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 June 30, 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
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34-1730488 |
(State or other jurisdiction
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(I.R.S. Employer Identification No.) |
of incorporation or organization) |
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33587 Walker Road, Avon Lake, Ohio
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44012 |
(Address of principal executive offices)
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(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, $0.01 par value, as of August 1,
2007 was 93,035,693
TABLE OF CONTENTS
Part I Financial Information
Item 1. Financial Statements
PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Sales |
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$ |
688.8 |
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$ |
686.4 |
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$ |
1,346.6 |
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$ |
1,361.0 |
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Operating costs and expenses: |
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Cost of sales |
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594.1 |
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590.6 |
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1,156.0 |
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1,173.3 |
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Selling and administrative |
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66.2 |
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49.5 |
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128.0 |
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97.8 |
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Depreciation and amortization |
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14.5 |
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14.3 |
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28.6 |
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28.6 |
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Income (loss) from equity affiliates and minority interest (see Note G) |
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(1.6 |
) |
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31.6 |
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4.9 |
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70.3 |
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Operating income |
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12.4 |
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63.6 |
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38.9 |
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131.6 |
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Interest expense |
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(16.0 |
) |
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(16.8 |
) |
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(31.3 |
) |
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(33.4 |
) |
Interest income |
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0.9 |
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0.8 |
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1.8 |
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1.3 |
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Premium on early extinguishment of long-term debt |
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(5.3 |
) |
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(1.2 |
) |
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(5.3 |
) |
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(1.2 |
) |
Other expense, net |
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(1.8 |
) |
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(1.5 |
) |
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(2.7 |
) |
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(2.7 |
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Income (loss) before income taxes and discontinued
operations |
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(9.8 |
) |
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44.9 |
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1.4 |
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95.6 |
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Income tax (expense) benefit |
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4.4 |
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(2.4 |
) |
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0.6 |
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(4.1 |
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Income (loss) before discontinued operations |
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(5.4 |
) |
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42.5 |
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2.0 |
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91.5 |
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Loss from discontinued operations, net of
income taxes |
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(2.1 |
) |
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Net income (loss) |
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$ |
(5.4 |
) |
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$ |
42.5 |
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$ |
2.0 |
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$ |
89.4 |
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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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$ |
(0.06 |
) |
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$ |
0.46 |
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$ |
0.02 |
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$ |
0.99 |
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Discontinued operations |
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(0.02 |
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Basic earnings (loss) per share |
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$ |
(0.06 |
) |
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$ |
0.46 |
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$ |
0.02 |
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$ |
0.97 |
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Weighted average shares used to compute earnings per
share: |
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Basic |
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92.8 |
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92.4 |
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92.7 |
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92.2 |
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Diluted |
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92.8 |
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93.0 |
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93.0 |
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92.6 |
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Dividends paid per share of common stock |
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$ |
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$ |
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$ |
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$ |
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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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June 30, |
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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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$ |
44.0 |
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$ |
66.2 |
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Accounts receivable, net |
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305.4 |
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316.4 |
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Inventories |
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261.9 |
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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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25.2 |
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27.8 |
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Total current assets |
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654.7 |
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669.3 |
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Property, net |
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439.2 |
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442.4 |
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Investment in equity affiliates |
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282.4 |
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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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11.7 |
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9.4 |
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Deferred income tax assets |
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25.5 |
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21.1 |
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Other non-current assets |
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62.1 |
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64.4 |
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Total assets |
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$ |
1,762.6 |
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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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$ |
23.7 |
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$ |
5.2 |
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Accounts payable |
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306.4 |
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221.0 |
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Accrued expenses |
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84.4 |
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93.1 |
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Current portion of long-term debt |
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12.5 |
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22.5 |
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Total current liabilities |
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427.0 |
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341.8 |
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Long-term debt |
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457.5 |
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567.7 |
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Post-retirement benefits other than pensions |
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82.9 |
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83.6 |
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Other non-current liabilities, including pensions |
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188.0 |
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200.5 |
|
Minority interest in consolidated subsidiaries |
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5.8 |
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5.5 |
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Total liabilities |
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1,161.2 |
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1,199.1 |
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Shareholders equity |
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601.4 |
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581.7 |
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Total liabilities and shareholders equity |
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$ |
1,762.6 |
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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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Six Months Ended |
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June 30, |
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2007 |
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2006 |
|
Operating Activities |
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Net income |
|
$ |
2.0 |
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$ |
89.4 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization |
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|
28.6 |
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28.6 |
|
Loss on disposition of discontinued business and plant
phaseout charge |
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2.3 |
|
Premium on early extinguishment of long-term debt |
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5.3 |
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1.2 |
|
Companies carried at equity and minority interest: |
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Impairment of investment in equity affiliate |
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15.9 |
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Income from equity affiliates and minority interest |
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(20.8 |
) |
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(70.3 |
) |
Dividends and distributions received |
|
|
9.8 |
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42.2 |
|
Change in assets and liabilities: |
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Accounts receivable |
|
|
(70.8 |
) |
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|
(43.4 |
) |
Inventories |
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|
(17.0 |
) |
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(16.4 |
) |
Accounts payable |
|
|
79.8 |
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31.7 |
|
Increase (decrease) in sale of accounts receivable |
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89.2 |
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(7.9 |
) |
Accrued expenses and other |
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(21.7 |
) |
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(8.1 |
) |
Net cash provided by discontinued operations |
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(0.1 |
) |
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Net cash provided by operating activities |
|
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100.3 |
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49.2 |
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Investing Activities |
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Capital expenditures |
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(20.4 |
) |
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(15.5 |
) |
Proceeds from sale of assets |
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4.0 |
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7.2 |
|
Proceeds from sale of discontinued business, net |
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|
17.3 |
|
Net cash used by discontinued operations |
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(0.2 |
) |
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Net cash provided (used) by investing activities |
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(16.4 |
) |
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8.8 |
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Financing Activities |
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Change in short-term debt |
|
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17.5 |
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(2.4 |
) |
Repayment of long-term debt |
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|
(121.4 |
) |
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|
(15.8 |
) |
Premium on early extinguishment of long-term debt |
|
|
(5.3 |
) |
|
|
(1.2 |
) |
Proceeds from exercise of stock options |
|
|
0.7 |
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|
2.8 |
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Net cash used by financing activities |
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|
(108.5 |
) |
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(16.6 |
) |
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Effect of exchange rate changes on cash |
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2.4 |
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|
0.8 |
|
Increase (decrease) in cash and cash equivalents |
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|
(22.2 |
) |
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|
42.2 |
|
Cash and cash equivalents at beginning of period |
|
|
66.2 |
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|
32.8 |
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Cash and cash equivalents at end of period |
|
$ |
44.0 |
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|
$ |
75.0 |
|
|
|
|
|
|
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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 |
|
Retained |
|
Stock Held |
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Other |
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Common |
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Held in |
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Common |
|
Paid-In |
|
Earnings |
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In |
|
Comprehensive |
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Shares |
|
Treasury |
|
Total |
|
Stock |
|
Capital |
|
(Deficit) |
|
Treasury |
|
Income (Loss) |
|
|
|
Balance January 1, 2006 |
|
|
122,192 |
|
|
|
30,255 |
|
|
$ |
387.4 |
|
|
$ |
1.2 |
|
|
$ |
1,066.4 |
|
|
$ |
(190.3 |
) |
|
$ |
(337.1 |
) |
|
$ |
(152.8 |
) |
Cumulative
effect of adoption of FSP AUG AIR-1 as of January 1, 2006 |
|
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|
|
|
|
|
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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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|
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|
|
|
|
|
|
|
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|
Net income |
|
|
|
|
|
|
|
|
|
|
46.9 |
|
|
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|
|
|
|
|
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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 |
|
|
|
|
|
|
|
|
|
|
47.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
and benefits |
|
|
|
|
|
|
(550 |
) |
|
|
3.1 |
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
4.0 |
|
|
|
(0.7 |
) |
|
|
|
Balance March 31, 2006 |
|
|
122,192 |
|
|
|
29,705 |
|
|
$ |
445.3 |
|
|
$ |
1.2 |
|
|
$ |
1,066.2 |
|
|
$ |
(136.4 |
) |
|
$ |
(333.1 |
) |
|
$ |
(152.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
42.5 |
|
|
|
|
|
|
|
|
|
|
|
42.5 |
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive
Income |
|
|
|
|
|
|
|
|
|
|
47.7 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Stock-based compensation
and benefits |
|
|
|
|
|
|
(163 |
) |
|
|
1.2 |
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
Balance June 30, 2006 |
|
|
122,192 |
|
|
|
29,542 |
|
|
$ |
494.2 |
|
|
$ |
1.2 |
|
|
$ |
1,065.9 |
|
|
$ |
(93.9 |
) |
|
$ |
(331.6 |
) |
|
$ |
(147.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2007 |
|
|
122,192 |
|
|
|
29,384 |
|
|
$ |
581.7 |
|
|
$ |
1.2 |
|
|
$ |
1,065.7 |
|
|
$ |
(59.9 |
) |
|
$ |
(326.2 |
) |
|
$ |
(99.1 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
Amortization of
unrecognized losses,
transition obligation
and prior service
costs, net of tax of
$0.5 |
|
|
|
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(5.4 |
) |
|
|
|
|
|
|
|
|
|
|
(5.4 |
) |
|
|
|
|
|
|
|
|
Amortization of
unrecognized losses,
transition obligation
and prior service
costs, net of tax of
$0.5 |
|
|
|
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.0 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
and benefits |
|
|
|
|
|
|
(113 |
) |
|
|
3.2 |
|
|
|
|
|
|
|
1.9 |
|
|
|
|
|
|
|
1.3 |
|
|
|
|
|
|
|
|
Balance June 30, 2007 |
|
|
122,192 |
|
|
|
29,201 |
|
|
$ |
601.4 |
|
|
$ |
1.2 |
|
|
$ |
1,067.3 |
|
|
$ |
(57.9 |
) |
|
$ |
(324.1 |
) |
|
$ |
(85.1 |
) |
|
|
|
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
5
PolyOne Corporation and Subsidiaries
INDEX TO NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
|
|
|
|
|
Note A
|
|
|
|
Basis of Presentation |
Note B
|
|
|
|
Discontinued Operations |
Note C
|
|
|
|
Accounting Policies |
Note D
|
|
|
|
Goodwill and Intangible Assets |
Note E
|
|
|
|
Inventories |
Note F
|
|
|
|
Income Taxes |
Note G
|
|
|
|
Investment in Equity Affiliates |
Note H
|
|
|
|
Share-Based Compensation |
Note I
|
|
|
|
Earnings Per Share Computation |
Note J
|
|
|
|
Employee Separation and Plant Phaseout |
Note K
|
|
|
|
Employee Benefit Plans |
Note L
|
|
|
|
Financing Arrangements |
Note M
|
|
|
|
Sale of Accounts Receivable |
Note N
|
|
|
|
Segment Information |
Note O
|
|
|
|
Commitments and Contingencies |
Note P
|
|
|
|
Subsequent Events |
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, PolyOnes vinyl operations located in
Singapore have been managed and
reported under the Vinyl Business operating segment. Historically,
the results of this operation
were included in the International Color and Engineered Materials operating segment. Prior period
results of operations have been reclassified to conform to 2007 presentation.
