Exhibit 99.2
The Masterbatches Business of Clariant Ltd
Unaudited Interim Combined Financial Statements
As of September 30, 2019 and December 31, 2018 and for the nine-month periods ended September 30, 2019 and 2018
Unaudited Interim Combined Financial Statements
Combined Balance Sheets as of September 30, 2019 and December 31, 2018 | 2 | ||||
Combined Statements of Income for the Nine-Month Periods Ended September 30, 2019 and 2018 | 3 | ||||
Combined Statements of Comprehensive Income for the Nine-Months Ended September 30, 2019 and 2018 | 4 | ||||
Combined Statements of Changes in Equity for the Nine-Months Ended September 30, 2019 and 2018 | 5 | ||||
Combined Statements of Cash Flows for the Nine-Months Ended September 30, 2019 and 2018 | 6 | ||||
Notes to the Interim Combined Financial Statements | 7 |
1
The accompanying notes are an integral part of these interim combined financial statements.
The Masterbatches Business of Clariant Ltd
COMBINED BALANCE SHEETS
As of September 30, 2019 and December 31, 2018
(unaudited)
(in CHF, thousands) | September 30 2019 | December 31 2018 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | 35,068 | 123,328 | ||||||
Accounts receivable, net | 182,642 | 176,604 | ||||||
Inventories | 98,565 | 102,711 | ||||||
Loans to related parties | 87,039 | 80,600 | ||||||
Other current assets | 22,853 | 32,339 | ||||||
Total current assets | 426,167 | 515,582 | ||||||
Non-current assets: | ||||||||
Property, plant and equipment, net | 186,674 | 196,071 | ||||||
Right-of-use assets | 24,446 | - | ||||||
Goodwill | 48,547 | 48,703 | ||||||
Intangible assets, net | 5,476 | 6,304 | ||||||
Deferred tax assets | 17,469 | 12,718 | ||||||
Investments in affiliates | 3,173 | 4,080 | ||||||
Total non-current assets | 285,785 | 267,876 | ||||||
Total assets | 711,952 | 783,458 | ||||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | 95,773 | 125,282 | ||||||
Accrued and other liabilities | 47,695 | 46,411 | ||||||
Accrued employee expenses | 36,118 | 42,114 | ||||||
Short-term debt | 25,077 | 17,871 | ||||||
Loans from related parties | 43,224 | 59,171 | ||||||
Total current liabilities | 247,887 | 290,849 | ||||||
Non-current liabilities: | ||||||||
Long-term debt | 6,736 | 3,945 | ||||||
Retirement benefit obligations | 24,953 | 18,855 | ||||||
Lease liabilities | 18,574 | - | ||||||
Deferred tax liabilities | 9,426 | 9,264 | ||||||
Other non-current liabilities | 2,010 | 3,066 | ||||||
Total non-current liabilities | 61,699 | 35,130 | ||||||
Total liabilities | 309,586 | 325,979 | ||||||
EQUITY | ||||||||
Net investment from the Parent | 449,138 | 492,686 | ||||||
Accumulated other comprehensive loss | (59,757) | (49,335) | ||||||
Total equity attributable to the Masterbatches Business | 389,381 | 443,351 | ||||||
Non-controlling interests | 12,985 | 14,128 | ||||||
Total equity | 402,366 | 457,479 | ||||||
Total liabilities and equity | 711,952 | 783,458 |
2
The accompanying notes are an integral part of these interim combined financial statements.
The Masterbatches Business of Clariant Ltd
COMBINED STATEMENTS OF INCOME
For the nine-months ended September 30, 2019 and September 30, 2018
(unaudited)
(in CHF, thousands) | September 30 2019 | September 30 2018 | ||||||
Sales | 856,163 | 905,500 | ||||||
Cost of goods sold | (622,187) | (663,956) | ||||||
Gross profit | 233,976 | 241,544 | ||||||
Selling, general and administrative costs | (172,398) | (170,182) | ||||||
Research and development costs | (7,922) | (5,855) | ||||||
Other expense | (480) | (155) | ||||||
Operating income | 53,176 | 65,352 | ||||||
Interest expense | (10,062) | (11,257) | ||||||
Interest income | 1,548 | 1,115 | ||||||
Income before income tax expense | 44,662 | 55,210 | ||||||
Income tax expense | (11,792) | (16,601) | ||||||
Net income | 32,870 | 38,609 | ||||||
Less: Net income attributable to non-controlling interests | 646 | 391 | ||||||
Net income attributable to the Masterbatches Business | 32,224 | 38,218 |
3
The accompanying notes are an integral part of these interim combined financial statements.
