e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2010
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file number 1-16091
POLYONE CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
(State or other jurisdiction
of incorporation or organization)
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34-1730488
(I.R.S. Employer Identification No.) |
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33587 Walker Road, Avon Lake, Ohio
(Address of principal executive offices)
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44012
(Zip Code) |
Registrants telephone number, including area code: (440) 930-1000
Former name, former address and former fiscal year, if changed since last report: Not Applicable
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). o
Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
The number of outstanding common shares of the registrant, $0.01 par value, as of July 28, 2010 was
93,082,923.
TABLE OF CONTENTS
Part I Financial Information
Item 1. Financial Statements
PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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Adjusted 2009 |
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2010 |
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Adjusted 2009 |
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Sales |
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$ |
692.9 |
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$ |
496.5 |
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$ |
1,323.3 |
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$ |
959.9 |
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Cost of sales |
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566.2 |
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415.6 |
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1,093.1 |
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828.2 |
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Gross margin |
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126.7 |
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80.9 |
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230.2 |
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131.7 |
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Selling and administrative |
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73.0 |
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77.1 |
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146.9 |
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147.3 |
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Adjustment to impairment of goodwill |
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5.0 |
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Income from equity affiliates |
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7.8 |
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10.1 |
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9.3 |
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23.4 |
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Operating income |
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61.5 |
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13.9 |
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92.6 |
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2.8 |
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Interest expense, net |
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(7.7 |
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(8.8 |
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(15.7 |
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(17.6 |
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Other expense, net |
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(1.2 |
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(0.7 |
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(1.9 |
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(7.3 |
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Income (loss) before income taxes |
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52.6 |
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4.4 |
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75.0 |
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(22.1 |
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Income tax (expense) benefit |
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(6.9 |
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(6.3 |
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(10.9 |
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2.5 |
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Net income (loss) |
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$ |
45.7 |
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$ |
(1.9 |
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$ |
64.1 |
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$ |
(19.6 |
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Earnings (loss) per common share: |
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Basic earnings (loss) |
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$ |
0.49 |
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$ |
(0.02 |
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$ |
0.69 |
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$ |
(0.21 |
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Diluted earnings (loss) |
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$ |
0.47 |
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$ |
(0.02 |
) |
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$ |
0.67 |
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$ |
(0.21 |
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Weighted-average shares used to
compute earnings (loss) per share: |
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Basic |
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92.8 |
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92.4 |
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92.7 |
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92.3 |
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Diluted |
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96.3 |
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92.4 |
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95.6 |
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92.3 |
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See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
2
PolyOne Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)
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(Unaudited) |
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Adjusted |
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June 30, |
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December 31, |
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2010 |
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2009 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
241.1 |
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$ |
222.7 |
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Accounts receivable, net |
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360.8 |
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274.4 |
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Inventories |
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226.9 |
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183.7 |
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Other current assets |
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28.7 |
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38.0 |
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Total current assets |
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857.5 |
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718.8 |
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Property, net |
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363.7 |
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392.4 |
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Investment in equity affiliates and nonconsolidated subsidiary |
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12.0 |
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5.8 |
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Goodwill |
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163.7 |
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163.5 |
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Other intangible assets, net |
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69.5 |
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71.7 |
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Deferred income tax assets |
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6.9 |
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8.1 |
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Other non-current assets |
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57.7 |
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55.7 |
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Total assets |
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$ |
1,531.0 |
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$ |
1,416.0 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
59.8 |
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$ |
19.9 |
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Short-term debt |
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0.4 |
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0.5 |
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Accounts payable |
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329.8 |
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238.3 |
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Accrued expenses |
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111.7 |
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117.0 |
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Total current liabilities |
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501.7 |
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375.7 |
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Long-term debt |
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329.6 |
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389.2 |
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Post-retirement benefits other than pensions |
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20.1 |
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21.8 |
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Pension benefits |
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167.5 |
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173.0 |
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Other non-current liabilities |
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104.6 |
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98.6 |
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Shareholders equity |
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407.5 |
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357.7 |
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Total liabilities and shareholders equity |
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$ |
1,531.0 |
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$ |
1,416.0 |
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See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
3
PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
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Six Months Ended |
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June 30, |
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Adjusted |
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2010 |
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2009 |
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Operating Activities |
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Net income (loss) |
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$ |
64.1 |
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$ |
(19.6 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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27.8 |
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34.0 |
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Deferred income tax provision |
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1.9 |
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8.8 |
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Provision for doubtful accounts |
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2.4 |
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1.5 |
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Stock compensation expense |
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2.1 |
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1.4 |
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Adjustment to impairment of goodwill |
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5.0 |
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Asset write-downs and impairment charges |
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0.1 |
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1.4 |
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Companies carried at equity: |
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Income from equity affiliates |
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(9.3 |
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(23.4 |
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Dividends and distributions received |
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1.5 |
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14.2 |
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Change in assets and liabilities, net of acquisition: |
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Increase in accounts receivable |
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(100.2 |
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(9.4 |
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(Increase) decrease in inventories |
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(49.0 |
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60.8 |
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Increase in accounts payable |
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100.3 |
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74.7 |
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Decrease in sale of accounts receivable |
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(14.2 |
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Decrease in accrued expenses and other |
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(0.5 |
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(0.6 |
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Net cash provided by operating activities |
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41.2 |
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134.6 |
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Investing Activities |
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Capital expenditures |
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(10.9 |
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(12.2 |
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Proceeds from sale of equity affiliate and other assets |
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7.8 |
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Net cash used by investing activities |
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(3.1 |
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(12.2 |
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Financing Activities |
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Change in short-term debt |
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15.1 |
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Repayment of long-term debt |
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(20.0 |
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Proceeds from the exercise of stock options |
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1.6 |
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Net cash (used) provided by financing activities |
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(18.4 |
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15.1 |
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Effect of exchange rate changes on cash |
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(1.3 |
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0.5 |
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Increase in cash and cash equivalents |
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18.4 |
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138.0 |
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Cash and cash equivalents at beginning of period |
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222.7 |
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44.3 |
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Cash and cash equivalents at end of period |
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$ |
241.1 |
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$ |
182.3 |
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See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
4
PolyOne Corporation and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with Form 10-Q instructions and in the opinion of management contain all adjustments,
consisting of normal recurring accruals necessary to present fairly the financial position, results
of operations and cash flows for the periods presented. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates. These interim financial statements should be read
in conjunction with the financial statements and accompanying notes included in the Annual Report
on Form 10-K for the year ended December 31, 2009 of PolyOne Corporation.
Operating results for the three-month and six-month periods ended June 30, 2010 are not necessarily
indicative of the results that may be attained in subsequent periods or for the year ending
December 31, 2010.
Note 2 Change in Accounting Principle
Effective January 1, 2010, we elected to change our method of valuing inventories for certain
U.S. businesses to the first-in, first-out (FIFO) method, while in prior years, these inventories
were valued using the last-in, first-out (LIFO) method. As a result of this change, all inventories
are valued using the FIFO method. Inventories accounted for under the FIFO method as a percent of
total consolidated inventories was 76%, with the remainder determined on a LIFO basis at December
31, 2009. We believe the FIFO method is preferable as it conforms the inventory costing methods for
all of our inventories to a single method and improves comparability with our industry peers. The
FIFO method also better reflects current acquisition cost of those inventories on our consolidated