Operating results for the three-month and six-month periods ended June 30, 2007 are not
necessarily indicative of the results that may be attained in subsequent periods or for the year
ending December 31, 2007. Unless otherwise noted, disclosures contained in this quarterly report
relate to continuing operations.
Reclassification Certain amounts for 2006 have been reclassified to conform to the 2007
presentation.
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 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 from the sale of the business 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 U.S. generally accepted accounting principles.
6
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
(benefit) expense has been recorded based on an estimated effective tax rate for all jurisdictions.
New Accounting Pronouncements
Statement
of Financial Accounting Standards (SFAS) No. 159 In February 2007, the Financial
Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS No.
115). SFAS No. 159 permits an entity to choose to measure many financial instruments and
certain other items at fair value at specified election dates. A business entity will report
unrealized gains and losses on items for which the fair value option has been elected in
earnings at each subsequent reporting date. SFAS No. 159 is required to be adopted January 1,
2008, and we are evaluating the effect, if any, that adoption will have on our financial
statements in 2008.
SFAS 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 the adoption of SFAS No. 158 by Oxy Vinyls, LP
(OxyVinyls). In July 2007, the Company sold its 24% interest in OxyVinyls. See Note P
Subsequent Events for further information. 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.
SFAS
No. 157 In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement, which
defines fair value, establishes the framework for measuring fair value under U.S. generally
accepted accounting principles and expands disclosures about fair value
measurements. We will adopt SFAS No. 157 as of January 1, 2008, and we are evaluating the
effect, if any, that adoption will have on our financial statements in 2008.
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
7
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognizing, classification, interest and penalties, accounting in interim periods,
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 a $6.0 million liability for an uncertain tax position. 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.
PolyOne will continue the accounting policy to classify interest and penalties on uncertain 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%.
See Note P Subsequent Events for further information regarding the Companys interest in
OxyVinyls.
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 financial statements:
Condensed Consolidated Statements of Operations (Unaudited)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006 |
|
|
As originally filed |
|
Adjustment |
|
Restated |
Income from equity affiliates and minority interest |
|
$ |
31.5 |
|
|
$ |
0.1 |
|
|
$ |
31.6 |
|
Income before discontinued operations |
|
$ |
42.4 |
|
|
$ |
0.1 |
|
|
$ |
42.5 |
|
Net income |
|
$ |
42.4 |
|
|
$ |
0.1 |
|
|
$ |
42.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006 |
|
|
As originally filed |
|
Adjustment |
|
Restated |
Income from equity affiliates and minority interest |
|
$ |
70.1 |
|
|
$ |
0.2 |
|
|
$ |
70.3 |
|
Income before discontinued operations |
|
$ |
91.3 |
|
|
$ |
0.2 |
|
|
$ |
91.5 |
|
Net income |
|
$ |
89.2 |
|
|
$ |
0.2 |
|
|
$ |
89.4 |
|
8
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.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2006 |
|
|
As originally filed |
|
Adjustment |
|
Restated |
Net income |
|
$ |
89.2 |
|
|
$ |
0.2 |
|
|
$ |
89.4 |
|
Income from equity affiliates and minority interest |
|
$ |
70.1 |
|
|
$ |
0.2 |
|
|
$ |
70.3 |
|
Use of Estimates The preparation of Consolidated Financial Statements in conformity with
U.S. 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-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.
Note D Goodwill and Intangible Assets
During the six months ended June 30, 2007, there were no acquisitions, disposals or impairment
of PolyOnes goodwill. Goodwill as of June 30, 2007 and December 31, 2006, by operating
segment, was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2007 |
|
|
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 |
|
|
|
|
|
|
|
|
For the six-month period ended June 30, 2007, there were no indicators of impairment for
goodwill.
The annual impairment testing for goodwill will be performed as of July 1, 2007. Carrying
values are compared with fair values, and when the carrying value exceeds the fair value, the
carrying value of the impaired asset is reduced to its fair value.
9
Information regarding PolyOnes other intangible assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007 |
|
|
|
Acquisition |
|
|
Accumulated |
|
|
Currency |
|
|
|
|
(In millions) |
|
Cost |
|
|
Amortization |
|
|
Translation |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-contractual customer relationships |
|
$ |
8.6 |
|
|
$ |
(6.4 |
) |
|
$ |
|
|
|
$ |
2.2 |
|
Sales contract |
|
|
13.5 |
|
|
|
(10.0 |
) |
|
|
|
|
|
|
3.5 |
|
Patents, technology and other |
|
|
8.0 |
|
|
|
(3.2 |
) |
|
|
1.2 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30.1 |
|
|
$ |
(19.6 |
) |
|
$ |
1.2 |
|
|
$ |
11.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
.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 $1.1 million and $0.4 million for the three-month
periods ended June 30, 2007 and 2006, respectively, and $1.5 million and $1.0 million for the
six-month periods ended June 30, 2007 and 2006, respectively.
The carrying values of intangible assets and other investments are adjusted to the estimated
net future cash flows based upon an evaluation done each year end, or more often, when
indicators of impairment exist. For the six-month period ended June 30, 2007, there were no
indicators of impairment for intangible assets.
Note E Inventories
Components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Finished products and in-process inventories |
|
$ |
190.0 |
|
|
$ |
165.4 |
|
Raw materials and supplies |
|
|
110.5 |
|
|
|
111.7 |
|
|
|
|
|
|
|
|
|
|
|
300.5 |
|
|
|
277.1 |
|
LIFO reserve |
|
|
(38.6 |
) |
|
|
(36.3 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
261.9 |
|
|
$ |
240.8 |
|
|
|
|
|
|
|
|
Note F Income Taxes
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 realization of the
Companys deferred income taxes. In 2005 and 2006, the valuation
allowance was reversed reducing income
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 and reduced income tax expense in that period. As a result, income taxes
in the second quarter of 2007 and first half of 2007 were recorded without regard to any
domestic deferred tax valuation allowance. The tax benefit of $4.4 million in the second
quarter of 2007 reflects an effective tax rate of 45% and the tax benefit of $0.6 million in
the first
10
half of 2007 reflects an effective tax rate of 43%. The difference between the effective rate
and the statutory rate was primarily the impact of foreign source income and domestic losses.
The tax expense of $2.4 million in the second quarter of 2006 and $4.1 million in the first
half of 2006 was net of the reversal of a portion of the valuation allowance. The income tax
expense in each period represents federal alternative minimum taxes, state and local taxes and
foreign taxes.
Note G Investment in Equity Affiliates
The most significant of PolyOnes investment in equity affiliates comprise the Resin and
Intermediates segment, the SunBelt Chlor-Alkali
Partnership (SunBelt) of which PolyOne owns 50% and OxyVinyls, a manufacturer and marketer of
PVC resins, which PolyOne owned 24% of as of June 30, 2007. OxyVinyls is a leading producer of
PVC resins in North America.
The following table presents OxyVinyls summarized financial results for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
614.5 |
|
|
$ |
647.2 |
|
|
$ |
1,108.3 |
|
|
$ |
1,340.3 |
|
Operating income |
|
|
14.8 |
|
|
|
63.0 |
|
|
|
10.9 |
|
|
|
170.6 |
|
Partnership income as reported by OxyVinyls |
|
|
8.6 |
|
|
|
68.4 |
|
|
|
2.7 |
|
|
|
170.6 |
|
PolyOnes ownership of OxyVinyls |
|
|
24 |
% |
|
|
24 |
% |
|
|
24 |
% |
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
PolyOnes proportionate share of OxyVinyls
earnings |
|
|
2.0 |
|
|
|
16.4 |
|
|
|
0.6 |
|
|
|
41.0 |
|
Amortization of the difference between PolyOnes
investment and its underlying share of
OxyVinyls equity |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliate earnings recorded by PolyOne |
|
$ |
2.2 |
|
|
$ |
16.6 |
|
|
$ |
0.9 |
|
|
$ |
41.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded an impairment of $15.9 million ($10.2 million after tax) on its OxyVinyls
investment during the three months ended June 30, 2007 due to an other than temporary decline in
value. It is recorded to
the Loss (income) from equity affiliates and minority interest caption in the Condensed Consolidate
Statement of Operations. The impairment is not reflected in the equity affiliate earnings above because it is
excluded as a measure of segment operating income or loss that is reported to and reviewed by the
chief operating decision maker (see Footnote N Segment
Information). In July 2007, PolyOne sold its 24% interest in OxyVinyls. See Footnote P
Subsequent Events for further information.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
480.6 |
|
|
$ |
382.4 |
|
Non-current assets |
|
|
1,256.1 |
|
|
|
1,293.2 |
|
|
|
|
|
|
|
|
Total assets |
|
|
1,736.7 |
|
|
|
1,675.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
210.3 |
|
|
|
238.9 |
|
Non-current liabilities |
|
|
381.2 |
|
|
|
294.5 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
591.5 |
|
|
|
533.4 |
|
|
|
|
|
|
|
|
Partnership capital |
|
$ |
1,145.2 |
|
|
$ |
1,142.2 |
|
|
|
|
|
|
|
|
11
The following table presents SunBelts summarized financial results for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
47.1 |
|
|
$ |
51.6 |
|
|
$ |
84.2 |
|
|
$ |
95.7 |
|
Operating income |
|
|
24.1 |
|
|
|
29.7 |
|
|
|
40.4 |
|
|
|
57.4 |
|
Partnership income as reported by SunBelt |
|
|
22.0 |
|
|
|
27.4 |
|
|
|
36.0 |
|
|
|
52.6 |
|
PolyOnes ownership of SunBelt |
|
|
50 |
% |
|
|
50 |
% |
|
|
50 |
% |
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity affiliate earnings recorded by PolyOne |
|
$ |
11.0 |
|
|
$ |
13.7 |
|
|
$ |
18.0 |
|
|
$ |
26.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
46.6 |
|
|
$ |
25.1 |
|
Non-current assets |
|
|
108.2 |
|
|
|
113.7 |
|
|
|
|
|
|
|
|
Total assets |
|
|
154.8 |
|
|
|
138.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
19.4 |
|
|
|
22.1 |
|
Non-current liabilities |
|
|
121.9 |
|
|
|
121.9 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
141.3 |
|
|
|
144.0 |
|
|
|
|
|
|
|
|
Partnership capital (deficit) |
|
$ |
13.5 |
|
|
$ |
(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.
