Exhibit 13.1
[GRAPHIC]
Pulling Together.
Emerging stronger.
[PolyOne-LOGO]
2001 Annual Report
"For PolyOne, 2001 was a year of learning, fighting back and
progress. We responded with determination to a weak economy
and world events, while making great progress in building a
solid foundation for our new Company. We are on a mission to
prove that customers can rely on us to help them succeed and
that shareholders can rely on us for consistent, profitable
growth."
-- Thomas A. Waltermire
Chairman, President
and Chief Executive Officer
ABOUT THE COVER
This year's annual report-- "Pulling Together. Emerging Stronger."-- speaks to
both the challenges of 2001 and the promise going forward. In the midst of
profound internal change, in an economy that severely tested us and our
customers, we made significant progress last year to position PolyOne for growth
and success. How did we do it? The answer lies in the hundreds of names on our
cover and the 8,000 PolyOne men and women worldwide whom they represent. Our
people are the real Power of PolyOne.
POLYONE CORPORATION
THE POWER OF POLYONE
1 PERFORMANCE PLASTICS ANNUAL REVENUES $1.8 billion
PLASTIC COMPOUNDS
AND COLORS
- - ANNUAL REVENUES
$1.4 billion (global)
PRODUCTS
Proprietary and custom polymer compounds derived from vinyl and engineering
resins and additives; specialty colorant and additive systems
MARKETS
Appliance, automotive, building materials, business equipment, consumer
goods, telecommunications
PRODUCT END USES
Appliance components, automotive trim, business equipment housing, bottles,
pipe fittings, wire and cable insulation, colorants for virtually every
plastic application
MANUFACTURING LOCATIONS
20 Centers of Manufacturing Excellence in United States and Canada; also,
Mexico, Belgium, Denmark, England, France, Germany, Hungary, Norway, Spain,
Sweden, China, Singapore
KNOWN FOR
Proprietary compounds and color technologies
[PICTURE]
SPECIALTY RESINS
AND FORMULATORS
ANNUAL REVENUES
$260 million (global)
PRODUCTS
Emulsion polymer and micro- dispersion specialty resins; vinyl plastisols,
powders and inks; latex; rigid and flexible urethane and urethane foams
MARKETS
Appliance, apparel, automotive, flooring, medical, packaging, sports and
recreation, toy, industrial
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
KNOWN FOR
Specialty resins of high quality and consistency, and unique technical
solutions for vinyl plastisol, urethane and latex system applications
[PICTURE]
ENGINEERED FILMS
ANNUAL REVENUES
$165 million
PRODUCTS
Flexible vinyl, thermoplastic olefin (TPO) and thermoplastic urethane (TPU)
polymer films, laminates, polyvinyl chloride (PVC)/polyolefin foam laminates,
TPO/polyolefin foam laminates
MARKETS
Automotive, medical, office supply, packaging, recreation, building materials
PRODUCT END USES
Automotive instrument panels, door trim panels, armrests, airbag doors and
covers, glovebox doors; loose-leaf binder covers; medical blood bags and
intravenous sets; hospital inflatable mattresses; pond/pool liners
MANUFACTURING LOCATIONS
United States
KNOWN FOR
Value-added film finishing technologies, including embossing, printing,
painting and laminating
[PICTURE]
2 ELASTOMERS AND PERFORMANCE ADDITIVES
ANNUAL REVENUES
$400 million
PRODUCTS/SERVICES
Proprietary and custom thermoset elastomer (rubber) compounds, roller and
specialty rubber compounds, elastomer-enhancing colorants and additives,
tolling
MARKETS
Aerospace, automotive, building materials, electrical, industrial, medical,
sporting goods
PRODUCT END USES
Automobile hoses and belts, footwear, escalator railings, industrial
conveyers, wire and cable, printing rollers
MANUFACTURING LOCATIONS
United States, Mexico
KNOWN FOR
Leader in non-tire rubber technology and compounding in North America
[PICTURE]
3 DISTRIBUTION
ANNUAL REVENUES
$460 million
SERVICES
Provider 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 automotive, building
materials, consumer goods, electrical/electronics, industrial, medical,
packaging, wire and cable
DISTRIBUTION LOCATIONS
United States, Canada, Mexico
KNOWN FOR
Responsive delivery, and engineering and technical expertise that provides
customers with application and processing support
JOINT VENTURES
- - DH COMPOUNDING COMPANY,
UNITED STATES
Partner: DOW CHEMICAL COMPANY
- - GEON/POLIMEROS ANDINOS, COLOMBIA
Partner: PETROQUIMICA COLOMBIANA S.A.
- - OXY VINYLS, LP, UNITED STATES
Partner: OCCIDENTAL CHEMICAL CORPORATION
- - SO.F.TER S.P.A., ITALY
Partner: SO.F.TER S.P.A.
- - 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
- - WELVIC AUSTRALIA PTY LTD., AUSTRALIA
Partner: ORICA LIMITED
FINANCIAL HIGHLIGHTS
Year Ended December 31,
Dollars in millions, except per share data 2001 2000(3)
- ----------------------------------------------------------------------------------------------
Reported Results(1, 2)
Sales $ 2,654.6 $ 1,887.8
Employee separation and plant phase-out 36.1 2.8
Operating income (loss) (17.1) 64.8
Net income (loss) (46.1) 15.9
Capital expenditures 80.2 62.7
Depreciation and amortization 91.3 57.4
Total debt (year end) 446.1 682.2
Stockholders' equity (year end) 713.4 827.6
Earnings (loss) per share $ (0.51) $ 0.26
Weighted-average common shares used to
compute diluted earnings per share (in millions) 89.8 62.0
Pro Forma Results(1,2)
Sales $ -- $ 3,139.7
Operating income -- 115.5
Net income -- 52.4
Depreciation and amortization -- 101.6
Other data, approximate:
Number of employees (year end) 8,000 9,000
Employee, management and board member stock ownership 13% 11%
Stockholders (estimated at December 31) 20,000 20,000
- ----------------------------------------------------------------------------------------------
(1) See Management's Analysis beginning on page 6 for a description of the
audited reported results and the 2000 pro forma results giving effect to
the merger.
(2) Both reported results and pro forma results include special items, which
are summarized in the table on page 10.
(3) 2000 represents eight months of Geon and four months of PolyOne.
[PIE CHART]
2001
SALES BY SEGMENT(*)
Dollars in millions
PERFORMANCE PLASTICS
$1,836.7
68%
DISTRIBUTION
$462.6
17%
ELASTOMERS AND
PERFORMANCE ADDITIVES
$402.6
15%
(*) Excluding corporate, eliminations
and other of $47.3 million
[PIE CHART]
2001
SALES
BY GEOGRAPHIC REGION
Dollars in millions
UNITED STATES
$2,031.4
77%
EUROPE
$345.4
13%
CANADA
$180.3
7%
ASIA
$51.1
2%
MEXICO
$46.2
1%
1 PolyOne Corporation
TO OUR SHAREHOLDERS
During a recent visit with prospective institutional shareholders, I was
asked what has pleased me most since the formation of PolyOne. I thought
carefully about my response before I realized that the answer was evident.
Ultimately, I've been most gratified by the energy, perseverance and
thirst for success of PolyOne people. Coming together as an integrated
organization is daunting enough -- but in our case, integration has been just
one of many imperatives. From battling a severe economic recession, to launching
a ground-breaking information technology system, to finalizing plans for the
upgrade and consolidation of our largest business group, we are proving time and
again that PolyOne people can take on major tasks and succeed. We've also shown
that we can pull together in adversity to emerge stronger. During 2001, we made
significant progress in a very tough year, with the overall goal of positioning
ourselves to deliver value to all our partners: our customers, our suppliers and
our shareholders.
2001: LAYING A FIRM FOUNDATION
To understand how far we've come, compare the PolyOne of a year ago with
the PolyOne of today:
A year ago, our value capture programs totaled $70 million. Today, we are
implementing more than $200 million in annual income-improving opportunities
that we expect to capture in earnings by 2003. What a journey this has been!
When we announced the formation of PolyOne in May 2000, we established an
annual savings target of $50 million; now, we are projecting a fourfold increase
in that early estimate.
More than merely hitting a bottom-line target, we are making programmatic
changes for the long term. Our remarkable progress testifies to the inherent
strength, focus and discipline of PolyOne. Through creative cost reduction
initiatives, a sound integration strategy and dedication to teamwork, we have
come very far very fast. We are shaping a solid foundation for success.
[PICTURE]
[Thomas A. Waltermire]:
A year ago, we ran our business on 22 information systems. Today, we are
doing nearly $2 billion in sales on a common information technology platform
that operates in seven countries. One of our foremost initiatives in 2001 was
the design and implementation of a single IT system linking nearly all our
businesses worldwide. We dubbed this undertaking projectOne; the name alone
speaks to the high priority we assigned it.
After launching projectOne late in 2000, we brought our Plastic Compounds
and Colors (PCC), Specialty Resins, Elastomers and most of our European
operations onto the unified system, in record time and on budget. In 2002, we'll
add our Formulators operations, the Performance Additives part of our Elastomers
group and much of the remaining European business.
With this astounding success, we have the capability to extend the
benefits of business-to-business e-commerce to our customers and suppliers, and
to provide access to a single source for most PolyOne products and services.
Unquestionably, our proficiency differentiates us -- and the secret is
out. In its ranking of the nation's 500 companies with the most innovative IT
departments, the trade publication InformationWeek recognized PolyOne as the
leader in the chemical industry and number 28 overall. We were the only chemical
company to receive InformationWeek's top-flight gold citation in all four rating
categories.
PolyOne Corporation 2
If space allowed, I would list every member of the projectOne team. This
group has performed a near-miracle -- and, in so doing, has demonstrated the
energy, perseverance and drive to succeed that I mentioned earlier.
A year ago, PolyOne's North American manufacturing structure was not
competitive. Today, more than 35 sites in several of our businesses are targeted
for improvements. The major thrust is in our North American PCC operations,
which we analyzed thoroughly, and where we then committed $45 million to
facility upgrades and expansion. In our three PCC product groups -- engineered
materials, colorants and vinyl compounds -- we've designated 20 customer-focused
Centers of Manufacturing Excellence that we will create at existing sites, where
we will install new equipment and production lines. Simultaneously, we will
close roughly one-third of our initial 34 North American PCC plants. The hard
work of implementing these changes has begun, and we expect to complete nearly
all of it by the end of 2002. We anticipate approximately $50 million in
annualized pre-tax savings in our North American PCC operations, beginning in
2003.
We also consolidated our Elastomers and Performance Additives operations
to better align our manufacturing assets with the needs of a changing customer
base. By mid-2002, we will have closed three plants.
The asset reconfiguration, and other business changes in Elastomers, are
expected to yield annual pre-tax savings of approximately $6 million. By elimi-
nating excess capacity and continuing to apply "lean" manufacturing principles,
we are increasing our customer responsiveness, improving our financial
performance and positioning PolyOne to compete in global markets.
We also took steps to streamline our Engineered Films manufacturing
function, a move that will produce estimated annual pre-tax savings of
approximately $8.5 million. To date, we have closed one plant and realigned the
overhead structure at three other sites. We are implementing additional options,
including product line reconfiguration and new product technology for
automotive and custom film applications. We see excellent opportunities to
employ our technology for thermoplastic olefins and related alloys in both of
these markets.
A year ago, our recordable injury rate already placed us among the best in
any manufacturing industry. During 2001, we raised our performance to
world-class standards by cutting injuries nearly 30 percent. In the midst of
profound change, one thing never changes: our vigilance on safety. Safety is at
the top of our business objectives. In fact, it was the first objective we set
for our people when we formed PolyOne.
Setting expectations of high standards for safety is smart business. It is
the best way to prove to our people that they are important. Our people
understand that at PolyOne, safety is a requirement, not a luxury. This is the
best way I have found to energize people with the habit of teamwork and
discipline. This is the foundation for creating a culture of quality and
customer responsiveness.
ONE SYSTEM FOR EVERYONE
POLYONE'S NEW BUSINESS INFORMATION SYSTEM LINKS PEOPLE AROUND THE WORLD. AT THE
START OF 2002, THE SYSTEM COMPRISED: 24,000 VENDORS
16,000 CUSTOMERS
3,000 TRAINED POLYONE EMPLOYEES
50 POLYONE SITES WORLDWIDE
71,300 PRODUCT RECIPES
3 PolyOne Corporation
Our stance on safety has helped us build trust. Our people have responded
with a willingness to change and take on new challenges. It is more than
coincidence that everywhere we've reduced accidents and injuries, we've seen
concurrent gains in quality and productivity.
A year ago, our vision, strategy and culture were still forming. Today,
our people, customers and suppliers are beginning to see the Power of PolyOne.
Those who dismiss culture as feel-good fluff are just plain wrong. We threw
ourselves into the task of shaping a common culture because it is the stuff of
sustainable competitive advantage.
The whole concept of PolyOne is based on sharing knowledge globally. We
will succeed in direct proportion to our ability to:
- Solve a customer problem, then replicate the solution anywhere in
the world
- Seamlessly serve the growing number of customers who want us to
supply the identical product the world over
- Source material and services globally
- Create teams of diverse product specialists when a customer need
demands an unusual combination of skills
All this teamwork starts with a common culture. PolyOne's culture is
rooted in the core values of excellence, integrity, innovation, teamwork and
respect for all. Our mission statement -- WE HELP PEOPLE WORK WONDERS WITH
POLYMERS, which we proudly display at all our sites -- is the driver. Our own
people see it, believe it and act on it, as shown by our progress in 2001.
