Exhibit 13.1
POLYONE...
Focus on performance
Innovative technologies
Significant earnings potential
Talented, dedicated people
Reliable, cost-efficient service
Global expansion
Modern manufacturing base
Market knowledge
[POLYONE LOGO]
2002 Annual Report
PolyOne
at a glance
Total assets $2.0 billion
People worldwide 7,600
Plants 66
Countries with plants 20
Raw material suppliers 2,000
Countries where we sell 35
Customers greater than 10,000
Products greater than 35,000
Business Platforms
Sales in millions
$2.5 billion in 2002 sales revenues*
Elastomers and Performance Additives $ 364 14%
Vinyl Compounding $ 627 24%
Color & Additives 13%
- N.A. $ 194
- Europe & Asia $ 147
Engineered Materials 13%
- N.A. $ 140
- Europe & Asia $ 192
Engineered Films $ 153 6%
Specialty Resins and Formulators $ 265 10%
Distribution $ 520 20%
*Excluding corporate, eliminations and other of $104 million
Diverse End Markets
Auto 15%
Construction 25%
Durable 10%
Non-durable 14%
Business Equipment &
Telecommunications 9%
Industrial Applications 11%
Miscellaneous 16%
% of Total Sales
FINANCIAL HIGHLIGHTS
Year Ended
December 31,
2002 2001
- --------------------------------------------------------------------------------
REPORTED RESULTS (1, 2)
SALES $2,498.2 $2,581.1
EMPLOYEE SEPARATION AND PLANT PHASEOUT 1.1 36.1
OPERATING INCOME (LOSS) 38.9 (29.5)
LOSS BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING (6.6) (47.1)
NET LOSS (58.9) (46.1)
CAPITAL EXPENDITURES 75.1 78.1
DEPRECIATION AND AMORTIZATION 72.5 89.2
TOTAL LONG-TERM DEBT (year end) 583.2 431.4
STOCKHOLDERS' EQUITY (year end) 579.7 713.4
DILUTED LOSS BEFORE DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PER SHARE $ (0.07) $ (0.52)
DILUTED EARNINGS (LOSS) PER SHARE (0.65) (0.51)
WEIGHTED-AVERAGE COMMON SHARES USED TO
COMPUTE DILUTED EARNINGS PER SHARE (in millions) 90.8 89.8
NUMBER OF EMPLOYEES (year end) 7,600 8,200
- --------------------------------------------------------------------------------
(1) See Management"s Analysis beginning on page 6 for a description of the
audited reported results.
(2) Reported results include special items, which are summarized in the table on
page 12.
2002
SALES BY SEGMENT*
Dollars in millions
PERFORMANCE PLASTICS $1,719 66%
DISTRIBUTION $ 520 20%
ELASTOMERS AND
PERFORMANCE ADDITIVES $ 364 14%
*Excluding corporate, eliminations and other of $104 million
2002
SALES
BY GEOGRAPHIC REGION
Dollars in millions
United States $1,915 76%
Europe $ 292 12%
Canada $ 168 7%
Asia $ 78 3%
Mexico $ 45 2%
POLYONE CORPORATION 1
To Our Shareholders:
Since we formed PolyOne in September 2000, we have pursued an aggressive agenda
to create a unified company built on reliable, cost-efficient service to
customers and capable of consistent growth and strong financial results. The
changes we have initiated are both necessary and beneficial but, in the midst of
prolonged economic recession, our sales and financial results have not met our
expectations.
In 2002, we undertook a thorough reassessment of our cost structure, our
organization and our portfolio of businesses. We entered 2003 with urgency and
focus to unleash the substantial earnings potential that PolyOne possesses.
In these pages, I will review our actions and accomplishments of the past
year. More important, I will explain how we intend to build on this foundation
in the year ahead to renew sales growth and drive significant earnings
improvement.
We move forward confident of the enterprise we are creating. Our business
model is sound and the opportunity exists for long-term profitability,
regardless of the vagaries of the economy. We laid much of the groundwork for
success in 2002.
2002: Building the Foundation
Our "to-do" list for 2002 called for launching new projects and extending or
completing major initiatives begun the year before:
- The consolidation and modernization of our North American manufacturing
assets in our Vinyl Compound, Color and Additives, and Engineered Materials
businesses was essentially finished. We expect to realize annual operating
savings of $50 million from our investment of approximately $45 million. Yet,
this project was much more than a cost-cutting move. It also addressed specific
operational and service issues. Today, these businesses have a modern,
cost-efficient manufacturing base.
- We extended our unified global information technology system, which is
nearly complete; we will finalize new information systems for Singapore,
Thailand and Spain in 2003. This invaluable tool helps multiple areas of our
business: sourcing, logistics, production planning, customer data and finance.
In practical terms, the system provides us with faster, better information for
smarter decision making.
- By year end, we had realized approximately $150 million in annualized
income improvements compared with the base year 2000, and we are on target to
attain our original goal of a total $200 million in these value capture
initiatives by the end of 2003.
- Responding to continuing sales growth in our international operations, we
embarked on a multi-phase expansion of our booming Asian business. Adding to
four existing plants, we opened a customer support laboratory and sales office
in southern China. We also expanded polymer compounding and color concentrates
capacity in the Shanghai area.
- In another move to strengthen our international business, we completed
the acquisition of Transformacion de Pigmentos y Colorantes, S.A. (Transcolor),
a large color concentrates producer near Pamplona in northern Spain. Transcolor
bolsters our product platform and delivery of color and additive concentrates to
customers in Spain and Portugal.
- PolyOne Distribution added our Geon brand vinyl compounds to its product
offering - a highly successful conversion from a third-party distributor, which
propelled the business to a 12 percent sales improvement in 2002 compared with
2001.
- As promised, we became more active in acquiring new technologies. We
forged agreements with respected partners such as DuPont Dow Elastomers;
Nanocor, Inc.; and Noveon, Inc. to manufacture and market innovative new
products with high growth potential. We also introduced a new wall-covering
technology based on polyolefins.
2 POLYONE CORPORATION
"We move forward confident of the enterprise we are creating. Our business model
is sound and the opportunity exists for long-term profitability, regardless of
the vagaries of the economy."
- We achieved an important goal in the integration of PolyOne with the
establishment of a unified employee benefits program that covers most PolyOne
people in the United States. Now, almost everyone is governed by the same
policies on compensation, health care and other benefits - a big step toward
building a cohesive team.
- Taking advantage of our scale and systems, we created opportunities
unavailable to many of our competitors in terms of a unified North American
logistics network and integrated raw material supply. We opened our first raw
material distribution warehouse that will allow us to more cost effectively
purchase quantities of small-use materials such as pigments.
2003: Higher Sales, Lower Costs
These achievements are the bedrock on which we are building a better, stronger
PolyOne that delivers value to customers, wins in the marketplace and earns a
good return for investors. Nevertheless, with continuing economic weakness and a
more competitive marketplace, we took a hard look at ourselves in 2002 and
concluded that more change was needed. We complemented our internal assessment
with in-depth surveys in which we asked our customers to rate us on attributes
such as quality, price, delivery, service and value.
On the strength of our own evaluation and our customers' feedback, we
entered 2003 with attention to four key initiatives for immediate and long-term
marketplace effectiveness.
CUSTOMER TARGETS: We are focusing resources on customers who provide the
best opportunities for growth and profitability. Not every customer has
identical needs. Our job is to match our service to the needs of our various
customer segments, ensuring that our cost to serve meets the customer's
willingness to pay.
In addition, each business unit has the objective to make it easier for
customers to do business with us and to improve our speed of response. We will
use our customer segmentation and survey results to address customers' needs
first and foremost. We expect to grow faster than our markets by helping our
customers do the same.
THE LOW-COST PROVIDER: Polymer services business is won first on cost,
reliability and speed - especially in these tough economic times. We need to
reduce our costs continually, and our customers expect us to help them do
likewise. The upgrade of our North American manufacturing assets gives us a
boost in our drive to become more cost competitive, but we need to do more.
In January, we eliminated approximately 400 salaried positions in overhead
areas and centralized some administrative functions such as human resources and
information technology. These actions, combined with non-personnel reductions,
will help us in our drive to bring our selling and administrative (S&A) costs to
an objective of less than 10 percent of sales and keep them there.
We are being proactive, rather than waiting for the economy to rebound. In
2003, we expect to reach our value capture initiatives goal and continue to
reduce costs. Our new facilities and systems will help us gain a competitive
advantage by establishing PolyOne as the most reliable cost-efficient producer.
POLYONE CORPORATION 3
"To our suppliers, we offer entry into more markets than any of our
competitors can deliver. Our customers trust our products. By being the best at
satisfying their needs, we will gain momentum and grow together."
SIMPLIFIED WORK: Our customers tell us that they want the same thing each
of us wants whenever we make a purchase: fast, right, cost-efficient,
hassle-free service. That means they want on-time shipments of defect-free
products at the lowest possible price. And, they want it to be easy to do
business with us.
In response, we have realigned our North American Plastic Compounds and
Colors operations, transitioning from numerous market-based sales teams to three
distinct, product-focused teams for Vinyl Compounds, Color and Additives, and
Engineered Materials. We will maintain market-based teams in a few select areas,
such as wire and cable and packaging, in which customers find the greatest value
in our capability to cross sell the full range of PolyOne products.
With fewer layers of authority in a simplified organization, we will
respond more quickly, enhancing our position as customers continue to seek lower
costs. This new alignment also helps us link marketing programs and technologies
on a global basis, an increasingly important opportunity.
