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EXHIBIT 13.1
One team. One resource.
[GRAPHIC]
2000 ANNUAL REPORT
[POLYONE LOGO]
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Contents
Financial Highlights 1
Letter to Shareholders 2
PolyOne At a Glance 6
Results of Operations 8
Consolidated Statements
of Income 13
Consolidated Balance 14
Sheets
Consolidated Statements
of Cash Flows 16
Consolidated Statements
of Shareholders' Equity 18
Notes to Consolidated
Financial Statements 19
Report of Independent
Auditors and Management
Report 37
PolyOne Leadership Team 38
Shareholder Information 38
Board of Directors 39
On the cover
- - The team at PolyOne's Pasadena, Texas, compound plant includes, from
left, control board operator James Idzi, process engineer Bill Kelty
and material handler Al J. Singleton.
PRESENTING
PolyOne's
inaugural
ANNUAL REPORT
- - WE ARE PROUD TO SUBMIT the first annual report of PolyOne Corporation,
which was formed on August 31, 2000, from the combination of The Geon
Company and M.A. Hanna Company. As PolyOne, we are one team -- 9,000 people
strong -- with 80 manufacturing sites worldwide. As the world's largest
polymer services company, we are dedicated to being the key partner, the
one resource that our customers depend on to meet their needs and achieve
success.
With this annual report, we aimed to produce a clear, concise document that
is easy to use and understand. We departed from the practice of PolyOne's
predecessor companies in that we did not include a section of detailed
narrative information on the new Company. This information, highlighting
PolyOne's industry, businesses, people and strengths, will appear in our
first corporate brochure, which will be available after April 15, 2001.
For complete information on PolyOne, we suggest that shareholders visit the
Investor Relations section of our Web site, www.polyone.com. Here
shareholders can find historic as well as recent information on PolyOne,
including Securities and Exchange Commission filings, webcasts of
conference calls, analyst presentations, past annual reports and our
corporate brochure.
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FINANCIAL HIGHLIGHTS
Year Ended December 31
(Dollars in Millions, Except Per Share Data) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------
REPORTED RESULTS (1, 2)
Sales $ 1,887.8 $ 1,261.2 $ 1,284.4
Operating income 64.8 99.7 41.0
Net income, before cumulative effect
of a change in accounting 15.9 106.2 13.8
Capital expenditures 62.7 60.1 40.7
Depreciation and amortization 57.4 44.4 57.9
Total debt(year end) 682.2 353.3 187.1
Stockholders' equity(year end) 827.6 334.7 214.1
Earnings per share, before cumulative effect
of a change in accounting, diluted $ 0.26 $ 2.18 $ 0.29
Weighted-average common shares used to
compute earnings per share(in millions, year end) 62.0 48.6 47.2
PRO FORMA RESULTS (1)
Sales $ 3,139.7 $ 3,039.9 $ 2,915.5
Operating income 115.5 181.8 151.2
Net income 52.4 79.9 56.2
Depreciation and amortization 101.6 104.3 95.4
Other data:
Number of employees (year end) 9,000 3,100 2,400
Employee and management stock ownership 11% 14% 14%
Stockholders (estimated at December 31) 11,000 7,000 7,000
(1) See Management's Analysis on page 8 for a description of the audited
reported results and the pro forma results giving effect to the merger.
(2) 1998 and 1999 represent Geon results only; 2000 represents eight months of
Geon and four months of PolyOne.
CHECK OUT OUR WEBSITE:
- - www.polyone.com
2000
PRO FORMA
SALES BY SEGMENT*
Dollars in millions
PERFORMANCE PLASTICS $ 2,180
69%
[PIE CHART]
ELASTOMERS
AND ADDITIVES DISTRIBUTION
$ 507 $ 482
16% 15%
*Excluding corporate, eliminations
and other of $29.9 million
2000
PRO FORMA SALES
BY GEOGRAPHIC REGION
Dollars in millions
UNITED
STATES EUROPE
$ 2,490 $ 362
79% 12%
[PIE CHART]
OTHER CANADA
$ 59 $ 229
2% 7%
1 POLYONE CORPORATION
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SHAREHOLDER LETTER
we help people
WORK WONDERS WITH POLYMERS
[PICTURE OF THOMAS A. WALTERMIRE] THOMAS A. WALTERMIRE
Chairman of the Board, President
and Chief Executive Officer
TO OUR SHAREHOLDERS:
ON SEPTEMBER 1,2000, WE LAUNCHED PolyOne Corporation by combining M.A.
Hanna Company and The Geon Company. Our predecessor companies had long,
proud traditions and distinct identities. Yet, we joined together because
we both saw the opportunity to create the world's largest polymer services
company. - PolyOne is much stronger than our predecessors, with a
comprehensive offering of complementary products and services and a
powerful presence in the global marketplace. Further, we gained a
significant increase in market capitalization and liquidity. In sum, we are
well positioned to pursue our mission of bringing our technical skills to
people who make products from plastics and rubber - helping them create
something special, something unique. We've distilled this mission to a
simple phrase: "We Help People Work Wonders with Polymers." - Although we
are feeling the effects of the weak U.S. economic climate and high energy
costs, we are seizing many opportunities never available to Geon or M.A.
Hanna. The talents of our people and the growth potential of our businesses
fill us with excitement and confidence that our future is bright indeed.
"Our goal is to create a culture of excellence that engages everyone."
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WHAT'S IN A NAME?
- - PLENTY, WHEN THE NAME IS POLYONE. It communicates several characteristics
that are important to our new company.
Poly denotes our industry, polymer services. One works on multiple
levels:
- One leader in whatever we do
- One resource, a single source where our customers can find solutions to
all their needs
- One team - 9,000 people united by a common vision, core values, and a
commitment to market leadership and shareholder value
We developed our name internally, with the input of our employees but
without the assistance of pricey consultants, because we felt that the
people charged with building this organization could best express its
verbal identity. We are proud of the result. Proud to be known as PolyOne.
- - TWO KEY TASKS: UNIFY THE TEAM, IMPROVE RESULTS
On our first day as PolyOne, members of the leadership team were
honored to ring the opening bell at the New York Stock Exchange in celebration
of our new listing (NYSE: POL). To our delight, the gallery was filled with
PolyOne employees who had trekked from our Farmingdale, New Jersey, site to
share in the launch of our new company.
What a heartening beginning! This spirit is all the more important
because we are, in effect, merging more than a dozen cultures, given the large
number of acquisitions that M.A. Hanna and Geon made. We are still hard at work
on the integration of our operations, but I think by any measure, we've come a
long way:
BUILDING A UNIFIED TEAM Beginning with our senior leadership team, we assembled
a lineup as talented and experienced as any group in our industry. Through the
efforts of these leaders, we integrated our business teams, particularly in
vinyl compounds, engineered materials and colors, which are now known as Plastic
Compounds and Colors (PCC).
Within 60 days of our launch of PolyOne, we had named the key personnel
in PCC, our largest business group, and had formed nine market-defined business
teams. We have begun training our sales and marketing organization so we can
offer customers one of the most comprehensive product lines in our industry. We
continue to believe our customers will be the real winners, and their success
will contribute to our growth.
As part of our team-building, we defined a new mission and vision for
our employees. The rollout of our vision, which began in late 2000, will engage
all 9,000 PolyOne employees in discussions on how all of us can make the vision
a reality. As a global services company harnessing multiple technologies, we
view teamwork as an explicit part of our strategy. Our goal is to create a
culture of excellence that engages everyone.
We established the Founders Grant program,which awarded each employee
200 stock options, exercisable in three years. We did this because we believe
every employee should be a shareholder and should benefit from the success we
are creating.
IMPROVING OUR PERFORMANCE We are driving to attain earnings of $2.00 per share
in 2003(1). To get there, we must increase operating income more than $150
million over the 1999 pro forma level. We know how to do this; already, we have
identified more than $100 million in savings through reduced corporate overhead,
purchasing improvements and asset rationalization, combined with business
growth. Guided by this strategy, we have taken a number of critical steps.
In January 2001, we announced the closing of four manufacturing
plants, the first action to result from Project Triple Crown, a comprehensive
analysis and reconfiguration of our North American PCC sites. This move, which
will yield annual savings of $6 million, is only the first of a series that we
anticipate in 2001 as we focus on improving customer service and quality while
reducing costs.
In our distribution business, we established four regional service
centers and organized our support staff to make it easier for customers to do
business with us. This new structure, coupled with our talented staff of
experts, positions us to grow into regions that we previously did not serve and
to serve customers better by offering all functions at each regional site.
3 POLYONE CORPORATION
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SHAREHOLDER LETTER
Shortly after our formation, we set about implementing new procurement
processes for raw materials and other purchases covering a broad range of
supplies and services. By centralizing our key common raw material purchases
across all our businesses, we expect to realize more than $20 million in annual
savings. Through an Internet-based program dubbed Smart$ource, we have set a
goal to reduce purchases of supplies and services by an additional $20 million
annually by 2002.
We are implementing a new information technology (IT) system for most
of our businesses. By the end of this year, our North American vinyl compound,
engineered materials, color, specialty resin and elastomer business groups, as
well as much of our European operation, will be on a common platform. We intend
to add most of our remaining businesses in 2002.
We realized early on that we needed to revamp our IT system. Throughout
PolyOne, we are running on no fewer than 12 information platforms. Our vinyl
compound and specialty resin businesses, however, have run on a single IT system
for five years, with excellent results: uniform business practices, reduced
inventories, improved reliability for customers and rapidly expanding electronic
links with suppliers and customers. We are building on our tradition of
excellence in this area.
Our vinyl compound unit also has demonstrated the value of
business-to-business technology. In 2000, more than 20 percent of our customers
used our Web-based order system. Moreover, five suppliers were linked
electronically to our information system, and additional suppliers are expected
to join us.
When a customer places a Web-based sales order today, he or she gets
immediate confirmation. The transaction automatically updates our production
planning and inventory delivery dates, and a raw materials order flows
seamlessly to our suppliers, without human intervention. This is speed and
accuracy 24 hours a day, seven days a week.
I am proudest of all that our manufacturing sites have reduced worker
injury rates more than 50 percent since the formation of PolyOne, establishing
us as the clear industry leader in safety. We are fortunate to have inherited a
legacy of excellent safety and environmental performance. PolyOne is building on
this legacy as the foundation of our culture: respect for each person and
devotion to operating precision.
Our strong safety performance signifies that we are sending our
employees home as healthy as when they arrived at work, and that our people are
showing the same operating discipline they bring to making defect-free products
every minute of every day.
- - SHORT-TERM SLOWDOWN
We are pleased with our integration progress, but it has not been our
only focus. In the midst of building a unified team and improving our
performance, we find ourselves with a third major task: managing our short-term
costs and cash to mitigate the impact of the recession affecting most
manufacturers.
A marked slowdown in key customer end markets and resulting inventory
adjustments, notably in the automotive and building materials markets, have
reduced demand for our products. In addition, we face high energy and raw
material costs. These factors caused a second-half earnings decline that wiped
out a reasonable start to 2000. Looking at our 2000 results on a pro forma basis
- - as if Geon and M.A. Hanna had been merged the entire year - we followed
first-half net earnings of $60.8 million with a second-half net loss of $8.4
million.
Most significantly affected was PolyOne's share of results from our 24
percent equity investment in the OxyVinyls polyvinyl chloride (PVC) resin joint
venture. Weak demand for PVC resin, declining prices and higher costs for
ethylene led to a sharp downturn in results during the second half.
As the economy weakened, our North American businesses saw second-half
shipment decreases ranging from 9 to 15 percent compared with first-half 2000.
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"the ultimate key to success is our people."
We are addressing this slowdown by aggressively reducing costs and
accelerating changes in how our operations function. We have imposed hiring and
discretionary spending freezes, and we have greatly reduced capital spending,
except for safety or environmental projects and key strategic projects such as
our new information system.
As we assess the markets we serve, it is apparent that the economic
weakness of second-half 2000 continues into early 2001. These conditions, along
with high energy costs, will hurt our earnings performance at least in the early
months of 2001.
If there is a bright side, it is that PolyOne is better positioned to
respond to these conditions than either predecessor company would have been.
Also, the entire organization is infused with a sense of urgency in reaching our
goals. The need to improve has brought us together in a common cause.
- - LOOKING FORWARD
We at PolyOne are building the foundation to provide our shareholders a
competitive return on investment. I am confident we will deliver on this pledge.
My optimism is grounded in the reasons we formed PolyOne:
We are the industry leader, offering a broader suite of polymer
products and services to an expanded customer base. Once the economy he ultimate
key to success is our people." recovers and our own earnings improvements
materialize, we will have the financial strength to continue growing through
acquisition and to expand our technology portfolio and our international
presence. We serve a diverse array of markets, and our businesses have solid
growth potential.
The ultimate key to success is our people. From Day One as PolyOne,
they have put their hearts into building a polymer services company that returns
value to shareholders by creating value for customers. I have visited many
PolyOne locations, including most in Europe and Asia, and I see this energetic
spirit everywhere I go. Rich in human talent, we will achieve our goals.
Some of you have been with us throughout our transformation, and I
thank you for your faith in PolyOne. If you are new to us, or are interested in
investing in PolyOne, I invite you to visit our Web site at www.polyone.com - or
come visit us. You'll like what you see.
/s/ TOM WALTERMIRE
THOMAS A. WALTERMIRE
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
March 16, 2001
(1) See Forward-Looking Statements, page 34.
POLYONE IS THE WORLD'S LARGEST POLYMER SERVICES
COMPANY. THAT SOUNDS GOOD, BUT WHAT DOES IT MEAN?
Polymer
Services:
THE ESSENTIAL link
Polymer services companies bridge the gulf between two groups of giants:
- - Our suppliers are large chemical producers with household names such as Dow
and DuPont, which provide us with commodity polymers and related materials.
- - Our customers are designers, fabricators and processors in scores of
industries that manufacture industrial and consumer end products, including
items that people rely on daily.
Between these groups is PolyOne. Using proprietary compounding techniques, we
blend unique raw materials with base polymers to help our customers meet
exacting specifications for particular applications.
Distinguished by our expertise in compounding and color, we can satisfy the most
stringent requirements. Our customers know that we are industry leaders in
bringing materials together. On three continents, they look to us for solutions
to their polymer needs.
WE HELP PEOPLE WORK WONDERS WITH POLYMERS
5 POLYONE CORPORATION
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WORLD OF OPPORTUNITY
POLYONE AT A GLANCE
Three business segments. One team.