OUR 2001 BUSINESS PERFORMANCE
PolyOne's markets and customers were severely challenged in 2001. Our
overall shipments fell approximately 15 percent from 2000 pro forma levels(1),
and 2001 total revenues declined to $2.7 billion from 2000 pro forma revenues of
$3.1 billion. Most adversely affected were our business units with exposure to
the automotive, industrial and telecommunications markets. Reduced demand for
certain building material applications and appliances also hurt our sales.
The performances of the joint ventures in our Resin and Intermediates
segment were hurt by volatility in commodity prices for natural gas, polyvinyl
chloride (PVC) resin, chlorine and caustic soda. These factors affected our
OxyVinyls joint venture and SunBelt, a chlor-alkali joint venture.
With a clear focus on short-term cost controls and longer-term structural
improvements from strategic initiatives, we walked the talk in responding to the
soft economy. The PolyOne team stepped up and reduced discretionary spending by
nearly $30 million from 2000 levels. Our aggressive but disciplined response
allowed us to make a small profit in the second and third quarters, even on
depressed sales.
In our operating businesses (excluding the Resin and Intermediates
segment), a 15 percent sales decline normally would cost us approximately $135
million in operating income -- but, by responding with substantial cost
savings in Selling & Administration, material sourcing and discretionary
spending, we held the effect of the sales decline to only $53 million (compared
with 2000 pro forma results). Despite the drop in operating
STRATEGIC VALUE CAPTURE INITIATIVES
PROGRAMS TO REDUCE 2003 COSTS COMPARED WITH 2000
Dollars in millions
LOGISTICS
19
SOURCING
59
PCC MANUFACTURING UPGRADE
41
STRATEGIC BUSINESS UNIT ACTIONS
29
52 SALES,TECHNOLOGY,GENERAL AND ADMINISTRATION
-------
$200
PolyOne Corporation 4
income, we managed our cash flow and reduced our short-term debt, lowering
inventories and improving receivable collections. The result is that we
generated operating cash flow(2) for the year of approximately $140 million.
OUR RALLYING CRY FOR 2002: FINISH THE FIX, BEGIN TO GROW
We entered 2002 assuming that the economy will not rebound in the first
half -- but that during the year, PolyOne certainly will. Our most urgent
priority is to implement the income improvements under way and bring them to the
bottom line. To make this happen, our businesses must operate with excellence
and we must continue our tight controls on spending. We are determined to
achieve reasonable profitability even during this economic slowdown.
Looking toward a second-half improvement, however modest, we intend to
capture more than our share of the additional market opportunity(3). Each of our
businesses has targeted specific customers for 2002. We will deliver on these
plans. Compared with when we launched PolyOne, we have better business systems
and practices; we are better prepared to bring all of our capabilities to our
customers; and we are better positioned to execute our strategy globally.
As we leverage long-term structural changes -- a common IT system,
improvements to our manufacturing assets, a new organization for our
Distribution group, new sourcing and logistics processes -- we will begin to
drive growth on the top line and the bottom line.
Sales growth will receive expanded focus in 2002 and the years ahead. Our
solution selling program is based on a recognition that, with the portfolio of
businesses we now have, we should be able to provide unique product and service
solutions to our customers. This capability, a founding precept of PolyOne,
should contribute to business growth even in times of economic distress. For
these reasons, we have stepped up the training of our sales organizations and
developed Web-based sales tools. We are committed to honing our solution selling
skills.
On another front, we are refocusing our research and development efforts.
In 2002, for example, we will redeploy several million dollars from other
programs to develop new product technology and to upgrade our technical
resources at Avon Lake, Ohio, where we will add new equipment.
These investments are prompted by a recognition that innovation is the
essential organic growth driver, and we need to quicken the pace at PolyOne. We
are turning our attention to developing new products, services and technologies,
and to delivering them anywhere in the world where our customers need our
expertise.
As we continue to execute our strategic initiatives and begin to pursue a
growth agenda, our stated goal of $2.00 per share in earnings remains in our
sight(3).
This goal, which requires a pre-tax earnings improvement of approximately
$300 million(4) over 2001, is driven largely by the value capture programs we
expect to realize, by sales growth initiatives and by assumptions that business
conditions and revenues will recover as the economy recovers.
For PolyOne, 2001 was a year of learning, fighting back and progress. We
responded with determination to a weak economy and world events, while making
great progress in building a solid foundation for our new Company. We are on a
mission to prove that customers can rely on us to help them succeed and that
shareholders can rely on us for consistent, profitable growth.
I thank you for your support, and I assure you that, along with earning
for you an attractive return on your investment, we want to earn your continuing
confidence and trust.
/s/ Thomas A. Waltermire
Thomas A. Waltermire
Chairman of the Board, President and Chief Executive Officer
March 28, 2002
(1) Details of pro forma assumptions can be found beginning on page 6.
(2) Before receivable sales facility and spending for employee severance and
plant phase-out.
(3) See Forward-Looking Statements, page 37.
(4) Excluding 2001 special items, see page 10.
5 PolyOne Corporation
MANAGEMENT'S ANALYSIS
RESULTS OF OPERATIONS
POLYONE CORPORATION (PolyOne or Company) is a leading global polymer services
company, with worldwide annual sales of approximately $2.7 billion. PolyOne was
formed on August 31, 2000, from the consolidation of The Geon Company (Geon) and
M.A. Hanna Company (Hanna).
The PolyOne consolidation was accounted for as a purchase business
combination, with Geon as the acquiring entity. 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 of PolyOne for four months (which include the
operating results of Hanna from the date of consolidation).
In the commentary that follows, "pro forma 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 recognized in the second and third quarters of 2000, as well as Geon's
1999 transactions with Occidental Chemical Corporation (OxyChem) and the
acquisition of O'Sullivan Corporation (O'Sullivan), occurred prior to the
periods presented. The pro forma operating results do not include any future
profit improvements and cost savings or associated costs, including
restructuring costs expected to result from the continuing 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.
The most significant forces impacting PolyOne's operating results in
2001 were the recession of the U.S. economy and the restructuring and
integration of PolyOne's operations to improve customer service and product
quality and to lower operating costs. The slowdown of the U.S. economy commenced
in the second half of 2000 and advanced to a recession in 2001, which was the
first U.S. recession since 1990-1991. The economic recession significantly
reduced customer sales demand and resulted in lower sales and earnings in
PolyOne's equity investments in the polyvinyl chloride (PVC) resin and
chlor-alkali industries. Partially offsetting the negative economic forces were
PolyOne's initiatives to integrate and restructure its operations following the
consolidation and formation of PolyOne in 2000. The implementation of a
substantial portion of the restructuring initiatives announced in 2001 will
continue through 2002.
2001 RESULTS OF OPERATIONS
REPORTED RESULTS Total sales for 2001 were $2.7 billion, an increase of $766.8
million from 2000. This increase is due to only four months of former Hanna
operations being included in the 2000 reported sales. Year 2001 sales were below
2000 on a comparable basis; see the pro forma commentary that follows.
Operating earnings for 2001 were a loss of $17.1 million compared
with income of $64.8 million in 2000. Operating income before special items,
depreciation and amortization (OIBSIDA) was $125.8 million compared with $138.9
million in 2000. The decrease in 2001 OIBSIDA is due primarily to an earnings
decrease of $40.5 million from the Resin and Intermediates (R&I) segment
equity affiliates, which was partially offset by a full year's inclusion of the
former Hanna operations.
The net loss in 2001 was $46.1 million. Before special items, the loss
was $10.2 million compared with income of $25.0 million in 2000 before special
items. The 2001 special items relate primarily to restructuring initiatives (see
the table titled "Summary of Special Items," page 10). The effective income tax
rate in 2001 was 35.7% compared with 39.1% in 2000. The lower effective income
tax rate reflects principally the effect of permanent differences such as
non-deductible goodwill on pre-tax losses.
PRO FORMA RESULTS Total sales for 2001 were $2.7 billion, a decrease of $485.1
million, or 15%, from pro forma results for 2000. Decrease in customer sales
demand in 2001 reflected the substantial weakening of the North American economy
across all business segments. Particularly impacting PolyOne were the
industrial, automotive, electronic and some construction markets. Automotive
production was down 10% (domestic producers were even weaker) in 2001 compared
with 2000. Industrial production fell 4.3% in 2001 compared with the prior
year. Average U.S. industrial capacity utilization in 2001 fell to 77%, five
percentage points below 2000, and reached the lowest level since 1983 in the
fourth quarter of 2001. Management estimates that operating income in 2001 was
down approximately $135 million as a direct result of the sales volume decline
from 2000.
The operating loss in 2001 was $17.1 million. The 2001 OIBSIDA of
$125.8 million was $104.2 million below the prior year. The decrease in 2001
OIBSIDA was driven by lower sales volumes (approximately $135 million) across
all business segments and weaker results in the R&I equity earnings, partially
offset by cost reduction initiatives associated with the merger integration and
announced restructuring programs (estimated at approximately $69 million). The
2001 net loss before special items was $10.2 million, $58.7 million below 2000
net income before special items.
PolyOne Corporation 6
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED OPERATING RESULTS
In millions, except per share data Year Ended December 31,
------------------------------------------------------------------
Reported Results Pro Forma Results
------------------------------------------------------------------
2001 2000 1999 2000 1999
------------------------------------------------------------------
Sales $ 2,654.6 $ 1,887.8 $ 1,261.2 $ 3,139.7 $ 3,039.9
Operating income before special items,
depreciation and amortization 125.8 138.9 148.6 230.0 288.6
Operating income (loss) (17.1) 64.8 99.7 115.5 181.8
Operating income before special items 34.5 81.5 105.4 128.4 184.3
Net income (loss) (46.1) 15.9 104.7 52.4 79.9
Special items (income) - after tax 35.9 9.1 (52.2) (3.9) 5.1
Net income (loss) before special items $ (10.2) $ 25.0 $ 52.5 $ 48.5 $ 85.0
Earnings (loss) per share, diluted $ (0.51) $ 0.26 $ 2.15 $ 0.57 $ 0.86
Effect on earnings per share of excluding
special items, increase (decrease) $ 0.40 $ 0.15 $ (1.07) $ (0.04) $ 0.05
- ----------------------------------------------------------------------------------------------------------------------
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 and 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 10. In addition, management uses net income before
special items as a measure of PolyOne'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.
The commentary on business segments is a comparison of the 2001
reported results with the 2000 and 1999 pro forma results for the years
presented.
PERFORMANCE PLASTICS had 2001 sales of $1.837 billion, a decrease of
$344.0 million, or 16%, from pro forma 2000. A breakdown of 2001 segment sales,
by primary product group, is as follows:
2001 % 2001 %
Change vs. Change vs.
% of Sales 2000 Sales $ 2000 Sales Lbs.
-----------------------------------------------
North American PCC 57 (20) (19)
International PCC 20 (7) (3)
Specialty Resins
and Formulators 14 (11) (12)
Engineered Films 9 (15) (16)
- ------------------------------------------------------------------------------
Performance Plastics 100 (16) (16)
- ------------------------------------------------------------------------------
Total Performance Plastics 2001 sales declines were driven by general
economic weakness. Sales were also affected in International Plastic Compounds
and Colors (PCC) by unfavorable euro currency exchange of approximately 3%.
Engineered Films was severely impacted by the decline in automotive
production, as was Specialty Resins and Formulators, but to a lesser extent.
Certain residential construction markets impacted sales, such as specialty
resins in flooring and North American PCC in windows and other residential
lineal applications. In addition, the electronics market impacted PolyOne
globally in wire and cable and business machines. In North American PCC and
Europe, the wire and cable business has been severely impacted by changes in the
telecommunications industry; in North America, some customers' business was down
more than 50%. As a result, sales in the North American wire and cable market
were down approximately 25% year over year. Due to economy-related price
pressure from competitors, PolyOne decided to give up business and market share
in some market segments rather than match price, but the impact of this
decision was relatively small.
OIBSIDA in 2001 was $124.2 million, $29.2 million below pro forma 2000
results. The decrease in earnings was driven primarily by the substantial
decline in sales volume, partially offset by cost-saving initiatives. In 2001,
five plants within the business segment were closed in connection with PolyOne's
restructuring initiatives.
7 PolyOne Corporation
MANAGEMENT'S ANALYSIS
RESULTS OF OPERATIONS
ELASTOMERS AND PERFORMANCE ADDITIVES sales in 2001 were $402.6
million, a decrease of $79.6 million, or 17%, from pro forma 2000. The decrease
in 2001 sales was driven primarily by reduced domestic demand from producers of
automotive parts, which impacted both the elastomers and additives markets. Of
the 17% year-over-year change, 2% was due to reduced tolling of rubber compounds
for tires, and the remaining 15% was due primarily to lower volumes related to
the automotive and industrial markets. Moreover, the impact of lower automotive
production was exacerbated by PolyOne's relatively strong market share with
Ford, General Motors and DaimlerChrysler, which collectively lost market share
in the North American market in 2001.
OIBSIDA in 2001 was $26.8 million, a decline of $18.5 million compared
with pro forma 2000. Cost-saving initiatives, including the "lean"
manufacturing initiative, reduced costs, but were not sufficient to offset the
adverse earnings impact from the sales volume declines previously noted. During
2001, two manufacturing plants were closed in this segment.