NEW TECHNOLOGY: Even as we reduce our costs, we are increasing our
investment in research and development. Our customers are interested in new
performance features, especially new ideas that will help them lower their
costs.
We are consolidating our laboratory personnel and equipment at our new
PolyOne Solution Center in Avon Lake, Ohio. Here, PolyOne scientists and
technicians have expanded resources to accelerate product development across a
wide range of our key product lines.
In addition, we are excited by the steady stream of major polymer and
additive suppliers that are selecting PolyOne to help them commercialize their
technical innovations. They value our knowledge of a wide range of markets, our
technical depth and our global reach. These strengths are unique. In the long
run, our customers benefit as PolyOne brings them the best new technologies to
help them meet their goals.
We are now executing in all four of these areas. The overall goal behind
this work is clear: Increase our sales and lower our costs. We believe we are
building on a solid foundation. Our suppliers and customers are eager to work
with us. To our suppliers, we offer entry into more markets than any of our
competitors can deliver. Our customers trust our products. By being the best at
satisfying their needs, we will gain momentum and grow together.
Financial Review
Our management team is committed to improving PolyOne's financial performance,
and we are united in our resolve to improve both immediately and for the long
term. This year, we are driving toward a sales growth objective of 3 percent to
5 percent in a flat economy(1). New income sources should include additional
value capture initiatives, S&A savings from our recent overhead reduction, and
improved results in our Resin and Intermediates businesses. These units should
be solid contributors, assuming that energy costs do not erode an apparent
upswing in the cycle for these basic materials.
Within the last two years, we invested nearly $150 million companywide in
our infrastructure. A major part of this investment was the upgrade of our U.S.
manufacturing assets, which is now complete. Accordingly, our capital
expenditures will decline to approximately $50 million from $75 million last
year. Even at this reduced level, we have allocated funds to help capture the
growing opportunities in Asia and Europe.
(1) See Forward-looking Statements, page 45.
4 POLYONE CORPORATION
Another action that will increase cash flow is the suspension of our
quarterly dividend. Unpopular as this decision may be, it was the right one
because dividends should come from earnings, and we were not earning a
sufficient amount to justify the annual $23 million payout. We have stated
repeatedly that we expect PolyOne to be a strong cash generator, and that the
Board of Directors will reconsider the dividend when earnings justify it.
We also have been open about seeking to change our business portfolio by
divesting our non-core assets. Initially, we would use the proceeds to reduce
debt; we have commented that this reduction could be in the range of $200
million to $300 million. Our debt structure does not require the sale of any
business, and we have no fixed timetable. We will take this step only if we
receive fair value.
This action would, however, provide us with financial flexibility in a
tenuous economy and it would better position us to invest rapidly in
strategically important projects when earnings rebound. We still see investment
and consolidation opportunities in our industry.
Ethics That Endure
In the wake of several widely reported instances of corporate corruption in
2002, I would be remiss if I did not address PolyOne's ethical standards. I am
proud to say that full, open disclosure always has been the norm for us.
With respect to corporate governance, you can take comfort in knowing that
PolyOne's Board of Directors comprises non-employees only, with the exception of
myself. Executive compensation is closely tied to performance. We already were
living the practices the New York Stock Exchange is now demanding of all listed
companies.
Our core values - excellence, integrity, innovation, teamwork, respect for
all - apply to everyone at every level of the organization, not just those in
leadership positions. In this spirit, we have codified our ethical business
practices in documents and training for all PolyOne people. We encourage our
people to report questionable conduct and to seek clarification if they are
unsure of the right thing to do in a given situation.
Our Promise to You
We have embarked on a watershed year in PolyOne's short history. Many challenges
remain, yet we believe deeply that our Company has the makings for sustained
growth and profitability. I salute our talented people for their past
contributions, and I am confident that they are more than equal to the task
ahead. We will perform and reward the fidelity of our customers and of you, our
shareholders. I thank you for your support. We will not rest until we have
created the success you expect and deserve.
[PHOTO OF THOMAS A. WALTERMIRE]
/s/ Thomas A. Waltermire
Thomas A. Waltermire
Chairman of the Board,
President and Chief Executive Officer
March 21, 2003
POLYONE CORPORATION 5
MD&A:
MANAGEMENT'S ANALYSIS - RESULTS OF OPERATIONS
PolyOne Corporation (PolyOne or Company) is a leading global polymer services
company, with worldwide annual sales of approximately $2.5 billion. PolyOne's
2002 sales and operating results were significantly impacted by the continued
weakness in the manufacturing sector of the U.S. economy. The U.S. industrial
manufacturing economic index (excluding high technology) for 2002 averaged
approximately 1% below the 2001 average and 7% below the index peak in June
2000. Commencing in the second half of 2000, the slowdown of the U.S. economy
has significantly reduced customer product demand and resulted in lower sales
and earnings in both PolyOne's consolidated businesses and the operations of our
equity affiliates. While lower sales in 2002 resulted primarily from economic
conditions, some market share losses occurred in the North American color and
additive concentrate, vinyl compound, and elastomer and performance additive
markets. In 2002, however, we saw some recovery in demand and margins of both
the U.S. polyvinyl chloride (PVC) resin industry and the chlor-alkali industry,
in which PolyOne has equity affiliates. Partially offsetting the negative U.S.
economic forces were PolyOne's continuing initiatives to restructure our
operations following the consolidation and formation of PolyOne in 2000. At the
end of 2002, we had realized approximately three-quarters of the strategic value
capture initiatives announced in 2001 - which consist of specific programs to
structurally reduce material, manufacturing, logistics, and selling and
administrative costs and to increase sales growth - with the remainder expected
to be realized in 2003.
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" are also provided for
the 2000 operating results because of the significant and pervasive impact of
the merger on comparative data. The 2000 pro forma operating results assume that
the consolidation of Geon and Hanna occurred prior to the period presented.
Further, the 2000 pro forma operating results assume that Hanna's sale of its
Cadillac Plastic business, recognized in the second and third quarters of 2000,
occurred prior to the period presented. The 2000 pro forma operating results do
not include any then-future profit improvements and cost savings or associated
costs, including restructuring costs expected or subsequently resulting from the
integration of Geon and Hanna. The 2000 pro forma operating results are provided
for illustrative purposes only, and do not necessarily indicate the operating
results that would have occurred.
6 POLYONE CORPORATION
MD&A:
SUMMARY OF CONSOLIDATED OPERATING RESULTS
(In millions, except per share data)
Year Ended December 31,
--------------------------------------------------
Pro Forma
Reported Results Results
--------------------------------------------------
2002 2001 2000 2000
--------------------------------------------------
SALES $2,498.2 $2,581.1 $1,861.3 $3,069.2
OPERATING INCOME (LOSS) 38.9 (29.5) 63.9 113.1
NET INCOME (LOSS) (58.9) (46.1) 15.9 52.4
(INCOME) FROM DISCONTINUED OPERATIONS - AFTER TAX (1.4) (1.0) (0.7) (1.6)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING -
AFTER-TAX EXPENSE 53.7 -- -- --
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING - AFTER TAX $ (6.6) $ (47.1) $ 15.2 $ 50.8
EARNINGS (LOSS) PER SHARE, DILUTED $ (0.65) $ (0.51) $ 0.26 $ 0.57
EARNINGS (LOSS) PER SHARE BEFORE DISCONTINUED
OPERATIONS AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING, DILUTED $ (0.07) $ (0.52) $ 0.25 $ 0.55
EFFECT ON EARNINGS PER SHARE OF EXCLUDING SPECIAL
ITEMS, INCREASE (DECREASE)(1) $ 0.10 $ 0.40 $ 0.15 $ (0.04)
EFFECT ON EARNINGS PER SHARE OF EXCLUDING GOODWILL
AMORTIZATION EXPENSE, INCREASE $ 0.00 $ 0.17 $ 0.09 $ 0.16
OTHER DATA:
NET CASH PROVIDED (USED) BY:
OPERATING ACTIVITIES OF CONTINUING OPERATIONS $ (32.7) $ 303.4 $ 88.2
INVESTING ACTIVITIES OF CONTINUING OPERATIONS (78.6) (72.4) 16.3
FINANCING ACTIVITIES OF CONTINUING OPERATIONS 136.4 (249.7) (117.4)
EBITDA(2) $ 111.4 $ 59.7 $ 120.5 $ 212.1
RECONCILIATION(2):
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING $ (6.6) $ (47.1) $ 15.2 $ 50.8
INCOME TAX EXPENSE (BENEFIT) (5.2) (27.1) 9.4 7.2
INTEREST EXPENSE, NET 41.5 38.4 34.7 51.5
OTHER EXPENSE, NET 9.2 6.3 4.6 3.6
DEPRECIATION AND AMORTIZATION 72.5 89.2 56.6 99.0
- -------------------------------------------------------------------------------------------------------------
EBITDA $ 111.4 $ 59.7 $ 120.5 $ 212.1
=============================================================================================================
(1) Special items in all years related primarily to restructuring initiatives,
the sale of equity investments, and merger and integration costs, and are
summarized and explained in the table titled "Summary of Special Items" on
page 12.
