PolyOne Corporation 10-Q
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 March 31, 2007
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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, in 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. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of outstanding shares of the registrants common stock, $0.01 par value, as of May 1,
2007 was 92,988,920.
TABLE OF CONTENTS
Part I
Financial Information
Item 1. Financial Statements
PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Sales |
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$ |
657.8 |
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$ |
674.6 |
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Operating costs and expenses: |
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Cost of sales |
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562.7 |
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583.7 |
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Selling and administrative |
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61.0 |
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47.3 |
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Depreciation and amortization |
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14.1 |
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14.3 |
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Income from equity affiliates and minority interest |
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(6.5 |
) |
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(38.7 |
) |
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Operating income |
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26.5 |
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68.0 |
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Interest expense |
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(15.3 |
) |
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(16.6 |
) |
Interest income |
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0.9 |
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0.5 |
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Other expense |
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(0.9 |
) |
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(1.2 |
) |
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Income before income taxes and discontinued operations |
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11.2 |
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50.7 |
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Income tax expense |
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(3.8 |
) |
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(1.7 |
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Income before discontinued operations |
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7.4 |
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49.0 |
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Loss from discontinued operations, net of income taxes |
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(2.1 |
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Net income |
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$ |
7.4 |
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$ |
46.9 |
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Earnings (loss) per common share: |
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Basic and diluted earnings (loss): |
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Before discontinued operations |
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$ |
0.08 |
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$ |
0.53 |
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Discontinued operations |
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(0.02 |
) |
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Basic and diluted earnings per share |
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$ |
0.08 |
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$ |
0.51 |
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Weighted-average shares used to compute earnings per share: |
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Basic |
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92.6 |
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92.1 |
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Diluted |
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93.0 |
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92.5 |
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See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
2
PolyOne Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In millions)
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March 31, |
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December 31, |
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2007 |
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2006 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
67.1 |
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$ |
66.2 |
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Accounts receivable, net |
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377.1 |
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316.4 |
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Inventories |
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246.6 |
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240.8 |
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Deferred income tax assets |
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18.2 |
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18.1 |
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Other current assets |
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24.7 |
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27.8 |
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Total current assets |
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733.7 |
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669.3 |
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Property, net |
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437.3 |
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442.4 |
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Investment in equity affiliates |
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293.6 |
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287.2 |
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Goodwill |
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287.0 |
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287.0 |
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Other intangible assets, net |
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8.9 |
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9.4 |
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Deferred income tax assets |
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19.3 |
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21.1 |
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Other non-current assets |
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63.5 |
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64.4 |
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Total assets |
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$ |
1,843.3 |
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$ |
1,780.8 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Short-term bank debt |
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$ |
5.4 |
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$ |
5.2 |
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Accounts payable |
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267.0 |
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221.0 |
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Accrued expenses |
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99.3 |
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93.1 |
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Current portion of long-term debt |
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22.5 |
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22.5 |
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Total current liabilities |
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394.2 |
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341.8 |
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Long-term debt |
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568.0 |
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567.7 |
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Post-retirement benefits other than pensions |
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83.6 |
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83.6 |
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Other non-current liabilities, including pensions |
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198.2 |
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200.5 |
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Minority interest in consolidated subsidiaries |
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5.7 |
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5.5 |
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Total liabilities |
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1,249.7 |
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1,199.1 |
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Shareholders equity |
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593.6 |
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581.7 |
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Total liabilities and shareholders equity |
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$ |
1,843.3 |
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$ |
1,780.8 |
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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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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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Operating Activities |
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Net income |
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$ |
7.4 |
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$ |
46.9 |
|
Adjustments to reconcile net income to net cash
provided (used) by operating activities: |
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Depreciation and amortization |
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14.1 |
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14.3 |
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Loss on disposition of discontinued businesses and related
plant phaseout charge |
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2.5 |
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Companies carried at equity and minority interest: |
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Income from equity affiliates |
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(6.5 |
) |
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(38.7 |
) |
Dividends and distributions received |
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0.2 |
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4.1 |
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Provision for deferred income taxes |
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1.1 |
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0.2 |
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Change in assets and liabilities: |
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Accounts receivable |
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(58.2 |
) |
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(47.3 |
) |
Inventories |
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(4.9 |
) |
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(7.9 |
) |
Accounts payable |
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44.1 |
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19.2 |
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Decrease in sale of accounts receivable |
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(7.9 |
) |
Accrued expenses and other |
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6.5 |
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3.9 |
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Net cash used by discontinued operations |
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(0.1 |
) |
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Net cash provided (used) by operating activities |
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3.8 |
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(10.8 |
) |
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Investing Activities |
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Capital expenditures |
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(7.5 |
) |
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(4.9 |
) |
Proceeds from sale of assets |
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4.0 |
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2.4 |
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Proceeds from sale of discontinued business, net |
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17.3 |
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Net cash used by discontinued operations |
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(0.2 |
) |
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Net cash (used) provided by investing activities |
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(3.5 |
) |
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14.6 |
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Financing Activities |
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Change in short-term debt |
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0.1 |
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(0.3 |
) |
Repayment of long-term debt |
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(0.7 |
) |
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Proceeds from exercise of stock options |
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0.3 |
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2.0 |
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Net cash (used) provided by financing activities |
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(0.3 |
) |
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1.7 |
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Effect of exchange rate changes on cash |
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0.9 |
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(0.8 |
) |
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Increase in cash and cash equivalents |
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0.9 |
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|
4.7 |
|
Cash and cash equivalents at beginning of period |
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66.2 |
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|
32.8 |
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Cash and cash equivalents at end of period |
|
$ |
67.1 |
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$ |
37.5 |
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|
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|
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
4
PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders Equity (Unaudited)
(Dollars in millions, shares in thousands)
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Common |
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Common |
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Accumulated |
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Shares |
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Additional |
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Retained |
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Stock Held |
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Other |
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Common |
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Held in |
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Common |
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Paid-In |
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Earnings |
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in |
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Comprehensive |
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Shares |
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Treasury |
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Total |
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Stock |
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Capital |
|
(Deficit) |
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Treasury |
|
Income (Loss) |
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|
Balance January 1, 2006 |
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|
122,192 |
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|
30,255 |
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|
$ |
387.4 |
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|
$ |
1.2 |
|
|
$ |
1,066.4 |
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|
$ |
(190.3 |
) |
|
$ |
(337.1 |
) |
|
$ |
(152.8 |
) |
Cumulative effect of
adoption of FSP AUG
AIR-1 as of January 1,
2006 |
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|
7.0 |
|
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7.0 |
|
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Comprehensive income: |
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|
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Net income |
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|
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|
|
|
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|
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|
46.9 |
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46.9 |
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Translation adjustment |
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0.9 |
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0.9 |
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Total comprehensive
Income |
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|
47.8 |
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Stock-based compensation
and benefits |
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|
(550 |
) |
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|
3.1 |
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(0.2 |
) |
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4.0 |
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|
(0.7 |
) |
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|
Balance March 31, 2006 |
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|
122,192 |
|
|
|
29,705 |
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|
$ |
445.3 |
|
|
$ |
1.2 |
|
|
$ |
1,066.2 |
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|
$ |
(136.4 |
) |
|
$ |
(333.1 |
) |
|
$ |
(152.6 |
) |
|
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|
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|
|
|
|
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|
|
|
|
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|
Balance January 1, 2007 |
|
|
122,192 |
|
|
|
29,384 |
|
|
$ |
581.7 |
|
|
$ |
1.2 |
|
|
$ |
1,065.7 |
|
|
$ |
(59.9 |
) |
|
$ |
(326.2 |
) |
|
$ |
(99.1 |
) |
Comprehensive income: |
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|
|
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|
Net income |
|
|
|
|
|
|
|
|
|
|
7.4 |
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|
7.4 |
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Amortization of
unrecognized losses,
transition obligation
and prior service
costs, net of tax of
$0.5 |
|
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|
|
|
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|
1.0 |
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
1.0 |
|
Translation adjustment |
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|
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|
3.0 |
|
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|
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|
|
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|
3.0 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
Income |
|
|
|
|
|
|
|
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
and benefits |
|
|
|
|
|
|
(70 |
) |
|
|
0.5 |
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
|
Balance March 31, 2007 |
|
|
122,192 |
|
|
|
29,314 |
|
|
$ |
593.6 |
|
|
$ |
1.2 |
|
|
$ |
1,065.4 |
|
|
$ |
(52.5 |
) |
|
$ |
(325.4 |
) |
|
$ |
(95.1 |
) |
|
|
|
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A
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, 2006 of PolyOne
Corporation.
As of January 1, 2007, the results of operations for PolyOnes business located in Singapore will
now be managed and reported under the Vinyl Business operating segment. Historically, the results
of this business were included in the International Color and Engineered Materials operating
segment. Prior period results of operations for Singapore have been reclassified to conform to 2007
presentation.
Operating results for the three-month period ended March 31, 2007 are not necessarily indicative of
the results that may be attained in subsequent quarters or for the year ending December 31, 2007.
Unless otherwise noted, disclosures contained in this quarterly report relate to continuing
operations.
Note B
Discontinued Operations
The Engineered Films business was sold in February 2006. As a result, PolyOne no longer has any
businesses that are accounted for as discontinued operations. The first quarter 2006 loss included
a pre-tax charge of $2.3 million to adjust the net assets of the Engineered Films business to the
net proceeds received and to recognize costs that were not able to be recognized until the
Engineered Films business was sold due to the contingent nature of these costs, as required by
generally accepted accounting principles.
