1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 2001. COMMISSION FILE NUMBER 1-16091.
POLYONE CORPORATION
-------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1730488
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Suite 36-5000, 200 Public Square, Cleveland, Ohio 44114-2304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 589-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _
--
As of April 30, 2001, there were 93,856,845 common shares outstanding. There is
only one class of common shares.
2
Item I.
Part I. Financial Information.
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
Three Months Ended
March 31,
-----------------------------
2001 2000
------------- -------------
Sales $ 709.7 $ 345.5
Operating costs and expenses:
Cost of sales 598.4 300.8
Selling and administrative 81.9 24.2
Depreciation and amortization 26.4 9.5
Employee separation and plant phase-out 8.9 -
Merger and integration costs 5.3 -
(Income) loss from equity affiliates and minority interest 12.1 (18.7)
------------- -------------
Operating income (loss) (23.3) 29.7
Interest expense (12.9) (7.0)
Interest income .2 .5
Other expense, net (2.3) (.6)
------------- -------------
Income (loss) before income taxes (38.3) 22.6
Income tax (expense) benefit 16.9 (8.8)
------------- -------------
Net income (loss) $ (21.4) $ 13.8
============= =============
Earnings (loss) per common share:
Basic $ (.24) $ .29
Diluted $ (.24) $ .29
Weighted average shares used to compute earnings per share:
Basic 89.7 47.0
Diluted 90.1 48.4
Dividends paid per share of common stock $ .0625 $ .0625
See Accompanying Notes to the Unaudited Condensed
Consolidated Financial Statements
1
3
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN MILLIONS)
March 31, December 31,
ASSETS 2001 2000
----------------- -----------------
Current assets:
Cash and cash equivalents $ 32.1 $ 37.9
Trade accounts receivable, net 291.6 330.4
Other receivables 9.0 17.1
Inventories 319.1 337.1
Deferred income tax assets 53.9 53.9
Other current assets 16.5 20.1
----------------- -----------------
Total current assets 722.2 796.5
Property, net 696.5 703.8
Investment in equity affiliates 296.1 311.6
Goodwill and other intangible assets, net 527.9 540.3
Other non-current assets 109.2 108.5
----------------- -----------------
Total assets $ 2,351.9 $ 2,460.7
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank debt $ 178.3 $ 237.2
Accounts payable 345.7 319.4
Accrued expenses 149.4 175.7
Current portion of long-term debt 2.0 2.6
----------------- -----------------
Total current liabilities 675.4 734.9
Long-term debt 439.7 442.4
Deferred income tax liabilities 123.0 132.8
Post-retirement benefits other than pensions 129.8 129.9
Other non-current liabilities, including pensions 179.4 179.1
Minority interest in consolidated subsidiaries 13.3 14.0
----------------- -----------------
Total liabilities 1,560.6 1,633.1
Shareholders' equity:
Preferred stock, 40.0 shares authorized, no shares issued
Common stock, $.01 par, 400.0 shares authorized, 122.2 shares
issued at March 31, 2001 and December 31, 2000 1.2 1.2
Other shareholders' equity 790.1 826.4
----------------- -----------------
Total shareholders' equity 791.3 827.6
----------------- -----------------
Total liabilities and shareholders' equity $ 2,351.9 $ 2,460.7
================= =================
See Accompanying Notes to the Unaudited Condensed
Consolidated Financial Statements
2
4
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
Three Months Ended
March 31,
------------------------------
2001 2000
----------- ------------
OPERATING ACTIVITIES
Net income (loss) $ (21.4) $ 13.8
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Employee separation and plant phase-out 8.9 -
Depreciation and amortization 26.4 9.5
Companies carried at equity:
(Income) loss 12.1 (18.7)
Dividends received 1.0 8.2
Provision (benefit) for deferred income taxes (9.1) 8.5
Change in assets and liabilities:
Operating working capital:
Accounts receivable 40.7 (36.6)
Inventories 14.2 (1.4)
Accounts payable 30.6 (7.8)
Accrued expenses and other (25.1) (13.3)
----------- ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 78.3 (37.8)
INVESTING ACTIVITIES
Capital expenditures (19.3) (6.3)
Return of cash from equity affiliates 2.2 1.8
Other (3.1) -
----------- ------------
NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES 58.1 (42.3)
FINANCING ACTIVITIES
Change in short-term debt (59.4) 34.1
Change in long-term debt 1.9 -
Net proceeds from issuance of common stock - 0.5