(2) EBITDA is defined as income before discontinued operations and cumulative
effect of a change in accounting, income taxes, net interest expense, net
other expense, and depreciation and amortization expense. EBITDA excludes
net other expense because the financing cost of the receivables sale
facility is the largest component. EBITDA is a non-GAAP measure and should
not be considered an alternative to any other measure of performance in
accordance with GAAP. PolyOne presents EBITDA because management believes
that EBITDA could be useful for investors in assessing our operating
performance and our performance relative to our financial obligations.
Additionally, EBITDA is a measure commonly used by financial analysts
because of its usefulness in evaluating operating performance. EBITDA,
as used by PolyOne, is not necessarily comparable with similarly titled
measures of other companies. The table above presents a reconciliation from
income (loss) before discontinued operations and cumulative effect of a
change in accounting to EBITDA.
2002 RESULTS OF OPERATIONS
In December 2002, PolyOne sold its 70% interest in So.F.teR S.p.A. (Softer), an
Italian compounder of thermoplastic materials. With the sale, all historical
operating results of this business have been reported separately as a
discontinued operation. The business was previously included within PolyOne's
Performance Plastics business segment. For more information regarding this
discontinued operation, see Note D to the Consolidated Financial Statements.
PolyOne's total sales for 2002 were $2.5 billion, a decrease of $82.9
million, or 3%, from 2001. The Distribution business segment was the only
business segment to demonstrate 2002 sales improvements compared with 2001, due
primarily to increased sales of vinyl
POLYONE CORPORATION 7
MD&A:
MANAGEMENT'S ANALYSIS - RESULTS OF OPERATIONS
compounds produced by PolyOne's Performance Plastics business segment. Prior to
2002, most of these sales were made through a third-party distributor. The 2002
sales of vinyl compounds produced by our Performance Plastics business segment
through the Distribution business segment also increased the 2002 inter-segment
sales elimination.
Operating income was $38.9 million in 2002 compared with a loss of $29.5
million in 2001. The operating loss in 2001 includes amortization expense
related to goodwill of $18.0 million. Effective January 1, 2002, PolyOne no
longer amortizes goodwill. EBITDA was $111.4 million in 2002 and $59.7 million
in 2001. The change in EBITDA between 2002 and 2001 was due primarily to special
items incurred during each year. Special items in both years related primarily
to restructuring initiatives and the sale of equity investments, and are
summarized and explained in the table titled "Summary of Special Items" on page
12. Special items totaled expense of $14.0 million in 2002 and $61.1 million in
2001. Accordingly, before the impact of special items, EBITDA in 2002 was $2.8
million higher than in 2001. This modest increase was driven by the net effect
of improved earnings of our Resin and Intermediates business segment and the
benefit of strategic value capture initiatives less lower sales and margin
compression that occurred primarily in our vinyl compounds and specialty resins
product groups.
The net loss in 2002 was $58.9 million and included an after-tax charge for
the cumulative effect of a change in goodwill accounting of $53.7 million. The
2002 loss before discontinued operations and cumulative effect of a change in
accounting was $6.6 million, or $40.5 million better than the comparable amount
in 2001. The 2002 loss included special charges of $9.3 million compared with
2001 expense of $35.9 million.
Interest expense increased $1.7 million to $42.4 million for 2002.
Impacting 2002 interest expense was the second-quarter issuance of $200 million
aggregate principal amount of senior debt at 8.875%, net of the debt retired
upon issuance, offset by the favorable impact of interest rate swap agreements.
Additionally, the average amount outstanding under the revolving credit facility
was reduced in 2002 compared with 2001.
Other expense, net, includes the finance costs associated with the
receivables sale facility, foreign currency gains and losses, and other
miscellaneous expenses. For 2002, other expense, net, was $9.2 million compared
with $6.3 million for 2001. The 2002 increase of $2.9 million in other expense,
net, compared with 2001 was due to a litigation settlement gain recognized in
2001. Additionally, for the year ended December 31, 2002, costs associated with
the receivables sale facility decreased $3.3 million. The decrease in
receivables sale facility costs resulted from lower interest rates in 2002,
along with a lower average level of receivables sold during 2002 compared with
2001.
The effective income tax rate benefit in 2002 was 44.1% compared with a
benefit of 36.5% in 2001. The benefit was due principally to the effect of
permanent differences, such as non-deductible goodwill amortization in 2001.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." In accordance
with this statement, we ceased amortization of all goodwill and indefinite-lived
intangible assets. During the first quarter of 2002, we also completed the
transitional review for goodwill impairment required under SFAS No. 142. The
review indicated that goodwill related to the 1999 acquisition of our Engineered
Films operations was impaired as of January 1, 2002. Accordingly, we measured
and recognized a pre-tax charge of $54.7 million ($53.7 million after tax) as a
cumulative effect of a change in accounting principle. The year 2001 included
pre-tax goodwill amortization of $18.0 million ($14.6 million after tax).
BUSINESS SEGMENT INFORMATION
Senior management uses operating income before special items and EBITDA before
special items to assess performance and allocate resources to business segments.
For a reconciliation from operating income to operating income before special
items to EBITDA before special items and EBITDA to EBITDA before special items,
see the following table. Operating income before special items and EBITDA before
special items are non-GAAP measures, and should not be considered an alternative
to any other measure of performance in accordance with GAAP. Senior management
presents operating income before special items and EBITDA before special items
when discussing the results of operations of the business segments because
senior management believes such measures are useful in assessing the underlying
earnings power and operating cash flows of each business segment. Special items
include gains and losses associated with the specific strategic initiatives such
as restructuring or consolidation of operations, gains and losses attributable
to divestment of joint ventures, and certain one-time items. Accordingly, senior
management believes that excluding special items provides insight into the
underlying results of operations of each of PolyOne's business segments.
Operating income before special items and EBITDA before special items may not be
comparable to financial performance measures presented by other companies.
8 POLYONE CORPORATION
(In millions) Year Ended December 31,
--------------------------------------
Pro Forma
Reported Results Results
--------------------------------------
2002 2001 2000
--------------------------------------
Sales:
Performance Plastics $ 1,718.8 $ 1,764.6 $ 2,110.2
Elastomers and
Performance Additives 363.9 402.6 482.2
Distribution 519.7 462.6 506.7
Resin and Intermediates -- -- --
Other (104.2) (48.7) (29.9)
- --------------------------------------------------------------------------------
$ 2,498.2 $ 2,581.1 $ 3,069.2
================================================================================
EBITDA before special items:
Performance Plastics $ 97.2 $ 119.2 $ 148.4
Elastomers and
Performance Additives 23.1 26.8 45.3
Distribution 8.8 2.5 14.6
Resin and Intermediates 11.4 (12.6) 27.9
Other (16.9) (15.1) (11.2)
- --------------------------------------------------------------------------------
$ 123.6 $ 120.8 $ 225.0
================================================================================
Operating income (loss)
before special items:
Performance Plastics $ 41.5 $ 51.0 $ 71.5
Elastomers and
Performance Additives 11.4 10.2 26.5
Distribution 7.0 (0.4) 11.3
Resin and Intermediates 10.6 (12.6) 27.9
Other (17.6) (16.6) (11.2)
- --------------------------------------------------------------------------------
$ 52.9 $ 31.6 $ 126.0
================================================================================
Reconciliation
Operating income (loss) $ 38.9 $ (29.5) $ 113.1
Special items, expense 14.0 61.1 12.9
- --------------------------------------------------------------------------------
Operating income before
special items 52.9 31.6 126.0
Depreciation and amortization 72.5 89.2 99.0
Accelerated depreciation in
special items (1.8) - -
- --------------------------------------------------------------------------------
EBITDA before
special items $ 123.6 $ 120.8 $ 225.0
================================================================================
EBITDA $ 111.4 $ 59.7 $ 212.1
Impact of special items,
expense 12.2 61.1 12.9
- --------------------------------------------------------------------------------
EBITDA before
special items $ 123.6 $ 120.8 $ 225.0
================================================================================
For additional information regarding reported business segment disclosures,
see Note T to the Consolidated Financial Statements.
PERFORMANCE PLASTICS had 2002 sales of $1.7 billion, a decrease of 3% from
2001. A breakdown of 2002 segment sales, by primary product group, is as
follows:
2002
2002 Sales $ Shipment Lbs.
2002 Sales $ % Change % Change
% of Total vs. 2001 vs. 2001
------------------------------------------
North American Plastic
Compounds and Colors 56% -9% -4%
International Plastic
Compounds and Colors 20 15 7
Specialty Resins and Formulators 15 3 4
Engineered Films 9 -4 -3
- --------------------------------------------------------------------------------
TOTAL PERFORMANCE PLASTICS 100% -3% -1%
================================================================================
The 2002 sales of $1.7 billion were $45.8 million below 2001 and primarily
reflect lower sales in North American Plastic Compounds and Colors, partially
offset by strong demand in Asia and the favorable euro currency exchange impact,
which increased U.S. dollar reported sales by $15.9 million, or 5%. North
American Plastic Compounds and Colors has experienced softened demand in nearly
all markets for vinyl, in addition to lower average selling prices compared with
2001. Vinyl compound volumes declined 6% while sales revenue declined 8% during
2002, with the most notable product platform deterioration occurring within the
wire and cable applications. Contributing to the lower 2002 sales was some loss
in market share in the North American color and additive concentrate and vinyl
compound markets. The market share loss in the vinyl compound market resulted
both from defending selling price and customers taking production in house.
EBITDA before special items was $97.2 million in 2002, a decrease of $22.0
million from 2001, reflecting lower segment sales and lower vinyl compound and
specialty resin margins, partially offset by the impact of strategic value
capture initiatives in addition to economy-driven cost reduction programs
totaling $10 million to $12 million. In 2002, seven plants within the
Performance Plastics business segment were closed as part of PolyOne's
restructuring initiatives.