Note C
Accounting Policies
Deferred
Taxes A valuation allowance was initially recorded against domestic deferred tax assets
in the fourth quarter of 2003 as a result of operating losses. The valuation allowance was adjusted
in subsequent periods through 2006 and charged or credited to income or other comprehensive income
as appropriate. In the fourth quarter of 2006, it was determined that it was more likely than not
that the deferred tax assets would be realized and the remaining amount of valuation allowance was
reversed to income in that period. Therefore, beginning with the first quarter of 2007, a tax
expense will be recorded based on an estimated effective tax rate for all jurisdictions.
New Accounting Pronouncements
FASB
Interpretation No. 48 In June 2006, the FASB issued Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109,
Accounting for Income Taxes, which is effective for fiscal years beginning after December 15,
2006. FIN 48 clarifies the recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods,
6
disclosure and transition. PolyOne adopted FIN 48 effective January 1, 2007. The adoption of FIN 48
did not have a material impact on the Companys financial position or results of operations.
PolyOne had previously recorded an $6.0 million liability for an unrecognized tax benefit. This
amount relates to an item under examination by a foreign tax authority related to the valuation
of assets. PolyOne does not agree with the proposed adjustment and has appealed the assessment.
PolyOne does not anticipate that this dispute will be resolved in the next twelve months. Any final
determination could adversely impact PolyOnes effective tax rate.
PolyOne will continue the accounting policy to classify interest and penalties on unrecognized
tax positions as income taxes. As of the date of adoption, PolyOne has accrued $2.5 million of
interest and penalties. PolyOne is no longer subject to U.S. income tax examinations for periods
preceding 2003, and with limited exceptions, for periods preceding 2002 for foreign, state and
local tax examinations.
FASB
Staff Position AUG AIR-1 In September 2006, the FASB issued FASB Staff Position (FSP) AUG
AIR-1, Accounting for Planned Major Maintenance Activities (FSP AUG AIR-1). FSP AUG AIR-1
prohibits the use of the accrue-in-advance method of accounting for planned major maintenance
activities in annual and interim financial reporting periods and is effective for the first fiscal
year beginning after December 15, 2006. OxyVinyls adopted FSP AUG AIR-1 in the first quarter of
2007, on a retrospective basis, and is now using the deferral method of accounting for planned
major maintenance. The effect on OxyVinyls consolidated balance sheet at January 1, 2007 from
adopting FSP AUG AIR-1 was an increase of $38.3 million in other assets, a decrease of $12.3
million in accrued liabilities, an increase of $4.2 million in minority interest and an increase of
$46.4 million in partners capital. PolyOnes proportionate share of OxyVinyls operations is 24%.
The adoption of FSP AUG AIR-1 represents a change in accounting principle and, under the guidance
of this principle, must be applied retrospectively. Under these retrospective provisions, PolyOne
has restated its historical financial statements to reflect the change in accounting for planned
major maintenance activities of its OxyVinyls equity affiliate. The following tables illustrate the
retrospective changes in PolyOnes respective financial statements:
Condensed Consolidated Statements of Operations (Unaudited)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 |
|
|
As originally filed |
|
Adjustment |
|
Restated |
Income from equity affiliates and minority interest |
|
$ |
38.6 |
|
|
$ |
0.1 |
|
|
$ |
38.7 |
|
Income before discontinued operations |
|
$ |
48.9 |
|
|
$ |
0.1 |
|
|
$ |
49.0 |
|
Net income |
|
$ |
46.8 |
|
|
$ |
0.1 |
|
|
$ |
46.9 |
|
Condensed Consolidated Balance Sheets (Unaudited)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
As originally filed |
|
Adjustment |
|
Restated |
Investment in equity affiliates |
|
$ |
276.1 |
|
|
$ |
11.1 |
|
|
$ |
287.2 |
|
Deferred income tax assets |
|
$ |
25.0 |
|
|
$ |
(3.9 |
) |
|
$ |
21.1 |
|
Total assets |
|
$ |
1,773.6 |
|
|
$ |
7.2 |
|
|
$ |
1,780.8 |
|
Retained deficit |
|
$ |
(67.1 |
) |
|
$ |
7.2 |
|
|
$ |
(59.9 |
) |
Shareholders equity |
|
$ |
574.5 |
|
|
$ |
7.2 |
|
|
$ |
581.7 |
|
The cumulative effect of the adoption of FSP AUG AIR-1 as of January 1, 2006 is a reduction to
retained deficit and an increase to shareholders equity of $7.0 million.
7
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 |
|
|
As originally filed |
|
Adjustment |
|
Restated |
Net income |
|
$ |
46.8 |
|
|
$ |
0.1 |
|
|
$ |
46.9 |
|
Income from equity affiliates and minority interest |
|
$ |
(38.6 |
) |
|
$ |
(0.1 |
) |
|
$ |
(38.7 |
) |
Statement of Financial Accounting Standards No. 158 On December 31, 2006, the Company
adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans an Amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires an
employer that is a business entity and sponsors one or more single employer benefit plans to (1)
recognize the funded status of the benefit in its statement of financial position, (2) recognize as
a component of other comprehensive income, net of tax, the gains or losses and prior service costs
or credits that arise during the period but are not recognized as components of net periodic
benefit cost, (3) measure defined benefit plan assets and obligations as of the date of the
employers fiscal year end statement of financial position and (4) disclose additional information
in the notes to financial statements about certain effects on net periodic benefit costs for the
next fiscal year that arise from delayed recognition of gains or losses, prior service costs or
credits, and transition assets or obligations. The adoption of SFAS No. 158 resulted in an increase
of $6.4 million on a pre-tax basis and a $0.4 million decrease on an after-tax basis on the
Companys accumulated other comprehensive loss. PolyOne also recorded an adjustment of $2.7 million
to increase accumulated other comprehensive loss to record its proportionate share of OxyVinyls
adoption of SFAS No. 158. The adoption of SFAS No. 158 had no effect on the Companys compliance
with the financial covenants contained in the agreements governing its debt and its receivables
sales facility, and is not expected to affect the Companys operating results in future periods.
Use of Estimates The preparation of Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make extensive use of estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements and the reported
amounts of revenues and expenses during these periods. Significant estimates in these Consolidated
Financial Statements include, but are not limited to, sales discounts and rebates, restructuring
charges, allowances for doubtful accounts, estimates of future cash flows associated with assets,
asset impairments, useful lives for depreciation and amortization, loss contingencies, net
realizable value of inventories, environmental and asbestos-related liabilities, income taxes and
tax valuation reserves, assumptions used for goodwill impairment analyses and the determination of
discount and other rate assumptions used to determine pension and post-retirement employee benefit
expenses. Actual results could differ from these estimates.
Reclassification Certain amounts for 2006 have been reclassified to conform to the 2007
presentation.
Note D Goodwill and Intangible Assets
During the three months ended March 31, 2007, there were no acquisitions, disposals or impairment
of PolyOnes goodwill. Goodwill as of March 31, 2007 and December 31, 2006, by operating segment,
was as follows:
8
|
|
|
|
|
|
|
|
|
(In millions) |
|
March
31, 2007 |
|
|
December 31, 2006 |
|
Vinyl Business |
|
$ |
152.3 |
|
|
$ |
152.3 |
|
International Color and Engineered Materials |
|
|
72.0 |
|
|
|
72.0 |
|
Polymer Coating Systems |
|
|
61.1 |
|
|
|
61.1 |
|
PolyOne Distribution |
|
|
1.6 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
Total |
|
$ |
287.0 |
|
|
$ |
287.0 |
|
|
|
|
|
|
|
|
Information regarding PolyOnes other intangible assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007 |
|
|
|
Acquisition |
|
|
Accumulated |
|
|
Currency |
|
|
|
|
(In millions) |
|
Cost |
|
|
Amortization |
|
|
Translation |
|
|
Net |
|
Non-contractual customer relationships |
|
$ |
8.6 |
|
|
$ |
(6.2 |
) |
|
$ |
|
|
|
$ |
2.4 |
|
Sales contract |
|
|
9.6 |
|
|
|
(9.3 |
) |
|
|
|
|
|
|
0.3 |
|
Patents, technology and other |
|
|
8.0 |
|
|
|
(3.0 |
) |
|
|
1.2 |
|
|
|
6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26.2 |
|
|
$ |
(18.5 |
) |
|
$ |
1.2 |
|
|
$ |
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
|
Acquisition |
|
|
Accumulated |
|
|
Currency |
|
|
|
|
(In millions) |
|
Cost |
|
|
Amortization |
|
|
Translation |
|
|
Net |
|
Non-contractual customer relationships |
|
$ |
8.6 |
|
|
$ |
(6.1 |
) |
|
$ |
|
|
|
$ |
2.5 |
|
Sales contract |
|
|
9.6 |
|
|
|
(9.1 |
) |
|
|
|
|
|
|
0.5 |
|
Patents, technology and other |
|
|
8.0 |
|
|
|
(2.9 |
) |
|
|
1.3 |
|
|
|
6.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26.2 |
|
|
$ |
(18.1 |
) |
|
$ |
1.3 |
|
|
$ |
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of other intangible assets was $0.4 million for the three-month period ended March 31,
2007 and $0.6 million for the three-month period ended March 31, 2006.
The carrying values of intangible assets and other investments are adjusted to fair value based
upon their respective estimated future cash flows as a result of an evaluation done each year end,
or more often when indicators of impairment exist. For the three-month period ended March 31, 2007,
there were no indicators of impairment for either goodwill or intangible assets.
