Avient Corp 8-K, filed Apr 29, 2020
Avient Corp (AVNT)
8-K
2020-04-29
For: 2020-04-29
View Original
Added on
July 07, 2026
About this 8-K
Avient Corp filed this 8-K on April 29, 2020.
Items reported
- Item 8.01: Other events
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): April 29, 2020
| (Exact Name of Registrant as Specified in Its Charter) | ||||||||||||||
| (State or Other Jurisdiction of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||||||
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (440 ) 930-1000
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 8.01 Other Events.
As previously disclosed, on December 19, 2019, PolyOne Corporation ("PolyOne") entered into a definitive share purchase agreement (the “Agreement”) with Clariant AG (“Clariant”), and a wholly owned subsidiary of PolyOne (“PolyOne India”) entered into a definitive business transfer agreement (the “BTA”) with Clariant Chemicals (India) Limited, an indirect majority-owned subsidiary of Clariant (“Clariant India”). Pursuant to the Agreement and the BTA, PolyOne has agreed to acquire the masterbatch business of Clariant (the “Masterbatches Business of Clariant Ltd”). The closing of the acquisition is expected to occur in mid-2020, subject to the satisfaction or waiver of customary closing conditions. PolyOne has obtained all pre-closing regulatory approvals in connection with the acquisition.
The audited combined financial statements of the Masterbatches Business of Clariant Ltd, which comprise the combined balance sheets as of December 31, 2019 and 2018, the related combined statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for the years then ended and related notes thereto, are filed as Exhibit 99.1 to this Current Report on Form 8-K.
The unaudited pro forma condensed combined balance sheet as of December 31, 2019 and the unaudited pro forma condensed combined statements of income for the year ended December 31, 2019 giving effect to PolyOne’s acquisition of the Masterbatches Business of Clariant Ltd are filed as Exhibit 99.2 to this Current Report on Form 8-K.
Item 9.01. Financial Statements and Exhibits
(d) Exhibits:
| Number | Exhibit | ||||
| 104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document | ||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| POLYONE CORPORATION | |||||
| By: /s/ Bradley C. Richardson | |||||
| Name: Bradley C. Richardson | |||||
Title: Executive Vice President and Chief Financial Officer | |||||
Dated: April 29, 2020
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-236116) and Form S-8 (Nos. 333-231236, 333-217879, 333-205919, 333-181787, 333-166775, 333-157486, 333-47796, and 333-141029) of PolyOne Corporation of our report dated March 19, 2020 relating to the financial statements of the Masterbatches Business of Clariant Ltd, which appears in this Current Report on Form 8-K.
/s/ PricewaterhouseCoopers AG
Basel, Switzerland
April 29, 2020
Exhibit 99.1
The Masterbatches Business of
Clariant Ltd
| Combined Financial Statements | ||
As of and for the years ended December 31, 2019 and December 31, 2018
The Masterbatches Business of Clariant Ltd
Audited Annual Combined Financial Statements
| Independent Auditors’ Report | 2 | ||||
Combined Balance Sheets as of December 31, 2019 and 2018 Combined Statements of Income for the Years Ended December 31, 2019 and 2018 | 4 | ||||
| 5 | |||||
| Combined Statements of Comprehensive Income for the Years Ended December 31, 2019 and 2018 | 6 | ||||
| Combined Statements of Changes in Equity for the Years Ended December 31, 2019 and 2018 | 7 | ||||
| Combined Statements of Cash Flows for the Years Ended December 31, 2019 and 2018 | 8 | ||||
| Notes to the Combined Financial Statements | 9 | ||||
The accompanying notes are an integral part of these combined financial statements.
1
Report of Independent Auditors
To the Board of Directors and Management of Clariant Ltd
We have audited the accompanying combined financial statements of the Masterbatches Business of Clariant Ltd (the “Company”), which comprise the combined balance sheets as of December 31, 2019 and 2018, and the related combined statements of income, comprehensive income, changes in equity and cash flows for the years then ended.
Management's Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
PricewaterhouseCoopers AG, St. Jakobs-Strasse 25, Postfach, CH-4002 Basel, Switzerland
Phone: +41 58 792 51 00, Telefax: +41 58 792 51 10, www.pwc.ch
2
PricewaterhouseCoopers AG is a member of the global PricewaterhouseCoopers network of firms, each of which is a separate and independent legal entity.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Masterbatches Business of Clariant Ltd as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers AG
Basel, Switzerland
March 19, 2020
3
The Masterbatches Business of Clariant Ltd
COMBINED BALANCE SHEETS
As of December 31, 2019 and December 31, 2018
| (in CHF, thousands) | December 31 2019 | December 31 2018 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | 55,516 | 123,328 | ||||||
| Accounts receivable, net | 165,265 | 176,604 | ||||||
| Inventories | 83,947 | 102,711 | ||||||
| Loans to related parties | 82,943 | 80,600 | ||||||
| Other current assets | 25,375 | 32,339 | ||||||
| Total current assets | 413,046 | 515,582 | ||||||
| Non-current assets: | ||||||||
| Property, plant and equipment, net | 190,034 | 196,071 | ||||||
| Right-of-use assets | 23,641 | - | ||||||
| Goodwill | 47,494 | 48,703 | ||||||
| Intangible assets, net | 5,005 | 6,304 | ||||||
| Deferred tax assets | 11,484 | 12,718 | ||||||
| Investments in affiliates | 3,146 | 4,080 | ||||||
| Total non-current assets | 280,804 | 267,876 | ||||||
| Total assets | 693,850 | 783,458 | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | 107,808 | 125,282 | ||||||
| Accrued and other liabilities | 46,385 | 46,411 | ||||||
| Accrued employee expenses | 41,852 | 42,114 | ||||||
| Short-term debt | 21,914 | 17,871 | ||||||
| Loans from related parties | 97,447 | 59,171 | ||||||
| Total current liabilities | 315,406 | 290,849 | ||||||
| Non-current liabilities: | ||||||||
| Long-term debt | 6,304 | 3,945 | ||||||
| Retirement benefit obligations | 21,342 | 18,855 | ||||||
| Lease liabilities | 17,766 | - | ||||||
| Deferred tax liabilities | 9,810 | 9,264 | ||||||
| Other non-current liabilities | 1,328 | 3,066 | ||||||
| Total non-current liabilities | 56,550 | 35,130 | ||||||
| Total liabilities | 371,956 | 325,979 | ||||||
| EQUITY | ||||||||
| Net investment from the Parent | 368,326 | 492,686 | ||||||
| Accumulated other comprehensive loss | (59,155) | (49,335) | ||||||
| Total equity attributable to the Masterbatches Business | 309,171 | 443,351 | ||||||
| Non-controlling interests | 12,723 | 14,128 | ||||||
| Total equity | 321,894 | 457,479 | ||||||
| Total liabilities and equity | 693,850 | 783,458 | ||||||
The accompanying notes are an integral part of these combined financial statements.
4
The Masterbatches Business of Clariant Ltd
COMBINED STATEMENTS OF INCOME
For the years ended December 31, 2019 and December 31, 2018
| (in CHF, thousands) | December 31 2019 | December 31 2018 | ||||||
| Sales | 1,120,368 | 1,182,893 | ||||||
| Cost of goods sold | (814,542) | (872,385) | ||||||
| Gross profit | 305,826 | 310,508 | ||||||
| Selling, general and administrative costs | (227,951) | (219,781) | ||||||
| Research and development costs | (10,769) | (8,539) | ||||||
| Other expense | (1,567) | (342) | ||||||
| Operating income | 65,539 | 81,846 | ||||||
| Interest expense | (13,269) | (14,599) | ||||||
| Interest income | 2,071 | 1,638 | ||||||
| Income before income tax expense | 54,341 | 68,885 | ||||||
| Income tax expense | (18,103) | (17,767) | ||||||
| Net income | 36,238 | 51,118 | ||||||
| Less: Net income attributable to non-controlling interests | 646 | 327 | ||||||
| Net income attributable to the Masterbatches Business | 35,592 | 50,791 | ||||||
The accompanying notes are an integral part of these combined financial statements.
5
The Masterbatches Business of Clariant Ltd
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2019 and December 31, 2018
| (in CHF, thousands) | December 31 2019 | December 31 2018 | ||||||
| Net income | 36,238 | 51,118 | ||||||
| Other comprehensive income (loss): | ||||||||
| Defined benefit plan adjustment | (2,782) | 1,461 | ||||||
| Currency translation adjustment | (8,871) | (12,866) | ||||||
| Other comprehensive loss for the period, gross | (11,653) | (11,405) | ||||||
| Deferred tax effect | 1,167 | (270) | ||||||
| Other comprehensive loss for the period, net of tax | (10,486) | (11,675) | ||||||
| Comprehensive income for the period | 25,752 | 39,444 | ||||||
| Less: Comprehensive income (loss) attributable to non-controlling interests | (20) | 355 | ||||||
| Comprehensive income attributable to the Masterbatches Business | 25,772 | 39,089 | ||||||
The accompanying notes are an integral part of these combined financial statements.
6
The Masterbatches Business of Clariant Ltd
COMBINED STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31, 2019 and December 31, 2018
| (in CHF, thousands) | Net investment from the Parent | Accumulated other comprehensive loss | Non-controlling interests | Total equity | ||||||||||
| Balance as of January 1, 2018 | 200,941 | (37,632) | 12,629 | 175,938 | ||||||||||
| Net income | 50,792 | - | 327 | 51,119 | ||||||||||
| Net transfers with Parent | 240,953 | - | - | 240,953 | ||||||||||
| Changes in non-controlling interests | - | - | 1,144 | 1,144 | ||||||||||
| Other comprehensive income / (loss) | - | (11,703) | 28 | (11,675) | ||||||||||
| Balance as of December 31, 2018 | 492,686 | (49,335) | 14,128 | 457,479 | ||||||||||
| Net income | 35,592 | - | 646 | 36,238 | ||||||||||
| Net transfers with Parent | (159,952) | - | - | (159,952) | ||||||||||
| Changes in non-controlling interests | - | - | (1,385) | (1,385) | ||||||||||
| Other comprehensive income / (loss) | - | (9,820) | (666) | (10,486) | ||||||||||
| Balance as of December 31, 2019 | 368,326 | (59,155) | 12,723 | 321,894 | ||||||||||
The accompanying notes are an integral part of these combined financial statements.
7
The Masterbatches Business of Clariant Ltd
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2019 and December 31, 2018
| (in CHF, thousands) | December 31 2019 | December 31 2018 | ||||||
| Operating activities: | ||||||||
| Net income | 36,238 | 51,119 | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Deferred tax expense (benefit) | 3,532 | (1,207) | ||||||
| Depreciation and amortization | 24,179 | 27,614 | ||||||
| Share-based compensation expense | 293 | 265 | ||||||
| Loss on disposal of long-lived assets | 187 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 5,989 | 21,264 | ||||||
| Inventories | 15,853 | (5,742) | ||||||
| Accounts payable | (10,582) | 10,364 | ||||||
| Other current assets and liabilities | 3,687 | (8,074) | ||||||
| Accrued liabilities | (2,940) | 5,115 | ||||||
| Net cash provided by operating activities | 76,436 | 100,718 | ||||||
| Investing activities: | ||||||||
| Investments in property, plant and equipment | (25,582) | (17,144) | ||||||
| Investments in intangible assets | (1,384) | (991) | ||||||
| Proceeds from sale of long-lived assets | 1,919 | — | ||||||
| Net cash used by investing activities | (25,047) | (18,135) | ||||||
| Financing activities: | ||||||||
| Proceeds from short-term debt | 21,984 | 7,827 | ||||||
| Repayments of short-term debt | (19,378) | (27,879) | ||||||
| Proceeds from long-term debt | 13,179 | — | ||||||
| Repayments of long-term debt | (7,167) | — | ||||||
| Net proceeds / (repayments) of loans to related parties | 35,822 | (206,266) | ||||||
| Net (distributions) / contributions with non-controlling interests | (1,385) | 1,144 | ||||||
| Net (distributions) / contributions with Parent | (160,539) | 239,615 | ||||||
| Net cash (used by) / provided by financing activities | (117,484) | 14,441 | ||||||
| Effect of exchange rate changes | (1,717) | (3,189) | ||||||
| (Decrease) / increase in cash and cash equivalents | (67,812) | 93,835 | ||||||
| Cash and cash equivalents at the beginning of year | 123,328 | 29,493 | ||||||
| Cash and cash equivalents at the end of year | 55,516 | 123,328 | ||||||
| Supplemental cash information: | ||||||||
| Interest paid | (11,875) | (15,024) | ||||||
| Income tax paid | (14,572) | (18,973) | ||||||
| Noncash investing and financing activity: | ||||||||
| Investments in property plant and equipment in accounts payable | 8,976 | 12,478 | ||||||
The accompanying notes are an integral part of these combined financial statements.
