| Basis of Presentation and Summary of Significant Accounting Policies | NOTE 2—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements as of December 31, 2017 and 2016 and for each of the three years in the period ended December 31, 2017 are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements of the Company contain the accounts of all entities that are controlled and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. A VIE is defined as a legal entity that has equity investors that do not have sufficient equity at risk for the entity to support its activities without additional subordinated financial support or, as a group, the holders of the equity at risk lack (i) the power to direct the entity’s activities or (ii) the obligation to absorb the expected losses or the right to receive the expected residual returns of the entity. A VIE is required to be consolidated by a company if that company is the primary beneficiary. Refer to Note 10 for further discussion of the Company’s Accounts Receivable Securitization Facility, which qualifies as a VIE and is consolidated within the Company’s financial statements.
All intercompany balances and transactions are eliminated. Joint ventures over which the Company has the ability to exercise significant influence that are not consolidated are accounted for by the equity method.
Certain prior year amounts have been reclassified to conform to the current year presentation. Effective September 30, 2017, the Company adopted guidance that aims to eliminate diversity in practice for how certain cash receipts and payments are presented and classified in the consolidated statements of cash flows. Refer to the discussion below under “Recent Accounting Guidance” for the impact of this adoption to the Company’s consolidated statement of cash flows for the periods presented herein.
Revisions
In 2017, the Company corrected its accounting related to a contract manufacturing agreement with a customer that had been entered into in conjunction with the Acquisition, in order to properly adjust for an embedded direct financing lease as well as an unfavorable contract liability, which had not been previously identified. As this agreement has been in place since the Acquisition, this correction includes an adjustment to the original purchase price allocation, resulting in an increase to goodwill of $8.5 million. Additional impacts from this adjustment are described below.
The Company assessed the materiality of this correction to prior periods’ financial statements in accordance with SEC Staff Accounting Bulletin No. (SAB) 99, Materiality , and concluded that the corrections were not material to prior periods, either individually or in the aggregate, and therefore, amendments of previously filed reports are not required. Although the corrections were immaterial to prior periods, in accordance with SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company has revised its previously reported consolidated financial statements and related notes thereto.
The following table details the effects of these revisions on impacted line items from the Company’s consolidated balance sheet as of December 31, 2016:
As of December 31, 2016
Balance Sheet Caption
As Reported
Adjustment
As Revised
Property, plant and equipment, net
$
513.8
$
(3.8)
$
510.0
Goodwill
29.5
8.5
38.0
Deferred income tax assets
40.2
3.6
43.8
Deferred charges and other assets
24.4
3.5
27.9
Total other assets
271.4
15.6
287.0
Total assets
2,409.5
11.8
2,421.3
Other noncurrent obligations
237.1
9.1
246.2
Total noncurrent liabilities
1,422.3
9.1
1,431.4
Retained earnings
258.5
2.7
261.2
Total shareholders’ equity
445.0
2.7
447.7
Total liabilities and shareholders’ equity
2,409.5
11.8
2,421.3
The impact of the correction on the Company’s consolidated statements of operations and consolidated statements of cash flows was not significant, and therefore those statements have not been revised herein.
As this error originated in periods prior to those presented, “Accumulated Deficit” as of December 31, 2014 has been reduced from $151.9 million to $149.2 million, and “Accumulated Deficit” as of December 31, 2015 has been reduced from $18.3 million to $15.6 million.
In addition, the Company revised certain previously reported amounts included within Notes 7, 8, 13, and 18 in the consolidated financial statements to correct for the impact of the above adjustments. The Company concluded that its compliance with debt covenants would not have been affected by the adjustments above for any period.
Use of Estimates in Financial Statement Preparation
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual amounts could differ from these estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable. The Company uses major financial institutions with high credit ratings to engage in transactions involving cash equivalents. The Company minimizes credit risk in its receivables by selling products to a diversified portfolio of customers in a variety of markets located throughout the world.
The Company performs ongoing evaluations of its customers’ credit and generally does not require collateral. The Company maintains an allowance for doubtful accounts for losses resulting from the inability of specific customers to meet their financial obligations, representing our best estimate of probable credit losses in existing trade accounts receivable. A specific reserve for doubtful receivables is recorded against the amount due from these customers. For all other customers, the Company recognizes reserves for doubtful receivables based on historical experience.
Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued and other current liabilities, approximate fair value due to their generally short maturities.
The estimated fair value of the Company’s 2024 Term Loan B and 2025 Senior Notes (both of which are defined in Note 10) are determined using Level 2 inputs within the fair value hierarchy. Refer to Note 12 for the fair value of these debt instruments. When outstanding, the estimated fair values of borrowings under the Company’s 2022 Revolving Facility and Accounts Receivable Securitization Facility (both of which are defined in Note 10) are determined using Level 2 inputs within the fair value hierarchy. The carrying amounts of borrowings under the 2022 Revolving Facility and Accounts Receivable Securitization Facility approximate fair value as these borrowings bear interest based on prevailing variable market rates.
At times, the Company manages its exposure to changes in foreign currency exchange rates, where possible, by entering into foreign exchange forward contracts. Additionally, the Company manages its exposure to variability in interest payments associated with the Company’s variable rate debt by entering into interest rate swap agreements. When outstanding, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the consolidated balance sheets at fair value. The fair value of the derivatives is determined from sources independent of the Company, including the financial institutions which are party to the derivative instruments. The fair value of derivatives also considers the credit default risk of the paying party. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the hedged item will be recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portion of the change in the fair value of the derivative will be recorded in other comprehensive income and will be recognized in the consolidated statements of operations when the hedged item affects earnings.
As of December 31, 2017 and 2016, the Company had certain foreign exchange forward contracts outstanding that were not designated for hedge accounting treatment. As such, the settlements and changes in fair value of underlying instruments are recognized in “Other expense (income), net” in the consolidated statements of operations. For the years ended December 31, 2017 and 2015, the Company recognized losses related to these forward contracts of $19.2 million and $16.5 million, respectively, while for the year ended December 31, 2016 the Company recognized gains related to these forward contracts of $3.7 million.
As of December 31, 2017 and 2016, the Company had foreign exchange forward contracts which are designated as cash flow hedges. Additionally, as of December 31, 2017, the Company had interest rate swap agreements designated as cash flow hedges. As such, the qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive income or loss, or AOCI, to the extent effective. Amounts are reclassified to “Cost of sales”, in the context of foreign exchange forward contracts, and “Interest expense, net”, in the context of interest rate swap agreements, in the consolidated statements of operations in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur. No interest rate swap agreements were outstanding as of December 31, 2016.
Forward contracts and interest rate swap agreements are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in a single currency in the event of a default on or termination of any one contract. The Company records these foreign exchange forward contracts and interest rate swap agreements on a net basis, by counterparty within the consolidated balance sheets.
As of December 31, 2017, the Company has certain fixed-for-fixed cross currency swaps outstanding, swapping U.S. dollar principal and interest payments on the Company’s 2025 Senior Notes for euro-denominated payments. These cross currency swaps have been designated as a hedge of the Company’s net investment in certain European subsidiaries. As such, to the extent that these cross currency swaps are deemed to be highly effective hedges, changes in their fair value are recorded within the cumulative translation adjustment account as a component of AOCI. The resulting gain or loss will be subsequently reclassified into earnings when the hedged net investment is either sold or substantially liquidated. No cross currency swaps were outstanding as of December 31, 2016.
The Company presents the cash receipts and payments from hedging activities in the same category as the cash flows from the items subject to hedging relationships. As the items subject to economic hedging relationships are the Company’s operating assets and liabilities, the related cash flows are classified within operating activities in the consolidated statements of cash flows.
Foreign Currency Translation
For the majority of the Company’s subsidiaries, the local currency has been identified as the functional currency. For remaining subsidiaries, the U.S. dollar has been identified as the functional currency due to the significant influence of the U.S. dollar on their operations. Gains and losses resulting from the translation of various functional currencies into U.S. dollars are not recorded within the consolidated statements of operations. Rather, they are recorded within the cumulative translation adjustment account as a separate component of shareholders’ equity (AOCI) in the consolidated balance sheets. The Company translates asset and liability balances at exchange rates in effect at the end of the period and income and expense transactions at the average exchange rates in effect during the period. Gains and losses resulting from foreign currency transactions are recorded within the consolidated statements of operations.