ELASTOMERS AND PERFORMANCE ADDITIVES sales in 2002 were $363.9 million, a
decrease of $38.7 million, or 10%, from 2001. The decline in year-over-year
sales was the result of lower sales volumes in the compounding and tire-tolling
platforms. Within compounding, approximately one-half of the sales volume
decrease was due to customers taking production back in house, while another
one-third of the sales volume decrease was due to low-margin business for which
PolyOne chose not to compete. In addition, we lost approximately $3 million of
sales in Canada as a result of closing our Canadian facility in the fourth
quarter of 2001.
POLYONE CORPORATION 9
MD&A:
MANAGEMENT'S ANALYSIS - RESULTS OF OPERATIONS
EBITDA before special items was $23.1 million in 2002, a $3.7 million
decrease from 2001, resulting largely from the aforementioned sales declines,
partially offset by the full-year savings from the plant facility shutdowns in
the second half of 2001.
DISTRIBUTION sales in 2002 were $519.7 million, an increase of $57.1
million, or 12%, from 2001. The sales improvements resulted largely from using
our Distribution business segment for small-volume sales of our vinyl compounds
instead of relying on a third-party distributor.
EBITDA before special items for 2002 was $8.8 million compared with $2.5
million for 2001. The improvement in 2002 EBITDA before special items compared
with 2001 was due principally to increased sales volumes in this
volume-sensitive business and improved material margins in the first half of
2002.
RESIN AND INTERMEDIATES operating income before special items for 2002 was
$10.6 million, an increase of $23.2 million from 2001, resulting from higher Oxy
Vinyls, LP (OxyVinyls) earnings of $25.2 million. Average industry PVC resin
market selling prices were approximately $0.015 per pound higher in 2002
compared with 2001, with the average industry resin spread over raw material
costs increasing a similar amount as lower ethylene costs offset higher chlorine
costs. Also, OxyVinyls' earnings were reduced by lower average industry caustic
soda selling price of approximately $120 per ton, while lower average natural
gas costs of approximately $1 per million BTU added to earnings.
OTHER consists primarily of corporate governance costs that are not
allocated to business segments and inter-segment profit elimination. EBITDA
before special items for the year was a loss of $16.9 million compared with a
loss of $15.1 million for 2001. The year 2002 includes the elimination of a $1.1
million pre-tax inter-segment profit in the Distribution business segment's
inventories related primarily to PolyOne vinyl compounds.
2001 RESULTS OF OPERATIONS
REPORTED RESULTS PolyOne's total sales for 2001 were $2.6 billion, an increase
of $719.8 million from 2000. This increase was 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 amounted to a loss of $29.5 million compared
with income of $63.9 million in 2000. Operating earnings in 2001 included
special charges of $61.1 million, and in 2000 included special charges of $16.7
million. The $44.4 million increase in special items related primarily to
significant 2001 restructuring initiatives. EBITDA before considering special
items decreased by $16.8 million compared with 2000 on the same basis. This
decrease in 2001 earnings was due primarily to an earnings decrease of $40.5
million from the Resin and Intermediates business segment, which was partially
offset by a full year's inclusion of the former Hanna operations.
Interest expense increased over the prior year, due primarily to only four
months of the debt assumed in the Hanna acquisition being included in the 2000
reported results, net of a decline in interest expense associated with a
reduction in the average amounts outstanding under our revolving credit facility
during 2001. Interest income remained relatively flat with the prior year. Other
expense increased due to the increased use of our receivables sale facility,
which accounted for an increase in expense of $2.3 million.
The net loss in 2001 was $46.1 million. Before discontinued operations, the
loss was $47.1 million compared with income of $15.2 million in 2000. The 2001
net loss included after-tax expense from special items totaling $35.1 million,
which was an expense increase of $26.8 million from 2000. The effective income
tax rate in 2001 was a benefit of 36.5% compared with expense of 38.2% in 2000.
The lower effective income tax rate reflected principally the effect of
permanent differences such as non-deductible goodwill on pre-tax losses.
PRO FORMA RESULTS Total sales for 2001 were $2.6 billion, a decrease of
$488.1 million, or 16%, 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. PolyOne was particularly impacted by 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 estimated 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 $29.5 million. The operating loss included
2001 special charges of $61.1 million, or $48.2 million more than the 2000 pro
forma expense. EBITDA before considering special items decreased by $104.2
million compared with 2000 on the same basis. This decrease in 2001 earnings was
driven by lower sales volumes (approximately $135 million) across all business
segments and weaker results in the equity earnings of the Resin and
Intermediates business segment, partially offset by cost-reduction initiatives
associated with the merger integration and announced restructuring programs
(estimated at approximately $69 million). The 2001 loss before discontinued
operations was $47.1 million, $97.9 million below the comparable pro forma
amount in 2000. The 2001 net loss included after-tax expense from special items
of $35.1 million, which was an expense increase of $39.8 million from pro forma
results of 2000.
10 POLYONE CORPORATION
PERFORMANCE PLASTICS had 2001 sales of $1.8 billion, a decrease of $345.6
million, or 16%, from pro forma 2000. A breakdown of 2001 segment sales, by
primary product group, is as follows:
2001
2001 Sales $ Shipment Lbs.
2001 Sales $ % Change % Change
% of Total vs. 2000 vs. 2000
------------------------------------------
North American Plastic
Compounds and Colors 57% -20% -19%
International Plastic Compounds
and Colors 20 -7 -3
Specialty Resins and Formulators 14 -11 -12
Engineered Films 9 -15 -16
- --------------------------------------------------------------------------------
TOTAL 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 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. Slowdown in certain
residential construction markets impacted sales, such as Specialty Resins in
flooring and North American Plastic Compounds and Colors in windows and other
residential applications. In addition, the electronics market affected PolyOne
globally with lower sales in wire and cable and business machines. In North
American Plastic Compounds and Colors and Europe, the wire and cable business
was also severely impacted by changes in the telecommunications industry. 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.
EBITDA before special items in 2001 was $119.2 million, a decrease of $29.2
million from 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, three plants within Performance Plastics were
closed in connection with PolyOne's restructuring initiatives.
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.
EBITDA before special items 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, three manufacturing plants were closed in this business
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 of lower material
costs to customers. The Mexican operations' sales, which account for
approximately 9% of this business segment's sales, increased in 2001 by 2%
compared with 2000. EBITDA before special items 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 of $1.3
million attributed to the sale of non-prime inventories.
RESIN AND INTERMEDIATES operating earnings before special items, consisting
of equity income from equity affiliates and allocated overhead support cost and
cost associated with past operations, were a loss of $12.6 million in 2001, or a
decrease of $40.5 million from 2000. The 2001 equity earnings, before a $4.3
million charge for employee severance and liabilities associated with the
temporary idling of a plant, decreased $34.1 million from 2000 levels for
OxyVinyls and $9.4 million from 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 5% from
2000. In 2001 compared with 2000, energy costs adversely impacted OxyVinyls'
equity earnings by approximately $5 million.
OTHER consisted 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 decreased more than 20% from 2000 pro forma costs.
POLYONE CORPORATION 11
MD&A:
MANAGEMENT'S ANALYSIS - RESULTS OF OPERATIONS
SUMMARY OF SPECIAL ITEMS
(In millions, except per share data) Year Ended December 31,
---------------------------------------------
Pro Forma
Reported Results Results
---------------------------------------------
2002 2001 2000 2000
---------------------------------------------
Employee separation and plant phaseout costs (1) $ (1.1) $(36.1) $ (2.8) $(2.8)
Period plant phaseout costs incurred (2) (1.1) (0.2) -- --
Equity affiliate - employee severance, liabilities
associated with the temporary idling of a plant,
and facility asset writeoff and decommissioning costs (3) (4.9) (9.4) -- --
Merger and integration costs (4) -- (5.9) (9.5) (8.5)
Loss on divestiture of equity investments (5) (5.1) (9.5) -- --
Acquired profit in inventory -- -- (2.8) --
Directors' pension termination -- -- (0.8) (0.8)
Writeoff of debt placement cost -- -- (0.8) (0.8)
- ------------------------------------------------------------------------------------------------------------
Subtotal - EBITDA (expense) (12.2) (61.1) (16.7) (12.9)
Plant phaseout accelerated depreciation (2) (1.8) -- -- --
- ------------------------------------------------------------------------------------------------------------
Subtotal - operating (loss) (14.0) (61.1) (16.7) (12.9)
Investment writedown (0.8) (0.6) -- --
Litigation settlement gain -- 4.1 -- --
Other restructuring costs -- -- (0.6) (0.6)
- ------------------------------------------------------------------------------------------------------------
Total - pre tax (expense) (14.8) (57.6) (17.3) (13.5)
Income tax benefit 5.5 21.7 6.7 5.4
German tax rate reduction -- -- 1.5 1.5
Hanna reversal of income tax reserve -- -- -- 10.5
- ------------------------------------------------------------------------------------------------------------
Total - after-tax income (expense) $ (9.3) $(35.9) $ (9.1) $ 3.9
============================================================================================================
Diluted earnings per share impact, income (expense) $(0.10) $(0.40) $(0.15) $0.04
============================================================================================================
(1) These costs include severance, employee outplacement, external outplacement
consulting, lease termination, facility closing costs and the writedown of
the carrying value of plants and equipment related to restructuring
initiatives associated with former Geon operations. In connection with the
acquisition of Hanna and resulting formation of PolyOne, management
developed several initiatives to capture the strategic value of the combined
former Geon and former Hanna businesses. Included in the initiatives were
the closing of excess manufacturing capacity of the Elastomers business and
the establishment of Centers of Manufacturing Excellence within the North
American Plastic Compounds and Colors operations. This resulted in several
announcements in 2001 that five former Geon plants and 12 former Hanna
plants would be closed. The initiatives also included the termination of
corporate and other positions at former Geon and former Hanna locations. The
plans and activities related to the former Geon plants and personnel were
finalized and approved during 2001. The costs related to the former Geon
activities were classified as employee separation and plant phaseout. The
2002 expense was associated with the consolidation of certain activities
related to the Formulator operations in the Performance Plastics business
segment, which resulted in 43 employees being terminated in 2002.