Dividends (5.6) (3.1)
----------- ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (63.1) 31.5
Effect of exchange rate changes on cash (0.8) -
----------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (5.8) (10.8)
Cash and cash equivalents at beginning of year 37.9 51.2
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32.1 $ 40.4
=========== ============
See Accompanying Notes to the Unaudited Condensed
Consolidated Financial Statements
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5
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(Dollars in Millions, Shares in Thousands)
COMMON
SHARES ADDITIONAL COMMON
COMMON HOLD IN COMMON PAID IN RETAINED SHARES HELD
SHARES TREASURY TOTAL SHARES CAPITAL EARNINGS IN TREASURY
-----------------------------------------------------------------------------------
BALANCE JANUARY 1, 2000 27,975 4,245 $334.7 $ 2.8 $ 297.3 $168.3 $ (104.5)
Non-owner equity changes:
Net income 13.8 13.8
Translation adjustment (0.6)
-----------
Total non-owner equity changes 13.2
Stock-based compensation and
exercise of options (118) 1.0 (2.2) 3.1
Cash dividends (3.1) (3.1)
-----------------------------------------------------------------------------------
BALANCE MARCH 31, 2000 27,975 4,127 $345.8 $ 2.8 $ 295.1 $179.0 $ (101.4)
===================================================================================
BALANCE JANUARY 1, 2001 122,192 28,315 $827.6 $ 1.2 $ 1,057.6 $169.3 $ (321.9)
Non-owner equity changes:
Net loss (21.4) (21.4)
Translation adjustment (10.4)
-----------
Total non-owner equity changes (31.8)
Stock-based compensation and
benefits and exercise of options 16 1.1
Adjustment to market value - 12.4
Cash dividends (5.6) (5.6)
-----------------------------------------------------------------------------------
BALANCE MARCH 31, 2001 122,192 28,331 $791.3 $ 1.2 $ 1,070.0 $142.3 $ (321.9)
===================================================================================
ACCUMULATED
SHARE OTHER NON-
OWNERSHIP OWNER EQUITY
TRUSTS CHANGES
-------------------------
BALANCE JANUARY 1, 2000 $ - $ (29.2)
Non-owner equity changes:
Net income
Translation adjustment (0.6)
Total non-owner equity changes
Stock-based compensation and
exercise of options 0.1
Cash dividends
-------------------------
BALANCE MARCH 31, 2000 $ - $ (29.7)
=========================
BALANCE JANUARY 1, 2001 $ (25.5) $ (53.1)
Non-owner equity changes:
Net loss
Translation adjustment (10.4)
Total non-owner equity changes
Stock-based compensation and
benefits and exercise of options 4.5 (3.4)
Adjustment to market value (12.4)
Cash dividends
-------------------------
BALANCE MARCH 31, 2001 $ (33.4) $ (66.9)
=========================
See Accompanying Notes to the Unaudited Condensed
Consolidated Financial Statements
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6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
---------------------------------------------------------------------
NOTE A - BASIS OF PRESENTATION
- ------------------------------
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). The
PolyOne consolidation has been accounted for as a purchase business combination,
with Geon as the acquiring enterprise. Accordingly, the Company's condensed
consolidated statements of operations under generally accepted accounting
principles for the three-months ended March 31, 2000 reflect only the operating
results of Geon prior to the consolidation. A preliminary assessment of the fair
value of the tangible and intangible assets and liabilities of the former Hanna
business has been reflected in both the reported and pro forma operating
results. The purchase price allocation reflected might be adjusted as estimated
fair values of assets acquired and liabilities assumed are finalized. For the
three-months ended March 31, 2001, there were no material adjustments made to
the purchase price allocation. 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. All per share data for all periods has been restated to reflect the
effects of the conversion.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion of
management contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These interim statements should be read in
conjunction with the financial statements and notes thereto incorporated by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
Operating results for the three months ended March 31, 2001 are not necessarily
indicative of the results expected in subsequent quarters or for the year ending
December 31, 2001.