For the years ended December 31, 2017 and 2015, the Company recognized net foreign exchange transaction gains of $20.6 million and $6.1 million, respectively, while for the year ended December 31, 2016, the Company recognized net foreign exchange transaction losses of $5.5 million. These amounts exclude the impacts of foreign exchange forward contracts discussed above. Gains and losses on net foreign exchange transactions are recorded within “Other expense (income), net” in the consolidated statements of operations.
Environmental Matters
Accruals for environmental matters are recorded when it is considered probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress, or as additional technical or legal information become available. Accruals for environmental liabilities are recorded within “Other noncurrent obligations” in the consolidated balance sheets at undiscounted amounts. As of December 31, 2017 and 2016, there were no accruals for environmental liabilities recorded.
Environmental costs are capitalized in recognition of legal asset retirement obligations resulting from the acquisition, construction or normal operation of a long-lived asset. Any costs related to environmental contamination treatment and clean-ups are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.
Cash and Cash Equivalents
Cash and cash equivalents generally include time deposits or highly liquid investments with original maturities of three months or less and no material liquidity fee or redemption gate restrictions.
Inventories
Inventories are stated at the lower of cost or net realizable value (“NRV”), with cost being determined on the first-in, first-out (“FIFO”) method. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation. The Company periodically reviews its inventory for excess or obsolete inventory, and will write-down the excess or obsolete inventory value to its net realizable value, if applicable.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation and less impairment, if applicable, and are depreciated over their estimated useful lives using the straight-line method.
Expenditures for maintenance and repairs are recorded in the consolidated statement of operations as incurred. Expenditures that significantly increase asset value, extend useful asset lives or adapt property to a new or different use are capitalized. These expenditures include planned major maintenance activity or turnaround activities that increase our manufacturing plants’ output and improve production efficiency as compared to pre-turnaround operations. As of December 31, 2017 and 2016, $11.6 million and $9.2 million, respectively, of the Company’s net costs related to turnaround activities were capitalized within “Deferred charges and other assets” in the consolidated balance sheets, and are being amortized over the period until the next scheduled turnaround.
The Company periodically evaluates actual experience to determine whether events and circumstances have occurred that may warrant revision of the estimated useful lives of property, plant and equipment. Engineering and other costs directly related to the construction of property, plant and equipment are capitalized as construction in progress until construction is complete and such property, plant and equipment is ready and available to perform its specifically assigned function. Upon retirement or other disposal, the asset cost and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds, is charged or credited to income. The Company also capitalizes interest as a component of the cost of capital assets constructed for its own use.
Impairment and Disposal of Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value based on a discounted cash flow analysis utilizing market participant assumptions. Refer to Note 12 for further information.
Long-lived assets to be disposed of by sale are classified as held-for-sale and are reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of in a manner other than by sale are classified as held-and-used until they are disposed.
Goodwill and Other Intangible Assets
The Company records goodwill when the purchase price of a business acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level annually, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. The Company utilizes a market approach and an income approach (under the discounted cash flow method) to calculate the fair value of its reporting units. When supportable, the Company employs the qualitative assessment of goodwill impairment prescribed by ASC 350. The annual impairment assessment is completed using a measurement date of October 1 st . No goodwill impairment losses were recorded in the years ended December 31, 2017, 2016, and 2015.
Finite-lived intangible assets, such as developed technology, customer relationships, manufacturing capacity rights, and computer software for internal use are amortized on a straight-line basis over their estimated useful life and are reviewed for impairment or obsolescence if events or changes in circumstances indicate that their carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows. No intangible asset impairment losses were recorded in the years ended December 31, 2017, 2016, and 2015.
Acquired developed technology is recorded at fair value upon acquisition and is amortized using the straight-line method over the estimated useful life ranging from 9 years to 15 years. We determine amortization periods for developed technology based on our assessment of various factors impacting estimated useful lives and timing and extent of estimated cash flows of the acquired assets. This includes estimates of expected period of future economic benefit and competitive advantage related to existing processes and procedures at the date of acquisition. Significant changes to any of these factors may result in a reduction in the useful life of these assets.