The Masterbatches Business of Clariant Ltd
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
For the nine-months ended September 30, 2019 and September 30, 2018
(unaudited)
(in CHF, thousands) | September 30 2019 | September 30 2018 | ||||||
Net income | 32,870 | 38,609 | ||||||
Other comprehensive income (loss): | ||||||||
Defined benefit plan adjustment | (7,339) | 1,083 | ||||||
Currency translation adjustment | (5,450) | (13,736) | ||||||
Other comprehensive loss for the period, gross | (12,789) | (12,653) | ||||||
Deferred tax effect | 2,098 | (83) | ||||||
Other comprehensive loss for the period, net of tax | (10,691) | (12,736) | ||||||
Comprehensive income for the period | 22,179 | 25,873 | ||||||
Less: Comprehensive income / (loss) attributable to non-controlling interests | 377 | (190) | ||||||
Comprehensive income attributable to the Masterbatches Business | 21,802 | 26,063 |
4
The accompanying notes are an integral part of these interim combined financial statements.
The Masterbatches Business of Clariant Ltd
COMBINED STATEMENTS OF CHANGES IN EQUITY
For the nine-months ended September 30, 2019 and September 30, 2018
(unaudited)
(in CHF, thousands) | Net investment from the Parent | Accumulated other comprehensive loss | Non-controlling interests | Total equity | ||||||||||
Balance as of December 31, 2018 | 492,686 | (49,335) | 14,128 | 457,479 | ||||||||||
Net income | 32,224 | - | 646 | 32,870 | ||||||||||
Net transfers with Parent | (75,772) | - | - | (75,772) | ||||||||||
Changes in non-controlling interests | - | - | (1,520) | (1,520) | ||||||||||
Other comprehensive loss | - | (10,422) | (269) | (10,691) | ||||||||||
Balance as of September 30, 2019 | 449,138 | (59,757) | 12,985 | 402,366 |
(in CHF, thousands) | Net investment from the Parent | Accumulated other comprehensive loss | Non-controlling interests | Total equity | ||||||||||
Balance as of December 31, 2017 | 200,941 | (37,632) | 12,629 | 175,938 | ||||||||||
Net income | 38,218 | - | 391 | 38,609 | ||||||||||
Net transfers with Parent | 205,125 | - | - | 205,125 | ||||||||||
Changes in non-controlling interests | - | - | 1,849 | 1,849 | ||||||||||
Other comprehensive loss | - | (12,155) | (581) | (12,736) | ||||||||||
Balance as of September 30, 2018 | 444,284 | (49,787) | 14,288 | 408,785 |
5
The accompanying notes are an integral part of these interim combined financial statements.
The Masterbatches Business of Clariant Ltd
COMBINED STATEMENTS OF CASH FLOWS
For the nine-months ended September 30, 2019 and September 30, 2018
(unaudited)
(in CHF, thousands) | September 30 2019 | September 30 2018 | ||||||
Operating activities: | ||||||||
Net income | 32,870 | 38,609 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Deferred tax benefit | (1,796) | (1,006) | ||||||
Depreciation and amortization | 17,953 | 21,341 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (10,617) | (7,876) | ||||||
Inventories | 1,675 | (11,622) | ||||||
Accounts payable | (20,878) | 1,813 | ||||||
Other current assets and liabilities | 7,245 | (6,182) | ||||||
Accrued liabilities | (6,948) | (15,208) | ||||||
Net cash provided by operating activities | 19,504 | 19,869 | ||||||
Investing activities: | ||||||||
Investments in property, plant and equipment | (17,671) | (12,516) | ||||||
Investments in intangible assets | (1,035) | (746) | ||||||
Net cash used by investing activities | (18,706) | (13,262) | ||||||
Financing activities: | ||||||||
Proceeds from short-term debt | 10,525 | 8,522 | ||||||
Repayments of short-term debt | (5,365) | (6,713) | ||||||
Proceeds from long-term debt | 6,686 | - | ||||||
Repayments of long-term debt | (430) | - | ||||||
Net (repayments) of loans from / to related parties | (22,182) | (211,669) | ||||||
(Distributions) / contributions to non-controlling interests | (1,520) | 1,849 | ||||||
(Distributions) / contributions to Parent | (75,994) | 204,447 | ||||||
Net cash used by financing activities | (88,280) | (3,564) | ||||||
Effect of exchange rate changes | (778) | (2,305) | ||||||
(Decrease) / increase in cash and cash equivalents | (88,260) | 738 | ||||||
Cash and cash equivalents at the beginning of year | 123,328 | 29,493 | ||||||
Cash and cash equivalents as of September 30 | 35,068 | 30,231 | ||||||
Noncash investing and financing activity: | ||||||||
Investments in property plant and equipment in accounts payable | 6,160 | 4,210 |
6
The accompanying notes are an integral part of these interim combined financial statements.
