which led to an increase of 11% year-over-year. In addition, sales price, primarily from the pass through of higher raw materials and energy costs, increased net sales by 8%. These increases were partially offset by a 13% decrease due to lower sales volumes from reduced demand primarily in construction, consumer electronics, wellness, and automotive applications. The$25.2 million , or 77%, decrease in Adjusted EBITDA was primarily due to a decrease of$18.3 million , or 56%, due to lower sales volumes from reduced demand, including impacts from geopolitical uncertainty inEurope . In addition to lower sales volume, reduced demand led to lower margins due to weak supply and demand dynamics and the inability 38
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to fully pass through significantly higher natural gas costs in
Nine Months Ended -
The 76% increase in net sales was primarily attributable to the contribution from the PMMA business and theAristech Surfaces acquisitions, which led to a 75% increase year-over-year. In addition, sales price, primarily from the pass through of higher raw materials and energy costs, increased net sales by 13%. These increases were partially offset by a decrease of 11% from lower sales volumes, as demand declined from very high levels in the prior year and also from COVID-19 lockdowns inChina and geopolitical uncertainty inEurope in the current year. Adjusted EBITDA increased$7.7 million , or 11%, year-over-year. Our recent acquisitions of the PMMA business andAristech Surfaces contributed a$52.3 million , or 76%, increase from the prior year. This increase was partially offset by a$10.2 million , or 15%, decrease due to lower sales volume as described above. In addition, lower margins contributed a$27.9 million , or 41%, decrease due to lower demand and higher supply. One-time charges also negatively impacted margins, including a$4.0 million charge related to a contract review with a significant supplier.
Latex Binders Segment
Our Latex Binders segment produces styrene-butadiene latex ("SB latex") and
other latex polymers and binders primarily for coated paper and packaging board,
carpet and artificial turf backings, as well as a broad range of performance
latex binders products, including SB latex, styrene-acrylate latex ("SA latex"),
and vinylidene chloride latex for coatings, adhesives, sealants, and elastomers
("CASE") applications.
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 2022 2021 % Change 2022 2021 % Change
Net sales $ 340.9 $ 315.6 8 % $ 1,001.3 $ 877.6 14 %
Adjusted EBITDA $ 31.0 $ 37.1 (16) % $ 90.6 $ 86.2 5 %
Adjusted EBITDA margin 9 % 12 % 9 % 10 %
Three Months Ended -
The 8% increase in net sales was primarily due to a 19% increase in pricing from the pass through of raw material costs and pricing actions, which more than offset a 4% decrease due to foreign exchange rate impacts and a 6% decrease due to lower sales volumes, mainly in carpet and construction applications. The$6.1 million , or 16%, decrease in Adjusted EBITDA was primarily due to a decrease of$5.4 million , or 15%, from lower sales volumes in carpet and construction applications, in addition to a decrease of$3.9 million , or 10%, due to higher fixed costs. These decreases were partially offset by a$4.2 million , or 11%, increase attributable to higher margins from favorable net timing and pricing actions.
