# Trinseo PLC (TSEOQ) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Trinseo PLC's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1519061/000155837023002165/tse-20221231x10k.htm Accession: 0001558370-23-002165 Filing date: 2023-02-27 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/TSEOQ/ All MD&A years: /company/TSEOQ/mda/ Previous year: /company/TSEOQ/mda/fy2021/ (FY 2021) Next year: /company/TSEOQ/mda/fy2023/ (FY 2023) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion summarizes the significant factors affecting the operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and the accompanying notes thereto, included elsewhere within this Annual Report. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and all other non-historical statements in this discussion are forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management and are made as of the date of this Annual Report. See “Cautionary Note Regarding Forward-Looking Statements.” Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere within this Annual Report, particularly in Item 1A—“Risk Factors.” Definitions of capitalized terms not defined herein appear in the notes to our consolidated financial statements. 2022 Highlights For the year ended December 31, 2022, we had net loss from continuing operations of $428.0 million, inclusive of a non-cash goodwill impairment charge of $297.1 million as discussed below, and Adjusted EBITDA of $311.7 million. Our year-to-date results were significantly impacted by the challenging operating conditions experienced throughout the 39 Table of Contents year, including the uncertain geopolitical situation, historically high natural gas and energy prices, continued COVID-19 lockdowns in China, and a rapid rise in interest rates in an inflationary environment. These factors constrained margins and led to weaker demand and significant customer destocking in the second half of the year, which was exacerbated by steep fluctuations in many raw material prices throughout the year, as well as extended year-end shutdowns at many customer sites. The challenging operating conditions noted above had a significant impact on the PMMA business and Aristech Surfaces, which led to lower operating results including slower growth projections as well as a prolonged drop in market capitalization. As a result, we recognized a non-cash impairment charge of $297.1 million related to these reporting unit’s goodwill balances. These impairment charges do not affect the Company’s cash position, and the Company remains encouraged about the businesses’ expected synergies and strategic value as we continue to evolve as a specialty material and sustainable solutions provider. Refer to the discussion below for further information and refer to “Non-GAAP Performance Measures” for discussion of our use of non-GAAP measures in evaluating our performance and a reconciliation of these measures. Amid these uncertain market conditions, the Company implemented liquidity-focused actions, including reduced capital spending, operating expenses and working capital. Additionally, the Company returned significant cash to our shareholders, purchasing approximately 3.1 million ordinary shares for total value of $150.0 million and declaring quarterly dividends for an aggregate value of $1.28 per ordinary share, or $46.4 million. The Company continues to maintain a healthy balance sheet and a strong liquidity position that affords us with financial flexibility. Further, there are no maintenance covenants on our debt agreements, and no significant debt maturing until September 2024. Refer to “Capital Resources and Liquidity” for further information. Highlights for the year are described below. Asset Restructuring Plan In response to the challenging macroeconomic conditions noted above, during the fourth quarter of 2022, Trinseo approved an asset restructuring plan to improve its economic position and operating flexibility, and reduce its exposure to cyclical commodity markets. These actions consist of the following: [[GREPCENT_TABLE]] [["","\u25cf","Closure of manufacturing operations at the styrene production facility in Boehlen, Germany. The closure is the result of an uncompetitive position in the global styrene market due to the site\u2019s subscale size, industry capacity additions and elevated natural gas prices in Europe."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","Closure of one polycarbonate production line in Stade, Germany due to an uncompetitive position in the global polycarbonate market. The Company will continue to produce polycarbonate for use in its downstream compounding business with the remaining assets. The line closure is expected to result in lower costs and significantly less exposure to the cyclical merchant polycarbonate market."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","Consolidation of the PMMA sheet manufacturing site in Matamoros, Mexico into the continuous sheet manufacturing operation of Aristech Surfaces in Florence, Kentucky."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u25cf","Capacity reduction of SB latex at the Hamina, Finland site starting mid-year 2023 due to over-capacity of SB latex in Europe."]] [[/GREPCENT_TABLE]] These actions are expected to be substantially completed by the end of 2024. Total charges of $56.7 million were incurred during the year ended December 31, 2022 related to this restructuring. Refer to Note 21 in the consolidated financial statements for more information. European Commission Request for Information In 2018, Trinseo received a request for information from the European Commission Directorate General for Competition (the “European Commission”) related to styrene monomer commercial activity in the European Economic Area, as well as subsequent requests for information. As a result of further developments in this matter, during the first quarter of 2022, Trinseo recorded a charge of $35.6 million which is included within “Impairment and other charges” on the consolidated statements of operations. In November 2022, Trinseo reached a final settlement with the European Commission in respect of this matter of $33.8 million, adjusted for foreign exchange rates, which was subsequently paid in full in December 2022. Refer to Note 16 in the consolidated financial statements for more information. Acquisition of Heathland On January 3, 2022, the Company closed on the previously-announced acquisition of Heathland for an estimated purchase price of $29.3 million, including an initial cash purchase price of $22.9 million, as well as $6.4 million of contingent cash consideration, representing the fair value of certain earn-out payments. Heathland is based in Utrecht, 40 Table of Contents the Netherlands, and is focused on converting post-consumer and post-industrial PMMA, PC, ABS, polystyrene, and other thermoplastic waste for use in a wide range of high-end applications. The acquisition of Heathland is consistent with Trinseo’s strategy and enhances our footprint as a sustainable solutions provider. Refer to Note 4 in the consolidated financial statements for more information. Process Pause for Divestiture of Styrenics Business In November 2021, the Company announced that it had begun work to explore the divestiture of our styrenics business and subsequently launched a formal sales process in the first quarter of 2022. The scope of the potential divestiture was expected to include the Feedstocks and Polystyrene reporting segments as well as our 50% ownership of Americas Styrenics. While this process generated broad and significant interest from both strategic and financial parties, the deterioration of financing markets and the economic uncertainty created by the war in Ukraine, particularly in European energy markets, has impeded the Company’s ability to obtain full value for the styrenics business. As a result, the Company announced in July 2022 that it decided to pause the sale process. This pause does not change the Company’s transformation strategy of becoming a higher growth, higher margin, and less volatile specialty material and sustainable solutions provider. The Company intends to reevaluate a potential sale of the styrenics business when macroeconomic conditions improve. ​ 41 Table of Contents Results of Operations Results of Operations for the Years Ended December 31, 2022, 2021, and 2020 The table below sets forth our historical results of operations, and these results as a percentage of net sales for the periods indicated. Refer to the Company’s Form 10-K filed on February 23, 2022 for explanations of our results of operations for 2021 in comparison to 2020. [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","Year Ended","\u200b"],["\u200b","\u200b","\u200b","December 31,","\u200b"],["(in millions)","","\u200b","2022","\u200b","%","","\u200b","2021","\u200b","%","","","2020","\u200b","%","\u200b"],["Net sales","\u200b","\u200b","$","4,965.5","\u200b","100","%","\u200b","$","4,827.5","\u200b","100","%","","$","2,744.6","\u200b","100","%"],["Cost of sales","\u200b","\u200b","","4,693.2","\u200b","95","%","\u200b","","4,128.6","\u200b","86","%","\u200b","","2,423.5","\u200b","88","%"],["Gross profit","\u200b","\u200b","","272.3","\u200b","5","%","\u200b","","698.9","\u200b","14","%","\u200b","","321.1","\u200b","12","%"],["Selling, general and administrative expenses","\u200b","\u200b","","398.8","\u200b","8","%","\u200b","","323.4","\u200b","7","%","\u200b","","227.5","\u200b","8","%"],["Equity in earnings of unconsolidated affiliates","\u200b","\u200b","","102.2","\u200b","2","%","\u200b","","92.7","\u200b","2","%","\u200b","","67.0","\u200b","2","%"],["Impairment and other charges","\u200b","\u200b","\u200b","339.6","\u200b","7","%","\u200b","\u200b","6.8","\u200b","\u2014","%","\u200b","\u200b","11.0","\u200b","\u2014","%"],["Operating income (loss)","\u200b","\u200b","","(363.9)","\u200b","(8)","%","\u200b","","461.4","\u200b","9","%","\u200b","","149.6","\u200b","6","%"],["Interest expense, net","\u200b","\u200b","","112.9","\u200b","2","%","\u200b","","79.4","\u200b","2","%","\u200b","","43.6","\u200b","2","%"],["Acquisition purchase price hedge loss (gain)","\u200b","\u200b","","\u2014","\u200b","\u2014","%","\u200b","","22.0","\u200b","\u2014","%","\u200b","","(7.3)","\u200b","\u2014","%"],["Other expense (income), net","\u200b","\u200b","","(7.2)","\u200b","\u2014","%","\u200b","","9.5","\u200b","\u2014","%","\u200b","","7.9","\u200b","\u2014","%"],["Income (loss) from continuing operations before income taxes","\u200b","\u200b","","(469.6)","\u200b","(10)","%","\u200b","","350.5","\u200b","7","%","\u200b","","105.4","\u200b","4","%"],["Provision for (benefit from) income taxes","\u200b","\u200b","","(41.6)","\u200b","(1)","%","\u200b","","70.9","\u200b","1","%","\u200b","","42.7","\u200b","2","%"],["Net income (loss) from continuing