DISTRIBUTION had sales in 2001 of $462.6 million, a decrease of $44.1
million, or 8.7%, from pro forma 2000. The decrease resulted primarily from
lower sales volumes (6.7%) in North America and from passing lower material
costs to customers. The Mexican operations' sales, which approximate 9% of
this segment, increased in 2001 by 2% compared with 2000.
OIBSIDA in 2001 was $2.5 million, a decrease of $12.1 million from pro
forma 2000. The decrease in earnings was driven by lower sales volumes and
margin erosion, including losses attributed to the sale of non-prime
inventories ($1.3 million).
RESIN AND INTERMEDIATES (R&I) operating earnings before special items,
consisting of equity income from joint ventures and allocated overhead support
cost and cost associated with past operations, were a loss of $12.6 million in
2001, or a decrease in earnings of $40.5 million from 2000. The 2001 equity
earnings before a charge for employee severance and liabilities associated
with the temporary idling of a plant of $4.3 million were $34.1 million below
2000 levels for Oxy Vinyls, LP (OxyVinyls) and $9.4 million below 2000 levels
for SunBelt Chlor-Alkali Partnership (SunBelt). The decreases in equity earnings
were driven by lower average industry PVC resin and chlor-alkali selling prices
and higher energy costs for OxyVinyls in 2001.
The domestic PVC resin industry capacity utilization in 2001 was 86%
compared with 91% in 2000. The domestic PVC resin industry average selling price
decreased by $0.07 per pound year over year; however, due largely to lower
ethylene and chlorine costs, the 2001 PVC resin industry spread (selling prices
less the cost of ethylene and chlorine) was generally flat compared with 2000.
PolyOne's equity earnings were negatively impacted by lower PVC resin spreads
due to OxyVinyls' customer/product mix in 2001. OxyVinyls' 2001 combined
pricing of the co-products caustic soda and chlorine decreased approximately 8%
from 2000. In 2001 versus 2000, energy costs adversely impacted OxyVinyls'
equity earnings by approximately $6 million.
OTHER consists primarily of corporate governance costs not allocated
to the business segments. These unallocated costs before special items were
$16.6 million in 2001 compared with $11.2 million in 2000. PolyOne's 2001
corporate costs incurred were more than 20% below 2000 pro forma costs.
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 million. The mid-year 1999 acquisitions
of O'Sullivan and formulators contributed additional sales of approximately $152
million in 2000, and the formation of OxyVinyls at the end of April 1999
resulted in PVC resin operation sales, which totaled approximately $144
million in 1999, no longer being consolidated.
Operating income for 2000 was $64.8 million compared with $99.7
million in 1999. OIBSIDA was $138.9 million compared with $148.6 million in
1999. The decrease in 2000 operating income was due primarily to declines in
construction and automotive-related sales, particularly in the vinyl compound
and engineered films operations. These sales declines were partially offset by
four months of earnings contributed by former Hanna operations.
Net income in 2000 was $15.9 million. Before special items, net income
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 the rate in
1999.
PolyOne Corporation 8
RESULTS OF OPERATIONS
BUSINESS SEGMENT INFORMATION
In millions Year Ended December 31,
------------------------------------------
Reported
Results Pro Forma Results
------------------------------------------
2001 2000 1999
------------------------------------------
Sales:
Performance Plastics $1,836.7 $2,180.7 $2,090.0
Elastomers and Performance
Additives 402.6 482.2 487.6
Distribution 462.6 506.7 483.4
Resin and Intermediates -- -- --
Other (47.3) (29.9) (21.1)
- -----------------------------------------------------------------------------
$2,654.6 $3,139.7 $3,039.9
=============================================================================
Operating income (loss) before
special items, depreciation
and amortization:
Performance Plastics $ 124.2 $ 153.4 $ 234.0
Elastomers and Performance
Additives 26.8 45.3 50.3
Distribution 2.5 14.6 15.6
Resin and Intermediates (12.6) 27.9 3.6
Other (15.1) (11.2) (14.9)
- -----------------------------------------------------------------------------
$ 125.8 $ 230.0 $ 288.6
=============================================================================
Operating income (loss) before
special items:
Performance Plastics $ 53.9 $ 73.9 $ 151.2
Elastomers and Performance
Additives 10.2 26.5 32.4
Distribution (0.4) 11.3 12.0
Resin and Intermediates (12.6) 27.9 3.6
Other (16.6) (11.2) (14.9)
- -----------------------------------------------------------------------------
$ 34.5 $ 128.4 $ 184.3
=============================================================================
See Note R to Consolidated Financial Statements for additional reported business
segment disclosures.
PRO FORMA RESULTS Total sales for 2000 were $3.140 billion, an increase of $99.8
million, or 3%, over 1999. 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. OIBSIDA 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 and Intermediates
earnings.
Net income before special items was $48.5 million in 2000 and $85.0
million in 1999.
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 PCC ($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%). OIBSIDA was $153.4 million in
2000 versus $234.0 million in 1999. The 2000 earnings decrease was 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 by 11% versus a 2%
decrease in the second half of 2000 (8% decrease in the fourth quarter of 2000)
compared with the same periods in 1999. The average industry market price for
PVC resin was $0.09 per pound, 35% higher in 2000 versus 1999. The International
PCC 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 AND PERFORMANCE 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 OIBSIDA 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. OIBSIDA was $14.6 million in 2000, or $1.0 million
below 1999, due to higher selling and administrative expense resulting primarily
from increased sales personnel.
9 PolyOne Corporation
MANAGEMENT'S ANALYSIS
RESULTS OF OPERATIONS
RESIN AND INTERMEDIATES operating income before special items,
consisting of equity income from joint ventures and allocated overhead support
cost and cost associated with past operations, was $27.9 million in 2000, an
increase of $24.3 million over 1999. 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, partially offset
by lower earnings from the joint venture Australian Vinyls Corporation. Domestic
PVC resin and chlor-alkali industry dynamics were stronger in 2000 versus 1999.
Domestic PVC resin industry spreads 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 that occurred through the commercial distribution chain.
With the decrease in sales demand, selling prices declined. In addition, 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 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.
- --------------------------------------------------------------------------------
SUMMARY OF SPECIAL ITEMS
In millions Year Ended December 31,
--------------------------------------------------------------------
Reported Results Pro Forma Results
--------------------------------------------------------------------
2001 2000 1999 2000 1999
--------------------------------------------------------------------
Employee separation and plant phase-out costs $ (36.1) $ (2.8) $ (0.5) $ (2.8) $ 0.1
Merger and integration costs (1.1) (9.5) -- -- --
Period cost of closed facilities (0.2) -- -- -- --
Equity investment restructuring and plant
idling costs(1) (9.4) -- (0.8) -- (0.8)
Executive separation cost (4.8) -- -- (8.5) --
Investment writedown (10.1) -- -- -- --
Litigation settlement gain 4.1 -- -- -- --
Acquired profit in inventory -- (2.8) (3.2) -- --
Directors' pension termination -- (0.8) -- (0.8) --
Writeoff of debt placement cost -- (0.8) -- (0.8) --
Other restructuring costs -- (0.6) (1.2) (0.6) (1.2)
Gain on formation of joint ventures -- -- 93.5 -- --
Reversal of M.A. Hanna dock operations reserves -- -- -- -- 1.2
Gain on sale of assets -- -- -- -- 13.2
Loss on sale of business -- -- -- -- (10.9)
- -------------------------------------------------------------------------------------------------------------------------
Subtotal - pre-tax income (expense) (57.6) (17.3) 87.8 (13.5) 1.6
- -------------------------------------------------------------------------------------------------------------------------
- after-tax income (expense) (35.9) (10.6) 53.7 (8.1) (3.6)
German tax rate reduction -- 1.5 -- 1.5 --
Cumulative effect of a change in accounting -- -- (1.5) -- (1.5)
M. A. Hanna reversal of income tax reserve -- -- -- 10.5 --
- -------------------------------------------------------------------------------------------------------------------------
Total - after-tax income (expense) $ (35.9) $ (9.1) $ 52.2 $ 3.9 $ (5.1)
=========================================================================================================================
(1) Employee severance, plant phase-out costs and liabilities associated with
the temporary idling of a plant.
PolyOne Corporation 10
CONSOLIDATED STATEMENTS OF INCOME
In millions, except per share data Year Ended December 31,
2001 2000 1999
---------------------------------------------------------
Sales $2,654.6 $1,887.8 $1,261.2
Operating costs and expenses:
Cost of sales 2,223.0 1,598.8 1,028.9
Selling and administrative 304.2 191.5 97.4
Depreciation and amortization 91.3 57.4 44.4
Employee separation and plant phase-out 36.1 2.8 0.5
Merger and integration costs 5.9 9.5 --
Loss (income) from equity affiliates and minority interest 11.2 (37.0) (9.7)
- --------------------------------------------------------------------------------------------------------------------------------
2,671.7 1,823.0 1,161.5
- --------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (17.1) 64.8 99.7
Interest expense (41.9) (36.7) (17.7)
Interest income 2.3 1.6 2.1
Other expense, net (15.0) (3.6) (3.6)
Gain on formation of joint ventures, net of formation costs -- -- 93.5
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative effect
of a change in accounting for start-up costs (71.7) 26.1 174.0
Income tax (expense) benefit 25.6 (10.2) (67.8)
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change in accounting (46.1) 15.9 106.2
Cumulative effect of a change in accounting -- -- (1.5)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (46.1) $ 15.9 $ 104.7
================================================================================================================================
Earnings (loss) per common share:
Basic earnings (loss) per share before effect
of a change in accounting $ (0.51) $ 0.26 $ 2.28
Cumulative effect of a change in accounting -- -- (0.03)
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (0.51) $ 0.26 $ 2.25
================================================================================================================================
Diluted earnings (loss) per share before effect
of a change in accounting $ (0.51) $ 0.26 $ 2.18
Cumulative effect of a change in accounting -- -- (0.03)
- --------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ (0.51) $ 0.26 $ 2.15
================================================================================================================================
Weighted-average shares used to compute earnings per share:
Basic 89.8 61.4 46.6
Diluted 89.8 62.0 48.6
See Notes to Consolidated Financial Statements.
11 PolyOne Corporation
MANAGEMENT'S ANALYSIS
CONSOLIDATED BALANCE SHEETS
At December 31, 2001, PolyOne had total shareholders' equity of
$713.4 million.
ASSETS
Total assets were $2.061 billion at December 31, 2001, a decrease of $369.4
million from December 31, 2000. The decrease was driven by a decrease of $153.2
million in trade receivables before the receivables sale facility and
inventories and an increase of $117.5 million in PolyOne's utilization of the
receivables sale facility. Further, restructuring initiatives in 2001 reduced
property by $33.4 million and the investment in equity affiliates by $18.9
million.
LIABILITIES AND EQUITY
At December 31, 2001, short-term bank debt was $14.7 million compared with
$249.1 million at December 31, 2000. Long-term debt was $431.4 million at
December 31, 2001, compared with $433.1 million at December 31, 2000. The public
debt was rated investment grade as of December 31, 2001, by Moody's Investors
Service, Standard & Poor's and Fitch Ratings.
In October 2001, PolyOne's $100 million, 364-day revolving credit
facility expired. In November 2001, PolyOne amended its five-year revolving
credit facility to reduce the existing facility from $200 million to $150
million, shorten the maturity date to October 2004 and modify existing financial
ratios to be maintained. There were no borrowings under this facility at
December 31, 2001.
In September 2000, PolyOne's Board of Directors authorized the
purchase of up to 9.6 million, or approximately 10 percent, of PolyOne's
outstanding shares of common stock. Through December 31, 2000, PolyOne
repurchased 2.6 million shares at an average cost of $7.15 per share. No common
stock was repurchased in 2001. Also, PolyOne returned $22.9 million to its
shareholders in the form of cash dividends in 2001.
ACCOUNTING POLICIES AND ESTIMATES
Note B of the Consolidated Financial Statements contains a summary of PolyOne's
accounting policies and commentary on the nature of estimates made in the
preparation of the financial statements. Following is a description of important
management judgments relating to the PolyOne 2001 Consolidated Financial
Statements.
ENVIRONMENTAL ACCRUED LIABILITY PolyOne has accrued $56.2 million to
cover future environmental remediation expenditures, and believes none of
these 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 PolyOne's best estimate of the remaining remediation
costs based upon information and technology currently available. For additional
discussion, refer to Note N to the Consolidated Financial Statements.
RESTRUCTURING COSTS PolyOne has announced plans to close 11
manufacturing plants in 2002. As of December 31, 2001, an accrued liability of
$37.7 million existed for future employee severance and plant closing costs. In
addition, at the end of 2001, the net property carrying value to be realized for
the plants closed or to be closed was $35 million (some assets will be
transferred to other locations as production ceases).
EQUITY INVESTMENT In December 2001, OxyVinyls (of which PolyOne owns
24%) announced the temporary closing of its Deer Park, Texas, chlor-alkali plant
due to low industry capacity utilization and low product market selling prices.
As of December 31, 2001, OxyVinyls had accrued $13.8 million for future employee
severance and liabilities associated with the temporary idling of a plant. The
plant had a net property carrying value by OxyVinyls at the end of 2001 of
approximately $139 million, which is anticipated to be realized through future
operations upon the restart of the plant.
GOODWILL As of December 31, 2001, PolyOne's recorded goodwill
totaled $476.3 million. PolyOne had not completed its assessment of any
potential impairment under the new provisions of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which is effective in 2002, as further explained in Note B to the Consolidated
Financial Statements.
