Trinseo(US:TSE)2023-11-06 18:48markdown Part I - Financial Information [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The unaudited condensed consolidated financial statements for the period ended September 30, 2023, show a significant net loss, primarily driven by a large goodwill impairment charge. Total assets decreased compared to year-end 2022, mainly due to the goodwill write-down, while total liabilities remained relatively stable. Shareholders' equity turned into a deficit. The company undertook significant debt refinancing during the period [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of September 30, 2023, Trinseo's total assets were $3.27 billion, a decrease from $3.76 billion at year-end 2022, primarily due to a significant reduction in goodwill from $410.4 million to $61.2 million. Total liabilities were largely flat at approximately $3.3 billion. A key change is the shift in shareholders' equity from a positive $420.3 million to a deficit of $21.4 million, driven by a large accumulated deficit Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Total Assets** | **$3,271.2** | **$3,760.2** | | Cash and cash equivalents | $278.6 | $211.7 | | Goodwill | $61.2 | $410.4 | | **Total Liabilities** | **$3,292.6** | **$3,339.9** | | Long-term debt, net | $2,274.2 | $2,301.6 | | **Total Shareholders' Equity (Deficit)** | **($21.4)** | **$420.3** | | Retained earnings (accumulated deficit) | ($177.6) | $264.5 | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For the nine months ended September 30, 2023, Trinseo reported a net loss of $436.3 million, a stark contrast to the $65.6 million net loss in the same period of 2022. This was primarily driven by a $349.5 million impairment charge. Net sales declined by 29% to $2.84 billion. The third quarter showed a net loss of $38.4 million on sales of $879.0 million, an improvement from the $119.8 million loss in Q3 2022, despite lower sales Statement of Operations Summary (in millions) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $879.0 | $1,178.1 | $2,837.9 | $3,990.3 | | Gross profit (loss) | $31.3 | ($39.5) | $122.0 | $275.5 | | Impairment and other charges | $0.1 | $1.9 | $349.5 | $39.5 | | Operating income (loss) | ($16.4) | ($99.1) | ($383.4) | $57.0 | | **Net loss** | **($38.4)** | **($119.8)** | **($436.3)** | **($65.6)** | | **Net loss per share- basic** | **($1.09)** | **($3.41)** | **($12.42)** | **($1.81)** | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) For the first nine months of 2023, the company generated $131.2 million in cash from operating activities, a significant improvement from $9.4 million in the prior-year period, despite a larger net loss. This was driven by positive changes in working capital, particularly inventories. Investing activities used $11.1 million, significantly less than the prior year due to lower capital expenditures. Financing activities used $48.2 million, mainly for debt repayments partially offset by proceeds from new debt issuance Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Cash provided by operating activities | $131.2 | $9.4 | | Cash used in investing activities | ($11.1) | ($109.8) | | Cash used in financing activities | ($48.2) | ($213.5) | | **Net change in cash** | **$66.9** | **($330.2)** | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Key notes detail significant corporate actions and financial events. The company completed a major debt refinancing, repaying the 2024 Term Loan B and part of the 2025 Senior Notes with new 2028 Refinance Term Loans. A goodwill impairment charge of $349.0 million was recorded for the Engineered Materials reporting unit. The company is also managing legal contingencies from the Bristol Spill and an arbitration with Synthos. Several restructuring plans are underway to optimize assets and reduce costs, including plant closures and workforce reductions - On September 8, 2023, the company entered into a new **$1,077.3 million senior secured term loan facility** (2028 Refinance Term Loans) to repay its 2024 Term Loan B in full and redeem **$385.0 million of its 2025 Senior Notes**[56](index=56&type=chunk)[62](index=62&type=chunk)[65](index=65&type=chunk) - A goodwill impairment charge of **$349.0 million** was recorded in Q2 2023 for the Engineered Materials reporting unit due to challenging operating conditions and a revised outlook[69](index=69&type=chunk) - The company is involved in legal proceedings related to a latex emulsion release (the "Bristol Spill") and an arbitration dispute with Synthos concerning the 2021 sale of the Synthetic Rubber business[109](index=109&type=chunk)[125](index=125&type=chunk) - Multiple restructuring plans are in progress, including the closure of a PMMA plant in Denmark, a polyester plant in New Mexico, and a PMMA line in Italy, with expected charges for severance, depreciation, and decommissioning[147](index=147&type=chunk)[154](index=154&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a