NOTE B - ACCOUNTING PRONOUNCEMENTS
- ----------------------------------
Effective January 1, 2001 the Company adopted the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The standard requires all derivatives, whether
designated in hedging relationships or not, to be recorded on the balance sheet
at fair value. Due to the short-term nature of the Company's forward exchange
contracts at March 31, 2001, the derivatives were marked to market through the
income statement consistent with the Company's current accounting policy for
these contracts. Accordingly, the adoption of SFAS 133 had no impact on the
Company's results of operations or financial position.
NOTE C - INVENTORIES
- --------------------
Components of inventories are as follows:
March 31, December 31,
(Dollars in millions) 2001 2000
------------------ -----------------
Finished products and in-process inventories $ 197.8 $ 201.4
Raw materials and supplies 142.8 159.8
---------- ----------
340.6 361.2
LIFO Reserve (21.5) (24.1)
---------- ----------
Total Inventories $ 319.1 $ 337.1
========== ==========
NOTE D - INCOME TAXES
- ---------------------
The Company's reported effective tax rate was 44.1% and 38.9% for the
three-months ended March 31, 2001 and 2000, respectively. The principle
difference in the rate is due to non-deductible goodwill amortization resulting
from purchase accounting.
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NOTE F - INVESTMENT IN EQUITY AFFILIATE
- ---------------------------------------
The Company owns 24% of Oxy Vinyls, LP (OxyVinyls), a manufacturer and marketer
of PVC resins. OxyVinyls is the largest producer of PVC resins in North America.
The following table presents OxyVinyls' summarized results of operations for the
three-months ended March 31, 2001 and 2000, and summarized balance sheet
information as of March 31, 2001 and December 31, 2000.
For the Three Months Ended
(Dollars in millions) March 31,
2001 2000
---------------- ----------------
Net sales $ 439.6 $ 493.7
Operating income (loss) (44.8) 81.4
Partnership income (loss) as reported by OxyVinyls (49.4) 79.4
PolyOne's ownership of OxyVinyls 24% 24%
---------------- ----------------
PolyOne's proportionate share of OxyVinyls' earnings (11.9) 19.1
Amortization of the difference between PolyOne's investment
and its underlying share of OxyVinyls' equity 0.2 0.1
---------------- --- ----------------
Earnings of equity affiliate recorded by PolyOne $ (11.7) $ 19.2
================ ================
(Dollars in millions) March 31, December 31,
2001 2000
---------------- ----------------
Current assets $ 410.8 $ 338.1
Non-current assets 992.4 1,045.1
---------------- ----------------
Total assets 1,403.2 1,383.2
Current liabilities 201.3 238.2
Non-current liabilities 200.3 93.9
---------------- ----------------
Total liabilities 401.6 332.1
---------------- ----------------
Partnership capital $ 1,001.7 $ 1,051.1
================ ================
OxyVinyls loss during the first quarter of fiscal 2001 reported above includes a
special, pre-tax charge of $4.4 million, all of which related to involuntary
severance, outplacement costs and other employee related separation benefits.
The Company's proportionate share of this special item was $1.0 million.
NOTE G - SHAREHOLDERS' EQUITY
- -----------------------------
Effective May 2, 2001, the Board of Directors of the Company approved the
termination of both the M.A. Hanna Associates Ownership Trust and The Geon
Company Share Ownership Trust to simplify the administration of the Company's
stock-based compensation plans. PolyOne shares remaining in the two trusts will
be reacquired by the Company in accordance with the terms of the trusts and held
in treasury. The termination of the two trusts does not have any impact on
Company earnings or shareholders' equity.