Note E
Inventories
Components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
Finished products and in-process inventories |
|
$ |
179.1 |
|
|
$ |
165.4 |
|
Raw materials and supplies |
|
|
101.9 |
|
|
|
111.7 |
|
|
|
|
|
|
|
|
|
|
|
281.0 |
|
|
|
277.1 |
|
LIFO reserve |
|
|
(34.4 |
) |
|
|
(36.3 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
246.6 |
|
|
$ |
240.8 |
|
|
|
|
|
|
|
|
Note F
Income Taxes
9
A deferred tax asset valuation allowance was recorded in 2003 in accordance with SFAS No. 109,
Accounting for Income Taxes, due to the uncertainty regarding the full utilization of the
Companys deferred income taxes. In 2005 and 2006, the valuation
allowance was reduced offsetting tax expense
in those periods. In the fourth quarter of 2006, the Company determined that it was more likely
than not that the remaining deferred tax asset would be realized and the valuation allowance was
reversed to income in that period. As a result, the tax expense in the first quarter 2007 was
recorded without regard to any domestic deferred tax valuation allowance. The tax expense of $3.8
million in the first quarter of 2007 reflects the effective tax rate of 34% applied against the
income before income taxes. The difference between the effective rate and the statutory rate was
primarily the impact of foreign source income, Medicare reimbursements and life insurance.
The tax expense of $1.7 million in the first quarter of 2006 represents taxes related to federal
alternative minimum tax, state and local taxes and foreign taxes.
Note G
Financial Information of Equity Affiliates
PolyOnes Resin and Intermediates segment consists primarily of investments in equity affiliates.
PolyOne owns 24% of OxyVinyls, a manufacturer and marketer of PVC resins in North America.
Summarized financial information follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
OxyVinyls: |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
493.8 |
|
|
$ |
693.2 |
|
Operating income (loss) |
|
|
(3.9 |
) |
|
|
107.6 |
|
Partnership income (loss) as reported by OxyVinyls |
|
|
(5.9 |
) |
|
|
102.4 |
|
PolyOnes ownership of OxyVinyls |
|
|
24 |
% |
|
|
24 |
% |
|
|
|
|
|
|
|
PolyOnes proportionate share of OxyVinyls earnings
(losses) |
|
|
(1.4 |
) |
|
|
24.6 |
|
Amortization of the difference between PolyOnes
investment and its underlying share of OxyVinyls
equity |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Earnings (losses) of equity affiliate recorded by PolyOne |
|
$ |
(1.3 |
) |
|
$ |
24.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Current assets |
|
$ |
416.6 |
|
|
$ |
382.4 |
|
Non-current assets |
|
|
1,272.8 |
|
|
|
1,293.2 |
|
|
|
|
|
|
|
|
Total assets |
|
|
1,689.4 |
|
|
|
1,675.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
185.9 |
|
|
|
238.9 |
|
Non-current liabilities |
|
|
367.2 |
|
|
|
294.5 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
553.1 |
|
|
|
533.4 |
|
|
|
|
|
|
|
|
Partnership capital |
|
$ |
1,136.3 |
|
|
$ |
1,142.2 |
|
|
|
|
|
|
|
|
PolyOne also owns 50% of SunBelt Chlor-Alkali Partnership (SunBelt). Summarized financial
information follows:
10
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
SunBelt: |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
37.1 |
|
|
$ |
44.1 |
|
Operating income |
|
|
16.3 |
|
|
|
27.7 |
|
Partnership income as reported by SunBelt |
|
|
14.0 |
|
|
|
25.2 |
|
PolyOnes ownership of SunBelt |
|
|
50 |
% |
|
|
50 |
% |
|
|
|
|
|
|
|
Earnings of equity affiliate recorded by PolyOne |
|
$ |
7.0 |
|
|
$ |
12.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Current assets |
|
$ |
42.3 |
|
|
$ |
25.1 |
|
Non-current assets |
|
|
110.7 |
|
|
|
113.7 |
|
|
|
|
|
|
|
|
Total assets |
|
|
153.0 |
|
|
|
138.8 |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
22.4 |
|
|
|
22.1 |
|
Non-current liabilities |
|
|
121.9 |
|
|
|
121.9 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
144.3 |
|
|
|
144.0 |
|
|
|
|
|
|
|
|
Partnership capital (deficit) |
|
$ |
8.7 |
|
|
$ |
(5.2 |
) |
|
|
|
|
|
|
|
OxyVinyls purchases chlorine from SunBelt under an agreement that expires in 2094. The agreement
requires OxyVinyls to purchase all of the chlorine produced by SunBelt up to 250,000 tons per year
at market price, less a discount.
On October 1, 2006, PolyOne purchased the remaining 50% interest in DH Compounding Company from a
subsidiary of The Dow Chemical Company. DH Compounding Company is now fully consolidated in the
financial statements of PolyOne. Prior to the acquisition of DH Compounding Company, it was
accounted for as an equity affiliate and was reflected in the All Other segment (owned 50% and
included in the Producer Services operating segment) along with BayOne Urethane Systems, L.L.C
equity affiliate (owned 50% and included in the Polymer Coating Systems operating segment). The
Vinyl Business operating segment includes the Geon/Polimeros Andinos equity affiliate (owned 50%).
Combined summarized financial information for these equity affiliates follows. The amounts shown
represent the entire operations of these businesses.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(In millions) |
|
2007 |
|
2006 |
Net sales |
|
$ |
24.1 |
|
|
$ |
37.1 |
|
Operating income |
|
|
1.8 |
|
|
|
3.1 |
|
Net income |
|
|
1.5 |
|
|
|
3.0 |
|
Note H
Share-Based Compensation
Share-based compensation expense recognized during the period is based on the value of the portion
of share-based payment awards that is ultimately expected to vest during the period. Share-based
compensation expense recognized in the Companys Condensed Consolidated Statement of Operations
11
includes compensation expense for share-based payment awards granted on or subsequent to January 1,
2006 based on the grant date fair value estimated in accordance with the provision of SFAS No.
123(R), Share-Based Payments. Because share-based compensation expense recognized in the
Condensed Consolidated Statement of Operations is based on awards ultimately expected to vest, it
has been reduced for estimated forfeitures. SFAS No. 123(R) requires that forfeitures be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates.
PolyOne has one active share-based compensation plan, which is described below. The pre-tax
compensation cost recognized for the three months ended March 31, 2007 and 2006 was $0.2 million
and $1.4 million, respectively, which is included in selling and administrative expenses on the
Condensed Consolidated Statement of Operations.
2005 Equity and Performance Incentive Plan
In May 2005, PolyOnes shareholders approved the PolyOne Corporation 2005 Equity and Performance
Incentive Plan (2005 EPIP). All future grants and awards to PolyOne employees will be issued only
from this plan until there are no shares remaining under the plan. As a result, all previous
equity-based plans were frozen in May 2005. The 2005 EPIP provides for the award of a broad variety
of share-based compensation alternatives, including non-qualified stock options, incentive stock
options, restricted stock, restricted stock units, performance shares, performance units and stock
appreciation rights. A total of five million shares of common stock have been reserved for grants
and awards under the 2005 EPIP. It is anticipated that all share-based grants and awards that are
earned and exercised will be issued from shares of PolyOne common stock that are held in treasury.
Stock Appreciation Rights
During the first quarter of 2007, the Compensation and Governance Committee of the Companys Board
of Directors authorized the issuance of 1,555,200 stock appreciation rights (SARs). The awards were
approved on March 8, 2007 and communicated to recipients on or around March 30, 2007. The date of
March 8, 2007 has been used as the grant date for valuation purposes. The grant date stock price
was $6.585. Vesting is based on a service period of one year and the achievement of stock price
targets. This condition is considered a market-based measure under SFAS No. 123(R), which is
considered in determining the grants fair value. This fair value is not subsequently revised for
actual market price achievement, but rather is a fixed expense subject only to service-related
forfeitures. The awards vest in one-third increments based on stock price achievement of $7.24,
$7.90 and $8.56, but may not be exercised earlier than one year from the date of the grant. The
SARs have a seven-year exercise period that expires on March 7, 2014.
The option pricing model used by PolyOne was a Monte Carlo simulation method that valued the SARs
granted during the first quarter of 2007. Under this method, the fair value of awards on the date
of grant is an estimate and is affected by the Companys stock price, as well as assumptions
regarding a number of highly complex and subjective variables as noted in the following table.
Expected volatility was set at the average of the six-year historical weekly volatility for PolyOne
and the implied volatility rates for exchange traded options. The expected term of options granted
was set equal to the midpoint between the vesting and expiration dates for each grant. Dividends
were omitted in this calculation because PolyOne does not currently pay dividends. The risk-free
rate of return for periods within the contractual life of the option is based on U.S. Treasury
rates in effect at the time of the grant. Forfeitures were estimated at 3% per year and were based
on PolyOnes historical experience.
The following is a summary of the assumptions related to the grants issued during the first quarter
of 2007:
12
|
|
|
|
|
|
|
2007 |
Expected volatility |
|
|
44.00 |
% |
Expected dividends |
|
|
|
|
Expected term |
|
4.28 years |
Risk-free rate |
|
|
4.30 |
% |
Value of SAR options granted |
|
$ |
2.72 |
|
A summary of SAR option activity under the 2005 EPIP as of March 31, 2007 and changes during the
quarter then ended, are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares (in |
|
|
Exercise |
|
|
Contractual |
|
|
Value (in |
|
Stock Appreciation Rights |
|
thousands) |
|
|
Price |
|
|
Term |
|
|
millions) |
|
Outstanding at January 1, 2007 |
|
|
1,640 |
|
|
$ |
7.90 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,555 |
|
|
|
6.59 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1 |
) |
|
|
6.00 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(25 |
) |
|
|
7.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
3,169 |
|
|
$ |
7.26 |
|
|
6.1 years |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31, 2007 |
|
|
979 |
|
|
$ |
7.84 |
|
|
5.4 years |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
904 |
|
|
$ |
7.72 |
|
|
5.3 years |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of SARs granted during the three months ended March 31,
2007 and 2006 was $2.72 and $2.70, respectively. No SARs were exercised during the three months
ended March 31, 2007. The total intrinsic value of SARs that were exercised during the three months
ended March 31, 2006 was $0.7 million.