balance sheets. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 250, Accounting Changes and Error Corrections, all prior periods presented
have been adjusted to apply the new method retrospectively. The effect of the change in our
inventory costing method increased our inventory balance and retained earnings by $42.4 million as
of January 1, 2009. There were no tax effects to retained earnings for any of the periods presented
below due to the fact that we have a valuation allowance recorded against our net deferred tax
assets in the United States.
We have presented the effects of the change in accounting principle for inventory costs on our
consolidated financial statements for 2010 and 2009 below. We have condensed the comparative
financial statements for financial statement line items that were not affected by the change in
accounting principle.
5
Condensed Consolidated Statements of Operations
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Three months ended June 30, 2010 |
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Three months ended June 30, 2009 |
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Computed |
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Change |
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Reported |
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Originally |
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Change |
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(In millions, except per share data) |
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under LIFO |
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to FIFO |
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under FIFO |
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Reported |
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to FIFO |
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Adjusted |
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Sales |
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$ |
692.9 |
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$ |
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$ |
692.9 |
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$ |
496.5 |
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$ |
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$ |
496.5 |
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Cost of sales |
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566.4 |
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(0.2 |
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566.2 |
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410.2 |
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5.4 |
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415.6 |
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Gross margin |
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126.5 |
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0.2 |
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126.7 |
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86.3 |
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(5.4 |
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80.9 |
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Selling and administrative |
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73.0 |
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73.0 |
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77.1 |
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77.1 |
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Income from equity affiliates |
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7.8 |
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7.8 |
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10.1 |
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10.1 |
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Operating income |
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61.3 |
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0.2 |
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61.5 |
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19.3 |
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(5.4 |
) |
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13.9 |
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Interest and other expense, net |
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(8.9 |
) |
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(8.9 |
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(9.5 |
) |
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(9.5 |
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Income before income taxes |
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52.4 |
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0.2 |
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52.6 |
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9.8 |
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(5.4 |
) |
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4.4 |
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Income tax expense |
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(6.9 |
) |
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(6.9 |
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(6.3 |
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(6.3 |
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Net income |
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$ |
45.5 |
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$ |
0.2 |
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$ |
45.7 |
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$ |
3.5 |
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$ |
(5.4 |
) |
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$ |
(1.9 |
) |
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Earnings per common share: |
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Basic earnings per common share |
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$ |
0.49 |
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$ |
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$ |
0.49 |
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$ |
0.04 |
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$ |
(0.06 |
) |
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$ |
(0.02 |
) |
Diluted earnings per common share |
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$ |
0.47 |
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$ |
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$ |
0.47 |
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$ |
0.04 |
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$ |
(0.06 |
) |
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$ |
(0.02 |
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Six months ended June 30, 2010 |
|
|
Six months ended June 30, 2009 |
|
|
|
Computed |
|
|
Change |
|
|
Reported |
|
|
Originally |
|
|
Change |
|
|
|
|
(In millions, except per share data) |
|
under LIFO |
|
|
to FIFO |
|
|
under FIFO |
|
|
Reported |
|
|
to FIFO |
|
|
Adjusted |
|
Sales |
|
$ |
1,323.3 |
|
|
$ |
|
|
|
$ |
1,323.3 |
|
|
$ |
959.9 |
|
|
$ |
|
|
|
$ |
959.9 |
|
Cost of sales |
|
|
1,093.8 |
|
|
|
(0.7 |
) |
|
|
1,093.1 |
|
|
|
814.4 |
|
|
|
13.8 |
|
|
|
828.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
229.5 |
|
|
|
0.7 |
|
|
|
230.2 |
|
|
|
145.5 |
|
|
|
(13.8 |
) |
|
|
131.7 |
|
Selling and administrative |
|
|
146.9 |
|
|
|
|
|
|
|
146.9 |
|
|
|
147.3 |
|
|
|
|
|
|
|
147.3 |
|
Other income, net |
|
|
9.3 |
|
|
|
|
|
|
|
9.3 |
|
|
|
18.4 |
|
|
|
|
|
|
|
18.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
91.9 |
|
|
|
0.7 |
|
|
|
92.6 |
|
|
|
16.6 |
|
|
|
(13.8 |
) |
|
|
2.8 |
|
Interest and other expense, net |
|
|
(17.6 |
) |
|
|
|
|
|
|
(17.6 |
) |
|
|
(24.9 |
) |
|
|
|
|
|
|
(24.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
74.3 |
|
|
|
0.7 |
|
|
|
75.0 |
|
|
|
(8.3 |
) |
|
|
(13.8 |
) |
|
|
(22.1 |
) |
Income tax expense |
|
|
(10.9 |
) |
|
|
|
|
|
|
(10.9 |
) |
|
|
2.5 |
|
|
|
|
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
63.4 |
|
|
$ |
0.7 |
|
|
$ |
64.1 |
|
|
$ |
(5.8 |
) |
|
$ |
(13.8 |
) |
|
$ |
(19.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.69 |
|
|
$ |
0.01 |
|
|
$ |
0.69 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.21 |
) |
Diluted earnings per common share |
|
$ |
0.66 |
|
|
$ |
0.01 |
|
|
$ |
0.67 |
|
|
$ |
(0.06 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.21 |
) |
6
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Computed |
|
|
Change |
|
|
Reported |
|
(In millions) |
|
under LIFO |
|
|
to FIFO |
|
|
under FIFO |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
202.1 |
|
|
$ |
24.8 |
|
|
$ |
226.9 |
|
Other current assets |
|
|
630.6 |
|
|
|
|
|
|
|
630.6 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
832.7 |
|
|
|
24.8 |
|
|
|
857.5 |
|
Other non-current assets |
|
|
673.5 |
|
|
|
|
|
|
|
673.5 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,506.2 |
|
|
$ |
24.8 |
|
|
$ |
1,531.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
501.7 |
|
|
$ |
|
|
|
$ |
501.7 |
|
Non-current liabilities |
|
|
621.8 |
|
|
|
|
|
|
|
621.8 |
|
Shareholders equity |
|
|
382.7 |
|
|
|
24.8 |
|
|
|
407.5 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,506.2 |
|
|
$ |
24.8 |
|
|
$ |
1,531.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Originally |
|
|
Change |
|
|
|
|
(In millions) |
|
Reported |
|
|
to FIFO |
|
|
Adjusted |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
159.6 |
|
|
$ |
24.1 |
|
|
$ |
183.7 |
|
Other current assets |
|
|
535.1 |
|
|
|
|
|
|
|
535.1 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
694.7 |
|
|
|
24.1 |
|
|
|
718.8 |
|
Other non-current assets |
|
|
697.2 |
|
|
|
|
|
|
|
697.2 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,391.9 |
|
|
$ |
24.1 |
|
|
$ |
1,416.0 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
375.7 |
|
|
$ |
|
|
|
$ |
375.7 |
|
Non-current liabilities |
|
|
682.6 |
|
|
|
|
|
|
|
682.6 |
|
Shareholders equity |
|
|
333.6 |
|
|
|
24.1 |
|
|
|
357.7 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,391.9 |
|
|
$ |
24.1 |
|
|
$ |
1,416.0 |
|
|
|
|
|
|
|
|
|
|
|
7
Condensed Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2010 |
|
|
|
Computed |
|
|
Change |
|
|
Reported |
|
(In millions) |
|
under LIFO |
|
|
to FIFO |
|
|
under FIFO |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
63.4 |
|
|
$ |
0.7 |
|
|
$ |
64.1 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments, net |
|
|
26.5 |
|
|
|
|
|
|
|
26.5 |
|
Change in assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase in inventories |
|
|
(48.3 |
) |
|
|
(0.7 |
) |
|
|
(49.0 |
) |
Decrease in other |
|
|
(0.4 |
) |
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
41.2 |
|
|
|
|
|
|
|
41.2 |
|
Net cash used by investing activities |
|
|
(3.1 |
) |
|
|
|
|
|
|
(3.1 |
) |
Net cash used by financing activities |
|
|
(18.4 |
) |
|
|
|
|
|
|
(18.4 |
) |
Effect of exchange rate changes on cash |
|
|
(1.3 |
) |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
18.4 |
|
|
|
|
|
|
|
18.4 |
|
Cash and cash equivalents at beginning of period |
|
|
222.7 |
|
|
|
|
|
|
|
222.7 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
241.1 |
|
|
|
|
|
|
$ |
241.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009 |
|
|
|
Originally |
|
|
Change |
|
|
Adjusted |
|
(In millions) |
|
Reported |
|
|
to FIFO |
|
|
|
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5.8 |
) |
|
$ |
(13.8 |
) |
|
$ |
(19.6 |
) |
Adjustments to reconcile net loss to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments, net |
|
|
42.9 |
|
|
|
|
|
|
|
42.9 |
|
Change in assets and liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in inventories |
|
|
47.0 |
|
|
|
13.8 |
|
|
|
60.8 |
|
Increase in other |
|
|
50.5 |
|
|
|
|
|
|
|
50.5 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
134.6 |
|
|
|
|
|
|
|
134.6 |
|
Net cash used by investing activities |
|
|
(12.2 |
) |
|
|
|
|
|
|
(12.2 |
) |
Net cash provided by financing activities |
|
|
15.1 |
|
|
|
|
|
|
|
15.1 |
|
Effect of exchange rate changes on cash |
|
|
0.5 |
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
138.0 |
|
|
|
|
|
|
|
138.0 |
|
Cash and cash equivalents at beginning of period |
|
|
44.3 |
|
|
|
|
|
|
|
44.3 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
182.3 |
|
|
|
|
|
|
$ |
182.3 |
|
|
|
|
|
|
|
|
|
|
|
8
Note 3 Goodwill
Goodwill as of June 30, 2010 and December 31, 2009, by operating segment, was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Global Specialty Engineered Materials |
|
$ |
82.5 |
|
|
$ |
82.4 |
|
Global Color, Additives and Inks |
|
|
72.2 |
|
|
|
72.1 |
|
Performance Products and Solutions |
|
|
7.4 |
|
|
|
7.4 |
|
PolyOne Distribution |
|
|
1.6 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
Total |
|
$ |
163.7 |
|
|
$ |
163.5 |
|
|
|
|
|
|
|
|
Note 4 Inventories
As discussed in Note 2, Change in Accounting Principle, effective January 1, 2010, we elected
to change our costing method for certain inventories. We applied this change in accounting
principle by adjusting all prior periods presented retrospectively. Components of inventories are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
At FIFO cost: |
|
|
|
|
|
|
|
|
Finished products |
|
$ |
141.0 |
|
|
$ |
108.4 |
|
Work in process |
|
|
3.5 |
|
|
|
2.4 |
|
Raw materials and supplies |
|
|
82.4 |
|
|
|
72.9 |
|
|
|
|
|
|
|
|
|
|
$ |
226.9 |
|
|
$ |
183.7 |
|
|
|
|
|
|
|
|
Note 5 Property
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Land and land improvements |
|
$ |
41.0 |
|
|
$ |
40.7 |
|
Buildings |
|
|
280.9 |
|
|
|
277.0 |
|
Machinery and equipment |
|
|
891.7 |
|
|
|
916.5 |
|
|
|
|
|
|
|
|
|
|
|
1,213.6 |
|
|
|
1,234.2 |
|
Less accumulated depreciation and amortization |
|
|
(849.9 |
) |
|
|
(841.8 |
) |
|
|
|
|
|
|
|
|
|
$ |
363.7 |
|
|
$ |
392.4 |
|
|
|
|
|
|
|
|
Note 6 Income Taxes
Income tax expense was $6.9 million for the second quarter of 2010 compared to $6.3 million in
the second quarter of 2009. For the first half of 2010, we recognized income tax expense of
$10.9 million compared to a benefit of $2.5 million in the first half of 2009. We record our
interim provision for income taxes based on our estimated annual effective tax rate as well as
certain items discrete to the current period. Our interim provision as well as our estimated
annual effective tax rate is impacted by a number of factors including our U.S. federal and state
and foreign income tax loss carryforwards and our ability to use them as well as changes to our
unrealized tax benefits.
We decreased existing valuation allowances against our deferred tax assets by $12.9 million and
$16.5 million, respectively, in the second quarter and first half of 2010. The related non-cash
benefit to income tax expense was $12.2 million and $15.1 million, respectively, and related to
various U.S. federal, state, local, and foreign deferred tax assets. We were able to realize these
benefits and reduce our valuation allowance primarily as a result of generating positive pretax
income during the second quarter and first half of 2010.
9
We increased existing valuation allowances against our deferred tax assets by $7.7 million in the
first half of 2009. This non-cash charge to income tax expense related to various U.S. federal,
state, local, and foreign deferred tax assets. Also, during the second quarter and first half of
2009, we recognized $7.0 million of income tax expense and $3.0 million of income tax benefit,
respectively, including related interest and penalties associated with uncertain tax positions.
We recognize interest and penalties related to uncertain income tax items in the provision for
income taxes.
Note 7 Investment in Equity Affiliates
The results of operations of SunBelt Chlor-Alkali Partnership (SunBelt) are included in the
SunBelt Joint Venture segment. We own 50% of SunBelt.
The following table presents SunBelts summarized financial results for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
41.4 |
|
|
$ |
45.7 |
|
|
$ |
69.0 |
|
|
$ |
98.2 |
|
Operating income |
|
$ |
16.3 |
|
|
$ |
20.1 |
|
|
$ |
19.7 |
|
|
$ |
47.6 |
|
Partnership income as reported by SunBelt |
|
$ |
14.2 |
|
|
$ |
18.1 |
|
|
$ |
15.8 |
|
|
$ |
43.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliate earnings recorded by PolyOne |
|
$ |
7.1 |
|
|
$ |
9.0 |
|
|
$ |
7.9 |
|
|
$ |
21.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Current assets |
|
$ |
39.5 |
|
|
$ |
16.1 |
|
Non-current assets |
|
|
86.5 |
|
|
|
94.1 |
|
|
|
|
|
|
|
|
Total assets |
|
|
126.0 |
|
|
|
110.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
21.4 |
|
|
|
21.4 |
|
Non-current liabilities |
|
|
85.3 |
|
|
|
85.3 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
106.7 |
|
|
|
106.7 |
|
|
|
|
|
|
|
|
Partnership capital |
|
$ |
19.3 |
|
|
$ |
3.5 |
|
|
|
|
|
|
|
|
Other investments in equity affiliates are discussed below.
We own 50% of BayOne Urethane Systems, L.L.C. (BayOne), which is included in the Global Color,
Additives and Inks operating segment. Through its disposition on October 13, 2009, the former Geon
Polimeros Andinos equity affiliate (owned 50%) was included in the Performance Products and
Solutions operating segment. Combined summarized financial information for these equity affiliates
follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
As reported by other equity affiliates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
14.5 |
|
|
$ |
22.2 |
|
|
$ |
27.1 |
|
|
$ |
42.4 |
|
Operating income |
|
$ |
1.4 |
|
|
$ |
2.5 |
|
|
$ |
2.8 |
|
|
$ |
3.6 |
|
Partnership income |
|
$ |
1.4 |
|
|
$ |
2.1 |
|
|
$ |
2.8 |
|
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliate earnings recorded by PolyOne |
|
$ |
0.7 |
|
|
$ |
1.1 |
|
|
$ |
1.4 |
|
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Note 8 Weighted-Average Shares Used in Computing Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2010 |
|
|
Adjusted 2009 |
|
|
2010 |
|
|
2009 |
|
Weighted-average shares outstanding basic |
|
|
92.8 |
|
|
|
92.4 |
|
|
|
92.7 |
|
|
|
92.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
92.8 |
|
|
|
92.4 |
|
|
|
92.7 |
|
|
|
92.3 |
|
Plus dilutive impact of stock options and awards |
|
|
3.5 |
|
|
|
|
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted |
|
|
96.3 |
|
|
|
92.4 |
|
|
|
95.6 |
|
|
|
92.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share is computed as net income available to common shareholders
divided by the weighted average basic shares outstanding. Diluted earnings per common share is
computed as net income available to common shareholders divided by the weighted average diluted
shares outstanding. Pursuant to FASB ASC Topic 260, Earnings Per Share, when a loss is reported the
denominator of diluted earnings per share cannot be adjusted for the dilutive impact of stock
options and awards because doing so will result in anti-dilution. Therefore, for the three-month
and six-month periods ended June 30, 2009, basic weighted-average shares outstanding are used in
calculating diluted earnings per share.