DEFERRED TAX BENEFIT FOR OPERATING LOSS CARRYFORWARDS As of December
31, 2001, PolyOne had a net deferred tax liability of $23.0 million, which
included a deferred tax asset of $82.3 million for operating loss carryforwards
for tax purposes. The operating loss carryforwards are expected to be utilized
against future earnings, thereby reducing taxes that would otherwise be paid.
See the discussion in Note P to the Consolidated Financial Statements.
PolyOne Corporation 12
CONSOLIDATED BALANCE SHEETS
In millions, except per share data December 31,
2001 2000
-----------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 18.2 $ 37.9
Trade accounts receivable (less allowance of $9.5 in 2001 and $9.8 in 2000) 135.6 330.4
Other receivables 11.4 17.1
Inventories 255.3 337.1
Deferred income tax assets 48.6 53.9
Other current assets 16.5 20.1
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 485.6 796.5
Property, net 683.6 703.8
Investment in equity affiliates 287.9 311.6
Goodwill and other intangible assets, net 537.3 540.3
Other non-current assets 66.8 78.4
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,061.2 $ 2,430.6
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank debt $ 14.7 $ 249.1
Accounts payable, including amounts payable to related party (see Note N) 311.4 319.4
Accrued expenses 169.4 175.7
Current portion of long-term debt 4.6 2.6
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 500.1 746.8
Long-term debt 426.8 430.5
Deferred income tax liabilities 64.5 132.8
Post-retirement benefits other than pensions 126.2 129.9
Other non-current liabilities, including pensions 214.5 149.0
Minority interest in consolidated subsidiaries 15.7 14.0
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,347.8 1,603.0
SHAREHOLDERS' EQUITY
Preferred stock, 40.0 shares authorized, no shares issued -- --
Common stock, $0.01 par, authorized 400.0 shares, issued 122.2 in 2001 and 2000 1.2 1.2
Additional paid-in capital 1,072.7 1,057.6
Retained earnings 100.3 169.3
Common stock held in treasury, 31.2 shares in 2001 and 28.3 shares in 2000 (350.1) (321.9)
Share ownership trust (5.3) (25.5)
Accumulated other non-owner equity changes (105.4) (53.1)
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 713.4 827.6
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,061.2 $ 2,430.6
===================================================================================================================
See Notes to Consolidated Financial Statements.
13 PolyOne Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
In millions Year Ended December 31,
2001 2000 1999
--------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (46.1) $ 15.9 $ 104.7
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Employee separation and plant phase-out charges 36.1 2.8 0.5
Cash payments on employee separation and plant phase-out (23.8) (5.0) --
Depreciation and amortization 91.3 57.4 44.4
Investment writedown 10.1 -- --
Gain on formation of joint ventures, net of formation costs -- -- (93.5)
Companies carried at equity and minority interest:
(Income) loss 11.2 (37.0) (9.7)
Dividends received 3.7 27.0 4.6
Provision (benefit) for deferred income taxes (29.0) 8.3 60.4
Changes in assets and liabilities:
Operating working capital:
Trade accounts receivable 191.0 60.0 (31.1)
Inventories 79.7 9.9 (23.9)
Accounts payable (4.8) (19.2) 36.4
Realization of retained working capital of
contributed PVC business -- -- 61.6
Accrued expenses and other (10.7) (56.2) (39.8)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 308.7 63.9 114.6
INVESTING ACTIVITIES
Capital expenditures (80.2) (62.7) (60.1)
Return of cash by (investment in) equity affiliates 1.7 5.3 (16.1)
Proceeds from sale of assets 4.4 44.2 --
Business acquisitions, net of cash acquired -- (2.4) (233.5)
Cash received in connection with consolidation of
M.A. Hanna Company, net of transaction costs paid -- 28.1 --
Net cash received in connection with OxyVinyls formation -- -- 66.1
Other (0.8) 7.9 --
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES 233.8 84.3 (129.0)
FINANCING ACTIVITIES
Change in short-term debt (233.2) 8.7 167.5
Net issuance (repayment) of long-term debt (0.8) (72.9) 2.0
Termination of interest rate swap agreements 4.3 -- --
Net proceeds from issuance of common stock -- 0.6 7.1
Repurchase of common stock -- (18.7) --
Dividends (22.9) (14.9) (11.8)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (252.6) (97.2) 164.8
Effect of exchange rate changes on cash (0.9) (0.4) 1.0
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19.7) (13.3) 36.8
Cash and cash equivalents at beginning of year 37.9 51.2 14.4
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18.2 $ 37.9 $ 51.2
=====================================================================================================================
See Notes to Consolidated Financial Statements.
PolyOne Corporation 14
MANAGEMENT'S ANALYSIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
The 2001 statement of cash flows is that of PolyOne. The 2000
statement of cash flows comprises eight months' operation of The Geon Company
and four months' operation of PolyOne. The 1999 statement of cash flows is that
of only The Geon Company.
In 2001, net cash provided by operating and investing activities was
$233.8 million. Cash from operating activities totaled $308.7 million, and
resulted primarily from a commercial working capital (trade receivables before
the receivables sale facility, FIFO inventories and accounts payable) decrease
of $156.0 million due to 2001 management initiatives, lower fourth-quarter sales
and an increase in the sale receivables facility. Further, PolyOne increased by
$117.5 million the utilization of the receivables sale facility (this facility
was increased from $100.0 million to $250.0 million in 2001). Investing
activities consisted primarily of capital expenditures of $80.2 million, of
which approximately one-half supported PolyOne's manufacturing restructuring
and the implementation of a common management business information systems
platform.
In 2000, net cash provided by operating and investing activities was
$84.3 million. Significant sources of cash included operating activities ($63.9
million) and proceeds from the sale of assets, primarily the former Hanna's
Cadillac Plastic business ($44.2 million) and net Hanna cash received at the
time of the consolidation ($28.1 million). Contributing to a $60.0 million
reduction in accounts receivable in 2000 was a significant slowdown in
fourth-quarter sales demand. The 2000 investing activities included capital
expenditures of $62.7 million.
Financing activities in 2001 consisted largely of the reduction of
short-term debt of $233.2 million and the payment to shareholders of dividends
totaling $22.9 million. In 2000, financing activities included PolyOne's
repurchase for $18.7 million of approximately 2.6 million shares through
December 31, 2000. Also, $72.9 million of long-term debt was repaid in 2000
after PolyOne entered into two revolving credit agreements totaling $400 million
in October 2000. Upon formation, PolyOne commenced the payment of quarterly
dividends at the annual rate of $0.25 per common share.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, PolyOne had existing facilities to access capital
resources (receivables sale facility, revolving credit agreement, uncommitted
short-term credit lines and long-term debt) totaling $882 million. At the end of
2001, PolyOne had utilized $664 million of these facilities, including $431
million of long-term debt. The effective available funds under these facilities
can vary, depending on the level of qualified receivables outstanding, ratings
on public debt and debt-related financial ratios. As of December 31, 2001,
approximately $69 million of the existing facilities was available to be drawn
while remaining in compliance with the facilities. As of December 31, 2001,
PolyOne's public debt was rated by Moody's Investors Service, Standard & Poor's
and Fitch Ratings as investment grade. The debt ratings from these agencies
impact PolyOne's cost of non-fixed interest rate financing.
On March 28, 2002, PolyOne amended and restated its revolving credit
agreement governing the revolving credit facility. The amended and restated
credit agreement provides that, among other things, PolyOne must issue at least
$200 million of unsecured debt. This financing will provide additional
liquidity and reduce the risk associated with refinancing existing long-term
debt. The revolving credit agreement requires the maintenance of certain defined
financial ratios with specified levels that would require limits on certain
expenditures. For a summary of these financial ratios, see the table that
follows.
Of the capital resource facilities available to PolyOne as of December
31, 2001, only the portion of the receivables sale facility that was actually
sold provided security in connection with the transfer of ownership of these
receivables. Each indenture governing PolyOne's public debt allows for a level
of secured debt, above which security must be provided under each such
indenture. The receivables sale facility does not constitute debt under the
public debt indentures. Security will be granted under the terms of the amended
and restated revolving credit agreement. Giving effect to the amendment and
restatement of PolyOne's credit agreement as though it had occurred as of
December 31, 2001, under the terms of the most restrictive indenture, PolyOne
would have been able to borrow an additional $20 million under the revolving
credit
15 PolyOne Corporation
MANAGEMENT'S ANALYSIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
agreement without having to provide security for obligations under PolyOne's
public debt. As of December 31, 2001, however, there were no drawings on this
revolving credit facility. Security on the revolving credit agreement and public
debt, if applicable, will terminate when the borrowed debt-to-EBITDA ratio is
less than 3.50:1 for any two consecutive fiscal quarters. As of December 31,
2001, PolyOne had guaranteed unconsolidated equity affiliate debt of $97.5
million for SunBelt and $42.3 million for OxyVinyls.
The following table summarizes the defined financial ratios for 2002
included in the March 28, 2002, amendment to the revolving credit agreement.
Borrowed Tangible
Interest Debt-to- Assets-to-
Coverage EBITDA Indebtedness
Ratio Ratio Ratio
(Minimum) (Maximum) (Minimum)
----------------------------------------
Agreement compliance
First quarter of 2002 2.75 Waived 1.00
Second quarter of 2002 2.75 5.70 1.00
Third quarter of 2002 2.75 5.50 1.00
Fourth quarter of 2002 3.00 5.25 1.00
Limitations on dividends and
stock repurchases(1),
capital expenditures(2)
and acquisitions(3)
Each quarter 3.99
- ---------------------------------------------------------------------------
(1) Payments for dividends and stock repurchases would be restricted to $6.0
million per quarter, excluding certain allowable stock repurchase
transactions as defined in the revolving credit agreement, as amended March
28, 2002.
(2) Capital expenditures would be restricted to $33.0 million in a quarter and
$88.0 million in a fiscal year.
(3) New acquisition investments would be limited to $25.0 million.
The realization of profitable operations will be important to
maintaining the existing levels of available capital resources and the execution
of PolyOne's announced restructuring initiatives. In 2001, PolyOne's OIBSIDA
(which approximates the free cash flow of ongoing operations) was approximately
$126 million. The free cash flow must cover expenditures for financing cost
(interest expense and discount on sale of receivables), dividends and capital
expenditures. These expenditures totaled approximately $150 million in 2001, and
are not projected to materially change in 2002. Additional projected
expenditures in 2002 total nearly $50 million for the funding of employee
severance and plant closing costs announced in 2001 and a previously announced
acquisition.
Projected to increase 2002 cash flow are increased earnings over 2001, in part
from higher sales (net of one-time working capital investment associated with
sales growth), from greater realization of value capture initiatives and from
continuing efforts to reduce the percent of commercial operating working capital
required to support each dollar of sales. Any remaining shortfall in cash flow
is expected to be covered by (1) utilizing the available capital resource
facilities noted previously, (2) securing additional capital resources, (3)
managing and redeploying assets and/or (4) revising the expenditures noted
previously.
PolyOne has managed and intends to continue to manage working capital
and its capital structure to maintain adequate liquidity in 2002 to support
normal operations, complete an acquisition and execute the restructuring
initiatives that are projected to enhance the Company's future profitability.
Certain factors that may affect these forward-looking comments are
discussed in "Risk Factors" and "Forward-Looking Statements."
MARKET RISK DISCLOSURES
PolyOne is exposed to market risk from changes in interest rates on debt
obligations. PolyOne's long-term debt at December 31, 2001, was primarily
fixed-rate obligations. To manage interest rate risk, PolyOne periodically
enters into interest rate swap agreements that generally convert fixed-rate
obligations to floating rates. As of December 31, 2001, PolyOne had interest
rate swap agreements on three of its fixed-rate obligations in the amount of
$182.8 million. These exchange agreements are perfectly effective as defined by
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities," and had a fair value
of $(1.6) million at December 31, 2001. The weighted-average interest rate for
these three agreements was 6.25% at December 31, 2001.
PolyOne is also exposed to foreign currency exchange risk in the
ordinary course of business because its 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 PolyOne's
exposure to this risk and has concluded that PolyOne's exposure in this area is
adequately hedged with foreign currency exchange contracts, and that exposure to
this risk is not material to fair values, cash flows or earnings. For additional
discussion, refer to Note T to the Consolidated Financial Statements.