As of March 31, 2007, there was $3.5 million of total unrecognized compensation cost related to
SARs, which is expected to be recognized over a weighted-average period of one year.
Stock Options
PolyOnes incentive stock plans provide for the award or grant of options to purchase PolyOne
common stock. Options granted generally become exercisable at the rate of 35% after one year, 70%
after two years and 100% after three years. The term of each option cannot extend beyond 10 years
from the date of grant. All options are granted at 100% or greater of market value (as defined) on
the date of the grant. PolyOne also has a stock plan for non-employee directors under which options
are granted.
A summary of option activity as of March 31, 2007 and changes during the quarter then ended are
presented below:
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares (in |
|
|
Exercise |
|
|
Contractual |
|
|
Value (in |
|
Options |
|
thousands) |
|
|
Price |
|
|
Term |
|
|
millions) |
|
Outstanding at January 1, 2007 |
|
|
7,385 |
|
|
$ |
11.47 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(44 |
) |
|
|
6.00 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(545 |
) |
|
|
12.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
6,796 |
|
|
$ |
11.49 |
|
|
2.75 years |
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at March 31, 2007 |
|
|
6,796 |
|
|
$ |
11.49 |
|
|
2.75 years |
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options that were exercised during the three months ended March
31, 2007 and 2006 was $0 and $0.4 million, respectively.
Cash received during the first quarter 2007 and 2006 from the exercise of stock options was $0.3
million and $2.0 million, respectively.
Performance Shares
At March 31, 2007, there were 531,669 performance share awards outstanding with a weighted-average
fair value of $8.94 per share. During the three months ended March 31, 2007, a benefit of $1.2
million was recognized on these awards. During the three months ended March 31, 2006, compensation
cost of $0.4 million was recognized on these awards. As of March 31, 2007, based on projected
performance attainment for the remaining life of the awards, the unrecognized compensation cost of
these awards is approximately $0.3 million.
Restricted Stock Awards
As of March 31, 2007, restricted stock totaling 220,000 shares remain unvested with a
weighted-average grant date fair value of $8.76 and a weighted-average remaining contractual term
of 29 months. Compensation expense recorded during the three months ended March 31, 2007 and 2006
was $0.2 million and $0.1 million, respectively. Unrecognized compensation cost for restricted
stock awards at March 31, 2007 is $1.1 million.
Note I
Weighted-Average Shares Used to Compute Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(In millions) |
|
2007 |
|
2006 |
Weighted-average shares basic: |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
92.6 |
|
|
|
92.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted: |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
92.6 |
|
|
|
92.1 |
|
Plus dilutive impact of stock options and stock awards |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding diluted |
|
|
93.0 |
|
|
|
92.5 |
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share is computed as net income (loss) available to common
shareholders divided by weighted-average basic shares outstanding. Diluted earnings (loss) per
common share is computed as net income (loss) available to common shareholders divided by
weighted-average diluted shares outstanding.
14
Outstanding stock options with exercise prices greater than the average price of the common shares
are anti-dilutive and are not included in the computation of diluted earnings per share. The number
of anti-dilutive options and awards was 6.9 million at March 31, 2007 and 8.3 million at March 31,
2006.
Note J
Employee Separation and Plant Phaseout
Since the formation of PolyOne in 2000, management has undertaken several restructuring initiatives
to improve profitability and, as a result, PolyOne has incurred employee separation and plant
phaseout costs. For further discussion of these initiatives, see Note E to the Consolidated
Financial Statements included in PolyOnes Annual Report on Form 10-K for the year ended December
31, 2006.
2007
Activity No charges were recorded for employee separation or plant phaseout activities
during the three-month period ended March 31, 2007. PolyOne made payments of $0.2 million for
executive severance and completed the closure and exit from its Commerce, California facility
during the quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation |
|
Plant Phaseout Costs |
|
|
|
|
Number of |
|
|
|
|
|
Cash |
|
Asset Write- |
|
|
(In millions, except employee numbers) |
|
Employees |
|
Costs |
|
Closure |
|
Downs |
|
Total |
Executive severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
|
|
|
$ |
1.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.3 |
|
Utilized |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
Balance at March 31, 2007 |
|
|
|
|
|
$ |
1.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation |
|
Plant Phaseout Costs |
|
|
|
|
Number of |
|
|
|
|
|
Cash |
|
Asset Write- |
|
|
(In millions, except employee numbers) |
|
Employees |
|
Costs |
|
Closure |
|
Downs |
|
Total |
Closure and exit of Commerce Polymer
Coating Systems facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
5 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
0.2 |
|
Utilized |
|
|
(5 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
Balance at March 31, 2007 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation |
|
Plant Phaseout Costs |
|
|
|
|
Number of |
|
|
|
|
|
Cash |
|
Asset Write- |
|
|
(In millions, except employee numbers) |
|
Employees |
|
Costs |
|
Closure |
|
Downs |
|
Total |
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
5 |
|
|
$ |
1.4 |
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
1.5 |
|
Utilized |
|
|
(5 |
) |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.4 |
) |
|
|
|
Balance at March 31, 2007 |
|
|
|
|
|
$ |
1.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.1 |
|
|
|
|
15
Note K
Employee Benefit Plans
Components of defined benefit pension plan costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
0.3 |
|
|
$ |
0.3 |
|
Interest cost |
|
|
7.6 |
|
|
|
7.5 |
|
Expected return on plan assets |
|
|
(8.0 |
) |
|
|
(7.6 |
) |
Amortization of unrecognized losses,
transition obligation and prior service
cost |
|
|
2.6 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
$ |
2.5 |
|
|
$ |
3.9 |
|
|
|
|
|
|
|
|
PolyOne estimates that the minimum funding requirements in 2007 for its qualified defined pension
plans will approximate $15 million.
Components of post-retirement health care plan benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
Interest cost |
|
|
1.4 |
|
|
|
1.4 |
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
Amortization of unrecognized losses,
transition obligation and prior service
cost |
|
|
(1.1 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
$ |
0.4 |
|
|
$ |
0.6 |
|
|
|
|
|
|
|
|
Note L
Financing Arrangements
PolyOne is exposed to market risk from changes in interest rates on debt obligations and from
changes in foreign currency exchange rates. PolyOne periodically enters into interest rate swap
agreements that modify its exposure to interest risk by converting fixed-rate obligations to
floating rates. PolyOne maintained interest rate swap agreements on six of its fixed-rate
obligations in the aggregate amount of $100.0 million at March 31, 2007. These exchange agreements
are perfectly effective as defined by SFAS No. 133, Accounting for Derivative Financial
Instruments and Hedging Activities. At March 31, 2007, these agreements had a net fair value
liability of $4.4 million. The weighted-average interest rate for these agreements was 9.2%. There
have been no material changes in the market risk faced by PolyOne from December 31, 2006 to March
31, 2007.
16
Note M
Sale of Accounts Receivable
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
Trade accounts receivable |
|
$ |
192.7 |
|
|
$ |
160.7 |
|
Retained interest in securitized accounts receivable |
|
|
190.0 |
|
|
|
161.6 |
|
Allowance for doubtful accounts |
|
|
(5.6 |
) |
|
|
(5.9 |
) |
|
|
|
|
|
|
|
|
|
$ |
377.1 |
|
|
$ |
316.4 |
|
|
|
|
|
|
|
|
Under the terms of its receivables sale facility, PolyOne sells its accounts receivable to PolyOne
Funding Corporation (PFC), a wholly-owned, bankruptcy-remote subsidiary. At March 31, 2007 and
December 31, 2006, accounts receivable totaling $190.0 million and $161.6 million, respectively,
were sold by PolyOne to PFC. PFC in turn may sell an undivided interest in these accounts
receivable to certain investors and realize proceeds of up to $175 million. The maximum proceeds
that PFC may receive under the facility is limited to 85% of the eligible accounts receivable that
are sold to PFC. At March 31, 2007 and December 31, 2006, PFC had not sold any of interests in its
accounts receivable. PolyOne retained an interest in the $190.0 million and $161.6 million of trade
receivables at March 31, 2007 and December 31, 2006, respectively. As a result, this retained
interest is included in accounts receivable on the Condensed Consolidated Balance Sheet at March
31, 2007 and December 31, 2006.
The receivables sale facility also makes up to $40 million available for the issuance of standby
letters of credit as a sub-limit within the $175 million facility, of which $10.9 million was used
at March 31, 2007. Continued availability of the securitization program depends upon compliance
with a covenant related primarily to operating performance as set forth in the related agreements.
As of March 31, 2007, PolyOne was in compliance with this covenant.
Note N
Segment Information
PolyOne manages its business in eight operating segments which results in four reportable segments
and an All Other segment. The four reportable segments are: Vinyl Business, International Color and
Engineered Materials, PolyOne Distribution, and Resin and Intermediates. The All Other segment
includes four operating segments, none of which meet the quantitative thresholds for separate
disclosure: North American Color and Additives, North American Engineered Materials, Producer
Services and Polymer Coating Systems. The accounting policies of each segment are consistent with
those described in Summary of Significant Accounting Policies in Note C to the Consolidated
Financial Statements included in PolyOnes Annual Report on Form 10-K for the year ended December
31, 2006.
As of January 1, 2007, the results of operations for PolyOnes vinyl business located in Singapore
will be reported within the Vinyl Business operating segment. Historically, the results of this
business were included in the International Color and Engineered Materials operating segment. Prior
period results of operations for Singapore have been reclassified to conform to the 2007
presentation.