Customer relationships are recorded at fair value upon acquisition and are amortized using the straight-line method over the estimated useful life of 19 years. We determine amortization periods for customer relationships based on our assessment of various factors impacting estimated useful lives and timing and extent of estimated cash flows of the acquired assets. This includes estimates of expected period of future economic benefit and customer retention rates. Significant changes to any of these factors may result in a reduction in the useful life of these assets.
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates in which the Company has the ability to exercise significant influence (generally, 20% to 50%-owned companies) are accounted for using the equity method. Investments are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. An impairment loss is recorded whenever a decline in fair value of an investment in an unconsolidated affiliate below its carrying amount is determined to be other-than-temporary.
As discussed below, in conjunction with the adoption of new cash flow guidance that aims to eliminate diversity in practice for how certain cash receipts and payments are presented and classified in the consolidated statements of cash flows, the Company made an accounting policy election to use the cumulative earnings approach for presenting distributions received from equity method investees, which is consistent with its existing approach.
Deferred Financing Fees
Capitalized fees and costs incurred in connection with the Company’s recognized debt liabilities are presented in the consolidated balance sheets as a direct reduction from the carrying value of those debt liabilities, consistent with debt discounts. Deferred financing fees related to the Company’s revolving debt facilities are included within “Deferred charges and other assets” in the consolidated balance sheets.
For the 2024 Term Loan B and 2025 Senior Notes (and the 2021 Term Loan B and 2022 Senior Notes, prior to their repayment in September 2017), deferred financing fees are amortized over the term of the agreement using the effective interest method, while for the 2022 Revolving Facility and the Accounts Receivable Securitization Facility, deferred financing fees are amortized using the straight-line method over the term of the respective facility. Amortization of deferred financing fees is recorded in “Interest expense, net” within the consolidated statements of operations.
Sales
Sales are recognized when the revenue is realized or realizable and the earnings process is complete, which occurs when risk and title to the product transfers to the customer, typically at the time shipment is made. As such, title to the product generally passes when the product is delivered to the freight carrier. Standard terms of delivery are included in contracts of sale, order confirmation documents and invoices. Taxes on sales are excluded from net sales.
Sales are recorded net of estimates for returns and price allowances, including discounts for prompt payment and volume-based incentives.
Cost of Sales
The Company classifies the costs of manufacturing and distributing its products as cost of sales. Manufacturing costs include raw materials, utilities, packaging, employee salary and benefits and fixed manufacturing costs associated with production. Fixed manufacturing costs include such items as plant site operating costs and overhead, production planning, depreciation and amortization, repairs and maintenance, environmental, and engineering costs. Distribution costs include shipping and handling costs. Freight and any directly related costs of transporting finished products to customers are also included within cost of sales. As discussed above, inventory costs are recorded within cost of sales utilizing the FIFO method.
Selling, General and Administrative Expenses
Selling, general and administrative, or SG&A, expenses are generally charged to expense as incurred. SG&A expenses are the cost of services performed by the marketing and sales functions (including sales managers, field sellers, marketing research, marketing communications and promotion and advertising materials) and by administrative functions (including product management, R&D, business management, customer invoicing, human resources, information technology, legal and finance services, such as accounting and tax). Salary and benefit costs, including stock-based compensation, for these sales personnel and administrative staff are included within SG&A expenses. R&D expenses include the cost of services performed by the R&D function, including technical service and development, process research including pilot plant operations, and product development. The Company also includes restructuring charges within SG&A expenses.
Total R&D costs included in SG&A expenses were $51.9 million, $51.0, million and $51.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.
The Company expenses promotional and advertising costs as incurred to SG&A expenses. Total promotional and advertising expenses were $1.5 million, $3.0 million, and $3.5 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Restructuring charges included within SG&A expenses were $8.0 million, $23.9 million and $8.2 million for the years ended December 31, 2017, 2016, and 2015, respectively. Refer to Note 19 for further information.
Pension and Postretirement Benefits Plans
The Company has several defined benefit plans, under which participants earn a retirement benefit based upon a formula set forth in the plan. The Company also provides certain health care and life insurance benefits to retired employees mainly in the United States. Prior to the divestiture of our latex binders and automotive businesses in Brazil (refer to Note 3) we also provided health care and life insurance benefits to retired employees in Brazil. The U.S.-based plan provides health care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits.