Other
investments in equity affiliates are discussed below.
The BayOne Urethane Systems, L.L.C. equity affiliate (owned 50%) is 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
is presented below.
The amounts shown represent the entire operations of these businesses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(In millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
29.2 |
|
|
$ |
21.6 |
|
|
$ |
53.3 |
|
|
$ |
51.6 |
|
Operating income |
|
$ |
2.0 |
|
|
$ |
2.5 |
|
|
$ |
3.8 |
|
|
$ |
4.6 |
|
Net income |
|
$ |
2.2 |
|
|
$ |
1.9 |
|
|
$ |
3.7 |
|
|
$ |
3.9 |
|
Prior to its acquisition, DH Compounding Company (DHC) was accounted for as an equity affiliate
(owned 50% and included in the Producer Services operating segment). On October 1, 2006, PolyOne
purchased the remaining 50% interest in DHC from a subsidiary of The Dow Chemical Company. DHC is
now fully consolidated in the financial statements of PolyOne, and is therefore excluded from the
information provided above.
12
Note H Share-Based Compensation
Share-based compensation expense recognized during a 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 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 cost is
included in selling and administrative expenses on the Condensed Consolidated Statement of
Operations. The pre-tax compensation cost recognized for the three months ended June 30, 2007
and 2006 was $2.4 million and $0.8 million, respectively. The pre-tax compensation expense
recognized for the six months ended June 30, 2007 and 2006 was $2.6 million and $2.2 million,
respectively.
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 or until the
shareholders approve a new equity plan. All previous equity-based plans were frozen upon the
approval of the 2005 EPIP 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 before March 30,
2007. The date of March 8, 2007 has been used as the grant date for valuation purposes.
Pursuant to the terms of the 2005 EPIP, the price used for individual grants ($6.585) was based
upon the average of the high and low sales prices as reported on the New York Stock Exchange
on the day immediately preceding the grant date. 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 (for a minimum of three consecutive
trading days) of $7.24, $7.90 and $8.56, but may not be exercised earlier than one year from
the date of the grant. At June 30, 2007, one-third of the awards had reached the $7.24 stock
price achievement target. The SARs have a seven-year exercise period that expires on March 7,
2014.
PolyOne utilizes an option pricing model based on the Monte Carlo simulation method that values
SAR awards. 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
13
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 2007:
|
|
|
|
|
|
|
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 June 30, 2007 and changes
during the six months then ended, are presented below:
(Shares in thousands, dollars in millions,
except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
Stock Appreciation Rights |
|
Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at January 1, 2007 |
|
|
1,640 |
|
|
$ |
7.90 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,575 |
|
|
|
6.59 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1 |
) |
|
|
6.00 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(86 |
) |
|
|
7.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
3,128 |
|
|
$ |
7.26 |
|
|
5.8 years |
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2007 |
|
|
1,484 |
|
|
$ |
7.41 |
|
|
5.6 years |
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 |
|
|
888 |
|
|
$ |
7.74 |
|
|
5.0 years |
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of SARs granted during the six months ended
June 30, 2007 and 2006 was $2.72 and $2.70, respectively. The total intrinsic value of SARs
that were exercised during the six months ended June 30, 2006 was $0.9 million.
As of June 30, 2007, there was $2.5 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 previously provided 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.
14
A summary of option activity as of June 30, 2007 and changes during the six months then ended
are presented below:
(Shares in thousands, dollars in millions, except per
share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
Options |
|
Shares |
|
|
Exercise Price |
|
|
Term |
|
|
Intrinsic Value |
|
Outstanding at January 1, 2007 |
|
|
7,385 |
|
|
$ |
11.47 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(122 |
) |
|
|
6.00 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(679 |
) |
|
|
12.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
6,584 |
|
|
$ |
11.49 |
|
|
2.13 years |
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at June 30, 2007 |
|
|
6,584 |
|
|
$ |
11.49 |
|
|
2.13 years |
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options that were exercised during the six months ended
June 30, 2007 and 2006 was less than $0.1 million and $0.8 million, respectively.
Cash received during the first six months of 2007 and 2006 from the exercise of stock options
was $0.7 million and $2.8 million, respectively.
Performance Shares
At June 30, 2007, there were 529,300 performance share awards outstanding with a
weighted-average fair value of $8.94 per share. There was no compensation expense recognized on
these awards for the six months ended June 30, 2007 and $0.5 million for the six months ended
June 30, 2006. As of June 30, 2007, based on projected performance attainment for the remaining
life of the awards, the unrecognized compensation cost of these awards is approximately $0.7
million.
Restricted Stock Awards
As of June 30, 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 21 months. Compensation expense recorded during the six months ended June 30, 2007 and
2006 was $0.3 million and $0.2 million, respectively. Unrecognized compensation cost for
restricted stock awards at June 30, 2007 was $1.1 million.
Note I Earnings Per Share Computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
92.8 |
|
|
|
92.4 |
|
|
|
92.7 |
|
|
|
92.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
92.8 |
|
|
|
92.4 |
|
|
|
92.7 |
|
|
|
92.2 |
|
Plus dilutive impact of stock options and
stock awards |
|
|
|
|
|
|
0.6 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares diluted |
|
|
92.8 |
|
|
|
93.0 |
|
|
|
93.0 |
|
|
|
92.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share is computed as net income available to common shareholders
divided by weighted-average basic shares outstanding. Diluted earnings per common share is
computed as net income available to common shareholders divided by weighted-average diluted
shares outstanding.
15
Outstanding SARs and 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 6.6 million at June 30, 2007 and 7.7
million at June 30, 2006. All options and awards were
anti-dilutive for the three months ended June 30, 2007.
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 During the three-month period ended June 30, 2007, the Company recorded
employee separation charges for restructuring of its manufacturing facility in St.Peters,
Missouri, which is part of the North American Color operating segment. The closure and exit
from the Companys Commerce, California facility was completed in the first quarter of 2007.
There was also one executive severance agreement at a cost of $250 thousand during the quarter
ended June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Expenses |
|
|
1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
Utilized |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
Balance at June 30, 2007 |
|
|
1 |
|
|
$ |
1.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation |
|
Plant Phaseout Costs |
|
|
|
|
Number of |
|
|
|
|
|
Cash |
|
Asset Write- |
|
|
(In millions, except employee numbers) |
|
Employees |
|
Costs |
|
Closure |
|
Downs |
|
Total |
St. Peters, Missouri facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Expenses |
|
|
33 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
Utilized |
|
|
(33 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
Balance at June 30, 2007
|
|
|
|
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation |
|
Plant Phaseout Costs |
|
|
|
|
Number of |
|
|
|
|
|
Cash |
|
Asset Write- |
|
|
(In millions, except employee numbers) |
|
Employees |
|
Costs |
|
Closure |
|
Downs |
|
Total |
Commerce, Ca. facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
|
5 |
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
0.2 |
|
Utilized |
|
|
(5 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
Balance at June 30, 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 |
|
Expenses |
|
|
34 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
Utilized |
|
|
(38 |
) |
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.8 |
) |
|
|
|
Balance at June 30, 2007 |
|
|
1 |
|
|
$ |
1.4 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1.4 |
|
|
|
|
16
Note K Employee Benefit Plans
Components of defined benefit pension plan costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
0.3 |
|
|
$ |
0.4 |
|
|
$ |
0.6 |
|
|
$ |
0.7 |
|
Interest cost |
|
|
7.6 |
|
|
|
7.4 |
|
|
|
15.2 |
|
|
|
14.9 |
|
Expected return on plan assets |
|
|
(8.0 |
) |
|
|
(7.5 |
) |
|
|
(16.0 |
) |
|
|
(15.1 |
) |
Amortization of unrecognized
losses, transition obligation
and prior service cost |
|
|
2.6 |
|
|
|
3.6 |
|
|
|
5.2 |
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2.5 |
|
|
$ |
3.9 |
|
|
$ |
5.0 |
|
|
$ |
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PolyOne estimates that the minimum funding requirements in 2007 for its qualified defined
benefit pension plans will approximate $15.0 million. During the six months ended June 30,
2007, payments of $8.1 million were made.
Components of post-retirement health care plan benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
Interest cost |
|
|
1.4 |
|
|
|
1.4 |
|
|
|
2.8 |
|
|
|
2.8 |
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized
losses, transition obligation
and prior service cost |
|
|
(1.1 |
) |
|
|
(0.9 |
) |
|
|
(2.2 |
) |
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.4 |
|
|
$ |
0.6 |
|
|
$ |
0.8 |
|
|
$ |
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note L Financing Arrangements
Long-term
Debt At June 30, 2007, PolyOne had long-term debt of $470.0 million, with maturities through
2015. Current maturities of long-term debt at June 30, 2007 and June 30, 2006 were $12.5 million
and $22.5 million, respectively. In June 2007 and
June 2006, PolyOne repurchased $100.0 million and
$15.0 million, respectively of our 10.625% Senior Notes at a premium. The premiums were $5.3
million and $1.1 million, respectively and are shown as a separate line item in the Condensed
Consolidated Statements of Operations. In addition, unamortized deferred note issuance costs of
$1.1 million and $0.2 million, respectively, were expensed due to the debt repurchase and are
included in interest expense in the Condensed Consolidated Statements of Operations.
PolyOne is exposed to market risk from changes in interest rates on debt obligations and from
changes in foreign currency exchange rates. Information about these risks and exposure
management is included in Item 7A Qualitative and Quantitative 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 modify its exposure to interest
rate risk by converting fixed-rate obligations to floating rates. PolyOne maintained interest
rate swap agreements on five of its fixed-rate obligations in the aggregate amount of $80.0
million at June 30, 2007. At June 30, 2007, these agreements had a net fair value obligation of
$4.5 million. The weighted-average interest rate for these five agreements was 9.0%. There have
been no material changes in the market risk faced by PolyOne from December 31, 2006 to June 30,
2007.