Segment assets are primarily customer receivables, inventories, net property, plant and equipment,
and goodwill. Intersegment sales are accounted for at prices that approximate those for similar
transactions with unaffiliated customers. Corporate and eliminations includes cash, sales of
accounts receivable, retained assets and liabilities of discontinued operations, and other
unallocated corporate assets and liabilities. Operating income is the primary measure that is
reported to the chief operating decision maker for purposes of making decisions about allocating
resources to the segment and assessing its performance.
17
Operating income at the segment level does not include: corporate general and administrative costs
that are not allocated to segments; intersegment sales and profit 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
Three months ended |
|
External |
|
Intersegment |
|
|
|
|
|
Operating |
|
and |
|
Capital |
|
Total |
March 31, 2007 (in millions) |
|
Customers |
|
Sales |
|
Total Sales |
|
Income (Loss) |
|
Amortization |
|
Expenditures |
|
Assets |
|
|
|
Vinyl Business |
|
$ |
177.8 |
|
|
$ |
31.3 |
|
|
$ |
209.1 |
|
|
$ |
18.9 |
|
|
$ |
4.2 |
|
|
$ |
0.8 |
|
|
$ |
439.9 |
|
International Color and
Engineered Materials |
|
|
149.7 |
|
|
|
|
|
|
|
149.7 |
|
|
|
6.5 |
|
|
|
3.6 |
|
|
|
3.5 |
|
|
|
396.1 |
|
PolyOne Distribution |
|
|
183.2 |
|
|
|
1.2 |
|
|
|
184.4 |
|
|
|
4.6 |
|
|
|
0.4 |
|
|
|
|
|
|
|
189.4 |
|
Resin and Intermediates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
288.2 |
|
All Other |
|
|
147.1 |
|
|
|
8.4 |
|
|
|
155.5 |
|
|
|
1.5 |
|
|
|
4.1 |
|
|
|
2.8 |
|
|
|
384.6 |
|
Corporate and eliminations |
|
|
|
|
|
|
(40.9 |
) |
|
|
(40.9 |
) |
|
|
(9.3 |
) |
|
|
1.7 |
|
|
|
0.4 |
|
|
|
145.1 |
|
|
|
|
Total |
|
$ |
657.8 |
|
|
$ |
|
|
|
$ |
657.8 |
|
|
$ |
26.5 |
|
|
$ |
14.1 |
|
|
$ |
7.5 |
|
|
$ |
1,843.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
Three months ended |
|
External |
|
Intersegment |
|
|
|
|
|
Operating |
|
and |
|
Capital |
|
Total |
March 31, 2006 (in millions) |
|
Customers |
|
Sales |
|
Total Sales |
|
Income (Loss) |
|
Amortization |
|
Expenditures |
|
Assets |
|
|
|
Vinyl Business |
|
$ |
215.1 |
|
|
$ |
35.3 |
|
|
$ |
250.4 |
|
|
$ |
20.3 |
|
|
$ |
4.5 |
|
|
$ |
0.7 |
|
|
$ |
467.2 |
|
International Color and
Engineered Materials |
|
|
125.8 |
|
|
|
|
|
|
|
125.8 |
|
|
|
6.0 |
|
|
|
3.4 |
|
|
|
2.2 |
|
|
|
350.0 |
|
PolyOne Distribution |
|
|
191.3 |
|
|
|
2.8 |
|
|
|
194.1 |
|
|
|
6.2 |
|
|
|
0.4 |
|
|
|
|
|
|
|
193.5 |
|
Resin and Intermediates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
304.3 |
|
All Other |
|
|
142.4 |
|
|
|
7.1 |
|
|
|
149.5 |
|
|
|
0.6 |
|
|
|
4.5 |
|
|
|
1.3 |
|
|
|
367.3 |
|
Corporate and eliminations |
|
|
|
|
|
|
(45.2 |
) |
|
|
(45.2 |
) |
|
|
(1.4 |
) |
|
|
1.4 |
|
|
|
0.7 |
|
|
|
100.2 |
|
|
|
|
Total |
|
$ |
674.6 |
|
|
$ |
|
|
|
$ |
674.6 |
|
|
$ |
68.0 |
|
|
$ |
14.3 |
|
|
$ |
4.9 |
|
|
$ |
1,782.5 |
|
|
|
|
Note O
Commitments and Contingencies
PolyOne has been notified by federal and state environmental agencies and by private parties that
it may be a potentially responsible party (PRP) in connection with the investigation and
remediation of several environmental waste disposal sites. While government agencies frequently
assert that PRPs are jointly and severally liable at these sites, in PolyOnes experience interim
and final allocations of liability costs are generally made based on the relative contribution of
waste. PolyOne believes that its potential continuing liability with respect to these sites will
not have a material adverse effect on its consolidated financial position, results of operations or
cash flows. In addition, PolyOne initiates corrective and preventive environmental projects of its
own to ensure safe and lawful activities at its operations. PolyOne believes that compliance with
current governmental regulations at all levels will not have a material adverse effect on its
financial condition. Based on estimates prepared by its environmental engineers and consultants,
PolyOne had accruals totaling $59.0 million at March 31, 2007 and $59.5 million at December 31,
2006 to cover probable future environmental expenditures relating to previously contaminated sites.
The accrual represents PolyOnes best estimate of the remaining probable remediation costs, based
upon information and technology that is currently available and PolyOnes 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 PolyOne could incur additional costs in excess of the amount accrued
at
18
March 31, 2007. However, such additional costs, if any, cannot be currently estimated. PolyOnes
estimate of the liability may be revised as new regulations or technologies are developed or
additional information is obtained. PolyOne incurred environmental expense of $1.0 million in the
first quarter of 2007. PolyOne incurred environmental expense of $2.8 million in the first quarter
of 2006, offset by insurance proceeds of $4.0 million during the same period. Additional
information related to environmental liabilities is in Note O to the Consolidated Financial
Statements included in PolyOnes Annual Report on Form 10-K for the year ended December 31, 2006.
Included in the first quarter of 2006 was a net benefit of $8.8 million from the combined effect of
settlements of legal disputes and adjustments to litigation reserves.
PolyOne guarantees $67.0 million of SunBelts outstanding senior secured notes in connection with
the construction of a chlor-alkali facility in McIntosh, Alabama. This debt matures in 2017.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading global provider of specialized polymer materials, services and solutions with
operations in thermoplastic compounds, specialty vinyl resins, specialty polymer formulations,
color and additive systems, and thermoplastic resin distribution with equity investments in
manufacturers of PVC resin and its intermediates. Headquartered in Avon Lake, Ohio, we have
employees at manufacturing sites and warehouses in North America, Europe, Asia and Australia, and
joint ventures in North America and South 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 and designers,
assemblers and processors of plastics.
Discontinued
Operations With the sale of the Engineered Films business on February 15, 2006, we
no longer have any businesses that are accounted for as discontinued operations. The first quarter
2006 loss included a pre-tax charge of $2.3 million to adjust the net assets of the Engineered
Films business to the net proceeds received and to recognize costs that were not able to be
recognized until the Engineered Films business was sold due to the contingent nature of these
costs, as required by generally accepted accounting principles.
Outlook
PolyOne anticipates that the overall North American economic environment in the second quarter
will remain generally soft, although modest seasonal strengthening is expected compared to the
first quarter. Construction related demand is projected to rebound modestly, favorably affecting
vinyl business sales sequentially, but to remain well below strong first-half 2006 levels.
Automotive demand is projected to remain low through the quarter. On the other hand, solid demand
is expected across each of the Companys primary international markets, driving continued strong
growth in sales and earnings compared to the second quarter of 2006. Total company sales and
shipments are projected to increase 4% to 7% compared to the first quarter. Compared with the
second-quarter of 2006, sales are expected to grow 1% to 3% on comparable shipment levels. Further
new business closes and sales mix improvements are expected to drive year-over-year gross margin
percentage gains in most businesses.
Resin and
Intermediates operating income is projected to rebound from the low
levels of the first quarter, but
are to remain substantially below second-quarter 2006 income. PVC resin demand is markedly softer and
product spreads have narrowed compared to a year ago. Sequentially, however, PVC resin spreads are
expected to expand as average resin price increases are forecasted to more than offset higher
ethylene, chlorine and energy prices. Sales growth is also anticipated compared to the first
quarter, reflecting infrastructure demand strength and a seasonal bump in other
construction-related end market applications. Chlor-alkali margins are projected to remain
relatively strong and advance moderately compared to first-quarter levels.
In the second quarter of 2006, the Company realized a $2.4 million net benefit from adjustments to
various operating reserves and favorable litigation settlements. The Company does not anticipate
that it will realize a similar benefit in the second quarter of 2007.
20
The Company will record a higher effective tax rate in the second quarter of 2007 as compared to
2006 for the same period, due to the reversal of a portion of the Companys deferred tax asset
allowance in the second quarter of 2006. This will not affect cash flow due to PolyOnes remaining
domestic net operating loss carry-forwards. Cash taxes will continue to be associated principally
with non-U.S. earnings.