challenging year-to-date performance, marked by a net loss of $436.3 million for the first nine months of 2023, heavily impacted by a $349.0 million goodwill impairment. Persistent weak demand, especially in building & construction and consumer durables, led to a 29% YTD revenue decline. However, cost control, commercial actions, and restructuring initiatives helped mitigate the impact, leading to positive operating cash flow. The company successfully refinanced its debt, extending maturities to 2028. The outlook for Q4 remains constrained, but the company expects benefits from ongoing restructuring - Persistent weak demand and customer destocking drove a **25% YoY decrease in net sales for Q3** and a **29% decrease for the nine-month period**[179](index=179&type=chunk)[196](index=196&type=chunk) - The company is exploring the divestiture of its Styrenics business, which includes the Feedstocks and Polystyrene segments and its **50% ownership of Americas Styrenics**[170](index=170&type=chunk)[173](index=173&type=chunk) - Despite a challenging environment, the company generated **positive Free Cash Flow of $82.1 million** for the nine months ended Sep 30, 2023, a significant improvement from a **negative $85.4 million** in the prior year, driven by working capital reductions[273](index=273&type=chunk) Adjusted EBITDA Reconciliation (in millions) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss from continuing operations | ($38.4) | ($117.9) | ($436.3) | ($63.7) | | Adjustments (Interest, Tax, D&A, etc.) | $67.6 | $64.2 | $459.9 | $269.8 | | Goodwill impairment charges | $0.0 | $0.0 | $349.0 | $0.0 | | **Adjusted EBITDA** | **$40.9** | **($36.6)** | **$134.0** | **$305.5** | [Results of Operations](index=38&type=section&id=Results%20of%20Operations) For Q3 2023 versus Q3 2022, net sales fell 25% to $879.0 million due to lower volumes (8%) and prices (20%). However, gross profit improved to $31.3 million from a loss of $39.5 million, driven by better margins in Feedstocks and Plastics Solutions. For the nine-month period, net sales dropped 29% to $2.84 billion, and gross profit fell 56% to $122.0 million. A significant $349.0 million goodwill impairment charge drove the nine-month operating loss to $383.4 million Q3 2023 vs Q3 2022 Key Changes (in millions) | Metric | Q3 2023 | Q3 2022 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $879.0 | $1,178.1 | ($299.1) | (25%) | | Gross Profit (Loss) | $31.3 | ($39.5) | $70.8 | 179% | | Operating Loss | ($16.4) | ($99.1) | $82.7 | 83% | | Net Loss | ($38.4) | ($119.8) | $81.4 | 68% | Nine Months 2023 vs Nine Months 2022 Key Changes (in millions) | Metric | 9M 2023 | 9M 2022 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $2,837.9 | $3,990.3 | ($1,152.4) | (29%) | | Gross Profit | $122.0 | $275.5 | ($153.5) | (56%) | | Operating (Loss) Income | ($383.4) | $57.0 | ($440.4) | (773%) | | Net Loss | ($436.3) | ($65.6) | ($370.7) | (565%) | [Selected Segment Information](index=42&type=section&id=Selected%20Segment%20Information) Segment performance for Q3 2023 was mixed. Plastics Solutions saw a significant Adjusted EBITDA increase to $22.0 million from a loss of $14.9 million in Q3 2022, driven by improved polycarbonate costs. Feedstocks also improved dramatically due to higher styrene margins. However, Engineered Materials, Latex Binders, and Polystyrene all experienced declines in Adjusted EBITDA due to lower volumes and weaker demand. For the nine-month period, all segments except Feedstocks saw significant declines in Adjusted EBITDA compared to 2022 Segment Adjusted EBITDA (in millions) | Segment | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | :--- | :--- | | Engineered Materials | $4.8 | $7.5 | $4.9 | $76.2 | | Latex Binders | $22.8 | $31.0 | $74.2 | $90.6 | | Plastics Solutions | $22.0 | ($14.9) | $73.1 | $99.8 | | Polystyrene | $9.2 | $18.7 | $31.2 | $87.0 | | Feedstocks | ($19.4) | ($78.0) | ($37.1) | ($59.8) | | Americas Styrenics | $19.0 | $22.8 | $49.1 | $83.8 | | **Total Segment Adjusted EBITDA** | **$58.4** | **($12.9)** | **$195.4** | **$377.6** | [Liquidity and Capital Resources](index=47&type=section&id=Liquidity%20and%20Capital%20Resources) As of September 30, 2023, the company had total liquidity of $492.9 million, consisting of $276.8 million in cash and $216.1 million in available borrowings. Total indebtedness stood at $2.3 billion. The company successfully refinanced its near-term debt, with no significant maturities until May 2028. A key covenant in the new 2028 Refinance Credit Agreement requires maintaining minimum liquidity of $100.0 million. The company was in compliance with all debt covenants as of the reporting date - Total liquidity as of Sep 30, 2023 was **$492.9 million**, including **$276.8 million cash** and **$216.1 million available** under revolving and securitization facilities[277](index=277&type=chunk) - The company's Senior Credit Facility has a springing covenant that limits borrowing capacity to **30% of the