17
Note M Sale of Accounts Receivable
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
$ |
204.7 |
|
|
$ |
160.7 |
|
Retained interest in securitized accounts receivable |
|
|
106.0 |
|
|
|
161.6 |
|
Allowance for doubtful accounts |
|
|
(5.3 |
) |
|
|
(5.9 |
) |
|
|
|
|
|
|
|
|
|
$ |
305.4 |
|
|
$ |
316.4 |
|
|
|
|
|
|
|
|
Under the terms of its receivables sale facility, PolyOne sells its accounts receivable to
PolyOne Funding Corporation (PFC), a wholly owned, fully consolidated, bankruptcy-remote
subsidiary. PFC in turn may sell an undivided interest in these accounts receivable to certain
investors. This facility size is $175.0 million. As of June 30, 2007, $166.7 million was
available. The receivables sale facility was amended in June 2007 to extend the maturity of the
facility to June 2012 and to, among other things, modify certain financial covenants and reduce
the cost of utilizing the facility.
At June 30, 2007 and December 31, 2006, accounts receivable totaling $195.2 million and $161.6
million, respectively, were sold by PolyOne to PFC. The maximum amount of proceeds that PFC may
receive under the facility is limited to 85% of the eligible accounts receivable that are sold
to PFC. At June 30, 2007, PFC had sold $89.2 million of its undivided interest in accounts
receivable, and at December 31, 2006, PFC had not sold any of its undivided interest. PolyOne
retained an interest in the difference between the amount of trade receivables sold by PolyOne
to PFC and the undivided interest sold by PFC as of June 30, 2007 and December 31, 2006. As a
result, the interest retained by PolyOne of $106.0 million and $161.6 million is included in
accounts receivable on the Condensed Consolidated Balance Sheet at June 30, 2007 and December
31, 2006, respectively.
The receivables sale facility also makes up to $40.0 million available for the issuance of
standby letters of credit as a sub-limit within the
$175.0 million facility, of which $10.9 million was
used at June 30, 2007. Continued availability of the receivables sale facility depends upon
compliance with a fixed charge coverage ratio covenant related primarily to operating
performance that is set forth in the related agreements. As of June 30, 2007, PolyOne was in
compliance with this covenant.
Note N Segment Information
PolyOne manages its business in eight operating segments of which four are reportable segments: Vinyl Business, International Color and
Engineered Materials, PolyOne Distribution, and Resin and Intermediates.
As of
January 1, 2007, PolyOnes vinyl operations located in
Singapore are managed and
reported within the Vinyl Business operating segment. Historically,
the results of this operation
were included in the International Color and Engineered Materials operating segment. Prior period
results of operations have been reclassified to conform to the 2007 presentation.
The All Other category 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.
18
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. The measure of segment operating income or loss that is reported to and reviewed
by the chief operating decision maker excludes significant costs that are not controllable by or the
responsibility of segment management. These costs are included in Corporate and eliminations
and consist of: 1)intersegment sales and profit eliminations; 2)charges related to specific strategic initiatives
such as the consolidation of operations; 3)significant restructuring activities, including employee
separation costs resulting from personnel reduction programs, plant closure and phaseout costs;
4)executive separation agreements; 5)share-based compensation costs;
6)asset impairments;
7)environmental remediation costs for facilities no longer owned or
closed in prior years; 8)gains
and losses on the divestiture of joint ventures and equity investments; and certain other
items.
Segment assets have not changed significantly from the amount reported in Note R to the
Consolidated Financial Statements included in PolyOnes Annual Report on Form 10-K for the year
ended December 31, 2006.
Segment information for the three and six months ended June 30, 2007 and 2006 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007 |
|
|
Six Months Ended June 30, 2007 |
|
|
|
Sales |
|
|
|
|
|
|
Segment |
|
|
Sales |
|
|
|
|
|
|
Segment |
|
|
|
to External |
|
|
Total |
|
|
Operating |
|
|
to External |
|
|
Total |
|
|
Operating |
|
(In millions) |
|
Customers |
|
|
Sales |
|
|
Income (Loss) |
|
|
Customers |
|
|
Sales |
|
|
Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business |
|
$ |
196.0 |
|
|
$ |
229.0 |
|
|
$ |
15.4 |
|
|
$ |
373.8 |
|
|
$ |
438.2 |
|
|
$ |
34.3 |
|
International Color and
Engineered Materials |
|
|
155.9 |
|
|
|
155.9 |
|
|
|
8.3 |
|
|
|
305.6 |
|
|
|
305.6 |
|
|
|
14.9 |
|
PolyOne Distribution |
|
|
188.5 |
|
|
|
190.1 |
|
|
|
6.5 |
|
|
|
371.7 |
|
|
|
374.5 |
|
|
|
11.1 |
|
Resin and Intermediates |
|
|
|
|
|
|
|
|
|
|
12.0 |
|
|
|
|
|
|
|
|
|
|
|
16.3 |
|
All Other |
|
|
148.4 |
|
|
|
155.9 |
|
|
|
4.8 |
|
|
|
295.5 |
|
|
|
311.4 |
|
|
|
6.4 |
|
Corporate and eliminations |
|
|
|
|
|
|
(42.1 |
) |
|
|
(34.6 |
) |
|
|
|
|
|
|
(83.1 |
) |
|
|
(44.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
688.8 |
|
|
$ |
688.8 |
|
|
$ |
12.4 |
|
|
$ |
1,346.6 |
|
|
$ |
1,346.6 |
|
|
$ |
38.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006 |
|
|
Six Months Ended June 30, 2006 |
|
|
|
Sales |
|
|
|
|
|
|
Segment |
|
|
Sales |
|
|
|
|
|
|
Segment |
|
|
|
to External |
|
|
Total |
|
|
Operating |
|
|
to External |
|
|
Total |
|
|
Operating |
|
(In millions) |
|
Customers |
|
|
Sales |
|
|
Income (Loss) |
|
|
Customers |
|
|
Sales |
|
|
Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business |
|
$ |
215.2 |
|
|
$ |
252.6 |
|
|
$ |
22.1 |
|
|
$ |
430.3 |
|
|
$ |
503.0 |
|
|
$ |
42.4 |
|
International Color and
Engineered Materials |
|
|
133.6 |
|
|
|
133.6 |
|
|
|
6.7 |
|
|
|
259.4 |
|
|
|
259.4 |
|
|
|
12.7 |
|
PolyOne Distribution |
|
|
187.7 |
|
|
|
189.7 |
|
|
|
5.1 |
|
|
|
379.0 |
|
|
|
383.8 |
|
|
|
11.3 |
|
Resin and Intermediates |
|
|
|
|
|
|
|
|
|
|
29.0 |
|
|
|
|
|
|
|
|
|
|
|
65.3 |
|
All Other |
|
|
149.9 |
|
|
|
157.8 |
|
|
|
3.0 |
|
|
|
292.3 |
|
|
|
307.3 |
|
|
|
3.7 |
|
Corporate and eliminations |
|
|
|
|
|
|
(47.3 |
) |
|
|
(2.3 |
) |
|
|
|
|
|
|
(92.5 |
) |
|
|
(3.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
686.4 |
|
|
$ |
686.4 |
|
|
$ |
63.6 |
|
|
$ |
1,361.0 |
|
|
$ |
1,361.0 |
|
|
$ |
131.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Note O Commitments and Contingencies
PolyOne has been notified by certain 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, the
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 that were prepared by its environmental
engineers and consultants, PolyOne had accruals totaling $59.0 million at June 30, 2007 and $59.5
million at December 31, 2006 to cover probable future environmental expenditures related 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 June 30, 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.
For the first six months of 2007, PolyOne recorded $1.9 million of expense related to environmental
activities at its active and inactive sites and received no proceeds from insurance recoveries.
PolyOne incurred environmental expense of $4.1 million at its active and inactive sites in the
first six months of 2006, offset by insurance proceeds of $7.5 million that were received 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.
During the second quarter and six months ended June 30, 2006, the Company recorded a credit to
pre-tax income of $6.1 million, and $14.8 million, respectively, from the net 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.
Note P Subsequent Events
On
July 6, 2007, the Company sold to Occidental Chemical Corporation (OxyChem) and certain of OxyChems
affiliates the Companys 24% interest in OxyVinyls to OxyChem and received cash proceeds of
$261 million. In a related transaction, the Company acquired OxyChems 10% interest in PVC Powder
Blends, LP for $11 million, which brings the Companys ownership of this PVC compounding operation
to 100 percent.
OxyVinyls was formed on May 1, 1999 and combined the polyvinyl chloride (PVC) and vinyl chloride
monomer (VCM) businesses of OxyChem and the Company. The Company will retain the existing polyvinyl
chloride PVC resin and VCM supply agreements that it entered into when OxyVinyls was formed.
The Company recorded an impairment of $15.9 million ($10.2 million after tax) on its OxyVinyls
investment during the three months ended June 30, 2007 due to an other than temporary decline in
value. The impairment includes the recognition of the $2.7 million adjustment made as of December
31, 2006 to increase accumulated other comprehensive loss to record the Companys proportionate
share of the adoption of SFAS No. 158 by
20
Oxy Vinyls, LP. The completion of the divestiture on July 6, 2007 will result in the reversal of an
associated deferred tax liability which will reduce tax expense by $31.5 million for the three
months ended September 30, 2007.
The proceeds from the sale will be used for the redemption of the entire outstanding balance of
$141.4 million in aggregate principal amount of the Companys 10.625% Senior Notes, which is
anticipated to occur on August 9, 2007. This will result in debt redemption premium costs and the
write-off of unamortized debt discount fees for the three months ending September 30, 2007 of $9.1
million ($5.9 million after tax).
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. We also have equity investments
in manufacturers of PVC resin and its intermediates and in a formulator of polyurethane compounds.
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.
We operate
within eight operating segments, which four are reportable segments: Vinyl Business,
International Color and Engineered Materials, PolyOne Distribution, and Resin and Intermediates.
The All Other category contains four operating segments: North American Color and Additives, North
American Engineered Materials, Producer Services and Polymer Coating Systems. As of January 1,
2007, PolyOnes vinyl operations located in Singapore are now managed and reported under the Vinyl
Business operating segment. Prior period results of operations have been reclassified to conform to
2007 presentation. We discuss the sales and operating income of our operating segments in the
Segment Information section below. Also, see Note N to the Condensed Consolidated Financial
Statements for further information regarding our reportable operating segments.
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.
OxyVinyls Investment On July 6, 2007 the Company sold its 24% interest in OxyVinyls for $261
million in cash. This sale will result in the reversal of an associated deferred tax liability
which will reduce tax expense by $31.5 million for the three months ended September 30, 2007.
Proceeds from the sale will be used for the redemption of the entire $141.4 million of the
Companys 10.625% Senior Notes, which is anticipated to occur on August 9, 2007 and to reduce
drawings on short-term facilities. This will result in debt redemption premium costs and the
write-off of unamortized debt issuance fees for the three months ending September 30, 2007 of $9.1
million ($5.9 million after tax).