Outstanding stock options with exercise prices greater than the average price of the common shares
and certain other awards are anti-dilutive and are not included in the computation of diluted
earnings per share. For the three-month and six-month periods ended June 30, 2010, 1.0 million of
these options and awards were excluded from the computation of diluted earnings per share. Since we
reported a net loss for the three-month and six-month periods ended June 30, 2009, all stock
options and awards, which totaled 7.8 million at June 30, 2009, were excluded from the computation
of the diluted loss per share because their effect would have been anti-dilutive.
Note 9 Employee Separation and Plant Phaseout
Management has undertaken certain restructuring initiatives to improve profitability and, as a
result, we incurred employee separation and plant phaseout costs. Employee separation and plant
phaseout costs are reflected on the line Corporate and eliminations in Note 13, Segment
Information. For further discussion of these initiatives, see Note 3, Employee Separation and Plant
Phaseout, to the consolidated financial statements and the accompanying notes included in PolyOnes
Annual Report on Form 10-K for the year ended December 31, 2009.
A summary of total employee separation and plant phaseout costs for the three-month and six-month
periods ended June 30, 2010 and 2009, including where the charges are recorded in the accompanying
condensed consolidated statements of operations, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Cost of sales |
|
$ |
0.3 |
|
|
$ |
2.9 |
|
|
$ |
0.3 |
|
|
$ |
12.7 |
|
Selling and administrative |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee separation and plant phaseout |
|
$ |
0.6 |
|
|
$ |
3.0 |
|
|
$ |
0.6 |
|
|
$ |
13.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments during the three-month periods ended June 30, 2010 and 2009 were $0.8 million
and $12.5 million, respectively. Cash payments during the six-month periods ended June 30, 2010 and
2009 were $2.9 million and $20.5 million, respectively. Included in Cost of sales for the six-month
periods ended June 30, 2010 and 2009 were charges of $0.2 million and $5.4 million, respectively,
for accelerated depreciation on assets related to these restructuring initiatives, all of which
were recognized during the first quarter of each respective year.
11
The following table details the charges and changes to the reserves associated with these
restructuring initiatives for the six-month period ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Plant Phaseout Costs |
|
|
|
|
|
|
Separation |
|
|
|
|
|
|
Asset |
|
|
|
|
(Dollars in millions) |
|
Costs |
|
|
Cash Closure |
|
|
Write-downs |
|
|
Total |
|
Realignment of certain manufacturing plants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2010 |
|
$ |
3.0 |
|
|
$ |
1.7 |
|
|
$ |
|
|
|
$ |
4.7 |
|
Charge |
|
|
0.5 |
|
|
|
0.1 |
|
|
|
|
|
|
|
0.6 |
|
Utilized |
|
|
(2.4 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
(4.2 |
) |
Impact of foreign currency translation |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
$ |
1.1 |
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not expect to incur significant expenses associated with these activities in 2010.
Note 10 Employee Benefit Plans
Components of defined benefit pension plan costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
0.8 |
|
|
$ |
0.7 |
|
Interest cost |
|
|
7.4 |
|
|
|
7.8 |
|
|
|
14.8 |
|
|
|
15.7 |
|
Expected return on plan assets |
|
|
(6.5 |
) |
|
|
(5.4 |
) |
|
|
(13.0 |
) |
|
|
(10.8 |
) |
Amortization of unrecognized
losses, transition obligation
and prior service costs,
including curtailment gain
recognized in 2009 |
|
|
2.5 |
|
|
|
2.9 |
|
|
|
5.0 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.8 |
|
|
$ |
5.7 |
|
|
$ |
7.6 |
|
|
$ |
13.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of post-retirement health care plan benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
0.1 |
|
Interest cost |
|
|
0.3 |
|
|
|
1.4 |
|
|
|
0.7 |
|
|
|
2.9 |
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized
losses, transition obligation
and prior service cost |
|
|
(4.2 |
) |
|
|
(0.9 |
) |
|
|
(8.4 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3.9 |
) |
|
$ |
0.6 |
|
|
$ |
(7.7 |
) |
|
$ |
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 15, 2009, our Board of Directors approved and adopted changes to the Geon
Pension Plan (Geon Plan), the Benefit Restoration Plan (BRP), the voluntary retirement savings
plan (RSP) and the Supplemental Retirement Benefit Plan (SRP). Effective March 20, 2009, the
amendments permanently froze future benefit accruals and provided that participants will not
receive credit under the Geon Plan or the BRP for any eligible earnings paid on or after that
date.
On September 1, 2009, we adopted changes to our post-retirement healthcare plan whereby,
effective January 1, 2010, the plan, for certain eligible retirees, was discontinued, and
benefits will be phased out through December 31, 2012.
12
Note 11 Financing Arrangements
Short-term debt At June 30, 2010, $0.4 million of short-term notes issued by certain of our
European subsidiaries were outstanding.
Long-term debt Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(Dollars in millions) |
|
2010(1) |
|
|
2009(1) |
|
8.875% senior notes due May 2012 |
|
$ |
279.6 |
|
|
$ |
279.5 |
|
7.500% debentures due December 2015 |
|
|
50.0 |
|
|
|
50.0 |
|
Medium-term notes: |
|
|
|
|
|
|
|
|
6.52% medium-term notes due February 2010 |
|
|
|
|
|
|
19.9 |
|
6.58% medium-term notes due February 2011 |
|
|
19.8 |
|
|
|
19.7 |
|
Credit facility borrowings, facility expires March 2011 |
|
|
40.0 |
|
|
|
40.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
389.4 |
|
|
$ |
409.1 |
|
Less current portion |
|
|
59.8 |
|
|
|
19.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
329.6 |
|
|
$ |
389.2 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Book values include unamortized discounts, as applicable. |
Current maturities of long-term debt at June 30, 2010 includes $19.8 million of our 6.58%
medium-term notes due February 2011 and $40.0 million of borrowings on our credit facility. On July
7, 2010, we repaid $40 million of outstanding borrowings from Citicorp USA, Inc. and also
terminated the related commitments under our $40 million unsecured revolving and letter of credit
facility, which was scheduled to mature on March 20, 2011.
We are exposed to market risk from changes in interest rates on debt obligations and from changes
in foreign currency exchange rates. Information about these risks and exposure management is
included in Item 7A Qualitative and Quantitative Disclosures about Market Risk in our Annual
Report on Form 10-K for the year ended December 31, 2009. There have been no material changes in
the market risk faced by PolyOne from December 31, 2009 to June 30, 2010.
Note 12 Sale of Accounts Receivable
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Trade accounts receivable |
|
$ |
152.6 |
|
|
$ |
129.2 |
|
Retained interest in securitized accounts receivable |
|
|
213.9 |
|
|
|
151.1 |
|
Allowance for doubtful accounts |
|
|
(5.7 |
) |
|
|
(5.9 |
) |
|
|
|
|
|
|
|
|
|
$ |
360.8 |
|
|
$ |
274.4 |
|
|
|
|
|
|
|
|
Sale of Accounts Receivable Under the terms of our receivables sale facility, we sell
accounts receivable to PolyOne Funding Corporation (PFC) and PolyOne Funding Canada Corporation
(PFCC), both wholly-owned, bankruptcy-remote subsidiaries. PFC and PFCC, in turn, may sell an
undivided interest in up to $175.0 million and $25.0 million of these accounts receivable,
respectively, to certain investors. The receivables sale facility matures in June 2012. As of June
30, 2010 and December 31, 2009, accounts receivable totaling $213.9 million and $151.1 million,
respectively, were sold by us to PFC and PFCC. The maximum proceeds that PFC and PFCC may receive
under the facility is limited to the lesser of $200.0 million or 85% of the eligible domestic and
Canadian accounts receivable sold. As of June 30, 2010 and December 31, 2009, neither PFC nor PFCC
had sold any of their undivided interests in accounts receivable.
13
The receivables sale facility also makes up to $40.0 million available for the issuance of standby
letters of credit as a sub-limit within the $200.0 million limit under the facility, of which $13.7
million was used at June 30, 2010. The level of availability under the receivables sale facility is
based on the prior months total accounts receivable sold to PFC and PFCC, as reduced by
outstanding letters of credit. Additionally, availability is dependent upon compliance with a fixed
charge coverage ratio covenant related primarily to operating performance that is set forth in the
related agreements. As of June 30, 2010, we were in compliance with these covenants. As of June 30,
2010, $153.6 million of securitized accounts receivable were available for sale.
Note 13 Segment Information
On February 4, 2010, we announced a new global organization structure that will help us better
serve our global customers, drive our earnings growth, better execute our strategy, and leverage
our strong geographic footprint. Our former International Color and Engineered Materials operating
segment has been split and is now reported within the Global Specialty Engineered Materials
operating segment and the Global Color, Additives and Inks operating segment. In addition, our
former Resins and Intermediates segment is now referred to as the SunBelt Joint Venture. We now
have five reportable segments: (1) Global Color, Additives and Inks; (2) Global Specialty
Engineered Materials; (3) Performance Products and Solutions; (4) PolyOne Distribution; and
(5) SunBelt Joint Venture.
As a result of these changes to PolyOnes segment structure, prior period segment information was
reclassified to conform to the 2010 presentation. These changes did not impact total segment
results.
