Styrolution Q3 net income plunges 86.9% year-over-year to €6.7M as sales slip 1.1% to €1.61B due to reduced sales volumes
December 5, 2011
– The following unaudited pro forma condensed combined interim financial information for the first nine months ended September 30, 2011 of Styrolution Group GmbH (‘Styrolution” or the “Company”) has been derived from the unaudited financial information of the BASF Styrenics Business, the INEOS Styrenics Business and the INEOS ABS business and has been adjusted to reflect the Joint Venture Transaction and related financings, and the payment of the Contribution Payment to BASF and/or its affiliates, and are prepared as described in the notes to this interim report of Styrolution. As used herein, the “Joint Venture Transaction” means the consummation of the joint venture among the BASF Styrenics Business, the INEOS Styrenics Business and the INEOS ABS Business as described in the Styrolution offering memorandum dated May 12, 2011.
Unaudited Pro Forma Condensed Combined Income Statement
For the Third Quarter and Year to Date September 30, 2011 and 2010
The unaudited pro forma condensed combined balance sheet as set forth below as of September 30, 2011 has been derived from the unaudited aggregate of the financial information of the BASF Styrenics Business, the INEOS Styrenics Business and the INEOS ABS Business as at September 30, 2011, assuming that the Joint Venture Transaction occurred at that date. It also assumes the issuance of Notes, the repayment of certain indebtedness and the payment of the Contribution Payment to BASF and/or its affiliates occurred at that date. Comparable period financial information as of December 31, 2010 has been derived from the Styrolution offering memorandum dated May 12, 2011.
The unaudited pro forma condensed combined interim income statements for the nine months ended September 30, 2011 and comparable prior-year period have been derived from the unaudited combined income statements of the BASF Styrenics Business, the INEOS Styrenics Business and the INEOS ABS Business for the nine months ended September 30, 2011 and September 30, 2010, assuming that the Joint Venture Transaction, the repayment of certain indebtedness, and the issuance of the Notes occurred on January 1, 2010. This interim report assumes that Styrolution commenced its operations on January 1, 2010, though the Joint Venture Transaction will only be consummated at a later date.
The unaudited pro forma adjustments are based upon currently available information and assumptions that we believe to be reasonable. The pro forma adjustments and related assumptions are described in the accompanying notes presented on the following pages in “Notes to the interim report”.
The unaudited pro forma condensed combined financial information has not been prepared in accordance with the requirements of Regulation S-X of the Securities Act or the Prospectus Directive. The unaudited pro forma condensed combined financial information has been prepared in accordance with German standard IDW RH HFA 1.004, “Preparation of pro forma financial information”.
The interim report is for informational purposes only and is not intended to represent or to be indicative of the consolidated results of operations or financial position that Styrolution would have reported had the Joint Venture Transaction been completed as of the dates set forth in this interim report and should not be taken as indicative of Styrolution’s future consolidated results of operations or financial position. The actual results may differ significantly from those reflected in the interim report for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the unaudited pro forma condensed combined interim financial information and actual amounts.
The interim report does not include adjustments for (i) any revenue or cost savings synergies that may be achievable subsequent to the completion of the Joint Venture Transaction or (ii) the impact of non-recurring items directly related to the Joint Venture Transaction.
NOTES TO THE INTERIM REPORT – YEAR TO DATE (JANUARY – SEPTEMBER 2011)
Styrolution is jointly controlled by BASF and INEOS Industries (through their interests in Styrolution Holding GmbH) and therefore Styrolution’s formation meets the scope exemption outlined in IFRS 3, “Business Combinations” and no fair value purchase price allocation is required. Accordingly the unaudited pro forma condensed combined balance sheet reflects the combined financial information of the BASF Styrenics Business, the INEOS Styrenics Business and the INEOS ABS Business at their carrying value as of September 30, 2011.
Note A – Elimination of intra-Joint Venture Transactions
Adjustments have been made to eliminate intercompany balances and activity between the BASF Styrenics Business, the INEOS Styrenics Business and the INEOS ABS Business for the nine months ended September 30, 2011 and 2010.