operations","\u200b","\u200b","$","(428.0)","\u200b","(9)","%","\u200b","$","279.6","\u200b","6","%","\u200b","$","62.7","\u200b","2","%"],["Net income (loss) from discontinued operations, net of income taxes","\u200b","\u200b","","(2.9)","\u200b","\u2014","%","\u200b","","160.4","\u200b","3","%","\u200b","","(54.8)","\u200b","(2)","%"],["Net income (loss)","\u200b","\u200b","$","(430.9)","\u200b","(9)","%","\u200b","$","440.0","\u200b","9","%","\u200b","$","7.9","\u200b","\u2014","%"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 Net Sales Of the 3% increase in net sales, 11% was due to higher selling prices resulting mainly from the pass through of higher raw material costs. An additional 8% increase was due to the contribution from our acquisitions in 2021, including the PMMA Acquisition, which closed on May 3, 2021 and the Aristech Surfaces Acquisition, which closed on September 1, 2021. These increases were partially offset by a 13% decrease due to lower volumes across all segments caused by continued customer destocking exacerbated by extended year-end shutdowns at many customer sites, COVID-19 impacts in China, and underlying demand weakness stemming from an uncertain economic and geopolitical macroenvironment. Cost of Sales The 14% increase in cost of sales reflects a 13% increase in raw material costs, an 8% increase related to our acquisitions, and a 3% increase from higher utility costs. Partially offsetting these increases was a decrease of 10% due to lower volumes. Gross Profit The decrease in gross profit of 61% was primarily attributable to lower margins compared to the very high levels observed in 2021 in Feedstocks, Base Plastics, and Polystyrene, as well as lower sales volume, and higher raw material 42 Table of Contents and utility costs as described above. These impacts were partially offset by additional gross profit from the 2021 acquisitions. See the segment discussion below for further information. Selling, General and Administrative Expenses The $75.4 million, or 23%, increase in SG&A was primarily due to an increase of $47.9 million in costs associated with the Company’s strategic initiatives, and a $47.0 million increase in restructuring costs, driven by the asset restructuring plan approved in the fourth quarter of 2022. Also contributing was a $6.0 million increase in employee compensation, partially driven by a full year of additional personnel from the 2021 acquisitions, and a $5.3 million increase in bad debt expense. Offsetting these costs was a decrease of $46.9 million related to acquisition transaction and integration costs incurred, primarily in connection with the PMMA Acquisition in 2021. Equity in Earnings of Unconsolidated Affiliates The increase in equity earnings of $9.5 million was due to higher equity earnings from Americas Styrenics due mainly to higher styrene profitability, which was partially offset by lower sales volume that resulted from styrene production outages and a weaker demand environment including limited export opportunities. Impairment and other charges During the year ended December 31, 2022, the Company recorded a non-cash, goodwill impairment charge of $297.1 million related to the PMMA business and Aristech Surfaces reporting units, as described within Note 10 in the consolidated financial statements. Additionally, the Company recorded a charge of $36.2 million related to the European Commission request for information, as described within Note 16 in the consolidated financial statements. The Company also recorded impairment charges of $6.3 million and $6.8 million related to the Boehlen styrene monomer assets during the years ended December 31, 2022 and 2021, respectively, as described within Note 14 in the consolidated financial statements. Interest Expense, Net The increase in interest expense, net of $33.5 million, or 42%, was primarily attributable to the impact of the increase in the London Interbank Offered Rate year-over-year on our variable rate debt. Also contributing to the increase was the Company’s issuance of the 2029 Senior Notes, which were not issued until late in the first quarter of 2021 and the 2028 Term Loan B, issued in the second quarter of 2021. Refer to Note 12 in the consolidated financial statements for further information. Acquisition purchase price hedge loss (gain) During the year ended December 31, 2021, the Company recorded an acquisition purchase price hedge loss of $22.0 million due to the change in fair value of the Company’s forward currency hedge arrangement on the euro-denominated purchase price of the PMMA business. Other Expense (Income), Net Other income, net for the year ended December 31, 2022 was $7.2 million. Other income, net was comprised of foreign exchange transaction gains of $8.0 million, which included $41.0 million of foreign exchange transaction losses primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between the U.S. dollar and the euro during the period, more than offset by $49.0 million of gains from our foreign exchange forward contracts. Other expense, net for the year ended December 31, 2021 was $9.5 million, which included $5.2 million of expense related to the non-service cost components of net periodic benefit cost and $4.5 million of transfer taxes associated with the PMMA Acquisition. These expense amounts were partially offset by foreign exchange transaction gains of $1.3 million, which included $61.9 million of foreign exchange transaction losses primarily from the remeasurement of our euro denominated payables due to the relative changes in rates between the U.S. dollar and the euro during the period, more than offset by $63.2 million of gains from our foreign exchange forward contracts, 43 Table of Contents excluding the acquisition purchase price hedge. Also included in Other expense, net was $0.5 million of loss on extinguishment of debt related to the Company's new financing arrangements entered into during the year. Provision for (Benefit from) Income Taxes Provision for (benefit from) income taxes was ($41.6) million and $70.9 million for the years ended December 31, 2022 and 2021, respectively, which resulted in an effective tax rate of 9% and 20%, respectively. The decrease in provision for income taxes was primarily driven by the $820.1 million decrease in income from continuing operations before income taxes, in addition to a release of a valuation allowance of $8.5 million in 2022, as a result of improvements in business operations and projected future results of the Company’s Luxembourg subsidiary. Offsetting this decrease was the revaluation of the Company’s net deferred tax assets in Switzerland which resulted in a one-time deferred tax expense of $15.3 million. Net Income (Loss) from Discontinued Operations, Net of Income Taxes Net income (loss) from discontinued operations, net of income taxes during the years ended December 31, 2022 and 2021 was ($2.9) million and $160.4 million, respectively, and was related to the results of our Rubber Business, including the divestiture of the business on December 1, 2021. This sale resulted in the recognition of an after-tax gain of $117.8 million, which is reflected in the results for the year ended December 31, 2021. Refer to Note 5 in the consolidated financial statements for further information. Selected Segment Information The Company’s reportable segments are as follows: Engineered Materials, Latex Binders, Base Plastics, Polystyrene, Feedstocks, and Americas Styrenics. Refer to Item 1—Business for a description of our segments, including a detailed overview, products and end uses, and competition and customers. The following sections present net sales, Adjusted EBITDA, and Adjusted EBITDA margin by segment for the years ended December 31, 2022, 2021, and 2020. Inter-segment sales have been eliminated. Refer to Note 20 in the consolidated financial statements for a detailed definition of Adjusted EBITDA and a reconciliation of income from continuing operations before income taxes to segment Adjusted EBITDA. Refer to the Company’s Form 10-K filed on February 23, 2022 for explanations of our segment results for 2021 in comparison to 2020. Engineered Materials Segment [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","\u200b","Percentage Change","\u200b","\u200b"],["($ in millions)","","2022","\u200b","","2021","\u200b","","2020","\u200b","","2022 vs. 2021","\u200b","2021 vs. 2020","\u200b","\u200b"],["Net sales","\u200b","$","1,044.4","\u200b","","$","755.0","\u200b","","$","194.9","\u200b","","38","%","287","%","\u200b"],["Adjusted EBITDA","\u200b","$","71.6","\u200b","\u200b","$","94.8","\u200b","\u200b","$","34.6","\u200b","\u200b","(24)","%","174","%","\u200b"],["Adjusted EBITDA margin","\u200b","","7","%","\u200b","","13","%","\u200b","","18","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 The 38% increase in net sales was primarily attributable to the contribution from the PMMA business and the Aristech Surfaces acquisitions, which led to a 47% increase year-over-year. In addition, sales price, primarily from the pass through of higher raw materials and energy costs, increased net sales by 9%. These increases were partially offset by a decrease of 17% from lower sales volumes, as demand declined from very high levels in the prior year due to weak underlying demand and customer destocking in the second half of the year, as well as COVID-19 lockdowns in China and geopolitical uncertainty in Europe in the year. In addition, particularly in the fourth quarter of 2022, volume was pressured as elevated natural gas prices in Europe and low demand in China created a temporary arbitrage window for lower-cost products from Asia to be more heavily imported into Europe. This predominantly impacted the non-formulated products in the portfolio including MMA and PMMA sheets. Adjusted EBITDA decreased $23.2 million, or 24%, year-over-year. Lower margins contributed a $42.9 million, or 45%, decrease due to lower demand and higher supply including impacts from an increase of lower-cost products 44 Table of Contents imported from Asia into Europe. Margins were also pressured by elevated natural gas prices in Europe, including a $10.0 million unfavorable impact from natural gas hedges, and one-time charges related to raw material contract obligations and write downs for slow-moving inventory. In addition, lower sales volumes as described above contributed to a $24.2 million, or 26% decrease, and higher fixed costs attributed to a $9.7 million, or 10%, decrease. These decreases were partially offset by the recent acquisitions of the PMMA business and Aristech Surfaces which contributed to a $52.3 million, or 55%, increase from the prior year. ​ Latex Binders Segment [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","\u200b","Percentage Change","\u200b","\u200b"],["($ in