During the first quarter of 2001, the Compensation Committee of PolyOne's Board
of Directors authorized the issuance of 532,800 shares of restricted PolyOne
stock to certain PolyOne executives. The restricted shares were valued at $7.22
per share and were issued from the Share Ownership Trust. Shares vest and
restrictions lapse three years from the date of grant. Accordingly, the Company
has recorded the grants as unearned compensation to be recognized as
compensation expense over the three-year vesting period.
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NOTE H - EARNINGS PER SHARE COMPUTATION
- ---------------------------------------
Weighted average shares outstanding are computed as follows:
(Shares in millions) Three Months Ended
March 31,
2001 2000
--------------- --------------
Weighted average shares outstanding - Basic
Average shares outstanding 90.1 47.8
Less unearned portion of restricted stock
awards included in outstanding shares (0.4) (0.8)
--------------- --------------
89.7 47.0
=============== ==============
Weighted average shares outstanding - Diluted
Average shares outstanding 90.1 47.8
Plus dilutive impact of stock options and
stock awards - 0.6
--------------- --------------
90.1 48.4
=============== ==============
Basic earnings (loss) per common share is computed as net income (loss)
available to common shareholders divided by weighted average basic shares
outstanding. Diluted earnings (loss) per common share is computed as net income
(loss) available to common shareholders divided by weighted average diluted
shares outstanding.
As disclosed in Note A above, the historical share amounts and related per share
data have been restated to reflect the conversion of each outstanding share of
Geon common stock into two common shares of PolyOne.
NOTE I - EMPLOYEE SEPARATION AND PLANT PHASE-OUT
- ------------------------------------------------
In March 2001, the Company announced its plan to eliminate 55 administrative and
manufacturing positions at three sites within the engineered films operations.
As a result, the Company recorded a special, pre-tax charge of $1.9 million,
all of which related to involuntary severance and other employee related
separation benefits. At March 31, 2001 the remaining accrual was $1.9 million
representing future cash severance and benefit payments. The Company projects
all positions to be eliminated by the end of the third quarter of 2001.
In January 2001, the Company announced its plan to close four plastic compounds
and colors operating plants within the United States, transferring production to
other Company manufacturing sites with available capacity and eliminating 65
positions. Related to this announcement, the Company has provided $1.7 million
within purchase accounting in addition recording a special, pre-tax charge of
$7.0 million. The charge to earnings included a $3.8 million non-cash write-off
of manufacturing assets, involuntary employee separation benefits of $2.1
million, and anticipated plant phase-out costs of $1.1 million. At March 31,
2001 the Company has remaining reserves of $2.4 million representing future cash
payments of employee separation and plant phase-out costs. As of April 30, 2001
two plants have been closed and 44 positions were eliminated. Remaining plant
closures and eliminations are projected to occur prior to the end of the third
quarter of 2001.
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 plant in Massachusetts. The accrual for employee separation and plant
phase-out costs was $2.1 million and $1.7 million for the periods ended December
31, 2000 and March 31, 2001, respectively. Cash payments made as a result of
closing the plant in February 2001 totaled $0.4 million for the three-months
ended March 31, 2001 and related to the elimination of 46 positions. Remaining
eliminations are projected to occur prior to the end of the third quarter of
2001.
NOTE J - MERGER AND INTEGRATION COSTS
- -------------------------------------
During the first quarter of fiscal 2001 the Company recorded $5.3 million for
certain costs associated with the consolidation and integration of Geon and
Hanna. The majority of this cost represents executive severance in connection
with a change in control resulting from the consolidation.
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NOTE K - FINANCING ARRANGEMENTS
- -------------------------------
In the first quarter the Company's accounts receivable sale facility was
increased $100 million to $200 million. As of March 31, 2001, $164 million of
this facility was being utilized. During May 2001 the Company also obtained
amendments to the October 2000 revolving credit agreements, which included a
$100 million reduction in available borrowings from an aggregate $400 million to
$300 million, effectively offsetting the increase in the receivable sale
facility.