1 Performance Plastics
ANNUALIZED REVENUES
$ 2.1 billion
PLASTIC COMPOUNDS
and COLORS
- ANNUALIZED REVENUES
$ 1.6 billion
PRODUCTS
High-performance polymer compounds derived from vinyl and engineering
resins and additives; specialty colorant and additive systems
MARKETS
Appliance, automotive, building materials, business equipment, consumer
goods, wire and cable
COMPOUND END USES
Appliance components, automotive trim, business equipment housing,
computer disk drive components, bottles, pipe and pipe fittings,
windows, vertical blinds, wire and cable insulation
COLORANT END USES
Plastic parts in virtually every market
MANUFACTURING SITES
United States, Canada, Mexico, Belgium, Denmark, England, France,
Germany, Hungary, Italy, Norway, Spain, Sweden, Thailand, Turkey,
China, Singapore
KNOWN FOR
Proprietary compounds and technologies, including SPEEDeCOLOR(TM), a
computerized color-matching system
SPECIALTY RESINS
and FORMULATORS
- ANNUALIZED REVENUES
$ 300 million
PRODUCTS
Emulsion polymer and microdispersion specialty resins; vinyl
plastisols, powders and inks; rigid and flexible urethane and urethane
foams
MARKETS
Appliance, apparel, automotive, flooring, medical, packaging, sports
and recreation, toy, wire and cable
PRODUCT END USES
Air filters; automotive instrument panels; vinyl flooring and carpet
backing; appliance and fabric coatings; fan, dishwasher and closet rack
coatings; medical examination gloves; footwear; screen printing inks;
signage
MANUFACTURING LOCATIONS
United States, England, Australia
KNOWN FOR
High quality and consistency in specialty resins and the expertise to
offer unique technical solutions for vinyl plastisols and urethane
system applications
ENGINEERED FILMS
- ANNUALIZED REVENUES
$ 200 million
PRODUCTS
Flexible vinyl sheeting, thermoplastic olefin (TPO) and thermoplastic
urethane (TPU) polymer films, polyvinyl chloride (PVC)/polyolefin foam
laminates, TPO/polyolefin foam laminates, vinyl laminates
MARKETS
Automotive, home furnishing, medical, office supply, packaging,
pond/pool/spa
PRODUCT END USES
Automotive instrument panels, door trim panels, armrests, airbag doors
and covers, glovebox doors; furniture fabrics; loose-leaf binder
covers; medical blood bags and intravenous sets; hospital inflatable
mattresses; pool liners
MANUFACTURING LOCATIONS
United States
KNOWN FOR
Value-added film finishing technologies such as embossing, painting and
laminating
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2 Elastomers and Performance Additives
ANNUALIZED REVENUES
$ 500 million
PRODUCTS/SERVICES
Thermoset elastomer (rubber) compounds, rubber compounds for
roller and specialty applications, elastomer-enhancing colorants
and additives, tolling (mixing of raw materials) for the rubber
industry
MARKETS
Aerospace, agriculture, automotive, electrical, industrial, medical,
sporting goods, wire and cable
PRODUCT END USES
Automobile hoses and belts, footwear, escalator railings, industrial
conveyers
MANUFACTURING SITES
United States, Mexico, Canada
KNOWN FOR
The leading non-tire rubber compounder in North America
3 Distribution
ANNUALIZED REVENUES
$ 500 million
SERVICES
Delivery of more than 3,500 grades of engineering and commodity resins
from approximately 20 major material suppliers, as well as standard and
custom-compounded materials
MARKETS
Custom molders and extruders of applications for agriculture,
automotive, building materials, consumer goods, electrical/
electronics, industrial, medical, packaging, wire and cable
DISTRIBUTION SITES
United States, Canada, Mexico
KNOWN FOR
Adding value, not only through rapid delivery, but through engineers
and technical specialists who provide customers with application
expertise and processing support
joint ventures
- Australian Vinyls Corporation, Australia Partner: Orica Limited
- Decillion, United States Partner: Owens Corning
- DH Compounding Company, United States Partner: Dow Chemical Company
- Geon/Polimeros Andinos, Colombia Partner: Petroquimica Colombiana S.A.
- OxyVinyls, LP, United States Partner: Occidental Chemical Corporation
- So.F.teR S.p.A., Italy Partner: So.F.teR S.p.A.
- SPCGeon PTE Limited, Singapore Partner: Singapore Polymers Corporation
- Star Color Company Limited, Thailand Majority owned by PolyOne
- Sunbelt Chlor-Alkali, United States Partner: Olin Corporation
- Techmer, PM, LLC, United States Partner: Techmer PM
- Tekno Polimer, Turkey Majority owned by PolyOne
www.polyone.com
7 POLYONE CORPORATION
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Management's Analysis
RESULTS OF OPERATIONS
PolyOne Corporation (PolyOne or Company) was formed on August 31, 2000,
from the consolidation of The Geon Company (Geon) and M.A. Hanna Company
(Hanna). PolyOne is the world's largest polymer services company, with annual
sales of approximately $3.1 billion and more than 9,000 employees at 80 sites
worldwide.
The PolyOne consolidation has been accounted for as a purchase business
combination, with Geon as the acquiring enterprise. Accordingly, PolyOne's
"Reported Results" under generally accepted accounting principles (GAAP) for the
year ended December 31, 2000, reflect the operating results of Geon for eight
months prior to the consolidation and four months of PolyOne (which include the
operating results of Hanna from the date of consolidation).
In the commentary that follows, "Pro Forma Operating Results" will also
be provided because of the significant and pervasive impact of the merger on
comparative data. The pro forma operating results assume that the consolidation
of Geon and Hanna occurred prior to the periods presented. Further, the pro
forma operating results assume that Hanna's sale of its Cadillac Plastic
business in the second quarter of 2000 and Geon's 1999 transactions with OxyChem
and its acquisition of O'Sullivan Corporation occurred prior to the periods
presented. A preliminary assessment of the fair value of the tangible and
intangible assets and liabilities of the former Hanna business on August 31,
2000, has been reflected in both the reported and pro forma operating results.
The purchase price allocation reflected may be adjusted as estimated fair values
of assets acquired and liabilities assumed are finalized. The pro forma
operating results do not include future profit improvements and cost savings or
associated costs, including restructuring costs expected to result from the
integration of Geon and Hanna. The pro forma operating results are provided for
illustrative purposes only, and may not necessarily indicate the operating
results that would have occurred or future operating results of PolyOne.
- - 2000 RESULTS OF OPERATIONS
REPORTED RESULTS Total sales for 2000 were $1.888 billion, an increase of $626.6
million from 1999. This change in sales included four months of former Hanna
operations totaling approximately $560.0 million. The mid-year 1999 acquisitions
of O'Sullivan and formulators contributed additional sales of approximately
$152.0 million in 2000. The formation of OxyVinyls at the end of April 1999
resulted in the previous polyvinyl chloride (PVC) resin operation sales, which
totaled approximately $144.0 million in 1999, no longer being consolidated.
Operating income for 2000 was $64.8 million compared with $99.7 million
in 1999. Operating income before special items, depreciation and amortization
was $138.9 million compared with $148.6 million in 1999. The decrease in 2000
operating income is due primarily to declines in construction and
automotive-related sales, particularly in the vinyl compound and engineered
films operations, partially offset by four months of earnings contributed by
former Hanna operations.
Net income in 2000 was $15.9 million and, before special items, was
$25.0 million compared with $52.5 million in 1999 before special items. The
effective income tax rate in 2000 was 39.1%, which approximated 1999.
PRO FORMA RESULTS Total sales for 2000 were $3.140 billion, an increase of $99.8
million, or 3%, over 1999. The sales growth was primarily in the Performance
Plastics segment. Sales growth significantly slowed in the second half of 2000,
particularly in construction and automotive-related markets.
Operating income was $115.5 million in 2000 versus $181.8 million in
1999. Operating income before special items, depreciation and amortization in
2000 was $230.0 million, or $58.6 million below 1999. The decrease in 2000 was
attributable largely to lower earnings in the Performance Plastics segment,
which were partially offset by higher Resin & Intermediates earnings.
Net income before special items was $48.5 million in 2000 and $85.0
million in 1999.
POLYONE CORPORATION 8
11
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED OPERATING RESULTS
In millions, except per share data Year Ended December 31,
2000 1999 1998
--------- --------- ---------
REPORTED RESULTS
Sales $ 1,887.8 $ 1,261.2 $ 1,284.4
Operating income before special items, depreciation and amortization 138.9 148.6 113.5
Operating income 64.8 99.7 41.0
Operating income before special items 81.5 105.4 55.6
Net income 15.9 104.7 13.8
Special items (income) - after tax 9.1 (52.2) 8.9
Net income before special items $ 25.0 $ 52.5 $ 22.7
Earnings per share, diluted $ 0.26 $ 2.15 $ 0.29
Effect on earnings per share of excluding special items, increase $ 0.15 $ (1.07) $ 0.19
(decrease)
PRO FORMA RESULTS
Sales $ 3,139.7 $ 3,039.9 $ 2,915.5
Operating income before special items, depreciation and amortization 230.0 288.6 270.8
Operating income 115.5 181.8 151.2
Operating income before special items 128.4 184.3 175.4
Net income 52.4 79.9 56.2
Special items (income) - after tax (3.9) 5.1 19.8
Net income before special items $ 48.5 $ 85.0 $ 76.0
Earnings per share, diluted $ 0.57 $ 0.86 $ 0.61
Effect on earnings per share of excluding special items,
increase (decrease) $ (0.04) $ 0.05 $ 0.21
SENIOR MANAGEMENT USES (1) OPERATING INCOME BEFORE SPECIAL ITEMS AND/OR (2)
OPERATING INCOME BEFORE SPECIAL ITEMS AND DEPRECIATION AND AMORTIZATION (SIMILAR
TO EBITDA, WHICH IS USED BY STOCK MARKET ANALYSTS) TO ASSESS PERFORMANCE AND
ALLOCATE RESOURCES TO BUSINESS SEGMENTS. SPECIAL ITEMS INCLUDE GAINS AND LOSSES
ASSOCIATED WITH SPECIFIC STRATEGIC INITIATIVES SUCH AS RESTRUCTURING OR
CONSOLIDATION OF OPERATIONS, GAINS OR LOSSES ATTRIBUTABLE TO ACQUISITIONS OR
FORMATION OF JOINT VENTURES, AND CERTAIN OTHER ONE-TIME ITEMS. FOR A DESCRIPTION
OF SPECIAL ITEMS, REFER TO THE TABLE TITLED "SUMMARY OF SPECIAL ITEMS" ON PAGE
12. IN ADDITION, THE COMPANY'S MANAGEMENT USES NET INCOME BEFORE SPECIAL ITEMS
AS A MEASURE OF THE COMPANY'S OVERALL EARNINGS PERFORMANCE. OPERATING INCOME
BEFORE SPECIAL ITEMS AND NET INCOME BEFORE SPECIAL ITEMS ARE NON-GAAP MEASURES
AND MAY NOT BE COMPARABLE TO FINANCIAL PERFORMANCE MEASURES PRESENTED BY OTHER
COMPANIES.
9 POLYONE CORPORATION
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Management's Analysis
RESULTS OF OPERATIONS
PERFORMANCE PLASTICS had 2000 sales of $2.181 billion, an increase of
$90.7 million over 1999. Sales growth was strongest in formulators ($50.0
million) and international ($35.0 million), reflecting both higher organic
growth rates and the effects of acquisitions. The 2000 sales in this segment
comprise the following primary product groups: vinyl compounds (39%), engineered
materials (23%), color and additive systems (16%), specialty resins and
formulators (13%) and engineered films (9%). Operating income before special
items, depreciation and amortization was $153.4 million in 2000 versus $234.0
million in 1999. The 2000 earnings decrease is attributable largely to the sales
slowdown in the second half of 2000 that resulted from the weak automotive and
construction markets and higher raw material costs. Segment sales in the first
half of 2000 increased 11% versus a 2% decrease in the second half of 2000 (8%
decrease in the fourth quarter) compared with the same periods in 1999. The
average industry market price for PVC resin was $0.09 per pound, or 35% higher
in 2000 versus 1999. The international operations, which account for 18% of this
segment's revenue, were not affected by the sales slowdown. Consolidated
international earnings were adversely impacted due to currency exchange in 2000,
with a weak euro versus the U.S. dollar.
ELASTOMERS & ADDITIVES sales in 2000 were $482.2 million, a decrease of
$5.4 million from 1999. Sales were adversely impacted by the slowdown in the
production of North American automobiles in the third and fourth quarters of
2000. Automotive applications comprise more than 40% of this segment's sales.
The 2000 operating income before special items, depreciation and amortization
was $45.3 million compared with $50.3 million in 1999.
DISTRIBUTION had sales in 2000 of $506.7 million, an increase of $23.3
million, or 5%, over 1999. Operating income before special items, depreciation
and amortization was $14.6 million in 2000, $1.0 million below 1999, due to
higher selling and administrative expense resulting primarily from increased
sales personnel.
RESIN & INTERMEDIATES (R&I) operating income before special items,
consisting of equity income from joint ventures, allocated overhead support cost
and cost associated with past operations, was $27.9 million in 2000, an increase
of $24.3 million over 1999. The OxyVinyls equity income in 2000 was $35.7
million, an increase of $17.9 million over 1999. The Sunbelt chlor-alkali joint
venture recorded higher 2000 earnings of $12.7 million, which were partially
offset by lower earnings of the Australian joint venture. The domestic PVC resin
and chlor-alkali industry dynamics were stronger in 2000 versus 1999. Domestic
PVC resin industry spreads (selling prices of PVC resin over the cost of
ethylene and chlorine) averaged approximately $0.02 per pound higher in 2000
versus 1999. Also, caustic soda and chlorine industry price averages were higher
by approximately $25 per ton and $120 per ton, respectively. Domestic PVC resin
industry selling prices and margins began to rise in the third quarter of 1999
and increased through the first half of 2000. In the third quarter of 2000,
sales demand slowed significantly with the economy, and inventory reductions
occurred through the commercial distribution chain. With the decrease in sales
demand, selling prices declined. Margins narrowed as a result of the selling
price decline, unusually high costs for natural gas used directly in
manufacturing and high ethylene costs. In the last six months of 2000, PolyOne
recorded a loss from OxyVinyls of $5.7 million.
"OTHER" consists primarily of corporate governance costs that are not
allocated to the business segments. These unallocated costs before special items
were $11.2 million in 2000 compared with $14.9 million in 1999.
- - 1999 RESULTS OF OPERATIONS
REPORTED RESULTS Total sales for 1999 were $1.261 billion, a decrease of $23.2
million, or 2%, from 1998. This change in sales included an increase of $267.9
million in Performance Plastics sales, driven by acquisitions and organic
growth. This growth was offset by the discontinuance of Resin & Intermediates
sales upon the formation of OxyVinyls on April 30, 1999.