millions)","","2022","\u200b","","2021","\u200b","","2020","\u200b","","2022 vs. 2021","\u200b","2021 vs. 2020","\u200b","\u200b"],["Net sales","\u200b","$","1,256.5","\u200b","","$","1,183.4","\u200b","","$","767.1","\u200b","","6","%","54","%","\u200b"],["Adjusted EBITDA","\u200b","$","110.8","\u200b","\u200b","$","106.5","\u200b","\u200b","$","76.6","\u200b","\u200b","4","%","39","%","\u200b"],["Adjusted EBITDA margin","\u200b","","9","%","\u200b","","9","%","\u200b","","10","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 The 6% increase in net sales was primarily due to a 16% increase in pricing from the pass through of raw material costs, which more than offset a 4% decrease due to foreign exchange rate impacts and a 6% decrease due to lower sales volumes across most applications from customer destocking and impacts from geopolitical uncertainty. The $4.3 million, or 4%, increase in Adjusted EBITDA was primarily due to an increase of $31.2 million, or 29%, attributable to higher margins which was a result of favorable net timing and pricing actions. This increase was largely offset by a $17.0 million, or 16%, decrease from lower sales volumes and an $8.8 million, or 8%, decrease due to foreign exchange rate impacts. Higher fixed costs contributed to a $3.4 million, or 3%, decrease year-over-year. Base Plastics Segment [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","\u200b","Percentage Change","\u200b","\u200b"],["($ in millions)","","2022","\u200b","","2021","\u200b","","2020","\u200b","","2022 vs. 2021","\u200b","2021 vs. 2020","\u200b","\u200b"],["Net sales","\u200b","$","1,323.0","\u200b","","$","1,497.9","\u200b","","$","918.2","\u200b","","(12)","%","63","%","\u200b"],["Adjusted EBITDA","\u200b","$","91.0","\u200b","\u200b","$","314.2","\u200b","\u200b","$","106.0","\u200b","\u200b","(71)","%","196","%","\u200b"],["Adjusted EBITDA margin","\u200b","","7","%","\u200b","","21","%","\u200b","","12","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 Of the 12% decrease in net sales, 18% was due to lower sales volume, mainly in building & construction, industrial and consumer durables applications, including impacts from customer destocking and a weaker macroeconomic environment. Also contributing to the overall decrease was unfavorable foreign exchange rate impacts of 4%. These decreases were slightly offset by a 10% increase from higher pricing due to the pass through of raw material cost. The $223.2 million, or 71%, decrease in Adjusted EBITDA was primarily due to lower margins of $104.3 million, or 33%, as weak demand pressured margins in polycarbonate and ABS products and led to lower sales volume of $92.2 million, or 29%. Also contributing to the decrease was unfavorable foreign exchange rate impacts of $10.2 million, or 3%, and a decrease of $17.7 million, or 6%, due to higher fixed costs resulting from lower fixed cost absorption. ​ 45 Table of Contents Polystyrene Segment [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","\u200b","Percentage Change","\u200b","\u200b"],["($ in millions)","","2022","\u200b","","2021","\u200b","","2020","\u200b","","2022 vs. 2021","\u200b","2021 vs. 2020","\u200b","\u200b"],["Net sales","\u200b","$","1,093.1","\u200b","","$","1,118.8","\u200b","","$","698.9","\u200b","","(2)","%","60","%","\u200b"],["Adjusted EBITDA","\u200b","$","99.3","\u200b","\u200b","$","183.1","\u200b","\u200b","$","79.4","\u200b","\u200b","(46)","%","131","%","\u200b"],["Adjusted EBITDA margin","\u200b","","9","%","\u200b","","16","%","\u200b","","11","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 Net sales decreased by 2% year-over-year. Lower sales volumes, including customer destocking amid falling raw material prices, led to an 8% decrease in net sales from prior year. The decrease was offset by a 5% increase from higher pricing, primarily from the pass through of higher styrene costs year-over-year. The $83.8 million, or 46%, decrease in Adjusted EBITDA was due to a decrease of $70.3 million, or 38%, from lower margins and a decrease of $20.4 million, or 11%, was due to lower volumes. Weaker demand in appliance and building & construction applications, as well as new supply in China, contracted margins and led to lower volumes. Slightly offsetting these decreases was an increase of $7.3 million, or 4%, due to foreign exchange rate impacts. Feedstocks Segment [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","\u200b","Percentage Change","\u200b","\u200b"],["($ in millions)","","2022","\u200b","","2021","\u200b","","2020","\u200b","","2022 vs. 2021","\u200b","2021 vs. 2020","\u200b","\u200b"],["Net sales","\u200b","$","248.5","\u200b","","$","272.4","\u200b","","$","165.5","\u200b","","(9)","%","65","%","\u200b"],["Adjusted EBITDA","\u200b","$","(75.2)","\u200b","\u200b","$","33.7","\u200b","\u200b","$","3.2","\u200b","\u200b","(323)","%","953","%","\u200b"],["Adjusted EBITDA margin","\u200b","","(30)","%","\u200b","","12","%","\u200b","","2","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]] [[/GREPCENT_TABLE]] 2022 vs. 2021 Net sales decreased 9% year-over-year. Lower styrene-related sales volume resulted in a 28% decrease which was partially offset by a 19% increase due to higher styrene prices. The decrease of $108.9 million, or 323%, in Adjusted EBITDA was primarily attributed to a $133.3 million, or 395%, decrease due to lower styrene margins including impacts from higher utility costs caused by a rise in natural gas prices in Europe and weaker demand. Slightly offsetting this decrease was an increase of $23.8 million, or 71%, due to foreign exchange rate impacts. ​ 46 Table of Contents Americas Styrenics Segment [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","\u200b","Percentage Change","\u200b","\u200b"],["($ in millions)","","2022","\u200b","","2021","\u200b","","2020","\u200b","","2022 vs. 2021","\u200b","2021 vs. 2020","\u200b","\u200b"],["Adjusted EBITDA*","\u200b","$","102.2","\u200b","\u200b","$","92.7","\u200b","\u200b","$","67.0","\u200b","\u200b","10","%","38","%","\u200b"]] [[/GREPCENT_TABLE]] *The results of this segment are comprised entirely of earnings from Americas Styrenics, our equity method investment. As such, Adjusted EBITDA related to this segment is included within “Equity in earnings of unconsolidated affiliates” in the consolidated statements of operations. 2022 vs. 2021 The increase in Adjusted EBITDA was due to higher margins, including a stronger styrene spot market, which were partially offset by lower volumes. Outlook While operating conditions in the beginning of 2023 are expected to be largely similar to 2022, we expect sequential first quarter earnings improvement as headwinds from the second half of 2022, such as negative net timing impacts, are not expected to repeat, and as the benefit of our restructuring actions takes effect. We expect earnings improvement as the year progresses due to the end of customer destocking and improvement in customer order patterns. Earnings in 2023 are also expected to benefit from recovery demand in China, coupled with moderated energy prices in Europe, which should limit arbitrage opportunities for lower-cost standard grade products to enter Europe from Asia. Through this market volatility and uncertainty, the Company has continued to maintain a healthy financial position with access to capital resources and liquidity to manage the anticipated impact of the challenging macroeconomic environment on our business operations for the foreseeable future. Our balance sheet and liquidity position will enable us to make further progress on our growth platforms, even under a reduced capital expenditure plan, while providing shareholder return. Non-GAAP Performance Measures We present Adjusted EBITDA as a non-GAAP financial performance measure, which we define as income from continuing operations before interest expense, net; provision for income taxes; depreciation and amortization expense; loss on extinguishment of long-term debt; asset impairment charges; gains or losses on the dispositions of businesses and assets; restructuring charges; acquisition related costs and other items. In doing so, we are providing management, investors, and credit rating agencies with an indicator of our ongoing performance and business trends, removing the impact of transactions and events that we would not consider a part of our core operations. There are limitations to using the financial performance measures such as Adjusted EBITDA. This performance measure is not intended to represent net income or other measures of financial performance. As such, it should not be used as an alternative to net income as an indicator of operating performance. Other companies in our industry may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use this or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing a reconciliation of this performance measure to our net income, which is determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”). 47 Table of Contents Adjusted EBITDA is calculated as follows for the years ended December 31, 2022, 2021, and 2020. For discussion related to 2020 activity, refer to the Company’s Form 10-K filed on February 23, 2022. [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b"],["\u200b","\u200b","December 31,"],["(in millions)","\u200b","2022","","2021","\u200b","2020"],["Net income (loss)","\u200b","$","(430.9)","","$","440.0","\u200b","$","7.9","\u200b"],["Net income (loss) from discontinued operations","\u200b","\u200b","(2.9)","\u200b","\u200b","160.4","\u200b","\u200b","(54.8)","\u200b"],["Net income (loss) from continuing operations","\u200b","\u200b","(428.0)","\u200b","\u200b","279.6","\u200b","\u200b","62.7","\u200b"],["Interest expense, net","\u200b","","112.9","\u200b","","79.4","\u200b","","43.6","\u200b"],["Provision for (benefit from) income taxes","\u200b","","(41.6)","\u200b","","70.9","\u200b","","42.7","\u200b"],["Depreciation and amortization","\u200b","","236.9","\u200b","","167.5","\u200b","","92.6","\u200b"],["EBITDA(a)","\u200b","$","(119.8)","\u200b","$","597.4","\u200b","$","241.6","\u200b"],["Net gain on disposition of businesses and assets","\u200b","\u200b","(1.8)","\u200b","\u200b","(0.6)","\u200b","","(0.4)","\u200b"],["Restructuring and other charges(b)","\u200b","\u200b","15.9","\u200b","\u200b","9.0","\u200b","","5.6","\u200b"],["Acquisition transaction and integration net costs (c)","\u200b","\u200b","6.6","\u200b","\u200b","75.3","\u200b","\u200b","9.1","\u200b"],["Acquisition purchase price hedge (gain) loss (d)","\u200b","\u200b","\u2014","\u200b","\u200b","22.0","\u200b","\u200b","(7.3)","\u200b"],["Asset impairment charges or write-offs(e)","\u200b","\u200b","6.3","\u200b","\u200b","6.8","\u200b","\u200b","11.0","\u200b"],["European Commission request for information(f)","\u200b","\u200b","36.2","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b"],["Goodwill impairment charges(g)","\u200b","\u200b","297.1","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b"],["Other items(h)","\u200b","\u200b","71.2","\u200b","\u200b","19.5","\u200b","","25.5","\u200b"],["Adjusted EBITDA","\u200b","$","311.7","\u200b","$","729.4","\u200b","$","285.1","\u200b"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(a)","EBITDA is a non-GAAP financial performance measure that we refer to in making operating decisions because we believe it provides our management as well as our investors and credit agencies with meaningful information regarding the Company\u2019s operational performance. We believe the use of EBITDA as a metric assists our board of directors, management and investors in comparing our operating performance on a consistent basis. Other companies in our industry may define EBITDA differently than we do. As a result, it may be difficult to use EBITDA, or similarly-named financial measures that other companies may use, to compare the performance of those companies to our performance. We compensate for these limitations by providing reconciliations of our EBITDA results to our net income, which is determined in accordance with GAAP."