Accounting for defined benefit pension plans and other postretirement benefit plans, and any curtailments and settlements thereof, requires various assumptions, including, but not limited to, discount rates, expected rates of return on plan assets and future compensation growth rates. The Company evaluates these assumptions at least once each year, or as facts and circumstances dictate, and makes changes as conditions warrant.
In 2016, the Company changed the method used to estimate the future service and interest cost components of net periodic benefit cost for our defined benefit pension and other postretirement benefit plans. As a result, beginning in 2017, the Company employed a full yield curve approach in the estimation of these components of benefit cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
A settlement is a transaction that is an irrevocable action that relieves the employer (or the plan) of primary responsibility for a pension or postretirement benefit obligation, and that eliminates significant risks related to the obligation and the assets used to effect the settlement. When a settlement occurs, the Company does not record settlement gains or losses during interim periods when the cost of all settlements in a year is less than or equal to the sum of the service cost and interest cost components of net periodic benefit cost for the plan in that year.
Income Taxes
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax basis of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. For each tax jurisdiction in which the Company operates, deferred tax assets and liabilities are offset against one another and are presented as a single noncurrent amount within the consolidated balance sheets.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Provision is made for income taxes on unremitted earnings of subsidiaries and affiliates, unless such earnings are deemed to be indefinitely invested.
The Company recognizes the financial statement effects of uncertain income tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Company accrues for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. Interest accrued related to unrecognized tax and income tax related penalties are included in the provision for income taxes. The current portion of uncertain income taxes positions is recorded in “Income taxes payable” while the long-term portion is recorded in “Other noncurrent obligations” in the consolidated balance sheets.
Stock-based Compensation
Refer to Note 16 for detailed discussion regarding the Company’s stock-based compensation award programs. In connection with the Company’s initial public offering (“IPO”), the Company’s board of directors approved the 2014 Omnibus Plan. Since that time, certain equity grants have been awarded, comprised of restricted share units (“RSUs”), option awards, and performance share units (“PSUs”). Stock-based compensation expense recognized in our consolidated financial statements is based on awards that are ultimately expected to vest. The Company’s policy election is to recognize forfeitures as incurred, rather than estimating forfeitures in advance.
Compensation costs for the RSUs are measured at the grant date based on the fair value of the award and are recognized ratably as expense over the applicable vesting term. The fair value of RSUs is equal to the fair market value of the Company’s ordinary shares based on the closing price on the date of grant. Dividend equivalents will accumulate on RSUs during the vesting period, and will be payable in cash and will not accrue interest. Award holders have no right to receive the dividend equivalents unless and until the associated RSUs vest.
Compensation costs for the option awards are measured at the grant date based on the fair value of the award and is recognized as expense over the appropriate service period utilizing graded vesting. The fair value for option awards is computed using the Black-Scholes pricing model, whose inputs and assumptions are determined as of the date of grant.
Compensation costs for the PSUs are measured at the grant date based on the fair value of the award, which is computed using a Monte Carlo valuation model, and is recognized ratably as expense over the applicable vesting term. Dividend equivalents will accumulate on PSUs during the vesting period, and will be payable in cash and will not accrue interest. Award holders have no right to receive the dividend equivalents unless and until the associated PSUs vest.
Treasury Shares
The Company may, from time to time, repurchase its ordinary shares at prevailing market rates. Share repurchases are recorded at cost within “Treasury shares” within shareholders’ equity in the consolidated balance sheets. It is the Company’s policy that, as RSUs, PSUs, and option awards vest or are exercised, ordinary shares will be issued from the existing pool of treasury shares on a first-in-first-out basis. Refer to Note 16 for details of vesting for RSUs and PSUs as well as the exercises of option awards.
Recent Accounting Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued guidance which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the FASB has issued certain clarifying updates to this guidance, which the Company has considered as part of our adoption, which is effective as of January 1, 2018. The Company has completed its scoping assessment for the adoption of this guidance by conducting surveys with relevant stakeholders in the business, including commercial and finance leadership, reviewing a representative sample of revenue arrangements across all businesses, and identifying potential qua |