PolyOne Corporation 16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In millions, except per share data; Common Common
shares in thousands Shares Additional Stock
Common Held in Common Paid-in Retained Held in
Shares Treasury Total Stock Capital Earnings Treasury
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 27,974 4,622 $ 214.1 $ 2.8 $ 296.1 $ 75.4 $ (115.1)
Non-owner equity changes:
Net income 104.7 104.7
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 10.6
Cash dividends ($0.25 per share) (11.8) (11.8)
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 27,974 4,245 334.7 2.8 297.3 168.3 (104.5)
Non-owner equity changes:
Net income 15.9 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 (215.6)
Formation of share ownership trust (500) 13.4
Stock-based compensation and
benefits and exercise of options 5 (90) (2.2) (7.5) 3.5
Purchase of shares for treasury 2,600 (18.7) (18.7)
Adjustment to market value (15.8)
Cash dividends ($0.25 per share) (14.9) (14.9)
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 122,192 28,315 827.6 1.2 1,057.6 169.3 (321.9)
Non-owner equity changes:
Net (loss) (46.1) (46.1)
Translation adjustment (10.0)
Adjustment of minimum
pension liability (38.9)
Net unrealized loss on securities (0.5)
-------
Total non-owner equity changes (95.5)
Stock-based compensation and
benefits and exercise of options 2,860 4.2 (0.8) (28.2)
Adjustment to market value 15.9
Cash dividends ($0.25 per share) (22.9) (22.9)
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 122,192 31,175 $ 713.4 $ 1.2 $ 1,072.7 $ 100.3 $ (350.1)
================================================================================================================================
In millions, except per share data; Accumulated
shares in thousands Share Other Non-
Ownership Owner Equity
Trust Changes
- -----------------------------------------------------------------
Balance December 31, 1998 $ -- $ (45.1)
Non-owner equity changes:
Net income
Translation adjustment 7.9
Adjustment of minimum
pension liability 7.6
Total non-owner equity changes
Stock-based compensation and
exercise of options 0.4
Cash dividends ($0.25 per share)
- -----------------------------------------------------------------
Balance December 31, 1999 -- (29.2)
Non-owner equity changes:
Net income
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 (29.7)
Formation of share ownership trust (13.4)
Stock-based compensation and
benefits and exercise of options 1.8
Purchase of shares for treasury
Adjustment to market value 15.8
Cash dividends ($0.25 per share)
- -----------------------------------------------------------------
Balance December 31, 2000 (25.5) (53.1)
Non-owner equity changes:
Net (loss)
Translation adjustment (10.0)
Adjustment of minimum
pension liability (38.9)
Net unrealized loss on securities (0.5)
Total non-owner equity changes
Stock-based compensation and
benefits and exercise of options 31.6 (2.9)
Adjustment to market value (15.9)
Cash dividends ($0.25 per share)
- -----------------------------------------------------------------
Balance December 31, 2001 $ (5.3) $ (105.4)
=================================================================
See Notes to Consolidated Financial Statements.
17 PolyOne Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. DESCRIPTION OF BUSINESS
PolyOne Corporation (PolyOne or Company) is a leading global 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) (see Note C). The reported financial
operating results and assets and liabilities prior to August 31, 2000, are those
of only the former Geon business.
PolyOne's operations are located primarily in the United States,
Europe, Canada, Mexico and Asia/Pacific in four business segments. The business
segments consist of Performance Plastics, Elastomers and Performance
Additives, Distribution, and Resin and Intermediates. See Note R for further
information on the Company's business segments.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION The Consolidated Financial Statements
include the accounts of the Company and its subsidiaries. All majority-owned
affiliates over which the Company has control are consolidated. Investments in
affiliates and joint ventures in which the Company's ownership is 50 percent
or less, or in which 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. Inter-company transactions are
eliminated.
The Company does not have off-balance sheet special-purpose
entities. PolyOne's accounts receivable sale facility is disclosed in Note I,
and its impact has been reflected on the balance sheet. The financial operations
and position of PolyOne's unconsolidated affiliates are disclosed in Note F.
Transactions with related parties (including joint ventures) are in the
ordinary course of business and are at an arm's length basis.
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 the 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 relating to this credit risk is remote.
INVENTORIES Inventories are stated at the lower of cost or market. Approximately
44% of the Company's inventories at December 31, 2001, had 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.
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, which ranges
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.
Depreciation of property, plant and equipment was $67.3 million in
2001, $45.9 million in 2000 and $40.6 million in 1999.
GOODWILL AND OTHER INTANGIBLE ASSETS The excess of the purchase price paid
over the fair value of the net assets of businesses acquired prior to July
2001 was recorded as goodwill and amortized on a straight-line basis over a life
of 35 years. Goodwill and other long-lived assets are reviewed for impairment.
During the periods presented, when indicators of impairment exist and when
undiscounted cash flows are not sufficient to recover the assets' carrying
amount, an analysis of impairment is completed. Measurement of impairment is
based upon discounted cash flows, asset appraisals or market values of similar
assets, and is charged to expense in the period identified. At December 31, 2001
and 2000, goodwill totaled $476.3 million and $470.8 million, net of
accumulated amortization of $29.0 million and $14.8 million, respectively.
Other intangible assets include values assigned to technology and
related patents, customer lists, workforce and long-term sales contracts of
businesses acquired. At December 31, 2001 and 2000, other intangible assets
totaled $61.0 million and $69.7 million, net of accumulated amortization of
$13.5 million and $3.7 million, respectively. These assets are being amortized
over periods ranging from four to 20 years on a straight-line basis.
PolyOne Corporation 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense related to goodwill and other intangibles was
$24.0 million in 2001, $11.5 million in 2000 and $3.8 million in 1999.
During July 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires the purchase method for all business combinations initiated
after June 30, 2001. SFAS No. 141 also clarifies the criteria for recognition of
intangible assets separate from goodwill. SFAS No. 142 eliminates the
amortization of goodwill and indefinite-lived intangible assets. This
Statement also requires an initial goodwill impairment assessment in the year of
adoption and annual impairment tests thereafter. Adoption of this Statement is
required, effective January 1, 2002. As of December 31, 2001, the Company had
net unamortized goodwill of $476.3 million and amortization expense on an
annual basis of approximately $14 million. Also as of December 31, 2001, the
Company had an intangible asset of $25.2 million recorded for acquired
workforces, with annual amortization of approximately $4 million. Under SFAS No.
142, on January 1, 2002, the intangible workforce asset will be reclassified as
goodwill. The discontinuation of goodwill amortization and reclassification
of the workforce intangible in 2002 will increase operating income by
approximately $18 million. Approximately $4.5 million of the annual goodwill
amortization and $4 million of the workforce intangible was tax benefited in
2001. The Company is assessing whether any goodwill impairment will be
recognized in 2002 under SFAS No. 142.
DERIVATIVE FINANCIAL INSTRUMENTS Effective January 1, 2001, the Company adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires that all derivative financial instruments, such as foreign
exchange contracts and interest rate swap agreements, be recognized in the
financial statements and measured at fair value, regardless of the purpose or
intent in holding them. Changes in the fair value of derivative financial
instruments are recognized periodically in either income or shareholders' equity
(as a component of accumulated other non-owner equity), depending on whether
the derivative is being used to hedge changes in fair value or cash flows. The
adoption of SFAS No. 133 did not have a material effect on the Company's
earnings, financial position or cash flows in fiscal 2001.
In the normal course of business, the Company is exposed to changes in
foreign currencies and fluctuations of interest rates. The Company has
established policies and procedures that govern the management of these
exposures through the use of financial instruments. By policy, the Company
does not enter into such instruments for trading purposes or speculation.
The Company enters into foreign currency exchange forward contracts
with certain major financial institutions to reduce the effect of fluctuating
exchange rates, primarily on foreign currency receivables, payables and
inter-company lending transactions. Such contracts are not treated as hedges
and, accordingly, are marked to market, with the resulting gains and losses
recognized as other income or expense in the Consolidated Statements of
Income. Realized gains and losses on these contracts offset the foreign exchange
gains and losses on the underlying transactions. The Company's forward contracts
have original maturities ranging from one to three months.
From time to time, the Company also enters into interest rate swap
agreements. The interest rate swap agreements effectively modify the Company's
exposure to interest risk by converting the Company's fixed-rate debt to a
floating rate. The interest rate swap and instrument being hedged are marked to
market in the balance sheet. The net effect of this accounting on the Company's
operating results is that interest expense on the portion of fixed-rate debt
being hedged is recorded based on the variable rate stated within the swap
agreement. No other cash payments are made unless the contract is terminated
prior to maturity. In this case, the amount paid or received in settlement is
established by agreement at the time of termination, and usually represents the
net present value, at current rates of interest, of the remaining obligations to
exchange payments under the terms of the contract. Any gains or losses upon the
early termination of the interest rate swap contracts are deferred within the
hedged item and recognized over the remaining life of the contract. During
2001, the Company terminated three interest rate swap contracts and received
$4.3 million of cash. This deferred gain has been classified as long-term
debt, and is being amortized over the remaining life of the related debt
instrument. See Note T for a further description of the Company's financial
instruments.
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.
19 PolyOne Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHIPPING AND HANDLING COSTS Shipping and handling costs are reflected in cost of
sales.
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, 2001 and 2000, there were no
deferred losses related to equity investees.
The Company assesses investments in equity affiliates under
Accounting Principles Board (APB) Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock," and recognizes impairment losses
in the value of investments that experience declines judged to be other than
temporary. See Note F for further information on the Company's equity
affiliates.
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
$18.8 million in 2001, $21.4 million in 2000 and $18.5 million in 1999, are
charged to expense as incurred.
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 that are
currently in effect.
FOREIGN CURRENCY TRANSLATION Revenues and expenses are translated at average
currency exchange rates effective during the period. Assets and liabilities of
foreign subsidiaries and equity investees are translated using 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 $42.5 million, $32.5
million and $27.8 million at December 31, 2001, 2000 and 1999, respectively.
Gains and losses resulting from foreign currency transactions, the amounts of
which were not material, are included in net income.
MARKETABLE SECURITIES Marketable securities are classified as available for sale
and recorded at current market value. Net unrealized gains and losses on
marketable securities available for sale are credited or charged as accumulated
other non-owner equity changes. The cumulative unrealized loss at December 31,
2001, was $0.5 million.
STOCK OPTIONS The Company accounts for stock options in accordance with APB
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 requires 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.
NEW ACCOUNTING PRONOUNCEMENT In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company expects to adopt SFAS No. 144 as of January 1,
2002, and does not anticipate that the Statement will have a significant
impact on the Company's financial position and results of operations.
USE OF ESTIMATES The preparation of Consolidated Financial Statements in
conformity with generally accepted accounting principles requires management to
make extensive use of certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and lia-
bilities at the date of the Consolidated Financial Statements, as well as the
reported amounts of revenues and expenses during the reported periods.
Significant estimates in these Consolidated Financial Statements include
restructuring and other non-recurring (credits) charges, purchase accounting
reserves, allowances
PolyOne Corporation 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for doubtful accounts receivable, estimates of future cash flows associated with
assets, asset impairments, useful lives for depreciation and amortization,
loss contingencies, net realizable value of inventories, environmental
liabilities, income taxes and tax valuation reserves, and the determination of
discount and other rate assumptions for pension and post-retirement employee
benefit expenses. Actual results could differ from these estimates.
RECLASSIFICATION Certain amounts for 2000 and 1999 have been reclassified to
conform to the 2001 presentation.
NOTE C. BUSINESS COMBINATIONS - FORMATION OF POLYONE
On August 31, 2000, the Company was formed as a result of the
consolidation of The Geon Company (Geon) and M.A. Hanna Company (Hanna), with
Geon as the acquiring entity. 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 was treated in a manner similar to a
two-for-one stock split. Per share data for 2000 and 1999 have been restated to
reflect the effects of the conversion.
The assets acquired and liabilities assumed in the acquisition of
Hanna were recorded at estimated fair values as determined by PolyOne's
management. The Company obtained independent appraisals for the fair value of
acquired property, plant and equipment, and identified intangible assets, and
completed a review and determination of the other assets acquired and
liabilities assumed during August 2001.
A summary of the assets acquired and liabilities assumed in the Hanna
acquisition follows:
In millions
Recorded fair values
Assets acquired $1,216.2
Liabilities assumed (993.4)
Goodwill 322.9
- --------------------------------------------------------------------
Purchase price $ 545.7
====================================================================
As a result of the acquisition of Hanna, PolyOne incurred employee
separation and plant phase-out costs for incremental expenditures to exit and
consolidate activities at former Hanna locations, to involuntarily terminate
former Hanna employees, and to integrate operating locations and other activi-
ties of the newly formed PolyOne. These costs have been reflected as assumed
liabilities in the above purchase price allocation.
In addition to the Hanna acquisition, the Company acquired businesses
for a combined purchase price, net of cash, of $2.4 million in 2000 and $233.5
million in 1999. All acquisitions were accounted for using the purchase method
and, accordingly, the Consolidated Statements of Income include the results of
the acquired businesses from the effective date of acquisition.
In October 2001, the Company announced that it had entered into a process to
acquire 100% of the shares of TRANSCOLOR S.A. in 2002. TRANSCOLOR S.A. is a
color concentrates producer in Spain, with annual revenues of approximately $30
million. The components of the acquisition integration liabilities are as
follows:
Plant
In millions, except employee numbers Employee Separation Phase-Out Costs
----------------------------------------------------
Asset
Number of Cash Write-
Employees Costs Closure Downs Total
- ----------------------------------------------------------------------------------------
Balance at December 31, 1999 -- $ -- $ -- $ -- $ --
2000 purchase accrual 135 15.1 -- -- 15.1
Utilized in 2000 (27) (4.4) -- -- (4.4)
- ----------------------------------------------------------------------------------------
Balance at December 31, 2000 108 10.7 -- -- 10.7
2001 purchase accrual 671 17.3 7.6 17.9 42.8
Utilized in 2001 (375) (16.2) (1.0) (17.5) (34.7)
- ----------------------------------------------------------------------------------------
Balance at December 31, 2001 404 $ 11.8 $ 6.6 $ 0.4 $ 18.8
========================================================================================
21 PolyOne Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D. EMPLOYEE SEPARATION AND PLANT PHASE-OUT
During 2001, subsequent to the formation of PolyOne and related to
the integration activities, the Company incurred various employee separation and
plant phase-out costs. These costs included severance, employee outplacement,
external consulting, lease termination, facility closing and the writedown
of the carrying value of plants and equipment. These employee separation and
plant phase-out costs have been accrued and recognized as expense in the
Consolidated Statements of Income. In addition, the Company incurred other
employee separation and plant phase-out costs in 2000.