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(b)","Restructuring and other charges for the years ended December 31, 2022 and 2021 primarily relate to charges incurred in connection with the Company\u2019s various restructuring programs. Refer to Note 21 in the consolidated financial statements for further information regarding restructuring activities."]] [[/GREPCENT_TABLE]] Note that the accelerated depreciation charges incurred as part of both the Company’s asset restructuring plan and corporate restructuring program are included within the “Depreciation and amortization” caption above, and therefore are not included as a separate adjustment within this caption. [[GREPCENT_TABLE]] [["(c)","Acquisition transaction and integration net costs for the years ended December 31, 2022 and 2021 relate to expenses incurred for the PMMA Acquisition and the Aristech Surfaces Acquisition."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(d)","The acquisition purchase price hedge loss for the year ended December 31, 2021 relates to the change in fair value of the Company\u2019s forward currency hedge arrangement that economically hedged the euro-denominated purchase price of the PMMA business. Refer to Note 13 in the consolidated financial statements for further information."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(e)","Asset impairment charges or write-offs for the years ended December 31, 2022 and 2021 relate to the impairment of the Company\u2019s styrene monomer assets in Boehlen, Germany. Refer to Note 14 in the consolidated financial statements for further information."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(f)","Amount for the year ended December 31, 2022 relates to the liability recorded in connection with the European Commission request for information, as described in Note 16 in the consolidated financial statements."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(g)","Amount for the year ended December 31, 2022 relates to the goodwill impairment of the PMMA business and Aristech Surfaces reporting units. Refer to Note 10 in the consolidated financial statements for further information."]] [[/GREPCENT_TABLE]] 48 Table of Contents [[GREPCENT_TABLE]] [["(h)","Other items for the years ended December 31, 2022 and 2021 primarily relate to fees incurred in conjunction with certain of the Company\u2019s strategic initiatives, including our ERP upgrade project."]] [[/GREPCENT_TABLE]] Liquidity and Capital Resources Cash Flows The table below summarizes our primary sources and uses of cash for the years ended December 31, 2022, 2021, and 2020. We have derived the summarized cash flow information from our audited financial statements. Refer to the Company’s Form 10-K filed on February 23, 2022 for discussion related to 2020. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended"],["\u200b","\u200b","December 31,"],["(in millions)","","2022","","2021","","2020"],["Net cash provided by (used in):","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating activities - continuing operations","\u200b","$","46.4","\u200b","$","456.0","\u200b","$","216.8","\u200b"],["Operating activities - discontinued operations","\u200b","\u200b","(2.9)","\u200b","\u200b","(3.3)","\u200b","\u200b","38.6","\u200b"],["Operating activities","\u200b","\u200b","43.5","\u200b","\u200b","452.7","\u200b","\u200b","255.4","\u200b"],["Investing activities - continuing operations","\u200b","","(163.2)","\u200b","","(1,936.2)","\u200b","","(3.0)","\u200b"],["Investing activities - discontinued operations","\u200b","\u200b","(0.8)","\u200b","\u200b","396.5","\u200b","\u200b","(21.2)","\u200b"],["Investing activities","\u200b","\u200b","(164.0)","\u200b","\u200b","(1,539.7)","\u200b","\u200b","(24.2)","\u200b"],["Financing activities","\u200b","","(233.7)","\u200b","","1,075.7","\u200b","","(104.3)","\u200b"],["Effect of exchange rates on cash","\u200b","","(7.1)","\u200b","","(4.4)","\u200b","","4.4","\u200b"],["Net change in cash, cash equivalents, and restricted cash","\u200b","$","(361.3)","\u200b","$","(15.7)","\u200b","$","131.3","\u200b"]] [[/GREPCENT_TABLE]] Operating Activities Net cash provided by operating activities from continuing operations during the year ended December 31, 2022 totaled $46.4 million, inclusive of dividends received from Americas Styrenics of $95.0 million. Although operating results were challenged by macroeconomic conditions resulting in reduced customer demand, higher raw material and utility costs and negative earnings, there was a slight working capital build during the year. The rapid and significant increase in raw material prices, along with the historically high energy prices led to a significant working capital build in the first half of 2022. This build was largely offset with the working capital release in the second half of the year, primarily attributable to a steep decline in many raw material prices from the historically high prices seen in the second quarter, inventory control actions, and sequentially lower sales. Operating activities also included a one-time payment of $33.8 million related to the settlement of the European Commission request for information as described in Note 16 in the consolidated financial statements. Further, there was an increase in interest payments driven by the 2029 Senior Notes and the 2028 Term Loan B, both of which were outstanding for the full year, as well as the impact of the rising interest rates on our variable rate debt. Tax payments also increased, driven by higher earnings before income taxes in the prior year. Net cash used in operating activities from discontinued operations during the year ended December 31, 2022 totaled $2.9 million. Net cash provided by operating activities from continuing operations during the year ended December 31, 2021 totaled $456.0 million, driven by strong earnings, and inclusive of dividends received from Americas Styrenics of $85.0 million. Partially offsetting these factors was a $23.0 million reduction in operating cash from a net working capital use during the period, primarily attributable to increases in raw material costs. Net cash used in operating activities from discontinued operations during the year ended December 31, 2021 totaled $3.3 million, and was related to the operations of our Rubber Business, which was sold during the period. Investing Activities Net cash used in investing activities from continuing operations during the year ended December 31, 2022 totaled $163.2 million, which was primarily attributable to net cash paid for asset or business acquisitions of $22.2 million (see Note 4 in the consolidated financial statements), and capital expenditures of $148.2 million, including cash spent for our ongoing enterprise resource planning system upgrade. Net cash used in investing activities from discontinued operations during the year ended December 31, 2022 totaled $0.8 million. 49 Table of Contents Capital expenditures for 2023 are expected to be approximately $100.0 million, inclusive of spending for both compliance and maintenance costs, and growth initiatives, including material substitution applications as well as products containing recycled or bio-based materials. Net cash used in investing activities from continuing operations during the year ended December 31, 2021 totaled $1,936.2 million, which was primarily attributable to net cash paid for asset or business acquisitions of $1,804.0 million (see Note 4), capital expenditures of $117.7 million, and payments for the settlement of hedging instruments of $14.7 million (related to the acquisition purchase price hedge – see Note 13). Net cash provided by investing activities from discontinued operations during the year ended December 31, 2021 totaled $396.5 million, which was primarily attributable to cash received from the sale of the Rubber Business. Financing Activities Net cash used in financing activities during the year ended December 31, 2022 totaled $233.7 million. This activity was primarily due to $151.9 million of payments related to the repurchase of ordinary shares, $47.5 million of dividend payments, and $17.5 million of net repayments of short-term borrowings. In addition, there was $16.6 million of repurchases and repayments long-term debt during the period, primarily related to our 2024 Term Loan B and 2028 Term Loan B obligations. Net cash provided by financing activities during the year ended December 31, 2021 totaled $1,075.7 million. This activity was primarily due to $746.3 million in proceeds from the issuance of the 2028 Term Loan B, $450.0 million in proceeds from the issuance of the 2029 Senior Notes, and $11.0 million in proceeds from exercise of option awards. This activity was partially offset by $48.1 million of ordinary share repurchases, $35.4 million of deferred financing fees paid, $14.6 million of net repayments of short-term borrowings, $21.9 million of dividend payments, and $10.7 million of net principal payments related to our 2024 Term Loan B and 2028 Term Loan B during the period. ​ Free Cash Flow We use Free Cash Flow as a non-GAAP measure to evaluate and discuss the Company’s liquidity position and results. Free Cash Flow is defined as cash from operating activities, less capital expenditures. We believe that Free Cash Flow provides an indicator of the Company’s ongoing ability to generate cash through core operations, as it excludes the cash impacts of various financing transactions as well as cash flows from business combinations that are not considered organic in nature. We also believe that Free Cash Flow provides management and investors with useful analytical indicator of our ability to