21
Third-quarter 2007 Outlook
PolyOne anticipates that the overall North American economic environment in the third quarter of
2007 will continue to be challenging and reflect only modest
improvement compared with the second quarter of 2007. North American construction and automotive demand are projected to remain
weak and below third quarter 2006 levels. Consequently, Vinyl
Business sales are expected to be flat sequentially, but decline up
to 10 percent compared with the third quarter of 2006. Aggregate
non-Vinyl business sales, on the other hand, are anticipated to grow
6 percent to 9 percent compared with the third quarter of 2006. In particular, solid demand is
expected across most primary international markets, driving continued growth in sales and earnings.
Total gross margin is projected to increase year-over-year reflecting early benefits from the
Companys specialization strategy.
SunBelt earnings are anticipated to decline moderately compared with the prior year, but overall
chlor-alkali margins are projected to remain relatively strong. After the divestiture on July 6,
2007, OxyVinyls results will no longer be reported.
In the
third quarter of 2006, the Company realized a $6.8 million net benefit from legal settlements
and adjustments to related reserves. The Company does not anticipate realizing a similar benefit
this year. The Company anticipates third quarter Corporate and eliminations, excluding
non-operational charges, to be consistent with the first half 2007 average.
The Company projects that interest expense for the third quarter will decline approximately $5
million sequentially as a result of its planned redemption on August 9, 2007 of the outstanding
balance of the 10.625% Senior Notes.
Consistent with the first and second quarters of this year, the Company will record tax expense
related to domestic earnings in the third quarter of 2007 in contrast with the same period in 2006.
Recording this tax expense 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.
22
Results of Operations
Summary of Consolidated Results:
The following table sets forth key financial information from our statement of operations for
the three and six months ended June 30, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions, except per share data) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Sales |
|
$ |
688.8 |
|
|
$ |
686.4 |
|
|
$ |
1,346.6 |
|
|
$ |
1,361.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
12.4 |
|
|
|
63.6 |
|
|
|
38.9 |
|
|
|
131.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium on early extinguisment of long-term debt |
|
|
(5.3 |
) |
|
|
(1.1 |
) |
|
|
(5.3 |
) |
|
|
(1.2 |
) |
Interest expense, net |
|
|
(15.1 |
) |
|
|
(16.0 |
) |
|
|
(29.5 |
) |
|
|
(32.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from before income taxes and
discontinued operations |
|
$ |
(9.8 |
) |
|
$ |
44.9 |
|
|
$ |
1.4 |
|
|
$ |
95.6 |
|
Income tax (expense) benefit |
|
|
4.4 |
|
|
|
(2.4 |
) |
|
|
0.6 |
|
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before discontinued operations |
|
|
(5.4 |
) |
|
|
42.5 |
|
|
|
2.0 |
|
|
|
91.5 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(5.4 |
) |
|
$ |
42.5 |
|
|
$ |
2.0 |
|
|
$ |
89.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share |
|
$ |
(0.06 |
) |
|
$ |
0.46 |
|
|
$ |
0.02 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the following discussion for an explanation of the results for the periods shown
above.
23
Income (loss)before Income Taxes and Discontinued Operations
Income (loss) before income taxes and discontinued operations for the second quarter of 2007
decreased by $54.7 million, from the second quarter of 2006, and for the first six months of
2007 by $94.2 million, from the first six months of 2006.
The following table sets forth the components of the variance for the three and six months
ended June 30, 2007 as compared to the same periods in the prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variances - Favorable (Unfavorable) |
|
|
|
|
|
|
Periods ended June 30, 2007 and 2006 |
|
(In millions) |
|
|
|
|
Three Months |
|
|
|
|
|
Six Months |
|
Operating segment performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business |
|
|
|
|
$ |
(6.7 |
) |
|
|
|
|
$ |
(8.1 |
) |
International Color and Engineered Materials |
|
|
|
|
|
1.6 |
|
|
|
|
|
|
2.2 |
|
Distribution |
|
|
|
|
|
1.4 |
|
|
|
|
|
|
(0.2 |
) |
All Other |
|
|
|
|
|
1.8 |
|
|
|
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
(3.4 |
) |
Resin and Intermediates |
|
|
|
|
|
(17.0 |
) |
|
|
|
|
|
(49.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
segment operating income |
|
|
|
|
|
(18.9 |
) |
|
|
|
|
|
(52.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of OxyVinyls investment |
|
|
(A |
) |
|
(15.9 |
) |
|
|
(A |
) |
|
(15.9 |
) |
Benefit of insurance and legal settlements |
|
|
(B |
) |
|
(8.8 |
) |
|
|
(B |
) |
|
(20.4 |
) |
All other and eliminations |
|
|
|
|
|
(7.7 |
) |
|
|
|
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Corporate and eliminations |
|
|
|
|
|
(32.4 |
) |
|
|
|
|
|
(40.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in operating income |
|
|
|
|
|
(51.2 |
) |
|
|
|
|
|
(92.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium on early extinguishment of debt |
|
|
(C |
) |
|
(4.1 |
) |
|
|
(C |
) |
|
(4.1 |
) |
Interest expense, net |
|
|
(D |
) |
|
0.9 |
|
|
|
(D |
) |
|
2.6 |
|
Other expense |
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in income from continuing operations
before income taxes |
|
|
|
|
$ |
(54.7 |
) |
|
|
|
|
$ |
(94.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
The Companys investment in OxyVinyls was adjusted at June 30, 2007 as the carrying
value was higher than the fair value and the decrease was determined to be other than a
temporary decline. |
|
(B) |
|
The benefit of insurance, legal settlements and adjustments to related reserves had a favorable
impact in the second quarter and six months ended June 30, 2006, which did not occur for the same
periods in 2007. |
|
(C) |
|
The Company continued to repurchase its 10.625% Senior Notes through early extinguishment,
repurchasing $100.0 million and $15.0 million in the second quarter of 2007 and 2006, respectively,
at a premium of $5.3 million and $1.2 million. |
|
(D) |
|
The early extinguishment of the 10.625% Senior Notes also resulted in unamortized deferred
note issuance costs of $1.1 million and $0.8 million being expensed in the second quarter of 2007
and 2006, respectively. |
See the operating segment discussion below for further explanation of their results for
the periods shown above.
24
Sales
Sales increased $2.4 million in the second quarter but declined $14.4 million or 1% for the
first six months of 2007 from the same periods last year. The increased sales in our
International Color and Engineered Materials segment of $22.3 million or 17% and $46.2 million
or 18% from the second quarter and for the first six
months of 2006 could not overcome the downturn in the Vinyl Business
which were $23.6 million or 9%
and $64.9 million or 13% below the second quarter and for the first six months of 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
% Change |
|
Vinyl Business |
|
$ |
229.0 |
|
|
$ |
252.6 |
|
|
$ |
(23.6 |
) |
|
|
(9 |
)% |
International Color and Engineered Materials |
|
|
155.9 |
|
|
|
133.6 |
|
|
|
22.3 |
|
|
|
17 |
% |
PolyOne Distribution |
|
|
190.1 |
|
|
|
189.7 |
|
|
|
0.4 |
|
|
|
0 |
% |
All Other |
|
|
155.9 |
|
|
|
157.8 |
|
|
|
(1.9 |
) |
|
|
(1 |
)% |
Intersegment eliminations |
|
|
(42.1 |
) |
|
|
(47.3 |
) |
|
|
5.2 |
|
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
688.8 |
|
|
$ |
686.4 |
|
|
$ |
2.4 |
|
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
% Change |
|
Vinyl Business |
|
$ |
438.2 |
|
|
$ |
503.0 |
|
|
$ |
(64.8 |
) |
|
|
(13 |
)% |
International Color and Engineered Materials |
|
|
305.6 |
|
|
|
259.4 |
|
|
|
46.2 |
|
|
|
18 |
% |
PolyOne Distribution |
|
|
374.5 |
|
|
|
383.8 |
|
|
|
(9.3 |
) |
|
|
(2 |
)% |
All Other |
|
|
311.4 |
|
|
|
307.3 |
|
|
|
4.1 |
|
|
|
1 |
% |
Intersegment eliminations |
|
|
(83.1 |
) |
|
|
(92.5 |
) |
|
|
9.4 |
|
|
|
(10 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
1,346.6 |
|
|
$ |
1,361.0 |
|
|
$ |
(14.4 |
) |
|
|
(6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Costs
Cost of Sales These costs include raw materials, plant conversion and distribution charges.
These costs as a percentage of sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Cost of sales |
|
|
86.3 |
% |
|
|
86.0 |
% |
|
|
85.8 |
% |
|
|
86.2 |
% |
These costs increased as a percentage of sales in the second quarter of 2007 as a result of
higher raw material costs not yet fully offset by price increases largely associated with the Vinyl
Business. For our non-vinyl operating segments, cost of sales decreased as a percentage of sales as
a result of the benefits being realized from the implementation of our specialization strategy.
25
Selling and Administrative These cost generally include selling, technology and administrative
functions and corporate and general expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(Dollars in millions) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Selling and administrative |
|
$ |
66.2 |
|
|
$ |
49.5 |
|
|
$ |
128.0 |
|
|
$ |
97.8 |
|
As a percentage of sales |
|
|
9.6 |
% |
|
|
7.2 |
% |
|
|
9.5 |
% |
|
|
7.2 |
% |
Selling and administrative costs increased $16.7 million or 34% and $30.4 million or 31% for the
three and six months ended June 30, 2007, respectively, compared to the same periods in the prior
year. The benefit of insurance, legal settlements and adjustments to related reserves had a
favorable impact in the second quarter and six months ended June 30, 2006 of $8.8 million and $20.4
million, respectively, compared to the same periods in 2007. The remainder of the change in selling
and administrative expense was due mainly to increased investment in commercial resources and
capabilities, and to a lesser extent, employee incentive, pension and
post-retirement benefit costs.
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 of $0.8 million and $2.1 million for the three
and six months ended June 30, 2007 as compared to the same periods in 2006 was due primarily to the
$58.6 miilion reduction of the 10.625% Senior Notes in the fourth quarter of 2006 partially offset
by higher write-offs of unamortized deferred note issuance costs.
Premium on Early Extinquishment of Long-Term Debt Cash expense from the repurchase of $100.0
million of 10.625% Senior Notes in 2007 was $5.3 million. Cash expense from the repurchase of $10.0
million of 10.625% Senior Notes in 2006 was $1.2 million.