Segment information for the three-month and six-month periods ended June 30, 2010 and 2009,
adjusted to reflect our new segment reporting structure and change in accounting principle follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
Three Months Ended June 30, 2010 |
|
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
|
Sales to |
|
|
|
|
|
|
Segment |
|
|
Sales to |
|
|
|
|
|
|
Operating |
|
|
|
External |
|
|
|
|
|
|
Operating |
|
|
External |
|
|
|
|
|
|
Income |
|
(In millions) |
|
Customers |
|
|
Total Sales |
|
|
Income |
|
|
Customers |
|
|
Total Sales |
|
|
(Loss) |
|
Global Specialty Engineered Materials |
|
$ |
119.0 |
|
|
$ |
127.5 |
|
|
$ |
12.1 |
|
|
$ |
91.1 |
|
|
$ |
96.2 |
|
|
$ |
5.7 |
|
Global Color, Additives and Inks |
|
|
136.6 |
|
|
|
137.1 |
|
|
|
11.6 |
|
|
|
117.5 |
|
|
|
118.1 |
|
|
|
6.2 |
|
Performance Products and Solutions |
|
|
196.8 |
|
|
|
218.5 |
|
|
|
17.6 |
|
|
|
153.3 |
|
|
|
170.3 |
|
|
|
12.4 |
|
PolyOne Distribution |
|
|
240.5 |
|
|
|
241.4 |
|
|
|
11.6 |
|
|
|
134.6 |
|
|
|
135.1 |
|
|
|
3.9 |
|
SunBelt Joint Venture |
|
|
|
|
|
|
|
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
8.0 |
|
Corporate and eliminations |
|
|
|
|
|
|
(31.6 |
) |
|
|
2.5 |
|
|
|
|
|
|
|
(23.2 |
) |
|
|
(22.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
692.9 |
|
|
$ |
692.9 |
|
|
$ |
61.5 |
|
|
$ |
496.5 |
|
|
$ |
496.5 |
|
|
$ |
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
Six Months Ended June 30, 2010 |
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
|
|
|
|
|
|
|
|
Segment |
|
|
|
Sales to |
|
|
|
|
|
|
Operating |
|
|
Sales to |
|
|
|
|
|
|
Operating |
|
|
|
External |
|
|
|
|
|
|
Income |
|
|
External |
|
|
|
|
|
|
Income |
|
(In millions) |
|
Customers |
|
|
Total Sales |
|
|
(Loss) |
|
|
Customers |
|
|
Total Sales |
|
|
(Loss) |
|
Global Specialty Engineered Materials |
|
$ |
238.0 |
|
|
$ |
253.8 |
|
|
$ |
24.2 |
|
|
$ |
172.2 |
|
|
$ |
182.8 |
|
|
$ |
4.2 |
|
Global Color, Additives and Inks |
|
|
266.6 |
|
|
|
268.0 |
|
|
|
20.5 |
|
|
|
220.7 |
|
|
|
221.8 |
|
|
|
7.6 |
|
Performance Products and Solutions |
|
|
363.2 |
|
|
|
402.2 |
|
|
|
29.7 |
|
|
|
295.9 |
|
|
|
329.1 |
|
|
|
13.5 |
|
PolyOne Distribution |
|
|
455.5 |
|
|
|
457.3 |
|
|
|
20.2 |
|
|
|
271.1 |
|
|
|
272.0 |
|
|
|
8.8 |
|
SunBelt Joint Venture |
|
|
|
|
|
|
|
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
19.7 |
|
Corporate and eliminations |
|
|
|
|
|
|
(58.0 |
) |
|
|
(7.8 |
) |
|
|
|
|
|
|
(45.8 |
) |
|
|
(51.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,323.3 |
|
|
$ |
1,323.3 |
|
|
$ |
92.6 |
|
|
$ |
959.9 |
|
|
$ |
959.9 |
|
|
$ |
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
December 31, |
|
(In millions) |
|
June 30, 2010 |
|
|
2009 |
|
Global Specialty Engineered Materials |
|
$ |
343.3 |
|
|
$ |
324.1 |
|
Global Color, Additives and Inks |
|
|
345.8 |
|
|
|
344.7 |
|
Performance Products and Solutions |
|
|
319.5 |
|
|
|
282.6 |
|
PolyOne Distribution |
|
|
200.2 |
|
|
|
152.9 |
|
SunBelt Joint Venture |
|
|
10.2 |
|
|
|
2.0 |
|
Corporate and eliminations |
|
|
312.0 |
|
|
|
309.7 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,531.0 |
|
|
$ |
1,416.0 |
|
|
|
|
|
|
|
|
Note 14 Commitments and Contingencies
We have been notified by federal and state environmental agencies and by private parties that
we may be a potentially responsible party (PRP) in connection with the investigation and
remediation of certain environmental waste disposal sites. While government agencies frequently
assert that PRPs are jointly and severally liable at these sites, in our experience, the interim
and final allocations of liability costs are generally made based on the relative contribution of
waste. We believe that our potential continuing liability with respect to these sites will not have
a material adverse effect on our consolidated financial position, results of operations or cash
flows. In addition, we initiate corrective and preventive environmental projects of our own to
ensure safe and lawful activities at our operations. We believe that compliance with current
governmental regulations at all levels will not have a material adverse effect on our financial
condition.
During the six-month periods ended June 30, 2010 and 2009, we recognized $6.3 million and $2.9
million, respectively, of expense related to environmental activities at all of our active and
inactive sites. During the six-month period ended June 30, 2010, we received $14.4 million of
proceeds from insurance recoveries. During the six-month period ended June 30, 2009, we did not
receive any proceeds from insurance recoveries.
Based on estimates that were prepared by our environmental engineers and consultants, we had
accrued $79.6 million at June 30, 2010 and $81.7 million at December 31, 2009 for probable future
environmental expenditures related to previously contaminated sites. The accruals represent our
best estimate of the remaining probable remediation costs, based upon information and technology
that is currently available and our view of the most likely remedy. Depending upon the results of
future testing, the ultimate remediation alternatives undertaken, changes in regulations, new
information, newly discovered conditions and other factors, it is reasonably possible that we could
incur additional costs in excess of the amount accrued at June 30, 2010. However, such additional
costs, if any, cannot be currently estimated. Our estimate of the liability may be revised as new
regulations or technologies are developed or additional information is obtained. Additional
information related to environmental liabilities is in Note 12, Commitments and Related-Party
Information, to the consolidated financial statements included in PolyOnes Annual Report on Form
10-K for the year ended December 31, 2009.
We guarantee $48.8 million of SunBelts outstanding senior secured notes in connection with the
construction of a chlor-alkali facility in McIntosh, Alabama. This debt matures in equal annual
installments through 2017.
Note 15 Financial Instruments
The estimated fair values of financial instruments were principally based on market prices
where such prices were available and, where unavailable, fair values were estimated based on market
prices of similar instruments. Short-term foreign exchange contracts are the only asset or
liability recorded at fair value on a recurring basis. These contracts are measured based on
exchange rates at June 30, 2010 and classified as a level 2 fair value measurement within the fair
value hierarchy.
15
The following table summarizes the contractual amounts of our foreign exchange contracts as of
June 30, 2010. Foreign currency amounts are translated at exchange rates as of June 30, 2010. The
Buy amounts represent the U.S. dollar equivalent of commitments to purchase currencies, and the
Sell amounts represent the U.S. dollar equivalent of commitments to sell currencies.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
Currency (In millions) |
|
Buy |
|
Sell |
|
|
|
U.S. Dollar |
|
$ |
53.7 |
|
|
|
|
|
Euro |
|
|
|
|
|
$ |
49.8 |
|
British pound |
|
|
|
|
|
$ |
3.9 |
|
The carrying amounts and fair values of our financial instruments as of June 30, 2010 and
December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
(In millions) |
|
Carrying Amount |
|
Fair Value |
|
Carrying Amount |
|
Fair Value |
Cash and cash equivalents |
|
$ |
241.1 |
|
|
$ |
241.1 |
|
|
$ |
222.7 |
|
|
$ |
222.7 |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility borrowings |
|
|
40.0 |
|
|
|
40.0 |
|
|
|
40.0 |
|
|
|
40.0 |
|
7.500% debentures |
|
|
50.0 |
|
|
|
49.0 |
|
|
|
50.0 |
|
|
|
45.8 |
|
8.875% senior notes |
|
|
279.6 |
|
|
|
291.9 |
|
|
|
279.5 |
|
|
|
285.1 |
|
Medium-term notes |
|
|
19.8 |
|
|
|
20.0 |
|
|
|
39.6 |
|
|
|
38.4 |
|
Foreign exchange contracts |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Note 16 Comprehensive Income
The following table sets forth the reconciliation of net income (loss) to comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
45.7 |
|
|
$ |
(1.9 |
) |
|
$ |
64.1 |
|
|
$ |
(19.6 |
) |
Amortization of unrecognized losses, transition obligation and
prior service costs, net of tax expense of $0.8 |
|
|
(0.9 |
) |
|
|
2.3 |
|
|
|
(2.6 |
) |
|
|
6.2 |
|
Net gain occurring in the year due to plan amendments (See Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.5 |
|
Translation adjustment |
|
|
(9.8 |
) |
|
|
7.3 |
|
|
|
(14.7 |
) |
|
|
(1.1 |
) |
Other |
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
34.9 |
|
|
$ |
7.8 |
|
|
$ |
46.7 |
|
|
$ |
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 17 Subsequent Events
On July 7, 2010, we repaid $40 million of outstanding borrowings from Citicorp USA, Inc. and
also terminated the related commitments under our $40 million unsecured revolving and letter of
credit facility, which was scheduled to mature on March 20, 2011.
16
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Our Business
We are a premier provider of specialized polymer materials, services and solutions with operations
in thermoplastic compounds, specialty polymer formulations, color and additive systems,
thermoplastic resin distribution and specialty vinyl resins. We also have two equity investments:
one in a manufacturer of caustic soda and chlorine and one in a formulator of polyurethane
compounds. Headquartered in Avon Lake, Ohio, we have employees at manufacturing sites and
distribution facilities in North America, Europe and Asia and joint ventures in North America. We
provide value to our customers through our ability to link our knowledge of polymers and
formulation technology with our manufacturing and supply chain to provide an essential link between
large chemical producers (our raw material suppliers) and designers, assemblers and processors of
plastics (our customers).
Recent Developments
Change in Accounting Principle
Effective January 1, 2010, we elected to change our method of valuing inventories for certain U.S.
businesses to the first-in, first-out (FIFO) method, while in prior years, these inventories were
valued using the last-in, first-out (LIFO) method. As a result of this change, all inventories are
valued using the FIFO method. We believe the FIFO method is preferable as it conforms the inventory
costing methods for all of our inventories to a single method and improves comparability with our
industry peers. The FIFO method also better reflects current acquisition cost of those inventories
on our consolidated balance sheets. All prior periods presented herein have been adjusted to apply
the new method retrospectively and conform to the current costing methodology.
Highlights and Executive Summary
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month period ended |
|
Six-month period ended |
|
|
June 30, |
|
June 30, |
(In millions) |
|
2010 |
|
2009 Adjusted |
|
2010 |
|
2009 Adjusted |
Sales |
|
$ |
692.9 |
|
|
$ |
496.5 |
|
|
$ |
1,323.3 |
|
|
$ |
959.9 |
|
Operating income |
|
|
61.5 |
|
|
|
13.9 |
|
|
|
92.6 |
|
|
|
2.8 |
|
Net income (loss) |
|
|
45.7 |
|
|
|
(1.9 |
) |
|
|
64.1 |
|
|
|
(19.6 |
) |
Sales increased 39.6% and 37.9% in the second quarter and first half of 2010, respectively, as
compared to the second quarter and first half of 2009. Volumes in the second quarter and first half
of 2010 increased 27.3% and 27.1%, respectively, versus the corresponding periods in 2009.
Additionally, sales were favorably impacted by a higher value sales mix and increased market
pricing associated with raw material inflation. Sales increased across most of our end markets in
the second quarter and first half of 2010 as compared to the corresponding periods in 2009. In
North America, sales increased 47.6% and 40.4% in the second quarter and first half of 2010,
respectively, led by the transportation, consumer, healthcare and industrial end markets. In
Europe, sales increased 14.7% and 25.8% in the second quarter and first half of 2010, respectively,
led by the transportation and wire and cable end markets. In Asia, sales increased 29.0% and 44.1%
in the second quarter and first half of 2010, respectively, led by the electrical and electronics
end markets.
Operating income increased in the second quarter of 2010 compared to the second quarter of 2009,
reflecting an increase in volumes, the favorable impact of improved sales mix and new business
gains and the realization of restructuring savings. Gains from insurance and legal settlements of
$18.4 million favorably impacted operating income in the second quarter of 2010. These positive
items were partially offset in the second quarter of 2010 by lower income from our equity
investment in SunBelt Chlor-Alkali Partnership (SunBelt) of $1.9 million.
Operating income increased in the first half of 2010 compared to the first half of 2009, reflecting
an increase in volumes, the favorable impact of improved sales mix and new business gains and the
realization of restructuring savings. Gains from insurance and legal settlements of $21.6 million
favorably impacted operating income in the first half of 2010. Charges related to environmental
remediation and plant related restructuring were $6.9 million in the first half of 2010
17
versus $16.0 in the first half of 2009. Additionally, operating income for the first half of 2009
included a $5.0 million charge related to the adjustment to our 2008 estimated year-end goodwill
impairment charge as compared to no such charge in the first half of 2010. These positive items
were partially offset in the first half of 2010 by lower income from our equity investment in
SunBelt of $13.9 million.