Operating income was $99.7 million compared with $41.0 million in 1998.
Operating income before special items, depreciation and amortization was $148.6
million compared with $113.5 million in 1998. The Performance Plastics and R&I
segments each had improved earnings in 1999 versus 1998 of approximately $20.0
million.
Net income before special items was $52.5 million in 1999 compared with
$22.7 million in 1998. The effective income tax rate was 39% in 1999 versus
41.5% in 1998, reflecting the effect of a change in foreign versus domestic
earnings and the effect of permanent differences such as non-deductible goodwill
on the lower pre-tax earnings in 1998.
POLYONE CORPORATION 10
13
RESULTS OF OPERATIONS
PRO FORMA BUSINESS SEGMENT INFORMATION
Year Ended December 31,
In millions 2000 1999 1998
-------- -------- --------
Sales:
Performance Plastics $2,180.7 $2,090.0 $1,940.7
Elastomers & Additives 482.2 487.6 496.9
Distribution 506.7 483.4 499.6
Resin & Intermediates -- -- --
Other (29.9) (21.1) (21.7)
-------- -------- --------
$3,139.7 $3,039.9 $2,915.5
======== ======== ========
Operating income before special items, depreciation and amortization:
Performance Plastics $ 153.4 $ 234.0 $ 211.4
Elastomers & Additives 45.3 50.3 55.7
Distribution 14.6 15.6 14.3
Resin & Intermediates 27.9 3.6 (6.0)
Other (11.2) (14.9) (4.6)
-------- -------- --------
$ 230.0 $ 288.6 $ 270.8
======== ======== ========
Operating income before special items:
Performance Plastics $ 73.9 $ 151.2 $ 140.0
Elastomers & Additives 26.5 32.4 37.7
Distribution 11.3 12.0 11.7
Resin & Intermediates 27.9 3.6 (6.0)
Other (11.2) (14.9) (8.0)
-------- -------- --------
$ 128.4 $ 184.3 $ 175.4
======== ======== ========
SEE PAGE 32 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR REPORTED BUSINESS
SEGMENT DISCLOSURES.
PRO FORMA RESULTS Total sales for 1999 were $3.040 billion compared with $2.916
billion in 1998, an increase of 4%. All of the sales growth occurred in the
Performance Plastics business segment.
Operating income was $181.8 million in 1999, an increase of $30.6
million over 1998. Operating income before special items, depreciation and
amortization in 1999 was $288.6 million versus $270.8 million in 1998. The
Performance Plastics business segment recorded increased 1999 operating income
before special items, depreciation and amortization of $22.6 million.
Net income before special items was $85.0 million in 1999 and $76.0
million in 1998.
PERFORMANCE PLASTICS had 1999 sales of $2.090 billion, an increase of
$149.3 million, or 8%. The increase was primarily from higher formulator
(approximately $77.0 million) and international (approximately $49.0 million)
sales reflecting both organic growth and the impact of acquisitions. Operating
income before special items, depreciation and amortization was $234.0 million in
1999, $22.6 million above 1998. Higher operating income in 1999 was attributable
primarily to increased sales demand.
ELASTOMERS & ADDITIVES sales in 1999 were $487.6 million, a $9.3
million decrease from 1998. Lower 1999 sales were due primarily to lower
pricing, partially offset by higher volumes. The 1999 operating income before
special items, depreciation and amortization was $50.3 million, a decrease from
1998 of $5.4 million due to the aforementioned decline in sales as well as plant
start-up costs in Mexico and the United States and additional expenses
associated with lean manufacturing and supply chain initiatives.
DISTRIBUTION had 1999 sales of $483.4 million, a decrease of $16.2
million from 1998 due to the sale of the Company's thermoset resin distribution
business, which was partially offset by higher volumes from the Company's
thermoplastic
11 POLYONE CORPORATION
14
Management's Analysis
RESULTS OF OPERATIONS
resin distribution business. Despite lower sales, 1999 operating income of $15.6
million increased $1.3 million over 1998. Improved operating earnings were
attributable primarily to better cost control in 1999.
RESIN & INTERMEDIATES operating income before special items was $3.6
million in 1999, an improvement of $9.6 million over 1998. The improved earnings
were the net result of higher average spreads of PVC resin selling prices over
the cost of ethylene and chlorine of approximately $0.03 per pound for the
domestic industry. This improvement was partially offset by lower average
selling prices in the chlor-alkali industry. Domestic industry caustic soda and
chlorine selling prices in 1999 averaged below 1998 by approximately $85 per ton
and $30 per ton, respectively.
OTHER unallocated costs before special items, depreciation and
amortization totaled $14.9 million in 1999 compared with $4.6 million in 1998.
The increase was due to business development activities and other expenses.
SUMMARY OF SPECIAL ITEMS
Year Ended December 31,
In millions 2000 1999 1998
------- ------- -------
Reported Results
Merger and integration costs $ (9.5) $ -- $ --
Acquired profit in inventory (2.8) (3.2) --
Employee separation and plant phase-out costs (2.8) (0.5) (14.6)
Directors' pension termination (0.8) -- --
Write-off of debt placement cost (0.8) -- --
Other restructuring costs - accelerated depreciation (0.6) (1.2) --
Restructuring costs incurred by OxyVinyls -- (0.8) --
Gain on formation of joint ventures -- 93.5 --
------- ------- -------
Subtotal - pretax (17.3) 87.8 (14.6)
------- ------- -------
- after tax (10.6) 53.7 (8.9)
German tax rate reduction 1.5 -- --
Cumulative effect of a change in accounting -- (1.5) --
------- ------- -------
Total - after-tax income (expense) $ (9.1) $ 52.2 $ (8.9)
======= ======= =======
Pro Forma Results
Employee separation and plant phase-out costs $ (3.4) $ 0.1 $ (43.2)
Directors' pension termination (0.8) -- --
Write-off of debt placement cost (0.8) -- --
Other restructuring costs - accelerated depreciation -- (1.2) --
Executive separation cost (8.5) -- (2.2)
Restructuring costs incurred by OxyVinyls -- (0.8) --
Reversal of Hanna dock operations reserves -- 1.2 --
Gain on sale of assets -- 13.2 1.0
Loss on sale of business -- (10.9) --
------- ------- -------
Subtotal - pretax (13.5) 1.6 (44.4)
------- ------- -------
- after tax (8.1) (3.6) (27.3)
Cumulative effect of a change in accounting -- (1.5) (2.0)
German tax rate reduction 1.5 -- --
Hanna reversal of income tax reserve 10.5 -- 9.5
------- ------- -------
Total - after-tax income (expense) $ 3.9 $ (5.1) $ (19.8)
======= ======= =======
POLYONE CORPORATION 12
15
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
In millions, except per share data 2000 1999 1998
--------- --------- ---------
Sales $ 1,887.8 $ 1,261.2 $ 1,284.4
Operating costs and expenses:
Cost of sales 1,598.8 1,028.9 1,084.3
Selling and administrative 191.5 97.4 90.3
Depreciation and amortization 57.4 44.4 57.9
Employee separation and plant phase-out 2.8 0.5 14.6
Merger and integration costs 9.5 -- --
(Income) from equity affiliates and minority interest (37.0) (9.7) (3.7)
--------- --------- ---------
1,823.0 1,161.5 1,243.4
--------- --------- ---------
Operating income 64.8 99.7 41.0
Interest expense (36.7) (17.7) (16.0)
Interest income 1.6 2.1 1.2
Other expense, net (3.6) (3.6) (2.6)
Gain on formation of joint ventures, net of formation costs -- 93.5 --
--------- --------- ---------
Income before income taxes and cumulative effect of a change
in accounting for start-up costs 26.1 174.0 23.6
Income tax expense (10.2) (67.8) (9.8)
--------- --------- ---------
Income before cumulative effect of a change in accounting 15.9 106.2 13.8
Cumulative effect of a change in accounting for start-up costs,
net of income tax benefit of $0.9 million -- (1.5) --
--------- --------- ---------
Net income $ 15.9 $ 104.7 $ 13.8
========= ========= =========
Earnings per common share:
Basic earnings per share before effect of a change in accounting $ 0.26 $ 2.28 $ 0.30
Cumulative effect of a change in accounting -- (.03) --
--------- --------- ---------
Basic earnings per share $ 0.26 $ 2.25 $ 0.30
========= ========= =========
Diluted earnings per share before effect of a change in accounting $ 0.26 $ 2.18 $ 0.29
Cumulative effect of a change in accounting -- (.03) --
--------- --------- ---------
Diluted earnings per share $ 0.26 $ 2.15 $ 0.29
========= ========= =========
Weighted-average shares used to compute earnings per share:
Basic 61.4 46.6 45.8
Diluted 62.0 48.6 47.2
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13 POLYONE CORPORATION
16
Management's Analysis
CONSOLIDATED BALANCE SHEETS
The consolidated balance sheet at December 31, 2000, reflects the
financial position of PolyOne Corporation and, therefore, includes the merged
assets and liabilities of the former Geon and Hanna companies. The December 31,
1999, consolidated balance sheet reflects only the former Geon.
- - ASSETS
Total assets were $2.461 billion at December 31, 2000, an increase of
$1.298 billion from December 31, 1999. The increase in total assets is the
result of the consolidation with M.A. Hanna Company in August 2000 to form
PolyOne Corporation.
- - LIABILITIES AND EQUITY
Short-term bank debt was $237.2 million at December 31, 2000, compared
with short-term bank debt of $222.0 million at December 31, 1999. Long-term debt
increased $311.5 million, from $130.9 million at December 31, 1999, to $442.4
million at December 31, 2000, due primarily to the outstanding debt of Hanna,
which consists of both senior and medium-term notes. This debt, along with the
outstanding debentures from the former Geon business, has investment-grade
credit rating.
During 2000, the Company entered into two revolving credit agreements
that provide up to $200.0 million in borrowings through October 2001 and up to
$200.0 million in borrowings through October 2005. These agreements replaced
existing credit agreements that would have expired between May 2001 and January
2003. There were $210.0 million in borrowings under these agreements at December
31, 2000.
In connection with the consolidation of Geon and Hanna to form PolyOne,
each outstanding share of Geon common stock was converted into two shares of
PolyOne and each outstanding share of Hanna common stock was converted into one
share of PolyOne. In addition, the authorized common stock of the Company was
increased from 100.0 million shares to 400.0 million shares and the par value
per share of common stock was decreased from $0.10 per share to $0.01 per share.
In September 2000, PolyOne's Board of Directors authorized the purchase
of up to 9.6 million, or approximately 10%, of the Company's outstanding shares.
Through December 31, 2000, PolyOne had repurchased 2.6 million shares at an
average cost of $7.15 per share. Also, the Company returned $14.9 million to its
shareholders in the form of cash dividends.
- - MARKET RISK DISCLOSURES
The Company is exposed to market risk from changes in interest rates on
debt obligations. The Company's long-term debt at December 31, 2000, is
primarily fixed-rate obligations. To manage interest rate risk, the Company
periodically enters into interest rate exchange contracts, which generally
convert fixed-rate obligations to floating rates. No such interest rate exchange
contracts were outstanding at December 31, 2000.
The Company is also exposed to foreign currency exchange risk in the
ordinary course of business, due to the fact that the Company's products are
provided in numerous countries around the world, and collection of revenues and
payment of certain expenses may give rise to currency exposure. Management has
reviewed the Company's exposure to this risk and has concluded that the
Company's exposure in this area is not material to fair values, cash flows or
earnings. The Company also enters into intercompany lending transactions and
foreign currency forward exchange contracts related to this foreign currency
exposure. For additional discussion, refer to Note U to the Consolidated
Financial Statements.
- - ENVIRONMENTAL MATTERS
The Company is subject to various laws and regulations concerning
environmental matters. The Company is committed to a long-term environmental
protection program that reduces releases of hazardous materials into the
environment as well as to the remediation of identified existing environmental
concerns.
The Company has been notified by federal and state environmental
agencies and by private parties that it may be a potentially responsible party
in connection with several environmental sites. The Company has accrued $58.4
million to cover future environmental remediation expenditures, and does not
believe any of the matters either individually or in the aggregate will have a
material adverse effect on its capital expenditures, earnings, cash flow or
liquidity. The accrual represents the Company's best estimate for the remaining
remediation costs, based upon information and technology currently available.
Depending upon the results of future testing and the ultimate remediation
alternatives taken at these sites, it is possible that the ultimate costs to be
incurred could be more or less than the accrual at December 31, 2000, by as much
as $19.0 million or $15.0 million, respectively.
POLYONE CORPORATION 14
17
CONSOLIDATED BALANCE SHEETS
December 31,
In millions, except per share data 2000 1999
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 37.9 $ 51.2
Accounts receivable
Trade (less allowance of $9.8 million in 2000 and $3.8 million in 1999) 330.4 100.6
Other 17.1 4.8
Inventories 337.1 168.2
Deferred income tax assets 53.9 27.2
Other current assets 20.1 5.7
-------- --------
TOTAL CURRENT ASSETS 796.5 357.7
Property, net 703.8 338.4
Investment in equity affiliates 311.6 265.1
Goodwill and other intangible assets, net 540.3 183.1
Other non-current assets 108.5 18.3
-------- --------
TOTAL ASSETS $2,460.7 $1,162.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank debt $ 237.2 $ 222.0
Accounts payable, including amounts payable to related party (see Note N) 319.4 148.3
Accrued expenses 175.7 70.0
Current portion of long-term debt 2.6 0.4
-------- --------
TOTAL CURRENT LIABILITIES 734.9 440.7
Long-term debt 442.4 130.9
Deferred income tax liabilities 132.8 106.5
Post-retirement benefits other than pensions 129.9 83.9
Other non-current liabilities, including pensions 179.1 60.2
Minority interest in consolidated subsidiaries 14.0 5.7
-------- --------
TOTAL LIABILITIES 1,633.1 827.9
SHAREHOLDERS' EQUITY
Preferred stock in 2000, 40.0 shares authorized, no shares issued;
and in 1999, 10.0 shares authorized, no shares issued -- --
Common stock in 2000, $0.01 par, 400.0 shares authorized, 122.2 shares issued;
and in 1999, $0.10 par, 100.0 shares authorized, 28.0 shares issued 1.2 2.8
Additional paid-in capital 1,057.6 297.3
Retained earnings 169.3 168.3
Common stock held in treasury, 28.3 shares in 2000 and 4.2 shares in 1999 (321.9) (104.5)
Share ownership trust (25.5) --
Accumulated other non-owner equity changes (53.1) (29.2)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 827.6 334.7
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,460.7 $1,162.6
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15 POLYONE CORPORATION
18
Management's Analysis
CONSOLIDATED STATEMENTS OF CASH FLOWS
The 2000 statement of cash flows comprises eight months' operations of
the former Geon Company and four months' operations of PolyOne. The 1999 and
1998 statements of cash flows are those of only The Geon Company.