8
The Masterbatches Business of Clariant Ltd
NOTES TO THE COMBINED FINANCIAL STATEMENTS
(in CHF, thousands)
NOTE 1 BASIS OF PRESENTATION
On July 25, 2019, Clariant Ltd (hereafter “Clariant” or “the Parent”) announced its intent to divest the Masterbatches Business (“the Masterbatches Business”, “the Masterbatches Business of Clariant Ltd” or “the Company”). On December 19, 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 combined financial statements have been prepared on a carve-out basis and are derived from the consolidated financial statements of the Parent to prepare the combined balance sheets as of December 31, 2019 and December 31, 2018 and the related combined statements of income, comprehensive income, changes in equity and cash flows for the years ended December 31, 2019 and December 31, 2018.
The combined financial statements were prepared on a combined basis in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) by combining financial information from the Parent’s accounting records, including assets and liabilities attributed to the business activity of the Company, specifically identified revenues and expenses of the Company, and allocations of certain expenses described further below.
The intercompany transactions and balances within the Company have been eliminated. All transactions between the Company and the Parent, which were not historically settled in cash, are considered to be effectively settled for cash in the combined financial statements at the time the transaction is recorded. The total net effect of the settlement of these transactions between the Company and the Parent are reflected in the combined statements of cash flows as a financing activity, and in the combined balance sheets and combined statements of changes in equity as net investment from the Parent. In addition, transactions between the Company and the Parent, which were historically settled for cash or are expected to be settled for cash, have been classified as related party in the combined financial statements. Refer to Note 16, Related Party Transactions and Net Investment from the Parent for further details.
The combined financial statements include all assets, liabilities, revenues, and expenses that management has determined are specifically or primarily related to the activities of the Company, as well as direct and indirect costs incurred within Clariant that are attributable to the operations of the Masterbatches Business. Central support costs include corporate and shared service functions that are provided on a centralized basis by Clariant, including but not limited to employee benefits, finance, human resources, risk management, information technology, facilities, and legal. These expenses have been allocated to the Company on the basis of direct usage when identifiable, or when specific identification is not practicable, a proportional allocation method based primarily on combined sales, headcount, or other measures, depending on the nature of services received. 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.
Cash generated from the Company’s operations is managed centrally by the Parent, with cash pooling agreements in place for each participating entity. Related party loan arrangements recorded in the combined balance sheets represent cash pooling arrangements between the Masterbatches Business and the Parent. Cash included in the combined balance sheets represents cash legally owned by the Company as of December 31, 2019 and December 31, 2018.
9
The Masterbatches Business of Clariant Ltd
Third-party debt obligations of the Parent and the corresponding interest costs related to those debt obligations, specifically those that relate to straight bonds and certificates of indebtedness, have not been attributed to the Company, as the Company was not the legal obligor of such debt obligations. The third-party debt obligations included in the combined financial statements are those for which the legal obligor is a legal entity within the Company. None of the Company’s assets were pledged as collateral under the Parent’s debt obligations as of December 31, 2019 or December 31, 2018.
As the separate legal entities that comprise the Company were not historically held by a single legal entity, equity shown in the combined financial statements relates to the equity attributable to the Masterbatches Business. Net investment from the Parent represents the cumulative investment by the Parent in the Company through the dates presented, inclusive of operating results. Transactions with the Parent are reflected in the accompanying combined statements of changes in equity as net amount of contributions from / distributions to Parent, and in the accompanying combined balance sheets within net investment from the Parent.
The Parent calculates foreign currency translation on its combined assets and liabilities, which include assets and liabilities of the Company. As a result, the Company has not historically recorded foreign currency translation on its own assets and liabilities. Therefore, the Company’s accumulated other comprehensive loss includes an allocation from the Parent’s foreign currency translation based on the net assets of the Company as of December 31, 2016. Foreign currency translation adjustment recorded during the fiscal years ended December 31, 2019, December 31, 2018 and December 31, 2017 is based on currency movements specific to the Company’s financial statements.
Tangible assets are included in the combined balance sheets based on the assets expected to be divested with the Masterbatches Business. In the case of shared assets, which are used in part by the Company and in part by other businesses of the Parent, tangible assets are attributed based on the “major user” principle, in which the asset is only recognized in the combined balance sheets of the Masterbatches Business when the Company is considered to be the major user of the asset. The impact from joint use of the shared asset is reflected as an asset charge expense to the Masterbatches Business or income from related parties in the combined statements of income. Where a tangible shared asset is not expected to be divested, but was used in the operations of the Company, an asset charge expense is levied to the Masterbatches Business and is included within the combined statements of income. Alternatively, if a tangible shared asset is expected to be divested, but was also used by other businesses of the Parent, then the Masterbatches Business charges the Parent an asset charge-out recorded within the combined statements of income.
The same “major user” principle is applied to determine leased assets and associated commitments of the Company. During the fiscal year ended December 31, 2018, leased assets allocated to the Company are accounted for under the guidance in ASC 840, Leases. 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). When shared with other businesses of the Parent, income from related parties is recognized in the combined statements of income to reflect such shared usage. Leased assets that are shared but are not expected to be divested are reflected only as an asset charge expense to the Masterbatches Business.
The tax amounts in the combined financial statements have been calculated based on a separate return methodology and presented as if the Company’s operations were separate tax payers in the respective jurisdictions.
10
The Masterbatches Business of Clariant Ltd
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
Preparation of 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 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.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash on hand, deposits, as well as short-term investment instruments with an initial lifetime of 90 days or less. They are valued at their nominal value, which is close to their fair market value. Cash and cash equivalents in the combined balance sheets represent cash legally owned by the Company and, as such, do not include balances from cash pooling arrangements managed centrally by the Parent.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are amounts due from customers for goods sold in the ordinary course of business. They are generally due within 40 days and, therefore, are classified as current. Accounts receivable are stated at the amount to which the Company is unconditionally entitled, net of allowance for doubtful accounts representing estimated losses resulting from inability or unwillingness of customers to make required payments. This estimated allowance is based on management’s evaluation of specific balances as the balances become past due, the financial condition of its customers and the Company’s historical experience with write-offs. A reserve is recorded against accounts receivables when amounts are estimated to be uncollectible. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts was CHF 1,749 thousand and CHF 2,025 thousand as of December 31, 2019 and 2018, respectively. Further, within the combined statements of income the Company recognized bad debt benefit of CHF 483 thousand and a bad debt expense of CHF 1,248 thousand for the years ended December 31, 2019 and 2018, respectively.
Inventories
Inventories are stated at the lower of cost and net realizable value. Purchased goods are valued at acquisition costs, while self-manufactured products are valued at manufacturing costs including related production overhead costs. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs. Inventory held at the balance sheet date is primarily valued at standard costs, which approximates actual costs on a weighted average basis. Adjustments are recorded to inventories with a carrying amount in excess of net realizable value. Unsaleable inventories are fully written off. Write-downs reduce the cost basis of inventories permanently.
Property, Plant and Equipment
Property, plant and equipment are carried at historical acquisition cost, net of accumulated depreciation and any impairment losses, as applicable. Land is not depreciated. Depreciation is recorded on a straight-line basis to the combined statements of income, using the assets’ estimated useful lives which fall within the following ranges:
11
The Masterbatches Business of Clariant Ltd
| Asset type | Useful life | |||||||
| Buildings | 15 to 40 years | |||||||
| Machinery and technical equipment | 10 to 16 years | |||||||
| Furniture and other equipment | 3 to 10 years | |||||||
| Vehicles | 5 to 10 years | |||||||
Major additions and improvements are capitalized, while minor repair and maintenance costs are expensed as incurred.
In the case of sale, retirement or disposal, the net book value of the asset is removed from the Company’s books. Gains and losses on disposals are determined by comparing the proceeds with the net book value and are included as a component of income from operations in the accompanying combined statements of income.
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price paid in a business combination over the fair value of the net assets of the acquired business. Goodwill is carried at cost and is tested for impairment, quantitatively or qualitatively, on an annual basis during the fourth quarter of the fiscal year, or more frequently, if impairment indicators are present. Impairment testing is performed at the Company’s reporting unit level, which includes the five reporting units aligned with the geographic regions in which the Company operates.
This impairment test determines whether the fair value of each reporting unit to which goodwill is allocated is lower than its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; any recognized loss cannot exceed the total amount of goodwill allocated to that reporting unit. In determining the fair value of a reporting unit, management uses significant judgments and estimates to forecast the future discounted cash flows associated with the reporting unit, including the expected growth of sales, the discount rates, and the development of raw material prices. Prior to performing the quantitative goodwill impairment test, the Company may first perform an assessment of qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The quantitative goodwill impairment test is required only if the totality of events and circumstances indicates it is more likely than not that the fair value is less than carrying value.
Trademarks and licenses are capitalized at historical costs and amortized on a straight-line basis to the combined statements of income over their estimated useful lives, with a maximum of ten years.
Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. They are amortized on a straight-line basis to the combined statements of income over their estimated useful lives (three to five years).
Internal and external costs directly associated with the production of identifiable and unique software and other intangible products for internal use, incurred during the application development stage are capitalized. All other costs are expensed as incurred. The activities during the application development stage include (1) design of chosen path, including software configuration and software interfaces, (2) coding, (3) installation to hardware and (4) testing, including the parallel processing phase. Costs associated with developing and maintaining common software programs are recognized as an expense when incurred. Capitalized software is amortized on a straight-line basis over the remaining economic useful life.
Impairment of Long-lived Assets
A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. In determining the recoverability of long-lived assets held and used, the Company initially assesses whether the carrying value of the asset (or group of assets) exceeds the estimated undiscounted future cash flows associated with the asset (or group of assets). If exceeded, the Company then evaluates whether an impairment charge is required by determining if the carrying value of the asset (or group of assets) exceeds its fair value. Additionally, the asset useful lives and depreciation methods are reviewed each period.
12
The Masterbatches Business of Clariant Ltd
Pension and Other Post-Retirement Plans
The Parent sponsors certain defined benefit pension plans, primarily in the United States of America, Canada, Belgium, Italy, Taiwan, Saudi Arabia, France and Pakistan, among others, for which sponsorship is expected to transfer as part of the Transaction (collectively, the “Direct Plans”). Defined benefit accounting is applied for the Direct Plans resulting in the recognition of a pension asset or liability to recognize the funded status within the combined financial statements. In addition to the Direct Plans, certain of the Company’s employees, primarily in Switzerland and Germany, participate in defined benefit pension plans, for which sponsorship does not transfer (collectively, the “Shared Plans”). Such Shared Plans are accounted for as multiemployer plans based on the multiemployer pension accounting guidance in ASC 715, Compensation—Retirement Benefits, and accordingly the Company does not record an asset or liability to recognize the funded status of the Shared Plans. The related pension and other postemployment expenses of the Shared Plans are charged to the Company based primarily on the service cost of active participants. Refer to Note 12 Employee Benefit Plans for additional information.
Debt Instruments
Bank loans are recognized at historical cost, net of debt issuance costs incurred. They are subsequently reported at amortized cost; any difference between the proceeds (net of debt issuance costs) and the redemption value is recognized through earnings within the interest expense line item on the combined statements of income over the period of the borrowings using the effective interest rate method. Financial instruments with maturities exceeding 12 months are classified as long-term.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable, short-term debt, and long-term debt approximate their fair values. See Note 14, Fair Value Measurements, to the combined financial statements for fair value of financial instruments.
Foreign Currency
The combined financial statements are presented in Swiss francs (“CHF”), which is the reporting currency of the Company. Foreign currency transactions are remeasured into the functional currency using the exchange rates prevailing at the dates of the transactions for each of the combined companies of the Masterbatches Business. Foreign exchange gains and losses resulting from the remeasurement at the reporting date of monetary assets and liabilities denominated in foreign currencies are recognized in the combined statements of income. The aggregate transaction (losses) / gains for the years ended December 31, 2019 and 2018 were CHF (844) thousand and CHF 1,060 thousand, respectively.
For the purposes of the combined financial statements, the results and financial position of the combined companies whose functional currency is different from the Swiss franc are translated into the reporting currency. Revenues and expenses of international entities are translated at average currency exchange rates during the period. Assets and liabilities of international entities are translated using the exchange rate at the end of the period. The resulting translation adjustments are accumulated as a component of other comprehensive income or loss.