Net income increased primarily due to the items discussed above. In addition, Other expense, net
decreased by approximately $5.4 million in the first half of 2010 primarily due to decreased
foreign exchange losses. Income tax expense was $10.9 million in the first half of 2010 as compared
to a benefit of $2.5 million in the first half of 2009.
|
|
|
|
|
|
|
|
|
(In millions) |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Cash and cash equivalents |
|
$ |
241.1 |
|
|
$ |
222.7 |
|
Accounts receivable facility availability |
|
|
153.6 |
|
|
|
112.8 |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
394.7 |
|
|
$ |
335.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, short- and long-term |
|
$ |
389.8 |
|
|
$ |
409.6 |
|
In the first half of 2010, liquidity increased by $59.2 million. The increase in our cash
balance of $18.4 million includes proceeds of $21.6 million from insurance and legal settlements
and $9.8 million from the sale of our investment in, and related seller note receivable from,
OSullivan Films, which was partially offset by the repayment of $20.0 million aggregate principal
of our 6.52% medium-term notes. The increase in our accounts receivable facility availability
reflects an increase in sales.
Results of Operations Three-Month Period Ended June 30, 2010 vs. Three-Month Period Ended June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VariancesFavorable |
|
|
|
Three Months Ended June 30, |
|
|
(Unfavorable) |
|
(Dollars in millions, except per share data) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
Sales |
|
$ |
692.9 |
|
|
$ |
496.5 |
|
|
$ |
196.4 |
|
|
|
39.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
566.2 |
|
|
|
415.6 |
|
|
|
(150.6 |
) |
|
|
(36.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
126.7 |
|
|
|
80.9 |
|
|
|
45.8 |
|
|
|
56.6 |
% |
Selling and administrative |
|
|
73.0 |
|
|
|
77.1 |
|
|
|
4.1 |
|
|
|
5.3 |
% |
Income from equity affiliates and minority interest |
|
|
7.8 |
|
|
|
10.1 |
|
|
|
(2.3 |
) |
|
|
(22.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
61.5 |
|
|
|
13.9 |
|
|
|
47.6 |
|
|
|
342.4 |
% |
Interest expense, net |
|
|
(7.7 |
) |
|
|
(8.8 |
) |
|
|
1.1 |
|
|
|
(12.5 |
)% |
Other expense, net |
|
|
(1.2 |
) |
|
|
(0.7 |
) |
|
|
(0.5 |
) |
|
|
71.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
52.6 |
|
|
|
4.4 |
|
|
|
48.2 |
|
|
NM |
Income tax expense |
|
|
(6.9 |
) |
|
|
(6.3 |
) |
|
|
(0.6 |
) |
|
|
9.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
45.7 |
|
|
$ |
(1.9 |
) |
|
$ |
47.6 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
0.49 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
0.47 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM Not meaningful
Sales
Sales increased 39.6% in the second quarter of 2010 as compared to the second quarter of 2009.
Volumes increased 27.3% versus the comparable period in 2009. Additionally, sales were favorably
impacted by a higher value sales mix and increased market pricing principally associated with raw
material inflation. These positive items were partially offset by the impact of unfavorable
changes in currency exchange rates of 1%, primarily due to a weaker euro.
Cost of Sales
These costs include raw materials, plant conversion, distribution, environmental remediation and
plant related restructuring charges. As a percentage of sales, these costs declined to 81.7% of
sales in the second quarter of 2010 as
18
compared to 83.7% in the second quarter of 2009. Cost of sales as a percentage of sales was
favorably impacted in the second quarter of 2010 by gains of $15.9 million associated with
insurance settlements and savings associated with our Lean Six Sigma improvement initiatives,
partially offset by a higher mix of sales from our Distribution business, which has lower gross
margin percentages than our other businesses.
Selling and Administrative
These costs include selling, technology, administrative functions, corporate and general expenses
and amortization of intangible assets. Selling and administrative costs decreased in the second
quarter of 2010 as compared to the second quarter of 2009 due primarily to lower pension and other
post-employment benefit expenses and the impact of changes in currency exchange rates. Partially
offsetting these gains were increased incentive compensation expense resulting from improved
performance results.
Income from Equity Affiliates
Income from equity affiliates is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
SunBelt |
|
$ |
7.1 |
|
|
$ |
9.0 |
|
Other equity affiliates |
|
|
0.7 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
$ |
7.8 |
|
|
$ |
10.1 |
|
|
|
|
|
|
|
|
During the second quarter of 2010, Income from equity affiliates decreased as compared to the
corresponding period in 2009 due to lower earnings from our SunBelt joint venture driven primarily
by lower caustic soda prices. The negative impact of caustic soda pricing was partially offset by
the favorable impact of increased volume for caustic soda and improved pricing and volume for
chlorine as compared to the second quarter of 2009.
Interest Expense, net
Interest expense, net decreased in the second quarter of 2010 as compared to the second quarter of
2009 due primarily to lower average borrowing levels.
Included in Interest expense, net for each of the three months ended June 30, 2010 and 2009 is
interest income of $0.8 million.
Other Expense, net
Financing costs associated with our receivables sale facility, foreign currency gains and losses
and other miscellaneous items were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Currency exchange (loss) gain |
|
$ |
(5.4 |
) |
|
$ |
3.8 |
|
Foreign exchange contracts gains (losses), net |
|
|
4.8 |
|
|
|
(3.9 |
) |
Receivables sale facility fees |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
Other expense, net |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
Other expense, net |
|
$ |
(1.2 |
) |
|
$ |
(0.7 |
) |
|
|
|
|
|
|
|
Income Tax (Expense) Benefit
For the second quarter of 2010, we recognized income tax expense of $6.9 million compared to $6.3
million in the second quarter of 2009. Valuation allowances against our deferred tax assets
decreased by $12.9 million in the second quarter of 2010 as a result of our positive pretax income
during that period. The related non-cash benefit to income tax expense was $12.2 million and was
associated with various U.S. federal, state, local, and foreign deferred tax assets.
19
During the second quarter of 2009 we recognized $7.0 million of tax expense, including the related
interest and penalties, associated with uncertain tax positions, partially offset by a $2.6 million
tax benefit associated with a decrease in the valuation allowance.
Results of Operations Six-Month Period Ended June 30, 2010 vs. Six-Month Period Ended June 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VariancesFavorable |
|
|
|
Six Months Ended June 30, |
|
|
(Unfavorable) |
|
(Dollars in millions, except per share data) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
Sales |
|
$ |
1,323.3 |
|
|
$ |
959.9 |
|
|
$ |
363.4 |
|
|
|
37.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
1,093.1 |
|
|
|
828.2 |
|
|
|
(264.9 |
) |
|
|
(32.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
230.2 |
|
|
|
131.7 |
|
|
|
98.5 |
|
|
|
74.8 |
% |
Selling and administrative |
|
|
146.9 |
|
|
|
147.3 |
|
|
|
0.4 |
|
|
|
0.3 |
% |
Adjustment to impairment of goodwill |
|
|
|
|
|
|
5.0 |
|
|
|
(5.0 |
) |
|
NM |
Income from equity affiliates and minority interest |
|
|
9.3 |
|
|
|
23.4 |
|
|
|
14.1 |
|
|
|
(60.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
92.6 |
|
|
|
2.8 |
|
|
|
89.8 |
|
|
NM |
Interest expense, net |
|
|
(15.7 |
) |
|
|
(17.6 |
) |
|
|
1.9 |
|
|
|
10.8 |
% |
Other expense, net |
|
|
(1.9 |
) |
|
|
(7.3 |
) |
|
|
5.4 |
|
|
|
74.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
75.0 |
|
|
|
(22.1 |
) |
|
|
97.1 |
|
|
NM |
Income tax (expense) benefit |
|
|
(10.9 |
) |
|
|
2.5 |
|
|
|
(13.4 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
64.1 |
|
|
$ |
(19.6 |
) |
|
$ |
83.7 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
0.69 |
|
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
0.67 |
|
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM Not meaningful
Sales
Sales increased 37.9% in the first half of 2010 as compared to the first half of 2009. Volumes in
the first half of 2010 increased 27.1% versus the comparable period in 2009. Additionally, sales
were favorably impacted by a higher value sales mix and increased market pricing associated with
raw material inflation.
Cost of Sales
Cost of sales declined to 82.6% of sales in the first half of 2010 as compared to 86.3% in the
first half of 2009. Cost of sales was favorably impacted in the first half of 2010 by gains of
$19.1 million associated with insurance settlements, the realization of savings associated with the
previously announced plant realignment activities and savings associated with our Lean Six Sigma
initiatives. Charges related to environmental remediation and plant related restructuring in cost
of sales was $6.6 million in the first half of 2010 as compared to $15.6 million in the first half
of 2009. Sales from our Distribution business, which has lower gross margin percentages than our
other businesses, increased from 28.3% to 34.6% of total PolyOne sales in the first half of 2010 as
compared to the first half of 2009.
Selling and Administrative
Selling and administrative costs decreased in the first half of 2010 as compared to the first half
of 2009 due to lower pension and other post-employment benefit expenses and savings associated with
our previously announced restructuring activities. These items were partially offset by increased
incentive compensation expense resulting from improved performance results and unfavorable changes
in currency exchange rates.
Adjustment to Impairment of Goodwill (2009)
During the fourth quarter of 2008, we identified indicators of potential impairment and evaluated
the carrying values of goodwill and other intangible and long-lived assets. Due to the extensive
work involved in performing the related asset appraisals, we initially recognized a preliminary
estimate of the impairment loss of $170.0 million in 2008. Upon
20
completion of the analysis in the first quarter of 2009, we revised our estimate of goodwill
impairment to $175.0 million, and, accordingly, we recorded $5.0 million of additional goodwill
impairment. There were no such charges in the first half of 2010.
Income from Equity Affiliates
Income from equity affiliates is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
SunBelt |
|
$ |
7.9 |
|
|
$ |
21.8 |
|
Other equity affiliates |
|
|
1.4 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
$ |
9.3 |
|
|
$ |
23.4 |
|
|
|
|
|
|
|
|
During the first half of 2010, Income from equity affiliates decreased as compared to the
corresponding period in 2009 due to lower earnings from our SunBelt joint venture driven primarily
by lower caustic soda prices. The negative impact of caustic soda pricing was partially offset by
the favorable impact of increased volume for caustic soda and improved pricing and volume for
chlorine as compared to the first half of 2009.
Interest Expense, Net
Interest expense, net decreased $1.9 million for the first half of 2010 as compared to the first
half of 2009 due primarily to lower average borrowing levels.
Included in Interest expense, net for the first half of 2010 and 2009 was interest income of $1.6
million and $1.5 million, respectively.
Other Expense, Net
Financing costs associated with our receivables sale facility, foreign currency gains and losses
and other miscellaneous items were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Currency exchange loss |
|
$ |
(9.4 |
) |
|
$ |
(0.4 |
) |
Foreign exchange contracts gains (losses), net |
|
|
8.4 |
|
|
|
(6.1 |
) |
Receivables sale facility fees |
|
|
(0.7 |
) |
|
|
(0.6 |
) |
Other expense, net |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Other expense, net |
|
$ |
(1.9 |
) |
|
$ |
(7.3 |
) |
|
|
|
|
|
|
|
Income Tax (Expense) Benefit
For the first half of 2010, we recognized income tax expense of $10.9 million compared to an income
tax benefit of $2.5 million in the first half of 2009. Valuation allowances against our deferred
tax assets decreased by $16.5 million in the first half of 2010 as a result of generating positive
pretax income during that period. The related non-cash benefit to income tax expense was $15.1
million and related to various U.S. federal, state, local, and foreign deferred tax assets. In the
first half of 2009, we increased existing valuation allowances against our deferred tax assets by
$7.7 million. We recognized $3.0 million of income tax benefit and related interest income due to
adjustments of liability estimates related to foreign tax audits.