In 2000, net cash provided by operating and investing activities was
$84.3 million. Significant sources of cash included operating activities ($63.9
million); proceeds from the sale of assets, primarily Hanna's Cadillac Plastic
net assets ($44.2 million); and net Hanna cash received at the time of merger
($28.1 million). Contributing to a $60.0 million reduction in accounts
receivable in 2000 was a significant slowdown in fourth-quarter 2000 sales
demand, particularly in the construction and automotive markets. The 2000
investing activities included capital expenditures of $62.7 million.
In 1999, net cash used by operating and investing activities was $23.2
million, excluding the impact on cash of the OxyChem transactions of $127.7
million and the net cash paid for the businesses acquired of $233.5 million. The
transactions with OxyChem generated cash of $127.7 million consisting of cash
received upon the formation of OxyVinyls of $77.5 million and collection of
$61.6 million of the $62.3 million of R&I working capital retained upon
formation of OxyVinyls, less cash payments of $11.4 million for certain costs
directly related to the OxyChem transactions. Geon paid $27.0 million to acquire
OxyChem's engineered film and vinyl compounding operations.
Operating activities provided $53.0 million of cash in 1999, before
collection of retained R&I working capital, compared with $106.6 million in
1998. The decrease in operating cash flow is primarily the result of the
increase in operating working capital. The 1999 investing activities consisted
primarily of investment in new businesses. Businesses acquired included
O'Sullivan, Acrol, Dennis Chemical, and the Burlington compound and engineered
film and the Pasadena compound operations from OxyChem. "Investment in Equity
Affiliates" consists primarily of Geon's investment in a Colombian compound
joint venture. The 1999 increase in the purchases of property is attributable
largely to the modernization of the Company's Henry, Illinois, specialty resin
plant, which was announced in the fourth quarter of 1998. Partially offsetting
the expenditures described above was the net cash received in conjunction with
the OxyVinyls formation.
Financing activities in 2000 reflect PolyOne's repurchase of
approximately 2.6 million shares through December 31, 2000, with an additional
authorization to repurchase 7.0 million shares under a September 2000 Board of
Directors resolution. Also, $72.9 million of long-term debt was repaid in 2000
after the Company entered into two revolving credit agreements totaling $400.0
million in October 2000. Upon formation, PolyOne commenced the payment of
quarterly dividends at the annual rate of $0.25 per common share.
The Company believes it has and/or can obtain sufficient funds to
support dividends, debt service requirements, and normal capital and operating
expenditures under its existing working capital facilities and other available
borrowings.
Certain factors that may affect these forward-looking comments are
discussed on page 34.
- - INFLATION
The Company employs a number of strategies to mitigate the impact of
inflation on financial results. A considerable amount of capital spending is
directed toward cost reduction and productivity improvement projects. Moreover,
through its research and development efforts, the Company is continually
exploring ways to reduce the cost of existing products and to develop new
products with improved characteristics that will command premium prices. The
Company is also reviewing and re-engineering its administrative activities on an
ongoing basis to streamline operations and reduce costs.
POLYONE CORPORATION 16
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
In millions 2000 1999 1998
------- ------- -------
OPERATING ACTIVITIES
Net income $ 15.9 $ 104.7 $ 13.8
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on formation of joint ventures, net of formation costs -- (93.5) --
Employee separation and plant phase-out 2.8 0.5 14.6
Depreciation and amortization 57.4 44.4 57.9
Companies carried at equity:
Income (37.0) (9.7) (3.7)
Dividends received 27.0 4.6 0.3
Provision (benefit) for deferred income taxes 8.3 60.4 (1.0)
Changes in assets and liabilities:
Operating working capital:
Accounts receivable 60.0 (31.1) 50.7
Inventories 9.9 (23.9) 16.5
Accounts payable (19.2) 36.4 (32.7)
Realization of retained working capital of contributed PVC business -- 61.6 --
Accrued expenses (46.2) (29.1) (2.3)
Income taxes payable/receivable, net (1.7) (3.3) 3.3
Other (13.3) (7.4) (10.8)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 63.9 114.6 106.6
INVESTING ACTIVITIES
Business acquisitions, net of cash acquired (2.4) (233.5) (57.1)
Cash received in connection with OxyVinyls formation,
net of formation costs paid -- 66.1 --
Cash received in connection with consolidation of M.A Hanna Company,
net of transaction costs paid 28.1 -- --
Proceeds from sale of assets 44.2 -- --
Capital expenditures (62.7) (60.1) (40.7)
Return of cash (investment in) equity affiliates 5.3 (16.1) 2.9
Other 7.9 -- --
------- ------- -------
NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES 84.3 (129.0) 11.7
FINANCING ACTIVITIES
Change in short-term debt 8.7 167.5 (34.4)
Net issuance (repayment) of long-term debt (72.9) 2.0 (0.9)
Net proceeds from issuance of common stock 0.6 7.1 1.8
Repurchase of common stock (18.7) -- --
Dividends (14.9) (11.8) (11.7)
------- ------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (97.2) 164.8 (45.2)
Effect of exchange rate changes on cash (0.4) 1.0 (1.2)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13.3) 36.8 (34.7)
Cash and cash equivalents at beginning of year 51.2 14.4 49.1
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 37.9 $ 51.2 $ 14.4
======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
17 POLYONE CORPORATION
20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common
Shares Additional
In millions, except per share data; Common Held in Common Paid-in
shares in thousands Shares Treasury Total Stock Capital
------- ------ --------- --------- ---------
BALANCE DECEMBER 31, 1997 27,877 4,700 $ 223.8 $ 2.8 $ 295.8
Non-owner equity changes:
Net income 13.8
Translation adjustment (8.8)
Adjustment of minimum
pension liability (6.6)
---------
Total non-owner equity changes (1.6)
Stock-based compensation and
exercise of options 97 (78) 3.6 0.3
Cash dividends ($0.25 per share) (11.7)
------- ------ --------- --------- ---------
BALANCE DECEMBER 31, 1998 27,974 4,622 214.1 2.8 296.1
Non-owner equity changes:
Net income 104.7
Translation adjustment 7.9
Adjustment of minimum
pension liability 7.6
---------
Total non-owner equity changes 120.2
Stock-based compensation and
exercise of options (377) 12.2 1.2
Cash dividends ($0.25 per share) (11.8)
------- ------ --------- --------- ---------
BALANCE DECEMBER 31, 1999 27,974 4,245 334.7 2.8 297.3
Non-owner equity changes:
Net income 15.9
Translation adjustment (4.7)
Adjustment of minimum
pension liability (19.2)
---------
Total non-owner equity changes (8.0)
Two-for-one stock split 27,979 3,654 2.8 (2.8)
Reduction in par value from
$0.10 per share to $0.01 per share (5.1) 5.1
Shares issued in business
combination merger 66,234 18,406 536.7 0.7 781.3
Formation of share ownership trust (500)
Stock-based compensation and
benefits and exercise of options 5 (90) (2.2) (7.5)
Purchase of shares for treasury 2,600 (18.7)
Adjustment to market value (15.8)
Cash dividends ($0.25 per share) (14.9)
------- ------ --------- --------- ---------
BALANCE DECEMBER 31, 2000 122,192 28,315 $ 827.6 $ 1.2 $ 1,057.6
======= ====== ========= ========= =========
Common Accumulated
Stock Share Other Non-
In millions, except per share data; Retained Held in Ownership Owner Equity
shares in thousands Earnings Treasury Trust Changes
--------- --------- --------- ---------
BALANCE DECEMBER 31, 1997 $ 73.3 $ (118.0) $ -- $ (30.1)
Non-owner equity changes:
Net income 13.8
Translation adjustment (8.8)
Adjustment of minimum
pension liability (6.6)
Total non-owner equity changes
Stock-based compensation and
exercise of options 2.9 0.4
Cash dividends ($0.25 per share) (11.7)
--------- --------- --------- ---------
BALANCE DECEMBER 31, 1998 75.4 (115.1) -- (45.1)
Non-owner equity changes:
Net income 104.7
Translation adjustment 7.9
Adjustment of minimum
pension liability 7.6
Total non-owner equity changes
Stock-based compensation and
exercise of options 10.6 0.4
Cash dividends ($0.25 per share) (11.8)
--------- --------- --------- ---------
BALANCE DECEMBER 31, 1999 168.3 (104.5) -- (29.2)
Non-owner equity changes:
Net income 15.9
Translation adjustment (4.7)
Adjustment of minimum
pension liability (19.2)
Total non-owner equity changes
Two-for-one stock split
Reduction in par value from
$0.10 per share to $0.01 per share
Shares issued in business
combination merger (215.6) (29.7)
Formation of share ownership trust 13.4 (13.4)
Stock-based compensation and
benefits and exercise of options 3.5 1.8
Purchase of shares for treasury (18.7)
Adjustment to market value 15.8
Cash dividends ($0.25 per share) (14.9)
--------- --------- --------- ---------
BALANCE DECEMBER 31, 2000 $ 169.3 $ (321.9) $ (25.5) $ (53.1)
========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
POLYONE CORPORATION 18
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A
- - FORMATION OF POLYONE AND BASIS OF PRESENTATION
PolyOne Corporation (Company or PolyOne) is the world's largest
international polymer services company, with operations in thermoplastic
compounds, specialty polymer formulations, engineered films, color and additive
systems, elastomer compounds and additives, and thermoplastic resin
distribution. PolyOne was formed on August 31, 2000, as a result of the
consolidation of The Geon Company (Geon) and M.A. Hanna Company (Hanna). The
consolidation was accounted for as a purchase business combination under
generally accepted accounting principles with Geon as the acquiring entity.
Hanna was a leading international specialty polymers company with operations in
thermoplastic compounds, color and additive systems, elastomer compounds and
additives, and thermoplastic resin distribution. In connection with the
consolidation, each outstanding share of Geon common stock was converted into
two shares of PolyOne and each outstanding share of Hanna common stock was
converted into one share of PolyOne. The conversion of the Geon shares has been
treated in a manner similar to a two-for-one stock split. All per-share data for
all periods presented has been restated to reflect the effects of the
conversion.
The purchase price approximated $546.0 million, including direct
acquisition costs. The excess of the purchase price paid over the fair value of
net assets acquired, totaling approximately $301.0 million, has been recorded as
goodwill. The purchase price allocation reflected in these financial statements
for the consolidation is preliminary and may be adjusted as estimated fair
values of assets acquired and liabilities assumed are finalized, including the
finalization of restructuring plans relating to the operations of Hanna, which
the Company has begun to assess. Such activities may include employee
separation, asset rationalization and certain plant closures expected to be
finalized during 2001.
PolyOne's operations are located primarily in the United States,
Europe, Canada, Mexico and Asia/Pacific, in four business segments: Performance
Plastics, Elastomers and Additives, Distribution, and Resin and Intermediates.
See Note S for further information on the Company's business segments.
Note B
- - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its subsidiaries. All majority-owned affiliates
where the Company has control are consolidated. Investments in affiliates where
the Company's ownership is 50% or less, or where the Company does not have
control but has the ability to exercise significant influence over operating and
financial policies, are accounted for under the equity method. Intercompany
transactions are eliminated.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments
purchased with a maturity of less than three months to be cash equivalents. Cash
equivalents are stated at cost, which approximates fair value.
CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the
Company to credit risk are trade accounts receivable and foreign exchange
contracts. Concentration of credit risk with respect to trade accounts
receivable is limited, due to a large number of customers comprising the
Company's customer base and their distribution among many different industries
and geographic locations. The Company is exposed to credit risk with respect to
forward foreign exchange contracts in the event of non-performance by the
counterparties to these financial instruments. Management believes the risk of
incurring material losses related to this credit risk is remote.
INVENTORIES Inventories are stated at the lower of cost or market. Approximately
43% of the Company's inventories at December 31, 2000, have been valued by the
last-in, first-out (LIFO) cost method. Inventories not valued by the LIFO method
are valued principally by the first-in, first-out (FIFO), or average cost
method. The excess of current cost over LIFO cost was $24.1 million and $20.1
million at December 31, 2000, and 1999, respectively.
19 POLYONE CORPORATION
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND DEPRECIATION Property, plant and equipment are recorded at cost,
net of depreciation and amortization computed principally using the
straight-line method over the estimated useful life of the assets, ranging from
three to 15 years for machinery and equipment and up to 40 years for buildings.
Computer software is amortized over periods not exceeding 10 years. Property,
plant and equipment are generally depreciated on accelerated methods for income
tax purposes. Repair and maintenance costs are expensed as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS The excess of the purchase price paid over
the fair value of the net assets of businesses acquired is recorded as goodwill
and amortized over a 35-year period on a straight-line basis. Goodwill and other
long-lived assets are reviewed for impairment. When undiscounted cash flows are
not sufficient to recover the assets' carrying amount, an impairment loss is
charged to expense in the period identified. Measurement of impairment is based
upon discounted cash flows, asset appraisals or market values of similar assets.
At December 31, 2000, and 1999, goodwill totaled $474.8 million and $180.0
million, net of accumulated amortization of $14.8 million and $6.2 million,
respectively.
Other intangible assets include values assigned to technology and
related patents and workforce. At December 31, 2000, and 1999, other intangible
assets totaled $65.5 million and $3.1 million, net of accumulated amortization
of $3.7 million and $0.1 million, respectively. These assets are being amortized
over periods ranging from four to 20 years on a straight-line basis.
Amortization expense related to goodwill and other intangibles was
$11.5 million, $3.8 million and $2.1 million in 2000, 1999 and 1998,
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS The Company periodically enters into interest
rate exchange and forward foreign exchange contracts. Interest rate exchange
contracts are generally used to convert fixed-rate to floating-rate debt in
order to take advantage of lower floating rates. At December 31, 2000, the
Company had no interest rate exchange contracts outstanding. Forward foreign
exchange contracts are used to minimize the risk related to certain foreign
currency receivables, payables and intercompany lending transactions. Gains and
losses related to these contracts are recognized in other income or expense, and
offset the foreign exchange gains and losses on the underlying transactions. In
June 1998, the Financial Accounting Standards Board (FASB) issued Statement No.
133, "Accounting for Derivative Financial Instruments and Hedging Activities,"
which was required to be adopted effective January 1, 2001. Because of the
Company's minimal use of derivative financial instruments, the adoption of this
statement will not have a material impact on the earnings or financial position
of the Company.