Recognition of Revenue from Contracts with Customers
Revenue from contracts with customers is measured based on the consideration the Company expects to receive in exchange for satisfying a performance obligation by transferring control of goods to the customer. Arrangements with customers are considered contracts if all the following criteria are met: (a) parties have approved the contract and are committed to perform their respective obligations; (b) each party’s rights regarding the goods or services to be transferred can be identified; (c) payment terms for the goods or services to be transferred can be identified; (d) the contract has commercial substance and (e) collectability of substantially all of the consideration is probable. The Company recognizes revenue from contracts with customers when products are sold and when it satisfies a performance obligation by transferring control over a product to the customer, which normally takes place at a point in time, upon delivery. Transaction price is allocated to each performance obligation when such performance obligation(s) are identified within each customer contract. Revenue is reported net of sales taxes, returns, discounts and rebates. Rebates to customers are provided for in the same period that the related sales are recorded, based on the contract terms. The payment terms are typically 40 days.
13
The Masterbatches Business of Clariant Ltd
For some of its sales transactions, depending on the incoterms, the Masterbatches Business may retain control until the goods are delivered to the customer. Accordingly, revenue associated with these transactions is typically not recognized until such point in time, with the deferred revenue balance considered a contract liability under Accounting Standards Codification 606, Revenue from Contracts with Customers (ASC 606), and presented as part of other liabilities. Deferred revenue is released and revenues associated with such transactions are recognized upon delivery and transfer of control over a product to the customer. Cash rebates and discounts granted to customers are classified as a reduction of revenue. Shipping and handling activities performed after control of goods has transferred to a customer are not treated as a separate performance obligation.
The Company adopted ASC 606, effective January 1, 2018, using the modified retrospective method. Refer to the section Accounting Standards Adopted below for a description of the impact of adoption of ASC 606.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Share-Based Compensation Expense
Certain employees of the Company participate in the Parent’s share-based compensation plans. Share-based compensation expense related to these plans is recognized based on a specific identification of cost related to the Company’s employees. The Company also records the allocated share-based compensation expense relating to employees of central support functions provided by the Parent; these expenses are included in the other income / (expense) account in the combined statements of income.
Share-based compensation expense is initially measured at fair value of the awards on the grant date and is recognized in the accompanying combined statements of income using an accelerated method, over the requisite service period. Share-based compensation expense is based on awards expected to ultimately vest and, therefore, has been reduced for estimated forfeitures.
The share-based compensation expense included in the combined financial statements has been derived from the share-based compensation awards granted by the Parent to employees who are specifically identified in the plans as well as an allocation of corporate employees of the Parent. The share-based compensation is treated as a capital contribution from the Parent in the combined financial statements and are assumed to be settled by the Parent. Total share-based compensation expense for the share-based compensation plans was CHF 293 thousand and CHF 265 thousand for the years ended December 31, 2019 and 2018, respectively and are reflected as an expense in selling, general and administrative costs in the combined statements of income.
Income Taxes
The Company’s operating results are included in the income tax returns of the Parent. The company accounts for income taxes under the separate return method. Under this approach, the Company determines its deferred tax assets and liabilities and related tax expense as if it were filing separate tax returns. Deferred tax assets and liabilities reflect temporary differences between the amount of assets and liabilities for financial and tax reporting purposes. Such amounts are adjusted, as appropriate, to reflect changes in tax rates expected to be in effect when the temporary differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. In the event the Company determines it is more likely than not that the deferred tax asset will not be realized in the future, the valuation allowance adjustment to the deferred tax assets will be charged to earnings in the period in which such determination is made. In determining the provision for income taxes for financial statement purposes, the Company makes certain estimates and judgments which affect its evaluation of the carrying value of its deferred tax assets, as well as its calculation of certain tax liabilities. See Note 13, Income Taxes, for additional detail.
14
The Masterbatches Business of Clariant Ltd
Accounting Standards Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). These ASUs (collectively, the “New Revenue Standard”) introduce a five-step model for recognition of revenue from contracts with customers that focuses on transfer of control. The Company adopted the New Revenue Standard using the modified retrospective method for all contracts with customers as of January 1, 2018. The Masterbatches Business applied the practical expedient for contracts modified prior to the beginning of the earliest reporting period presented under the new standard (i.e., January 1, 2018), which allows the Company to reflect the aggregate effect of all modifications that occur before January 1, 2018 when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligations for the modified contract at transition. The adoption did not have a material impact on the Company’s combined financial statements and as a result, the Masterbatches Business did not recognize a cumulative effect adjustment included in the net investment from the Parent.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the standard as of January 1, 2018 and the adoption did not have a material impact on the Company's financial statements.
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 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.
15
The Masterbatches Business of Clariant Ltd
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock compensation (Topic 718) (“ASU 2017-09”). The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This ASU is effective for periods beginning after December 15, 2017. The Group adopted this update as of January 1, 2018. The adoption had no impact on the Company's financial statements.
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.
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 years ended:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Europe, Middle East and Africa | 520,242 | 564,733 | ||||||
| North America | 251,970 | 270,099 | ||||||
| Asia Pacific | 161,343 | 159,570 | ||||||
| Greater China | 104,398 | 110,726 | ||||||
| Latin America | 82,415 | 77,765 | ||||||
| Total sales | 1,120,368 | 1,182,893 | ||||||
As of December 31, 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. As of December 31, 2019 and 2018 deferred revenues amounted to CHF 2,039 thousand and CHF 6,500 thousand, respectively.
Revenue recognized in the year ended December 31, 2019 and 2018 that was part of the deferred revenues balance as of January 1, 2019 and 2018 was CHF 6,500 thousand and CHF 5,864 thousand respectively.
Outstanding obligations for returns, refunds, and warranties as of December 31, 2019 were not material.
16
The Masterbatches Business of Clariant Ltd
NOTE 4 INVENTORIES
Components of inventories, consisted of the following, as of:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Raw materials and work in process | 42,940 | 48,734 | ||||||
| Finished products | 35,252 | 48,623 | ||||||
| Consumables | 5,755 | 5,354 | ||||||
| Total inventories | 83,947 | 102,711 | ||||||
The Company evaluates its product inventory to identify inventory with net realizable value below its carrying amount, including obsolete or slow-moving items as well as inventory that is not of saleable quality. 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 year ended December 31, 2019 and 2018, respectively.
NOTE 5 OTHER CURRENT ASSETS
Other current assets consisted of the following, as of:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| VAT and other taxes receivable | 11,181 | 13,351 | ||||||
| Prepayments and deferred charges | 7,304 | 9,155 | ||||||
| Other receivables | 6,165 | 9,279 | ||||||
| Income tax receivables | 725 | 554 | ||||||
| Total other current assets | 25,375 | 32,339 | ||||||
NOTE 6 PROPERTY, PLANT AND EQUIPMENT, NET
Components of property, plant and equipment consisted of the following, as of:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Machinery and technical equipment | 354,700 | 357,927 | ||||||
| Buildings | 189,358 | 187,472 | ||||||
| Furniture and other equipment | 41,114 | 41,490 | ||||||
| Construction in progress | 11,256 | 15,860 | ||||||
| Land | 8,928 | 10,562 | ||||||
| Vehicles | 5,172 | 5,895 | ||||||
| Total property, plant and equipment, gross | 610,528 | 619,206 | ||||||
| Less accumulated depreciation | (420,494) | (423,135) | ||||||
| Total property, plant and equipment, net | 190,034 | 196,071 | ||||||
Depreciation expense was CHF 21,582 thousand and CHF 23,153 thousand in the years ended December 31, 2019 and 2018, respectively.
NOTE 7 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.
17
The Masterbatches Business of Clariant Ltd
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.
Operating leases consisted of the following as of December 31, 2019:
| (in CHF, thousands) | December 31, 2019 | ||||
| Right-of-use assets: | |||||
| Right-of-use assets | 23,641 | ||||
| Total operating lease assets | 23,641 | ||||
| Lease liabilities: | |||||
| Accrued and other liabilities | 4,807 | ||||
| Lease liabilities | 17,766 | ||||
| Total operating lease liabilities | 22,573 | ||||
Maturities of operating lease liabilities are as follows as of December 31, 2019:
| (in CHF thousands) | December 31, 2019 | ||||
| 2020 | 6,239 | ||||
| 2021 | 5,392 | ||||
| 2022 | 4,174 | ||||
| 2023 | 3,145 | ||||
| 2024 | 2,125 | ||||
| Thereafter | 8,238 | ||||
| Total future undiscounted cash flows | 29,313 | ||||
| Less imputed interest | 6,740 | ||||
| Total operating lease liabilities | 22,573 | ||||
As of December 31, 2018, future minimum lease payments for operating leases with initial or remaining non-cancelable lease terms in excess of one year under prior lease accounting rules (ASC 840) were (in CHF thousands):
18
The Masterbatches Business of Clariant Ltd
| (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 lease commitments under ASC 840 | 28,144 | ||||
Operating lease expense, cash paid and lease liabilities arising from obtaining right-of-use assets are as follows for the twelve-month period ended:
| December 31, 2019 | |||||
| Weighted average remaining lease term (in years) | 7.3 | ||||
| Weighted average discount rate | 7.0 | ||||
Operating lease expense, cash paid and lease liabilities arising from obtaining right-of-use assets are as follows for the twelve-month period ended:
| December 31, 2019 | |||||
| Operating lease expense | 7,295 | ||||
| Operating lease cash paid | 8,136 | ||||
| Lease liabilities arising from obtaining right-of-use assets | 5,067 | ||||
NOTE 8 GOODWILL AND INTANGIBLE ASSETS, NET
The amounts shown below reflect the change in goodwill during 2019 and 2018:
| (in CHF, thousands) | 2019 | 2018 | ||||||
| Balance at the beginning of the year | 48,703 | 49,561 | ||||||
| Currency translation adjustment | (1,209) | (858) | ||||||
| Total goodwill at the end of the year | 47,494 | 48,703 | ||||||
During the fourth quarter of 2019 and 2018, the Company performed its annual impairment test. No impairment was recorded in 2019 or 2018 as a result of the impairment tests.
Net intangible assets consisted of the following, as of:
December 31, 2019
| (in CHF, thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||
| Capitalized software for internal use | 12,310 | (9,553) | 2,757 | ||||||||
| Patents, technology and other | 7,830 | (6,425) | 1,405 | ||||||||
| Trade names | 14,649 | (13,806) | 843 | ||||||||
| Total intangible assets | 34,789 | (29,784) | 5,005 | ||||||||
19
The Masterbatches Business of Clariant Ltd
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 2,597 thousand and CHF 4,461 thousand in the years ended December 31, 2019 and 2018, respectively.
Expected amortization of finite-lived intangible assets for the next five years and thereafter is as follows:
| (in CHF, thousands) | |||||
| 2020 | 1,885 | ||||
| 2021 | 678 | ||||
| 2022 | 659 | ||||
| 2023 | 398 | ||||
| 2024 | 237 | ||||
| Thereafter | 1,148 | ||||
| Total | 5,005 | ||||
NOTE 9 ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities as of December 31, 2019 and 2018 consisted of the following:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| VAT and other taxes payable | 9,293 | 11,773 | ||||||
| Accrued expenses | 8,935 | 4,830 | ||||||
| Customer rebates | 7,169 | 7,776 | ||||||
| Lease liabilities | 4,807 | - | ||||||
| Accrued raw materials purchases | 3,848 | 6,133 | ||||||
| Income tax payable | 2,956 | 563 | ||||||
| Deferred revenue | 2,039 | 6,500 | ||||||
| Prepayments from customers | 1,725 | 2,208 | ||||||
| Other | 5,613 | 6,628 | ||||||
| Total | 46,385 | 46,411 | ||||||
NOTE 10 ACCRUED EMPLOYEE EXPENSES
Accrued employee expenses as of December 31, 2019 and 2018 consisted of the following:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Wages, salaries and related accruals | 20,825 | 20,363 | ||||||
| Bonus accrual | 12,596 | 15,225 | ||||||
| Accrued taxes | 2,651 | 3,002 | ||||||
| Other employee expenses accruals | 5,780 | 3,524 | ||||||
| Total | 41,852 | 42,114 | ||||||
20
The Masterbatches Business of Clariant Ltd
NOTE 11 DEBT ARRANGEMENTS
Long-term debt
The Company's long-term debt as of December 31, 2019 and 2018 mainly consists of interest-bearing notes. During 2019, new arrangements with maturity dates from 2021 - 2025 were signed. The proceeds from the new arrangements were used to settle the notes outstanding as of December 31, 2018. Given the issuers of the new arrangements and prior arrangements were different parties, this was accounted for as an issuance of long-term debt and an extinguishment of the existing long-term debt. 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) | December 31, 2019 | December 31, 2018 | ||||||
| Notes due 2021 - 2025 | 6,767 | - | ||||||
| Notes due 2019 - 2021 | - | 5,896 | ||||||
| Less: maturities classified as current | 463 | 1,951 | ||||||
| Total long-term debt | 6,304 | 3,945 | ||||||
| Weighted average interest rate on outstanding borrowings at end of year | 4.7% | 8.0% | ||||||
Aggregate maturities of the outstanding principal amount of long-term debt for the next five years and thereafter are as follows:
| (in CHF, thousands) | |||||
| 2020 | - | ||||
| 2021 | 643 | ||||
| 2022 | 1,132 | ||||
| 2023 | 1,492 | ||||
| 2024 | 1,492 | ||||
| Thereafter | 1,545 | ||||
| Total maturities | 6,304 | ||||
Short-term debt
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Current maturities of long-term debt | 463 | 1,951 | ||||||
| Short term debt | 21,451 | 15,920 | ||||||
| Loans from related parties | 97,447 | 59,171 | ||||||
| Total short-term debt | 119,361 | 77,042 | ||||||
| Weighted average interest rate on outstanding non-related party borrowings at end of year | 11.4% | 9.3% | ||||||
NOTE 12 EMPLOYEE BENEFIT PLANS
Upon the divestiture of the Masterbatches Business by Clariant, the Parent transferred certain employee benefit plans in full to the Company and retained certain other plans. The defined benefit plans that were transferred in full (the “Direct Plans”) are accounted for in the 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 were not 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.