Nine Months Ended -
The 14% increase in net sales was primarily due to a 22% increase in pricing from the pass through of raw material costs, slightly offset by a 4% decrease due to foreign exchange rate impacts and a 4% decrease due to lower sales volumes mainly in carpet and construction applications. The$4.4 million , or 5%, increase in Adjusted EBITDA was primarily due to an increase of$23.8 million , or 28%, attributable to higher margins which was a result of favorable net timing and pricing actions. This increase was largely offset by a$6.7 million , or 8%, decrease from lower sales volumes, a$7.2 million , or 8%, decrease due to foreign exchange rate impacts, and a$7.5 million , or 9%, decrease due to higher fixed costs. 39 Table of Contents Base Plastics Segment Our Base Plastics segment consists of a variety of compounds and blends, the majority of which are for automotive applications. The segment also includes our acrylonitrile-butadiene-styrene ("ABS"), styrene-acrylonitrile ("SAN"), and polycarbonate ("PC") businesses. The Base Plastics segment also includes the results of Heathland, which was acquired in the first quarter of 2022. However, this did not have a material impact on sales or Adjusted EBITDA for the period. Three Months Ended Nine Months Ended September 30, September 30, ($ in millions) 2022 2021 % Change 2022 2021 % Change Net sales$ 293.4 $ 393.3 (25) %$ 1,051.8 $ 1,119.3 (6) % Adjusted EBITDA$ (14.9) $ 87.9 (117) %$ 99.8 $ 235.0 (58) % Adjusted EBITDA margin (5) % 22 % 9 % 21 %
Three Months Ended -
Net sales decreased by 25% year-over-year, primarily due to lower sales volume, mainly in ABS as a result of weaker demand for applications supporting building & construction and consumer durables, which contributed to a 27% decrease. Also contributing to the overall decrease was unfavorable foreign exchange rate impacts of 4%. These decreases were slightly offset by a 5% increase from higher pricing due to the pass through of raw material cost. The$102.8 million , or 117%, decrease in Adjusted EBITDA was primarily due to lower sales volumes and margins. Lower sales volumes, as described above, contributed to a$38.2 million , or 44%, decrease in Adjusted EBITDA. In addition, Adjusted EBITDA decreased by$60.2 million , or 69%, due to a margin decline from higher raw material and utility costs, weaker demand, and increased cost competition from improved supply and lower cost imports of polycarbonate and ABS intoEurope . In addition, higher fixed costs also attributed to a$5.2 million , or 6%, decrease in Adjusted EBITDA.
Nine Months Ended -
Net sales decreased by 6% year-over-year. Lower sales volume from weaker demand for building & construction and consumer durable applications led to a 17% decrease, as well as a 4% decrease due to foreign exchange rate impacts. These were partially offset by higher pricing from the pass through of higher raw material costs which led to a 15% increase in net sales from the prior year. The$135.2 million , or 58%, decrease in Adjusted EBITDA was primarily due to lower sales volume of$62.9 million , or 27%, and lower margins of$51.0 million , or 22%, as described above. Also contributing to the decrease was unfavorable foreign exchange rate impacts of$10.0 million , or 4%, and a decrease of$12.2 million , or 5%, due to higher fixed costs.
Polystyrene Segment
Our product offerings in our Polystyrene segment include a variety of general
purpose polystyrenes ("GPPS") and polystyrene that has been modified with
polybutadiene rubber to increase its impact resistant properties ("HIPS"). These
products provide customers with performance and aesthetics at a low cost across
applications, including appliances, packaging, including food packaging and food
service disposables, consumer electronics, and building and construction
materials.
Three Months Ended Nine Months Ended
September 30, September 30,
($ in millions) 2022 2021 % Change 2022 2021 % Change
Net sales $ 247.7 $ 274.8 (10) % $ 877.7 $ 855.0 3 %
Adjusted EBITDA $ 18.7 $ 51.2 (63) % $ 87.0 $ 149.6 (42) %
Adjusted EBITDA margin 8 % 19 % 10 % 17 %
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Three Months Ended -
Net sales decreased by 10% year-over-year. Lower sales volumes, including customers destocking amid falling raw material prices, led to a 20% decrease in net sales from the prior year. This decrease was offset by 10% increase from higher pricing, primarily from the pass through of higher styrene costs. The$32.5 million , or 63%, decrease in Adjusted EBITDA was primarily due to weaker demand which negatively impacted volumes and margins, particularly in building & construction and appliance applications. This resulted in a decrease of$13.0 million , or 25%, due to lower volumes, and a decrease of$19.3 million , or 38%, due to lower margins. Additionally, a decrease of$3.6 million , or 7%, was due to higher fixed costs.