The Masterbatches Business of Clariant Ltd
UNAUDITED NOTES TO THE COMBINED FINANCIAL STATEMENTS
(in CHF, thousands)
NOTE 1 BASIS OF PRESENTATION
On 25 July 2019, Clariant Ltd (hereafter “Clariant” or “the Parent”) announced its intent to divest the entire Masterbatches Business (“the Masterbatches Business”, “the Masterbatches Business of Clariant Ltd” or “the Company”). On 19 December 2019, the Parent entered into a Share Purchase Agreement (“SPA”) with PolyOne Corporation (the “Buyer”) providing for the sale of the Masterbatches Business for approximately USD 1,560 million.
The Masterbatches Business is a part of the global business of Clariant, and specializes in color and additive concentrates and performance solutions for plastics whose product offerings enhance the market appeal or the end-use performance of plastic products, packaging and fibers. The Company’s portfolio of products caters to various industries including healthcare, infrastructure, agriculture, consumers goods, printing and packaging, transportation, fibers and home and personal care.
The Company has historically operated as part of the Parent and not as a separate entity. The accompanying interim combined financial statements have been prepared on a carve-out basis and are derived from the consolidated financial statements of the Parent.
The interim combined financial statements were prepared on a combined basis in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) consistent in all material respects with those applied for the year ended December 31, 2018, except for the effects of adopting new accounting guidance effective on January 1, 2019, as described in Note 2, Significant Accounting Policies. The interim financial information is unaudited but reflects all normal adjustments which are, in the opinion of management, necessary to provide a fair statement of results for the periods presented. The results of operations for the interim period are not necessarily indicative of the results to be expected for the entire year.
The December 31, 2018 balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Therefore, these interim combined financial statements should be read in conjunction with the combined financial statements for the year ended December 31, 2018.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Preparation of the interim carve-out financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. These estimates and underlying assumptions can impact all elements of the interim combined financial statements, including but not limited to: allocations of costs and expenses from the Parent; pension and post-retirement obligations; impairment testing for goodwill, inventory reserves, intangible assets; deferred tax assets; uncertain income tax positions; and contingencies.
Although these estimates represent management’s best estimates based on available information, historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances, actual results may differ from these estimates. As future events and their effects cannot be determined with certainty, the estimates and assumptions may prove to be incomplete or inaccurate, or unanticipated events and circumstances may occur that might cause a change in the estimates and assumptions.
Accounting Standards Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“the New Leases Standard”). The New Leases Standard was issued to increase transparency and comparability among entities by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. The New Leases Standard is effective for public companies for
7
The Masterbatches Business of Clariant Ltd
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Masterbatches Business adopted the New Leases Standard as of January 1, 2019 using the transition option established by ASU 2018-11, Leases (Topic 842), Targeted Improvements (ASU 2018-11), which permits companies to adopt the New Leases Standard as of the beginning of the period of adoption without recasting financial information for prior periods presented.
The applied practical expedients at the adoption of the standard are as follows:
1. Practical expedient under ASC 842-10-65-1 (gg) to not reassess whether expired or existing land easements are or contain leases.
2. The package of transition practical expedients under ASC 842-10-65-1 (f) (elected as a package and applied consistently to all leases) not to reassess leases that commenced before the effective date consisting in:
a) No need to reassess whether any expired or existing contracts are or contain leases.
b) No need to reassess the lease classification for any expired or existing leases.
c) No need to reassess initial direct costs for any existing leases.
The company does not make use of the following practical expedients:
1. Practical expedient under ASC 842-10-65-1 (g) to use hindsight to determine the likelihood of whether a lease will be extended, terminated or whether a purchase option will be exercised.
2. Practical expedient to not separate lease and non-lease components. Therefore, the company separates non-lease components for all classes of underlying assets.