Note B – Financing
B1 – Elimination of debt and cash of transferred businesses
The Joint Venture Transaction is planned so that the businesses are transferred cash and debt free (except as otherwise agreed among the joint venture parties and subject to compliance with the Indenture governing the Notes) to the Joint Venture at closing. To reflect this agreement, an adjustment has been recorded to eliminate financial liabilities of € 242.7 million and cash of € 192.4 million (partly netting balances in other receivable) with an offsetting increase in owners’ equity of € 50.7 million. Accordingly, the associated interest expense of € 3.4 million was eliminated against equity.
B2 – New financing and payment to BASF SE
Adjustments have been recorded for the new financing of € 720 million expected to be incurred by the joint venture and to be used for the payment of € 600 million to BASF SE and/or its affiliates shown as a reduction to owners’ equity of € 600 million, additional cash of € 100.0 million, incurred financing costs of € 5.3 million and deferred financing costs of € 8.1 million included in the line item “Other receivables and miscellaneous assets”. The amounts included as cash and cash equivalents in the condensed combined pro-forma financial statements are expected to be required for the funding of operations including working capital and other expenses.
The financing of Styrolution is assumed through the issuance of Senior Secured Notes of € 480 million, a Trade Receivables Securitization Facility with an assumed average utilization of € 240 million (limit € 500 million) and ancillary lines for instruments such as guarantees and letters of credit (no balance sheet impact) with an assumed average utilization of € 20 million for fiscal year 2010. The terms of such financing are set out in further detail in the offering memorandum dated May 12, 2011.
The Styrolution business prepared this discussion and analysis of its results of operations by comparing its combined statements of income and other financial information as of the quarters ended September 30, 2011 and 2010.
Results of operations
Sales. Sales decreased by € (17.3) million, or (1.1)%, to € 1,611.7 million. The decrease in sales in Q3-2011 compared to Q3-2010 is mainly due to reduced sales volumes. The decrease in sales volumes was in all business areas. After a strong start in the first quarter 2011 with high sales driven by volume and prices, global demand in the second quarter slowed down due to high inventory levels at customer’s side for most products and regions. In the third quarter sales volumes were impacted by uncertain economic conditions globally, new ABS capacity on-stream in Asia and PS capacity in EMEA. The volume effect is partly offset by higher average sales prices. Feedstock prices are higher in 2011 compared to 2010 and these resulted in higher average sales prices.
Cost of Sales. Cost of sales increased by € (36.7) million, or (2.6)%, to € (1,471.1) million. This increase is largely attributable to increased feedstock pricing in Q3-2011 compared to Q3-2010.
Gross profit. Gross profit decreased by € (54.0) million, or (27.7)%, to € 140.6 million compared to € 194.6 million in the previous year. The decline in gross profit is primarily attributable to lower sales volumes in Q3-2011 compared to Q3-2010. As a result of reduced customer demand, underlying margins in the polymer businesses in most regions and products are weaker in Q3-2011. Margin had a strong negative impact from new capacity that came on stream in particularly Asia but also in EMEA.
Selling expenses. Selling expenses decreased by € 3.9 million or 4.4% to € (85.1) million compared to € (89.0) million in the previous year. The decrease mainly reflects lower freight and selling costs. Selling costs decreased in Asia and Europe due to a reorganisation of BASF Styrolution styrene selling department and lower service charges from the regional European BASF organisation.
General and administrative expenses. General and administrative expenses increased by € (8.7) million, or (51.0)%, to € (25.7) million compared to € (17.0) million in the previous year. The increase is mainly due to increased costs for the closure and go-live of Styrolution that are mostly on-off advisory and audit costs. There is also an increase in service level agreement costs and management charges.
Research and development expenses. Research and development expenses remained at a comparable level of € (3.0) million compared to € (2.5) million in the previous year.