(2) These are plant and phaseout costs associated with the Geon restructuring
initiatives described in (1) above that are to be recognized as period costs
versus when the restructuring initiatives were approved.
(3) The year 2002 costs include PolyOne's share of OxyVinyls' employee severance
and liabilities associated with the temporary idling of a plant in December
2001, plus the 2002 asset writeoff and decommissioning costs related to the
permanent closing of specific production assets included in the idled plant.
The costs in 2001, in addition to OxyVinyls' costs and liabilities
associated with the temporary idling of a plant, included other OxyVinyls
employee severance costs and Australian Vinyls Corporation's (AVC) employee
severance and restructuring costs.
(4) These costs were a direct result of the acquisition of Hanna and the
formation of PolyOne, and relate primarily to the executive separation costs
for former Geon executives resulting from employment change-in-control
provisions triggered by the formation of PolyOne, and severance costs paid
to former Geon employees terminated as a result of the formation of PolyOne.
(5) This item is the loss on our sale of our 37.4% investment in the PVC resin
operations of AVC of $1.5 million in 2002 and $9.5 million in 2001. AVC was
a joint venture with Orica Limited that had PVC resin and PVC compounding
operations. The compounding operations of AVC were transferred to a newly
formed joint venture that has the same ownership percentages as AVC. We and
Orica then sold our interests in AVC, as announced on January 11, 2002, and
we recognized a loss on the sale of the investment. Additionally, in
December 2002, PolyOne recognized a pre-tax impairment loss on its
investment in Techmer PM, LLC, an unconsolidated equity investment (owned
51%) of $3.6 million, in connection with the pending sale of our investment
in Techmer PM, LLC.
12 POLYONE CORPORATION
- - CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data) Year Ended December 31,
------------------------------------
2002 2001 2000
------------------------------------
Sales $2,498.2 $2,581.1 $1,861.3
Operating costs and expenses:
Cost of sales 2,098.2 2,162.4 1,577.1
Selling and administrative 302.6 297.7 189.1
Depreciation and amortization 72.5 89.2 56.6
Employee separation and plant phaseout 1.1 36.1 2.8
Merger and integration costs -- 5.9 9.5
Loss on divestiture of equity investment 5.1 9.5 --
(Income) loss from equity affiliates and minority interest (20.2) 9.8 (37.7)
- ---------------------------------------------------------------------------------------------------
2,459.3 2,610.6 1,797.4
- ---------------------------------------------------------------------------------------------------
Operating income (loss) 38.9 (29.5) 63.9
Interest expense (42.4) (40.7) (36.3)
Interest income 0.9 2.3 1.6
Other expense, net (9.2) (6.3) (4.6)
- ---------------------------------------------------------------------------------------------------
Income (loss) before income taxes, discontinued
operations and cumulative effect of a change
in accounting (11.8) (74.2) 24.6
Income tax (expense) benefit 5.2 27.1 (9.4)
- ---------------------------------------------------------------------------------------------------
Income (loss) before discontinued operations
and cumulative effect of a change in accounting (6.6) (47.1) 15.2
Discontinued operations:
Income from operations and loss on sale, net of income 1.4 1.0 0.7
taxes
Cumulative effect of a change in accounting,
net of income taxes (53.7) -- --
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ (58.9) $ (46.1) $ 15.9
===================================================================================================
Earnings (loss) per common share:
Basic earnings (loss):
Before discontinued operations and cumulative effect
of a change in accounting $ (0.07) $ (0.52) $ 0.25
Discontinued operations 0.01 0.01 0.01
Cumulative effect of a change in accounting (0.59) -- --
- ---------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (0.65) $ (0.51) $ 0.26
===================================================================================================
Diluted earnings (loss):
Before discontinued operations and cumulative effect of
a change in accounting $ (0.07) $ (0.52) $ 0.25
Discontinued operations 0.01 0.01 0.01
Cumulative effect of a change in accounting (0.59) -- --
- ---------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ (0.65) $ (0.51) $ 0.26
===================================================================================================
Weighted-average shares used to compute earnings per share:
Basic 90.8 89.8 61.4
Diluted 90.8 89.8 62.0
See Notes to Consolidated Financial Statements.
POLYONE CORPORATION 13
- - CONSOLIDATED BALANCE SHEETS
(In millions, except per share data) December 31,
----------------------
2002 2001
----------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 41.4 $ 18.2
Accounts receivable (less allowance of $12.3 in 2002 and $9.5 in 2001) 164.3 135.6
Inventories 253.7 255.3
Deferred income tax assets 42.1 40.2
Other current assets 12.7 27.9
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 514.2 477.2
Property, net 682.1 683.6
Investment in equity affiliates 271.8 287.9
Goodwill, net 444.0 476.3
Other intangibles assets, net 32.8 61.0
Other non-current assets 52.6 65.5
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,997.5 $2,051.5
======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank debt $ 0.7 $ 14.7
Accounts payable, including amounts payable to related party (see Note P) 242.0 311.4
Accrued expenses 160.2 161.0
Current portion of long-term debt 91.0 4.6
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 493.9 491.7
Long-term debt 492.2 426.8
Deferred income tax liabilities 39.0 63.2
Post-retirement benefits other than pensions 122.5 126.2
Other non-current liabilities including pensions 261.2 214.5
Minority interest in consolidated subsidiaries 9.0 15.7
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,417.8 1,338.1
SHAREHOLDERS' EQUITY
Preferred stock, 40.0 shares authorized, no shares issued -- --
Common stock, $0.01 par, authorized 400.0 shares, issued 122.2 in 2002 and 2001 1.2 1.2
Additional paid-in capital 1,069.5 1,072.7
Retained earnings 18.7 100.3
Common stock held in treasury, 30.5 shares in 2002 and 31.2 shares in 2001 (341.1) (350.1)
Share ownership trust (1.8) (5.3)
Accumulated other non-owner equity changes (166.8) (105.4)
- ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 579.7 713.4
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,997.5 $2,051.5
======================================================================================================
See Notes to Consolidated Financial Statements.
14 POLYONE CORPORATION
MD&A:
MANAGEMENT'S ANALYSIS - CONSOLIDATED BALANCE SHEETS
At December 31, 2002, PolyOne had total shareholders' equity of $579.7 million,
which was a decrease of $133.7 million from December 31, 2001. The decrease in
equity in 2002 was due primarily to a change in accounting method in the amount
of $53.7 million, an adjustment to the minimum pension liability in the amount
of $60.5 million and dividends paid in the amount of $22.7 million.
ASSETS
Total assets were $1.998 billion at December 31, 2002, a decrease of $54.0
million from December 31, 2001. The decrease was driven by the writeoff of
goodwill of $54.7 million recognized for the adoption of SFAS No. 142. The
adoption of SFAS No. 142 also resulted in the reclassification of the workforce
intangible asset of $25.2 million at December 31, 2001 to goodwill, net of
deferred taxes, in 2002. The 2002 sale of Softer and the acquisition of
Transformacion de Pigmentos y Colorantes, S.A. (Transcolor) also resulted in a
net decrease of $56.7 million in assets as of December 31, 2002 compared with
December 31, 2001. However, as of December 31, 2002, we had sold $57.6 million
less of accounts receivable compared with December 31, 2001.
LIABILITIES AND EQUITY
At December 31, 2002, short-term bank debt was $0.7 million compared with $14.7
million at December 31, 2001. The balance sheet long-term debt, including
current portion and capital leases, totaled $583.2 million at December 31, 2002
compared with $431.4 million at December 31, 2001. As of December 31, 2002,
$91.0 million of the long-term debt is due in 2003.
In 2002, PolyOne amended its revolving credit facility twice. The
amendments reduced the commitments under the revolving credit facility to $125
million and secured any obligations under the revolving credit facility. Our
obligations under the revolving credit facility are guaranteed by some of our
domestic subsidiaries. There were no borrowings outstanding under the facility
at December 31, 2002.
In April 2002, PolyOne completed a private placement of $200 million
aggregate principal amount of 8.875% senior notes due in 2012 to certain
institutional investors. Subsequently, PolyOne registered with the Securities
and Exchange Commission an offer to exchange the senior notes for registered
senior notes, which became effective in July 2002. A portion of the proceeds was
used to repay a loan held by a German subsidiary of PolyOne. The senior notes
rank equally with all of PolyOne's other senior unsecured indebtedness.
Other significant changes in liabilities as of December 31, 2002 compared
with December 31, 2001 include a decrease of $69.4 million in accounts payable.