The impact upon adoption on January 1, 2019 was the recognition of CHF 21.5 million of right-of-use assets and lease obligations in the combined balance sheet. There was no cumulative effect adjustment as a result of the adoption of this standard. The impact of this ASU is non-cash in nature and did not materially affect the Company’s cash flows.
In February 2018 the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that gives entities the option to reclassify to retained earnings tax effects related to items that have been stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (the Act). An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the Act’s change in US federal tax rate for all items accounted for in other comprehensive income.
For all entities, the guidance is effective for fiscal years beginning after 15 December 2018, and interim periods within those fiscal years. The Company adopted this update as of January 1, 2019. The adoption had no impact on the Company's combined financial statements.
Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under ASU 2016-13, the Company will be required to use a current expected credit loss model (“CECL”) that will result in immediate recognition of an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including accounts receivable. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. This guidance becomes effective for the Company on January 1, 2023, including the interim periods in that year. The Company is currently evaluating the impact that the adoption of this ASU will have on the combined financial statements and related disclosures.
8
The Masterbatches Business of Clariant Ltd
NOTE 3 SALES
The Masterbatches Business is a manufacturer and seller of industrial goods and generally meets the criteria to recognize revenues as products are shipped to customers. Set out below is the disaggregation of the sales from contracts with customers of the Company for the periods ended:
(in CHF, thousands) | September 30, 2019 | September 30, 2018 | ||||||
Europe, Middle East and Africa | 407,417 | 438,540 | ||||||
North America | 187,946 | 204,644 | ||||||
Asia Pacific | 122,622 | 119,063 | ||||||
Greater China | 75,879 | 83,428 | ||||||
Latin America | 62,299 | 59,826 | ||||||
Total sales | 856,163 | 905,501 |
As of September 30, 2019, the Company did not have a material amount of unsatisfied performance obligations outstanding with customers for contracts in excess of one year in duration. Deferred revenue, considered a contract liability under ASC 606, amounted to CHF 6,995 thousand and CHF 6,500 thousand as of September 30, 2019 and December 31, 2018, respectively.
Revenue recognized as of September 30, 2019 that was part of the deferred revenues balance as of December 31, 2018 was CHF 6,500 thousand.
Outstanding obligations for returns, refunds, and warranties as of September 30, 2019 were not material.
NOTE 4 INVENTORIES
Components of inventories consisted of the following, as of:
(in CHF, thousands) | September 30, 2019 | December 31, 2018 | ||||||
Raw materials and work in process | 49,843 | 48,734 | ||||||
Finished products | 42,693 | 48,623 | ||||||
Consumables | 6,029 | 5,354 | ||||||
Total inventories | 98,565 | 102,711 |
Inventories are adjusted for estimated obsolescence and written down to net realizable value. The Company did not record material amounts of inventory write-downs for the nine-month period ended September 30, 2019 or for the year ended December 31, 2018.
9
The Masterbatches Business of Clariant Ltd
NOTE 5 PROPERTY, PLANT AND EQUIPMENT, NET
Components of property, plant and equipment consisted of the following, as of:
(in CHF, thousands) | September 30, 2019 | December 31, 2018 | ||||||
Machinery and technical equipment | 351,767 | 357,927 | ||||||
Buildings | 184,096 | 187,472 | ||||||
Furniture and other equipment | 41,175 | 41,490 | ||||||
Construction in progress | 19,065 | 15,860 | ||||||
Land | 9,168 | 10,562 | ||||||
Vehicles | 5,412 | 5,895 | ||||||
Total property, plant and equipment, gross | 610,683 | 619,206 | ||||||
Less accumulated depreciation | (424,009) | (423,135) | ||||||
Total property, plant and equipment, net | 186,674 | 196,071 |
Depreciation expense was CHF 16,062 thousand and CHF 17,566 thousand in the periods ended September 30, 2019 and September 30, 2018, respectively.
NOTE 6 LEASING
A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company determines if an arrangement is a lease at inception. Right-of-use assets and lease liabilities are included in the Company’s combined balance sheet.
Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.
The Company leases machinery, equipment, land, buildings and cars which have remaining lease terms between less than one year and 37 years. Certain lease contracts contain options to extend the leases, which the Company has included in the lease term when it is reasonably certain for the Company to exercise that option. In addition, the Company made an accounting policy election for all the asset classes to not capitalize short-term leases and recognize them in the combined statement of income on a straight-line basis over the lease term. A short-term lease is defined as a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.