Other expense, net The following table lists the major items included in other expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Currency exchange loss |
|
$ |
(0.8 |
) |
|
$ |
(1.2 |
) |
|
$ |
(1.4 |
) |
|
$ |
(1.7 |
) |
Foreign exchange contracts gain |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
0.7 |
|
Discount on sale of trade receivables |
|
|
(0.7 |
) |
|
|
(0.5 |
) |
|
|
(1.0 |
) |
|
|
(1.3 |
) |
Other loss |
|
|
(0.5 |
) |
|
|
(0.2 |
) |
|
|
(0.8 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1.8 |
) |
|
$ |
(1.5 |
) |
|
$ |
(2.7 |
) |
|
$ |
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes 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 realization
of the Companys deferred income taxes. In 2005 and 2006, the valuation allowance was reversed
reducing 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 assets would be realized and the
valuation allowance was reversed and reduced income tax expense in that period. As a result, income
taxes in the second quarter 2007 and first half of 2007 were recorded without regard to any
domestic deferred tax valuation allowance. The tax benefit of $4.4 million in the second quarter of
2007 reflects the effective tax rate of 45%. The tax benefit of $0.6 million in the first half
26
of 2007 is 43%. The difference between the effective rate and the statutory rate was primarily the
impact of foreign source income, and domestic losses.
The income tax expense of $2.4 million in the second quarter of 2006 and $4.1 million in the first
half of 2006 was net of the reversal of a portion of the valuation allowance. The expense in
each period represents 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:
For more information about our operating segments, see Note N to the Consolidated Financial
Statements.
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
% Change |
|
Vinyl Business |
|
$ |
229.0 |
|
|
$ |
252.6 |
|
|
$ |
(23.6 |
) |
|
|
(9 |
)% |
International Color and Engineered Materials |
|
|
155.9 |
|
|
|
133.6 |
|
|
|
22.3 |
|
|
|
17 |
% |
PolyOne Distribution |
|
|
190.1 |
|
|
|
189.7 |
|
|
|
0.4 |
|
|
|
0 |
% |
All Other |
|
|
155.9 |
|
|
|
157.8 |
|
|
|
(1.9 |
) |
|
|
(1 |
)% |
Intersegment eliminations |
|
|
(42.1 |
) |
|
|
(47.3 |
) |
|
|
5.2 |
|
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
688.8 |
|
|
$ |
686.4 |
|
|
$ |
2.4 |
|
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
(Dollars in millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
% Change |
|
Vinyl Business |
|
$ |
438.2 |
|
|
$ |
503.0 |
|
|
$ |
(64.8 |
) |
|
|
(13 |
)% |
International Color and Engineered Materials |
|
|
305.6 |
|
|
|
259.4 |
|
|
|
46.2 |
|
|
|
18 |
% |
PolyOne Distribution |
|
|
374.5 |
|
|
|
383.8 |
|
|
|
(9.3 |
) |
|
|
(2 |
)% |
All Other |
|
|
311.4 |
|
|
|
307.3 |
|
|
|
4.1 |
|
|
|
1 |
% |
Intersegment eliminations |
|
|
(83.1 |
) |
|
|
(92.5 |
) |
|
|
9.4 |
|
|
|
(10 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
1,346.6 |
|
|
$ |
1,361.0 |
|
|
$ |
(14.4 |
) |
|
|
(6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
Sales were $23.6 million or 9% lower in the second quarter 2007 compared to the same period in
2006. The decline was primarily due to the slowdown in residential building and construction
markets that reduced demand in window, pipe and fitting, flooring and appliance applications.
For the six months ended June 30, 2007, sales were down 13% compared to the same period in 2006,
due primarily to the same factors affecting the second quarter 2007 demand, as discussed above.
27
International Color and Engineered Materials
Total sales increased by $22.3 million or 17% in the second quarter of 2007 compared to the same
period in 2006 driven by solid improvements in the Color and Additives business in Europe and Asia
as well as by favorable foreign exchange rates. The impact of higher foreign exchange rates on
sales was $10.1 million. Improving mix in Asia coupled with solid progress in the penetration of
specialty applications in the European color business were the primary drivers of this increase in
sales.
For the first half of 2007, sales were $305.6 million, a $46.2 million or an 18% increase compared
with the same period in 2006. Volume increased by 9% driven by gains in both Asia and Europe.
Foreign exchange impacted sales favorably by 9%. Adjusted for the impact of foreign exchange, sales
growth was underpinned by improved mix and overall growth in Asia, and stronger specialty sales in
the European color business. In Asia, sales were driven by higher color and additives volumes and growing demand
for the Companys engineered material products in the electrical / electronics market. In Europe,
the improvement in sales was driven by further penetration of specialty applications in the
automotive and packaging markets.
PolyOne Distribution
Sales in the second quarter of 2007 were flat compared to the same quarter in 2006 despite a 1%
increase in average selling prices as suppliers raised prices this year to cover higher raw
material costs. Second quarter 2007 volumes were 1% lower than the same quarter in 2006, influenced
by several factors, the most significant of them being the relative weaker condition of the housing
and automotive sectors this year compared to last year. Mitigating a portion of the effects of a
softening general economic environment are successes in closing new business in various industries
and applications as well as the revenue yield from our investments in additional sales resources.
For the first six months of 2007, sales were 2% lower than for the same period in 2006. In the
first half of 2006, demand was still being favorably affected by residual effects
of the storms that paralyzed the U.S. Gulf Coast in third quarter of 2005. Also, during the first
half of 2006, we had not yet begun to experience the impacts from the cyclical downturn in the
housing and automotive markets.
All Other
The All Other category includes the North American Color and Additives, North American Engineered
Materials, Producer Services and Polymer Coating Systems operating segments.
Aggregate second quarter 2007 sales reached $155.9 million, down 1% from a year ago. The decline
was attributable to North American Color and Additives, where sales were off 19% compared to second
quarter 2006 primarily due to the pruning of unprofitable business and withdrawing from general
purpose oriented applications. North American Engineered materials sales were flat compared to the
same period last year due to increases in specialized applications being offset by lower demand in
construction and automotive applications. Producer Services sales were up 13% reflecting the
acquisition of DH Compounding in the fourth quarter 2006. Polymer Coating Systems grew sales 4%
based on record ink-based product line sales and higher urethane sales to the Companys BayOne
joint venture.
For the first half of 2007, aggregate sales were $311.4 million, up 1% versus first half 2006.
The decline in sales in North American Color and Additive sales was offset by higher sales in
Producer Services, primarily driven by the impact of DH Compounding, and higher Polymer Coating
Systems sales of inks and urethanes product lines.
28
Operating Income
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 items that are not the
responsibility of the operating segment management teams. (see below
for more information regarding the excluded items).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
Change |
|
|
2007 |
|
|
2006 |
|
|
Change |
|
Vinyl Business |
|
$ |
15.4 |
|
|
$ |
22.1 |
|
|
$ |
(6.7 |
) |
|
$ |
34.3 |
|
|
$ |
42.4 |
|
|
$ |
(8.1 |
) |
International Color and
Engineered Materials |
|
|
8.3 |
|
|
|
6.7 |
|
|
|
1.6 |
|
|
|
14.9 |
|
|
|
12.7 |
|
|
|
2.2 |
|
PolyOne Distribution |
|
|
6.5 |
|
|
|
5.1 |
|
|
|
1.4 |
|
|
|
11.1 |
|
|
|
11.3 |
|
|
|
(0.2 |
) |
All Other |
|
|
4.8 |
|
|
|
3.0 |
|
|
|
1.8 |
|
|
|
6.4 |
|
|
|
3.7 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.0 |
|
|
|
36.9 |
|
|
|
(1.9 |
) |
|
|
66.7 |
|
|
|
70.1 |
|
|
|
(3.4 |
) |
Resin and Intermediates |
|
|
12.0 |
|
|
|
29.0 |
|
|
|
(17.0 |
) |
|
|
16.3 |
|
|
|
65.3 |
|
|
|
(49.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating income |
|
|
47.0 |
|
|
|
65.9 |
|
|
|
(18.9 |
) |
|
|
83.0 |
|
|
|
135.4 |
|
|
|
(52.4 |
) |
Corporate and eliminations |
|
|
(34.6 |
) |
|
|
(2.3 |
) |
|
|
(32.3 |
) |
|
|
(44.1 |
) |
|
|
(3.8 |
) |
|
|
(40.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating income |
|
$ |
12.4 |
|
|
$ |
63.6 |
|
|
$ |
(51.2 |
) |
|
$ |
38.9 |
|
|
$ |
131.6 |
|
|
$ |
(92.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
Operating Income was $15.4 million in second quarter of 2007, a 30% decrease over the prior
year. The primary drivers of this decline were weak residential construction demand and margin
compression due to the combination of downward pricing pressure in residential building and
construction end markets and higher raw material and energy costs.
Comparing first half 2007 to the same period in 2006, operating income decreased by 19% due
primarily to lower volume, pricing pressure in the residential building and construction end
markets and rising raw material and energy costs. Value-based pricing initiatives were implemented
and we began to see early benefits despite sluggish end market demand.
International Color and Engineered Materials
Operating income in the second quarter of 2007 was $8.3 million, a 24% improvement compared to the
same quarter in 2006. Higher foreign exchange rates accounted for $7.3 million of the increase.
Compared to the first half 2006, operating income increased $2.2 million, or 17%. The increase in
foreign exchange rates in the first half 2007 resulted in $1.2 million of the increase. In both
comparisons, the foreign exchange adjusted improvement in operating income was driven by stronger
margins in the European color business and in Asia overall due to improved mix from the penetration
of specialty color applications and demand growth from the electrical / electronics market.
PolyOne Distribution
Operating income in the second quarter of 2007 was $6.5 million, 27% higher than the same period a
year ago and a record for the segment. The $1.4 million improvement came from stronger gross margin
performance, lower bad debt costs, and lower operating costs. Comparing first half 2007 to the same
period in 2006,
29
operating income was down $0.2 million as the impact of lower volumes were mostly offset by lower
delivery and margin improvement.
All Other
The All Other category includes the North American Color and Additives, North American Engineered
Materials, Producer Services and Polymer Coating Systems operating segments.
For the second quarter of 2007, operating income was $4.8 million, a 60% increase versus the
same period a year ago. This result was driven by the North American Color and Additives
business, which was profitable in the quarter, and improved operating income versus the same
period last year as the result of executing value-based pricing initiatives, enhanced product
mix and lower operating costs. Producer Services and Polymer Coating Systems operating income
also improved in the second quarter of 2007 compared to the same period in 2006.