NOTE L - 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. Inter-segment sales are
accounted for at prices generally approximating those for similar transactions
with unaffiliated customers and the elimination of inter-segment sales revenue
is included in the "Other" segment. Certain other corporate expenses and
eliminations are included in the "Other" segment. Business segment assets
consist primarily of customer receivables, inventories, net property and
goodwill. Cash, accounts receivable sold to a third party and certain other
assets not identified with a specific segment are included in the "Other"
segment.
(Dollars in millions) PERFORMANCE ELASTOMERS & RESINS &
THREE MONTHS ENDED MARCH 31, 2001 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER
----- ------------ ------------ ------------ ------------- ------
Net Sales $ 709.7 $ 488.8 $ 109.7 $ 121.1 $ - $ (9.9)
Operating income (loss) (23.3) (1.9) 2.7 1.1 (15.4) (9.8)
Employee separation and plant phase-out 9.9 8.9 - - 1.0 -
costs
Merger and integration costs 5.3 - - - - 5.3
----------------------------------------------------------------------------------
Operating income (loss) before employee
separation and plant phase-out, and
merger and integration costs (8.1) 7.0 2.7 1.1 (14.4) (4.5)
Depreciation and amortization 26.4 19.0 4.3 0.8 - 2.3
----------------------------------------------------------------------------------
Operating income (loss) before
depreciation and amortization, employee
separation and plant phase-out, and
merger and integration costs $ 18.3 $ 26.0 $ 7.0 $ 1.9 $ (14.4) $ (2.2)
==================================================================================
Total assets $ 2,351.9 $ 1,563.5 $ 321.9 $ 175.6 $ 247.0 $ 43.9
Capital Expenditures $ 19.3 $ 6.0 $ 4.5 $ 0.3 $ - $ 8.5
(Dollars in millions) PERFORMANCE ELASTOMERS & RESINS &
THREE MONTHS ENDED MARCH 31, 2000 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER
----- ------------ ------------ ------------ ------------- ------
Net Sales $ 345.5 $ 345.5 $ - $ - $ - $ -
Operating income (loss) 29.7 17.2 - - 16.5 (4.0)
Depreciation and amortization 9.5 9.5 - - - -
----------------------------------------------------------------------------------
Operating income (loss) before
depreciation and amortization $ 39.2 $ 26.7 $ - $ - $ 16.5 $ (4.0)
==================================================================================
Total assets $ 1,196.9 $ 930.2 $ - $ - $ 269.7 $ (3.0)
Capital expenditures $ 6.3 $ 6.3 $ - $ - $ - $ -
8
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NOTE M - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
There are pending or threatened against the Company or its subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to employment, commercial, product liability and
environmental matters, which seek damages or other remedies. The Company
believes that any liability that may finally be determined will not have a
material adverse effect on the Company's consolidated financial position.
The Company has accrued for environmental liabilities based upon estimates
prepared by its environmental engineers and consultants to cover probable future
environmental expenditures related to previously contaminated sites. The
accrual, totaling approximately $55.2 million at March 31, 2001, 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 to be undertaken at
these sites, it is possible that the ultimate costs to be incurred could be more
than the accrual recorded by as much as $19.0 million. The Company's estimate of
the liability may be revised as new regulations and technologies are developed
or additional information is obtained. Additional information related to the
Company's environmental liabilities is included in Note N to the consolidated
financial statements incorporated by reference from the Company's Annual Report
on Form 10-K for the year ended December 31, 2000.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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). 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
quarter ended March 31, 2000 reflect only the operating results of former Geon.
In the commentary that follows, "Pro Forma Operating Results" will also be
provided because of the significant and pervasive impact of the consolidation 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 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 2001 reported results 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.
