Trinseo(TSE) - 2018 Q4 - Annual Report

Part I Business Trinseo S.A. is a global materials company producing synthetic rubber, latex binders, and plastics across six segments, focusing on growth, acquisitions, and cost efficiencies - Trinseo is a leading global materials company producing synthetic rubber, latex binders, and plastics for diverse industries like automotive and packaging[23] - As of December 31, 2018, the company operated 30 manufacturing plants at 23 sites across 12 countries and 10 R&D facilities globally[24] - Effective January 1, 2018, the company realigned its reporting structure into six segments: Latex Binders, Synthetic Rubber, Performance Plastics, Polystyrene, Feedstocks, and Americas Styrenics[32][33] Latex Binders Segment This segment is a global leader in styrene-butadiene (SB) latex, primarily used in coated paper and carpet, leveraging R&D and global manufacturing - The Latex Binders segment holds the 1 global market position for supplying SB latex for the coated paper market[37] - In 2018, sales were geographically distributed with 43% in Europe, 27% in the United States, and the majority in Asia[35] - Principal competitors include BASF Group, Omnova Solutions Inc., and Synthomer plc, with over half of 2018 net sales from raw material pass-through contracts[40][42] Synthetic Rubber Segment This segment is a leading European producer of styrene-butadiene and polybutadiene-based rubber, primarily for high-performance tires, focusing on advanced SSBR grades - Approximately 88% of the segment's 2018 net sales were attributable to the tire market[47] - The product mix is shifting towards advanced SSBR grades, growing from 12% of segment volume in 2012 to 34% in 2018, with SSBR representing approximately 60% of total segment net sales in 2018[49] - The company expanded SSBR capacity by 125 KT since 2012, including a new capacity addition and pilot plant in Schkopau, Germany in 2018[58] - In 2018, the top three customers accounted for 56% of the segment's net sales, indicating significant customer concentration[53] Performance Plastics Segment This segment produces highly engineered compounds and plastics for automotive, electronics, and medical markets, leveraging proprietary technology and the API Plastics acquisition - In 2018, sales were geographically distributed with 59% in Europe, 21% in the United States, and 14% in Asia[61] - The segment's 2018 product sales comprised approximately 47% Copolymers (ABS, SAN) and 49% PC & Compounding products[62][66] - The company started a new MAGNUM™ ABS production line in Zhangjiagang, China in late 2017 to serve the Asia Pacific market[63] Polystyrene Segment This segment is a leading polystyrene producer for injection molding and thermoforming, focusing on maintaining market position without near-term strategic growth investments - In 2018, approximately 60% of the segment's net sales were generated in Europe and 40% in Asia[79] - The product offerings include general purpose polystyrene (GPPS) and high impact polystyrene (HIPS)[80] - Principal competitors include INEOS Styrolution, Versalis S.p.A., and Total S.p.A[82] Feedstocks Segment This segment produces and procures styrene monomer, primarily for internal consumption, benefiting from high global operating rates that can elevate margins - The segment supplied 15% of the styrene monomer capacity in Europe in 2018[86] - The majority of styrene monomer produced is consumed internally by the Company's other manufacturing activities[88] - Global styrene operating rates were approximately 89% in 2018 and are expected to increase through 2020 due to demand growth and limited new capacity[89] Americas Styrenics Segment This segment represents the company's 50% ownership in Americas Styrenics, a leading North American styrene and polystyrene producer, which provided significant dividends in 2018 - In 2018, Americas Styrenics was the 1 producer of polystyrene and supplied 18% of the styrene monomer capacity in North America[91] - Trinseo received $117.5 million in cash dividends from Americas Styrenics during 2018[91] - Approximately 58% of the styrene monomer produced by Americas Styrenics in 2018 was consumed in its own polystyrene production[92] Risk Factors The company faces significant business risks from raw material volatility, operational disruptions, legal inquiries, and debt covenants, alongside share-related risks due to its Luxembourg incorporation - Volatility in the cost and supply of principal raw materials, representing approximately 56% of Cost of Goods Sold, can adversely affect financial results[145] - The company is migrating key IT, ERP, and supply chain services from Dow, incurring $26.1 million in 2018 costs and potential operational disruptions[151][152] - Trinseo Europe GmbH received a Request for Information from the European Commission regarding styrene monomer commercial