service our indebtedness, pay dividends (when declared), and meet our ongoing cash obligations. Free Cash Flow is not intended to represent cash flows from operations as defined by GAAP, and therefore, should not be used as an alternative for that measure. Other companies in our industry may define Free Cash Flow differently than we do. As a result, it may be difficult to use this or similarly-named financial measures that other companies may use, to compare the liquidity and cash generation of those companies to our own. We compensate for these limitations by providing a reconciliation to cash provided by operating activities, which is determined in accordance with GAAP. [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended","\u200b"],["\u200b","\u200b","December 31,","\u200b"],["(in millions)","","2022","","2021","","2020","\u200b"],["Cash provided by operating activities","\u200b","$","43.5","\u200b","$","452.7","\u200b","$","255.4","\u200b"],["Capital expenditures","\u200b","\u200b","(149.0)","\u200b","\u200b","(123.5)","\u200b","\u200b","(82.3)","\u200b"],["Free Cash Flow","\u200b","$","(105.5)","\u200b","$","329.2","\u200b","$","173.1","\u200b"]] [[/GREPCENT_TABLE]] Refer to the discussion above for significant impacts to cash provided by operating activities for the years ended December 31, 2022 and 2021. Refer to the Company’s Form 10-K filed on February 23, 2022 for discussion related to 2020. ​ Capital Resources, Indebtedness and Liquidity We require cash principally for day-to-day operations, to finance capital investments and other initiatives, to purchase materials, to service our outstanding indebtedness, and to fund the return of capital to shareholders via dividend 50 Table of Contents payments and ordinary share repurchases, when deemed appropriate. Our sources of liquidity include cash on hand, cash flow from continuing operations, and amounts available under the Senior Credit Facility and the Accounts Receivable Securitization Facility (discussed further below). As of December 31, 2022 and 2021, we had $2,353.7 million and $2,368.8 million, respectively, in outstanding indebtedness and $701.3 million and $1,064.1 million, respectively, in working capital (calculated as current assets from continuing operations less current liabilities from continuing operations). In addition, as of December 31, 2022 and 2021, we had $168.7 million and $560.6 million, respectively, of foreign cash and cash equivalents on our consolidated balance sheets, outside of our country of domicile, which was Ireland as of December 31, 2022 and 2021, all of which is readily convertible into other foreign currencies, including the U.S. dollar. Our intention is not to permanently reinvest our foreign cash and cash equivalents. Accordingly, we record deferred income tax liabilities related to the unremitted earnings of our subsidiaries. For a detailed description of the Company’s debt structure, borrowing rates, and expected future payment obligations, refer to Note 12 in the consolidated financial statements. The following table outlines our outstanding indebtedness as of December 31, 2022 and 2021 and the associated interest expense, including amortization of deferred financing fees and issuance discounts. Effective interest rates for the borrowings included in the table below exclude the impact of deferred financing fee amortization, certain other fees charged to interest expense (such as fees for unused commitment fees during the period), and the impacts of derivatives designated as hedging instruments. [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","As of and for the Year Ended","\u200b","As of and for the Year Ended"],["\u200b","\u200b","December 31, 2022","\u200b","December 31, 2021"],["\u200b","\u200b","\u200b","\u200b","Effective","\u200b","\u200b","\u200b","\u200b","\u200b","Effective","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","Interest","\u200b","Interest","\u200b","\u200b","\u200b","Interest","\u200b","Interest"],["($ in millions)","","Balance","","Rate","","Expense","","Balance","\u200b","Rate","","Expense"],["Senior Credit Facility","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["2024 Term Loan B","\u200b","$","663.4","\u200b","3.9","%","$","29.1","\u200b","$","670.4","\u200b","2.1","%","$","20.6","\u200b"],["2028 Term Loan B","\u200b","\u200b","735.9","\u200b","4.2","%","\u200b","34.7","\u200b","\u200b","742.8","\u200b","2.6","%","\u200b","15.2","\u200b"],["2026 Revolving Facility","\u200b","\u200b","\u2014","\u200b","\u2014","%","\u200b","1.8","\u200b","\u200b","\u2014","\u200b","\u2014","%","\u200b","2.1","\u200b"],["2029 Senior Notes","\u200b","\u200b","447.0","\u200b","5.1","%","\u200b","24.8","\u200b","\u200b","450.0","\u200b","5.1","%","\u200b","19.0","\u200b"],["2025 Senior Notes","\u200b","\u200b","500.0","\u200b","5.4","%","\u200b","25.8","\u200b","\u200b","500.0","\u200b","5.4","%","\u200b","20.7","\u200b"],["Accounts Receivable Securitization Facility","\u200b","","\u2014","\u200b","\u2014","%","","1.4","\u200b","","\u2014","\u200b","2.0","%","","1.8","\u200b"],["Other indebtedness*","\u200b","","7.4","\u200b","5.1","%","","0.1","\u200b","","5.6","\u200b","2.2","%","","\u2014","\u200b"],["Total","\u200b","$","2,353.7","\u200b","\u200b","\u200b","$","117.7","\u200b","$","2,368.8","\u200b","\u200b","\u200b","$","79.4","\u200b"]] [[/GREPCENT_TABLE]] *For the year ended December 31, 2021, interest expense on “Other indebtedness” totaled less than $0.1 million. Our Senior Credit Facility includes the 2026 Revolving Facility, which matures in May 2026 and has a borrowing capacity of $375.0 million. The 2026 Revolving Facility contains a springing covenant which applies when 30% or more is drawn from the facility and would require the Company to meet a first lien net leverage ratio not to exceed 3.50x at the end of each financial quarter. As of December 31, 2022 the first lien net leverage ratio (as defined in our secured credit agreement) was 3.20x. As of December 31, 2022, the Company had $354.7 million of funds available for borrowing (net of $20.3 million outstanding letters of credit) under the 2026 Revolving Facility. Further, as of December 31, 2022, the Company is required to pay a quarterly commitment fee in respect of any unused commitments under the 2026 Revolving Facility equal to 0.375% per annum. Also included in our Senior Credit Facility is our 2024 Term Loan B (with original principal of $700.0 million, maturing in September 2024), and our 2028 Term Loan B (with original principal of $750.0 million, maturing in May 2028), each of which requires scheduled quarterly payments in amounts equal to 0.25% of the original principal. The stated interest rate on our 2024 Term Loan B is London Interbank Offered Rate (“LIBOR”) plus 2.00% (subject to a 0.00% LIBOR floor). The stated interest rate on our 2028 Term Loan B is LIBOR plus 2.50% (subject to a 0.00% LIBOR floor). The Company made net principal payments of $7.0 million on the 2024 Term Loan B and net principal payments of $7.5 million on the 2028 Term Loan B during the year ended December 31, 2022, with an additional $14.5 million of scheduled future payments classified within current debt on the Company’s consolidated balance sheet as of December 31, 2022 related to both the 2024 Term Loan B and 2028 Term Loan B. 51 Table of Contents Our 2025 Senior Notes issued under the indenture executed in 2017 include $500.0 million aggregate principal amount of 5.375% senior notes that mature on September 1, 2025. Interest on the 2025 Senior Notes is payable semi-annually on May 3 and November 3 of each year. These Notes may be redeemed prior to their maturity at the option of the Company under certain circumstances at specific redemption prices. Refer to Note 12 in the consolidated financial statements for further information. Our 2029 Senior Notes (with original principal of $500.0 million), as issued under the indenture executed in 2021, include $447.0 million aggregate principal amount of 5.125% senior notes that mature on April 1, 2029. Interest on the 2029 Senior Notes is payable semi-annually on February 15 and August 15 of each year, which commenced on August 15, 2021. These Notes may be redeemed prior to their maturity at the option of the Company under certain circumstances at specific redemption prices. Refer to Note 12 in the consolidated financial statements for further information. We also continue to maintain our Accounts Receivable Securitization Facility, which matures in November 2024 and has an outstanding borrowing capacity of $150.0 million. As of December 31, 2022, there were no amounts outstanding under this facility and the Company had approximately $150.0 million of accounts receivable available to support this facility, based on the pool of eligible accounts receivable. Refer to Note 12 in the consolidated financial statements for further information on the facility. Our ability to raise additional financing and our borrowing costs may be impacted by short- and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on our performance as measured by certain credit metrics such as interest coverage and leverage ratios. We and our subsidiaries, affiliates, or significant shareholders may from time to time seek to retire or purchase our outstanding debt through cash purchases in the open market, privately negotiated transactions, exchange transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. (the “Issuers” of our 2029 Senior Notes and 2025 Senior Notes and “Borrowers” under our Senior Credit Facility) are dependent upon the cash generation and receipt of distributions and dividends or other payments from our subsidiaries and joint venture in order to satisfy their debt obligations. There are no known significant restrictions by third parties on the ability of subsidiaries of the Company to disburse or dividend funds to the Issuers and the Borrowers in order to satisfy these obligations. However, as the Company’s subsidiaries are located in a variety of jurisdictions, the Company can give no assurances that our subsidiaries will not face transfer restrictions in the future due to regulatory or other reasons beyond our control. The Senior Credit Facility and Indentures also limit the ability of the Borrowers and Issuers, respectively, to pay dividends or make other distributions to Trinseo PLC, which could then be used to make distributions to shareholders. During the year ended December 31, 2022, the Company declared total dividends of $1.28 per ordinary share, or $46.4 million, of which $12.5 million, inclusive of dividend equivalents, remains accrued as of December 31, 2022 and the majority of which was paid in January 2023. These dividends are well within the available capacity under the terms of the restrictive covenants contained in the Senior Credit Facility and Indentures. Further, significant