For the first half of 2007, operating income increased $2.7 million or 73% with the North
American Color and Additives, Producer Services and Polymer Coating Systems operating segments
all contributing to the year-over-year improvement. The North American Engineered Materials
operating segment experienced lower construction and automotive demand and attendant margin
pressure resulting in operating income being down compared to the first half of 2006.
Corporate and eliminations these costs are excluded from segment income and include:
1) intersegment sales and profit eliminations; 2) charges related to specific strategic initiatives, such as the
consolidation of operations; 3) significant restructuring activities, including employee separation costs
resulting from personnel reduction programs, plant closure and
phaseout costs; 4) executive
separation agreements; 5) share-based compensation costs;
6) asset impairments; 7) environmental
remediation costs for facilities no longer owned or closed in prior
years; 8) gains and losses on
the divestiture of joint ventures and equity investments and certain other items.
During the
three months and six months ended June 30, 2007, Corporate and eliminations expense
was $32.3 million and $40.3 million higher than for the comparable periods in the prior year.
The benefit of insurance, legal settlements and adjustments to related reserves realized in
2006 and the impairment recognized in the second quarter of 2007 account for $24.8 million and
$36.3 million of the increase for the quarter and year to date ended June 30, 2007,
respectively.
Significant benefits (expenses) that are included in Corporate and eliminations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Employee separation and plant phaseout |
|
$ |
(0.7 |
) |
|
$ |
0.2 |
|
|
$ |
(0.7 |
) |
|
$ |
0.3 |
|
Environmental remediation at inactive sites (A) |
|
|
(0.9 |
) |
|
|
2.3 |
|
|
|
(1.9 |
) |
|
|
4.1 |
|
Settlement of legal issues and related reserves (A) |
|
|
0.4 |
|
|
|
6.1 |
|
|
|
0.4 |
|
|
|
14.8 |
|
LIFO inventory adjustments (B) |
|
|
(1.9 |
) |
|
|
0.5 |
|
|
|
(1.4 |
) |
|
|
3.9 |
|
Unallocated corporate general and administrative
costs (C) |
|
|
(14.6 |
) |
|
|
(10.9 |
) |
|
|
(22.9 |
) |
|
|
(22.3 |
) |
Impairment of equity investment (D) |
|
|
(15.9 |
) |
|
|
|
|
|
|
(15.9 |
) |
|
|
|
|
|
Intersegment profit eliminations |
|
|
0.2 |
|
|
|
(2.0 |
) |
|
|
|
|
|
|
(2.5 |
) |
All other |
|
|
(1.2 |
) |
|
|
1.5 |
|
|
|
(1.7 |
) |
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Corporate and eliminations |
|
$ |
(34.6 |
) |
|
$ |
(2.3 |
) |
|
$ |
(44.1 |
) |
|
$ |
(3.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
(A) |
|
The benefit of insurance, legal settlements and adjustments to related reserves had a
favorable impact in the second quarter and six months ended June 30, 2006 of $8.8 million and $20.4
million, respectively, which did not occur for the same periods in 2007. |
|
(B) |
|
LIFO inventory adjustments for the six months ended June 30, 2007 reflect 7% inflation compared
to 9% deflation in raw material costs for the first half of 2006. |
|
(C) |
|
The increase in unallocated corporate and administrative costs is due mainly to increased
investment in commercial resources and capabilities and to a lesser extent higher employee
incentive, pension and post-retirement benefit costs. |
|
(D) |
|
The Companys investment in OxyVinyls was impaired at June 30, 2007 as the carrying value
was higher than the fair value and the decrease was determined to be other than a temporary
decline. |
Liquidity and Capital Resources
The following discussion focuses on 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 (June 30, 2007).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
Cash flow summary |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
100.3 |
|
|
$ |
49.2 |
|
|
$ |
51.1 |
|
Cash provided by (used by) investing activities |
|
|
(16.4 |
) |
|
|
8.8 |
|
|
|
(25.2 |
) |
Cash used in financing activities |
|
|
(108.5 |
) |
|
|
(16.6 |
) |
|
|
(91.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(24.6 |
) |
|
|
41.4 |
|
|
|
(66.0 |
) |
Effect of exchange rates on cash |
|
|
2.4 |
|
|
|
0.8 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and equivalents |
|
|
(22.2 |
) |
|
|
42.2 |
|
|
|
(64.4 |
) |
|
|
|
|
|
|
|
|
|
|
The $22.2 million decrease in cash and equivalents in the first six months of 2007 compared to
the $42.2 million increase in cash and equivalents during the first six months of 2006 was due
primarily to the following: $20.5 million lower proceeds from
the sale of assets, higher capital
spending of $4.9 million, funding for the qualified defined benefit pension plans of $8.1 million
and lower cash distributions that we received from our equity affiliates of $32.4 million (which
follows directly from the decrease in equity earnings in the first half of 2007 compared to the
same period in 2006).
Also, during the six months ended June 30, 2007, $126.7 million in long-term debt, including the
$5.3 million premium from early extinguishment, (see Financing activities) was repaid utilizing
$89.2 million of proceeds from the sale of accounts receivable (see Operating activities),
short-term borrowings of $18.0 million in Europe and the use of cash and equivalents.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2.0 |
|
|
$ |
89.4 |
|
|
$ |
(87.4 |
) |
Depreciation and amortization |
|
|
28.6 |
|
|
|
28.6 |
|
|
|
|
|
Loss on disposition of discontinued businesses
and related plant phaseout charge |
|
|
|
|
|
|
2.3 |
|
|
|
(2.3 |
) |
Premium on early extinguishment of long-term debt |
|
|
5.3 |
|
|
|
1.2 |
|
|
|
4.1 |
|
Companies carried at equity and minority interest : |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of investment in equity affiliate |
|
|
15.9 |
|
|
|
|
|
|
|
15.9 |
|
Income from equity affiliates |
|
|
(20.8 |
) |
|
|
(70.3 |
) |
|
|
49.5 |
|
Distributions received |
|
|
9.8 |
|
|
|
42.2 |
|
|
|
(32.4 |
) |
Change in assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) from working capital |
|
|
(8.0 |
) |
|
|
(28.1 |
) |
|
|
20.1 |
|
Increase (decrease) in sale of accounts receivable |
|
|
89.2 |
|
|
|
(7.9 |
) |
|
|
97.1 |
|
Accrued expenses and other |
|
|
(21.7 |
) |
|
|
(8.1 |
) |
|
|
(13.6 |
) |
Net cash used by discontinued operations |
|
|
|
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
100.3 |
|
|
$ |
49.2 |
|
|
$ |
51.1 |
|
|
|
|
|
|
|
|
|
|
|
Operating Activities Our operations provided $100.3 million of cash in the first six months
of 2007, an increase of $51.1 million from the same period in 2006. The primary reason for the
increase was the sale of accounts receivable, which provided $89.2 million (which was used to
partially fund the early extinguishment of $100.0 million of senior notes). This is $97.1 million
more than the first six months of 2006 when there was a decrease of $7.9 million in the sales of
accounts receivable. Cash dividends and distributions that we receive from our equity affiliates
declined $32.4 million from $42.2 million to $9.8 million for the first six months of 2006 compared
to 2007. Working capital used $28.5 million less cash as the improvement in accounts payable more
than offset the increase in accounts receivable. (for more information about working capital, see
discussion below)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
Cash Flows from working capital |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
(70.8 |
) |
|
$ |
(43.4 |
) |
|
$ |
(27.4 |
) |
Inventories |
|
|
(17.0 |
) |
|
|
(16.4 |
) |
|
|
(0.6 |
) |
Accounts payable |
|
|
79.8 |
|
|
|
31.7 |
|
|
|
48.1 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used by working capital |
|
$ |
(8.0 |
) |
|
$ |
(28.1 |
) |
|
$ |
20.1 |
|
|
|
|
|
|
|
|
|
|
|
Net cash
used by working capital for the first six months of 2007 was
$8.0 million, a $20.1 million improvement from the same period last year. The increase is due to the increase in accounts
payable, which reflects a higher current payable associated with June 30, 2007 ending inventory,
being partially offset by the increase in accounts receivable resulting from higher days sales
outstanding, comparing the June 30, 2007 results to the same period in 2006.
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
(20.4 |
) |
|
$ |
(15.5 |
) |
|
$ |
(4.9 |
) |
Proceeds from sale of assets |
|
|
4.0 |
|
|
|
7.2 |
|
|
|
(3.2 |
) |
Proceeds from sale of discontinued business, net |
|
|
|
|
|
|
17.3 |
|
|
|
(17.3 |
) |
Net cash used by discontinued operations |
|
|
|
|
|
|
(0.2 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by investing activities |
|
$ |
(16.4 |
) |
|
$ |
8.8 |
|
|
$ |
(25.2 |
) |
|
|
|
|
|
|
|
|
|
|
Investing activities Cash used by investing activities in the first six months of 2007 was
$16.4 million. The same period in 2006 included net proceeds of $17.3 million received from the
sale of the Engineered Films business. The increase in capital spending was largely for the
construction of a manufacturing facility in Poland that is scheduled to be operational in the third
quarter of 2007.
Discontinued Operations With the sale of the Engineered Films business in February 2006, we no
longer have any businesses accounted for as discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
(In millions) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Change in short-term debt |
|
$ |
17.5 |
|
|
$ |
(2.4 |
) |
|
$ |
19.9 |
|
Repayment of long-term debt |
|
|
(121.4 |
) |
|
|
(15.8 |
) |
|
|
(105.6 |
) |
Premium paid for early extinguishment of long-term debt |
|
|
(5.3 |
) |
|
|
(1.2 |
) |
|
|
(4.1 |
) |
Proceeds from exercise of stock options |
|
|
0.7 |
|
|
|
2.8 |
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
$ |
(108.5 |
) |
|
$ |
(16.6 |
) |
|
$ |
(91.9 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities Cash used by financing activities in the first six months of 2007
totaled $108.5 million, the result of a $20.0 million scheduled repayment of a medium term note and
the early extinguishment of $100.0 million of 10.625% Senior Notes and the associated $5.3 million
premium paid. This was partially offset by short-term borrowings of $18.0 million in Europe to
partially fund the repayment of the 10.625% Senior Notes.
As of June 30, 2007, we had $44.0 million in cash and cash equivalents along with existing
facilities to access available capital resources (receivables sale facility, uncommitted short-term
credit lines and senior unsecured notes and debentures) totaling $634.5 million. As of June 30,
2007, we had used $582.9 million of these facilities, and $51.6 million was available to be drawn.
In addition, at June 30, 2007, we could incur additional secured debt in an amount up to $10.9
million while remaining in compliance with the debt coverage limit contained in the Guarantee and
Agreement, discussed below.