Discount rates
To determine the present value of lease payments, the rate implicit in the lease is used, whenever such rate is readily determinable. When the implicit rate is not determinable, the Company uses its incremental borrowing rate, derived from information available at the lease commencement date. The Company gives consideration to publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates, which are representative of rates for borrowings on a collateralized basis.
The below information is presented for the operating leases only under ASC 842. The Company does not have material finance leases.
10
The Masterbatches Business of Clariant Ltd
Operating leases consisted of the following as of September 30, 2019:
(in CHF, thousands) | September 30, 2019 | |||||||
Right-of-use assets: | ||||||||
Right-of-use assets | 24,446 | |||||||
Total operating lease assets | 24,446 | |||||||
Lease liabilities: | ||||||||
Accrued and other liabilities | 4,782 | |||||||
Lease liabilities | 18,575 | |||||||
Total operating lease liabilities | 23,357 |
Maturities of operating lease liabilities are as follows:
(in CHF thousands) | September 30, 2019 | ||||
Remainder of 2019 | 1,740 | ||||
2020 | 6,000 | ||||
2021 | 5,236 | ||||
2022 | 4,176 | ||||
2023 | 3,000 | ||||
Thereafter | 10,491 | ||||
Total future undiscounted cash flows | 30,643 | ||||
Less imputed interest | 7,286 | ||||
Total operating lease liabilities | 23,357 |
Operating lease term and discount rate are as follows, for the nine-month period ended:
September 30, 2019 | |||||
Weighted average remaining lease term (in years) | 8.5 | ||||
Weighted average discount rate | 7 | % |
Operating lease expense and cash paid are as follows for the nine-month period ended:
September 30, 2019 | |||||
Operating lease expense | 5,388 | ||||
Operating lease cash paid | 6,334 | ||||
Lease liabilities arising from obtaining right-of-use assets | 4,590 |
11
The Masterbatches Business of Clariant Ltd
As of December 31, 2018, the future minimum lease payments for operating leases under ASC 840 with initial or remaining non-cancelable lease terms in excess of one year for the next five years and thereafter are as follows:
(in CHF, thousands) | December 31, 2018 | ||||
2019 | 5,134 | ||||
2020 | 4,695 | ||||
2021 | 3,838 | ||||
2022 | 2,913 | ||||
2023 | 2,113 | ||||
Thereafter | 9,451 | ||||
Total | 28,144 |
NOTE 7 GOODWILL AND INTANGIBLE ASSETS, NET
The amounts shown below reflect the change in goodwill during the nine-month period ended September 30, 2019:
(in CHF, thousands) | ||||||||
Balance at the beginning of the year | 48,703 | |||||||
Currency translation adjustment | (156) | |||||||
Balance as of September 30, 2019 | 48,547 |
Net intangible assets consisted of the following, as of:
September 30, 2019
(in CHF, thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||
Capitalized software for internal use | 12,034 | (8,936) | 3,098 | ||||||||
Patents, technology and other | 7,974 | (6,471) | 1,503 | ||||||||
Trade names | 14,725 | (13,850) | 875 | ||||||||
Total intangible assets | 34,733 | (29,257) | 5,476 |
December 31, 2018
(in CHF, thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||
Capitalized software for internal use | 11,128 | (7,585) | 3,543 | ||||||||
Patents, technology and other | 8,047 | (6,264) | 1,783 | ||||||||
Trade names | 15,168 | (14,190) | 978 | ||||||||
Total intangible assets | 34,343 | (28,039) | 6,304 |
Amortization expense was CHF 1,891 thousand and CHF 3,775 thousand for the periods ended September 30, 2019 and 2018, respectively.
12
The Masterbatches Business of Clariant Ltd
Expected amortization of finite-lived intangible assets for the next five years and thereafter are as follows:
(in CHF thousands) | As of September 30, 2019 | ||||
Remainder of 2019 | 813 | ||||
2020 | 1,986 | ||||
2021 | 1,047 | ||||
2022 | 797 | ||||
2023 | 636 | ||||
Thereafter | 197 | ||||
Total | 5,476 |
NOTE 8 DEBT ARRANGEMENTS
Long-term debt
The Company's long-term debt as of September 30, 2019 and December 31, 2018 mainly consists of interest-bearing notes due in 2019 through 2025. The Company did not record material amounts of unamortized debt discount or debt issuance costs related to their long-term borrowings.