21
The Masterbatches Business of Clariant Ltd
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 information included in this footnote relates to the material plans of the Company. The remaining plans are insignificant to the Company both individually and in the aggregate. The obligations for these plans are recorded over the requisite service period.
The amounts shown below reflect the change in the defined benefit obligations and plan assets during 2019 and 2018:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Benefit obligation at the beginning of the year | 92,284 | 101,213 | ||||||
| Service cost | 2,142 | 2,688 | ||||||
| Interest cost | 2,941 | 3,184 | ||||||
| Employee contributions | 15 | 19 | ||||||
| Actuarial (gains)/losses | 10,165 | (5,787) | ||||||
| Benefits paid | (4,659) | (7,158) | ||||||
| Foreign currency translation | (1,224) | (1,948) | ||||||
| Other | (520) | 73 | ||||||
| Parent (contributions) / distributions | (12,223) | - | ||||||
| Benefit obligation at the end of the year | 88,921 | 92,284 | ||||||
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at the beginning of the year | 76,390 | 77,535 | ||||||
| Actual return on the plan assets | 10,173 | (2,045) | ||||||
| Employer contributions | 1,990 | 8,624 | ||||||
| Employee contributions | 15 | 19 | ||||||
| Benefits paid | (3,558) | (6,256) | ||||||
| Foreign currency translation | (689) | (1,428) | ||||||
| Other | - | (59) | ||||||
| Parent contributions / (distributions) | (13,811) | - | ||||||
| Fair value of plan assets at the end of the year | 70,510 | 76,390 | ||||||
| Funded status | (18,411) | (15,894) | ||||||
Included in the rollforward above are certain contributions and distributions of plan liabilities and plan assets associated with the employee benefits expected to be assumed by the Buyer on the acquisition date. These amounts are reflected under the caption “Parent contributions / (distributions).”
Amounts recognized in accumulated other comprehensive income before tax effects were as follows:
22
The Masterbatches Business of Clariant Ltd
| Actuarial (gains)/losses | Total | |||||||
| Accumulated other comprehensive loss at December 31, 2017 | 376 | 376 | ||||||
| Net amount generated/arising in current year | (1,005) | (1,005) | ||||||
| Amortization | - | - | ||||||
| Foreign currency translation adjustment | (67) | (67) | ||||||
| Accumulated other comprehensive loss at December 31, 2018 | (696) | (696) | ||||||
| Net amount generated/arising in current year | 2,544 | 2,544 | ||||||
| Amortization | - | - | ||||||
| Foreign currency translation adjustment | (35) | (35) | ||||||
| Accumulated other comprehensive loss at December 31, 2019 | 1,813 | 1,813 | ||||||
The projected benefit obligation (“PBO”), accumulated benefit obligation (“ABO”), and fair value of plan assets for pension plans with accumulated benefit obligations are as follows:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Pension plans with ABO in excess of the fair value of plan assets: | ||||||||
| PBO | 20,566 | 41,384 | ||||||
| ABO | 14,904 | 32,899 | ||||||
| Fair value of plan assets at the end of the year | 5,810 | 25,734 | ||||||
| Pension plans with fair value of plan assets in excess of ABO: | ||||||||
| PBO | 68,355 | 50,900 | ||||||
| ABO | 62,220 | 47,436 | ||||||
| Fair value of plan assets at the end of the year | 64,700 | 50,656 | ||||||
| Total pension plans: | ||||||||
| PBO | 88,921 | 92,284 | ||||||
| ABO | 77,124 | 80,325 | ||||||
| Fair value of plan assets at the end of the year | 70,510 | 76,390 | ||||||
Benefit costs presented below were determined based on actuarial methods and included the following:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Service cost | 2,142 | 2,688 | ||||||
| Interest cost | 2,941 | 3,184 | ||||||
| Expected return on plan assets | (2,551) | (2,737) | ||||||
| Other | (521) | - | ||||||
| Net periodic benefit cost | 2,011 | 3,135 | ||||||
Pension service costs are classified as employee compensation costs within cost of sales, selling, general and administrative costs and research and development costs within the combined statements of income. All other components of net periodic benefit cost are classified within the other income, net line item, for all periods presented. As a result, for all defined benefit plans, the Company included
23
The Masterbatches Business of Clariant Ltd
CHF 2,380 thousand and CHF 3,046 thousand of service cost in Cost of goods sold, selling and administrative costs and research and development costs for the periods ended December 31, 2019 and December 31, 2018, respectively, which are mapped to these cost accounts consistently with other employee compensation costs. The remainder of the net periodic benefit costs are included in Other income, net within the combined statements of income.
Experience gains and losses, as well as the effects of changes in actuarial assumptions and plan provisions are recognized in other comprehensive income. Cumulative gains and losses in excess of 10% of the greater of the PBO or the market related value of plan assets for a particular plan are amortized over the average future service period of the employees in that plan. The Company does not expect to recognize cumulative gains and losses in excess of 10% of the PBO and therefore does not expect to amortize any actuarial losses from accumulated other comprehensive income into net periodic benefit cost in 2020.
The weighted average assumptions used to determine the actuarial value of the projected benefit obligation and the net expense for the pension plans were as follows:
Assumptions used to determine benefit obligations are as follows as at:
| December 31, 2019 | December 31, 2018 | |||||||||||||
| Weighted-average discount rate | 2.8% | 3.8% | ||||||||||||
| Weighted-average rate of increase in compensation levels | 3.3% | 3.3% | ||||||||||||
Assumptions used to determine net expense are as follows as at:
| December 31, 2019 | December 31, 2018 | |||||||||||||
| Weighted-average discount rate | 3.4% | 4.2% | ||||||||||||
| Weighted-average rate of increase in compensation levels | 3.9% | 3.9% | ||||||||||||
| Weighted-average expected long-term rate of return on plan assets | 2.7% | 3.6% | ||||||||||||
The Company selects discount rates by analyzing the results of matching each plan’s projected benefit obligations with a portfolio of high-quality fixed income investments rated AA-or higher by Standard and Poor’s in the relevant country where the plan is located. In developing the expected long-term rate of return on assets, the Company modelled the expected long-term rates of return for broad categories of investments held by the plan against a number of various potential economic scenarios.
The fair value of the Company’s pension plan assets, as of December 31, 2019, was split into the major asset categories, by level, as follows:
| (in CHF, thousands) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
| Cash and cash equivalents | 482 | 482 | - | - | ||||||||||
| Corporate debt securities | 42,365 | - | 42,365 | - | ||||||||||
| Investment funds | 20,415 | 7,971 | 12,443 | - | ||||||||||
| Insurance assets - contracts and reserves | 3,924 | - | 3,924 | - | ||||||||||
| Government securities | 3,189 | 3,007 | 182 | - | ||||||||||
| Other | 135 | - | 135 | - | ||||||||||
| Total | 70,510 | 11,460 | 59,050 | - | ||||||||||
24
The Masterbatches Business of Clariant Ltd
The Company’s investment strategy for its pension plans is to optimize the long-term investment return on plan assets in relation to the liability structure to maintain an acceptable level of risk while minimizing the cost of providing pension benefits and maintaining adequate funding levels in accordance with applicable rules in each jurisdiction. The investment mix between equity securities and insurance assets securities is based upon achieving a desired return, balancing higher return, more volatile equity securities, and lower return, less volatile fixed income securities and is adjusted for the expected duration of the obligation and the funded status of the plan. Investment allocations are made across a range of securities, maturities and credit quality. The Company's defined benefit plan investments are based on local laws and customs. Most plans invest in insurance assets and investment funds.
Pension Funding
The following future benefit payments, which reflect expected future level of service, are expected to be paid as of December 31, 2019:
(in CHF, millions) | |||||
| 2020 | (4,623) | ||||
| 2021 | (5,762) | ||||
| 2022 | (5,138) | ||||
| 2023 | (4,845) | ||||
| 2024 | (5,317) | ||||
| 2025-2029 | (26,127) | ||||
The Company anticipates making pension contributions of approximately CHF 2,556 thousand in 2020.
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 6,210 thousand and CHF 5,887 thousand for the years ended December 31, 2019 and 2018, respectively. These amounts are primarily comprised of contributions to defined benefit plans in Germany, Italy and the United States.
Multiemployer Pension Plans
The Company accounts for certain of its pension plans as multiemployer pension plans, that based on their nature qualify as multiemployer pension plans under US GAAP. When a plan is accounted for using the multiemployer accounting approach, the related assets and liabilities are not reflected in the combined financial statements. Benefits under these plans are based primarily on the years of service and employee’s compensation. The Company recorded expense in the combined statement of income of CHF 1,520 thousand and CHF 2,232 thousand for the years ended December 31, 2019 and 2018 respectively, related to the employees’ participation in Parent sponsored plans.
The Company had no other postretirement benefit obligations as of December 31, 2019 or 2018.
NOTE 13 INCOME TAXES
On September 28, 2018 the Swiss Parliament approved the Federal Act on Tax Reform and AHV Financing (TRAF). On May 19, 2019 a public referendum was held in Switzerland that approved the federal reform proposals. In the fiscal third quarter of 2019, the Swiss Federal Council enacted TRAF which became effective on January 1, 2020. TRAF withdraws – amongst others – the cantonal tax privileges for holding, domiciliary and mixed companies. Additionally, TRAF provides for parameters which enable the Swiss cantons to establish localized tax rates and regulations for companies. The new cantonal tax parameters include favorable tax benefits for patents and additional research and development tax deductions. The specific cantonal transitional provisions of TRAF are allowing companies to elect either 1) tax basis step-up in case of the withdrawal of an existing tax privilege or 2) alternative reduced statutory tax rate for a period not to exceed 5 years.
25
The Masterbatches Business of Clariant Ltd
On June 6, 2019 the Basel-Land Parliament approved the amended cantonal tax law. On November 24, 2019 a public referendum was held in Basel-Land that approved the cantonal reform proposals. On December 10, 2019, the cantonal government of Basel-Land enacted the new law as of January 1, 2020. The amended cantonal tax law includes a reduction of the ordinary tax rate to 16.5% as of January 1, 2020 and a further reduction to 13.5% as of January 1, 2025. Additionally, it introduces a patent box as well as additional research and development tax deductions and offers the transitional provisions mentioned above.
The deferred taxes and the respective valuation allowances to deferred taxes have increased by CHF 4’279 thousand due to the application of the new tax rates.
The Company is currently assessing and applying for approval for the elective transition provisions in the canton of Basel-Land which includes discussions with local tax authorities on the application of the new law. The Company has recorded a DTA and a corresponding full valuation allowance of CHF 6'000 thousand in connection with a tax basis step-up in Switzerland relating to the Swiss Tax Reform based on the best available information. However, the Company has not yet received a final tax ruling.
Income before income taxes is summarized below based on the geographic location of the operation to which such earnings are attributable.
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Domestic | (600) | 12,548 | ||||||
| Foreign | 54,941 | 56,337 | ||||||
| Income from operations, before income taxes | 54,341 | 68,885 | ||||||
A summary of income tax expense is as follows:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Current income tax expense (benefit): | ||||||||
| Domestic | (2) | (41) | ||||||
| Foreign | 14,573 | 19,014 | ||||||
| Total current income tax expense | 14,571 | 18,973 | ||||||
| Deferred income tax (benefit) expense: | ||||||||
| Domestic | 2 | 1 | ||||||
| Foreign | 3,530 | (1,208) | ||||||
| Total deferred income tax (benefit) expense | 3,532 | (1,207) | ||||||
| Total income tax expense | 18,103 | 17,767 | ||||||
A reconciliation of the applicable Swiss statutory tax rate to the consolidated effective income tax rate along with a description of significant or unusual reconciling items is included below.