Results of Operations
Summary of Consolidated Results:
First quarter 2007 sales decreased 2% from the comparable period last year due to an aggregate 3%
decrease in volume, partially offset by an increase in selling prices to recapture escalating raw
material and manufacturing conversion costs. Increased volume in International Color and Engineered
Materials, Producer Services, North American Engineered Materials and Polymer Coating Systems
operating segments was offset by decreases in Vinyl Business, PolyOne Distribution and North
American Color and Additives operating segments. Stronger demand internationally in our automotive,
specialty, appliance and general purpose markets drove up volume. The acquisition of the remaining
50% of DH Compounding Company in the fourth quarter of 2006 provided the extra volume in our
Producer Services operating segment. Domestically, mainly due to the sluggish automotive, building
and construction markets, volume has been adversely affected. Operating income for the first
quarter 2007 decreased by $41.5 million from the first quarter of 2006. The majority of this
decrease, or $32.0 million, was the result of lower earnings at our OxyVinyls and Sunbelt equity
affiliates. The remaining decrease was primarily a result of a one-time benefit of $8.8 million
received in the first quarter of 2006 associated with insurance and legal settlements and
adjustments to related reserves.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
Sales: |
|
|
|
|
|
|
|
|
Vinyl Business |
|
$ |
209.1 |
|
|
$ |
250.4 |
|
International Color and Engineered Materials |
|
|
149.7 |
|
|
|
125.8 |
|
PolyOne Distribution |
|
|
184.4 |
|
|
|
194.1 |
|
All Other |
|
|
155.5 |
|
|
|
149.5 |
|
Intersegment eliminations |
|
|
(40.9 |
) |
|
|
(45.2 |
) |
|
|
|
|
|
|
|
Total sales |
|
$ |
657.8 |
|
|
$ |
674.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
Vinyl Business |
|
$ |
18.9 |
|
|
$ |
20.3 |
|
International Color and Engineered Materials |
|
|
6.5 |
|
|
|
6.0 |
|
PolyOne Distribution |
|
|
4.6 |
|
|
|
6.2 |
|
Resin and Intermediates |
|
|
4.3 |
|
|
|
36.3 |
|
All Other |
|
|
1.5 |
|
|
|
0.6 |
|
Corporate and eliminations |
|
|
(9.3 |
) |
|
|
(1.4 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
26.5 |
|
|
|
68.0 |
|
Interest expense, net |
|
|
(14.4 |
) |
|
|
(16.1 |
) |
Other expense, net |
|
|
(0.9 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
Income before income taxes and discontinued operations |
|
|
11.2 |
|
|
|
50.7 |
|
Income tax expense |
|
|
(3.8 |
) |
|
|
(1.7 |
) |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
7.4 |
|
|
|
49.0 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
Net income |
|
$ |
7.4 |
|
|
$ |
46.9 |
|
|
|
|
|
|
|
|
21
Period-to-period changes in sales and operating income are discussed in the Business Segment
Information section that follows. Segments are also discussed in Note N to the Condensed
Consolidated Financial Statements.
Selected Operating Costs:
Selected operating costs, expressed as a percentage of sales, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Cost of sales |
|
|
85.5 |
% |
|
|
86.5 |
% |
Selling and administrative |
|
|
9.3 |
% |
|
|
7.0 |
% |
Cost of Sales These costs include raw materials, plant conversion and distribution charges. As a
percentage of sales, these costs declined in the first quarter of 2007 primarily from successful
efforts to increase our selling prices during 2006 to pass on higher raw material, distribution and
utility costs, as well as the impact of our specialization strategy to increase new higher value
business.
Selling and Administrative These costs generally include selling, technology and general and
administrative charges. Selling and administrative costs increased in the first quarter of 2007
compared to the first quarter of 2006 due mainly to increased investment in commercial resources
and capabilities. Also, included in the first quarter of 2006 was an $8.8 million net benefit from
the combined effect of settlements of legal disputes and adjustments to litigation reserves and a
$1.2 million net benefit from environmental reserve adjustments and related insurance settlements
that reduced first quarter 2006 selling and administrative costs as a percentage of sales by 1.5
percentage points.
Other Components of Income and Expense:
Following are discussions of significant components of income and expense that are presented below
the line Operating income in the Condensed Consolidated Statements of Operations.
Interest expense The decrease in interest expense for the first quarter of 2007 as compared to
the first quarter of 2006 was mainly the result of lower average borrowings due to the repurchase
of $58.6 million aggregate principal amount of our 10.625% senior notes during 2006.
Other expense Other expense included finance costs associated with our receivables sale facility,
foreign currency gains and losses, retained post-retirement benefit costs from previously
discontinued operations and other miscellaneous items.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
Currency exchange loss |
|
$ |
(0.6 |
) |
|
$ |
(0.5 |
) |
Foreign exchange contracts gain |
|
|
0.3 |
|
|
|
0.3 |
|
Discount on sale of trade receivables |
|
|
(0.3 |
) |
|
|
(0.8 |
) |
Other, net |
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Other expense |
|
$ |
(0.9 |
) |
|
$ |
(1.2 |
) |
|
|
|
|
|
|
|
Income tax expense A deferred tax asset valuation allowance was recorded in 2003 in accordance
with SFAS No. 109, Accounting for Income Taxes, due to the uncertainty regarding the full
utilization of the Companys deferred income taxes. In 2005 and 2006, the valuation was reduced
offsetting tax expense in
22
those periods. In the fourth quarter of 2006, the Company determined that it was more likely than
not that the remaining deferred tax asset would be realized and the valuation allowance was
reversed to income in that period. As a result, the tax expense in the first quarter of 2007 was
recorded without regard to any domestic deferred tax valuation allowance. The tax expense of $3.8
million in the first quarter of 2007 reflects the effective tax rate of 34% applied against the
income before income taxes. The difference between the effective rate and the statutory rate was
primarily the impact of foreign source income, Medicare reimbursements and life insurance.
The tax expense of $1.7 million in the first quarter of 2006 represents taxes related to federal
alternative minimum tax, state and local taxes and foreign taxes.
Loss
from discontinued operations, net of income taxes The first quarter 2006 loss included a
pre-tax charge of $2.3 million to adjust the net assets of the Engineered Films business that was
sold in February 2006 to the net sales proceeds received and to recognize costs that we were not
allowed to recognize until the Engineered Films business was sold due to the contingent nature of
the costs, as required by generally accepted accounting principles.
Segment Information:
First Quarter 2007 Compared with First Quarter 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(In millions) |
|
2007 |
|
2006 |
|
Change |
|
% Change |
|
|
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business |
|
$ |
209.1 |
|
|
$ |
250.4 |
|
|
$ |
(41.3 |
) |
|
|
(16 |
)% |
International Color and Engineered
Materials |
|
|
149.7 |
|
|
|
125.8 |
|
|
|
23.9 |
|
|
|
19 |
% |
PolyOne Distribution |
|
|
184.4 |
|
|
|
194.1 |
|
|
|
(9.7 |
) |
|
|
(5 |
)% |
All Other |
|
|
155.5 |
|
|
|
149.5 |
|
|
|
6.0 |
|
|
|
4 |
% |
Intersegment eliminations |
|
|
(40.9 |
) |
|
|
(45.2 |
) |
|
|
4.3 |
|
|
|
10 |
% |
|
|
|
Total sales |
|
$ |
657.8 |
|
|
$ |
674.6 |
|
|
$ |
(16.8 |
) |
|
|
(2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business |
|
$ |
18.9 |
|
|
$ |
20.3 |
|
|
$ |
(1.4 |
) |
|
|
(7 |
)% |
International Color and Engineered
Materials |
|
|
6.5 |
|
|
|
6.0 |
|
|
|
0.5 |
|
|
|
8 |
% |
PolyOne Distribution |
|
|
4.6 |
|
|
|
6.2 |
|
|
|
(1.6 |
) |
|
|
(26 |
)% |
Resin and Intermediates |
|
|
4.3 |
|
|
|
36.3 |
|
|
|
(32.0 |
) |
|
|
(88 |
)% |
All Other |
|
|
1.5 |
|
|
|
0.6 |
|
|
|
0.9 |
|
|
|
150 |
% |
Corporate and eliminations |
|
|
(9.3 |
) |
|
|
(1.4 |
) |
|
|
(7.9 |
) |
|
|
564 |
% |
|
|
|
Operating income |
|
$ |
26.5 |
|
|
$ |
68.0 |
|
|
$ |
(41.5 |
) |
|
|
(61 |
)% |
|
|
|
Operating income is the primary measure that is reported to the chief operating decision maker for
purposes of making decisions about 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
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 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
23
profit or loss that is reported to and reviewed by the chief operating decision maker. These costs
are included in Corporate and eliminations.
Sales for the Vinyl Business were down 16% for the first quarter of 2007 compared to the same
period in 2006. The main driver for this was a volume decrease of 13% due to the slowdown in the
building and construction industry, which adversely affected demand in the windows, pipe &
fittings, flooring and appliance markets. Operating income declined 7% in the first quarter of 2007
compared to the first quarter of 2006 due to lower volume, which was
largely offset by higher
product spreads and lower manufacturing costs.
International Color and Engineered Materials sales increased $23.9 million, or 19% in the first
quarter of 2007 compared to the same period in 2006. In the aggregate, volume increased 9% in the
first quarter of 2007 compared to the first quarter of 2006. Also,
the higher euro exchange rate
contributed approximately $12.0 million in the first quarter of 2007 compared to the first quarter
of 2006. During the quarter sales mix improvements, from growth into higher valued
applications, helped drive the operating income improvement of8% compared to the same period in
2006. The higher euro exchange rate also had a favorable impact on
earnings.
PolyOne Distribution
sales decreased 5% in the first quarter of 2007 compared to the same period in 2006 due to generally
soft automotive and construction-related demand that resulted in a 5%
volume decline from the first quarter of 2006. Moreover, PolyOne Distribution was still benefiting in the first quarter of 2006 from the residual
effects of the weather-related demand surge in late 2005. Operating income in the first quarter of
2007 decreased $1.6 million compared to the same period in 2006 primarily from lower volumes and
increased commercial investments.