additional capacity continues to be available under the terms of these covenants to support expected future dividends to shareholders, should the Company continue to declare them. The Company’s cash flow generation in recent years has been strong. Despite the challenging and uncertain market conditions we experienced in 2022, the Company generated positive cash flows from operating activities for the year ended December 31, 2022. Due to the expectation that operating conditions in the beginning of 2023 will be largely similar to 2022, the Company may exceed the first lien net leverage ratio in the first half of 2023, which would limit the availability of the 2026 Revolving Facility to 30% of the total capacity. However, we believe funds provided by operations, our existing cash and cash equivalent balances of $211.7 million, coupled with borrowings available under our 2026 Revolving Facility and our Accounts Receivable Securitization Facility totaling a minimum of $252.2 million, which reflects the potential borrowing limit imposed by the aforementioned springing covenant, will be adequate to meet all necessary operating and capital expenditures for at least the next 12 months under current operating conditions, while continuing to invest in our growth and sustainability objectives. Further, we also believe that our financial resources will allow us to manage the anticipated impact of this challenging macroeconomic environment on our business operations for the foreseeable future, which could include lower demand, reductions in revenue or delays in payments from customers and other third parties. Our ability to 52 Table of Contents generate cash from operations to pay our indebtedness and meet other liquidity needs is subject to certain risks described herein and under Item 1A – Risk Factors. As of December 31, 2022, we were in compliance with all the covenants and default provisions under our debt agreements. Refer to Note 12 in the consolidated financial statements for further information on the details of the covenant requirements. The ongoing war in Ukraine and the corresponding sanctions and other measures being imposed by various governments have impacted global markets, particularly in Europe, leading to: (i) high volatility and increasing prices for natural gas and other energy supplies, (ii) changing trade flow patterns, and (iii) increasing levels of economic and geopolitical uncertainty globally. We do not have manufacturing operations in Ukraine, Russia or Belarus, and we have temporarily suspended sales and deliveries to Russia and Belarus, which sales do not constitute a material portion of our business. However, a significant escalation or expansion of economic disruption caused by this conflict, including supply disruptions, higher costs of raw materials or energy could have a material adverse effect on our results of operations, financial condition and cash flows. We are actively monitoring the broader economic impact from the crisis, in particular on the price and availability of raw materials and energy. We do not have any off-balance sheet financing arrangements that we believe are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations and Commercial Commitments The Company’s primary contractual obligations and commercial commitments consist of the payments for principal and interest on our outstanding long-term debt, raw material purchases, funding requirements under our pension and other postretirement benefits, lease commitments, and obligations under our SAR SSAs. The Company has both fixed and variable-rate long-term debt arrangements, which have varying principal and interest payment requirements over their contractual terms. Refer to the table and section above as well as to Note 12 in the consolidated financial statements for more information on our debt arrangements. Additionally, refer to Item 7A—Quantitative and Qualitative Disclosures about Market Risk for discussion of our interest rate and foreign currency risks related to our debt and debt-related hedging arrangements. The Company has certain raw material purchase contracts where we are required to purchase certain minimum volumes at the then prevailing market prices. During the year ended December 31, 2022, the Company recorded a one-time charge within “Cost of sales” in the consolidated statement of operations of approximately $18.1 million related to estimated raw material purchase contract obligations. As of December 31, 2022, the Company had $1,349.5 million of raw material purchase obligations, of which $478.6 million is due within the next twelve months. These commitments have remaining terms ranging from one to four years. Refer to Note 16 in the consolidated financial statements for more information on raw material purchase commitments. Additionally, refer to Item 1 – Business – Sources and Availability of Raw Materials for further description of the sources of our key raw materials. The Company has various pension and other postretirement plans. The Company is required to make minimum contributions to certain of our funded pension plans and is also obligated to make benefit payments to employees for the unfunded pension plans and other postretirement plans. As of December 31, 2022, the Company’s estimated future benefit payments through 2032, reflecting expected future service, as appropriate, was $132.9 million, of which $10.0 million is due within the next twelve months. Refer to the section of our Critical Accounting Policies and Estimates entitled “Pension Plans and Postretirement Benefits” for more information on the factors impacting our pension and postretirement costs. Additionally, refer to Note 17 in the consolidated financial statements for more details on these employee benefit plans and the future payments expected to be made for them through 2032. The Company has operating and finance leases for certain of its plant and warehouse sites, office spaces, rail cars, storage facilities, and equipment. The Company’s leases have remaining terms of four months through thirteen years. As of December 31, 2022, the Company’s estimated minimum commitments related to our finance and operating lease obligations was $96.3 million, of which $19.9 million is due within the next twelve months. Refer to Note 24 in the consolidated financial statements for further information on our lease portfolio and future lease obligations. As described in Item 1— Business— Our Relationship with Dow, the Company is party to SAR SSAs with Dow, which are agreements under which Dow provides certain site services to the Company at Dow-owned locations. Based on our current year known costs and assuming that we continue with the SAR SSAs with similar annualized costs going forward, we estimate our contractual obligations under these agreements to be approximately $192.3 million annually for 53 Table of Contents 2023 through 2027, and a total of $2,158.9 million thereafter through June 2039. Refer to the aforementioned section of Item 1 for more information regarding these agreements, including details regarding the rights of the Company and Dow to terminate said agreements. Derivative Instruments The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates, interest rate risk, and commodity price risk. To manage this risk, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts, interest rate swap agreements, and commodity swap agreements. A summary of these derivative financial instrument programs is described below; however, refer to Note 13 of the consolidated financial statements for further information. The Company does not hold or enter into financial instruments for trading or speculative purposes. Foreign Exchange Forward Contracts Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. Our principal strategy in managing exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on our consolidated balance sheets against corresponding assets of the same currency such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce our exposure, the Company uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on our assets and liabilities denominated in certain foreign currencies. These derivative contracts are not designated for hedge accounting treatment. Foreign Exchange Cash Flow Hedges The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by one of our subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rate. Commodity Cash Flow Hedges & Commodity Economic Hedges The Company purchases certain commodities, primarily natural gas, to operate facilities and generate heat and steam for various manufacturing processes, which are subject to price volatility. In order to manage the risk of price fluctuations associated with these commodity purchases, as deemed appropriate, the Company may enter into commodity swaps agreements or option contracts. Under these derivative contracts, the Company is effectively converting a portion of our natural gas costs into a fixed rate obligation to mitigate the risk of price fluctuations associated with the underlying commodity purchases. Certain of these commodity swaps are designated as cash flow hedges (“commodity cash flow hedges”), and the remaining commodity swaps are not designated for hedge accounting treatment (“commodity economic hedges”). Interest Rate Swaps The Company enters into interest rate swap agreements to manage our exposure to variability in interest payments associated with the Company’s variable rate debt. Under these interest rate swap agreements, which are designated as cash flow hedges, the Company is effectively converting a portion of our variable rate borrowings into a fixed rate obligation to mitigate the risk of variability in interest rates. The Company does not have any outstanding interest rate swap agreements as of December 31, 2022. 