Below is a summary of consolidated operating results showing both the "Reported
Results" for the quarters ended March 31, 2001 and 2000 and the "Pro Forma
Results" for the quarter ended March 31, 2000. Also summarized are the special
items included in these periods.
Pro Forma
(Dollars in millions) Reported Results Results
2001 2000 2000
-------------- -------------- --------------
Net Sales $ 709.7 $ 345.5 $ 825.2
Operating income (loss) (23.3) 29.7 51.1
Operating income (loss) before special items (8.1) 29.7 51.1
Operating income before special items,
depreciation and amortization 18.3 39.2 77.2
Net income (loss) (21.4) 13.8 26.2
Special items (income) - after tax 9.6 - -
-------------- -------------- --------------
Net income (loss) before special items $ (11.8) $ 13.8 $ 26.2
============== ============== ==============
Earnings (loss) per share, diluted $ (0.24) $ 0.29 $ 0.28
Per share effect of special items, increase $ 0.11 $ - $ -
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. 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.
10
12
Pro Forma
(Dollars in millions) Reported Results Results
2001 2000 2000
-------------- -------------- --------------
Net income (loss) - as reported $ (21.4) $ 13.8 $ 26.2
SPECIAL ITEMS:
- --------------
Employee separation and plant phase-out cost (8.9) - -
OxyVinyls employee separation cost (1.0) - -
Merger and integration cost (5.3) - -
-------------- -------------- --------------
Subtotal - operating income $ (15.2) $ - $ -
Investment write-down (0.6) - -
-------------- -------------- --------------
Special items - pre-tax (15.8) - -
Special items - after-tax (9.6) - -
-------------- -------------- --------------
Net income (loss) excluding special items $ (11.8) $ 13.8 $ 26.2
============== ============== ==============
REPORTED RESULTS
- ----------------
Total first quarter 2001 sales were $709.7 million or $364.2 million higher than
first quarter 2000. The consolidation of Geon and Hanna in the third quarter of
fiscal 2000 contributed $422.1 million in sales for the three-months ended March
31, 2001.
The operating loss for the first quarter of 2001 was $23.3 million versus $29.7
million operating income in the first quarter of 2000. Operating income before
special items, depreciation and amortization (OIBSIDA) was $18.3 million in the
first quarter of 2001 and $20.9 million below the first quarter of 2000. The
lower first quarter 2001 OIBSIDA was driven by lower Resin & Intermediates
OIBSIDA which was down $30.9 million from the first quarter 2000.
The net loss in the first quarter of 2001 was $21.4 million, or a loss of $11.8
million before special items as compared to income, before special items of
$13.8 million in the first quarter of 2000.
PRO FORMA RESULTS
- -----------------
Total sales of $709.7 million in the first quarter were 14% below the pro forma
first quarter of 2000, reflecting weak volume across all business segments as
compared to first quarter 2000.
The operating loss before special items in the first quarter of 2001 was $8.1
million versus pro forma first quarter 2000 income of $51.1 million on a
comparable basis. OIBSIDA was $18.3 million and $77.2 million for first quarter
2001 and first quarter pro forma 2000, respectively. The decrease in first
quarter 2001 OIBSIDA is due primarily to declines in volume and decreases in
earnings from the Resin and Intermediates segment ($30.9 million) and partially
offset by implemented earnings improvement and cost reduction initiatives.
Net loss in the first quarter of 2001 was $21.4 million and $11.8 million before
special items. The 2001 first quarter net loss before special items was $38.0
million worse than 2000 pro forma first quarter.
11
13
BUSINESS SEGMENT INFORMATION
- ----------------------------
Below is a summary of business segment information
showing both the "Reported Results" for the quarters ended March 31, 2001 and
2000 and the "Pro Forma Results" for the quarter ended March 31, 2000.