Total outstanding principal related to long-term debt arrangements consisted of the following as of:
(in CHF, thousands) | September 30, 2019 | December 31, 2018 | |||||||||
Notes due 2019 through 2025 | 10,239 | 5,896 | |||||||||
Less: maturities classified as current | (3,503) | (1,951) | |||||||||
Total long-term debt | 6,736 | 3,945 | |||||||||
Weighted average interest rate on outstanding borrowings at end of year | 6.0 | % | 8.0 | % |
Short-term debt
(in CHF, thousands) | September 30, 2019 | December 31, 2018 | |||||||||
Current maturities of long-term debt | 3,503 | 1,951 | |||||||||
Short term debt | 21,574 | 15,920 | |||||||||
Loans with related parties | 43,224 | 59,171 | |||||||||
Total short-term debt | 68,301 | 77,042 | |||||||||
Weighted average interest rate on outstanding non-related party borrowings at end of year | 10.6 | % | 9.3 | % |
NOTE 9 FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurement, (ASC 820) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
Level 3 - Unobservable inputs that are supported by little or no market activity. Level 3 assets or liabilities are those whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques with significant unobservable inputs, as well as assets or
13
The Masterbatches Business of Clariant Ltd
liabilities for which the determination of fair value requires significant judgment or estimation. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Observable market data is used in determining fair value, when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Financial assets and liabilities measured at fair value on a nonrecurring basis include long-lived assets and intangible assets which may be written down to fair value as a result of impairment.
The Company has determined the fair value measurements related to each of these rely primarily on Company-specific inputs and the Company's assumptions about the use of the assets, as observable inputs may not be available (Level 3). To determine the fair value of long-lived asset groups, the Company utilizes discounted cash flows expected to be generated by the long-lived asset group.
The Company performs the annual impairment test in the fourth quarter, however as of September 30, 2019 or 2018 no indicators of impairment were observed by management. As such, during the periods ended September 30, 2019 and 2018, the Company did not record a goodwill impairment charge for any of its reporting units.
Financial Instruments Not Carried at Fair Value
The Company recorded CHF 6,736 thousand and CHF 3,945 thousand of long-term debt as of September 30, 2019 and December 31, 2018, respectively, whose carrying value approximates fair value (Level 2), which consists primarily of interest bearing notes due in 2019 - 2025. See Note 8, Debt Arrangements for additional information.
Assets and Liabilities Not Carried at Fair Value
The carrying value of cash and cash equivalents, short term receivables, accounts payable, short-term debt and current loans to and from related parties are reasonable estimates of fair value due to the relatively short period of time between the origination of the instruments and their expected realization.
NOTE 10 EMPLOYEE BENEFIT PLANS
Upon the divestiture of the Masterbatches Business by Clariant, the Parent expects to transfer certain employee benefit plans in full to the Company and retained certain other plans. The defined benefit plans that are expected to be transferred in full (the “Direct Plans”) are accounted for in the interim combined financial statements as defined benefit plans in accordance with ASC 715, Compensation—Retirement Benefits, to reflect the related assets and liabilities of these plans. The defined benefit plans that are not expected to be transferred in full (the “Shared Plans”), are accounted for using the multiemployer accounting approach with the related assets or liabilities not reflected in these combined financial statements.
Defined Benefit Plans
The Company sponsors the Direct Plans, which are defined benefit pension plans for certain active employees, terminated employees and retirees of the Masterbatches Business. The defined benefit plans provide pension benefits based on years of service and employee compensation levels. The Company’s primary plans are located in the United States of America, Canada, Belgium, Taiwan, Italy, Saudi Arabia, Pakistan and France. The below defined benefit plan disclosures include those material plans to the Company.
14
The Masterbatches Business of Clariant Ltd
The interim net periodic benefit costs presented below were determined based on actuarial methods and include the following for the nine-month period ended:
(in CHF, thousands) | September 30, 2019 | September 30, 2018 | ||||||||||||
Service cost | 2,092 | 2,421 | ||||||||||||
Interest cost | 3,131 | 2,816 | ||||||||||||
Expected return on plan assets | (2,903) | (2,514) | ||||||||||||
Net periodic benefit cost | 2,320 | 2,723 |
The total amount of the employer’s contribution paid, and expected to be paid, during 2019 is not significantly different from the disclosure in the annual financial statements.
The weighted average expected long-term rate of return on plan assets used in the determination of the pension net benefit cost was 3.6%.
Service costs are classified as employee compensation costs within cost of sales and selling, general and administrative costs within the interim combined statement of income. All other components of net periodic benefit cost are classified within the other income, net line item, for all periods presented.