54 Table of Contents Net Investment Hedge The Company had certain fixed-for-fixed cross currency swaps (“CCS”), swapping U.S. dollar principal and interest payments on our 2025 Senior Notes for euro-denominated payments, which were designated as a hedge of the Company’s net investment in certain European subsidiaries under the spot method through the original CCS agreement entered into on September 1, 2017 (“2017 CCS”). As such, changes in the fair value of the 2017 CCS that were included in the assessment of effectiveness (changes due to spot foreign exchange rates) were recorded as cumulative foreign currency translation within accumulated other comprehensive income or loss (“AOCI”), and will remain in AOCI until either the sale or substantially complete liquidation of the subsidiary. Additionally, the initial value of any component excluded from the assessment of effectiveness is recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in the fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI. The Company elected to amortize the initial excluded component value as a reduction of “Interest expense, net” in the consolidated statements of operations using the straight-line method over the remaining term of the 2017 CCS. Additionally, the Company recognizes the accrual of periodic USD and euro-denominated interest receipts and payments under the terms of CCS arrangements, including the 2017 CCS, within “Interest expense, net” in the consolidated statements of operations. On February 26, 2020, the Company settled our 2017 CCS and replaced it with a new CCS arrangement (the “2020 CCS”) that carried substantially the same terms as the 2017 CCS and also is designated as a net investment hedge under the spot method. Upon settlement of the 2017 CCS, the Company realized net cash proceeds of $51.6 million. The remaining $13.8 million unamortized balance of the initial excluded component related to the 2017 CCS at the time of settlement is no longer being amortized following the settlement and will remain in AOCI until either the sale or substantially complete liquidation of the relevant subsidiaries. On April 7, 2022, the Company settled its existing 2020 CCS, which was set to mature in November 2022. Upon settlement of the 2020 CCS, the Company realized net cash proceeds of $1.9 million. Critical Accounting Policies and Estimates Our discussion and analysis of results of operations and financial condition are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts reported. We base these estimates and judgments on historical experiences and assumptions believed to be reasonable under the circumstances. Actual results could vary from our estimates under different conditions. Our significant accounting policies, which may be affected by our estimates and assumptions, are more fully described in Note 2 in the consolidated financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. The following critical accounting policies reflect our most significant estimates and assumptions used in the preparation of the consolidated financial statements. Business Combinations and Asset Impairments Business Combinations Acquisitions that qualify as a business combination are accounted for using the purchase accounting method. Amounts paid for an acquisition are allocated to the assets acquired and liabilities assumed based on their fair value as of the date of acquisition. Goodwill is recorded as the difference between the fair value of the acquired assets and liabilities assumed (net assets acquired) and the purchase price. Goodwill is not amortized, but is reviewed for impairment annually as of October 1, or when events or changes in the business environment indicate that the carrying value of a reporting unit may exceed its fair value. Refer to the discussion below for further information on asset impairments. Under the purchase accounting method, the Company completes valuation procedures for an acquisition, often with the assistance of third-party valuation specialists, to determine the fair value of the assets acquired and liabilities assumed. These valuation procedures require management to make assumptions and apply significant judgment to estimate the fair value of the assets acquired and liabilities assumed. If the estimates or assumptions used should significantly change, the resulting differences could materially affect the fair value of net assets. 55 Table of Contents Specifically, the calculation of the fair value of tangible assets, including property, plant and equipment, typically utilize the cost approach, which computes the cost to replace the asset, less accrued depreciation resulting from physical deterioration and functional and external obsolescence. The calculation of the fair value of identified intangible assets is determined using cash flow models following the income and cost approaches (or some combination thereof). Significant inputs include estimated future cash flows, discount rates, royalty rates, growth rates, sales projections, customer retention rates, and terminal values, all of which require significant management judgment. Definite-lived intangible assets, which are primarily comprised of customer relationships, developed technology, tradenames, and software, are amortized over their estimated useful lives using the straight-line method and are assessed for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. During the year ended December 31, 2022, the Company completed the Heathland Acquisition, which closed on January 3, 2022. Refer to Note 4 in the consolidated financial statements for further information on this transaction. Asset Impairments As of December 31, 2022, net property, plant and equipment, net identifiable finite-lived intangible assets, and goodwill totaled $691.1 million, $772.0 million, and $410.4 million, respectively. Management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time. This includes the recoverability of long-lived assets employed in the business. These estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant. For instance, expected asset lives may be shortened or impairment may be recorded based on a change in the expected use of the asset or performance of the related asset group. We evaluate long-lived assets and identifiable finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset grouping may not be recoverable. In the event the carrying value of the asset exceeds its undiscounted future cash flows and the carrying value is not considered recoverable, impairment may exist. An impairment loss, if any, is measured as the excess of the asset’s carrying value over its fair value, generally based on a discounted future cash flow method, independent appraisals, etc. In connection with our strategy to focus efforts and increase investments in certain product offerings serving specific applications that are less cyclical and offer significantly higher growth and margin potential, and other management considerations, in March of 2020, the Company initiated a consultation process with the Economic Council and Works Councils of Trinseo Deutschland regarding the disposition of our styrene monomer assets in Boehlen, Germany. The Company’s assessments of these long-lived asset groups for impairment indicated that the carrying values of the asset groups at each location were not recoverable when compared to the expected undiscounted future cash flows from the operation and potential disposition of these assets. The fair value of the depreciable assets at each location was determined through an analysis of the underlying fixed asset records in conjunction with the use of industry experience and available market data. Based on the Company’s assessments, for the year ended December 31, 2022, we recorded impairment charges on the Boehlen styrene monomer assets of $6.3 million, which include charges recorded subsequent to March 2020 related to capital expenditures at the facility that we determined to be impaired. The amounts are included within “Impairment and other charges” in the consolidated statements of operations and are all allocated to the Feedstocks segment. Refer to Note 14 for more information. Through December 31, 2022, we have continued to assess the recoverability of certain assets, and concluded there are no additional significant events or circumstances identified by management that would indicate these assets are not recoverable. However, the current environment is subject to changing market conditions and requires significant management judgment to identify the potential impact to our assessment. If we are not able to achieve certain actions or our future operating results do not meet our expectations, it is possible that impairment charges may need to be recorded on one or more of our operating facilities. Long-lived assets to be disposed of by sale are classified as held-for-sale and are reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased. Long-lived assets to be disposed of in a manner other than by sale are classified as held-and-used until they are disposed. The Company had no assets classified as held-for-sale as of December 31, 2022. As noted above, our goodwill impairment testing is performed annually as of October 1 at a reporting unit level. We perform more frequent impairment tests when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below the carrying value. 56 Table of Contents A goodwill impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. When supportable, the Company employs the qualitative assessment of goodwill impairment prescribed by Accounting Standards Codification 350. Otherwise, the estimated fair value of a reporting unit is primarily determined using an income approach (under the discounted cash flow method). Key assumptions and estimates used in the goodwill impairment testing include projections of revenues and EBITDA, the estimated weighted average cost of capital (“WACC”), and a projected long-term growth rate, all of which are based on data available at the time of the testing. The WACC is calculated incorporating weighted average returns on debt and equity from similar market participants, and therefore, changes in the market, which are beyond the control of the Company, may have an impact on future calculations of estimated fair value. As a result of the goodwill impairment testing performed in the fourth quarter of 2022, the PMMA business and Aristech Surfaces carrying value of their net assets exceeded fair value, resulting in an impairment. All other reporting units had fair values that exceeded the carrying value of their net assets, indicating that no impairment of goodwill is warranted. These reporting units, which are included in the Engineered Materials operating segment, were acquired in 2021 as described in Note 4 in the consolidated financial statements. The impairment charges were attributed to the continuation of the challenging macroeconomic environment experienced in 2022, including significantly lower demand for building & construction and wellness applications, which led to lower operating results including slower growth projections, and a prolonged drop in market capitalization, as well as an increase in the WACC. The Company reduced the carrying value of the PMMA business and Aristech Surfaces reporting units through the recognition of a $226.6 million and $70.5 million non-cash goodwill impairment loss, respectively. These losses are recorded within “Impairment and other charges” on the consolidated statement of operations and are allocated to the Engineered Materials segment. As of December 31, 2022, the remaining $410.4 million in total goodwill is allocated to the reportable segments as follows: $348.9 million to Engineered Materials, $14.8 million to Latex Binders, $42.5 million to Base Plastics, and $4.2 million to Polystyrene, with no amounts allocated to the Feedstocks or Americas Styrenics