The decrease in accounts payable resulted from a reduction in the days of
payables outstanding as of December 31, 2002. In addition, other non-current
liabilities increased $46.7 million, due primarily to an adjustment increasing
the accrued minimum pension liability.
In September 2000, PolyOne's Board of Directors authorized the purchase of
up to 9.6 million, or approximately 10%, of PolyOne's outstanding common shares.
Through December 31, 2000, PolyOne repurchased 2.6 million shares at an average
cost of $7.15 per share. No common shares were repurchased in 2001 or 2002.
Also, PolyOne paid $22.9 million in cash dividends to its shareholders in 2001
and $22.7 million in cash dividends to its shareholders in 2002.
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires PolyOne's management to make
estimates, judgments and assumptions in certain circumstances that affect
amounts reported in the accompanying Consolidated Financial Statements. On an
ongoing basis, PolyOne evaluates the accounting policies and estimates it uses
to prepare financial statements. PolyOne bases its estimates on historical
experience and assumptions believed to be reasonable under certain facts and
circumstances. In preparing these financial statements, management has made its
best estimates and judgments of certain amounts included in the financial
statements related to the accounting policies and estimates described in the
text that follows. The application of these critical accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. For additional information regarding our accounting policies, see
Note C to the Consolidated Financial Statements.
ENVIRONMENTAL ACCRUED LIABILITY PolyOne has accrued $52.3 million to cover
future environmental remediation expenditures, and believes that 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 probable remediation
costs based upon information and technology currently available. PolyOne's
estimate of the liability may be revised as new regulations, or technologies or
additional information is obtained. For additional information regarding the
environmental accrued liability, see Note P to the Consolidated Financial
Statements.
RESTRUCTURING ACCRUALS PolyOne has recorded accruals in connection with
restructuring its businesses, as well as the integration of acquired businesses.
These accruals principally include estimates related to employee separation
costs, the closure and/or consolidation of facilities, contractual obligations
and the valuation of certain assets including property, plant and equipment, and
inventories. Actual amounts could differ from the original estimates.
POLYONE CORPORATION 15
MANAGEMENT'S ANALYSIS - CONSOLIDATED BALANCE SHEETS
Restructuring-related accruals are reviewed on a quarterly basis and
changes to the initial plans are appropriately recognized when identified.
Changes to plans associated with restructuring existing businesses are generally
recognized as employee separation and plant phaseout costs in the period the
change occurs. Under EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination," changes to plans associated with the integration
of acquired businesses are recognized as an adjustment to the acquired business'
original purchase price (goodwill) if recorded within one year of the
acquisition. After one year, a reduction of goodwill is recorded if the actual
costs incurred are less than the original reserve. More than one year subsequent
to an acquisition, if the actual costs incurred exceed the original reserve, the
excess is recognized as an employee separation and plant phaseout cost. No such
changes occurred during 2002.
In 2001, PolyOne announced several manufacturing improvements and
restructuring plans to close 17 U.S. and Canadian facilities. As of December 31,
2002, all but four of these facilities were closed. Three of the remaining
facilities are projected to cease operations by mid-2003. In January 2003, we
decided to continue operating the fourth facility. Accordingly, in the first
quarter of 2003, the reserve of approximately $1 million associated with this
facility (which relates to an acquired business) will be reversed and recognized
as a reduction to goodwill of the acquired business.
As of December 31, 2002, an accrued liability of $20.1 million related to
the 2001 restructuring initiatives, adjusted for the January 2003 revision,
remained for future employee severance and cash plant closing costs, which are
projected to be paid in 2003. In addition, at the end of 2002, the net property
carrying value to be realized for the plants closed or to be closed was $17
million (some assets will be transferred to other locations as production
ceases).
In 2002, Formulator operations in the Performance Plastics business segment
consolidated certain activities, which resulted in the termination of 43
employees. As of December 31, 2002, all costs relating to this consolidation,
totaling $1.1 million, had been incurred and no accrual remained.
On January 14, 2003, PolyOne announced a restructuring plan whereby it
would eliminate approximately 400 salaried positions, primarily in
administrative functions. PolyOne projects this reduction will lower selling and
administrative costs by $30 million to $35 million annually, starting in the
second quarter of 2003. PolyOne expects nearly all staff reductions to occur in
the first quarter of 2003. We project the total pre-tax first-quarter 2003
earnings charge from this restructuring effort will be approximately $22
million.
EQUITY INVESTMENT In December 2001, OxyVinyls, of which PolyOne owns 24%
interest, announced the temporary idling 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 the
Deer Park plant. In 2002, OxyVinyls recognized an additional $2.2 million of
expense associated with the temporary plant idling, plus an additional expense
of $17.0 million in the third quarter related to the permanent closing of
specific production assets included in the idled plant. The permanent closing
costs included $14.5 million for the impairment of the fixed assets as well as
$2.5 million for decommissioning costs. As of December 31, 2002, OxyVinyls had a
remaining accrual of $4.7 million for future employee severance liabilities and
decommissioning costs. The plant had a net property carrying value by OxyVinyls
at the end of 2002 of approximately $122.5 million, which is anticipated to be
realized through future operations upon the restart of the plant. Although
chlorine demand in all major market segments increased steadily in 2002,
particularly vinyl chloride monomer (VCM), domestic demand for co-product
caustic soda was flat year over year and exports from the U.S. declined.
OxyVinyls will maintain the Deer Park chlor-alkali plant in a standby mode
pending further strengthening in overall economic conditions and improved demand
for caustic soda.
GOODWILL As of December 31, 2002, PolyOne had $444.0 million of goodwill
resulting from the acquisition of businesses. New accounting standards adopted
in 2002 required an initial review of goodwill for impairment and the cessation
of all goodwill amortization. In making the goodwill impairment assessment,
management relies on a number of factors, including operating results, business
plans, projections, anticipated future cash flows, transactions and marketplace
data. Changes in forecasted operations and changes in discount rates can
materially affect these estimates. There are inherent uncertainties related to
these factors and management's judgments in applying them to the analysis of
goodwill impairment. Because management's judgment is involved in performing
goodwill valuation analysis, there is risk that the carrying value of our
goodwill may be overstated or understated. As announced in April 2002, the
adoption of the new rules resulted in an impairment of our recorded goodwill of
$54.7 million ($53.7 million after tax).
In addition to the transitional impairment assessment, an annual assessment
is required for all reporting units. We have elected to make July 1 the annual
assessment date. We determined that there was no additional goodwill impairment
impact as of the annual assessment on July 1, 2002 or through December 31, 2002.
However, the occurrence of a potential indicator of impairment, such as a
significant adverse change in legal factors or business climate, an adverse
action or assessment by a regulator, unanticipated competition, loss of key
personnel or
16 POLYONE CORPORATION
a more-likely-than-not expectation that a reporting unit or a significant
portion of a reporting unit will be sold or disposed of, would result in our
having to perform another first-step valuation analysis, as required under SFAS
No. 142, for some or all of our reporting units prior to the required 2003
annual assessment. These types of events and the resulting analysis could result
in additional charges for goodwill and other asset impairments in the future.
Any future goodwill impairment could result in violation of financial ratios
required by our debt agreements.
DEFERRED TAX BENEFIT FOR OPERATING LOSS CARRYFORWARDS As of December 31,
2002, PolyOne had a net deferred tax asset of $3.1 million, which relates to
foreign operations. The net U.S. deferred taxes at the end of 2002 were zero
after the recording of a valuation allowance against the 2002 increase in the
deferred tax asset resulting from an increase in the minimum pension liability.
Deferred tax assets include $109.2 million for operating loss carryforwards for
tax purposes. For additional information regarding PolyOne's deferred tax
benefit, see Note R to the Consolidated Financial Statements.
Deferred tax assets are reviewed for realization and a valuation allowance
is recognized if, based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
PENSIONS AND POST-RETIREMENT BENEFITS The measurement of liabilities
related to pension plans and other post-retirement benefit plans is based on
management's assumptions related to future events, including interest rates,
return on pension plan assets, compensation increases and health care cost trend
rates. The discount rates used to determine the present value of future benefits
are based on yields of investment grade AA quality or better fixed-income
securities. The weighted-average discount rate used to value pension plan and
post-retirement obligations was 6.75% at December 31, 2002 compared with 7.25%
at December 31, 2001. Annual expense amounts are determined based on the
discount rate at the end of the prior year. The expected rate of return on
pension assets is designed to be a long-term assumption that will not be subject
to year-to-year variability. The rate for computing 2002 and 2001 expense was
9.0%. PolyOne has reduced the assumed long-term rate on pension assets for 2003
to 8.75%. During 2002, the fair market value of pension plan assets decreased.
Actual pension plan asset performance will either reduce or increase unamortized
losses, which will ultimately affect net income. The rate of compensation
increase for 2002 and 2001 was 4% to 7%, averaging approximately 4.25%, and
reflects the average projected future increases over the next five years.
The rate of increase in medical costs over the next five years was
increased to reflect both actual experience and projected expectations. The
health care cost trend rate assumption has a significant effect on the amounts
reported. Employees hired after December 31, 1999 are not eligible to
participate in the post-retirement plan.
The overall effect of these assumption changes will be to increase pension
and post-retirement expenses in fiscal 2003 to an estimated $36 million from
$25.0 million in 2002.
CONTINGENCIES PolyOne is subject to various investigations, claims, and
legal and administrative proceedings covering a wide range of matters that arise
in the ordinary course of business activities. Any liability that may result
from these proceedings, and any liability that is judged to be probable and
estimable, has been accrued. Any potential liability not accrued is not
currently expected to have a material adverse effect on PolyOne's future
financial position, net income or cash flows.