Pro Forma
(Dollars in millions) Reported Results Results
2001 2000 2000
------------- ------------- -------------
Sales:
Performance Plastics $ 488.8 $ 345.5 $ 568.0
Elastomers & Additives 109.7 - 132.9
Distribution 121.1 - 128.9
Resin & Intermediates - - -
Other (9.9) (4.6)
------------- ------------- -------------
Total sales $ 709.7 $ 345.5 $ 825.2
============= ============= =============
Operating income before special items,
depreciation and amortization:
Performance Plastics $ 26.0 $ 26.7 $ 46.3
Elastomers & Additives 7.0 - 14.0
Distribution 1.9 - 3.8
Resin & Intermediates (14.4) 16.5 16.5
Other (2.2) (4.0) (3.4)
------------- ------------- -------------
Total operating income before special items,
depreciation and amortization: $ 18.3 $ 39.2 $ 77.2
============= ============= =============
Operating income (loss) before special items
Performance Plastics $ 7.0 $ 17.2 $ 25.6
Elastomers & Additives 2.7 - 9.4
Distribution 1.1 - 3.0
Resin & Intermediates (14.4) 16.5 16.5
Other (4.5) (4.0) (3.4)
------------- ------------- -------------
Total operating income (loss) before special items $ (8.1) $ 29.7 $ 51.1
============= ============= =============
BUSINESS SEGMENT OPERATING RESULTS
- ----------------------------------
PERFORMANCE PLASTICS had first quarter 2001 sales of $488.8 million, which were
14% below the pro forma first quarter 2000. A breakdown of the 2001 first
quarter segment sales, by primary product group, is as follows:
% Change
in 2001
% of Sales vs.
Sales 2000
-------------- --------------
Vinyl compounds 37% (19.5)%
Engineered materials 19% (1.6)%
Color and additives 22% (15.2)%
Specialty resins and formulators 13% (9.1)%
Engineered films 9% (16.4)%
-------------- ------------
Total 100% (14.0)%
============== ============
International sales comprised 21% of the segment and increased in the first
quarter of 2001 by 4% over first quarter 2000. European demand remained
relatively strong across most markets in the first quarter of 2001 but weakened
in
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Asia due to lower export sales and a slowdown in the electronics industry.
The total Performance Plastics segment's lower first quarter 2001 sales versus a
year ago on a pro forma basis was driven primarily by lower U.S. auto production
of approximately 20% and lower demand in domestic construction related markets
impacted by reductions in inventory levels throughout the commercial supply
chain. During the quarter, demand for pipe and fittings products improved as
compared to the depressed levels in the second half of 2000, but remained at a
level below first quarter 2000.
OIBSIDA was $26.0 million in the first quarter of 2001, $20.3 million below the
pro forma first quarter of 2000. Compared to the first quarter of 2000, the
decrease in first quarter 2001 earnings was primarily sales demand driven.
ELASTOMERS & ADDITIVES sales were $109.7 million in the first quarter of 2001,
17% below the first quarter of 2000 on a pro forma basis. The first quarter 2001
sales shortfall from the same quarter a year ago was primarily driven by reduced
domestic automotive production.
OIBSIDA in the first quarter of 2001 was $7.0 million compared to $14.0 million
in the pro forma first quarter of 2000. The decline in comparable first quarter
earnings is primarily attributable to lower sales demand.
DISTRIBUTION sales in the first quarter of 2001 were $121.1 million, 6% below
the pro forma first quarter of 2000. The operations in Mexico, which represent
10% of the segment sales, recorded growth over the first quarter of 2000 by 24%.
OIBSIDA in the first quarter of 2001 was $1.9 million, $1.9 million below the
pro forma first quarter of 2000 driven by lower sales volumes. In the first
quarter of 2001, some duplicate staffing cost was incurred as customer service
transitioned to a regional structure in April 2001.
RESIN & INTERMEDIATES (R&I) operating loss before special items, consisting of
equity income from joint ventures, allocated overhead support cost and cost
associated with past operations was $14.4 million for the first quarter of 2001.