Resin and
Intermediates operating income of $4.3 million for the first quarter of 2007 was down
$32.0 million compared to the same period in 2006. Segment operating income dropped primarily at
OxyVinyls as a result of substantially lower construction-related product demand and contracting PVC
resin product spreads. Chlor-alkali earnings at SunBelt were also down compared to the first
quarter of 2006, reflecting lower demand and moderately lower
operating margins.
The All Other segment includes the North American Color and Additives, North American Engineered
Materials, Producer Services and Polymer Coating Systems operating segments. Sales in aggregate
were up 4% in the first quarter of 2007 compared to the first quarter of 2006 primarily from a
shift in product mix to higher margin products from an 11% volume
increase mainly attributable to the acquisition of the
remaining 50% of the DH Compounding Company in the fourth quarter of 2006. Operating income for the
first quarter of 2007 for the All Other segment improved $0.9 million compared to the first quarter
of 2006.
Corporate and eliminations expense of $9.3 million for in the first quarter of 2007 was $7.9
million higher compared to the same period last year. This increase was primarily due to a
non-recurring benefit of $8.8 million received in the first quarter of 2006 associated with
insurance and legal settlements and adjustments to the related reserves.
Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires us to make estimates and assumptions about future events that affect the amounts reported
in our
24
financial statements and accompanying notes. We base our estimates on historical experience and
assumptions that we believe are reasonable under the related facts and circumstances. The
application of these critical accounting policies involves the exercise of judgment and use of
assumptions for future uncertainties. Accordingly, actual results could differ significantly from
these estimates. A description of these accounting policies and estimates is included in Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2006. For additional information
regarding our accounting policies, see Note C to the Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended December 31, 2006.
Deferred Taxes A valuation allowance was initially recorded against domestic deferred tax assets
in the fourth quarter of 2003 as a result of our operating losses. The valuation allowance was
adjusted in subsequent periods through 2006 and charged or credited to income or other
comprehensive income as appropriate. In the fourth quarter of 2006, management determined that it
was more likely than not that the deferred tax assets would be realized and the remaining amount of
valuation allowance was reversed to income in that period. Therefore, beginning with the first
quarter of 2007, a tax expense will be recorded based on an estimated effective tax rate for all
jurisdictions.
FASB Interpretation No. 48 In June 2006, the FASB issued Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109,
Accounting for Income Taxes, which is effective for fiscal years beginning after December 15,
2006. FIN 48 clarifies the recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We adopted FIN 48 effective January 1,
2007. The adoption of FIN 48 did not have a material impact on our financial position or results of
operations.
We
previously recorded an $6.0 million liability for unrecognized tax benefit. This amount relates
to an item under examination by a foreign tax authority the related to the valuation of assets. We
do not agree with the proposed adjustment and have appealed the assessment. We do not anticipate
that this dispute will be resolved in the next twelve months. Any final determination could
adversely impact our effective tax rate.
Management will continue the accounting policy to classify interest and penalties on unrecognized
tax positions as income taxes. As of the date of adoption, we have accrued $2.5 million of interest
and penalties. We are no longer subject to U.S. income tax examinations for periods preceding
2002. In addition, with limited exceptions, we are no longer subject to foreign, state and local tax
examinations for periods preceding 2002.
FASB Staff Position AUG AIR-1 In September 2006, the FASB issued FASB Staff Position (FSP) AUG
AIR-1, Accounting for Planned Major Maintenance Activities (FSP AUG AIR-1). FSP AUG AIR-1
prohibits the use of the accrue-in-advance method of accounting for planned major maintenance
activities in annual and interim financial reporting periods and is effective for the first fiscal
year beginning after December 15, 2006. OxyVinyls adopted FSP AUG AIR-1 in the first quarter of
2007, on a retrospective basis, and is now using the deferral method of accounting for planned
major maintenance. The effect on OxyVinyls consolidated balance sheet at January 1, 2007 from
adopting FSP AUG AIR-1 was an increase of $38.3 million in other assets, a decrease of $12.3
million in accrued liabilities, an increase of $4.2 million in minority interest and an increase of
$46.4 million in partners capital. Our proportionate share of OxyVinyls operations is 24%.
25
The adoption of FSP AUG AIR-1 represents a change in accounting principle and, under the guidance
of this principle, must be applied retrospectively. Under these retrospective provisions, we have
restated our historical financial statements to reflect the change in accounting for planned major
maintenance activities of our OxyVinyls equity affiliate. For further discussion and illustration
of the changes made to our financial statements, refer to Note C of the Condensed Consolidated
Financial Statements.
Goodwill
As of March 31, 2007, we had $287.0 million of goodwill that resulted from the
acquisition of businesses. SFAS No. 142, Goodwill and Other Intangible Assets, requires us to
perform impairment tests of our goodwill at least once a year, and more frequently if an event or
circumstance indicates that an impairment or decline in value may have occurred. To make this
impairment assessment, we compare the fair value of each of our reporting units with that reporting
units carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill
is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value,
an impairment loss is measured and recognized. We have selected July 1 as our annual impairment
testing date.
We determined that goodwill was not impaired when we performed our last annual assessment as of
July 1, 2006. As of March 31, 2007, no potential indicator of impairment exists, such as a
significant adverse change in legal factors or business climate, an adverse action or assessment by
a regulator, unanticipated competition, loss of key personnel or a more-likely-than-not expectation
that a reporting unit or a significant portion of a reporting unit will be sold or disposed. Based
upon this, we concluded that an interim assessment as of March 31, 2007 was not required.
Cash Flows
Detail about cash flows can be found in the Condensed Consolidated Statement of Cash Flows. The
following discussion focuses on the material components of cash flows from operating, investing and
financing activities from the end of the preceding fiscal year (December 31, 2006) to the date of
the most recent interim balance sheet (March 31, 2007).
Operating
Activities In the first quarter of 2007, our operations provided $3.8 million of cash.
Primary sources of cash were profitable business operations and an increase in accounts payable due
to higher purchasing levels to support higher sales levels at the end of the first quarter of 2007
compared to the prior year end. Primary uses of cash were: an increase in accounts receivable due
to higher sales levels at the end of the first quarter of 2007 compared to the prior year end; an
increase in inventories due to higher production levels to support higher sales levels at the end
of the first quarter of 2007 compared to the prior year end; and an increase in accounts payable
due to higher purchasing levels to support higher sales levels at the end of the first quarter of
2007 compared to the prior year end.
Income from our equity affiliates and minority interests exceeded the cash dividends and
distributions that we received by $6.3 million.
Working capital management
Our working capital management efforts focus on three components of working capital that we believe
are the most critical to maximizing cash provided by operating activities that we can manage on a
day-to-day basis. These components are accounts receivable, inventories and accounts payable. To
help us manage working capital, we use metrics that measure the number of days of sales in
receivables (DSO), days of sales in inventories (DSI) and days of sales in accounts payable (DSP).
This allows us to better
26
understand the total dollar changes in these components of working capital by separating the
changes due to efficiency (days outstanding) and the underlying volume of business (sales and
production levels).
The following table presents our working capital metrics and the impact of changes in efficiency
and volume on accounts receivable, inventories and accounts payable. Under these measurements,
higher sales and production levels would have consumed approximately $62.4 million in cash to fund
the growth in these three components. More efficient management of these components, however,
reduced the amount of cash that was required by $43.4 million.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Accounts receivable DSO |
|
|
50.9 |
|
|
|
53.1 |
|
Inventories DSI |
|
|
44.5 |
|
|
|
52.6 |
|
Accounts payable DSP |
|
|
(42.3 |
) |
|
|
(44.8 |
) |
|
|
|
|
|
|
|
Net days outstanding at end of the period |
|
|
53.1 |
|
|
|
60.9 |
|
|
|
|
|
|
|
|
|
Change in net days from prior period |
|
|
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by: |
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
(58.2 |
) |
|
|
|
|
Inventories |
|
|
(4.9 |
) |
|
|
|
|
Accounts payable |
|
|
44.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(19.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of change in net days outstanding |
|
$ |
43.4 |
|
|
|
|
|
Impact of change in sales and production levels |
|
|
(62.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(19.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities Cash used by investing activities in the first quarter of 2007 was $3.5
million and was primarily the result of capital expenditures to support manufacturing operations in
the amount of $7.5 million, offset by proceeds from the sale of assets of $4.0 million.
Financing activities Cash used by financing activities in the first quarter of 2007 totaled $0.3
million and was primarily the result of monthly payments on our three-year note issued in
connection with the acquisition of the remaining 50% of the DH Compounding Company, partially
offset by cash proceeds we received from the exercise of stock options by employees.
Discontinued Operations Cash flows from discontinued operations are presented separately on a
single line in each section of the Consolidated Statement of Cash Flows. With the sale of the
Engineered Films business in February 2006, we no longer have any businesses that are accounted for
as discontinued operations.
27
Balance Sheet
The following discussion focuses on material changes in balance sheet line items from December 31,
2006 to March 31, 2007 that are not discussed in the preceding Cash Flows section.
Other
current assets The decrease in other current assets was primarily due to payment received
from the sale of the Lincoln and Southern Railroad that we sold in December 2006.
Accrued
expenses The increase in accrued expenses was primarily due to an increase in accrued
interest expense caused by timing differences between the dates that the payment of interest is due
and the periods in which the expense is recognized, partially offset by the reduction in accrued
incentive compensation due to payments being made during the first quarter of 2007.
Capital Resources and Liquidity
As of March 31, 2007, we had existing facilities to access available capital resources (receivables
sale facility, uncommitted short-term credit lines and senior unsecured notes and debentures)
totaling $724.3 million. As of March 31, 2007, we had used $595.9 million of these facilities, and
$128.4 million was available to be drawn while remaining in compliance with covenants.