The following table summarizes our outstanding and available facilities at June 30, 2007:
|
|
|
|
|
|
|
|
|
(In millions) |
|
Outstanding |
|
|
Available |
|
Long-term debt |
|
$ |
470.0 |
|
|
$ |
|
|
Receivables sale facility |
|
|
89.2 |
|
|
|
51.6 |
|
Short-term bank debt |
|
|
23.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
582.9 |
|
|
$ |
51.6 |
|
|
|
|
|
|
|
|
33
Long-term Debt At June 30, 2007, we had long-term debt of $470.0 million with maturities
through 2015. Current maturities of long-term debt at June 30, 2007 and June 30, 2006 of $12.5
million and $22.5 million, respectively. In June 2007 and June 2006, we repurchased $100.0 million
and $15.0 million of our 10.625% Senior Notes at a premium. The
premiums were $5.3 million and $1.2 million, respectively, and are shown as a separate line item in the Condensed Consolidated Statements of
Operations. In addition, unamortized deferred note issuance costs of
$1.1 million and $0.2 million, respectively, were expensed due to this debt repurchase and are included in interest expense in the Condensed
Consolidated Statements of Operations.
Receivables Sale Facility The receivables sale facility was amended in June 2007 to extend the
maturity to June 2012 and to among other things, modify certain financial covenants and reduce the
cost of utilizing the facility. This facility size is $175.0 million. As of June 30, 2007, $166.7
million was available. 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 as a sub-limit within the $175.0 million facility, of which $10.9
million was used at June 30, 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 $40.0 million or less. As of June 30, 2007, the fixed charge coverage ratio
was 1.7 to 1 and we had sold $89.2 million of accounts receivable resulting in availability under the
facility of $51.6 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.
Of the capital resource facilities available to us as of June 30, 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 June 30, 2007,
we had sold $89.2 million of 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 and unconsolidated subsidiary interests. 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 and
are primarily to support strategic growth initiatives and manufacturing operations.
In the third quarter of 2007, we received cash proceeds of $261 million from the sale of our
24% interest in OxyVinyls and in a related transaction, purchased the 10% minority
interest in Powder Blends, LP, for $11 million. The net proceeds of approximately $250 million
from these transactions will be used for the redemption of the entire outstanding balance of
$141.4 million of the Companys 10.625% Senior Notes and
the repayment of drawings on short-term
facilities.
34
Critical 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 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 and reduced income tax expense in that period. Therefore,
beginning with the first quarter of 2007, a tax benefit (expense) has been recorded based on an
estimated effective tax rate for all jurisdictions.
FASB Interpretation No. 48 In June 2006, the Financial Accounting Standards Board (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
derecognizing, 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 a $6.0 million liability for uncertain tax position. This amount relates
to an item under examination by a foreign tax authority associated with 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 uncertain
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 2003. 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 was 24%. We sold our
interest in OxyVinyls on July 6, 2007.
35
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 June 30, 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 June 30, 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 June 30,
2007 was not required.
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; |
|
|
|
|
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; |
36
|
|
|
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
SunBelt partnership and other minority equity holdings of PolyOne; |
|
|
|
|
an inability to launch new specialized 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 to profitability and/or maintain that
profitability for the North American Color and Additives and the North American
Engineered Materials segments; |
|
|
|
|
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; |
|
|
|
|
any change that would affect the PolyOnes ability to reverse associated tax
liabilities as a result of the sale to OxyVinyls; |
|
|
|
|
the timing and amounts of any repurchases of outstanding senior notes and debentures
of the Company, including the amount of any premiums paid; |
|
|
|
|
the actual interest savings resulting from the reduction of debt; |
|
|
|
|
any changes in the supply agreements and extensions with OxyVinyls; 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 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.
37
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 about these risks and exposure
management 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 modify its exposure to interest
rate risk by converting fixed-rate obligations to floating rates. PolyOne maintained interest
rate swap agreements on five of its fixed-rate obligations in the aggregate amount of $80.0
million at June 30, 2007. These exchange agreements are perfectly effective as defined by
SFAS No. 133, Accounting for Derivative Financial Instruments and Hedging Activities. At June
30, 2007, these agreements had a net fair value obligation of $4.5 million. The
weighted-average interest rate for these five agreements was 9.0%. There have been no material
changes in the market risk faced by PolyOne from December 31, 2006 to June 30, 2007.
Item 4. Controls and Procedures
Disclosure controls and procedures
PolyOnes management, under the supervision of and with the participation of our Chief
Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of the
design and operation of PolyOnes disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act, 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
There were no changes in PolyOnes internal control over financial reporting during the
quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.
Part
II Other Information
Item 1A. Risk Factors
PolyOnes sale of its 24% interest in OxyVinyls on July 6, 2007, as reported in PolyOnes Current
Report on Form 8-K filed on July 12, 2007 materially changed the Companys risk factors by
eliminating those previously associated with the OxyVinyls investment, as described under Item 1A
of our Annual Report of Form 10-K for the year ended December 31, 2006. Other than that change,
there have been no material changes to the Companys risk factors.
38
Item 4. Submission of Matters to a Vote of Security Holders
PolyOne held its Annual Meeting of Stockholders on May 10, 2007. At the Meeting,
the following actions were taken:
|
a) |
|
The nine nominees for director were elected by the following votes: |
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
Number of Shares |
|
|
Voted For |
|
Withheld |
J. Douglas Campbell |
|
|
84,404,280 |
|
|
|
2,351,438 |
|
Carol A Cartwright |
|
|
81,989,680 |
|
|
|
4,766,038 |
|
Gale Duff-Bloom |
|
|
84,093,025 |
|
|
|
2,662,693 |
|
Richard H. Fearon |
|
|
82,988,535 |
|
|
|
3,767,183 |
|
Robert A. Garda |
|
|
82,669,135 |
|
|
|
4,086,583 |
|
Gordon D. Harnett |
|
|
82,867,561 |
|
|
|
3,888,157 |
|
Edward J. Mooney |
|
|
81,989,019 |
|
|
|
4,766,699 |
|
Stephen D. Newlin |
|
|
84,053,247 |
|
|
|
2,702,471 |
|
Farah M. Walters |
|
|
84,975,847 |
|
|
|
1,779,871 |
|
|
b) |
|
Ratification of the appointment of Ernst & Young LLP as PolyOnes independent
registered public accounting firm for the fiscal year ending December 31, 2007 received
the following number of votes: |
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Broker Non-Votes |
81,059,101
|
|
5,409,785
|
|
286,831
|
|
- 0 - |
39
Item 6. Exhibits
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
|
Under Reg. S-K |
|
|
|
|
Item 601 |
|
Form 10-Q Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
|
|
(10)
|
|
|
10.1 |
|
|
Sale and Amendment
Agreement, by and among
PolyOne Corporation,
Occidental Chemical
Corporation, and their
respective affiliates
party thereto, dated as
of July 6, 2007. |
|
|
|
|
|
|
|
(10)
|
|
|
10.2 |
|
|
Second Amended and
Restated Receivables
Purchase Agreement,
dated as of June 26,
2007, among PolyOne
Funding Corporation, as
seller, PolyOne
Corporation, as
servicer, the Banks and
Other Financial
Institutions Party
thereto, as
purchasers, Citicorp
USA, Inc., as agent,
and National City
Business Credit, Inc.,
as syndication agent. |
|
|
|
|
|
|
|
(10)
|
|
|
10.3 |
|
|
Second Amended and
Restated Receivables
Sale Agreement, dated
as of June 26, 2007,
among PolyOne
Corporation, as seller,
PolyOne Funding
Corporation, as buyer,
and PolyOne
Corporation, as
servicer. |
|
|
|
|
|
|
|
(10)
|
|
|
10.4 |
|
|
Canadian Receivables
Purchase Agreement,
dated as of July 13,
2007, among PolyOne
Funding Canada
Corporation, as seller,
PolyOne Corporation, as
servicer, the Banks and
Other Financial
Institutions Party
thereto, as purchasers,
Citicorp USA, Inc. as
agent, and National
City Business Credit,
Inc., as syndication
agent. |
|
|
|
|
|
|
|
(10)
|
|
|
10.5 |
|
|
Canadian Receiables
Sale Agreement, dated
as of July 13, 2007,
among PolyOne Canada
Inc. as seller, PolyOne
Funding Canada
Corporation, as buyer,
and PolyOne
Corporation, as
servicer. |
|
|
|
|
|
|
|
(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. |
40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
August 7, 2007 |
POLYONE CORPORATION
|
|
|
/s/ W. David Wilson
|
|
|
W. David Wilson |
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
41
Index to Exhibits
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
|
Under Reg. S-K |
|
Form 10-Q |
|
|
Item 601 |
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
|
|
(10)
|
|
|
10.1 |
|
|
Sale and Amendment
Agreement, by and among
PolyOne Corporation,
Occidental Chemical
Corporation, and their
respective affiliates
party thereto, dated as
of July 6, 2007. |
|
|
|
|
|
|
|
(10)
|
|
|
10.2 |
|
|
Second Amended and
Restated Receivables
Purchase Agreement,
dated as of June 26,
2007, among PolyOne
Funding Corporation, as
seller, PolyOne
Corporation, as
servicer, the Banks and
Other Financial
Institutions Party
thereto, as
purchasers, Citicorp
USA, Inc., as agent,
and National City
Business Credit, Inc.,
as syndication agent. |
|
|
|
|
|
|
|
(10)
|
|
|
10.3 |
|
|
Second Amended and
Restated Receivables
Sale Agreement, dated
as of June 26, 2007,
among PolyOne
Corporation, as seller,
PolyOne Funding
Corporation, as buyer,
and PolyOne
Corporation, as
servicer. |
|
|
|
|
|
|
|
(10)
|
|
|
10.4 |
|
|
Canadian Receivables
Purchase Agreement,
dated as of July 13,
2007, among PolyOne
Funding Canada
Corporation, as seller,
PolyOne Corporation, as
servicer, the Banks and
Other Financial
Institutions Party
thereto, as purchasers,
Citicorp USA, Inc. as
agent, and National
City Business Credit,
Inc., as syndication
agent. |
|
|
|
|
|
|
|
(10)
|
|
|
10.5 |
|
|
Canadian Receiables
Sale Agreement, dated
as of July 13, 2007,
among PolyOne Canada
Inc. as seller, PolyOne
Funding Canada
Corporation, as buyer,
and PolyOne
Corporation, as
servicer. |
|
|
|
|
|
|
|
(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. |
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
|
Under Reg. S-K |
|
Form 10-Q |
|
|
Item 601 |
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
|
|
(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. |