Nine Months Ended -
The 3% increase in net sales was due to higher pricing primarily from the pass through of higher styrene costs, which led to an increase of 10% increase in net sales compared to the prior year. Slightly offsetting this increase was a 7% decrease due to lower sales volume as described above. The$62.6 million , or 42%, decrease in Adjusted EBITDA was due to a decrease of$47.6 million , or 32%, from lower margins primarily from weaker demand as well as new supply inChina . In addition, a decrease of$17.3 million , or 12%, was due to lower volumes. Feedstocks Segment
The Feedstocks segment includes the Company's production and procurement of styrene monomer outside ofNorth America , which is used as a key raw material for the production of polystyrene, expandable polystyrene, SAN resins, SA latex, SB latex, ABS resins, unsaturated polyethylene resins, and styrene-butadiene rubber. Three Months Ended Nine Months Ended September 30, September 30, ($ in millions) 2022 2021 % Change 2022 2021 % Change Net sales$ 53.4 $ 54.8 (3) %$ 220.3 $ 199.6 10 % Adjusted EBITDA$ (78.0) $ (27.6) 183 %$ (59.8) $ 58.5 (202) % Adjusted EBITDA margin (146) % (50) % (27) % 29 %
Three Months Ended -
Net sales decreased 3% year-over-year. Lower styrene-related sales volume resulted in a 24% decrease which was partially offset by a 22% increase due to higher styrene prices.
The decrease of$50.4 million in Adjusted EBITDA was primarily attributed to a$59.0 million , or 214%, decrease due to lower styrene margins including impacts from elevated utility costs caused by historically high natural gas prices inEurope , weaker demand, and unfavorable net timing. In addition, a decrease of$5.5 million , or 20%, was due to higher fixed costs. Slightly offsetting these decreases was an increase of$14.1 million , or 51%, due to foreign exchange impacts.
Nine Months Ended -
Net sales increased 10% year-over-year. Higher styrene prices resulted in a 29% increase in net sales, which was partially offset by an 18% decrease due to lower styrene-related sales volume.
The decrease of$118.3 million in Adjusted EBITDA was primarily attributed to a$134.8 million , or 231%, decrease due to lower styrene margins including impacts from higher utility costs caused by a rise in natural gas prices inEurope and weaker demand. Slightly offsetting this decrease was an increase of$20.6 million , or 35%, due to foreign exchange rate impacts.
Americas Styrenics Segment
This segment consists solely of the equity earnings from of our 50%-owned joint venture,Americas Styrenics , a producer of both styrene monomer and polystyrene inNorth America . Styrene monomer is a basic building block of 41
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plastics and a key input to many of the Company's products, as well as a key raw material for the production of polystyrene. Major applications for the polystyrene productsAmericas Styrenics produces include appliances, food packaging, food service disposables, consumer electronics, and building and construction materials. Three Months Ended Nine Months Ended September 30, September 30, ($ in millions) 2022 2021 % Change 2022 2021 % Change Adjusted EBITDA*$ 22.8 $ 17.1 33 %$ 83.8 $ 70.2 19 % *The results of this segment are comprised entirely of earnings fromAmericas 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 margins which were partially offset by lower volumes. Prior period included headwinds from production issues caused by Hurricane Ida.
Nine Months Ended -
The increase in Adjusted EBITDA was due to higher margins, including a stronger styrene spot market, which were partially offset by lower volumes.
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 nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2022 2021 2022 2021
Net income (loss) $ (119.8) $ 93.1 $ (65.6) $ 316.2
Net income (loss) from discontinued
operations (1.9) 13.7 (1.9) 38.0
Net income (loss) from continuing
operations (117.9) 79.4 (63.7) 278.2
Interest expense, net 30.4 23.0 77.7 56.6
Provision for (benefit from) income
taxes (12.1) 5.5 41.4 48.9
Depreciation and amortization 45.9 49.8 147.1 111.0
EBITDA(a) $ (53.7) $ 157.7 $ 202.5 $ 494.7
Net gain on disposition of businesses
and assets - - (1.8) (0.2)
Restructuring and other charges(b) - 0.2 (1.0) 6.8
Acquisition transaction and
integration net costs (c) 0.4 13.6 6.2 62.8
Acquisition purchase price hedge loss
(d) - - - 22.0
Asset impairment charges or
write-offs(e) 1.9 1.2 3.9 3.0
European Commission request for
information(f) - - 35.6 -
Other items(g) 14.8 0.7 60.1 7.6
Adjusted EBITDA $ (36.6) $ 173.4 $ 305.5 $ 596.7 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.
Amounts for the three and nine months ended
restructuring programs. Refer to Note 17 in the condensed consolidated
financial statements for further information.