2001 CHARGES: Operating income in 2001 for the Performance Plastics
segment was reduced by charges of $36.1 million ($22.0 million after tax) for
costs associated with integration efforts and programs to update North American
manufacturing. The costs included $21.0 million for employee separation, $2.1
million for cash plant closing and $13.0 million for the writedown of the
carrying value of plant and equipment. The employee separation consisted of
severance and other related employee benefits, and includes the projected
termination of approximately 400 employees. Approximately 300 employees remain
to be terminated in 2002 in association with the vinyl manufacturing
restructuring announced in November 2001.
2000 CHARGES: Operating income in 2000 was reduced by charges of
$3.4 million ($2.1 million after tax) for costs associated with the closing of
an engineered films facility. This facility closed in February 2001, with the
elimination of all positions at the plant during the first six months of 2001.
During 2001, the Company reassessed the value of the facility that was closed
and recorded an impairment charge of $3.8 million.
In millions, except employee numbers Employee Separation Plant Phase-Out Costs
----------------------------------------------------------------------------
Asset
Number of Write-
Employees Costs Cash Closure Downs Total
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 -- $ 0.5 $ -- $ -- $ 0.5
2000 charges 80 2.5 -- 0.3 2.8
Utilized in 2000 (2) (0.6) -- (0.3) (0.9)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 78 2.4 -- -- 2.4
2001 charges 400 21.0 2.1 13.0 36.1
Utilized in 2001 (178) (6.4) (0.2) (13.0) $(19.6)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 300 $ 17.0 $ 1.9 $ -- $ 18.9
=======================================================================================================================
NOTE E. OXYVINYLS JOINT VENTURE FORMATION
On April 30, 1999, the Company completed certain transactions with
Occidental Chemical Corporation (OxyChem), which included the formation of Oxy
Vinyls, LP (OxyVinyls), a manufacturer and marketer of polyvinyl chloride (PVC)
resins. OxyVinyls is a leading producer of PVC resins in North America, with
PolyOne holding a 24% ownership interest and OxyChem owning 76%.
In conjunction with the transactions, PolyOne 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 comprised 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.
As a result of these transactions, the Company recognized a pre-tax
gain of $93.5 million representing the excess of the fair value received over
the book value of net assets contributed. This gain was net of certain
one-time costs directly related to the transactions.
In conjunction with these transactions, PolyOne entered into PVC resin
and vinyl chloride monomer (VCM) supply agreements with OxyVinyls under which
PolyOne purchases a substantial portion of its PVC resin and all of its VCM.
The agreements have an initial term of 15 years, with PolyOne having the right
to renew for two five-year option periods. The Company also has entered into
various service agreements with the partnership.
PolyOne Corporation 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F. FINANCIAL INFORMATION OF EQUITY AFFILIATES
The Company's Resin and Intermediates (R&I) segment consists primarily
of investments in equity affiliates. Summarized financial information for
OxyVinyls follows. In December 2001, OxyVinyls announced the temporary closing
of its Deer Park, Texas, chlor-alkali plant, which has a book carrying value
of approximately $139 million. OxyVinyls intends to restart the plant when
market conditions improve.
In millions 2001 2000
-------------------------
OxyVinyls:
Net sales $ 1,546.3 $ 1,892.3
Employee separation and liabilities associated
with the temporary idling of a plant (18.2) --
Operating income (loss) (14.7) 147.3
Partnership income (loss) as reported
by OxyVinyls (13.9) 146.2
PolyOne's ownership of OxyVinyls 24% 24%
- --------------------------------------------------------------------------------
PolyOne's proportionate share of
OxyVinyls' earnings (loss) (3.3) 35.1
Amortization of the difference between
PolyOne's investment and its
underlying share of OxyVinyls' equity 0.6 0.6
- --------------------------------------------------------------------------------
Earnings (loss) of equity affiliate
recorded by PolyOne $ (2.7) $ 35.7
================================================================================
Current assets $ 287.2 $ 347.7
Non-current assets 1,006.1 1,045.1
- --------------------------------------------------------------------------------
Total assets $ 1,293.3 $ 1,392.8
================================================================================
Current liabilities $ 178.7 $ 247.8
Non-current liabilities 81.6 93.9
- --------------------------------------------------------------------------------
Total liabilities $ 260.3 $ 341.7
================================================================================
The Company's R&I segment also includes the SunBelt Chlor-Alkali
(owned 50%) and Australian Vinyls Corporation (owned 37.4%) equity affiliates.
The Performance Plastics segment includes the DH Compounding Company (owned
50%), Geon/Polimeros Andinos (owned 51%), SPCGeon PTE Limited (owned 50%) and
Techmer, PM, LLC (owned 51%) equity affiliates. Combined summarized financial
information for these equity affiliates follows. The sale of Australian Vinyls
Corporation's PVC resin operations was announced on January 11, 2002; the sale
closed in February 2002. In December 2001, PolyOne recognized an investment
impairment charge of $9.5 million, including a $4.9 million translation loss,
in connection with the pending sale. The retained Australian compound oper-
ations are named Welvic Australia Pty Ltd. The amounts shown represent the
entire operations of these businesses, rather than the Company's proportionate
share.
In millions 2001 2000
---------------------------
Net sales $ 359.0 $ 323.2
Operating income (loss) (32.7) 28.4
Net income (loss) $ (34.1) $ 3.8
========================================================================
Current assets $ 96.4 $ 112.3
Non-current assets 220.5 267.1
- ------------------------------------------------------------------------
Total assets $ 316.9 $ 379.4
========================================================================
Current liabilities $ 55.3 $ 42.5
Non-current liabilities 196.6 219.5
- ------------------------------------------------------------------------
Total liabilities $ 251.9 $ 262.0
========================================================================
OxyVinyls purchases chlorine from SunBelt under an agreement that
expires in 2094. The agreement requires OxyVinyls to purchase at market price,
less a discount, all chlorine produced by SunBelt up to a maximum of 250,000
tons per year. OxyVinyls chlorine purchases from SunBelt totaled $9.8 million in
2001 and $38.7 million in 2000.
NOTE G. FINANCING ARRANGEMENTS
Long-term debt at December 31 consisted of the following:
In millions 2001 2000
-----------------------
9.375% senior notes due 2003 (converted
to floating rate of 7.96% by interest rate
swap - see Note T) $ 91.5 $ 91.1
6.875% debentures due 2005 (converted
to floating rate of 4.5675% by interest
rate swap - see Note T) 75.2 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
($20.0 at 6.875% converted to 5.0825%
by interest rate swap - see Note T) 151.1 149.4
Deutsche mark denominated, at 5.1%, due 2003 40.5 43.2
Colombian peso denominated, at 14.02%
to 15.93%, due 2004-2005 11.4 11.3
Italian lira denominated, at 2% to 5.1%,
due 2003-2008 6.5 4.2
Bank borrowings 5.2 8.9
- --------------------------------------------------------------------------------
431.4 433.1
Less current portion 4.6 2.6
- --------------------------------------------------------------------------------
$ 426.8 $ 430.5
================================================================================
Aggregate maturities of long-term debt for the next five years are:
2002-$4.6 million; 2003-$135.8 million; 2004-$25.3 million; 2005-$102.3
million; 2006-$20.1 million; and thereafter-$143.3 million.
23 PolyOne Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2001, the Company's $100 million 364-day revolving credit
facility expired. In November 2001, the Company amended its five-year revolving
credit facility. The November 2001 amendment reduced the existing facility from
$200 million to $150 million, shortened the maturity date to October 2004 and
modified existing financial ratios to be maintained. The amended agreement
provides for interest rates to be determined at the time of borrowing based on a
choice of formulas specified in the agreement. There were no borrowings under
this agreement at December 31, 2001.
The weighted-average interest on short-term borrowings was 4.0% and
7.5% at December 31, 2001 and 2000, respectively. Interest paid amounted to
$42.5 million, $38.6 million and $16.7 million in 2001, 2000 and 1999,
respectively. The Company capitalized $1.1 million of interest costs during 2001
in connection with the implementation of a common management business
information systems platform.
The Company's bank agreements require, among other things, that the
Company comply with interest coverage, borrowed debt-to-EBITDA earnings and
tangible assets-to-indebtedness ratios. The revolving credit agreement requires
the maintenance of certain defined financial ratios and, at certain levels,
would require limits on certain spending for dividends, capital expenditures and
acquisitions, and/or the granting of security in specified assets and certain
subsidiary stock. Any granting of security under the revolving credit agreement
would require similar security for the outstanding public debt. No restrictions
were in effect as of December 31, 2001.
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 $25.7 million in 2001, $21.3 million in 2000 and $20.9
million in 1999.
The future minimum lease payments under non-cancelable operating
leases with initial lease terms in excess of one year at December 31, 2001, are
as follows: 2002-$17.1 million; 2003-$13.1 million; 2004-$7.8 million; 2005-$4.9
million; 2006-$3.3 million; and thereafter-$5.1 million.
NOTE I. SALE OF ACCOUNTS RECEIVABLE
PolyOne participates in a bank program to provide liquidity through
the sale of accounts receivable at a cost similar to commercial paper. In 2001,
the Company amended an agreement with a bank to sell an undivided interest in
certain trade accounts receivable under which, on an ongoing basis, a maximum of
$250.0 million ($100.0 million in 2000) can be sold from a designated pool,
subject to limited recourse. In this securitization, the Company retains
servicing responsibilities. The Company receives an annual servicing fee,
approximating 1/4 of 1% of the outstanding balance. 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 $196.8 million in 2001, $87.5 million in 2000 and $69.6 million in
1999. Trade accounts receivable are net of $217.5 million on the December 31,
2001, Consolidated Balance Sheet and $100.0 million on the December 31, 2000,
Consolidated Balance Sheet, representing the interest in receivables sold
under this agreement. The discount from the Company's sales of receivables,
net of servicing fee, is included in other expense, net, in the Consolidated
Statements of Income.
NOTE J. INVENTORIES
December 31,
In millions 2001 2000
At FIFO or average cost, which
approximates current costs:
Finished products and in process $ 154.8 $ 201.4
Raw materials and supplies 117.0 159.8
- --------------------------------------------------------------------------------
271.8 361.2
Reserve to reduce certain inventories
to LIFO cost basis (16.5) (24.1)
- --------------------------------------------------------------------------------
$ 255.3 $ 337.1
================================================================================
Approximately 44% of the Company's inventory had been valued by the
LIFO method at December 31, 2001, and 43% at December 31, 2000.
24 PolyOne Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K. PROPERTY
In millions December 31,
2001 2000
------------------------
Land and land improvements $ 62.0 $ 55.3
Buildings 287.2 287.5
Machinery and equipment 864.3 823.6
- --------------------------------------------------------------------------------
1,213.5 1,166.4
Less accumulated depreciation
and amortization (529.9) (462.6)
- --------------------------------------------------------------------------------
$ 683.6 $ 703.8
================================================================================
NOTE L. OTHER BALANCE SHEET LIABILITIES
Non-current
Accrued Expenses Liabilities
----------------------------------------------
December 31, December 31,
In millions 2001 2000 2001 2000
----------------------------------------------
Employment costs $ 68.5 $ 80.9 $ 21.1 $ 43.7
Environmental 4.1 10.0 52.1 48.4
Taxes, other than income 8.5 8.3 -- --
Post-retirement benefits 12.5 12.7 -- --
Pension -- -- 95.6 31.8
Employee separation
and plant phase-out 36.5 13.1 1.2 --
Other 39.3 50.7 44.5 25.1
- --------------------------------------------------------------------------------
$169.4 $175.7 $214.5 $149.0
================================================================================
NOTE M. EMPLOYEE BENEFIT PLANS
The Company has four defined-benefit pension plans under which service
benefits are accruing for certain 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 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 acquisitions 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.
A charge of $9.0 million for curtailment and special termination
benefits was recorded in 1999 related 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 recorded an intangible asset of $1.4 million related to
both funded and unfunded pension plans as of December 31, 2001, and of $1.8
million as of December 31, 2000. The Company's accumulated other non-owner
equity changes included $59.5 million at December 31, 2001, and $20.6 million at
December 31, 2000, 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 Share-holders' Equity.
The income tax (expense) benefit related to the adjustment of the minimum
pension liability was $32.0 million in 2001, $11.1 million in 2000 and $(4.1)
million in 1999.
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 co-insurance. 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.
25 PolyOne Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In millions Pension Benefits Health Care Benefits
2001 2000 2001 2000
----------------------------------------
Change in benefit obligation
Benefit obligation - beginning of year $ 415.3 $ 292.5 $ 155.0 $ 86.2
Service cost 5.0 4.2 0.8 0.8
Interest cost 30.7 25.0 10.2 7.9
Participant contributions -- -- 2.0 0.9
Benefits paid (34.2) (25.5) (16.8) (12.7)
Acquired businesses and plan amendments 0.1 101.0 -- 54.3
Change in discount rate and other 25.5 18.1 (5.7) 17.6
- --------------------------------------------------------------------------------------------------
Benefit obligation - end of year 442.4 415.3 145.5 155.0
Projected salary increases 31.4 26.4 -- --
- --------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 411.0 $ 388.9 $ 145.5 $ 155.0
==================================================================================================
Change in plan assets
Plan assets - beginning of year $ 353.2 $ 256.5 $ -- $ --
Actual return on plan assets (11.4) 6.8 -- --
Company contributions 4.5 7.3 -- --
Acquired businesses -- 107.7 -- --
Benefits paid (34.2) (25.1) -- --
- --------------------------------------------------------------------------------------------------
Plan assets - end of year $ 312.1 $ 353.2 $ -- $ --
==================================================================================================
Funded status
Plan assets less than projected benefit obligation $ 130.3 $ 62.1 $ 145.5 $ 155.0
Unamortized
Transition liability (0.7) (1.4) -- --
Prior service cost (0.7) (0.8) (0.9) --
Net actuarial gain (loss) (126.2) (61.6) (5.9) (12.4)
Cumulative adjustment to recognized minimum liability 92.9 33.5 -- --
- --------------------------------------------------------------------------------------------------
Accrued benefit cost $ 95.6 $ 31.8 $ 138.7 $ 142.6
==================================================================================================
The following table summarizes the assumptions used by the consulting
actuaries, and the related benefit cost information.