REVENUE RECOGNITION The Company recognizes revenues at the point of passage of
title, which is based on shipping terms for product sales or when service is
performed.
SHIPPING AND HANDLING COSTS Shipping and handling costs are reflected in cost of
sales.
INCOME AND LOSSES FROM EQUITY AFFILIATES The Company recognizes its
proportionate share of the income of equity affiliates. Losses of equity
affiliates are recognized to the extent of the Company's investment, advances,
financial guarantees and other commitments to provide financial support to the
investee. Any losses in excess of this are deferred, and reduce the amount of
future earnings of the equity investee recognized by the Company. At December
31, 2000, and 1999, there were no deferred losses related to equity investees.
ENVIRONMENTAL COSTS The Company expenses, on a current basis, recurring costs
associated with managing hazardous substances and pollution in ongoing
operations. Costs associated with the remediation of environmental contamination
are accrued when it becomes probable that a liability has been incurred and the
Company's proportionate share of the amount can be reasonably estimated.
RESEARCH AND DEVELOPMENT EXPENSE Research and development costs, which were
$21.4 million, $18.5 million and $15.0 million in 2000, 1999 and 1998,
respectively, are charged to expense as incurred.
POLYONE CORPORATION 20
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES Deferred tax liabilities and assets are determined based on the
differences between the financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rate and laws currently in
effect.
FOREIGN CURRENCY TRANSLATION Income statement items are translated at average
currency exchange rates. Transaction gains and losses are included in
determining net income. All balance sheet accounts of foreign subsidiaries and
equity investees are translated at the exchange rate at the end of the period.
The Company's share of the resulting translation adjustment is recorded as
accumulated other non-owner equity changes. The cumulative unrecognized
translation adjustment loss was $32.5 million, $27.8 million and $35.7 million
at December 31, 2000, 1999 and 1998, respectively.
STOCK OPTIONS The Company accounts for stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
CHANGE IN ACCOUNTING METHOD In January 1999, the Company adopted the American
Institute of Certified Public Accountants Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities," which required that all
pre-operating costs be expensed as incurred. Adoption of this statement resulted
in a one-time charge of $2.4 million ($1.5 million net of income tax benefit)
and was reported as a cumulative effect of a change in accounting principle in
1999 earnings.
USE OF ESTIMATES 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 those estimates.
RECLASSIFICATION Certain amounts for 1999 and 1998 have been reclassified to
conform to the 2000 presentation.
Note C
- - OXYVINYLS JOINT VENTURE FORMATION
On April 30, 1999, the Company completed certain transactions with
Occidental Chemical Corporation (OxyChem), which included the formation of
OxyVinyls, LP (OxyVinyls), a manufacturer and marketer of PVC resins. OxyVinyls
is the largest producer of PVC resins in North America.
PolyOne contributed to OxyVinyls five PVC suspension and mass resin
plants and one VCM plant as well as related assets and all the outstanding
capital stock of LaPorte Chemicals Corporation, a subsidiary of the Company. In
exchange, PolyOne received a 24% interest in OxyVinyls and OxyVinyls assumed
certain liabilities and obligations of Poly-One. OxyChem contributed to
OxyVinyls one PVC plant; one VCM plant; a 50% interest in OxyMar, a Texas
general partnership that operates a VCM plant; and a portion of a chlor-alkali
chemical complex, together with other related assets. In exchange, OxyChem
received a 76% interest in OxyVinyls, and OxyVinyls assumed certain liabilities
and obligations of OxyChem, including certain OxyMar debt. For accounting
purposes, PolyOne's contribution to OxyVinyls was treated as a sale of 76% of
its PVC business net assets to OxyChem.
In addition, PolyOne and OxyChem formed Powder Blends, a small powder
compounding partnership that is 90% owned by PolyOne. PolyOne also acquired from
OxyChem a PVC engineered film and pellet compounding plant located in
Burlington, New Jersey, and a pellet compound business located in Pasadena,
Texas.
In conjunction with the above transactions, Poly-One realized
approximately $104.0 million through retention of certain working capital from
its businesses contributed to OxyVinyls and the distribution of cash from
OxyVinyls. This $104.0 million comprises cash received from OxyChem of $77.5
million and retained working capital of $62.0 million, less $27.0 million paid
by PolyOne to OxyChem for the purchase of the acquired businesses and $9.0
million representing PolyOne's incremental share of OxyVinyls' incremental
financing.
21 POLYONE CORPORATION
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognized a pre-tax gain of $93.5 million as a result of
these transactions, representing the excess of the fair value received over the
book value of the 76% and 10% of PolyOne's net assets contributed to Oxy-Vinyls
and Powder Blends, respectively. This gain is net of certain one-time costs
directly related to the transactions.
In conjunction with the transactions above, Poly-One entered into PVC
resin and VCM supply agreements with OxyVinyls under which PolyOne purchases a
substantial portion of its PVC resin and VCM. The agreements have an initial
term of 15 years with renewal options. The Company also has entered into various
service agreements with the partnerships.
Note D
- - BUSINESS COMBINATIONS
On July 7, 1999, the Company acquired O'Sullivan Corporation
(O'Sullivan), a Virginia corporation, for approximately $192.0 million,
including direct acquisition costs. Included in the acquired assets of
O'Sullivan was $36.0 million in cash, which was used to partially finance the
acquisition. O'Sullivan is a leading producer of engineered polymer films for
the automotive and industrial markets.
The Company also acquired Acrol Holdings Limited (Acrol) on July 1,
1999, and Dennis Chemical Company, Inc. (Dennis Chemical) on September 8, 1999.
Acrol, headquartered in Widnes, England, is the United Kingdom's leading
formulator of vinyl plastisols. Acrol is also a leading distributor of
compounding additives, and manufactures a range of specialty polymer-coated
textiles. Dennis Chemical is a custom plastisol formulator of specialty vinyl
resins and urethanes, and is headquartered in St. Louis, Missouri. The combined
purchase price for these formulator acquisitions was approximately $57.0
million.
These acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed are
recorded at their estimated fair values on the acquisition dates. The excess of
the purchase price paid over the fair value of net assets acquired, totaling
approximately $97.0 million, has been recorded as goodwill. The acquisitions of
O'Sullivan, Acrol and Dennis Chemical were financed with short-term credit
facilities and available cash on hand, including a portion of the cash held by
O'Sullivan at the acquisition date. The Company's results of operations include
the results of the acquired businesses from the date of acquisition.
Note E
- - PRO FORMA FINANCIAL INFORMATION
The following table sets forth certain unaudited pro forma financial
information for the Company, assuming that the transactions with Hanna
(discussed in Note A), OxyChem (discussed in Note C) and O'Sullivan (discussed
in Note D) had occurred on January 1, 1999. In addition, the pro forma financial
information reflects the effect of Hanna's sale of its Cadillac Plastic business
as if it had occurred prior to the periods shown. The net proceeds from the sale
of Cadillac were assumed to be used to repay long-term debt. The unaudited pro
forma information is not necessarily indicative of the results of operations
that would have occurred had the aforementioned transactions been made at the
beginning of the periods presented.
In millions, except per share data 2000 1999
--------- ---------
Sales $ 3,139.7 $ 3,039.9
Income before cumulative effect of
a change in accounting principle 52.4 79.9
--------- ---------
Basic earnings per share 0.57 0.88
--------- ---------
Diluted earnings per share 0.57 0.86
========= =========
POLYONE CORPORATION 22
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F
- - FINANCIAL INFORMATION OF R&I SEGMENT EQUITY AFFILIATES
The Company's R&I segment consists primarily of investments in equity
affiliates. Summarized financial information for OxyVinyls, which was formed in
April 1999, is presented below.
In millions 2000 1999
-------- --------
OxyVinyls:
Net sales $1,892.3 $1,102.1
Operating income 148.2 71.8
Partnership income as reported
by OxyVinyls 146.2 63.7
PolyOne's ownership of OxyVinyls 24% 24%
-------- --------
PolyOne's proportionate share of
OxyVinyls' earnings 35.1 15.3
Amortization of the difference between
PolyOne's investment and its
underlying share of OxyVinyls' equity 0.6 1.2
-------- --------
Earnings of equity affiliate
recorded by PolyOne $ 35.7 $ 16.5
======== ========
Current assets $ 338.1 $ 367.7
Non-current assets 1,045.1 1,021.1
-------- --------
Total assets $1,383.2 $1,388.8
======== ========
Current liabilities $ 238.2 $ 272.0
Non-current liabilities 93.9 102.5
-------- --------
Total liabilities $ 332.1 $ 374.5
======== ========
The Company's R&I segment also includes the Sun-belt and AVC equity
affiliates. Combined summarized financial information for Sunbelt (owned 50%)
and AVC (owned 37.4%) is presented in the following table. The amounts shown
represent the entire operations of these businesses, rather than the Company's
proportionate share.
In millions 2000 1999
------- -------
Net sales $ 239.2 $ 200.3
Operating income 24.5 9.6
Net income (loss) before cumulative effect
of a change in accounting 3.1 (13.5)
Net income (loss) $ 3.1 $ (18.3)
======= =======
Current assets $ 52.5 $ 67.7
Non-current assets 204.6 226.6
------- -------
Total assets $ 257.1 $ 294.3
======= =======
Current liabilities $ 22.1 $ 57.6
Non-current liabilities 219.1 201.3
------- -------
Total liabilities $ 241.2 $ 258.9
======= =======
Note G
- - FINANCING ARRANGEMENTS
Long-term debt at December 31 consists of the following:
In millions 2000 1999
------- -------
9.375% senior notes due 2003 $ 91.1 $ --
6.875% debentures due 2005 75.0 75.0
7.500% debentures due 2015 50.0 50.0
Medium-term notes - interest rates from
6.52% to 7.16% with a weighted average
of 6.85% - due between 2004 and 2011 149.4 --
Bank borrowings 79.5 6.3
------- -------
445.0 131.3
Less current portion 2.6 0.4
------- -------
$ 442.4 $ 130.9
======= =======
Aggregate maturities of long-term debt for the next five years are:
2001 - $2.6 million; 2002 - $2.4 million; 2003 - $137.4 million; 2004 - $40.6
million; and 2005 - $99.4 million.
23 POLYONE CORPORATION
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2000, the Company entered into two revolving credit
agreements that provide for up to $200.0 million in borrowings through October
2001 and up to $200.0 million in borrowings through October 2005. The agreements
replaced existing revolving credit facilities that would have expired between
May 2001 and January 2003. The new agreements provide for interest rates to be
determined at the time of borrowing based on a choice of formulas specified in
the agreement. There were $210.0 million in borrowings under these agreements at
December 31, 2000.
Bank borrowings include committed and uncommitted credit lines. At
December 31, 2000, the Company had $20.0 million of borrowings from uncommitted
credit lines and $210.0 million of borrowing from committed bank lines at rates
ranging from 7.1% to 7.6%, with a weighted-average rate of 7.5%. The Company has
a 5.1% fixed-rate borrowing for 90 million DM ($43.2 million as of December 31,
2000) due in 2003.
The weighted-average interest on short-term borrowings was 7.5% and
6.6% at December 31, 2000, and 1999, respectively.
Interest paid amounted to $38.6 million, $16.7 million and $14.5
million in 2000, 1999 and 1998, respectively.
The Company's bank agreements require, among other things, that the
Company comply with interest coverage and debt-to-cash earnings ratios.
Note H
- - LEASING ARRANGEMENTS
The Company leases certain manufacturing facilities, warehouse space,
machinery and equipment, automobiles and railcars under operating leases. Rent
expense amounted to $21.3 million, $20.9 million and $32.2 million during 2000,
1999 and 1998, respectively.
The future minimum lease payments under non-cancelable operating leases
with initial lease terms in excess of one year at December 31, 2000, are as
follows: 2001 - $11.1 million; 2002 - $8.9 million; 2003 - $6.0 million; 2004 -
$5.0 million; 2005 - $3.5 million; and thereafter - $7.9 million.
Note I
- - SALE OF ACCOUNTS RECEIVABLE
The Company has an agreement with a bank to sell an undivided interest
in certain trade accounts receivable under which, on an ongoing basis, a maximum
of $100.0 million ($85.0 million in 1999) can be sold from a designated pool
subject to limited recourse. Payments are collected from the sold accounts
receivable; the collections are reinvested in new accounts receivable for the
buyers, and a yield based on defined short-term market rates is transferred to
the buyers. Buyers have collection rights to recover payments from the
receivables in the designated pool. Sales of accounts receivable averaged $87.5
million, $69.6 million and $78.4 million in 2000, 1999 and 1998, respectively.
Accounts receivable at December 31, 2000, and 1999 were net of $100.0 million
and $85.0 million, respectively, representing the interests in receivables sold
under these agreements. The discount from the Company's sale of receivables is
included in "Other expense, net" in the Consolidated Statements of Income.
POLYONE CORPORATION 24
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which the Company is required to adopt prospectively for transactions beginning
in April 2001. Based on current circumstances, the Company believes that the
adoption of Statement No. 140 will not have a material impact on its financial
statements.
Note J
- - INVENTORIES
December 31,
In millions 2000 1999
------- -------
At FIFO or average cost, which
approximates current costs:
Finished products and in process $ 201.4 $ 96.3
Raw materials and supplies 159.8 92.0
------- -------
361.2 188.3
Reserve to reduce certain
inventories to LIFO basis (24.1) (20.1)
------- -------
$ 337.1 $ 168.2
======= =======
Approximately 43% and 53% of the Company's inventory was valued by the
LIFO method at December 31, 2000, and 1999, respectively.
Note K
- - PROPERTY
December 31,
In millions 2000 1999
-------- --------
Land and land improvements $ 55.3 $ 22.0
Buildings 287.5 153.0
Machinery and equipment 823.6 584.3
-------- --------
1,166.4 759.3
Less accumulated depreciation
and amortization (462.6) (420.9)
-------- --------
$ 703.8 $ 338.4
======== ========
Note L
- - OTHER BALANCE SHEET LIABILITIES
Accrued Expenses Non-current Liabilities
-------------------- --------------------
December 31, December 31,
In millions 2000 1999 2000 1999
------- ------- ------- -------
Employment costs $ 80.9 $ 28.8 $ 43.7 $ 9.7
Environmental 10.0 7.1 48.4 37.0
Taxes, other than income 8.3 10.4 -- --
Post-retirement benefits 12.7 7.7 -- --
Pension -- -- 37.8 12.6
Employee separation
and plant phase-out 2.4 2.7 -- --
Other 61.4 13.3 49.2 0.9
------- ------- ------- -------
$ 175.7 $ 70.0 $ 179.1 $ 60.2
======= ======= ======= =======
Note M
- - EMPLOYEE BENEFIT PLANS
The Company has four defined benefit pension plans covering some of the
former Geon U.S. employees. The Company's salaried plan closed participation to
employees after December 31, 1999. The plans generally provide benefit payments
using a formula that is based on employee compensation and length of service.