activity, potentially leading to fines or adverse effects[161][165][167] - The company's total indebtedness was approximately $1.2 billion as of December 31, 2018, with debt covenants potentially restricting operations and actions[181][183] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[206] Properties The company operates a global network of owned and leased facilities, including 61 production units at 16 sites and 14 units at 7 joint venture sites as of December 31, 2018 | Facility Type | Location Highlights | | :--- | :--- | | Corporate Offices | Luxembourg, Berwyn (USA), Hong Kong, Horgen (Switzerland) | | Production Sites | Germany (Boehlen, Rheinmunster, Schkopau, Stade), USA (Dalton, Midland), The Netherlands (Terneuzen), Italy (Mussolente), China (Zhangjiagang), Taiwan (Hsinchu) | | R&D Facilities | Germany (Rheinmunster, Schkopau), USA (Dalton, Midland), Switzerland (Samstagern), The Netherlands (Terneuzen) | | Joint Venture Sites | Americas Styrenics has 7 sites in the USA and Colombia | Legal Proceedings The company is subject to various legal claims but believes no pending litigation will have a material adverse effect, excluding the European Commission inquiry - The company states no pending litigation is likely to have a material adverse effect on its business[212] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[213] Part II Market for Registrant's Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities Trinseo's ordinary shares trade on the NYSE under "TSE", with details on share repurchases and Luxembourg tax considerations for shareholders - The company's ordinary shares are traded on the New York Stock Exchange under the ticker symbol "TSE"[215] | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | Oct 1 - Oct 31, 2018 | 202,624 | $65.14 | | Nov 1 - Nov 30, 2018 | 45,000 | $50.24 | | Dec 1 - Dec 31, 2018 | 755,000 | $46.80 | | Total Q4 2018 | 1,002,624 | $50.66 | - The company has a share repurchase authorization from June 2017 to repurchase up to 4.0 million ordinary shares, ending in June 2020[219] Selected Financial Data This section provides a five-year summary of the company's key financial data from its statements of operations, balance sheets, and other financial metrics | (In millions, except per share data) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net sales | $4,622.8 | $4,448.1 | $3,716.6 | | Gross profit | $528.8 | $640.3 | $592.2 | | Operating income | $414.4 | $525.0 | $498.2 | | Net income | $292.5 | $328.3 | $318.3 | | Net income per share—diluted | $6.70 | $7.30 | $6.70 | | Dividends per share | $1.56 | $1.38 | $0.90 | | Total assets (at year-end) | $2,726.8 | $2,772.0 | $2,421.3 | | Total debt (at year-end) | $1,192.4 | $1,199.7 | $1,187.4 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's 2018 financial performance, segment results, liquidity, and capital resources, anticipating continued market challenges into Q1 2019 - For FY 2018, net income was $292.5 million and Adjusted EBITDA was $573.2 million, amidst challenging market dynamics and economic conditions late in the year[244] - The company returned significant cash to shareholders in 2018, repurchasing approximately 2.2 million shares for $142.9 million and paying dividends of $1.56 per share[244] - The company expects unfavorable market conditions from late 2018 to continue into Q1 2019, with market recovery timing being a key factor for 2019 results[311] Results of Operations This section details operational results, showing 2018 net sales increased 4% to $4.62 billion but gross profit decreased 17%, while 2017 net sales increased 20% to $4.45 billion and gross profit increased 8% | (in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net sales | $4,622.8 | $4,448.1 | $3,716.6 | | Gross profit | $528.8 | $640.3 | $592.2 | | Operating income | $414.4 | $525.0 | $498.2 | | Net income | $292.5 | $328.3 | $318.3 | - 2018 vs. 2017: Net sales increased 4% due to currency impacts, while gross profit decreased 17% due to weaker margins across several segments[255][257] - 2017 vs. 2016: Net sales increased 20% primarily due to higher selling prices from raw material cost pass-through, and gross profit increased 8% due to higher margins, especially in Latex Binders and Feedstocks[268][270] Selected Segment Information This section details the financial performance of the company's six segments, highlighting 2018 Adjusted EBITDA declines in Performance Plastics, Latex Binders, and Polystyrene, and an increase in Americas Styrenics | Segment (2018 Adjusted EBITDA in millions) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Latex Binders | $110.4 | $138.5 | (20)% | | Synthetic Rubber | $77.0 | $83.3 | (8)% | | Performance Plastics | $188.9 | $230.9 | (18)% | | Polystyrene | $33.7 | $48.2 | (30)% | | Feedstocks | $107.1 | $110.5 | (3)% | | Americas Styrenics | $144.1 | $122.9 | 17% | Liquidity and Capital