Dollars in millions Pension Benefits Health Care Benefits
2001 2000 1999 2001 2000 1999
-----------------------------------------------------------------
Assumptions
Discount rate 7.25% 7.5% 7.7% 7.25% 7.5% 7.7%
Future compensation 4.0-7.0% 4.0-7.0% 4.0-7.0% -- -- --
Expected long-term return on plan assets 9.0% 9.0% 9.5% -- -- --
Components of net periodic benefit costs
Service cost $ 5.0 $ 4.2 $ 3.7 $ 0.8 $ 0.8 $ 0.5
Interest cost 30.7 25.0 21.1 10.2 7.9 6.2
Curtailment loss and special termination benefits -- -- 9.0 -- -- --
Expected return on plan assets (29.9) (26.8) (22.6) -- -- --
Amortization of unrecognized losses, transition
obligation and prior service cost 3.7 1.9 2.6 (0.1) -- --
- -----------------------------------------------------------------------------------------------------------------------
$ 9.5 $ 4.3 $ 13.8 $ 10.9 $ 8.7 $ 6.7
=======================================================================================================================
PolyOne Corporation 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The combined projected benefit obligation (PBO) included the PBO of
unfunded plans of $34.3 million at December 31, 2001, and $31.3 million at
December 31, 2000. The accumulated benefit obligation (ABO) of these unfunded
plans was $32.6 million at December 31, 2001, and $28.8 million at December
31, 2000. The remaining PBO relates to the Company's funded pension plans,
including the acquired Hanna and O'Sullivan plans. At December 31, 2001, the
Company had six plans with a PBO and an ABO in excess of the related plan
assets. These included the Company's salaried and wage plans, two plans acquired
with O'Sullivan and two plans acquired with Hanna. For these plans, at December
31, 2001, the PBO was $401.6 million, the ABO was $371.9 million and the fair
value of plan assets was $301.7 million.
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 2002, declining gradually to 5.5% in 2008 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,
2001, by approximately $13.6 million, and the aggregate of the service and
interest cost components of net periodic post-retirement benefit cost for 2001
by $1.0 million.
The Company sponsors three voluntary retirement savings plans (RSP).
Under provisions of these plans, eligible employees can receive Company matching
contributions on up to the first 6% of their eligible earnings. In addition, the
Company may make discretionary profit-sharing contributions to these plans for
eligible employees. The Company made no such contribution in 2001 or 2000, and
$2.2 million was contributed in 1999. Also, the Company continues to sponsor
defined-retirement contribution plans for certain employees, which provide
for Company contributions of a specified percentage of each employee's
compensation. Following are the Company contributions to the RSP:
In millions 2001 2000 1999
-----------------------------
Retirement savings match $ 8.9 $ 9.2 $7.6
Profit sharing -- -- 2.2
Defined-retirement benefit 6.7 1.4 --
- -------------------------------------------------------------------
$15.6 $10.6 $9.8
===================================================================
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 allocation of liability costs are
generally made based on the relative contribution of waste. The Company believes
that its potential continuing lia- bility with respect to such sites will not
have a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Company. In addition, the Company initiates
corrective and preventive environmental projects of its own to ensure safe and
lawful activities at its operations. 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, 2001, had
accruals totaling $56.2 million to cover probable future environmental
expenditures relating 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, the probable range of costs to be incurred could be more or less than the
accrual at December 31, 2001, by as much as $19.5 million and $19.9 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 $3.9 million in 2001, $2.2 million in 2000 and $1.7 million
in 1999.
GUARANTEES In connection with the formation of OxyVinyls, the Company has
guaranteed $42.3 million of OxyVinyls' borrowings from Occidental Petroleum
Corporation. This guarantee terminates on the later of April 30, 2002, or when
OxyVinyls attains a defined amount of cumulative earnings before income taxes,
depreciation and amortization. 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
PVC resin and all of its VCM raw materials under the terms of supply agreements
with OxyVinyls. The agreements have an initial term of 15 years, with PolyOne
having the right to renew for two five-year option periods. The Company also has
entered into various service agreements with OxyVinyls. Net amounts owed to
OxyVinyls, primarily for raw material purchases, totaled $14.2 million at
December 31, 2001, and $16.1 million at December 31, 2000. The Company's
purchases of raw materials from OxyVinyls totaled approximately $184 million
during 2001 and $297 million during 2000.
27 PolyOne Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O. OTHER EXPENSE, NET
In millions 2001 2000 1999
------------------------------
Currency exchange gain (loss), net
of foreign exchange contracts $ (0.8) $ 2.8 $ (0.4)
Discount on sale of trade receivables (8.1) (5.8) (3.5)
Investment writedown (10.1) -- --
Litigation settlement gain 3.1 -- --
Other income (expense), net 0.9 (0.6) 0.3
- ---------------------------------------------------------------------------
$ (15.0) $ (3.6) $ (3.6)
===========================================================================
NOTE P. INCOME TAXES
Income (loss) before income taxes and cumulative effect of a change in
accounting consists of the following:
In millions 2001 2000 1999
------------------------------
Domestic $(81.2) $23.8 $179.6
Foreign 9.5 2.3 (5.6)
- -------------------------------------------------------------------
$(71.7) $26.1 $174.0
===================================================================
A summary of income tax expense (benefit) follows:
In millions 2001 2000 1999
------------------------------
Current:
Federal $ -- $ 0.1 $ --
State (0.5) 1.0 1.2
Foreign 3.9 0.8 5.3
- -------------------------------------------------------------------
Total current 3.4 1.9 6.5
Deferred:
Federal (26.1) 8.7 61.3
State (4.3) (1.2) 6.8
Foreign 1.4 0.8 (6.8)
- -------------------------------------------------------------------
Total deferred (29.0) 8.3 61.3
- -------------------------------------------------------------------
Total tax expense (benefit) $(25.6) $10.2 $67.8
===================================================================
The income tax rate for financial reporting purposes varied from the
federal statutory rate as follows:
2001 2000 1999
---------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
State tax, net of federal benefit 4.3 (0.4) 3.0
Goodwill (3.2) 7.7 0.5
Differences in rates of
foreign operations (1.4) 3.4 --
Enacted tax rate reduction -- (5.4) --
Other, net 1.0 (1.2) 0.5
- -------------------------------------------------------------------
Effective income tax rate 35.7% 39.1% 39.0%
===================================================================
Significant components of the Company's deferred tax liabilities and
assets at December 31 were as follows:
In millions 2001 2000
-------------------
Deferred tax liabilities:
Tax over book depreciation $ 72.2 $ 70.6
Intangibles 23.0 17.3
Equity investments 140.9 142.2
State taxes 4.9 5.0
Other, net 36.4 15.2
- -------------------------------------------------------------------
Total deferred tax liabilities 277.4 250.3
- -------------------------------------------------------------------
Deferred tax assets:
Post-retirement benefits other than pensions 51.7 49.9
Employment cost and pension 44.4 33.7
Employee separation and plant phase-out 17.4 --
Environmental 18.8 19.9
Net operating loss carryforward 82.3 41.5
LIFO inventory 2.5 1.7
Alternative minimum tax credit carryforward 5.8 5.6
Foreign net operating losses and tax
credit carryforward 10.7 13.7
Foreign net operating losses and tax credit
carryforward valuation allowance (10.7) (13.7)
Other, net 31.5 14.7
- -------------------------------------------------------------------
Total deferred tax assets 254.4 167.0
- -------------------------------------------------------------------
Net deferred tax liabilities $ 23.0 $ 83.3
===================================================================
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 $6.4 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 had provided for U.S. federal and foreign withholding tax
on $22.0 million, or 12%, of foreign subsidiaries' undistributed earnings as of
December 31, 2001. 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.
PolyOne Corporation 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2001, the Company received income tax refunds net of taxes paid
of $4.1 million. The Company paid income taxes net of refunds of $4.2 million in
2000 and $8.8 million in 1999. The Company has a net operating loss
carryforward of approximately $235.2 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, $12.4 million will expire in 2020 and the
remaining $116.5 million will expire in 2021. In addition, the Company has an
alternative minimum tax loss carryforward of $142.2 million and an alternative
minimum tax credit carryforward of $5.8 million.
NOTE Q. 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. For 2001 grants, the amount scheduled to vest
in the third year may vest earlier based upon the stock performance. The term
of each option cannot extend beyond 10 years from the date of grant. In 2001, in
addition to the 10-year term option, stock options were granted that vest on the
third anniversary of the date of grant and have a term of 39 months. 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. 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 plan then in effect.
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. A total of 4.5 million shares may be granted under the
Incentive Plan. The options have the same term and pricing structure as options
granted under the Company's other incentive stock plans.
A summary of stock option activity follows:
Weighted-
Average
In thousands, except per share data Shares Exercise Price
----------------------------
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 (84) 11.68
- --------------------------------------------------------------------------------
Outstanding at December 31, 2000 13,656 11.98
Issued 1,531 8.70
Exercised (128) 8.41
Forfeited (529) 11.69
- --------------------------------------------------------------------------------
Outstanding at December 31, 2001 14,530 11.68
Exercisable at December 31, 2001 10,258 12.73
Exercisable at December 31, 2000 10,099 12.46
Exercisable at December 31, 1999 4,586 10.58
- --------------------------------------------------------------------------------
At December 31, 2001:
Exercisable options:
Exercise price: $7.46 - $17.00 9,194 11.78
Exercise price: $17.01 - $26.82 1,064 20.88
Unexercisable options:
Exercise price: $7.46 - $17.00 4,272 9.16
Exercise price: $17.01 - $26.82 -- --
================================================================================
At December 31, 2001, the weighted-average remaining life for options
with an exercise price of $17.00 or less was 4.3 years. Options with an exercise
price of more than $17.00 had a remaining life of 4.6 years.
Under the Company's prior 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
both 2000 and 1999. These annual stock awards are restricted, with the
restriction generally lapsing after three years. As a result of the
consolidation, all restrictions lapsed under the change-in-control provisions of
the plan then in effect. Incentive plans for 2001 for senior executives and
other key employees will pay out in cash.
29 PolyOne Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $4.1 million ($0.05
per diluted share) in 2001, $4.0 million ($0.06 per diluted share) in 2000 and
$2.1 million ($0.05 per diluted share) in 1999. The weighted-average fair value
of stock options granted per share was $3.28 for 2001, $3.90 for 2000 and $4.76
for 1999. The fair value of the stock options at the grant date was estimated
using the Black-Scholes option-pricing model. The following assumptions were
used for the Black-Scholes option-pricing model:
2001 2000 1999
-----------------------------
Risk-free interest rate 4.8% 5.2% 6.1%
Dividend yield 2.5% 2.0% 1.7%
Stock price volatility 41.2% 36.7% 32.7%
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 amounted to $1.3 million in 2001, $10.3 million in 2000 and $5.8
million in 1999. The weighted-average fair value per share of restricted stock
and stock awards under the long-term incentive plan on the grant date was $7.34
for 2001, $14.95 for 2000 and $11.69 for 1999.
At December 31, 2001, approximately 10.3 million shares were reserved
for future issuance upon exercise of stock options previously granted, and
approximately 8.1 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. Hanna also had
a SOT to fund a portion of employee compensation and employee benefit plans.
Effective May 2, 2001, the Board of Directors of the Company approved the
termination of both SOTs 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 has no impact on Company
earnings, earnings per share or shareholders' equity. 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.
In September 2000, the Company awarded an option of 200 shares to all
eligible PolyOne employees. The option will vest on the second anniversary of
the date of grant and have a 10-year term.
During the first half 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 Geon Company Share Ownership Trust.
An additional 40,000 shares were issued in the fourth quarter of 2001. These
shares were valued at $8.96 per share and were issued from shares held in
treasury. 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.
NOTE R. SEGMENT INFORMATION
The Company operates primarily in four business segments: Performance
Plastics, Elastomers and Performance Additives, (E&A), Distribution, and Resin
and Intermediates (R&I). The addition of the E&A and Distribution segments in
2000 resulted from 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 that
generally approximate those for similar transactions with unaffiliated
customers. The elimination of inter-segment sales revenue in 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 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In millions Elastomers and
Performance Performance Resin and
Total Plastics Additives Distribution Intermediates Other
--------------------------------------------------------------------
Year ended December 31, 2001:
Net sales $ 2,654.6 $ 1,836.7 $ 402.6 $ 462.6 $ -- $(47.3)
Operating income (loss) (17.1) 17.5 10.2 (0.4) (22.0) (22.4)
Employee separation and plant phase-out 36.1 36.1
Merger and integration costs 1.1 0.1 1.0
Period cost of closed facilities 0.2 0.2
Restructuring and plant idling costs incurred by equity
affiliates(1) 9.4 9.4
Executive separation 4.8 4.8
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) before restructuring costs, merger
and integration costs, and executive separation costs 34.5 53.9 10.2 (0.4) (12.6) (16.6)
Depreciation and amortization 91.3 70.3 16.6 2.9 1.5
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) before depreciation and amortization,
restructuring costs, merger and integration costs,
and executive separation costs 125.8 124.2 26.8 2.5 (12.6) (15.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 2,061.2 1,470.1 285.4 122.2 244.6 (61.1)
Capital expenditures 80.2 33.1 10.0 1.9 35.2
====================================================================================================================================
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 inventory profit 105.4 109.0 2.1 (5.7)
Depreciation and amortization 43.2 33.1 10.1
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) before depreciation, amortization,
restructuring costs and acquired inventory profit 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
====================================================================================================================================
(1) Employee severance, plant phase-out costs and liabilities associated with
the temporary idling of a plant.