Annual contributions to the plans are sufficient to satisfy legal requirements.
Plan assets consist principally of corporate and government obligations and
funds invested in equities, including stock of the Company. Two of the Company's
pension plans are unfunded non-qualified pension plans that provide supplemental
pension benefits for senior executives. In connection with the acquisition of
Hanna and O'Sullivan, the Company assumed the obligations and assets of Hanna's
and O'Sullivan's defined benefit pension plans, covering certain Hanna and
O'Sullivan employees. Benefits earned under Hanna's and O'Sullivan's defined
benefit pension plans have been frozen.
25 POLYONE CORPORATION
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A charge of $9.0 million for curtailment and special termination
benefits was recorded in 1999 relating to the transfer of R&I employees from
Geon to OxyVinyls. This charge is included in the gain on formation of joint
ventures, net of formation expenses, in the Consolidated Statements of Income.
The Company has recorded an intangible asset of $1.8 million and $3.2 million
related to both funded and unfunded pension plans as of December 31, 2000, and
1999, respectively. At December 31, 2000, and 1999, the Company's accumulated
other non-owner equity changes included $20.6 million and $1.3 million,
respectively, related to the accumulated minimum pension liability.
The Company reports other non-owner equity changes net of the related
income tax expense or benefit in the Consolidated Statements of Shareholders'
Equity. The income tax (expense) benefit related to the adjustment of the
minimum pension liability was $11.1 million, $(4.1) million and $3.6 million in
2000, 1999 and 1998, respectively.
The Company sponsors several unfunded defined benefit post-retirement
plans that provide certain health care and life insurance benefits to eligible
employees. The health care plans are contributory, with retiree contributions
adjusted periodically, and contain other cost-sharing features such as
deductibles and coinsurance. The life insurance plans are generally
non-contributory.
The following tables set forth the change in benefit obligation, change
in plan assets funded status and amounts recognized in the Consolidated Balance
Sheets related to the defined benefit pension and post-retirement health care
benefit plans.
Pension Benefits Health Care Benefits
In millions 2000 1999 2000 1999
------- ------- ------- -------
Change in benefit obligation
Benefit obligation -
beginning of year $ 292.5 $ 302.1 $ 86.2 $ 95.8
Service cost 4.1 3.7 0.8 0.5
Interest cost 24.3 21.1 7.9 6.2
Participant contributions -- -- 0.9 0.5
Benefits paid (25.5) (23.5) (12.7) (8.0)
Curtailment and special
termination benefits -- 9.0 -- --
Acquired businesses and
plan amendments 79.5 10.6 54.3 2.4
Transfer to OxyVinyls -- -- -- (2.7)
Change in discount rate
and other 18.1 (30.5) 17.6 (8.5)
------- ------- ------- -------
Benefit obligation -
end of year 393.0 292.5 155.0 86.2
Projected salary increases 26.4 22.7 -- --
------- ------- ------- -------
Accumulated benefit
obligation $ 366.6 $ 269.8 $ 155.0 $ 86.2
======= ======= ======= =======
Change in plan assets
Plan assets -
beginning of year $ 256.5 $ 243.9 $ -- $ --
Actual return on
plan assets 6.8 14.2 -- --
Company contributions 7.3 9.8 -- --
Acquired businesses 107.7 9.5 -- --
Benefits paid (25.1) (20.9) -- --
------- ------- ------- -------
Plan assets - end of year $ 353.2 $ 256.5 $ -- $ --
======= ======= ======= =======
Funded status
Plan assets less than
projected benefit obligation $ 39.8 $ 36.0 $ 155.0 $ 86.2
Unamortized
Transition liability (1.4) (2.3) -- --
Prior service cost (0.8) (1.6) -- --
Net actuarial gain (loss) (62.7) (24.7) (12.4) 5.4
Adjustment to recognized minimum liability 33.5 5.2 -- --
------- ------- ------- -------
Accrued benefit cost $ 8.4 $ 12.6 $ 142.6 $ 91.6
POLYONE CORPORATION 26
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the assumptions used by the consulting actuaries,
and the related benefit cost information.
Pension Benefits Health Care Benefits
--------------------------------- -------------------------------
Dollars in millions 2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- -------
Assumptions
Discount rate 7.5% 7.7% 7.0% 7.5% 7.7% 7.0%
Future compensation 4.0-7.0% 4.0-7.0% 4.0-7.0% -- -- --
Expected long-term return on plan assets 9.0% 9.5% 9.5% -- -- --
Components of net periodic benefit costs
Service cost $ 4.1 $ 3.7 $ 3.9 $ 0.8 $ 0.5 $ 0.4
Interest cost 24.3 21.1 20.1 7.9 6.2 6.5
Curtailment loss and special termination benefits -- 9.0 -- -- -- --
Expected return on plan assets (26.8) (22.6) (22.5) -- -- --
Amortization of unrecognized losses,
transition obligation and prior service cost 1.9 2.6 2.6 -- -- --
------- ------- ------- ------- ------- -------
$ 3.5 $ 13.8 $ 4.1 $ 8.7 $ 6.7 $ 6.9
======= ======= ======= ======= ======= =======
The combined projected benefit obligation (PBO) includes the PBO of
unfunded plans of $8.9 million and $7.0 million at December 31, 2000, and 1999,
respectively. The accumulated benefit obligation (ABO) of these unfunded plans
was $6.4 million and $6.3 million at December 31, 2000, and 1999, respectively.
The remaining PBO relates to the Company's funded pension plans, including the
acquired Hanna and O'Sullivan plans. At December 31, 2000, the Company had three
plans with a PBO and an ABO in excess of the related plan assets. These include
the Company's salaried plan and two plans acquired with O'Sullivan. At December
31, 2000, the PBO, ABO and fair value of plan assets for these plans were $276.0
million, $253.0 million and $216.7 million, respectively.
For measurement purposes, the Company assumed an average annual rate of
increase in the per capita cost of health care benefits (health care cost trend
rates) of 8.5% for 2000, declining gradually to 5.5% in 2007 and thereafter. A
change in the assumed health care cost trend rates of 1% in each year would
increase or decrease the benefit obligation as of December 31, 2000, by
approximately $11.0 million, and the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost for 2000 by $1.1
million.
The Company maintains voluntary retirement savings plans (RSP) for most
employees. Under provisions of the RSP, eligible employees can receive Company
matching contributions up to the first 6% of their eligible earnings. For 2000,
1999 and 1998, Company contributions amounted to $9.2 million, $7.6 million and
$5.4 million, respectively. In addition, the Company makes profit-sharing
payments to the RSP for those employees not covered by management incentive
compensation plans. In 1999 and 1998, these profit-sharing payments totaled $2.2
million and $1.5 million, respectively. There were no payments made in 2000. In
addition, the Company continues to sponsor defined contribution plans for
certain former Hanna employees, which provide for Company contributions of a
specified percentage of each employee's compensation. In 2000, these
contributions amounted to $1.4 million.
Note N
- - COMMITMENTS AND RELATED PARTY INFORMATION
ENVIRONMENTAL The Company has been notified by federal and state environmental
agencies and by private parties that it may be a potentially responsible party
(PRP) in connection with several environmental sites. While government agencies
frequently claim PRPs are jointly and severally liable at these sites, in the
Company's experience, interim and final allocations of liability costs are
generally made based on the relative contribution of waste. The Company believes
that its potential continuing liability with respect to such sites will not have
a material adverse effect on its consolidated financial position, results of
operations or cash flows. In addition, the Company initiates corrective and
preventive environmental projects of its own to ensure safe and lawful
activities at its operations.
27 POLYONE CORPORATION
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company believes that compliance with current governmental regulations at
all levels will not have a material adverse effect on its financial condition.
Based on estimates prepared by the Company's environmental engineers and
consultants, the Company, at December 31, 2000, had accruals totaling $58.4
million to cover probable future environmental expenditures related to
previously contaminated sites. The accrual represents the Company's best
estimate for the remaining remediation costs, based upon information and
technology currently available. Depending upon the results of future testing and
the ultimate remediation alternatives undertaken at these sites, it is possible
that the ultimate costs to be incurred could be more or less than the accrual at
December 31, 2000, by as much as $19.0 million or $15.0 million, respectively.
The Company's estimate of the liability may be revised as new regulations,
technologies or additional information is obtained. Environmental expense
incurred was $2.2 million, $1.7 million and $2.4 million in the years ended
December 31, 2000, 1999 and 1998, respectively.
GUARANTEES In connection with the formation of OxyVinyls, the Company has
guaranteed $42.0 million of OxyVinyls borrowings from Occidental Petroleum
Corporation. The Company also has guaranteed $97.5 million of Sunbelt's
outstanding senior secured notes, maturing in 2017.
RELATED PARTY TRANSACTIONS The Company purchases a substantial portion of its
raw materials under the terms of supply agreements with OxyVinyls. The
agreements have an initial term of 15 years with renewal options. The Company
also has entered into various service agreements with OxyVinyls. At December 31,
2000, and 1999, net amounts owed to OxyVinyls, primarily for raw material
purchases, totaled approximately $16.0 million and $26.0 million, respectively.
During 2000 and 1999, the Company's purchases of raw materials from OxyVinyls
totaled approximately $336.0 million and $220.0 million, respectively.
Note O
- - OTHER EXPENSE, NET
In millions 2000 1999 1998
------- ------- -------
Currency exchange gain (loss) $ 2.8 $ (0.4) $ 1.8
Discount on sale of trade
receivables (5.8) (3.5) (4.6)
Other income (expense), net (0.6) 0.3 0.2
------- ------- -------
$ (3.6) $ (3.6) $ (2.6)
======= ======= =======
Note P
- - INCOME TAXES
Income (loss) before income taxes and cumulative effect of a change in
accounting consists of the following:
In millions 2000 1999 1998
------- ------- -------
Domestic $ 23.8 $ 179.6 $ 5.1
Foreign 2.3 (5.6) 18.5
------- ------- -------
$ 26.1 $ 174.0 $ 23.6
======= ======= =======
A summary of income tax expense (benefit) is as follows:
In millions 2000 1999 1998
------- ------- -------
Current:
Federal $ 0.1 $ -- $ 0.2
State 1.0 1.2 0.6
Foreign 0.8 5.3 10.0
------- ------- -------
Total current 1.9 6.5 10.8
Deferred:
Federal 8.7 61.3 2.0
State (1.2) 6.8 (0.4)
Foreign 0.8 (6.8) (2.6)
------- ------- -------
Total deferred 8.3 61.3 (1.0)
------- ------- -------
Total tax expense $ 10.2 $ 67.8 $ 9.8
======= ======= =======
POLYONE CORPORATION 28
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax rate for financial reporting purposes varied from the
federal statutory rate as follows:
2000 1999 1998
---- ---- ----
Federal statutory income tax rate 35.0% 35.0% 35.0%
State tax, net of federal benefit (0.4) 3.0 0.8
Goodwill 7.7 0.5 2.6
Differences in rates of
foreign operations 3.4 -- 1.5
Enacted tax rate reduction (5.4) -- --
Other, net (1.2) 0.5 1.6
---- ---- ----
Effective income tax rate 39.1% 39.0% 41.5%
==== ==== ====
Significant components of the Company's deferred tax liabilities and
assets at December 31 are as follows:
In millions 2000 1999
------- -------
Deferred tax liabilities:
Tax over book depreciation $ 70.6 $ 39.3
Intangibles 17.3 (2.0)
Equity investments 142.2 146.4
State taxes 5.0 6.2
Other, net 15.2 12.5
------- -------
Total deferred tax liabilities 250.3 202.4
------- -------
Deferred tax assets:
Post-retirement benefits other
than pensions 49.9 32.1
Employment cost and pension 33.7 14.0
Environmental 19.9 15.7
Net operating loss carryforward 41.5 34.2
LIFO inventory 1.7 4.8
Alternative minimum tax credit
carryforward 5.6 5.2
Foreign net operating losses and
tax credit carryforward 13.7 5.6
Foreign net operating losses and tax credit
carryforward valuation allowance (13.7) (5.6)
Other, net 14.7 17.1
------- -------
Total deferred tax assets 167.0 123.1
------- -------
Net deferred tax liabilities $ 83.3 $ 79.3
======= =======
SFAS No. 109, "Accounting for Income Taxes," requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets will not be realized. As
realization of the foreign tax credit carryforwards is considered uncertain, a
valuation allowance has been recorded. Approximately $6.5 million of the
valuation allowance relates to the consolidation with Hanna, and will reduce
goodwill upon subsequent recognition of the related tax benefit. The Company
believes that the timing of the reversal of its deferred tax liabilities will be
sufficient to fully recognize its remaining deferred tax assets.
The Company has provided for U.S. federal and foreign withholding tax
on $22.0 million, or 12%, of foreign subsidiaries' undistributed earnings as of
December 31, 2000. Regarding the undistributed earnings on which no federal and
foreign withholding tax has been provided, earnings are intended to be
reinvested indefinitely. It is not practical to determine the amount of income
tax liability that would result had such earnings actually been repatriated.
During 2000, 1999 and 1998, the Company paid income taxes net of
refunds of $4.2 million, $8.8 million and $7.8 million, respectively. The
Company has a net operating loss carryforward of approximately $118.6 million,
of which $11.9 million will expire in 2011, $22.2 million will expire in 2012,
$66.6 million will expire in 2018, $5.6 million will expire in 2019 and the
remaining $12.3 million will expire in 2020. In addition, the Company has an
alternative minimum tax loss carryforward of $30.7 million and an alternative
minimum tax credit carryforward of $5.6 million.
Note Q
- - EMPLOYEE SEPARATION AND PLANT PHASE-OUT CHARGES
During 2000, the Company recorded employee separation and plant
phase-out charges of $3.4 million ($0.6 million of which pertained to inventory
write-offs and was recorded in cost of sales) relating to the closing of an
engineered films facility. The facility is expected to be closed by the end of
the first quarter in 2001. The charge of $2.8 million included $2.3 million for
involuntary severance benefits for 80 employees whose positions will be
eliminated, a $0.3 million write-off of intangible assets and a $0.2 million
pension curtailment charge. At December 31, 2000, two positions had been
eliminated and approximately $0.2 million in severance benefits had been paid.