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Swiss statutory income tax rate 12% | 6,521 | 8,266 | ||||||
| Total foreign tax rate differential | 6,379 | 7,230 | ||||||
| Non-deductible items | 1,841 | 785 | ||||||
| Tax exempt income | (792) | (811) | ||||||
| Utilization and changes in recognition of tax losses and tax credits | 680 | 476 | ||||||
| Unrecognized current year tax losses and tax credits | 522 | 265 | ||||||
| Adjustments relating to prior periods | 3,273 | 1,234 | ||||||
| Other items | (320) | 322 | ||||||
| Effective tax rate | 33% | 26% | ||||||
26
The Masterbatches Business of Clariant Ltd
The effective tax rates for all periods differ from the applicable Swiss statutory tax rate as a result of differences in foreign tax rates, permanent items and certain unusual items. Permanent items primarily consist of income or expense not taxable or deductible as well as unrecognized current year tax losses. Significant or unusual items impacting the effective income tax rate are described below.
2019 Significant items
The additional expense from non-deductible items relate to Singapore and Colombia and the additional expense from adjustments relating to prior periods mainly relates to Mexico.
2018 Significant items
The additional expense from prior period relates to prior year adjustments in various jurisdictions.
Components of the Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 were as follows:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
Deferred tax assets: | ||||||||
| PPE and intangible assets | 39,989 | 20,589 | ||||||
| Retirement benefit obligations | 3,021 | 2,084 | ||||||
| Tax losses and tax credits | 5,230 | 6,713 | ||||||
| Other accruals and provisions | 9,856 | 8,189 | ||||||
| Gross deferred tax assets | 58,096 | 37,575 | ||||||
| Valuation allowances | 33,241 | 17,358 | ||||||
| Deferred tax assets, net of valuation allowances | 24,855 | 20,217 | ||||||
| Deferred tax liabilities: | ||||||||
| PPE and intangible assets | (14,486) | (12,272) | ||||||
| Retirement benefit obligations | (36) | (36) | ||||||
| Other accruals and provisions | (8,659) | (4,455) | ||||||
| Deferred tax liabilities | (23,181) | (16,763) | ||||||
| Net deferred tax assets | 1,674 | 3,454 | ||||||
| Included in: | ||||||||
| Deferred tax assets | 11,484 | 12,718 | ||||||
| Deferred tax liabilities | (9,810) | (9,264) | ||||||
As of December 31, 2019, a foreign subsidiary has gross net operating loss carryforwards totaling CHF 5,654 thousand that have indefinite carryforward periods. The Company has not provided valuation allowances against these losses as it believes that the subsidiary will generate sufficient taxable profits to use these losses.
On the other hand, another foreign subsidiary has gross net operating loss carryforwards totaling CHF 10'394 thousand for which the Company has provided a full valuation allowance as it believes that the subsidiary will not generate sufficient taxable profits to use these losses.
Total tax valuation allowances on all deferred tax assets increased by CHF 15,883 thousand from the prior year. The increase is predominantly driven by higher deferred tax assets and valuation allowances in Switzerland.
27
The Masterbatches Business of Clariant Ltd
The Company decided to repatriate certain current and prior year foreign earnings. A provision has been made for non-recoverable withholding taxes on the undistributed earnings of certain consolidated non-Swiss subsidiaries, primarily outside of Europe, of approximately CHF 563 thousand as of December 31, 2019.
The Company records provisions for uncertain tax positions in accordance with ASC 740, Income Taxes. A reconciliation of unrecognized tax benefits is as follows:
| (in CHF, thousands) | 2019 | 2018 | ||||||
| Balance as of the beginning of the year | 721 | 156 | ||||||
| Increases as a result of positions taken during current year | 207 | - | ||||||
| Increases as a result of positions taken for prior years | 2,424 | 565 | ||||||
| Balance as of the end of the year | 3,352 | 721 | ||||||
The majority of the uncertain tax positions relate to Mexico.
The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes. As of December 31, 2019, and 2018, the Company had CHF 300 thousand and CHF 178 thousand accrued for interest and penalties, respectively.
Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next twelve months a reduction in unrecognized tax benefits may occur up to CHF 500 thousand based on the outcome of tax examinations and settlements.
The following table summarizes key jurisdictions and tax years that remain subject to examination:
| China | 2016 - 2019 | ||||
| Germany | 2009 - 2019 | ||||
| Italy | 2015 - 2019 | ||||
| Switzerland | 2018 - 2019 | ||||
| USA | 2016 - 2019 | ||||
If all unrecognized tax benefits were recognized, the net impact on the provision for income tax expense would be a benefit of CHF 3,352 thousand.
NOTE 14 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 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
28
The Masterbatches Business of Clariant Ltd
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
In addition to items measured at fair value on a recurring basis, assets may be measured at fair value on a nonrecurring basis. These assets 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 evaluates the carrying value of its goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter of each year. These fair value measurements require the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, and growth rates, which are subject to a high degree of uncertainty. The Company believes the assumptions and estimates used to determine the estimated fair value are reasonable, but different assumptions could materially affect the estimated fair value.
During the years ended December 31, 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 6,304 thousand and CHF 3,945 thousand of long-term debt as of December 31, 2019 and 2018, respectively, whose amortized costs approximates fair value (Level 2), which consists of interest-bearing notes due 2021 - 2025. See 11, Debt Arrangements for additional information.
Assets and Liabilities Not Carried at Fair Value
The carrying value of cash and cash equivalents, short receivables, accounts payable, and short-term debt approximates fair value due to their short-term nature.
NOTE 15 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 major part 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.
29
The Masterbatches Business of Clariant Ltd
NOTE 16 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 combined 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.
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Revenue from sale of goods | 1,811 | 1,501 | ||||||
| Purchase of goods | 36,176 | 36,679 | ||||||
| Interest expense paid to related parties | 7,963 | 10,572 | ||||||
| Interest income from related parties | 1,710 | 1,350 | ||||||
| Income from shared assets used jointly with the Parent | 1,664 | 1,404 | ||||||
| Expenses from shared assets used jointly with the Parent | 3,847 | 3,501 | ||||||
| Transfers of fixed assets | 2,920 | - | ||||||
Goods sold includes revenues from sales of inventories from the Masterbatches Business to other strategic business units of the Parent.
Goods and services purchased mainly consist of purchases of inventories to the Masterbatches Business from other strategic business units of the Parent as well as indirect production and other related costs allocated to the Company.
Related Party Balances
Related party balances as of December 31, 2019 and 2018 consisted of the following:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Accounts receivable, net | 430 | 330 | ||||||
| Accounts payable | 5,858 | 5,621 | ||||||
| Loans to related parties | 82,943 | 80,600 | ||||||
| Loans from related parties | 97,477 | 59,171 | ||||||
30
The Masterbatches Business of Clariant Ltd
Allocations of Costs for The Parent’s Services
The Masterbatches Business has certain services and functions provided to it by the Parent. These services and functions included, but were not limited to, senior management, legal, human resources, finance and accounting, treasury, information technology (“IT”) services and support, cash management, payroll processing, pension and benefit administration, other shared services and research and developments costs. These costs were allocated using methodologies that management believes were reasonable for the item being allocated. Allocation methodologies included direct usage when identifiable, as well as the Company’s relative share of revenues as a percentage of the total.
The total costs, net of income, for services and functions allocated to the Masterbatches Business from the Parent were as follows, for the years ended:
| (in CHF, thousands) | December 31, 2019 | December 31, 2018 | ||||||
| Research and development costs | 1,583 | 1,401 | ||||||
| Selling, general and administrative costs | 84,836 | 78,000 | ||||||
| Total costs, net of income, allocated from the Parent | 86,419 | 79,401 | ||||||
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 17 ACCUMULATED OTHER COMPREHENSIVE LOSS
The amounts recognized in accumulated other comprehensive loss were 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 | (12,835) | 1,390 | (11,445) | ||||||||
| Effect of deferred taxes | - | (258) | (258) | ||||||||
| Balance at December 31, 2018 | (49,378) | 43 | (49,335) | ||||||||
| Reclassification to earnings | - | - | - | ||||||||
| Gain (loss) arising during the period | (8,178) | (2,787) | (10,965) | ||||||||
| Effect of deferred taxes | - | 1,145 | 1,145 | ||||||||
| Balance at December 31, 2019 | (57,556) | (1,599) | (59,155) | ||||||||
NOTE 18 SUBSEQUENT EVENTS
The combined financial statements of the Company are derived from the financial statements of the Parent, which issued its consolidated financial statements for the year ended December 31, 2019 on February 11, 2020. Accordingly, the Company has evaluated transactions or other events for consideration as recognized subsequent events in the annual financial statements through February 11, 2020. Additionally, the Company has evaluated transactions and other events that occurred through the issuance of these financial statements, March 19, 2020, for purposes of disclosure of unrecognized subsequent events.
In January 2020, the outbreak of the virus COVID-19, also known as the coronavirus, resulted in some interruption and adverse impact to the Masterbatches Business globally. The impact of the virus may continue during 2020. Management is evaluating the impact and developing actions plan to minimize the effect.
31
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On December 19, 2019, PolyOne Corporation (the “Company” and, together with its subsidiaries, “PolyOne” or “we”) entered into a definitive share purchase agreement (the “Purchase Agreement”) with Clariant AG (“Clariant”), a corporation organized and existing under the laws of Switzerland, and a definitive business transfer agreement (the “BTA” and, together with the Purchase Agreement, the “Agreements”) with Clariant Chemicals (India) Limited, a public limited company incorporated in India and an indirect majority-owned subsidiary of Clariant (“Clariant India” and, together with Clariant AG, “Clariant”). Pursuant to the Purchase Agreement, PolyOne has agreed to acquire Clariant’s global masterbatch business outside of India (the “Clariant Masterbatch Business”), and pursuant to the BTA, PolyOne has agreed to purchase Clariant India’s masterbatch business (the “Clariant India Masterbatch Business”, together with the Clariant Masterbatch Business, “Clariant Masterbatch” or “Clariant MB”), for a net purchase price of $1.45 billion in cash, subject to customary closing adjustments. We refer to the pending acquisition of Clariant MB as the “Clariant MB Acquisition”. The Clariant MB Acquisition, which has not yet been consummated, will be accounted for as a business combination under Accounting Standards Codification ("ASC") Topic 805, Business Combinations ("ASC 805"), with PolyOne considered as the accounting acquirer and Clariant MB as the accounting acquiree. The Clariant MB Acquisition is subject to customary closing conditions and is expected to close in 2020.
The Clariant MB Acquisition will be financed, in part, with the net proceeds received from the issuance of common shares and senior unsecured debt securities. The remaining portion of the purchase price will be paid with cash on hand as of the acquisition closing date.
On January 30, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Morgan Stanley & Co. LLC and Citigroup Global Markets Inc., acting as representatives of the several underwriters named therein (the “Underwriters”), in connection with the public offering and sale (the “Offering”) of 13,333,333 of the Company’s common shares, par value $.01 per share (“Common Shares”), at a price to the public of $33.75 per share. As a component of the Offering, the Company granted the Underwriters a 30-day option to purchase up to an additional 2,000,000 Common Shares from the Company, which was fully exercised. In connection with the Offering, we generated net proceeds, after deducting the underwriters' discount but before deducting offering expenses, of approximately $496.8 million from the sale of 15,333,333 Common Shares.
The Company intends to issue approximately $650.0 million aggregate principal amount of senior unsecured debt securities (the “New Notes”) on or prior to the consummation of the Clariant MB Acquisition. We anticipate that in the event the New Notes are issued prior to the consummation of the Clariant MB Acquisition, the New Notes will be subject to a special mandatory redemption in the event that the Clariant MB Acquisition is not consummated on or prior to December 19, 2020 or, if prior to December 19, 2020, the Purchase Agreement is terminated other than in connection with the consummation of the Clariant MB Acquisition.
The remaining portion of the net purchase price of the Clariant MB Acquisition will be paid with a portion of the net cash proceeds received from the sale of the Company’s Performance Products and Solutions business segment (“PP&S”). As previously announced, on October 25, 2019, the Company completed the sale of PP&S, which generated net cash proceeds of $761.8 million.