Amounts for the three and nine months ended
the PMMA business and Aristech Surfaces Acquisitions. Refer to Note 3 in the
condensed consolidated financial statements for further information.
Acquisition purchase price hedge loss for the nine months ended
2021 was due to the change in fair value of the Company's forward currency (d) hedge arrangement on the euro-denominated purchase price of the PMMA
business. Refer to Note 10 in the condensed consolidated financial statements
for further information.
Amounts for the three and nine months ended September 30, 2022 and 2021
primarily relate to the impairment of the Company's styrene monomer assets in
(e) Boehlen,
financial statements. There were additional impairment charges of
million during the three and nine months ended
certain long-lived assets in the Base Plastics segment.
Amount for the nine months ended
information, as described in Note 13 in the condensed consolidated financial
statements.
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Other items for the three and nine months ended
primarily relate to fees incurred in conjunction with certain of the (g) Company's strategic initiatives, including the potential divestiture of our
styrenics business and 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 nine months ended
Nine Months Ended
September 30,
(in millions) 2022 2021
Net cash provided by (used in):
Operating activities - continuing operations $ 10.8 $218.7
Operating activities - discontinued operations (1.4)
19.5
Operating activities 9.4
238.2
Investing activities - continuing operations (109.0)
(1,885.8)
Investing activities - discontinued operations (0.8)
(3.3)
Investing activities (109.8) (1,889.1)
Financing activities (213.5) 1,272.8Effect of exchange rates on cash (16.3)
(3.1)
Net change in cash, cash equivalents, and restricted cash
(381.2) Operating Activities
Net cash provided by operating activities from continuing operations during the nine months endedSeptember 30, 2022 totaled$10.8 million , which included$62.5 million of dividends received fromAmericas Styrenics . Although operating results were challenged by macroeconomic conditions resulting in reduced customer demand, higher raw material and utility costs and negative earnings and cash flow, there was a significant working capital release during the quarter. The working capital release, which came mostly within the third quarter, was primarily attributable to a steep decline in many raw material prices from the historically high prices seen in the second quarter, inventory control actions, and sequentially lower sales. Net cash used in operating activities from discontinued operations during the nine months endedSeptember 30, 2022 totaled$1.4 million . Net cash provided by operating activities from continuing operations during the nine months endedSeptember 30, 2021 totaled$218.7 million , driven by strong earnings, and inclusive of dividends received fromAmericas Styrenics of$60.0 million . Partially offsetting these factors was a$174.7 million reduction in operating cash from net working capital changes during the period, which were primarily attributable to increases in raw material costs. Net cash provided by operating activities from discontinued operations during the nine months endedSeptember 30, 2021 totaled$19.5 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 nine months endedSeptember 30, 2022 totaled$109.0 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$94.0 million . Net cash used in investing activities from discontinued operations during the nine months endedSeptember 30, 2022 totaled$0.8 million . Net cash used in investing activities from continuing operations during the nine months endedSeptember 30, 2021 totaled$1,885.8 million , which was primarily attributable to net cash paid for asset or business acquisitions of$1,806.6 million , capital expenditures of$64.7 million , and payments for the settlement of hedging instruments of$14.7 million 44
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(related to the acquisition purchase price hedge). Net cash used in investing activities from discontinued operations during the nine months endedSeptember 30, 2021 totaled$3.3 million , which was entirely attributable to capital expenditures.
Financing Activities
Net cash used in financing activities during the nine months endedSeptember 30, 2022 totaled$213.5 million . This activity was primarily due to$151.9 million of payments related to the repurchase of ordinary shares,$36.3 million of dividends paid, and$12.2 million of net repayments of short-term borrowings. In addition, there was$12.9 million of repurchases and repayments of long-term debt during the period, primarily related to our 2024 Term Loan B and 2028 Term Loan B obligations. Net cash provided by financing activities during the nine months endedSeptember 30, 2021 totaled$1,272.8 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,$120.0 million in net proceeds from a draw on the Accounts Receivable Securitization Facility, 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,$11.6 million of net repayments of short-term borrowings,$9.5 million of dividend payments, and$7.1 million of net principal payments related to our 2024 Term Loan B and 2028 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.