Defined Contribution Plans
The Parent sponsors defined contribution plans for certain hourly and salaried employees, which accrue benefits for employees on a pro-rata basis during their employment period based on their individual salaries. Expense related to the contributions for these plans recorded by the Company was approximately CHF 4,433 thousand and CHF 4,441 thousand for the nine months ended September 30, 2019 and 2018, respectively.
Multiemployer Pension Plans
The Company accounts for certain of its pension plans as multiemployer pension plans. These include pension plans as well as the Shared Plans that based on their nature qualify as multiemployer pension plans under US GAAP. As such, the related assets and liabilities are not reflected in the combined financial statements. The Company recorded expense in the Combined statement of Income of CHF 1,065 thousand and CHF 1,701 thousand for the nine months ended September 30, 2019 and 2018, related to the employees’ participation in Parent sponsored plans.
The Company had no other postretirement benefit obligations as of September 30, 2019.
15
The Masterbatches Business of Clariant Ltd
NOTE 11 INCOME TAXES
A summary of income tax expense is as follows for the periods ended:
(in CHF, thousands) | September 30, 2019 | September 30, 2018 | ||||||
Current income tax expense (benefit): | ||||||||
Domestic | (3) | 3 | ||||||
Foreign | 13,591 | 17,604 | ||||||
Total current income tax expense | 13,588 | 17,608 | ||||||
Deferred income tax (benefit) expense: | ||||||||
Domestic | 4 | 1 | ||||||
Foreign | (1,800) | (1,008) | ||||||
Total deferred income tax (benefit) expense | (1,797) | (1,007) | ||||||
Total income tax expense | 11,792 | 16,601 |
The annual estimated effective tax rate method was applied, as management believes it provides a reliable estimate of the expected 2018 and 2019 income tax expense on an interim basis. During the first nine months of 2019, the Company recorded an income tax expense of CHF 11,792 thousand, reflecting the estimated annual effective tax rate in each of its jurisdictions, applied to the third quarter of 2019 combined result before taxes.
As of September 30, 2019, there is pending tax legislation that is expected to be enacted before the end of 2019 that will increase the Company’s income tax rate in Switzerland effective January 1, 2020. Upon enactment, the Company will be required to remeasure its current deferred tax assets and liabilities to reflect the new tax rate.
NOTE 12 COMMITMENTS AND CONTINGENCIES
Purchase commitments. In the regular course of business, the Masterbatches Business enters into relationships with vendors and suppliers whereby the Company commits itself to capital acquisition of property, plant and equipment and intangible assets in order to benefit from better pricing conditions. The majority of the capital commitments will be paid within the one year after the respective balance sheet date. These commitments are not in excess of current market prices and reflect normal business operations.
Contingencies. The Masterbatches Business operates in countries where political, economic, social, legal, and regulatory developments can have an impact on the operational activities. The effects of such risks on the Company’s results, which arise during the normal course of business, are not foreseeable and are, therefore, not included in the accompanying financial statements.
In the ordinary course of business, the Company is involved in lawsuits, claims, investigations and proceedings, including product liability, intellectual property, commercial, environmental, and health and safety matters. Although the outcome of any legal proceedings cannot be predicted with certainty, the Company is not aware of such matters pending which would likely have any material adverse effect in relation to its business, financial position, or results of operations.
In determining loss contingencies, the Company considers the likelihood of impairing an asset or the incurrence of a liability at the date of the combined financial statements as well as the ability to reasonably estimate the amount of such loss. The Company records a provision for a loss contingency when information available before the combined financial statements are issued or are available to be issued indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the combined financial statements and when the amount of loss can be reasonably estimated. The Company regularly re-evaluates claims to determine whether provisions need to be readjusted based on the most current information available to the Company.
16
The Masterbatches Business of Clariant Ltd
NOTE 13 RELATED PARTY TRANSACTIONS AND NET INVESTMENT FROM THE PARENT
The Masterbatches Business has historically operated as part of the Parent and not as a stand-alone company. Accordingly, the Parent has funded certain expenses or provided services on behalf of the Company. These services included support functions provided by the Parent on behalf of the Company. As such the Parent allocated certain costs to the Company that are reflected within these combined financial statements. Such allocations are based on the requirements of preparing combined financial statements and in that same context management determined that such allocations are determined on a reasonable basis. However, such cost allocations may not be indicative of the costs that would have been incurred if the Company had been operated on a standalone basis during the periods presented. In addition, the expenses reflected in the financial statements may not be indicative of expenses the business will incur in the future. Actual costs that would have been incurred if the Company had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including the Company’s capital structure, information technology and infrastructure.