Additionally, on December 19, 2019, we entered into a Commitment Letter (the “Commitment Letter”) with Citigroup Global Markets Inc., Morgan Stanley Senior Funding, Inc., Wells Fargo Bank, National Association, Citizens Bank, N.A., HSBC Bank USA, N.A., PNC Bank, National Association, Truist Bank and U.S. Bank National Association (collectively, the “Commitment Parties”). Pursuant to and subject to the terms and conditions set forth in the Commitment Letter, the Commitment Parties have provided up to a 12-month commitment for a $1,150 million senior unsecured bridge loan facility (the “Bridge Facility”) for purposes of funding the Clariant MB Acquisition. The Commitment Parties’ commitments under the Bridge Facility were subsequently reduced on a dollar-for-dollar basis by the net proceeds from the Offering described above. We currently intend to issue the New Notes in lieu of borrowing under the Bridge Facility.
1
The unaudited pro forma condensed combined financial statements, which have been prepared to give effect to the completion of the Clariant MB Acquisition, have been developed from, and should be read in conjunction with, (1) the audited consolidated financial statements of PolyOne contained in its Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 19, 2020 and (2) the audited combined financial statements of Clariant MB as of and for the fiscal year ended December 31, 2019 filed as Exhibit 99.1 to this Current Report.
Clariant MB has historically operated as part of Clariant and not as a separate entity. Therefore, the accompanying historical financial statements of Clariant MB have been prepared on a carve-out basis and are derived from the consolidated financial statements of Clariant. These historical financial statements, which were prepared on a combined basis in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), include all assets, liabilities, revenues, and expenses that Clariant’s management has determined are specifically or primarily related to the business activities of Clariant MB, as well as direct and indirect costs incurred within Clariant that are attributable to the operations of Clariant MB. Central support costs include corporate and shared service functions that are provided on a centralized basis by Clariant, including but not limited to employee benefits, finance, human resources, risk management, information technology, facilities, and legal. These expenses have been allocated to Clariant MB on the basis of direct usage when identifiable, or when specific identification is not practicable, a proportional allocation method based primarily on combined sales, headcount, or other measures depending on the nature of services received.
The accompanying unaudited pro forma condensed combined financial statements were prepared in accordance with Article 11 of Regulation S-X. The combined historical financial statements have been adjusted on a pro forma basis to reflect factually supportable items that are directly attributable to the completion of the Clariant MB Acquisition and, with respect to the combined statements of operations only, expected to have a continuing impact. The unaudited pro forma condensed combined balance sheet as of December 31, 2019 is presented as if the Clariant MB Acquisition had occurred, and the acquisition-related costs were paid, on December 31, 2019. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 is presented as if the completion of the Clariant MB Acquisition had occurred on January 1, 2019, the beginning of the period presented.
The unaudited pro forma condensed combined financial statements have been prepared using the acquisition method of accounting for business combinations under US GAAP. Under the acquisition method of accounting, the preliminary purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with any excess purchase price allocated to goodwill. The pro forma adjustments to the historical financial information are based on currently available information, and in many cases, are based on estimates and preliminary information. The Company believes such estimates are reasonable and supportable under the circumstances and reflect the best currently available assumptions. The assumptions underlying the pro forma adjustments are described in greater detail in the accompanying notes to the unaudited pro forma condensed combined financial statements. A final determination of the fair values of Clariant MB's assets and liabilities, which cannot be made prior to the completion of the Clariant MB Acquisition, will be based on the actual net assets of Clariant MB that exist as of the date of completion of the Clariant MB Acquisition. Consequently, the final acquisition accounting adjustments may be materially different from the unaudited pro forma adjustments.
The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or the consolidated financial position of PolyOne would have been if the Clariant MB Acquisition had occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. Furthermore, the unaudited pro forma condensed combined financial statements do not reflect the costs of any integration activities including planning costs or any benefits that may result from realization of future cost savings from operating efficiencies or revenue synergies expected to result from the Clariant MB Acquisition. The unaudited pro forma condensed combined financial statements do not reflect any dispositions or the effects of any other commitments that may be required by either PolyOne or Clariant in connection with the receipt of regulatory approvals required to complete the Clariant MB Acquisition.
2
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of December 31, 2019
(In millions)
| Historical PolyOne | Historical Clariant MB After Reclassifications (Note 4) | Pro Forma Adjustments (Note 5) | Eliminations (Note 5) | Pro Forma Combined | |||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Current assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 864.7 | $ | 57.1 | $ | (210.8) | a | $ | — | $ | 711.0 | ||||||||||||||||||
| Accounts receivable, net | 330.0 | 170.1 | — | (0.4) | b | 499.7 | |||||||||||||||||||||||
| Inventories, net | 260.9 | 86.4 | 11.0 | c | — | 358.3 | |||||||||||||||||||||||
| Other current assets | 57.7 | 111.4 | — | — | 169.1 | ||||||||||||||||||||||||
| Total current assets | 1,513.3 | 425.0 | (199.8) | (0.4) | 1,738.1 | ||||||||||||||||||||||||
| Property, net | 407.4 | 195.6 | 110.8 | d | — | 713.8 | |||||||||||||||||||||||
| Goodwill | 685.7 | 48.9 | 700.7 | e | — | 1,435.3 | |||||||||||||||||||||||
| Intangible assets, net | 469.3 | 5.1 | 458.1 | f | — | 932.5 | |||||||||||||||||||||||
| Operating lease assets | 63.8 | 24.3 | — | — | 88.1 | ||||||||||||||||||||||||
| Other non-current assets | 133.8 | 15.0 | — | — | 148.8 | ||||||||||||||||||||||||
| Total assets | $ | 3,273.3 | $ | 713.9 | $ | 1,069.8 | $ | (0.4) | $ | 5,056.6 | |||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||
| Current liabilities: | |||||||||||||||||||||||||||||
| Short-term and current portion of long-term debt | $ | 18.4 | $ | 122.7 | $ | — | $ | — | $ | 141.1 | |||||||||||||||||||
| Accounts payable | 287.7 | 111.0 | — | (0.4) | b | 398.3 | |||||||||||||||||||||||
| Current operating lease obligations | 21.0 | 4.9 | — | — | 25.9 | ||||||||||||||||||||||||
| Accrued expenses and other current liabilities | 375.4 | 86.0 | 85.3 | g | — | 546.7 | |||||||||||||||||||||||
| Total current liabilities | 702.5 | 324.6 | 85.3 | (0.4) | 1,112.0 | ||||||||||||||||||||||||
| Non-current liabilities: | |||||||||||||||||||||||||||||
| Long-term debt | 1,210.9 | 6.5 | 641.9 | h | — | 1,859.3 | |||||||||||||||||||||||
| Pension and other post-retirement benefits | 56.6 | 21.9 | 30.6 | i | — | 109.1 | |||||||||||||||||||||||
| Deferred income taxes | 63.5 | 10.1 | 161.7 | j | — | 235.3 | |||||||||||||||||||||||
| Non-current operating lease obligations | 42.8 | 18.3 | — | — | 61.1 | ||||||||||||||||||||||||
| Other non-current liabilities | 144.3 | 1.3 | — | — | 145.6 | ||||||||||||||||||||||||
| Total non-current liabilities | 1,518.1 | 58.1 | 834.2 | — | 2,410.4 | ||||||||||||||||||||||||
| Equity: | |||||||||||||||||||||||||||||
| PolyOne shareholders' equity | 1,051.9 | 318.1 | 150.3 | k | — | 1,520.3 | |||||||||||||||||||||||
| Noncontrolling interests | 0.8 | 13.1 | — | — | 13.9 | ||||||||||||||||||||||||
| Total Equity | 1,052.7 | 331.2 | 150.3 | — | 1,534.2 | ||||||||||||||||||||||||
| Total liabilities and equity | $ | 3,273.3 | $ | 713.9 | $ | 1,069.8 | $ | (0.4) | $ | 5,056.6 | |||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial statements.
3
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Year ended December 31, 2019
(In millions except for share and per share data)
| Historical PolyOne | Historical Clariant MB After Reclassifications (Note 4) | Pro Forma Adjustments (Note 6) | Eliminations (Note 6) | Pro Forma Combined | |||||||||||||||||||||||||
| Sales | $ | 2,862.7 | $ | 1,127.3 | $ | — | $ | (4.2) | a | $ | 3,985.8 | ||||||||||||||||||
| Cost of Sales | 2,205.5 | 820.2 | 14.5 | b | (4.2) | b | 3,036.0 | ||||||||||||||||||||||
| Gross Margin | 657.2 | 307.1 | (14.5) | — | 949.8 | ||||||||||||||||||||||||
| Selling and administrative expenses | 500.4 | 241.2 | 19.8 | c | — | 761.4 | |||||||||||||||||||||||
| Operating income | 156.8 | 65.9 | (34.3) | — | 188.4 | ||||||||||||||||||||||||
| Interest expense, net | (59.5) | (11.3) | (35.7) | d | — | (106.5) | |||||||||||||||||||||||
| Other income (expense), net | 12.1 | — | (5.6) | e | — | 6.5 | |||||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | 109.4 | 54.6 | (75.6) | — | 88.4 | ||||||||||||||||||||||||
| Income tax expense | (33.7) | (18.2) | 22.3 | f | — | (29.6) | |||||||||||||||||||||||
| Net income (loss) from continuing operations | 75.7 | 36.4 | (53.3) | — | 58.8 | ||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (0.2) | (0.6) | — | — | (0.8) | ||||||||||||||||||||||||
| Net income (loss) from continuing operations attributable to common shareholders | $ | 75.5 | $ | 35.8 | $ | (53.3) | $ | — | $ | 58.0 | |||||||||||||||||||
| Earnings per common share attributable to PolyOne common shareholders: | |||||||||||||||||||||||||||||
| Basic | $ | 0.98 | $ | 0.63 | |||||||||||||||||||||||||
| Diluted | $ | 0.97 | $ | 0.62 | |||||||||||||||||||||||||
| Weighted-average shares used to compute earnings per common share: | |||||||||||||||||||||||||||||
| Basic | 77.2 | 15.3 | g | 92.5 | |||||||||||||||||||||||||
| Plus dilutive impact of share-based compensation | 0.5 | — | 0.5 | ||||||||||||||||||||||||||
| Diluted | 77.7 | 15.3 | 93.0 | ||||||||||||||||||||||||||
| Anti-dilutive shares not included in diluted common shares outstanding | 0.6 | — | 0.6 | ||||||||||||||||||||||||||
See accompanying notes to unaudited pro forma condensed combined financial statements.
4
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1.BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements show the historical financial positions and results of operations of PolyOne and Clariant MB and have been prepared to illustrate the effect of the completion of the pending Clariant MB Acquisition, including pro forma assumptions and adjustments related to the Clariant MB Acquisition, and the related completed and anticipated financing transactions, as described in these accompanying notes to the unaudited pro forma condensed combined financial statements. The pro forma adjustments give effect to events that are (1) directly attributable to the Clariant MB Acquisition, (2) factually supportable, and (3) with respect to the statement of operations, expected to have a continuing impact on the results of operations of the combined business.
The Clariant MB Acquisition is being accounted for as a business combination using the acquisition method of accounting under the provisions of ASC 805, which requires assets acquired and liabilities assumed to be recorded at their acquisition date fair value. ASC Topic 820, Fair Value Measurements ("ASC 820"), defines the term "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." This is an exit price concept that assumes the highest and best use of an asset or liability by market participants, who are assumed to be buyers and sellers in the principal (or the most advantageous) market for the asset or liability. As a result, the Company may be required to value assets of Clariant MB at fair value measures that do not reflect the Company’s intended use of those assets.
The unaudited pro forma condensed combined balance sheet as of December 31, 2019 is presented as if the Clariant MB Acquisition had occurred, and the acquisition-related costs were paid, on December 31, 2019. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 is presented as if the Clariant MB Acquisition had occurred on January 1, 2019, the beginning of the period presented.
As of the date of this Current Report, PolyOne has not completed the detailed valuation studies necessary to determine the fair value of the Clariant MB assets to be acquired and the liabilities to be assumed and the related allocations of purchase price. Therefore, the allocation of the purchase price as reflected in the unaudited pro forma condensed combined financial information is based upon management's preliminary estimates of the fair market value of the assets acquired and liabilities assumed, as if the Clariant MB Acquisition had occurred on the aforementioned dates. The final allocation of the purchase price will be determined after completion of the Clariant MB Acquisition and determination of the estimated fair value of Clariant’s assets and liabilities, and associated tax adjustments. Any adjustments to the preliminary estimated fair value amounts could have a significant impact on the unaudited pro forma condensed combined financial information contained herein and our future results of operations and financial position.