The Company expects most of the remaining positions to be eliminated by the end
of the first quarter of 2001, and the remaining $2.1 million in cash payments
for severance to be paid by the end of 2001.
29 POLYONE CORPORATION
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1999, the Company recorded net employee separation and plant
phase-out charges totaling $0.5 million, plus $1.2 million of additional
depreciation expense related to the consolidation of its compounding operations,
which began in the fourth quarter of 1998 when the Company recorded employee
separation and plant phase-out charges totaling $14.6 million. The plan included
the closing of two manufacturing facilities and the partial closing of
manufacturing lines at other plants. The consolidation resulted in the write-off
of software, machinery and equipment; cost associated with the elimination of
201 positions; and costs associated with demolition and lease termination. At
December 31, 1999, all positions were eliminated and all manufacturing lines
were closed. The cash costs related to site demolition and severance were fully
paid in 2000.
Note R
- - SHAREHOLDERS' EQUITY
The Company's incentive stock plans provide for the awarding or
granting of options to purchase common stock of the Company. Generally, options
granted become exercisable at the rate of 35% after one year, 70% after two
years and 100% after three years. Certain options granted under the Company's
long-term incentive plan are exercisable after six years, with accelerated
vesting based upon achievement of target stock prices. The term of each option
cannot extend beyond 10 years from the date of grant. Certain options carry
limited stock appreciation rights exercisable in the event of a change in
control. All options under the plans have been granted at 100% of market (as
defined) on the date of the grant. The Company also has a stock plan for
non-employee directors under which options are granted.
During 1998, the Company issued 2.2 million stock options under a
three-year, long-term incentive plan. Two-thirds of these options become
exercisable after six years, with accelerated vesting if target stock prices are
met. The remainder of these options is exercisable only if the target stock
prices are met. As a result of the consolidation, all outstanding options, with
the exception of unearned challenge grant options, became vested under the
change in control provisions of the then stock plans.
In August 2000, shareholders approved the 2000 Stock Incentive Plan
(Incentive Plan). The Incentive Plan is administered by a committee of the Board
of Directors. Officers, employees and non-employee directors are eligible to
participate. The Incentive Plan provides for the award of a broad variety of
stock-based compensation alternatives such as non-qualified stock options,
incentive stock options, restricted stock, performance awards and stock
appreciation rights. The total number of shares that may be granted under the
Incentive Plan is 4.5 million shares. Options granted will expire no more than
10 years after the grant date. The exercise price is equal to 100% of the fair
market value on the date of grant.
A summary of stock option activity follows:
Weighted-Average
In thousands, except per share data Shares Exercise Price
------ -----
Outstanding at January 1, 1998 5,068 $10.41
Issued 2,924 10.49
Exercised (252) 9.47
Forfeited (124) 12.44
------ -----
Outstanding at January 1, 1999 7,616 10.44
Issued 298 12.33
Exercised (902) 9.82
Forfeited (74) 10.93
------ -----
Outstanding at December 31, 1999 6,938 10.63
Hanna options assumed at merger date 4,295 15.24
Issued 2,628 10.19
Exercised (121) 10.32
Forfeited (815) 14.85
------ -----
Outstanding at December 31, 2000 12,925 11.79
Exercisable at December 31, 2000 10,099 12.46
Exercisable at December 31, 1999 4,586 10.58
Exercisable at December 31, 1998 4,292 10.35
------ -----
At December 31, 2000:
Exercisable options:
Exercise price: $7.46 - $17.00 8,989 11.42
Exercise price: $17.01 - $26.82 1,110 20.96
Unexercisable options:
Exercise price: $7.46 - $17.00 2,826 9.40
Exercise price: $17.01 - $26.82 -- --
====== =====
At December 31, 2000, the weighted-average remaining life for options
with an exercise price of $17.00 or less was 4.5 years. Options with an exercise
price of more than $17.00 had a remaining life of 5.4 years.
POLYONE CORPORATION 30
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Company's incentive programs, senior executives and other key
employees are also eligible to receive annual bonus awards, consisting of stock
or a combination of stock and cash. Under these plans, performance measures are
established and used to determine the payout, if any. The Company granted 0.2
million shares of stock under these annual incentive stock plans in each of the
past three years. These annual stock awards are restricted, with the restriction
generally lapsing over three years. As a result of the consolidation, all
restrictions lapsed under the change in control provisions of the then plan.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its incentive plans.
Accordingly, no compensation cost has been recognized for its fixed-option plans
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant. Had the compensation cost
for the stock options granted been determined based upon the fair value at the
grant date, consistent with the fair value method of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
earnings per share would have been reduced by $4.0 million ($0.06 per diluted
share) in 2000, $2.1 million ($0.05 per diluted share) in 1999 and $1.9 million
($0.04 per diluted share) in 1998. The weighted-average fair value of stock
options granted per share was $1.06, $4.76 and $3.27 for 2000, 1999 and 1998,
respectively. The fair value of the stock options at the grant date was
estimated using the Black-Scholes option pricing model, with an assumed
risk-free interest rate of 5.2%, 6.1% and 4.8%; an assumed dividend yield of
2.0%, 1.7% and 2.5%; and stock price volatility of 36.7%, 32.7% and 29.9% for
2000, 1999 and 1998, respectively. A seven-year weighted-average life was used
for all periods.
The compensation cost recognized relating to the stock portion of the
annual incentive plans, three-year incentive plan and amortization of restricted
stock awarded at the IPO amounted to $10.3 million, $5.8 million and $4.9
million in 2000, 1999 and 1998, respectively. The weighted-average fair value
per share of restricted stock and stock awards under the long-term incentive
plan on the grant date was $14.95, $11.69 and $10.38 for 2000, 1999 and 1998,
respectively.
At December 31, 2000, approximately 12.9 million shares were reserved
for future issuance upon exercise of stock options previously granted, and
approximately 8.8 million shares were available for future grants under the
Company's incentive plans.
In May 2000, the Company established a Share Ownership Trust (SOT) with
an initial contribution of 1.0 million shares from treasury. The SOT will serve
over time as a vehicle to minimize future share dilution by issuing shares
associated with the exercise of stock options and by funding contributions to
other equity-related programs. Hanna also has a SOT, which is used to fund a
portion of employee compensation and employee benefit plans. Shares remaining in
the SOT are adjusted at each balance sheet date to their respective market
value, with the offsetting entry to additional paid-in capital. Shares remaining
in the SOT are not considered outstanding for purposes of computing earnings per
share.
Note S
- - SEGMENT INFORMATION
The Company operates primarily in four business segments: the
Performance Plastics segment, the Elastomers and Additives (E&A) segment, the
Distribution segment, and the Resin and Intermediates (R&I) segment. The
addition of the E&A and Distribution segments in 2000 is a result of the merger
with Hanna. The Performance Plastics segment is a combination of the former Geon
Performance Polymers & Services segment and Hanna's Plastic Processing segment.
The accounting policies of each business segment are consistent with those
described in the "Summary of Significant Accounting Policies." Inter-segment
sales are accounted for at prices generally approximating those for similar
transactions with unaffiliated customers. The elimination of inter-segment sales
revenue in 1998 and 1999 is primarily for sales from the R&I segment to the
Performance Plastics segment, and is included in the "Other" segment. Certain
other corporate expenses and eliminations are also included in the "Other"
segment. Business segment assets consist primarily of customer receivables,
inventories, net property and goodwill. Cash, sales of accounts receivable and
certain other assets not identified with a specific segment are included in the
"Other" segment.
POLYONE CORPORATION
31
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Resins &
Performance Elastomers Inter-
In millions Total Plastics & Additives Distribution mediates Other
-------- -------- -------- -------- -------- --------
YEAR ENDED DECEMBER 31, 2000
Net sales $1,887.8 $1,594.7 $ 145.8 $ 158.9 $ -- $ (11.6)
Operating income (loss) 64.8 52.5 7.6 2.1 27.9 (25.3)
Employee separation and plant phase-out 2.8 2.8
Charge for acquired profit in inventory 2.8 2.3 0.5
Merger and integration costs 9.5 9.5
Pension termination and debt placement costs 1.6 1.6
-------- -------- -------- -------- -------- --------
Operating income (loss) before restructuring costs,
acquired profit in inventory, merger and
integration costs, and pension termination and
debt placement costs 81.5 57.6 8.1 2.1 27.9 (14.2)
Depreciation and amortization 57.4 49.5 5.8 2.1
-------- -------- -------- -------- -------- --------
Operating income (loss) before depreciation and
amortization, restructuring costs, acquired profit
in inventory, merger and integration costs, and
pension termination and debt placement costs 138.9 107.1 13.9 4.2 27.9 (14.2)
-------- -------- -------- -------- -------- --------
Total assets 2,460.7 1,607.6 320.9 167.0 262.5 102.7
Capital expenditures 62.7 42.9 7.1 0.6 12.1
======== ======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1999
Net sales $1,261.2 $1,107.1 $ 191.5 $ (37.4)
Operating income (loss) 99.7 104.1 1.3 (5.7)
Employee separation and plant phase-out 0.5 0.5
Other restructuring costs - accelerated depreciation 1.2 1.2
Restructuring costs incurred by OxyVinyls 0.8 0.8
Charge for acquired profit in inventory 3.2 3.2
-------- -------- -------- -------- -------- --------
Operating income (loss) before restructuring costs
and acquired profit in inventory 105.4 109.0 2.1 (5.7)
Depreciation and amortization 43.2 33.1 10.1
-------- -------- -------- -------- -------- --------
Operating income (loss) before depreciation and
amortization, restructuring costs, and acquired
profit in inventory 148.6 142.1 12.2 (5.7)
-------- -------- -------- -------- -------- --------
Total assets 1,162.6 905.2 247.7 9.7
Capital expenditures 60.1 49.1 4.0 7.0
======== ======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1998
Net sales $1,284.4 $ 839.2 $ 577.7 $ (132.5)
Operating income (loss) 41.0 79.2 (36.4) (1.8)
Employee separation and plant phase-out 14.6 14.6
-------- -------- -------- -------- -------- --------
Operating income (loss) before restructuring costs 55.6 93.8 (36.4) (1.8)
Depreciation and amortization 57.9 28.6 28.8 0.5
-------- -------- -------- -------- -------- --------
Operating income (loss) before depreciation and
amortization and restructuring costs 113.5 122.4 (7.6) (1.3)
-------- -------- -------- -------- -------- --------
Total assets 802.0 463.4 347.8 (9.2)
Capital expenditures 40.7 21.7 18.8 0.2
======== ======== ======== ======== ======== ========
POLYONE CORPORATION 32
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings of equity affiliates are included in the related business
segment earnings (loss) and the investment in equity affiliates is included in
related business segment assets. Amounts related to equity affiliates included
in the business segment information are as follows:
In millions 2000 1999 1998
------- ------- -------
Earnings of equity affiliates:
Performance Plastics $ 1.0 $ 0.1 $ 0.5
R&I 37.9 9.6 3.2
------- ------- -------
Total $ 38.9 $ 9.7 $ 3.7
======= ======= =======
Investment in equity affiliates:
Performance Plastics $ 60.0 $ 17.5 $ 3.2
R&I 251.6 247.6 16.6
------- ------- -------
Total $ 311.6 $ 265.1 $ 19.8
======= ======= =======
The Company's sales are principally to customers in the United States,
Europe, Canada and Asia/Pacific, and the majority of the Company's assets are
located in these countries. Below is a summary of sales based on the country
from which the sales originated, and assets by location.
In millions 2000 1999 1998
-------- -------- --------
Net sales:
United States $1,502.9 $1,056.1 $1,004.7
Europe 132.2 -- --
Canada 215.4 190.6 279.7
Other 37.3 14.5 --
-------- -------- --------
Long-lived assets:
United States $1,322.6 $ 690.2 $ 443.7
Europe 194.6 -- --
Canada 61.8 60.9 105.5
Other 85.2 53.8 18.1
======== ======== ========
Note T
- - WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE
In millions 2000 1999 1998
---- ---- ----
Weighted-average shares - basic:
Weighted-average shares
outstanding 61.8 47.4 46.6
Less unearned portion of
restricted stock awards
included in outstanding shares (0.4) (0.8) (0.8)
---- ---- ----
61.4 46.6 45.8
==== ==== ====
Weighted-average shares - diluted:
Weighted-average shares
outstanding 61.8 47.4 46.6
Plus dilutive impact of stock
options and stock awards 0.2 1.2 0.6
---- ---- ----
62.0 48.6 47.2
==== ==== ====
The historical share amounts have been restated to reflect the
conversion of each outstanding share of Geon common stock into two shares of
PolyOne.
Note U
- - FINANCIAL INSTRUMENTS
The Company transacts business in various foreign currencies and is
subject to financial exposure from foreign exchange rate movement between the
date a foreign currency transaction is recorded and the date it is consummated.
To mitigate this risk, the Company enters into foreign exchange contracts. Gains
and losses on these contracts generally offset gains or losses on the assets and
liabilities being hedged, and are recorded as other income or expense.
Additionally, the Company enters into intercompany lending transactions. The
Company also enters into foreign exchange contracts related to this foreign
exchange exposure. Realized and unrealized gains and losses on these contracts
are recorded as other income or expense. The Company does not hold or issue
financial instruments for trading purposes.
- - 33 POLYONE CORPORATION
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes by currency the contractual amounts of the
Company's foreign exchange contracts at December 31, 2000 (in millions). Foreign
currency amounts are translated at exchange rates as of December 31, 2000. The
"Buy" amounts represent the U.S. dollar equivalent of commitments to purchase
foreign currencies, and the "Sell" amounts represent the U.S. dollar equivalent
of commitments to sell foreign currencies.
Currency Buy Sell
----- -----
U.S. dollar $75.2 $39.6
Euro 3.5 76.7
British pound sterling -- 9.3
Canadian dollar 35.7 --
Other 7.6 --
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet
approximate fair value.
LONG- AND SHORT-TERM DEBT: The carrying amount of the Company's short-term
borrowings approximates fair value. The fair value of the Company's senior
notes, debentures and medium-term notes is based on quoted market prices. The
carrying amount of the Company's borrowings under its variable interest rate
long-term revolving credit agreements and other long-term borrowings
approximates fair value.
FOREIGN EXCHANGE CONTRACTS: The fair value of short-term foreign exchange
contracts is based on exchange rates at December 31, 2000. The fair value of
long-term foreign exchange contracts is based on quoted market prices for
contracts with similar maturities.
The carrying amounts and fair values of the Company's financial
instruments at December 31, 2000, are as follows (in millions). Carrying amounts
of the Company's financial instruments at December 31, 1999, approximate fair
value.