STOCK OPTIONS GRANTED TO EMPLOYEES In December 2002, SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," was
issued by the Financial Accounting Standards Board. SFAS No. 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative methods
of transition when a company voluntarily changes to the fair value-based method
of recognizing expense in the income statement for stock-based employee
compensation, including stock options granted to the employees. As allowed by
SFAS No.123, PolyOne adopted the disclosure-only provisions of the standard and
does not recognize expense for stock options granted to employees.
POLYONE CORPORATION 17
- - CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) Year Ended December 31,
--------------------------------
2002 2001 2000
--------------------------------
OPERATING ACTIVITIES
Net income (loss) $(58.9) $ (46.1) $ 15.9
Cumulative effect of a change in accounting (53.7) -- --
Income from discontinued operations 1.4 1.0 0.7
- -----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (6.6) (47.1) 15.2
Adjustments to reconcile net income (loss) to net cash provided
by operating activities of continuing operations:
Employee separation and plant phaseout charges 1.1 36.1 2.8
Cash payments on employee separation and plant phaseout (17.0) (23.8) (5.0)
Depreciation and amortization 72.5 89.2 56.6
Realized currency gains (losses) (13.0) (0.8) 7.9
Investment writedown and loss on sale of equity affiliate 5.1 9.5 --
Companies carried at equity and minority interest:
(Income) loss (20.2) 9.8 (37.7)
Dividends and distributions received 37.4 4.2 26.2
Provision (benefit) for deferred income taxes (12.7) (29.2) 8.3
Changes in assets and liabilities:
Operating working capital:
Trade accounts receivable (38.6) 188.8 87.2
Inventories 0.8 76.7 22.8
Accounts payable (64.5) 1.4 (41.7)
Accrued expenses and other 23.0 (11.4) (54.4)
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS (32.7) 303.4 88.2
INVESTING ACTIVITIES
Capital expenditures (75.1) (78.1) (60.7)
(Investment in) return of capital by equity affiliates, net (6.8) 1.3 7.1
Business acquisitions, net of cash acquired (11.4) -- (2.4)
Proceeds from sale of assets 14.7 4.4 44.2
Cash received in connection with consolidation of
M.A. Hanna Company, net of transaction costs paid -- -- 28.1
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
OF CONTINUING OPERATIONS (78.6) (72.4) 16.3
FINANCING ACTIVITIES
Change in short-term debt (5.8) (230.2) (4.9)
Net issuance (repayment) of long-term debt 149.6 (0.9) (79.5)
Termination of interest rate swap agreements 8.3 4.3 --
Proceeds from the exercise of stock options 7.0 -- --
Net proceeds from issuance of common stock -- -- 0.6
Repurchase of common stock -- -- (18.7)
Dividends (22.7) (22.9) (14.9)
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
OF CONTINUING OPERATIONS 136.4 (249.7) (117.4)
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS 1.4 (0.1) --
Effect of exchange rate changes on cash (3.3) (0.9) (0.4)
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23.2 (19.7) (13.3)
Cash and cash equivalents at beginning of year 18.2 37.9 51.2
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 41.4 $ 18.2 $ 37.9
=====================================================================================================
See Notes to Consolidated Financial Statements.
18 POLYONE CORPORATION
MD&A: MANAGEMENT'S ANALYSIS o CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS
The 2002 and 2001 statements of cash flows are those of PolyOne. The 2000
statement of cash flows comprises eight months' operation of Geon and four
months' operation of PolyOne.
Operating activities of continuing operations utilized $32.7 million of
cash in 2002, a $336.1 million change from 2001 operating activities. The 2002
utilization of cash was driven by a $46.5 million increase in commercial working
capital (trade accounts receivable before receivables sold, FIFO inventories and
accounts payable). Excluding business acquisitions and divestments, the increase
in commercial working capital was $59.9 million, consisting of a decrease in
accounts payable of $64.5 million and a reduction of trade accounts receivable
and inventory of $4.6 million. The 2002 versus 2001 decrease in cash from
operating activities of $336.1 million related largely to changes in operating
working capital, which included a $175.1 million swing in the level of accounts
receivable sold. Additionally, the inventory reduction in 2001 was essentially
maintained in 2002 and the days of accounts payable outstanding at December 31,
2002 were reduced from December 31, 2001. Other 2002 uses of cash included $17.0
million in cash payments related to employee separation and plant phaseout
obligations and a decrease of $57.6 million in the utilization of the
receivables sale facility. Partially offsetting the 2002 uses of cash were $70.4
million of earnings before discontinued operations and change in accounting and
depreciation and amortization, net of income from equity affiliates and minority
interests, dividends and distributions received, and deferred taxes. In 2001,
net cash from continuing operating activities totaled $303.4 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 of $117.5 million in the receivables sale facility.
Investing activities for continuing operations in 2002 used $78.6 million,
consisting primarily of capital expenditures of $75.1 million and the
acquisition of Transcolor, offset by cash proceeds from the sale of Softer and
other assets. Nearly half of the capital spending is associated with the North
American Plastic Compounds and Colors manufacturing restructuring and the new
business information system. Investing activities in 2001 consisted primarily of
capital expenditures of $78.1 million.
Financing activities of continuing operations in 2002 consisted largely of
an increase in long-term debt from the April 2002 issuance of $200 million
aggregate principal amount of 8.875% senior notes due in 2012, partially offset
by the funds used to repay a loan held by one of our German subsidiaries.
Additionally, dividends of $22.7 million were paid and net proceeds of
$7.0 million were received from the exercise of stock options. In 2001,
financing activities included the reduction of short-term debt of $230.2 million
and the payment to shareholders of dividends totaling $22.9 million.
CAPITAL RESOURCES AND LIQUIDITY
The following table summarizes PolyOne's obligations related to long-term debt,
leases and guarantees as of December 31, 2002:
Payments Due by Period
-------------------------------------------
Less
Than 1-3 4-5 After
(In millions) Total 1 Year Years Years 5 Years
-------------------------------------------
Long-term debt $583.0 $ 90.9 $148.7 $39.7 $303.7
Capital lease
obligations 0.2 0.1 0.1 -- --
Operating leases 50.1 16.6 23.0 5.4 5.1
Standby letters
of credit 26.2 24.4 1.8 -- --
Guarantees 142.4 57.1 18.3 12.2 54.8
- --------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT,
LEASE AND GUARANTEE
OBLIGATIONS $801.9 $189.1 $191.9 $57.3 $363.6
================================================================================
As of December 31, 2002, PolyOne had existing facilities to access capital
resources (receivables sale facility, revolving credit facility, uncommitted
short-term credit lines, and senior unsecured notes and debentures) totaling
approximately $959 million. As of December 31, 2002, PolyOne had utilized
approximately $744 million of these facilities (long-term debt of $583.0
million, short-term debt of $0.7 million, capital leases of $0.2 million and
receivables sold of $159.9 million), including $573 million of senior unsecured
notes and debentures, of which $87.8 million is payable in September 2003 and,
therefore, is classified as a current liability. The effective available funds
under these facilities can vary, depending on the level of qualified receivables
outstanding, ratings on senior unsecured notes and debentures, and debt-related
financial ratios.
In December 2002, PolyOne's public debt rating was placed under review for
possible downgrade by Moody's Investors Service (Moody's). On March 3, 2003,
Moody's downgraded the senior unsecured debt of PolyOne to Ba3 from Baa3. This
downgrade places PolyOne's debt rating by Moody's into a non-investment-grade
category. In January 2003, Standard & Poor's (S&P) affirmed its BB+ rating, the
highest non-investment-grade category within S&P. Both Moody's and S&P ratings
carry a negative outlook. The current public debt ratings do not affect the
revolver, uncommitted short-term lines of credit, or outstanding fixed-debt
pricing or covenants. After June 30, 2003, the receivables sale facility could
be terminated should PolyOne's senior unsecured debt receive a rating below BB-
by S&P or a rating below Ba3 by Moody's.
POLYONE CORPORATION 19
MD&A: CONSOLIDATED STATEMENTS OF CASH FLOWS
As of March 28, 2002, PolyOne's revolving credit facility was amended and
restated to require that we secure any obligations under the revolving credit
facility effective upon the issuance of our $200 million 8.875% senior notes.
The revolving credit facility was further amended on December 26, 2002. This
amendment effectively waived compliance requirements with the financial ratio
covenants of the facility for the fourth quarter of 2002, reduced credit
available to PolyOne under the facility from $150 million to $125 million and
established new compliance financial ratios. For a summary of the existing
borrowed debt-to-EBITDA compliance ratios for 2003, see the table that follows.
Additionally, our obligations under the revolving credit facility are guaranteed
by some of our domestic subsidiaries.
Of the capital resource facilities available to PolyOne as of December 31,
2002, 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 our senior unsecured notes and debentures
and our guarantee of the SunBelt note allows for a specific level of secured
debt, above which security must be provided on each such indenture. The
receivables sale facility does not constitute debt under the indentures
governing PolyOne's senior unsecured notes and debentures. Security was granted
under the terms of the amended and restated revolving credit agreement; however,
as of December 31, 2002, PolyOne had no borrowings under the revolving credit
agreement and had not triggered any security being provided to the outstanding
public unsecured debt. On February 28, 2003, PolyOne made borrowings on the
revolving credit agreement at levels that triggered the security on the public
indentures. Security on the revolving credit agreement and public debt will
terminate when the borrowed debt-to-EBITDA ratio is less than 3.50 to 1.0 for
any two consecutive fiscal quarters. As of December 31, 2002, PolyOne had
guaranteed unconsolidated equity affiliate debt of $91.4 million for SunBelt and
$42.3 million for OxyVinyls. The OxyVinyls guarantee is expected to expire in
the second quarter of 2003.