revolver** because the first lien net leverage ratio of **6.41x** exceeded the **3.50x threshold**. As of Sep 30, 2023, available borrowing under this facility was **$95.7 million**[280](index=280&type=chunk) - The company believes existing cash and available borrowings are adequate to meet operating needs and liquidity covenants for at least the next 12 months[289](index=289&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=51&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company states that there have been no material changes in its exposure to market risks, which include interest rates, foreign currency exchange rates, and commodity prices, from the information provided in its 2022 Annual Report - The company confirms no material changes in its exposure to market risks (interest rate, foreign currency, commodity prices) since its last Annual Report[301](index=301&type=chunk) [Controls and Procedures](index=51&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2023. There were no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of September 30, 2023[302](index=302&type=chunk) - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[304](index=304&type=chunk) Part II - Other Information [Legal Proceedings](index=52&type=section&id=Item%201.%20Legal%20Proceedings) The company is subject to various legal claims incidental to its business. For details on new matters and material developments during the quarter, the report refers to Note 13 of the condensed consolidated financial statements, which discusses litigation related to the Bristol Spill and other matters - For information on legal proceedings, including new matters and material developments, the company directs readers to Note 13 of the financial statements[306](index=306&type=chunk) [Risk Factors](index=52&type=section&id=Item%201A.%20Risk%20Factors) This section provides material updates to the company's risk factors. Key risks highlighted include the potential failure to successfully divest the styrenics business, which is a key part of its transformation strategy. It also emphasizes risks associated with its substantial indebtedness of approximately $2.3 billion, which could increase vulnerability to economic downturns and limit operational flexibility. The restrictive covenants in its debt agreements, particularly the springing covenant on its revolving credit facility, are also noted as a significant risk - There is a risk that the company may not be successful in the proposed divestiture of its styrenics business, which could be impacted by economic conditions and the ability to find a suitable buyer[309](index=309&type=chunk)[310](index=310&type=chunk) - The company's total indebtedness of approximately **$2.3 billion** could adversely affect its financial condition by increasing vulnerability to downturns and dedicating a substantial portion of cash flow to debt service[311](index=311&type=chunk)[312](index=312&type=chunk) - Debt agreements contain restrictive covenants that may limit the ability to pay dividends, make investments, or incur additional debt. The Senior Credit Facility's springing covenant has limited access to the revolver since March 31, 2023[317](index=317&type=chunk)[320](index=320&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=54&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities. A share repurchase program authorized in September 2022 for up to $200.0 million remains in effect, with the full amount still available as of September 30, 2023, as no shares were repurchased during the third quarter - No share repurchases were made during the three months ended September 30, 2023. The full **$200.0 million** remains available under the current share repurchase authorization, which expires 18 months from September 2, 2022[326](index=326&type=chunk) [Defaults Upon Senior Securities](index=55&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reports no defaults upon its senior securities during the period - **None**[327](index=327&type=chunk) [Mine Safety Disclosures](index=55&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - **Not applicable**[328](index=328&type=chunk) [Other Information](index=55&type=section&id=Item%205.%20Other%20Information) The company states that none of its directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the third quarter of 2023 - No director or officer trading plans under Rule 10b5-1 were adopted, modified, or terminated during the fiscal quarter ended September 30, 2023[329](index=329&type=chunk) [Exhibits](index=55&type=section&id=Item%206.%20Exhibits) This section provides an index of the exhibits filed with the Form 10-Q. Notable exhibits include the new Credit Agreement dated September 8, 2023, and the required CEO and CFO certifications under the Sarbanes-Oxley Act - The Exhibit Index lists key legal documents filed with the report, including the new Credit Agreement from September 2023 and Sarbanes-Oxley certifications[333](index=333&type=chunk)