Other operating income/expenses. Other operating income/expenses improved by € 11.0 million to € 1.6 million compared to € (9.4) million in the previous year. The increase is mainly because of one time positive impacts from revaluation of an onerous contract
EBITDA before exceptionals. EBITDA before exceptionals decreased by € (53.0) million from € 99.9 million to € 46.9 million. This decrease was primarily attributable to decreased gross profit. Special or exceptionals items decreased by € 3.1 million to € (1.0) million compared to € (4.1) million in the same period last year. Exceptionals mainly represent various fees and expenses related to the Styrolution project.
Tarragona remedy. The financial result of the INEOS ABS Business in Tarragona, Spain is included in the balance sheet and income statement. On June 1, 2011, the EU Commission gave its approval for the formation of the Styrolution joint venture subject to the requirement that the parties sell the ABS production site in Tarragona. Management estimates that the plant does not exceed 3% of either pro forma EBITDA before exceptionals or pro forma total assets of Styrolution for the nine months ended September 30, 2011.
Liquidity and capital resources
Historical Liquidity and Capital Resources
Cash provided by (used in) operating activities
The increase of € 292.5 million in cash provided by operating activities generated by Styrolution in the first nine months of 2011 compared to the same period of 2010 comprised of a reduction of net income before tax of € (4.2) million, an increase in depreciation and amortisation of € 11.0 million, an increase in pension provision and defined benefit assets and other non-cash items of € 29.5 million and a reduction in net working capital of € 256.2 million.
The change in net working capital during the first nine months of 2011 was impacted by the extended payment terms in the legacy BASF Styrenics business from the BASF Group. Both periods were in an environment of increased feedstock prices, which tends to have an increasing effect on the cash flow requirements of the Company. The effect was more significant in 2010 than it was in 2011.
Styrolution has structured its financing to absorb the movements in net changes in cash and cash provided by or used in operating activities. For the purpose of these combined financial statements, the asset securitization is assumed to be at a consistent absolute level of € 240.0 million for all periods involved, while in an environment of increased trade receivables this facility could have been drawn more at the end of both September 2011 and September 2010. For the purpose of this combined financial information, the cash balance is also assumed to be at a constant absolute level of € 100.0 million.
Cash used in investing activities
The cash used in investing activities increased by € (7.8) million to € (56.1) million. Capital expenditure increased to € (56.5) million. Capital expenditures of Styrolution are attributable to the cost of additions to intangibles, property, plant and equipment and financial assets. The increase is mainly due to regular maintenance capital expenditures. There were no significant overhauls performed in the third quarter of 2011.
Cash provided by (used in) financing activities
The cash flow provided from financing activities decreased by € (245.4) million. This change is caused by the change in net investment. The change in net investments consists of three elements.
The first element was the legal carve out in the BASF Styrenics Business. Until December 31, 2010 separate legal entities did not exist for the BASF Styrenics Business. Therefore cash and cash equivalents as well as any financing related balances were managed on a centralized basis and not allocated to the Styrenics business. They were part of the parent net investment. Changes in parent net investment represented cash surplus and financing needs of the Styrolution business with other legal entities of BASF. They were determined by the change in net assets for the respective period not reflected in the income statement (retained earnings).
The second element is the carve-out of the Expandable Polystyrene business of the INEOS Styrenics Business. Because this business has only been legally carved out at the end of June 2011, cash and cash equivalents and financing-related balances that were shared were partly carved out and charged to net investment.
The third element is the pro forma adjustments. Cash and financing balances that were adjusted were accounted for as changes in net investments.
Critical Accounting Estimates
Styrolution’s reported financial condition and results of operations are sensitive to accounting policies, assumptions and estimates that underlie the preparation of its financial information. The accounting policies of the BASF Styrenics Business, the INEOS Styrenics Business and the INEOS ABS Business are set out in the offering memorandum dated May 12, 2011.
All amounts (Millions €)
Cost of sales
General and administrative expenses
Research and development expenses
Other operating income (expenses)
Income from operations
Other finance income (expenses)
Income before taxes and non-controlling interests
Income before non-controlling interests
Other financial information
EBITDA before exceptionals (1)
Depreciation and amortization
Unaudited Pro Forma Condensed Combined Income Statement
For the Third Quarter and Year to Date September 30, 2011 and 2010
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