Carrying Fair
Amount Value
------ ------
Cash and cash equivalents $ 37.9 $ 37.9
Long-term debt
9.375% senior notes 91.1 93.4
6.875% debentures 75.0 65.9
7.500% debentures 50.0 48.6
Medium-term notes 149.4 155.2
Bank borrowings 279.5 279.5
Foreign exchange contracts (3.7) (3.7)
- - CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This annual report contains statements concerning trends and other
forward-looking information affecting or relating to PolyOne Corporation and its
industries that are intended to qualify for the protections afforded
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. Actual results could differ materially from such statements for a
variety of factors including, but not limited to: (1) the risk that the former
Geon and M.A. Hanna businesses will not be integrated successfully; (2)
inability to achieve or delays in achieving savings related to the consolidation
and restructuring programs; (3) unanticipated delays in achieving or inability
to achieve cost reduction and employee productivity goals; (4) costs related to
the consolidation of Geon and M.A. Hanna; (5) 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; (6) unanticipated changes in world, regional or
U.S. plastic, rubber and PVC consumption growth rates affecting the Company's
markets; (7) unanticipated changes in global industry capacity or in the rate at
which anticipated changes in industry capacity come online in the PVC, VCM,
chlor-alkali or other industries in which the Company participates; (8)
fluctuations in raw material prices and supply, in particular fluctuations
outside the normal range of industry cycles; (9) unanticipated production
outages or material costs associated with scheduled or unscheduled maintenance
programs; (10) unanticipated delay in realizing, or inability to realize,
expected cost savings from acquisitions; (11) unanticipated costs or
difficulties and delays related to the operation of the joint venture entities;
(12) lack of day-to-day operating control, including procurement of raw material
feedstocks, of the OxyVinyls partnership; (13) lack of direct control over the
reliability of delivery and quality of the primary raw materials utilized in the
Company's products; (14) partial control of investment decisions and dividend
distribution policy of the OxyVinyls partnership.
POLYONE CORPORATION 34
37
Other
QUARTERLY DATA
(Unaudited) 2000 QUARTERS 1999 QUARTERS
------------------------------------------- -------------------------------------------
In millions, except per share data Fourth Third Second First Fourth Third Second First
--------- ---------- ---------- --------- --------- --------- --------- ---------
Sales $ 702.8 $ 478.3 $ 361.2 $ 345.5 $ 319.2 $ 319.3 $ 296.9 $ 325.8
Employee separation and plant phase-out -- -- 2.8 -- (1.9) -- 1.3 1.1
Operating income (loss) (6.4) 11.1 30.4 29.7 27.7 26.0 24.2 21.8
Income (loss) before cumulative effect
of a change in accounting (13.2) 0.5 14.8 13.8 13.9 12.7 68.5 11.1
Net income (loss) (13.2) 0.5 14.8 13.8 13.9 12.7 68.5 9.6
--------- ---------- ---------- --------- --------- --------- --------- ---------
Earnings (loss) per share, before
cumulative effect of a change in
accounting:
Basic $ (0.15) $ 0.01 $ 0.31 $ 0.29 $ 0.30 $ 0.27 $ 1.48 $ 0.24
Diluted (0.15) 0.01 0.31 0.29 0.28 0.26 1.40 0.23
Earnings (loss) per share:
Basic $ (0.15) $ 0.01 $ 0.31 $ 0.29 $ 0.30 $ 0.27 $ 1.48 $ 0.21
Diluted (0.15) 0.01 0.31 0.29 0.28 0.26 1.40 0.20
Dividend paid per common share $ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625 $ 0.0625
Common stock price
High $ 8.44 $ 9.88 $ 13.00 $ 17.25 $ 16.75 $ 17.88 $ 18.50 $ 12.94
Low 4.56 6.19 8.69 8.53 12.34 12.50 11.47 10.78
2000: Second-quarter results include $2.8 million ($1.7 million after
tax) for employee separation and plant phase-out, a $0.6 million charge ($0.4
million after tax) for inventory write-off associated with a restructuring, a
$0.8 million charge ($0.5 million after tax) for Board of Directors pension
buyout and a $0.8 million charge ($0.5 million after tax) for write-off of costs
associated with postponed debt placement. Third-quarter results include a charge
of $7.8 million ($3.2 million after tax) for merger and integration costs and a
$1.2 million charge ($0.8 million after tax) related to acquired profit on
inventory of acquired businesses. Fourth-quarter results include a $1.7 million
charge ($1.0 million after tax) for merger and integration costs, a $1.6 million
charge ($0.9 million after tax) related to acquired profit on inventory of
acquired businesses and a tax credit of $1.5 million from a reduction of
deferred taxes due to a change in German income tax rates.
1999: First-quarter results include a $1.7 million charge ($1.0 million
after tax) for employee separation and plant phase-out ($0.6 million of
accelerated depreciation is included in depreciation and amortization expense).
Second-quarter results include a $1.9 million charge ($1.1 million after tax)
for employee separation and plant phase-out, including accelerated depreciation
of $0.6 million included in depreciation and amortization expense.
Second-quarter results also include Geon's share of a restructuring charge
recognized by OxyVinyls of $0.8 million ($0.5 million after tax) and a $92.9
million gain ($56.8 million after tax) on the formation of joint ventures.
Third-quarter results include a $3.2 million charge ($2.0 million after tax)
related to acquired profit on inventory of acquired businesses. Fourth-quarter
results include a reduction in the restructuring charge of $1.9 million ($1.1
million after tax) to reflect revised estimates of remaining costs.
Fourth-quarter results also include an adjustment to increase the gain
recognized on the joint venture formation of $0.6 million ($0.4 million after
tax).
- - 35 POLYONE CORPORATION
38
Other
SELECTED FINANCIAL DATA
In millions, except per share data 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Sales $ 1,887.8 $ 1,261.2 $ 1,284.4 $ 1,250.0 $ 1,144.4
Employee separation and plant phase-out 2.8 0.5 14.6 15.0 --
Operating income 64.8 99.7 41.0 51.7 30.9
Income before extraordinary item and cumulative effect
of a change in accounting 15.9 106.2 13.8 22.5 12.2
Cumulative effect of change in method of accounting -- (1.5) -- -- --
Net income 15.9 104.7 13.8 22.5 12.2
--------- --------- --------- --------- ---------
Basic earnings per share:
Before extraordinary item and change in method of accounting $ 0.26 $ 2.28 $ 0.30 $ 0.49 $ 0.25
Change in method of accounting -- (0.03) -- -- --
Net income 0.26 2.25 0.30 0.49 0.25
--------- --------- --------- --------- ---------
Diluted earnings per share:
Before extraordinary item and change in method of accounting $ 0.26 $ 2.18 $ 0.29 $ 0.48 $ 0.25
Change in method of accounting -- (0.03) -- -- --
Net income 0.26 2.15 0.29 0.48 0.25
Dividends per common share 0.25 0.25 0.25 0.25 0.25
Total assets $ 2,460.7 $ 1,162.6 $ 802.0 $ 872.9 $ 736.9
Long-term debt 442.4 130.9 135.4 136.4 137.2
The historical results include the following business acquisitions,
from the acquisition date indicated forward: Synergistics Industries Limited,
from October 31, 1997; Plast-O-Meric, Inc. and the Wilflex division of Flexible
Products Company, from June 1, 1998; Adchem, Inc., from September 1, 1998; Acrol
Holdings Limited, from July 1, 1999; O'Sullivan Corporation, from July 8, 1999;
Dennis Chemical Company, Inc., from September 8, 1999; and M.A. Hanna Company,
from September 1, 2000. In addition, 1999 results of operations reflect the
formation of OxyVinyls, LP on May 1, 1999, and the contribution of substantially
all of Geon's formerly consolidated R&I business segment operations to the
partnership. In connection with this, the Company acquired businesses from
Occidental Chemical Corporation and formed a powder compounding joint venture,
all of which is included in the Company's consolidated results of operations
from May 1, 1999.
POLYONE CORPORATION 36 -
39
REPORT OF INDEPENDENT AUDITORS AND MANAGEMENT REPORT
- - TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF POLYONE CORPORATION:
We have audited the accompanying consolidated balance sheets of PolyOne
Corporation and subsidiaries as of December 31, 2000, and 1999, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 2000, appearing on pages 13,
15, and 17 through 34. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of Oxy
Vinyls, LP (a limited partnership in which the Company has a 24% interest) have
been audited by other auditors whose reports have been furnished to us; insofar
as our opinion relates to data included for Oxy Vinyls, LP, it is based solely
on their reports.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PolyOne Corporation
and subsidiaries at December 31, 2000, and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 30, 2001
- - MANAGEMENT REPORT
Management is responsible for the preparation of PolyOne Corporation's
consolidated financial statements and all of the related information appearing
in this annual report in accordance with generally accepted accounting
principles. Where necessary, this information reflects estimates that are based
upon currently available information and management's judgments.
Management is also responsible for maintaining a system of internal
accounting controls, with the objective of providing reasonable assurance that
PolyOne's assets are safeguarded against material loss from unauthorized use or
disposition and that authorized transactions are properly recorded to permit the
preparation of accurate financial information. Cost/benefit judgments are an
important consideration in this regard. The effectiveness of internal controls
is maintained by personnel selection and training, division of responsibilities,
establishment and communication of policies, and ongoing internal review
programs and audits.
Management believes that PolyOne's system of internal accounting
controls as of December 31, 2000, was effective and adequate to accomplish the
objectives described above.
Thomas A. Waltermire
Chairman of the Board, President and Chief Executive Officer
W. David Wilson
Vice President and Chief Financial Officer
January 30, 2001
37 POLYONE CORPORATION
40
CORPORATE INFORMATION
EXECUTIVES AND OFFICERS
THOMAS A. WALTERMIRE
Chairman of the Board, President and Chief Executive Officer
ROGER W. AVAKIAN
Chief Technology Officer
BERNARD BAERT
Vice President,
International, Plastic Compounds and Colors Group
DENIS L. BELZILE
Vice President,
Specialty Resins and Formulators
DENNIS A. COCCO
Chief Investor and Communications Officer
DIANE J. DAVIE
Chief Human Resources Officer
RONALD C. KAMINSKI SR.
Chief Environment, Safety and Quality Officer
DANIEL L. KICKEL
Chief Sourcing Officer
DONALD P. KNECHTGES
Chief Development Officer
V. LANCE MITCHELL
Group Vice President,
Plastic Compounds and Colors
DAVID D. QUESTER
Vice President, Engineered Films
JOHN E. QUINN
Group Vice President, Elastomers and Performance Additives
MICHAEL L. RADEMACHER
Group Vice President, Distribution
JOHN L. RASTETTER
Treasurer
GREGORY L. RUTMAN
Chief Legal Officer
GREGORY P. SMITH
Controller
KENNETH M. SMITH
Chief Information Officer
W. DAVID WILSON
Chief Financial Officer
STOCK EXCHANGE LISTING
PolyOne Corporation Common Stock is listed on the New York Stock
Exchange.SYMBOL: POL.
STOCKHOLDER INQUIRIES
If you have any questions concerning your account as a stockholder, name or
address changes, inquiries regarding dividend checks or stock certificates, or
if you need tax information regarding your account, please contact our transfer
agent:
EquiServe Trust Company, N.A.
P.O. Box 2500
Jersey City, New Jersey 07303
PHONE: (800) 317-4445
Complimentary copies of Form 10-K and other reports filed with the Securities
and Exchange Commission are available online at www.polyone.com or from:
Investor Affairs Administrator
PolyOne Corporation
Suite 36-5000
200 Public Square
Cleveland, Ohio 44114
PHONE: (216) 589-4376
ANNUAL MEETING
The annual meeting of stockholders of PolyOne Corporation will be held May 2,
2001, at 9:00 a.m. at The Forum Conference and Education Center, One Cleveland
Center, 1375 East 9th Street, Cleveland, Ohio.
The meeting notice and proxy materials were mailed to stockholders with this
report. PolyOne Corporation urges all stockholders to vote their proxies so that
they can participate in the decisions at the annual meeting.
FINANCIAL INFORMATION
Security analysts and representatives of financial institutions are invited to
contact:
W. David Wilson
Chief Financial Officer
PHONE: (216) 589-4038
FAX: (216) 589-4280
E-MAIL: wdavid.wilson@polyone.com
FINANCIAL INFORMATION AND MEDIA CONTACT
Dennis A. Cocco
Chief Investor and Communications Officer
PHONE: (216) 589-4018
FAX: (216) 589-4077
E-MAIL: dennis.cocco@polyone.com
AUDITORS
Ernst & Young LLP
1300 Huntington Building
925 Euclid Avenue
Cleveland, Ohio 44115-1405
INTERNET ACCESS
Information on PolyOne's products and services, news releases, EDGAR filings,
Form 10-K, 10-Q, etc., as well as an electronic version of this annual report,
are available on the Internet at www.polyone.com.
38
41
BOARD OF DIRECTORS
THOMAS A. WALTERMIRE, 51
Chairman of the Board, President and Chief Executive Officer
JAMES K. BAKER, 69
Retired Chairman and Chief Executive Officer, Arvin Industries, Inc.
Committees:(4*, 5)
J. DOUGLAS CAMPBELL, 59
Retired President and Chief Executive Officer, Arcadian Corporation
Committees:(1, 4)
DR. CAROL A. CARTWRIGHT, 59
President, Kent State University
Committees:(3, 4)
GALE DUFF-BLOOM, 61
Retired President, Company Communications and Corporate Image, J. C. Penney
Company, Inc. Committees:(2*, 5)
WAYNE R. EMBRY, 63
Retired President and Chief Operating Officer,
Team Division, Cleveland Cavaliers Committees:(2, 3)
ROBERT A. GARDA, 61
Executive-in-Residence, The Fuqua School of Business, Duke University
Committees:(1, 4)
GORDON D. HARNETT, 58
Chairman, President and Chief Executive Officer, Brush Engineered Materials Inc.
Committees:(1*, 3)
DAVID H. HOAG, 61
Retired Chairman, LTV Corporation Committees:(4, 5)
MARVIN L. MANN, 67
Retired Chairman,
Lexmark International, Inc. Committees:(2, 5*)
D. LARRYMOORE, 64
Retired President and Chief Operating Officer, Honeywell, Inc.
Committees:(1, 3*)
FARAH M. WALTERS, 56
President and Chief Executive Officer, University Hospitals Health System and
University Hospitals of Cleveland Committees:(2, 3)
COMMITTEES:
(1) Audit
(2) Compensation
(3) Environmental, Health and Safety
(4) Financial Policy
(5) Nominating and Governance
* Denotes Chairperson
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