The unaudited pro forma condensed combined financial information has been compiled in a manner consistent with the accounting policies adopted by PolyOne. Certain financial information of Clariant MB as presented in its historical combined financial statements has been preliminarily reclassified to conform to the historical presentation in PolyOne’s consolidated financial statements for the purposes of preparing the unaudited pro forma condensed combined financial information. Upon completion of the Clariant MB Acquisition, PolyOne will perform a full and detailed review of Clariant MB’s accounting policies. As a result of that review, PolyOne may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on the consolidated financial statements of the combined company.
These pro forma condensed combined financial statements are being provided for illustrative purposes only and do not claim to represent the Company’s actual financial position or results of operations had the Clariant MB Acquisition occurred on the dates specified nor do they project the Company’s results of operations or financial position for any future period or date. The actual results reported by the combined company in periods following the Clariant MB Acquisition may differ significantly from these unaudited pro forma condensed combined financial statements. The pro forma condensed combined financial statements do not account for the cost of any restructuring activities or synergies resulting from the Clariant MB Acquisition or other costs relating to the integration of the two companies.
5
2. PURCHASE PRICE ALLOCATION
The total estimated purchase consideration to be paid to Clariant pursuant to the Agreements assuming that the Clariant MB Acquisition occurred on December 31, 2019, inclusive of estimated closing adjustments, is approximately $1,406.4 million. The cash portion of the consideration is estimated to be $1,321.1 million. The contingent portion of the consideration is $85.3 million and represents loan receivables from Clariant to the Clariant Masterbatch Business as of December 31, 2019. These loan receivables are treated as a net debt adjustment within the Purchase Agreement, with cash payable to Clariant upon the receivable being collected.
The table below reflects the sources and uses of funds relating to the Clariant MB Acquisition as follows:
| Description | Amount | Notes | ||||||
| (in millions) | ||||||||
| Sources: | ||||||||
| Issuance of New Notes | $ | 650.0 | (i.) | |||||
| Net proceeds from issuance of common shares | 496.8 | (ii.) | ||||||
| Cash on hand | 296.1 | (iii.) | ||||||
| $ | 1,442.9 | |||||||
| Uses: | ||||||||
| Purchase Consideration | $ | 1,406.4 | ||||||
| Total estimated remaining transaction fees, costs, and expenses | 36.5 | (iv.) | ||||||
| $ | 1,442.9 | |||||||
(i.) Reflects the anticipated gross proceeds from the issuance of the New Notes. In the event that we do not issue the New Notes, we may instead incur borrowings under the Bridge Facility or issue other indebtedness in lieu thereof, which could result in a significant change to the amount of interest expense included within these unaudited pro forma condensed combined financial statements. The interest under the Bridge Facility would be paid quarterly in arrears at a rate per annum equal to the three-month LIBOR plus a margin of 4.25%. This margin is stepped up 50 basis points every three months to a maximum rate of 8.0%.
(ii.) Represents the net proceeds received from the Offering, after deducting the underwriters' discount but before deducting offering expenses.
(iii.) Reflects the portion of the cash on hand as of December 31, 2019 that will be used to fund the Clariant MB Acquisition, including the payment of related fees and expenses.
(iv.) Reflects the total estimated transaction fees, costs, and expenses not yet recognized as of December 31, 2019, including (1) issuance costs related to the Offering, excluding the underwriters’ discount, (2) the cash expected to be paid for issuance costs related to the New Notes offering, (3) non-refundable commitment fees paid related to Bridge Facility, and (4) other acquisition costs incurred by the Company for investment banking, attorney, consultant, independent accountants, and other external costs related to the Clariant MB Acquisition.
6
The table below represents a preliminary allocation of the estimated total purchase consideration to Clariant MB’s tangible and intangible assets acquired and liabilities assumed based on PolyOne management’s preliminary estimates of their respective fair values as of December 31, 2019. The final allocation will be determined at a later date and is dependent on a number of factors, including the final evaluation of the fair value of Clariant MB's tangible and identifiable intangible assets to be acquired and liabilities to be assumed. Such final adjustments may be material.
| (in millions) | |||||
| Cash and cash equivalents | $ | 57.1 | |||
| Accounts receivable | 170.1 | ||||
| Inventories | 97.4 | ||||
| Other current assets | 111.4 | ||||
| Property, plant, and equipment | 306.4 | ||||
| Goodwill | 749.6 | ||||
| Intangible assets | 463.2 | ||||
| Operating lease assets | 24.3 | ||||
| Other non-current assets | 15.0 | ||||
| Short-term and current portion of long-term debt | (122.7) | ||||
| Accounts payable | (111.0) | ||||
| Accrued expenses and other current liabilities | (86.0) | ||||
| Operating lease obligations | (23.2) | ||||
| Other non-current liabilities | (232.1) | ||||
| Non-controlling interests | (13.1) | ||||
| Total Estimated Purchase Consideration | $ | 1,406.4 | |||
Any changes to the initial estimates of the fair value of assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.
3. CLARIANT MB HISTORICAL COMBINED FINANCIAL STATEMENTS
Clariant MB historical balances were derived from Clariant MB’s historical combined financial statements described in the introduction and are presented under US GAAP and converted from Swiss francs to U.S. dollars based on historical exchange rates. The historical combined income statements of Clariant MB were translated using the average exchange rate for the year ended December 31, 2019 (1.00619 USD/CHF). The historical combined balance sheet of Clariant MB as of December 31, 2019 was translated using the spot rate on December 31, 2019 (1.02925 USD/CHF).
7
4. RECLASSIFICATION ADJUSTMENTS
Acquisition accounting rules require evaluation of certain assumptions, estimates or determination of financial statement classifications which are completed during the measurement period as defined in current accounting standards. Certain balances were reclassified from the Clariant MB historical financial statements so that their presentation would be consistent with that of PolyOne. These adjustments and reclassifications are based on management's preliminary analysis. Upon consummation of the Clariant MB Acquisition, additional differences or reclassifications may be identified that, when conformed, could have a material impact on these unaudited pro forma condensed combined financial statements.
The amounts included in the table below may differ slightly from the historical financial statements of Clariant MB due to rounding.
Clariant MB
Combined Statements of Financial Position
As of December 31, 2019
(In Millions)
| Financial Statement Line | Historical Clariant MB Before Reclassifications (CHF) | Historical Clariant MB Before Reclassifications (USD) | Reclassifications (USD) | Notes | Historical Clariant MB After Reclassifications (USD) | |||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | CHF | 55.5 | $ | 57.1 | $ | — | $ | 57.1 | ||||||||||||||||||||||||
| Accounts receivable, net | 165.3 | 170.1 | — | 170.1 | ||||||||||||||||||||||||||||
| Inventories | 83.9 | 86.4 | (86.4) | i. | — | |||||||||||||||||||||||||||
| Inventories, net | — | — | 86.4 | i. | 86.4 | |||||||||||||||||||||||||||
| Loans to related parties | 82.9 | 85.3 | (85.3) | ii. | — | |||||||||||||||||||||||||||
| Other current assets | 25.4 | 26.1 | 85.3 | ii. | 111.4 | |||||||||||||||||||||||||||
| Total current assets | 413.0 | 425.0 | — | 425.0 | ||||||||||||||||||||||||||||
| Property, plant and equipment, net | 190.0 | 195.6 | (195.6) | iii. | — | |||||||||||||||||||||||||||
| Property, net | — | — | 195.6 | iii. | 195.6 | |||||||||||||||||||||||||||
| Right-of-use assets | 23.6 | 24.3 | (24.3) | iv. | — | |||||||||||||||||||||||||||
| Goodwill | 47.5 | 48.9 | — | 48.9 | ||||||||||||||||||||||||||||
| Intangible assets, net | 5.0 | 5.1 | — | 5.1 | ||||||||||||||||||||||||||||
| Operating lease assets, net | — | — | 24.3 | iv. | 24.3 | |||||||||||||||||||||||||||
| Deferred tax assets | 11.5 | 11.8 | (11.8) | v. | — | |||||||||||||||||||||||||||
| Investments in affiliates | 3.1 | 3.2 | (3.2) | vi. | — | |||||||||||||||||||||||||||
| Other non-current assets | — | — | 15.0 | v., vi. | 15.0 | |||||||||||||||||||||||||||
| Total non-current assets | 280.7 | 288.9 | — | 288.9 | ||||||||||||||||||||||||||||
| Total assets | CHF | 693.7 | $ | 713.9 | $ | — | $ | 713.9 | ||||||||||||||||||||||||
(i.) To reclassify inventories to inventories, net
(ii.) To reclassify loans to related parties to other current assets
(iii.) To reclassify property, plant, and equipment, net to property, net
(iv.) To reclassify right-of-use assets to operating lease assets
(v.) To reclassify deferred tax assets to other non-current assets
(vi.) To reclassify investments in affiliates to other non-current assets
8
| Financial Statement Line | Historical Clariant MB Before Reclassifications (CHF) | Historical Clariant MB Before Reclassifications (USD) | Reclassifications (USD) | Notes | Historical Clariant MB After Reclassifications (USD) | |||||||||||||||||||||||||||
| Liabilities and Equity | ||||||||||||||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||||||||||
| Short-term debt | CHF | 21.9 | $ | 22.5 | $ | (22.5) | vii. | $ | — | |||||||||||||||||||||||
| Short-term and current portion of long-term debt | — | — | 122.7 | vii., ix. | 122.7 | |||||||||||||||||||||||||||
| Accounts payable | 107.8 | 111.0 | — | 111.0 | ||||||||||||||||||||||||||||
| Accrued employee expenses | 41.9 | 43.1 | (43.1) | viii. | — | |||||||||||||||||||||||||||
| Current operating lease obligations | — | — | 4.9 | x. | 4.9 | |||||||||||||||||||||||||||
| Loans from related parties | 97.4 | 100.2 | (100.2) | ix. | — | |||||||||||||||||||||||||||
| Accrued and other liabilities | 46.4 | 47.8 | (47.8) | x. | — | |||||||||||||||||||||||||||
| Accrued expenses and other current liabilities | — | — | 86.0 | viii, x. | 86.0 | |||||||||||||||||||||||||||
| Total current liabilities | 315.4 | 324.6 | — | 324.6 | ||||||||||||||||||||||||||||
| Non-current liabilities: | ||||||||||||||||||||||||||||||||
| Long-term debt | 6.3 | 6.5 | — | 6.5 | ||||||||||||||||||||||||||||
| Retirement benefit obligations | 21.3 | 21.9 | (21.9) | xi. | — | |||||||||||||||||||||||||||
| Pension and other post-retirement benefits | — | — | 21.9 | xi. | 21.9 | |||||||||||||||||||||||||||
| Lease liabilities | 17.8 | 18.3 | (18.3) | xii. | — | |||||||||||||||||||||||||||
| Non-current operating lease obligations | — | — | 18.3 | xii. | 18.3 | |||||||||||||||||||||||||||
| Deferred tax liabilities | 9.8 | 10.1 | (10.1) | xiii. | — | |||||||||||||||||||||||||||
| Deferred income taxes | — | — | 10.1 | xiii. | 10.1 | |||||||||||||||||||||||||||
| Other non-current liabilities | 1.3 | 1.3 | — | 1.3 | ||||||||||||||||||||||||||||
| Total non-current liabilities | 56.5 | 58.1 | — | 58.1 | ||||||||||||||||||||||||||||
| Total liabilities | 371.9 | 382.7 | — | 382.7 | ||||||||||||||||||||||||||||
| Equity: | ||||||||||||||||||||||||||||||||
| PolyOne shareholders' equity | — | — | 318.1 | xiv. | 318.1 | |||||||||||||||||||||||||||
| Net investment from the Parent | 368.3 | 379.0 | (379.0) | xiv. | — | |||||||||||||||||||||||||||
| Accumulated other comprehensive loss | (59.2) | (60.9) | 60.9 | xiv. | — | |||||||||||||||||||||||||||
| Total equity attributable to the Masterbatches Business | 309.1 | 318.1 | — | 318.0 | ||||||||||||||||||||||||||||
| Non-controlling interests | 12.7 | 13.1 | — | 13.1 | ||||||||||||||||||||||||||||
| Total Equity | 321.8 | 331.2 | — | 331.2 | ||||||||||||||||||||||||||||
| Total liabilities and equity | CHF | 693.7 | $ | 713.9 | $ | — | $ | 713.9 | ||||||||||||||||||||||||
(vii.) To reclassify short-term debt to short-term and current portion of long-term debt
(viii.) To reclassify accrued employee expenses to accrued expenses and other current liabilities
(ix.) To reclassify loans from related parties to short-term and current portion of long-term debt
(x.) To reclassify accrued and other liabilities to accrued expenses and other current liabilities and current operating lease obligations
(xi.) To reclassify retirement benefit obligations to pension and other post-retirement benefits
(xii.) To reclassify lease liabilities to non-current operating lease obligations
(xiii.) To reclassify deferred tax liabilities to deferred income taxes
(xiv.) To reclassify net investment from parent and accumulated other comprehensive loss to shareholders’ equity
9
Clariant MB
Combined Statements of Income
Year Ended December 31, 2019
(In millions)
| Financial Statement Line | Historical Clariant MB Before Reclassifications (CHF) | Historical Clariant MB Before Reclassifications (USD) | Reclassifications (USD) | Notes | Historical Clariant MB After Reclassifications (USD) | |||||||||||||||||||||||||||
| Sales | CHF | 1,120.4 | $ | 1,127.3 | $ | — | $ | 1,127.3 | ||||||||||||||||||||||||
| Cost of goods sold | 814.5 | 819.5 | 0.7 | i. | 820.2 | |||||||||||||||||||||||||||
| Gross profit | 305.9 | 307.8 | (0.7) | 307.1 | ||||||||||||||||||||||||||||
| Selling, general and administrative costs | 228.0 | 229.4 | (229.4) | ii. | — | |||||||||||||||||||||||||||
| Selling and administrative expenses | — | — | 241.2 | i., ii., iii. | 241.2 | |||||||||||||||||||||||||||
| Research and development costs | 10.8 | 10.9 | (10.9) | iii. | — | |||||||||||||||||||||||||||
| Other expense | 1.6 | 1.6 | (1.6) | i. | — | |||||||||||||||||||||||||||
| Operating income | 65.5 | 65.9 | — | 65.9 | ||||||||||||||||||||||||||||
| Interest expense | (13.3) | (13.4) | 13.4 | iv. | — | |||||||||||||||||||||||||||
| Interest income | 2.1 | 2.1 | (2.1) | v. | — | |||||||||||||||||||||||||||
| Interest expense, net | — | — | (11.3) | iv., v. | (11.3) | |||||||||||||||||||||||||||
| Income from continuing operations before income taxes | 54.3 | 54.6 | — | 54.6 | ||||||||||||||||||||||||||||
| Income tax expense | (18.1) | (18.2) | — | (18.2) | ||||||||||||||||||||||||||||
| Net Income | 36.2 | 36.4 | — | 36.4 | ||||||||||||||||||||||||||||
| Less: Net income attributable to non-controlling interests | (0.6) | (0.6) | — | (0.6) | ||||||||||||||||||||||||||||
| Net income attributable to the Masterbatches Business | CHF | 35.6 | $ | 35.8 | $ | — | $ | 35.8 | ||||||||||||||||||||||||
(i.) To reclassify certain restructuring and other charges from other expense to cost of goods sold and selling and administrative expenses in accordance with PolyOne’s accounting policies
(ii.) To reclassify selling, general, and administrative costs to selling and administrative expenses
(iii.) To reclassify research and development costs to selling and administrative expenses
(iv.) To reclassify interest expense to interest expense, net
(v.) To reclassify interest income to interest expense, net
5. PRO FORMA AND ELIMINATION ADJUSTMENTS TO CONDENSED COMBINED BALANCE SHEET
a.Cash and cash equivalents - Represents adjustments comprised of the following:
| (in millions) | As of December 31, 2019 | ||||
| Estimated gross proceeds from issuance of New Notes | $ | 650.0 | |||
| Net proceeds from issuance of common shares (see Note 5k) | 496.8 | ||||
| Total estimated remaining transaction fees, costs, and expenses | (36.5) | ||||
| Estimated purchase consideration paid at closing | (1,321.1) | ||||
| Pro forma adjustment to cash and cash equivalents | $ | (210.8) | |||
b.Accounts receivable, net - Represents elimination of balances related to sales and purchases between PolyOne and Clariant MB.