31 PolyOne Corporation
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 2001 2000 1999
------------------------------------
Earnings of equity affiliates:
Performance Plastics $ 7.2 $ 1.2 $ 0.1
R&I (14.7) 37.9 9.6
Other (0.4) -- --
- --------------------------------------------------------------------------------
Subtotal (7.9) 39.1 9.7
Minority interest (3.3) (2.1) --
- --------------------------------------------------------------------------------
Total $ (11.2) $ 37.0 $ 9.7
================================================================================
Investment in equity affiliates:
Performance Plastics $ 59.7 $ 60.0 $ 17.5
R&I 228.2 251.6 247.6
- --------------------------------------------------------------------------------
Total $ 287.9 $ 311.6 $ 265.1
================================================================================
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 geographic areas. Following is a summary of sales based on
geographic areas from which the sales originated and assets by location:
In millions 2001 2000 1999
-------------------------------------------
Net sales:
United States $ 2,031.4 $ 1,502.9 $ 1,056.1
Europe 345.4 132.2 --
Canada 180.3 215.4 190.6
Other 97.5 37.3 14.5
- --------------------------------------------------------------------------------
Long-lived assets:
United States $ 1,278.6 $ 1,322.6 $ 690.2
Europe 199.5 194.6 --
Canada 50.8 61.8 60.9
Other 55.4 85.2 53.8
================================================================================
NOTE S. WEIGHTED-AVERAGE SHARES USED IN
COMPUTING EARNINGS PER SHARE
In millions 2001 2000 1999
--------------------------------
Weighted-average shares - basic:
Weighted-average
shares outstanding 90.3 61.8 47.4
Less unearned portion of
restricted stock awards
included in outstanding shares (0.5) (0.4) (0.8)
- --------------------------------------------------------------------------------
89.8 61.4 46.6
================================================================================
Weighted-average shares - diluted:
Weighted-average shares
outstanding - basic 89.8 61.4 46.6
Plus unearned portion of
restricted stock awards
included in outstanding shares -- 0.4 0.8
Plus dilutive impact of stock
options and stock awards -- 0.2 1.2
- --------------------------------------------------------------------------------
89.8 62.0 48.6
================================================================================
The historical share amounts have been restated to reflect the
conversion of each outstanding share of Geon common stock into two shares of
PolyOne. At December 31, 2001, the Company had excluded all outstanding options
from the calculation of diluted loss per share because they would have had an
anti-dilutive effect (0.1 million shares).
NOTE T. 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 inter-company 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.
PolyOne Corporation 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes by currency the contractual amounts of
the Company's foreign exchange contracts at December 31, 2001 (in millions).
Foreign currency amounts are translated at exchange rates as of December 31,
2001. 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 $ 68.1 $ 81.0
Euro 12.9 65.7
British pound sterling 1.9 9.3
Canadian dollar 62.6 --
Other 11.7 2.3
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, 2001. The fair
value of long-term foreign exchange contracts is based on quoted market prices
for contracts with similar maturities.
INTEREST RATE SWAPS: The fair value of interest rate swap
agreements, obtained from the respective financial institutions, is based on
current rates of interest and is computed as the net present value of the
remaining exchange obligations under the terms of the contract.
The carrying amounts and fair values of the Company's financial
instruments at December 31 for the years 2001 and 2000 are as follows:
2001 2000
-----------------------------------------
Carrying Fair Carrying Fair
In millions Amount Value Amount Value
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 18.2 $ 18.2 $ 37.9 $ 37.9
Long-term debt
9.375% senior notes 91.5 91.3 91.1 93.4
6.875% debentures 75.2 72.4 75.0 65.9
7.500% debentures 50.0 43.1 50.0 48.6
Medium-term notes 151.1 148.0 149.4 155.2
Bank borrowings 63.6 63.6 279.5 279.5
Foreign exchange contracts (0.9) (0.9) (3.7) (3.7)
Interest rate swaps (1.6) (1.6) -- --
33 PolyOne Corporation
OTHER DATA
QUARTERLY DATA
(Unaudited) 2001 Quarters 2000 Quarters
In millions, except per share data Fourth Third Second First Fourth Third Second First
------------------------------------------------------------------------------------------
Sales $ 589.9 $ 659.6 $ 695.4 $ 709.7 $ 702.8 $ 478.3 $ 361.2 $ 345.5
Employee separation and plant phase-out 26.3 -- 0.9 8.9 -- -- 2.8 --
Operating income (loss) (26.1) 15.5 16.8 (23.3) (6.4) 11.1 30.4 29.7
Net income (loss) (30.1) 2.9 2.5 (21.4) (13.2) 0.5 14.8 13.8
Earnings (loss) per share:
Basic $ (0.33) $ 0.03 $ 0.03 $ (0.24) $ (0.15) $ 0.01 $ 0.31 $ 0.29
Diluted (0.33) 0.03 0.03 (0.24) (0.15) 0.01 0.31 0.29
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 $10.55 $ 10.70 $ 10.65 $ 9.49 $ 8.44 $ 9.88 $ 13.00 $ 17.25
Low 7.50 7.00 8.00 5.69 4.56 6.19 8.69 8.53
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 and 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. The following table summarizes the special items included in the
quarterly results:
2001 Quarters 2000 Quarters
In millions Fourth Third Second First Fourth Third Second First
-----------------------------------------------------------------------------------
Employee separation and plant
phase-out costs $(26.3) $ -- $(0.9) $ (8.9) $ -- $ -- $(2.8) $--
Merger and integration costs -- (0.1) (0.5) (0.5) (1.7) (7.8) -- --
Period cost of closed facilities -- -- (0.2) -- -- -- -- --
Equity investment restructuring
and plant idling costs(1) (3.3) (5.1) -- (1.0) -- -- -- --
Executive separation cost -- -- -- (4.8) -- -- -- --
Charge for acquired profit in inventory -- -- -- -- (1.6) (1.2) -- --
Directors' pension termination -- -- -- -- -- -- (0.8) --
Writeoff of debt placement cost -- -- -- -- -- -- (0.8) --
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal - operating loss (29.6) (5.2) (1.6) (15.2) (3.3) (9.0) (4.4) --
Litigation settlement gain -- -- 4.1 -- -- -- -- --
Investment writedown (9.5) -- -- (0.6) -- -- -- --
Other restructuring cost -- -- -- -- -- -- (0.6) --
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal - pre-tax (expense) income (39.1) (5.2) 2.5 (15.8) (3.3) (9.0) (5.0) --
Subtotal - after-tax (expense) income (24.6) (3.2) 1.5 (9.6) (1.9) (5.6) (3.1) --
German tax rate adjustment -- -- -- -- 1.5 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total - after-tax (expense) income $(24.6) $(3.2) $ 1.5 $ (9.6) $(0.4) $(5.6) $(3.1) $--
===================================================================================================================================
(1) Employee severance, plant phase-out costs and liabilities associated with
the temporary idling of a plant.
PolyOne Corporation 34
SELECTED FINANCIAL DATA
In millions, except per share data 2001 2000 1999 1998 1997
----------------------------------------------------------------
Sales $2,654.6 $1,887.8 $1,261.2 $1,284.4 $1,250.0
Employee separation and plant phase-out 36.1 2.8 0.5 14.6 15.0
Operating income (loss) (17.1) 64.8 99.7 41.0 51.7
Income (loss) before extraordinary item and cumulative effect
of a change in accounting (46.1) 15.9 106.2 13.8 22.5
Cumulative effect of change in method of accounting -- -- (1.5) -- --
Net income (loss) (46.1) 15.9 104.7 13.8 22.5
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Before extraordinary item and change in method of accounting $(0.51) $ 0.26 $ 2.28 $ 0.30 $ 0.49
Change in method of accounting -- -- (0.03) -- --
Net income (loss) (0.51) 0.26 2.25 0.30 0.49
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Before extraordinary item and change in method of accounting $ (0.51) $ 0.26 $ 2.18 $ 0.29 $ 0.48
Change in method of accounting -- -- (0.03) -- --
Net income (loss) (0.51) 0.26 2.15 0.29 0.48
Dividends per common share 0.25 0.25 0.25 0.25 0.25
Total assets $2,061.2 $2,430.6 $1,162.6 $ 802.0 $ 872.9
Long-term debt 426.8 430.5 130.9 135.4 136.4
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 Oxy Vinyls, LP on April 30, 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 com-
pounding joint venture, all of which are included in the Company's
consolidated results of operations from May 1, 1999.
35 PolyOne Corporation
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, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2001, appearing on
pages 11, 13, 14 and 17 through 33. 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, and our opinion insofar as it relates to data included for Oxy
Vinyls, LP 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, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
/s/Ernst & Young LLP
Cleveland, Ohio
January 30, 2002
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 objectives of providing reasonable assurance that
PolyOne's assets are safe-guarded 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, 2001, was effective and adequate to accomplish the
objectives described above.
Thomas A. Waltermire
Chairman, President and Chief Executive Officer
W. David Wilson
Vice President and Chief Financial Officer
January 30, 2002
PolyOne Corporation 36
FORWARD-LOOKING STATEMENTS
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
In this annual report, statements that are not reported financial
results or other historical information are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, including,
for example, statements about business outlook, assessment of market
conditions, strategies, future plans, future sales, prices for major products,
inventory levels, capital spending and tax rates. These forward-looking
statements are not guarantees of future performance. They are based on
management's expectations that involve a number of business risks and
uncertainties, any of which could cause actual results to differ materially from
those expressed in or implied by the forward-looking statements. Factors that
could cause actual results to differ materially include (but are not limited
to): (1) an inability to achieve or delays in achieving savings related to
consolidation and restructuring programs; (2) unanticipated delays in
achieving or inability to achieve cost reduction and employee productivity goals
and other strategic value capture initiatives; (3) 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; (4) unanticipated changes in world,
regional or U.S. plastic, rubber and PVC consumption growth rates affecting the
Company's markets; (5) 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;
(6) fluctuations in raw material prices and supply and energy prices and supply,
in particular fluctuations outside the normal range of industry cycles; (7)
unanticipated production outages or material costs associated with scheduled or
unscheduled maintenance programs; (8) unanticipated costs or difficulties and
delays related to the operation of joint venture entities; (9) lack of
day-to-day operating control, including procurement of raw material feed-
stocks, of other equity or joint venture relationship companies; (10) lack of
direct control over the reliability of delivery and quality of the primary raw
materials utilized in the Company's products; (11) partial control over
investment decisions and dividend distribution policy of the OxyVinyls
partnership and other minority equity holdings of the Company; (12) an inability
to launch new products and/or services that fit strategically with and add value
to the Company's business; (13) the possibility of goodwill impairment.
CORPORATE INFORMATION
BOARD OF DIRECTORS
[PHOTOS]
THOMAS A. WALTERMIRE, 52
Chairman of the Board, President
and Chief Executive Officer
JAMES K. BAKER, 70
Retired Chairman and
Chief Executive Officer,
Arvin Industries, Inc. -
an auto parts supplier
Committees: 4(*), 5
J. DOUGLAS CAMPBELL, 60
Retired President and
Chief Executive Officer,
Arcadian Corporation - a chemicals
and fertilizer manufacturer
Committees: 1, 4
DR. CAROL A. CARTWRIGHT, 60
President, Kent State University -
a public higher education institution
Committees: 4, 5
GALE DUFF-BLOOM, 62
Retired President, Company
Communications and Corporate
Image, J. C. Penney Company, Inc. -
a major retailer
Committees: 2(*), 5
WAYNE R. EMBRY, 65
Retired President and
Chief Operating Officer,
Team Division, Cleveland Cavaliers -
a professional basketball team
Committees: 2, 3
ROBERT A. GARDA, 63
Executive-in-Residence,
The Fuqua School of Business,
Duke University - a private higher
education institution
Committees: 1, 4
GORDON D. HARNETT, 59
Chairman, President and
Chief Executive Officer,
Brush Engineered Materials Inc. -
a supplier and producer of
engineered materials
Committees: 1(*), 3
DAVID H. HOAG, 62
Retired Chairman, LTV Corporation -
a steel manufacturer
Committees: 2, 5(*)
D. LARRY MOORE, 65
Retired President and
Chief Operating Officer,
Honeywell, Inc. - a manufacturer
of control systems for home,
industry and aviation
Committees: 1, 3(*)
FARAH M. WALTERS, 57
President and Chief Executive Officer,
University Hospitals Health System
and University Hospitals of Cleveland -
a health care provider
Committees: 2, 3
COMMITTEES:
1 Audit
2 Compensation
3 Environmental, Health and Safety
4 Financial Policy
5 Nominating and Governance
(*) Denotes Chairperson
PolyOne Corporation 38
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
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
WENDY C. SHIBA
Chief Legal Officer
and Corporate Secretary
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 23,
2002, 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: David.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.
39 PolyOne Corporation
[POLYONE LOGO]
www.polyone.com