Resources The company's liquidity stems from cash, operations, and credit facilities, with $452.3 million cash and $1.2 billion total debt as of year-end 2018, and it uses derivatives to manage financial risks | (in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $366.5 | $391.3 | $403.7 | | Net cash used in investing activities | $(118.7) | $(182.6) | $(117.3) | | Net cash used in financing activities | $(222.2) | $(253.0) | $(247.6) | - As of December 31, 2018, total debt was $1,192.4 million, and working capital was $1,094.3 million[334] - Free Cash Flow, a non-GAAP measure, was $245.1 million in 2018, compared to $243.9 million in 2017[332] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign currency, and commodity prices, which it manages using derivatives, though commodity price volatility can impact earnings due to cost pass-through lags - Interest Rate Risk: The company has variable rate debt (2024 Term Loan B) and uses interest rate swaps to convert a portion to a fixed rate[399][400] - Foreign Currency Risk: The primary exposure is the euro, as approximately 60% of 2018 net sales were generated in Europe, hedged with foreign exchange forward contracts[405] - Commodity Price Risk: The company is exposed to volatile raw material prices; a hypothetical 10% change would have impacted 2018 cost of sales by approximately $322.2 million[409] Financial Statements and Supplementary Data This section indicates that required financial statements and supplementary data are included in Item 15 of the report - The financial statements and supplementary data are included in Item 15 of the Form 10-K[411] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[412] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2018[413] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework[416] Other Information The company reports no other information for this item - None[419] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2019 proxy statement - Information is incorporated by reference from the 2019 Proxy Statement[421] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[423] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[424] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[425] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2019 Proxy Statement - Information is incorporated by reference from the 2019 Proxy Statement[426] Part IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements, Americas Styrenics LLC financials, and an index of all exhibits - This item contains the list of financial statements and an index of all exhibits filed with the Form 10-K[428][430] Form 10-K Summary The company reports no summary for this item - None[438] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued unqualified opinions on Trinseo S.A.'s consolidated financial statements and the effectiveness of its internal control over financial reporting - PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[447] Consolidated Financial Statements This section presents Trinseo S.A.'s core audited financial statements, including Consolidated Balance Sheets and Statements of Operations, Comprehensive Income, Shareholders' Equity, and Cash Flows | (in millions) | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Assets | $2,726.8 | $2,772.0 | | Total Liabilities | $1,958.1 | $2,097.2 | | Total Shareholders' Equity | $768.7 | $674.8 | | (in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Sales | $4,622.8 | $4,448.1 | $3,716.6 | | Net Income | $292.5 | $328.3 | $318.3 | Notes to Consolidated Financial Statements This section provides detailed disclosures supplementing financial statements, covering accounting policies, acquisitions, investments, debt, derivatives, income taxes, and segment information - Note 2: The company adopted new accounting guidance for revenue recognition (Topic 606) on January 1, 2018, with no material impact, and new guidance for presenting pension costs[529][534] - Note 4: The company acquired API Plastics in July 2017 for a net purchase price of $82.3 million, adding TPEs to its Performance Plastics segment[555] - Note 11: As of December 31, 2018, total debt was $1.2 billion, primarily comprising a $691.3 million 2024 Term Loan B and $500.0 million in 5.375% 2025 Senior Notes[578] - Note 19: Details the realignment of reporting segments effective January 1, 2018, and provides a reconciliation of income before taxes to Segment Adjusted EBITDA[697][701] Americas Styrenics LLC Financial Statements This section contains the complete audited consolidated financial statements for Americas Styrenics LLC, the company's 50%-owned joint venture, including auditor's report and financial statements | (in millions) | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Sales | $1,825.7 | $1,783.6 | $1,483.1 | | Net Income | $260.2 | $194.4 | $228.8 | | Distribution to Members | $235.0 | $240.0 | $260.0 |