segments. Factors which could result in future impairment charges, among others, include changes in worldwide economic conditions, changes in technology, changes in competitive conditions and customer preferences, and fluctuations in foreign currency exchange rates. These factors are discussed in Item 7A—Quantitative and Qualitative Disclosures about Market Risk and Item 1A— Risk Factors included in this Annual Report. Income Taxes We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. Deferred taxes are provided on the outside basis differences and unremitted earnings of subsidiaries outside of Ireland. All undistributed earnings of foreign subsidiaries and affiliates are expected to be repatriated as of December 31, 2022. Based on the evaluation of available evidence, both positive and negative, we recognize future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not. As of December 31, 2022, we had deferred tax assets of $163.6 million, after valuation allowances of $118.4 million. In evaluating the ability to realize the deferred tax assets, we rely on, in order of increasing subjectivity, taxable income in prior carryback years, the future reversals of existing taxable temporary differences, tax planning strategies and forecasted taxable income using historical and projected future operating results. Swiss federal and cantonal tax reform was enacted on August 6, 2019 and October 25, 2019, respectively, and includes measures such as, the elimination of certain preferential tax regimes and implementation of new tax rates at both the federal and cantonal levels. It also includes transitional relief measures which may provide for future tax deductions. The Company believes it is more likely than not that a portion of this deferred tax benefit recorded as a result of these cantonal tax law changes will not be realized during the utilization period provided by the legislation, spanning 2023 through 2029. This is based on the Company’s estimate of future taxable income in Switzerland, which was determined using management’s judgment and assumptions about various factors, such as: historical experience and results, cyclicality of the business, implications of COVID-19, recent acquisitions and divestitures, and future industry 57 Table of Contents and macroeconomic conditions and trends possible during the aforementioned utilization period. During the second quarter of 2022, Trinseo revalued its deferred tax assets in Switzerland, as well as adjusted the related valuation allowance. Trinseo reduced the deferred tax asset by $19.7 million and released a corresponding valuation allowance of $4.4 million. As of December 31, 2022, due to foreign exchange translation, the total valuation allowance recorded was $20.1 million. As of December 31, 2022, we had deferred tax assets for tax loss carryforward of approximately $560.5 million, $21.6 million of which is subject to expiration in the years between 2023 and 2028. We continue to evaluate our historical and projected operating results for several legal entities for which we maintain valuation allowances on net deferred tax assets. We are subject to income taxes in Ireland, the United States and numerous foreign jurisdictions, and are subject to audit within these jurisdictions. Therefore, in the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. The tax provision includes amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ from the amounts accrued. Since significant judgment is required to assess the future tax consequences of events that have been recognized in our financial statements or tax returns, the ultimate resolution of these events could result in adjustments to our financial statements and such adjustments could be material. Therefore, we consider such estimates to be critical in preparation of our financial statements. The financial statement effect of an uncertain income tax position is recognized when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Accruals are recorded for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. Uncertain income tax positions have been recorded in “Other noncurrent obligations” in the consolidated balance sheets for the periods presented. Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. The valuation allowance is based on our estimates of future taxable income and the period over which we expect the deferred tax assets to be recovered. Our estimate of future taxable income is based on management’s judgment and assumptions about various factors including historical experience and results, cyclicality of the business, and future industry and macroeconomic conditions and trends. Changes in these assumptions in future periods may require we adjust our valuation allowance, which could materially impact our financial position and results of operations. Pension Plans and Postretirement Benefits We have various company-sponsored retirement plans covering substantially all employees. We also provide certain health care and life insurance benefits to retired employees in the United States. The U.S.-based plans provide health care benefits, including hospital, physicians’ services, drug and major medical expense coverage, and life insurance benefits. We recognize the underfunded or overfunded status of a defined benefit pension or postretirement plan as an asset or liability in our consolidated balance sheets and recognize changes in the funded status in the year in which the changes occur through AOCI, which is a component of shareholders’ equity. A settlement is a transaction that is an irrevocable action that relieves the employer (or the plan) of primary responsibility for a pension or postretirement benefit obligation, and that eliminates significant risks related to the obligation and the assets used to effect the settlement. The Company does not record settlement gains or losses during interim periods when the cost of all settlements in a year is less than or equal to the sum of the service cost and interest cost components of net periodic benefit cost for the plan in that year. Pension benefits associated with these plans are generally based on each participant’s years of service, compensation, and age at retirement or termination. The discount rate is an important element of expense and liability measurement. We evaluate our assumptions at least once each year, or as facts and circumstances dictate, and make changes as conditions warrant. We determine the discount rate used to measure plan liabilities as of the December 31 measurement date for the pension and postretirement benefit plans. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. We set our discount rates to reflect the yield of a portfolio of high 58 Table of Contents quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. We use a full yield curve approach in the estimation of the future service and interest cost components of net periodic benefit cost for our defined benefit pension and other postretirement benefit plans by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. Service cost related to our defined benefit pension plans and other postretirement plans is included within “Cost of sales” and “Selling, general and administrative expenses,” whereas all other components of net periodic benefit cost are included within “Other expense (income), net” in the consolidated statements of operations. We determine the expected long-term rate of return on assets by performing an analysis of historical and expected returns based on the underlying assets, which generally are insurance contracts. We also consider our historical experience with the pension fund asset performance. The expected return of each asset class is derived from a forecasted future return confirmed by current and historical experience. Future actual net periodic benefit cost will depend on the performance of the underlying assets and changes in future discount rates, among other factors. The weighted average assumptions used to determine pension plan obligations and net periodic benefit costs are provided below: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Non-U.S. Defined","\u200b","U.S. Defined Benefit","\u200b","Other Postretirement","\u200b"],["\u200b","\u200b","Benefit Pension Plans","\u200b","Pension Plans","\u200b","Benefit Plans","\u200b"],["\u200b","\u200b","December 31,","\u200b","December 31,","\u200b","December 31,","\u200b"],["\u200b","\u200b","2022","\u200b","2021","\u200b","2022","\u200b","2021","\u200b","2022","\u200b","2021","\u200b"],["Pension and other postretirement plan obligations:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Discount rate for projected benefit obligation / accumulated postretirement benefit obligation","\u200b","3.51","%","1.10","%","5.53","%","2.92","%","6.01","%","2.90","%"],["Net periodic benefit costs:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Discount rate for service cost","\u200b","1.20","%","0.78","%","3.00","%","3.20","%","2.99","%","3.32","%"],["Discount rate for interest cost","\u200b","0.93","%","0.57","%","2.44","%","2.37","%","2.42","%","2.34","%"],["Expected long-term rate of return on plan assets","\u200b","0.84","%","0.66","%","5.40","%","5.89","%","N/A","\u200b","N/A","\u200b"]] [[/GREPCENT_TABLE]] Holding all other factors constant, a 0.25% increase (decrease) in the discount rate used to determine net periodic benefit cost would decrease (increase) 2023 pension expense for our non-U.S. plans by approximately $1.1 million and $(1.3) million, respectively. Holding all other factors constant, a 0.25% increase (decrease) in the long-term rate of return on assets used to determine net periodic benefit cost for our non-U.S. plans would decrease (increase) 2023 pension expense by approximately $0.1 million and $(0.1) million, respectively. Holding all other factors constant, a 0.25% increase or decrease in the discount rate, or the long-term rate of return on assets, used to determine net periodic benefit cost for our U.S. plans would change our 2023 pension expense by less than $0.1 million. Plan assets totaled $99.5 million and $157.1 million as of December 31, 2022 and 2021. As noted above, plan assets are invested primarily in insurance contracts that provide for guaranteed returns. Investments in the pension plan insurance contracts are valued utilizing unobservable inputs, which are contractually determined based on returns, fees, and the present value of the future cash flows, or cash surrender values, of the contracts, and are classified as Level 3 investments. The Company presents certain pension plan assets valued at net asset value per share as a practical expedient outside of the fair value hierarchy. Recent Accounting Pronouncements We describe the impact of recent accounting pronouncements in Note 2 of the consolidated financial statements, included elsewhere within this Annual Report.