SEGMENT INFORMATION
Operating income is the primary financial measure that is reported to the chief operating decision
maker for purposes of allocating resources to the segment and assessing its performance. Operating
income at the segment level does not include: corporate general and administrative costs that are
not allocated to segments; intersegment sales and profit
21
eliminations; charges related to specific strategic initiatives, such as the consolidation of
operations; restructuring activities, including employee separation costs resulting from personnel
reduction programs, plant closure and phaseout costs; executive separation agreements; share-based
compensation costs; asset and goodwill impairments; environmental remediation costs for facilities
no longer owned or closed in prior years; gains and losses on the divestiture of joint ventures and
equity investments; and certain other items that are not included in the measure of segment profit
or loss that is reported to and reviewed by the chief operating decision maker. These costs are
included in Corporate and eliminations.
During the first quarter of 2010, we announced our new global organization structure that will help
us better serve our global customers, drive our earnings growth, better execute our strategy, and
leverage our strong geographic footprint. As a result, our former International Color and
Engineered Materials operating segment has been split and is now reported within the Global
Specialty Engineered Materials operating segment and the Global Color, Additives and Inks operating
segment. In addition, our former Resin and Intermediates segment is now referred to as the SunBelt
Joint Venture. As a result of these changes, we now have five reportable segments: (1) Global
Color, Additives and Inks; (2) Global Specialty Engineered Materials; (3) Performance Products and
Solutions; (4) PolyOne Distribution; and (5) SunBelt Joint Venture.
As a result of these changes to PolyOnes segment structure, all prior period segment information
was reclassified to conform to the 2010 presentation. These changes did not impact total segment
results.
Sales and Operating Income Three Months Ended June 30, 2010 compared to Three Months Ended June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Specialty Engineered Materials |
|
$ |
127.5 |
|
|
$ |
96.2 |
|
|
$ |
31.3 |
|
|
|
32.5 |
% |
Global Color, Additives and Inks |
|
|
137.1 |
|
|
|
118.1 |
|
|
|
19.0 |
|
|
|
16.1 |
% |
Performance Products and Solutions |
|
|
218.5 |
|
|
|
170.3 |
|
|
|
48.2 |
|
|
|
28.3 |
% |
PolyOne Distribution |
|
|
241.4 |
|
|
|
135.1 |
|
|
|
106.3 |
|
|
|
78.7 |
% |
Corporate and eliminations |
|
|
(31.6 |
) |
|
|
(23.2 |
) |
|
|
(8.4 |
) |
|
|
36.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
692.9 |
|
|
$ |
496.5 |
|
|
$ |
196.4 |
|
|
|
39.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Specialty Engineered Materials |
|
$ |
12.1 |
|
|
$ |
5.7 |
|
|
$ |
6.4 |
|
|
|
112.3 |
% |
Global Color, Additives and Inks |
|
|
11.6 |
|
|
|
6.2 |
|
|
|
5.4 |
|
|
|
87.1 |
% |
Performance Products and Solutions |
|
|
17.6 |
|
|
|
12.4 |
|
|
|
5.2 |
|
|
|
41.9 |
% |
PolyOne Distribution |
|
|
11.6 |
|
|
|
3.9 |
|
|
|
7.7 |
|
|
|
197.4 |
% |
SunBelt Joint Venture |
|
|
6.1 |
|
|
|
8.0 |
|
|
|
(1.9 |
) |
|
|
(23.8 |
)% |
Corporate and eliminations |
|
|
2.5 |
|
|
|
(22.3 |
) |
|
|
24.8 |
|
|
|
(111.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61.5 |
|
|
$ |
13.9 |
|
|
$ |
47.6 |
|
|
|
342.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) as a percentage of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Specialty Engineered Materials |
|
|
9.5 |
% |
|
|
5.9 |
% |
|
3.6% points |
|
|
|
|
Global Color, Additives and Inks |
|
|
8.5 |
% |
|
|
5.2 |
% |
|
3.3% points |
|
|
|
|
Performance Products and Solutions |
|
|
8.1 |
% |
|
|
7.3 |
% |
|
0.8% points |
|
|
|
|
PolyOne Distribution |
|
|
4.8 |
% |
|
|
2.9 |
% |
|
1.9% points |
|
|
|
|
Total |
|
|
8.9 |
% |
|
|
2.8 |
% |
|
6.1% points |
|
|
|
|
22
Global Specialty Engineered Materials
Sales increased $31.3 million, or 32.5%, in the second quarter of 2010 compared to the second
quarter of 2009 primarily due to the improved demand in our end markets and a higher value sales
mix. Volumes increased 22.0% as compared to the second quarter of 2009 driven by growth in the
healthcare, industrial, electrical and electronics and transportation end markets. These items were
partially offset by the unfavorable impact of changes in currency exchange rates of approximately
2.0%.
Operating income increased $6.4 million in the second quarter of 2010 compared to the second
quarter of 2009 primarily due to increased volumes, improved mix, and the realization of savings
from our restructuring activities. These items were partially offset by an increase in selling and
administrative costs, primarily due to increased incentive compensation expenses associated with
the improved performance results and the unfavorable impacts of changes in currency exchange rates.
Global Color, Additives and Inks
Sales increased $19.0 million, or 16.1%, in the second quarter of 2010 compared to the second
quarter of 2009 primarily due to an increase in volumes and a higher value sales mix. Volumes
increased 13.6% as compared to the second quarter of 2009, with the largest percentage increases in
North America and Europe. In North America, sales increased across most of our end markets, led by
industrial and transportation. In Europe, the increase in sales was primarily attributable to the
packaging and transportation end markets. These items were partially offset by the unfavorable
impact of changes in currency exchange rates of approximately 2.0%.
Operating income increased $5.4 million in the second quarter of 2010 as compared to the second
quarter of 2009 driven by increased volumes, cost reductions from our restructuring initiatives and
improved sales mix. These items were partially offset by an increase in selling and administrative
costs, primarily due to increased incentive compensation expenses associated with the improved
performance results and the unfavorable impact of changes in currency exchange rates.
Performance Products and Solutions
Sales increased $48.2 million, or 28.3%, in the second quarter of 2010 compared to the second
quarter of 2009 due to an increase in volumes. Volumes increased 27.9% as compared to the second
quarter of 2009, driven primarily by improvements in the transportation, industrial, building and
construction and wire and cable end markets.
Operating income increased $5.2 million in the second quarter of 2010 compared to the second
quarter of 2009 due to the increase in volumes and savings from our restructuring activities. These
items were partially offset by an increase in raw material costs.
PolyOne Distribution
PolyOne Distribution sales increased $106.3 million, or 78.7%, in the second quarter of 2010
compared to the second quarter of 2009, reflecting a 33.8% increase in volume and improved mix.
The remainder of the increase in sales was due to increased market pricing associated with raw
material inflation in the North American plastics and chemicals industry, as our Distribution
business is largely a pass through for raw material costs from our suppliers.
Operating income increased $7.7 million in the second quarter of 2010 compared to the second
quarter of 2009 due to the increase in volume and a more profitable mix of products sold. These
items were partially offset by an increase in selling and administrative costs, primarily due to
increased incentive compensation expenses associated with the improved performance results.
23
SunBelt Joint Venture
Income from the SunBelt Joint Venture declined $1.9 million in the second quarter of 2010 compared
to the second quarter of 2009 primarily due to lower caustic soda pricing. The negative impact of
caustic soda pricing was partially offset by the favorable impact of increased volume for caustic
soda and improved pricing and volume for chlorine.
Corporate and Eliminations
The following table breaks down Corporate and eliminations into its various components for the
second quarter of 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Environmental remediation costs |
|
$ |
(3.2 |
) |
|
$ |
(1.4 |
) |
Employee separation and plant phaseout (a) |
|
|
(0.6 |
) |
|
|
(3.0 |
) |
Share-based compensation |
|
|
(1.2 |
) |
|
|
(0.8 |
) |
Incentive compensation |
|
|
(7.5 |
) |
|
|
(6.7 |
) |
Unallocated pension and post-retirement medical expense (b) |
|
|
1.1 |
|
|
|
(4.5 |
) |
Gains from insurance and legal settlements |
|
|
18.4 |
|
|
|
|
|
All other and eliminations (c) |
|
|
(4.5 |
) |
|
|
(5.9 |
) |
|
|
|
|
|
|
|
Total Corporate and eliminations |
|
$ |
2.5 |
|
|
$ |
(22.3 |
) |
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the third quarter of 2008, we announced the restructuring of certain manufacturing
assets, primarily in North America. In January 2009, we announced the initiation of further
cost saving measures that include eliminating approximately 370 jobs, implementing reduced
work schedules, closing a facility and idling certain other capacity. |
|
(b) |
|
During the third quarter of 2009, we amended certain of our postretiree healthcare plans
whereby benefits to be paid under these plans will be phased out through 2012. |
|
(c) |
|
All other and eliminations is comprised of intersegment eliminations and corporate general
and administrative costs that are not allocated to segments. |
Sales
and Operating Income Six Months Ended June 30, 2010 compared to Six Months Ended June
30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
(Dollars in millions) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
% Change |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Specialty Engineered Materials |
|
$ |
253.8 |
|
|
$ |
182.8 |
|
|
$ |
71.0 |
|
|
|
38.8 |
% |
Global Color, Additives and Inks |
|
|
268.0 |
|
|
|
221.8 |
|
|
|
46.2 |
|
|
|
20.8 |
% |
Performance Products and Solutions |
|
|
402.2 |
|
|
|
329.1 |
|
|
|
73.1 |
|
|
|
22.2 |
% |
PolyOne Distribution |
|
|
457.3 |
|
|
|
272.0 |
|
|
|
185.3 |
|
|
|
68.1 |
% |
Corporate and eliminations |
|
|
(58.0 |
) |
|
|
(45.8 |
) |
|
|
(12.2 |
) |
|
|
26.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,323.3 |
|
|
$ |
959.9 |
|
|
$ |
363.4 |
|
|
|
37.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Specialty Engineered Materials |
|
$ |
24.2 |
|
|
$ |
4.2 |
|
|
$ |
20.0 |
|
|
|
476.2 |
% |
Global Color, Additives and Inks |
|
|
20.5 |
|
|
|
7.6 |
|
|
|
12.9 |
|
|
|
169.7 |
% |
Performance Products and Solutions |
|
|
29.7 |
|
|
|
13.5 |
|
|
|
16.2 |
|
|
|
120.0 |
% |
PolyOne Distribution |
|
|
20.2 |
|
|
|
8.8 |
|
|
|
11.4 |
|
|
|
129.5 |
% |
SunBelt Joint Venture |
|
|
5.8 |
|
|
|
19.7 |
|
|
|
(13.9 |
) |
|
|
(70.6 |
)% |
Corporate and eliminations |
|
|
(7.8 |
) |
|
|
(51.0 |
) |
|
|
43.2 |
|
|
|
(84.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
92.6 |
|
|
$ |
2.8 |
|
|
$ |
89.8 |
|
|
|
3,207.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) as a percentage of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Specialty Engineered Materials |
|
|
9.5 |
% |
|
|
2.3 |
% |
|
7.2% points |
|
|
|
|
Global Color, Additives and Inks |
|
|
7.6 |
% |
|
|
3.4 |
% |
|
4.2% points |
|
|
|
|
Performance Products and Solutions |
|
|
7.4 |
% |
|
|
4.1 |
% |
|
3.3% points |
|
|
|
|
PolyOne Distribution |
|
|
4.4 |
% |
|
|
3.2 |
% |
|
1.2% points |
|
|
|
|
Total |
|
|
7.0 |
% |
|
|
0.3 |
% |
|
6.7% points |
|
|
|
|
24
Global Specialty Engineered Materials
Sales increased $71.0 million, or 38.8%, in the first half of 2010 compared to the first half of
2009 primarily due to the improved demand in our end markets and a higher value sales mix. Volumes
increased 31.1% as compared to the first half of 2009 driven by growth in the consumer products,
wire and cable, transportation, industrial and electrical and electronics end markets.