Nine Months Ended
September 30,
(in millions) 2022 2021
Cash provided by operating activities
(94.8) (68.0)
Free Cash Flow $ (85.4) $ 170.2 Refer to the discussion above for significant impacts to cash provided by
operating activities for the nine 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).
At
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assets from continuing operations less current liabilities from continuing
operations). In addition, as of September 30, 2022 and December 31, 2021 , we had
$242.2 million and $560.6 million , respectively, of foreign cash and cash
equivalents on our balance sheet, outside of Ireland , our country of domicile,
all of which is readily convertible into other foreign currencies, including the
U.S. dollar. Our intention is not to permanently reinvest our foreign cash and
cash equivalents. Accordingly, we record deferred income tax liabilities related
to the unremitted earnings of our subsidiaries.
The following table outlines our outstanding indebtedness as of September 30,
2022 and December 31, 2021 and the associated interest expense, including
amortization of deferred financing fees and debt discounts. Effective interest
rates for the borrowings included in the table below exclude the impact of
deferred financing fee amortization, certain other fees charged to interest
expense (such as fees for unused commitment fees during the period), and the
impacts of derivatives designated as hedging instruments. For definitions of
capitalized terms not included herein, refer to our Annual Report on Form 10-K
("Annual Report").
As of and for the Nine Months Ended As of and for the Year Ended
September 30, 2022 December 31, 2021
Effective Effective
Interest Interest Interest Interest
($ in millions) Balance Rate Expense Balance Rate Expense
Senior Credit Facility
2024 Term Loan B $ 665.2 3.1 % $ 18.8 $ 670.4 2.1 % $ 20.6
2028 Term Loan B 737.6 3.5 % 22.3 742.8 2.6 % 15.2
2026 Revolving Facility - - % 1.3 - - % 2.1
2029 Senior Notes 447.0 5.1 % 18.6 450.0 5.1 % 19.0
2025 Senior Notes 500.0 5.4 % 18.7 500.0 5.4 % 20.7
Accounts Receivable
Securitization Facility - - % 1.0 - 2.0 % 1.8
Other indebtedness* 3.0 1.5 % - 5.6 2.2 % -
Total $ 2,352.8 $ 80.7 $ 2,368.8 $ 79.4 *For the nine months ended
As ofSeptember 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 ofSeptember 30, 2022 , the Company had$369.2 million of funds available for borrowing (net of$5.8 million outstanding letters of credit) under the 2026 Revolving Facility. Further, as ofSeptember 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. The 2026 Revolving Facility contains a springing covenant which applies when 30% or more is drawn from the facility, and would require the Company to meet a first lien net leverage ratio not to exceed 3.5x at the end of each financial quarter. As ofSeptember 30, 2022 the first lien net leverage ratio (as defined in our secured credit agreement) was 2.9x.
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$447.0 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 ofSeptember 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
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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 . 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 nine months endedSeptember 30, 2022 , the Company declared dividends of$0.96 per ordinary share, totaling$35.1 million , of which$12.4 million was accrued as ofSeptember 30, 2022 , the majority of which was paid inOctober 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. The Company's cash flow generation in recent years has been strong. Despite the challenging and uncertain market conditions we are experiencing in 2022, the Company generated positive cash flows from operating activities for the nine months endedSeptember 30, 2022 , which we expect to continue for full year 2022. We believe funds provided by operations, our existing cash and cash equivalent balances of$242.8 million , coupled with borrowings available under our 2026 Revolving Facility and our Accounts Receivable Securitization Facility totaling$519.2 million , will be adequate to meet all necessary operating expenditures, while continuing to invest in our growth and sustainability objectives. Further, we also believe that our financial resources will allow us to manage the anticipated impact of this challenging macroeconomic environment on our business operations for the foreseeable future, which could include lower demand, reductions in revenue or delays in payments from customers and other third parties. Our ability to generate cash from operations to pay our indebtedness and meet other liquidity needs is subject to certain risks described herein and under Part I, Item 1A-"Risk Factors" of our Annual Report, as well as the risk factors included in Part II, Item 1A herein. As ofSeptember 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. 47 Table of Contents 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. 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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