c.Inventories, net - Represents an $11.0 million adjustment to increase the carrying value of Clariant MB’s inventory to its estimated acquisition-date fair value. As a result of this adjustment, the estimated inventory step-up will increase cost of sales as the acquired inventory is sold within the first turn of inventory after the Clariant MB Acquisition. As there is no continuing impact, the effect on cost of sales from the inventory step-up is not included in the unaudited pro forma condensed combined statement of operations.
10
d.Property, net - To eliminate Clariant MB’s previously existing property, plant, and equipment assets and to record the fair value of the acquired property, plant, and equipment assets. Adjustments to property, net consist of the following:
| (in millions) | As of December 31, 2019 | ||||
| Fair value of acquired property (see Note 2) | $ | 306.4 | |||
| Elimination of Clariant MB pre-acquisition property | (195.6) | ||||
| Pro forma adjustment to property, net | $ | 110.8 | |||
e.Goodwill - To eliminate Clariant MB’s previously existing goodwill and to record goodwill resulting from the Clariant MB Acquisition. Adjustments to goodwill consist of the following:
| (in millions) | As of December 31, 2019 | ||||
| Goodwill (as determined in Note 2) | $ | 749.6 | |||
| Elimination of Clariant MB pre-acquisition goodwill | (48.9) | ||||
| Pro forma adjustment to goodwill | $ | 700.7 | |||
f.Intangible assets, net - To eliminate Clariant MB’s previously existing intangible assets and to record the fair value of Clariant MB’s identifiable intangible assets, including customer relationships and brands. Adjustments to intangible assets consist of the following:
| (in millions) | As of December 31, 2019 | ||||
| Fair value of acquired intangible assets (see Note 2) | $ | 463.2 | |||
| Elimination of Clariant MB pre-acquisition intangible assets | (5.1) | ||||
| Pro forma adjustment to intangible assets, net | $ | 458.1 | |||
g.Accrued expenses and other current liabilities - To reflect the contingent portion of the purchase price. See Note 2.
h.Long-term debt - To pay a portion of the purchase price of the Clariant MB Acquisition, PolyOne intends to issue approximately $650.0 million aggregate principal amount of New Notes, which, for purposes of the unaudited pro forma condensed combined financial information, PolyOne has assumed will be issued at a 6.50% fixed interest rate. As a result of the anticipated issuance of the New Notes, the unaudited pro forma condensed combined balance sheet reflects an increase in long-term debt of $641.9 million, which is net of $8.1 million of estimated debt issuance costs.
i.Pension and other post-retirement benefits - Represents a $30.6 million increase to reflect the remeasurement of Clariant MB’s retirement plans as of the assumed acquisition date. The adjustment primarily relates to the fact that Clariant MB had appropriately measured certain of its defined benefit plans that were shared with Clariant as multi-employer plans in its historical combined financial statements, which were prepared on a carve-out basis. However, upon consummation of the Clariant MB Acquisition, PolyOne will provide post-retirement benefits to the relevant employees through single-employer plans.
j.Deferred income taxes - Adjustments reflect accounting for the deferred income tax effects of the purchase accounting adjustments at the estimated blended statutory tax rate.
k.PolyOne Shareholders’ Equity - Adjustments to shareholders’ equity consist of the following:
11
| (in millions) | As of December 31, 2019 | ||||
| Net proceeds from issuance of common shares (i.) | $ | 496.8 | |||
| Non-refundable Bridge Facility commitment fees recognized within retained earnings (ii.) | (10.3) | ||||
| Transaction costs recognized within retained earnings (iii.) | (18.1) | ||||
| Elimination of Clariant MB’s historical equity | (318.1) | ||||
| Pro forma adjustment to shareholders’ equity | $ | 150.3 | |||
i.Represents the net proceeds received from the Offering, after deducting the underwriters' discount but before deducting offering expenses.
ii.Represents non-refundable commitment fees paid to secure the Bridge Facility.
iii.Represents transaction costs not yet recognized as of December 31, 2019 but expected to be incurred by the Company related to the Clariant MB Acquisition, including expenses related to the Offering, such as investment banking, attorney, consultant, independent accountant, and other external costs.
6. PRO FORMA AND ELIMINATION ADJUSTMENTS TO CONDENSED COMBINED STATEMENT OF OPERATIONS
a.Sales - Represents elimination of revenues earned by PolyOne on sales to Clariant MB, and vice versa, that would be considered intercompany transactions and will be eliminated in the consolidated financial statements of the combined company following completion of the Clariant MB Acquisition. Revenue eliminated for the year ended December 31, 2019 was $4.2 million.
b.Cost of sales - Represents adjustments comprised of the following:
| (in millions) | Year Ended December 31, 2019 | ||||
| Depreciation of acquired property, net (i) | $ | 14.5 | |||
| Elimination of cost of sales (ii) | 4.2 | ||||
i.Represents net impact of removal of historical depreciation expense and increased depreciation expense for the fair value of property, plant, and equipment assets recognized as part of acquisition accounting. Property, plant, and equipment assets are depreciated over their estimated remaining useful lives, determined in accordance with PolyOne's policy.
ii.Represents elimination of cost of goods sold relating to transactions between PolyOne and Clariant MB that would be considered intercompany transactions and will be eliminated in the consolidated financial statements of the combined company following the Clariant MB Acquisition
c.Selling and administrative expenses - Represents adjustments comprised of the following:
| (in millions) | Year Ended December 31, 2019 | ||||
| Amortization of intangible assets, net (i) | $ | 24.4 | |||
| Elimination of acquisition-related expenses (ii) | (4.6) | ||||
| Pro forma adjustment to selling and administrative expenses | $ | 19.8 | |||
i.Represents net impact of removal of historical amortization expense and increased amortization expense for the fair value of definite lived intangible assets recognized as part of acquisition accounting. Acquired intangible assets are assumed to be amortized on a straight-line basis over expected useful lives of 14 - 20 years.
12
ii.Represents the amount recognized in PolyOne’s statement of operations for acquisition-related expenses. As these expenses are not expected to have a continuing impact on the results of operations of the combined business, we have eliminated them from the unaudited pro forma condensed combined statement of operations.
d.Interest expense, net - Represents adjustments comprised of the following:
| (in millions) | Year Ended December 31, 2019 | ||||
| Estimated interest expense on New Notes (i) | $ | 42.3 | |||
| Estimated amortization of deferred financing costs (ii) | 1.0 | ||||
| Elimination of interest on ABL (iii) | (7.6) | ||||
| Pro forma adjustment to interest expense, net | $ | 35.7 | |||
i.Represents interest expense on approximately $650.0 million aggregate principal amount of New Notes that PolyOne intends to issue to finance a portion of the purchase price of the Clariant MB Acquisition. For the purposes of the unaudited pro forma condensed combined financial information, PolyOne has assumed that the New Notes will be issued at a 6.50% fixed interest rate.
ii.Represents the estimated amortization of deferred financing costs expected to be incurred through the issuance of the New Notes. See Note 5h.
iii.Represents the elimination of historical interest expense related to the senior secured revolving credit facility because the outstanding principal amounts of such facility were repaid with a portion of the net proceeds from the sale of PP&S.
If the actual annual interest rate of the New Notes were to vary by 1/8th percent, the pro forma adjustment for interest expense would change by $0.8 million for the year ended December 31, 2019.
Further, as disclosed in Note 4, the total gross interest expense included within Clariant MB’s combined statements of income for year ended December 31, 2019 was $13.4 million. We believe that such amounts may have been less in those periods had the Clariant MB Acquisition occurred on January 1, 2019 given PolyOne’s capital structure. However, no pro forma adjustment has been made to the historical interest expense of Clariant MB since the related debt may be assumed upon consummation of the Clariant MB Acquisition.
e.Other (expense) income, net - Represents the additional net periodic pension cost related to Clariant MB’s retirement plans that would have been presented in Other (expense) income, net under PolyOne’s accounting policies. Specifically, as a result of adopting Accounting Standards Update (“ASU”) 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”), PolyOne presents all components of net periodic benefit cost, except for service costs, in Other (expense) income, net. In addition, this pro forma adjustment reflects the difference in net periodic benefit cost due to the fact that PolyOne immediately recognizes actuarial gains and losses in our operating results in the year in which the gains or losses occur whereas Clariant MB amortized these gains and losses using the corridor approach in its historical financial statements.
f.Income tax expense - Represents the income tax effect of the Clariant MB Acquisition pro forma and elimination adjustments using an estimated blended statutory rate of 29% for the year ended December 31, 2019.
13
g.Weighted-average shares used to compute earnings per common share - Represents common shares issued in conjunction with the Offering. The adjustment is comprised of the following:
| (in millions) | Year Ended December 31, 2019 | ||||
| Shares issued for public offering | 13.3 | ||||
| Additional shares issued for underwriter’s option | 2.0 | ||||
| Pro forma adjustment to weighted-average shares used to compute earnings per common share | 15.3 | ||||
14