Operating income increased $20.0 million in the first half of 2010 as compared to the first half of
2009 primarily due to increased volumes, improved mix and the realization of savings from our
restructuring activities. These items were partially offset by an increase in selling and
administrative costs, primarily due to increased incentive compensation expenses associated with
the improved performance results.
Global Color, Additives and Inks
Sales increased $46.2 million, or 20.8%, in the first half of 2010 compared to the first half of
2009 due to an increase in volumes and a higher value sales mix. Volumes increased 16.8% as
compared to the first half of 2009, with increases in North America, Europe and Asia. In North
America, sales increased across most of our end markets, led by the transportation, packaging and
wire and cable end markets. In Europe, the increase in sales was primarily attributable to the
building and construction, packaging and wire and cable end markets. In Asia, the increase in sales
was primarily attributable to the transportation, building and construction and consumer end
markets.
Operating income increased $12.9 million in the first half of 2010 as compared to the first half of
2009 driven by increased volumes, cost reductions from our restructuring initiatives and improved
sales mix. These items were partially offset by an increase in selling and administrative costs,
primarily due to increased incentive compensation expenses associated with the improved performance
results.
Performance Products and Solutions
Sales increased $73.1 million, or 22.2%, in the first half of 2010 compared to the first half of
2009 primarily due to an increase in volumes. Volumes increased 24.9% compared to the first half of
2009, driven primarily by improvements in the transportation, industrial and building and
construction end markets. Sales increased less than volumes primarily due to the impact of a higher
mix of tolling services provided by our Producer Services business for the automotive industry.
Operating income increased $16.2 million in the first half of 2010 compared to the first half of
2009 primarily due to the increase in volumes.
PolyOne Distribution
PolyOne Distribution sales increased $185.3 million, or 68.1%, in the first half of 2010 compared
to the first half of 2009, reflecting a 31.5% increase in volume and higher selling prices
associated with raw material inflation in the North American plastics and chemicals industry, as
our Distribution business is largely a pass through for raw material costs from our suppliers.
Operating income increased $11.4 million in the first half of 2010 compared to the first half of
2009 due to the increase in volume and a more profitable mix of products sold. These items were
partially offset by an increase in selling and administrative costs, primarily due to increased
incentive compensation expenses associated with the improved performance results.
25
SunBelt Joint Venture
Income from the SunBelt Joint Venture declined $13.9 million in the first half of 2010 compared to
the first half of 2009 primarily due to lower caustic soda pricing. The negative impact of caustic
soda pricing was partially offset by the favorable impact of increased volume for caustic soda and
improved pricing and volume for chlorine.
Corporate and Eliminations
The following table breaks down Corporate and eliminations into its various components for the
first half of 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
(In millions) |
|
2010 |
|
|
2009 |
|
Adjustment to impairment of goodwill (a) |
|
$ |
|
|
|
$ |
(5.0 |
) |
Environmental remediation costs |
|
|
(6.3 |
) |
|
|
(2.9 |
) |
Employee separation and plant phaseout (b) |
|
|
(0.6 |
) |
|
|
(13.1 |
) |
Share-based compensation |
|
|
(2.1 |
) |
|
|
(1.4 |
) |
Incentive compensation (c) |
|
|
(15.9 |
) |
|
|
(8.5 |
) |
Unallocated pension and post-retirement medical expense (d) |
|
|
2.2 |
|
|
|
(11.9 |
) |
Gains from insurance and legal settlements |
|
|
21.6 |
|
|
|
|
|
All other and eliminations (e) |
|
|
(6.7 |
) |
|
|
(8.2 |
) |
|
|
|
|
|
|
|
Total Corporate and eliminations |
|
$ |
(7.8 |
) |
|
$ |
(51.0 |
) |
|
|
|
|
|
|
|
|
|
|
(a) |
|
In the first quarter of 2009, we increased our estimated 2008 year-end goodwill impairment
charge of $170.0 million by $5.0 million. |
|
(b) |
|
During the third quarter of 2008, we announced the restructuring of certain manufacturing
assets, primarily in North America. In January 2009, we announced the initiation of further
cost saving measures that include eliminating approximately 370 jobs, implementing reduced
work schedules, closing a facility and idling certain other capacity. |
|
(c) |
|
Incentive compensation increased in the first half of 2010 as compared to the first half of
2009 due to improved operating results. |
|
(d) |
|
During the third quarter of 2009, we amended certain of our postretiree healthcare plans
whereby benefits to be paid under these plans will be phased out through 2012. |
|
(e) |
|
All other and eliminations is comprised of intersegment eliminations and corporate general
and administrative costs that are not allocated to segments. |
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
(In millions) |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Cash and cash equivalents |
|
$ |
241.1 |
|
|
$ |
222.7 |
|
Accounts receivable facility availability |
|
|
153.6 |
|
|
|
112.8 |
|
|
|
|
|
|
|
|
Liquidity |
|
$ |
394.7 |
|
|
$ |
335.5 |
|
|
|
|
|
|
|
|
Liquidity is defined as an enterprises ability to generate adequate amounts of cash to meet
both current and future needs. These needs include paying obligations as they mature, maintaining
production capacity and providing for planned growth. Capital resources are sources of funds other
than those generated by operations.
In the first half of 2010, liquidity increased by $59.2 million. The increase in our cash balance
of $18.4 million includes proceeds of $21.6 million from insurance and legal settlements and $9.8
million from the sale of our investment in, and related seller note receivable from, OSullivan
Films, which was partially offset by the repayment of $20.0 million aggregate principal of our
6.52% medium-term notes. The increase in our accounts receivable balance reflects an increase in
sales.
Cash Flows
The following discussion focuses on the material components of cash flows from operating, investing
and financing activities for the first half of 2010 and 2009.
26
Operating Activities In first half of 2010, net cash provided by operating activities was $41.2
million as compared to $134.6 million in the first half of 2009. In the first half of 2010, working
capital, which we define as accounts receivable plus inventory less accounts payable, increased
reflecting our investment in support of our sales growth. In the first half of 2009, net cash
provided by operating activities was favorably impacted by working capital improvements, which
contributed $147.2 million. Working capital as a percentage of sales continued to improve, and for
the first half of 2010 was 8.9% versus 12.3% for the first half of 2009. Accounts receivable as a
percentage of quarterly sales increased to 52.1% as of June 30, 2010 as compared to 49.7% as of
December 31, 2009. This increase is due to the fact that our sales are typically lowest in the
month of December, and the increase in accounts receivable resulted principally from higher sales
in June 2010 versus December 2009. Days sales outstanding over the period from December 31, 2009 to
June 30, 2010 decreased from 49.1 to 46.3.
Investing Activities Cash used by investing activities during the first half of 2010 was $3.1
million, which was primarily comprised of capital expenditures of $10.9 million. Partially
offsetting these expenditures was cash proceeds from the sale of our investment in OSullivan and
the collection of the principal on the related note receivable totaling $7.8 million. Cash used by
investing activities in the first half of 2009 included $12.2 million of capital expenditures.
Financing Activities Net cash used by financing activities in the first half of 2010 reflects the
repayment of $20.0 million aggregate principal amount of our 6.52% medium-term notes partially
offset by proceeds from the exercise of stock options. In the first half of 2009, net cash provided
by financing activities reflected a $15.1 million increase in short-term borrowings.
Capital Resources
The following table summarizes our available and outstanding facilities as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Outstanding |
|
|
Available |
|
|
Total |
|
Long-term debt, including current maturities |
|
$ |
389.4 |
|
|
$ |
|
|
|
$ |
389.4 |
|
Receivables sale facility |
|
|
|
|
|
|
153.6 |
|
|
|
153.6 |
|
Short-term debt |
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
389.8 |
|
|
$ |
153.6 |
|
|
$ |
543.4 |
|
|
|
|
|
|
|
|
|
|
|
We may from time to time seek to retire or purchase our outstanding debt through cash purchases
and/or exchanges for equity securities, in open market purchases, privately negotiated transactions
or otherwise. We may also seek to repurchase our outstanding equity securities. 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.
Long-Term Debt
As of June 30, 2010, long-term debt totaled $389.4 million, with maturities ranging from 2011 to
2015. Current maturities of long-term debt at June 30, 2010 were $59.8 million.
Aggregate maturities of long-term debt for the next five years are: 2011 $59.8 million; 2012
$279.6 million; 2013 $0.0 million; 2014 $0.0 million; and thereafter $50.0 million.
Each of our 8.875% senior notes due 2012, 7.500% debentures due 2015 and medium-term notes are our
direct, unsecured obligations and are not guaranteed by any of our subsidiaries. Each of the
indentures governing these debt securities contains limitations on our ability to incur secured
debt.
Guarantee and Agreement
We entered into a definitive Guarantee and Agreement with Citicorp USA, Inc., KeyBank National
Association and National City Bank (now PNC Bank) on June 6, 2006. Under this Guarantee and
Agreement, we guarantee some treasury management and banking services provided to us and our
subsidiaries, such as foreign currency forwards and bank overdrafts. This guarantee is secured by
our inventories located in the United States.
27
Credit Facility
On January 3, 2008, we entered into a credit agreement with Citicorp USA, Inc., as administrative
agent and as issuing bank, and The Bank of New York, as paying agent. Borrowings under the credit
facility are based on the applicable LIBOR rate plus a fixed facility fee of 4.77%. At June 30,
2010, we had outstanding borrowings under the credit facility of $40.0 million included in Current
portion of long-term debt in the accompanying consolidated balance sheets.
On July 7, 2010, we fully repaid the $40 million of outstanding borrowings from Citicorp USA, Inc.
and also terminated the related commitments and credit agreement.
Receivables Sale Facility
As of June 30, 2010, we had receivables sale facilities outstanding in the United States and Canada
totaling $200.0 million. These facilities expire in June 2012. The maximum proceeds that we may
receive are limited to the lesser of $200.0 million or 85% of the eligible domestic and Canadian
accounts receivable sold. This facility also makes up to $40.0 million available for issuing
standby letters of credit as a sub-limit within the $200.0 million facility, of which $13.7 million
was used at June 30, 2010.
The facility requires us to maintain a minimum fixed charge coverage ratio (defined as Adjusted
EBITDA less capital expenditures, divided by the sum of interest expense and scheduled debt
repayments for the next four quarters) of at least 1 to 1 when average excess availability under
the facility is $40.0 million or less. As of June 30, 2010, the average excess availability under
the facility was greater than $40.0 million. Additionally, the fixed charge coverage ratio exceeded
1 to 1.
Each indenture governing our senior unsecured notes and debentures and our guarantee of the $48.8
million of SunBelt notes allows a specific level of secured debt, above which security must be
provided on each indenture and our guarantee of the SunBelt notes. The receivables sale facility
and our guarantee of the SunBelt notes are not considered debt under the covenants associated with
our senior unsecured notes and debentures.
Notes Receivable
Included in Other non-current assets as of June 30, 2010 is $24.6 million outstanding on a seller
note receivable due from Excel Polymers LLC, which purchased our elastomers and performance
additives business in August 2004. With the extension of this note in 2009, we were given a secured
position in the assets of the business. This note accrues interest at 10% per annum and is due in
full with accrued interest at maturity on February 29, 2012.
Contractual Obligations
We have future obligations under various contracts relating to debt and interest payments,
operating leases, standby letters of credit, pension and postretirement benefit plans and purchase
obligations. During the six months ended June 30, 2010, there were no significant changes to these
obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2009.