As described in Note 1, Basis of Presentation, the Masterbatches Business participates in a global cash pooling arrangement operated by the Parent and certain of its subsidiaries, whereby cash generated by the Company is managed by the Parent. This arrangement manages the working capital needs of the Masterbatches Business. The majority of the Company’s cash is transferred to the Parent, and the Parent funds the Company’s operating and investing activities as necessary. The cumulative net transfers related to these transactions are recorded in Net parent investment in the combined financial statements.
Related Party Transactions
In the ordinary course of business, the Masterbatches Business enters into transactions with related parties, which are subsidiaries and other businesses of the Parent, for the sale or purchase of goods, as well as other arrangements. Related party transactions include the following for the nine-month period ended:
(in CHF, thousands) | September 30, 2019 | September 30, 2018 | ||||||
Revenue from sale of goods | 1,219 | 1,098 | ||||||
Purchase of goods | 26,093 | 27,438 | ||||||
Interest expense from related parties | 6,491 | 8,687 | ||||||
Interest income with related parties | 1,240 | 902 | ||||||
Income from shared assets used jointly with the Parent | 1,328 | 1,090 | ||||||
Expenses from shared assets used jointly with the Parent | 2,961 | 2,652 |
Related Party Balances
Related party balances as of September 30, 2019 and December 31, 2018 consisted of the following:
(in CHF, thousands) | September 30, 2019 | December 31, 2018 | ||||||
Accounts receivable, net | 225 | 330 | ||||||
Accounts payable | 3,855 | 5,621 | ||||||
Loans to related parties | 87,039 | 80,600 | ||||||
Loans from related parties | 43,224 | 59,171 |
Allocations of Costs for The Parent’s Services
The total costs for services and functions allocated to the Company from the Parent were as follows for the nine-month period ended:
17
The Masterbatches Business of Clariant Ltd
(in CHF, thousands) | September 30, 2019 | September 30, 2018 | ||||||
Selling, general and administrative costs | 63,688 | 66,731 | ||||||
Research and development costs | 1,077 | 996 | ||||||
Total costs allocated from the Parent | 64,765 | 67,726 |
Net Investment from the Parent
Net investment from the Parent on the combined balance sheets and combined statements of changes in equity represents the Parent’s historical investment in the Masterbatches Business, the net effect of transactions with, and allocations from, the Parent, as well as the Company’s accumulated earnings and other comprehensive income. Net transfers to the Parent are included within Net Parent investment.
NOTE 14 ACCUMULATED OTHER COMPREHENSIVE LOSS
The amounts recognized in accumulated other comprehensive loss as of September 30, 2019 was as follows:
(in CHF, thousands) | Cumulative Translation Adjustment | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Loss | ||||||||
Balance at December 31, 2018 | (49,378) | 43 | (49,335) | ||||||||
Reclassification to earnings | - | - | - | ||||||||
Loss arising during the period | (5,170) | (7,339) | (12,509) | ||||||||
Effect of deferred taxes | - | 2,087 | 2,087 | ||||||||
Balance at September 30, 2019 | (54,548) | (5,209) | (59,757) |
The amounts recognized in accumulated other comprehensive loss as of September 30, 2018 was as follows:
(in CHF, thousands) | Cumulative Translation Adjustment | Pension and Other Postretirement Benefits | Accumulated Other Comprehensive Loss | ||||||||
Balance at December 31, 2017 | (36,543) | (1,089) | (37,632) | ||||||||
Reclassification to earnings | - | - | - | ||||||||
Gain / (loss) arising during the period | (13,145) | 1,083 | (12,062) | ||||||||
Effect of deferred taxes | - | (93) | (93) | ||||||||
Balance at September 30, 2018 | (49,688) | (99) | (49,787) |
NOTE 15 SUBSEQUENT EVENTS
The Company has evaluated transactions for consideration as recognized subsequent events in these combined financial statements through 23 December 2019, the date these financial statements were available for issuance (or issued), for the purposes of unrecognized subsequent events.
On 19 December 2019, the Parent entered into a Share Purchase Agreement with PolyOne Corporation providing for the sale of the Masterbatches Business. Refer to Note 1, Basis of Presentation for further details.
18