The 2001 first quarter operating loss was $30.9 million lower than the pro forma
first quarter of 2000 earnings. The primary reason for the significant decrease
from the prior quarter is the earnings from the Company's 24% investment in
OxyVinyls. PolyOne's equity earnings from OxyVinyls in the first quarter of 2001
and pro forma first quarter of 2000 was a loss of $10.7 million (before special
charge) and income of $19.2 million, respectively.
Domestic PVC resin industry demand continued to be weak as effective capacity
utilization approximated 81% in first quarter 2001 compared to 93% in the first
quarter of 2000. The domestic PVC resin industry realized a maximum of 3(cent)
per pound price increase in the first quarter of 2001. Despite this increase,
PVC resin industry spreads (selling prices of PVC resin less the cost of
ethylene and chlorine) averaged approximately $.14 per pound, $.025 per pound
below the first three months of 2000. Continued high natural gas cost reduced
PolyOne's first quarter 2001 equity earnings by $10.8 million compared to the
first quarter of 2000. Higher caustic soda pricing contributed positively to
earnings.
OTHER consists primarily of corporate governance costs that are not allocated to
business segments. These unallocated costs before special items were $4.5
million in the first quarter of 2001.
CAPITAL RESOURCES AND LIQUIDITY
For the first quarter of 2001, the Company generated $58.1 million of cash from
operating and investing activities. Operating activities contributed $78.3
million of cash driven by an $85.5 million reduction in operating working
capital. The reduction in operating working capital was comprised of a $64
million increase in the sale of accounts receivable plus a $21.5 million
reduction through management initiatives despite March 2001 sales exceeding
December 2000 sales by approximately $50 million. Approximately 45% of the
capital expenditures in the first quarter 2001 were in support of two key
information technology initiatives: projectOne (common SAP system platform) and
Smart$ource (leveraging indirect or non-material purchases with ARIBA software).
In the first quarter the Company's accounts receivable sale facility was
increased $100 million to $200 million. As of March 31, 2001 $164 million of
this facility was being utilized. During May 2001 the Company obtained
amendments to the October 2000 revolving credit agreements, which included a
$100 million reduction in available borrowings from an aggregate $400 million to
$300 million, effectively offsetting the increase in the receivable sale
facility.
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Capital expenditures for 2001 are projected to be between $70 million and $80
million, depending upon the outlook of second half 2001 earnings and cash flows.
Regardless, management intends to fund key strategic initiatives, such as
projectOne, reconfiguring the manufacturing assets of the former M.A. Hanna
Company and The Geon Company and Smart$ource.
Cash used by financing activities during the first three months of 2001 reflect
repayments of short-term debt and payment of dividends.
For the foreseeable future, the Company believes it will have sufficient funds
from operations and existing credit facilities and other available permitted
borrowings to support dividends, debt service requirements, and normal capital
and operating expenditures.
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 $55.2 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 March 31, 2001, by as much as $19.0 million or $15.0
million, respectively. Certain factors that may affect these forward-looking
comments are discussed under "Cautionary Note on Forward-Looking Statements."
Additional information related to the Company's environmental liabilities is
included in Note N to the consolidated financial statements incorporated by
reference from the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q 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 Hanna businesses will not be integrated successfully; (2) an 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 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; and (14) partial control over investment decisions and
dividend distribution policy of the OxyVinyls partnership.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on debt
obligations and from changes in foreign currency exchange rates. Information
related to these risks and the Company's management of the exposure
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is included in "Management's Analysis - Consolidated Balance Sheets" in the 2000
Annual Report under the caption "Market Risk Disclosures" incorporated by
reference from the Company's Annual Report on Form 10-K.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION:
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Reports on Form 8-K from January 1, 2001 through March 31, 2001:
- Form 8-K filed on January 30, 2001 announcing closure of four
plants in the United States.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 15, 2001 POLYONE CORPORATION
/s/ W. D. Wilson
----------------
W. D. Wilson
Vice President and Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
/s/ G. P. Smith
---------------
G. P. Smith
Corporate Controller and Assistant Treasurer
(Principal Accounting Officer)
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