28
Critical Accounting Policies and Estimates
Effective January 1, 2010, we elected to change our method of valuing inventories for certain
U.S. businesses to the FIFO method, while in prior years, these inventories were valued using the
LIFO method. As a result of this change, all inventories are valued using the FIFO method.
Inventories accounted for under the FIFO method as a percent of total consolidated inventories was
76%, with the remainder determined on a LIFO basis at December 31, 2009. In accordance with
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 250,
Accounting Changes and Error Corrections, all prior periods presented have been adjusted to apply
the new method retrospectively. The effect of the change in our inventory costing method increased
our inventory balance and retained earnings by $42.4 million as of January 1, 2009.
29
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
In this quarterly report on Form 10-Q, statements that are not reported financial results or
other historical information are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or
forecasts of future events and are not guarantees of future performance. They are based on
managements expectations that involve a number of business risks and uncertainties, any of which
could cause actual results to differ materially from those expressed in or implied by the
forward-looking statements. They use words such as will, anticipate, estimate, expect,
project, intend, plan, believe and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance and/or sales. Factors that could
cause actual results to differ materially from those implied by these forward-looking statements
include, but are not limited to:
|
|
|
the effect on foreign operations of currency fluctuations, tariffs and other
political, economic and regulatory risks; |
|
|
|
|
changes in polymer consumption growth rates in the markets where PolyOne conducts
business; |
|
|
|
|
changes in global industry capacity or in the rate at which anticipated changes in
industry capacity come online in the polyvinyl chloride (PVC), chlor alkali, vinyl
chloride monomer (VCM) or other industries in which PolyOne participates; |
|
|
|
|
fluctuations in raw material prices, quality and supply and in energy prices and
supply; |
|
|
|
|
production outages or material costs associated with scheduled or unscheduled
maintenance programs; |
|
|
|
|
unanticipated developments that could occur with respect to contingencies such as
litigation and environmental matters, including any developments that would require any
increase in our costs and/or reserves for such contingencies; |
|
|
|
|
an inability to achieve or delays in achieving or achievement of less than the
anticipated financial benefit from initiatives related to working capital reductions,
cost reductions and employee productivity goals and our new global organization
structure; |
|
|
|
|
an inability to raise or sustain prices for products or services; |
|
|
|
|
an inability to maintain appropriate relations with unions and employees; |
|
|
|
|
the speed and extent of an economic recovery, including the recovery of the housing
and chlor-alkali markets; |
|
|
|
|
the financial condition of our customers, including the ability of customers
(especially those that may be highly leveraged and those with inadequate liquidity) to
maintain their credit availability; |
|
|
|
|
disruptions, uncertainty or volatility in the credit markets that could adversely
impact the availability of credit already arranged and the availability and cost of
credit in the future; and |
|
|
|
|
other factors affecting our business beyond our control, including, without
limitation, changes in the general economy, changes in interest rates and changes in
the rate of inflation. |
We cannot guarantee that any forward-looking statement will be realized, although we believe we
have been prudent in our plans and assumptions. Achievement of future results is subject to risks,
uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties
materialize, or should underlying assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected. Investors should bear this in mind as
they consider forward-looking statements. We undertake no obligation to publicly update
forward-looking statements, whether as a result of new information, future events or otherwise,
except as otherwise required by law. You are advised, however, to consult any further disclosures
we make on related subjects in our reports on Forms 10-Q, 8-K and 10-K furnished to the SEC. You
should understand that it is not possible to predict or identify all risk factors. Consequently,
you should not consider any such list to be a complete set of all potential risks or uncertainties.
30
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures about Market Risk |
We are exposed to certain market risks as part of our ongoing business operations, including risks
from changes in interest rates on debt obligations and foreign currency exchange rates that could
impact our financial condition, results of operations and cash flows. We manage our exposure to
these and other market risks through regular operating and financing activities, including the use
of derivative financial instruments. We intend to use these derivative financial instruments as
risk management tools and not for speculative investment purposes.
Interest rate exposure On July 7, 2010, we fully repaid the $40 million of outstanding borrowings
from Citicorp USA, Inc. and also terminated the related commitments and credit agreement. Because
this was our only variable rate debt, we currently have no significant exposure to changes in
market interest rates.
To help manage borrowing costs, we may periodically enter into interest rate swap agreements. Under
these arrangements, we agree to exchange, at specified intervals, the difference between fixed and
floating interest amounts on agreed-upon notional principal amounts. As of June 30, 2010, there
were no outstanding interest rate swap agreements.
Foreign currency exposure We enter into intercompany lending transactions that are denominated in
various foreign currencies and are subject to financial exposure from foreign exchange rate
movement from the date a loan is recorded to the date it is settled or revalued. To mitigate this
risk, we enter into foreign exchange contracts, which had a fair value of $0.3 million at June 30,
2010. Gains and losses on these contracts generally offset gains and losses on the assets and
liabilities being hedged.
We face translation risks related to the changes in foreign currency exchange rates. Amounts
invested in our foreign operations are translated into U.S. dollars at the exchange rates in effect
at the balance sheet date. The resulting translation adjustments are recorded as a component of
Accumulated other comprehensive income (loss) in the Shareholders equity section of the
accompanying consolidated balance sheets. Net sales and expenses in our foreign operations foreign
currencies are translated into varying amounts of U.S. dollars depending upon whether the U.S.
dollar weakens or strengthens against other currencies. Therefore, changes in exchange rates may
either positively or negatively affect our net sales and expenses from foreign operations as
expressed in U.S. dollars.
|
|
|
Item 4. |
|
Controls and Procedures |
Disclosure controls and procedures
PolyOnes management, under the supervision of and with the participation of its Chief Executive
Officer and its Chief Financial Officer, has evaluated the effectiveness of the design and
operation of PolyOnes disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this
quarterly report. Based upon this evaluation, PolyOnes Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of the period covered by this quarterly report, its
disclosure controls and procedures were effective.
Changes in internal control over financial reporting
There were no changes in PolyOnes internal control over financial reporting during the quarter
ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
31
Part II Other Information
|
|
|
Exhibit No. |
|
Description of Exhibit |
4.1
|
|
Form of Medium-Term Note, issued under the Indenture between
the Company and NBD Bank, as trustee (which Indenture is
incorporated by reference to Exhibit 4.1 to M.A. Hanna
Companys Registration Statement on Form S-3, Registration
Statement No. 333-05763, filed on June 12, 1996). |
|
|
|
10.1
|
|
Second Amended and Restated Receivables Purchase Agreement,
dated as of June 26, 2007, among PolyOne Funding Corporation,
as seller; the Company, as servicer; the banks and other
financial institutions party thereto, as purchasers; Citicorp
USA, Inc., as agent; and National City Business Credit, Inc.,
as syndication agent |
|
|
|
10.2
|
|
Second Amended and Restated Receivables Sale Agreement, dated
as of June 26, 2007, among the Company, as seller and as
servicer, and PolyOne Funding Corporation, as buyer |
|
|
|
10.3
|
|
Canadian Receivables Purchase Agreement, dated as of July 13,
2007, among PolyOne Funding Canada Corporation, as seller; the
Company, as servicer; the banks and other financial
institutions party thereto, as purchasers; Citicorp USA, Inc.,
as agent; and National City Business Credit, Inc., as
syndication agent |
|
|
|
10.4
|
|
Canadian Receivables Sale Agreement, dated as of July 13,
2007, among PolyOne Canada Inc., as seller; PolyOne Funding
Canada Corporation, as buyer; and the Company, as servicer |
|
|
|
10.5+
|
|
PolyOne Corporation 2010 Equity and Performance Incentive Plan
(incorporated by reference to Exhibit 4.4 to the Companys
Registration Statement on Form S-8, Registration Statement No.
333-166775, filed on May 12, 2010), as approved by PolyOnes
Shareholders May 12, 2010. |
|
|
|
10.6+
|
|
PolyOne Senior Executive Annual Incentive Plan (effective
January 1, 2011) (incorporated by reference to Appendix B to
the Companys definitive proxy statement on Schedule 14A, SEC
File No. 1-16091, filed on March 29, 2010), as approved by
PolyOnes Shareholders May 12, 2010. |
|
|
|
31.1
|
|
Certification of Stephen D. Newlin, Chairman, President and
Chief Executive Officer, pursuant to SEC Rules 13a-14(a) and
15d-14(a), adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Robert M. Patterson, Senior Vice President
and Chief Financial Officer, pursuant to SEC Rules 13a-14(a)
and 15d-14(a), adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Stephen D. Newlin, Chairman, President and
Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
|
|
|
32.2
|
|
Certification of Robert M. Patterson, Senior Vice President
and Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
+
|
|
Indicates management contract or compensatory plan, contract
or arrangement in which one or more directors or executive
officers of the Registrant may be participants |
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
August 2, 2010 |
POLYONE CORPORATION
|
|
|
/s/ Robert M. Patterson
|
|
|
Robert M. Patterson |
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
|
33
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
4.1
|
|
Form of Medium-Term Note, issued under the Indenture between
the Company and NBD Bank, as trustee (which Indenture is
incorporated by reference to Exhibit 4.1 to M.A. Hanna
Companys Registration Statement on Form S-3, Registration
Statement No. 333-05763, filed on June 12, 1996). |
|
|
|
10.1
|
|
Second Amended and Restated Receivables Purchase Agreement,
dated as of June 26, 2007, among PolyOne Funding Corporation,
as seller; the Company, as servicer; the banks and other
financial institutions party thereto, as purchasers; Citicorp
USA, Inc., as agent; and National City Business Credit, Inc.,
as syndication agent |
|
|
|
10.2
|
|
Second Amended and Restated Receivables Sale Agreement, dated
as of June 26, 2007, among the Company, as seller and as
servicer, and PolyOne Funding Corporation, as buyer |
|
|
|
10.3
|
|
Canadian Receivables Purchase Agreement, dated as of July 13,
2007, among PolyOne Funding Canada Corporation, as seller; the
Company, as servicer; the banks and other financial
institutions party thereto, as purchasers; Citicorp USA, Inc.,
as agent; and National City Business Credit, Inc., as
syndication agent |
|
|
|
10.4
|
|
Canadian Receivables Sale Agreement, dated as of July 13,
2007, among PolyOne Canada Inc., as seller; PolyOne Funding
Canada Corporation, as buyer; and the Company, as servicer |
|
|
|
10.5+
|
|
PolyOne Corporation 2010 Equity and Performance Incentive Plan
(incorporated by reference to Exhibit 4.4 to the Companys
Registration Statement on Form S-8, Registration Statement No.
333-166775, filed on May 12, 2010), as approved by PolyOnes
Shareholders May 12, 2010. |
|
|
|
10.6+
|
|
PolyOne Senior Executive Annual Incentive Plan (effective
January 1, 2011) (incorporated by reference to Appendix B to
the Companys definitive proxy statement on Schedule 14A, SEC
File No. 1-16091, filed on March 29, 2010), as approved by
PolyOnes Shareholders May 12, 2010. |
|
|
|
31.1
|
|
Certification of Stephen D. Newlin, Chairman, President and
Chief Executive Officer, pursuant to SEC Rules 13a-14(a) and
15d-14(a), adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
31.2
|
|
Certification of Robert M. Patterson, Senior Vice President
and Chief Financial Officer, pursuant to SEC Rules 13a-14(a)
and 15d-14(a), adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Stephen D. Newlin, Chairman, President and
Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
|
|
|
32.2
|
|
Certification of Robert M. Patterson, Senior Vice President
and Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
+
|
|
Indicates management contract or compensatory plan, contract
or arrangement in which one or more directors or executive
officers of the Registrant may be participants |
34