The following table summarizes our outstanding and available facilities at March 31, 2007:
|
|
|
|
|
|
|
|
|
(In millions) |
|
Outstanding |
|
|
Available |
|
Long-term debt |
|
$ |
590.5 |
|
|
$ |
|
|
Receivables sale facility |
|
|
|
|
|
|
128.4 |
|
Short-term bank debt |
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
595.9 |
|
|
$ |
128.4 |
|
|
|
|
|
|
|
|
In addition, we could incur additional secured debt in an amount up to $37.1 million while
remaining in compliance with the debt coverage limit contained in the Guarantee and Agreement
discussed below, and we also had a $67.1 million cash and cash equivalents balance that exceeded
our typical operating cash requirements of $35 million to $40 million, both of which add to our
availability at March 31, 2007.
Long-term Debt At March 31, 2007, we had long-term debt of $590.5 million, with maturities
through 2015. Current maturities of long-term debt at March 31, 2007 were $22.5 million.
Receivables Sale Facility The receivables sale facility expires in July 2010. This facility
allows us to sell accounts receivable and obtain proceeds of up to $175.0 million. The maximum
proceeds that we may receive are limited to 85% of the eligible domestic accounts receivable sold.
This facility also makes up to $40.0 million available for issuing standby letters of credit, of
which $10.9 million was used at March 31, 2007. The facility requires us to maintain a minimum
fixed charge coverage ratio (defined as Adjusted EBITDA less capital expenditures, divided by
interest expense and scheduled debt repayments for the next four quarters) of at least 1 to 1 when
availability under the facility is $40 million or less. As of March 31, 2007, the fixed charge
coverage ratio was 2.1 to 1 and availability under the facility was $128.4 million.
Guarantee
and Agreement We entered into a definitive Guarantee and Agreement with Citicorp USA,
Inc. on June 6, 2006. Under this Guarantee and Agreement, we guarantee the treasury management and
banking services provided to us and our subsidiaries, such as subsidiary borrowings, interest rate
swaps, foreign currency forwards, letters of credit, credit card programs and bank overdrafts. This
guarantee is secured by our inventories located in the United States.
28
Of the capital resource facilities available to us as of March 31, 2007, the portion of the
receivables sale facility that was actually sold provided security for the transfer of ownership of
these receivables. Each indenture governing our senior unsecured notes and debentures and our
guarantee of the 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. As of March 31, 2007, we had not sold any accounts
receivable and had guaranteed $67.0 million of SunBelts debt.
We expect profitable operations in 2007 will enable us to maintain existing levels of available
capital resources and meet our cash requirements. Expected sources of cash in 2007 include net
income, ongoing working capital efficiency improvements, cash distributions from our equity
affiliates, borrowings under existing loan agreements and proceeds from the sale of previously
closed facilities and redundant assets. Expected uses of cash in 2007 include interest expense and
discounts on the sale of accounts receivable, cash taxes, a contribution to a defined benefit
pension plan, capital expenditures, early extinguishment of a portion of long-term debt and the
retirement of medium-term notes maturing in 2007. Capital expenditures are currently estimated
between $45 million and $50 million primarily to support strategic growth initiatives and
manufacturing operations.
Based on current projections, we believe that we should be able to continue to manage and control
working capital, discretionary spending and capital expenditures and that cash provided by
operating activities, along with available borrowing capacity under the receivables sale facility,
should allow us to maintain adequate levels of available capital resources to fund our operations
and meet debt service and minimum pension funding requirements for both the short- and long-term.
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. You can identify these statements by the fact that they do not relate
strictly to historic or current facts. They use words such as 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. In particular, these include
statements relating to: future actions; prospective changes in raw material costs, product pricing
or product demand; future performance or results of current and anticipated market conditions and
market strategies; sales efforts; expenses; the outcome of contingencies such as legal proceedings;
and financial results. Factors that could cause actual results to differ materially include, but
are not limited to:
|
|
|
the effect on foreign operations of currency fluctuations, tariffs, nationalization,
exchange controls, limitations on foreign investment in local businesses and other
political, economic and regulatory risks; |
|
|
|
|
changes in polymer consumption growth rates within the U.S., Europe or Asia or other
countries 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; |
29
|
|
|
fluctuations in raw material prices, quality and supply and in energy prices and
supply, in particular fluctuations outside the normal range of industry cycles; |
|
|
|
|
production outages or material costs associated with scheduled or unscheduled
maintenance programs; |
|
|
|
|
costs, difficulties or delays related to the operation of joint venture entities; |
|
|
|
|
lack of day-to-day operating control, including procurement of raw materials, of
equity affiliates or joint ventures; |
|
|
|
|
partial control over investment decisions and dividend distribution policy of the
OxyVinyls partnership and other minority equity holdings of PolyOne; |
|
|
|
|
an inability to launch new products and/or services within PolyOnes various businesses; |
|
|
|
|
the possibility of further goodwill impairment; |
|
|
|
|
an inability to maintain any required licenses or permits; |
|
|
|
|
an inability to comply with any environmental laws and regulations; |
|
|
|
|
the cost of compliance with environmental laws and regulations, including any
increased cost of complying with new or revised laws and regulations; |
|
|
|
|
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 cost reductions and employee
productivity goals; |
|
|
|
|
a delay or inability to achieve targeted debt level reductions; |
|
|
|
|
an inability to access the receivables sale facility as a result of breaching
covenants due to not achieving anticipated earnings performance or for any other
reason; |
|
|
|
|
any poor performance of our pension plan assets and any obligation on our part to
fund PolyOnes pension plan; |
|
|
|
|
any delay and/or inability to bring the North American Color and Additives and the
North American Engineered Materials segments to profitability; |
|
|
|
|
an inability to raise or sustain prices for products or services; |
|
|
|
|
an inability to maintain appropriate relations with unions and employees in certain
locations in order to avoid business disruptions; |
|
|
|
|
any change in any agreements with product suppliers to PolyOne Distribution that
prohibits PolyOne from continuing to distribute a suppliers products to customers; |
|
|
|
|
the timing and amounts of any repurchases of outstanding senior notes and debentures
of the Company, including the amount of any premiums paid; |
|
|
|
|
timing of completion of acquisitions, including the acquisition of Ngai Hing
PlastChem Company; |
|
|
|
|
the future financial performance of acquisitions, including that of Ngai Hing
PlastChem Company, 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. You are advised, however, to consult any further
disclosures we
30
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PolyOne is exposed to market risk from changes in interest rates on debt obligations and from
changes in foreign currency exchange rates. Information related to these risks and our management
of the exposure is included in Item 7A Qualitative and Quantitative Information about Market Risk
in PolyOnes Annual Report on Form 10-K for the year ended December 31, 2006. PolyOne periodically
enters into interest rate swap agreements that convert fixed-rate obligations to floating rates.
PolyOne maintained interest rate swap agreements on six of its fixed-rate obligations in the
aggregate amount of $100.0 million at January 1, 2007. These exchange agreements are perfectly
effective as defined by SFAS No. 133, Accounting for Derivative Financial Instruments and Hedging
Activities. At March 31, 2007, the six agreements had a net fair value liability of $4.4 million.
The weighted-average interest rate for these six agreements was 9.2%. There have been no material
changes in the market risk faced by the Company from December 31, 2006 to March 31, 2007. We have
updated the disclosure concerning our financing arrangements, which is included in Note L to the
Condensed Consolidated Financial Statements included in this quarterly report.
Item 4. Controls and Procedures
Disclosure controls and procedures
Our management, under the supervision of and with the participation of our Chief Executive Officer
and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act, as of the end of the period covered by this quarterly report. Based upon
this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of
the end of the period covered by this quarterly report, PolyOnes disclosure controls and
procedures were effective.
Changes in internal control over financial reporting
The following changes occurred in PolyOnes internal control over financial reporting during the
quarter ended March 31, 2007 that materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting. A significant upgrade to the companys
information systems for non-raw material procurement was implemented on January 1, 2007 in a
controlled environment. The upgrade includes new software functionality and a hosted hardware and
software arrangement with the developer of the software. PolyOne believes that its internal control
over financial reporting for the quarter ended March 31, 2007, following this upgrade, is effective
and reliable.
31
Part
II Other Information
Item 1A. Risk Factors
There have been no material changes to the risk factors that are included in our Annual Report on
Form 10-K for the year ended December 31, 2006 that could affect our business, results of
operations or financial condition.
Item 6. Exhibits
|
|
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
|
Under Reg. S-K |
|
Form 10-Q |
|
|
Item 601 |
|
Exhibit No. |
|
Description of Exhibit |
|
|
(10 |
) |
|
|
10.1 + |
|
|
Form of Award Agreement for Stock-Settled
Stock Appreciation Rights |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
10.2 + |
|
|
Form of Award Agreement for Performance Units |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
10.3 + |
|
|
Form of Management Continuity Agreement |
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
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 |
) |
|
|
31.2 |
|
|
Certification of W. David Wilson, 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 |
) |
|
|
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 |
) |
|
|
32.2 |
|
|
Certification of W. David Wilson, 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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
May 2, 2007 |
POLYONE CORPORATION
|
|
|
/s/ W. David Wilson
|
|
|
W. David Wilson |
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
33
PolyOne Corporation
Index to Exhibits
|
|
|
|
|
Exhibit |
|
Description |
|
|
10.1 + |
|
|
Form of Award Agreement for Stock-Settled Stock Appreciation Rights |
|
|
|
|
|
|
10.2 + |
|
|
Form of Award Agreement for Performance Units |
|
|
|
|
|
|
10.3 + |
|
|
Form of Management Continuity Agreement |
|
|
|
|
|
|
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 W. David Wilson, 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 W. David Wilson, 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