The following table summarizes the defined financial ratios for 2003 under
the revolving credit facility.
Borrowed Tangible
Interest Debt-to- Assets-to-
Coverage EBITDA Indebtedness
Ratio Ratio Ratio
(Minimum) (Maximum) (Minimum)
-------------------------------------
Agreement compliance*
First quarter of 2003 1.90 6.00 1.00
Second quarter of 2003 1.90 6.00 1.00
Third quarter of 2003 4.00 4.00 1.00
Fourth quarter of 2003 4.00 3.50 1.00
*Limitations - Capital expenditures are restricted to $15.0 million in a quarter
and $25.0 million for the six months ending June 30, 2003.
The realization of profitable operations will be important to (1)
maintaining the existing levels of available capital resources, (2) any
refinancing of a portion of the existing capital resources, (3) the payment of
public debt maturing in September 2003 and (4) the execution of PolyOne's
announced restructuring initiatives. The EBITDA before special items (which
approximates the cash flow of current ongoing operations) totaled approximately
$124 million in 2002. The value capture initiatives and the 2003 reduction in
selling and administrative costs, net of 2003 estimated specific program cost
increases, are projected to increase 2003 cash flow of operations between $57
million and $77 million. The cash flow of operations must cover expenditures for
financing costs (interest expense and discount on sale of accounts receivable,
which are projected to be approximately $50 million in 2003), spending
associated with restructuring, capital expenditures and cash to fund sales
growth through increased working capital requirements. Cash spending for the
previously announced restructuring programs (North American Plastic Compounds
and Colors manufacturing improvements, business unit initiatives and the recent
cost-reduction program) are projected to be between $43 million and $50 million
for 2003. Capital expenditures for 2003 are projected to be approximately $50
million. In December 2002, PolyOne announced that it will discontinue the
payment of dividends, commencing in the first quarter of 2003. As of December
31, 2002, and utilizing the required financial ratios for the first quarter of
2003, approximately $125 million of the existing capital resource facilities
would have been available to be drawn while remaining in compliance with the
facilities.
20 POLYONE CORPORATION
PolyOne currently estimates minimum funding requirements for its qualified
defined benefit pension plans of approximately $1 million in 2003 and $5 million
in 2004. Market asset performance in 2003 will impact the final minimum funding
requirements in 2005. As of December 31, 2002, PolyOne decreased by 25 basis
points its assumption regarding the long-term rate of return on pension assets
to 8.75%. An 8.75% return on assets in 2003, combined with the minimum
contributions required in 2003 and 2004, would produce a projected minimum
funding requirement by September 15, 2005 of approximately $45 million (each 1%
return on asset variance in 2003 from 8.75% impacts the 2005 minimum funding by
approximately $1 million). However, PolyOne intends to continue funding in
excess of the minimum required for the qualified defined benefit pension plans
during calendar 2003 and 2004, which would reduce any otherwise required funding
by September 15, 2005.
Based on PolyOne's current projected operations, management believes that
it should be able to continue to manage and control working capital,
discretionary spending and capital expenditures to maintain compliance with the
revolving credit facility's required financial ratios through June 30, 2003.
Management believes that, prior to the end of the third quarter of 2003, it will
either sell sufficient non-strategic business assets to maintain compliance
under the revolving credit facility through the end of 2003 or it will arrange
new financing that will amend or replace the existing revolving credit
agreement. If it becomes necessary to secure additional capital resources, there
can be no assurance that the additional capital resources would be available or,
if available, that their terms would be acceptable to PolyOne. The anticipated
actions should assure adequate levels of liquidity in 2003 to support normal
operations, pay the public debt maturing in September 2003 and execute the
announced restructuring initiatives that are projected to enhance PolyOne's
future profitability.
Certain factors that may affect these forward-looking comments are
discussed in "Forward-looking Statements" on page 45.
MARKET RISK DISCLOSURES
PolyOne is 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 information
regarding foreign currency exchange risk, refer to Note V to the Consolidated
Financial Statements.
POLYONE CORPORATION 21
- - CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Common Accumulated
Shares Additional Stock Share Other Non-
(In millions, except per share data; Common Held in Common Paid-in Retained Held in Ownership Owner Equity
shares in thousands) Shares Treasury Total Stock Capital Earnings Treasury Trust Changes
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 27,974 4,245 $334.7 $ 2.8 $ 297.3 $168.3 $(104.5) $ -- $(29.2)
Non-owner equity changes:
Net income 15.9 15.9
Translation adjustment (4.7) (4.7)
Adjustment of minimum
pension liability (19.2) (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) (29.7)
Formation of share ownership trust (500) 13.4 (13.4)
Stock-based compensation and
benefits and exercise of options 5 (90) (2.2) (7.5) 3.5 1.8
Purchase of shares for treasury 2,600 (18.7) (18.7)
Adjustment to market value (15.8) 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) (25.5) (53.1)
Non-owner equity changes:
Net (loss) (46.1) (46.1)
Translation adjustment (10.0) (10.0)
Adjustment of minimum
pension liability (38.9) (38.9)
Net unrealized loss on securities (0.5) (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) 36.1 (2.9)
Adjustment to market value 15.9 (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) (5.3) (105.4)
Non-owner equity changes:
Net (loss) (58.9) (58.9)
Translation adjustment (2.8) (2.8)
Adjustment of minimum
pension liability (60.5) (60.5)
Reclassification of net
unrealized loss on securities 0.5 0.5
------
Total non-owner equity changes (121.7)
Stock-based compensation and
benefits and exercise of options (658) 10.7 (4.5) 9.0 4.8 1.4
Adjustment to market value -- 1.3 (1.3)
Cash dividends ($0.25 per share) (22.7) (22.7)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 122,192 30,517 $579.7 $ 1.2 $1,069.5 $ 18.7 $(341.1) $(1.8) $(166.8)
=================================================================================================================================
See Notes to Consolidated Financial Statements.
22 POLYONE CORPORATION
Notes: 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 F). 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 T for further information on
PolyOne's business segments.
NOTE B - CHANGE IN ACCOUNTING METHOD
PolyOne adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002. Under SFAS
No. 142, goodwill and indefinite-lived intangible assets are no longer
amortized, but must be reviewed at least annually for impairment. PolyOne does
not have any indefinite-lived intangible assets. Separable intangible assets
that have finite useful lives will continue to be amortized over their useful
lives. As part of adopting this standard, PolyOne completed a transitional
review for goodwill impairment during the first quarter of 2002 for each of its
reporting units. PolyOne determined that the carrying value of the Engineered
Films reporting unit exceeded its estimated fair value as determined by
utilizing various valuation techniques, including discounted cash flows. Given
the indication of a potential impairment, we completed the assessment of the
implied fair value of goodwill for the Engineered Films reporting unit. This
assessment resulted in the writeoff of all of Engineered Films' goodwill, an
impairment loss of $54.7 million ($53.7 million after tax). The Engineered Films
reporting unit is included in the Performance Plastics segment. This
transitional impairment loss was recognized as the cumulative effect of an
accounting change. The fair value of all other reporting units at January 1,
2002, as determined by the valuation techniques noted above, exceeds their
respective carrying value. The transitional impairment loss will not impact the
future cash flows of our businesses. Prior to the adoption of SFAS No. 142,
amortization expense was recorded for goodwill and other intangible assets. The
following table sets forth a reconciliation of net income and earnings per share
information for the years ended December 31, 2002, 2001 and 2000, adjusted for
the non-amortization provisions of SFAS No. 142:
(In millions) 2002 2001 2000
------------------------------
Reported net income (loss) $(58.9) $(46.1) $15.9
Discontinued operations (1.4) (1.0) (0.7)
Cumulative effect of change in
accounting, net of tax 53.7 -- --
Goodwill amortization, net of tax -- 12.3 4.8
Workforce amortization, net of tax -- 2.3 0.9
- --------------------------------------------------------------------------------
Adjusted income (loss) before
discontinued operations and
cumulative effect of a change
in accounting $ (6.6) $(32.5) $20.9
===============================================================================-
Basic and diluted income (loss)
per share:
As reported $(0.65) $(0.51) $0.26
Discontinued operations (0.01) (0.01) (0.01)
Cumulative effect of change in
accounting, net of tax 0.59 -- --
Goodwill amortization,
net of tax -- 0.14 0.08
Workforce amortization,
net of tax -- 0.03 0.01
- --------------------------------------------------------------------------------
Adjusted income (loss) before
discontinued operations and
cumulative effect of a change
in accounting $(0.07) $(0.35) $0.34
===============================================================================-
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND BASIS OF PRESENTATION The Consolidated Financial Statements
include the accounts of PolyOne and its subsidiaries. All majority-owned
affiliates over which PolyOne has control are consolidated. Investments in
affiliates and joint ventures in which our ownership is 50% or less, or in which
PolyOne 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.
PolyOne's accounts receivable sale agreement as disclosed in Note K
includes a wholly owned subsidiary, PolyOne Funding Corporation, that is a
qualifying special-purpose entity (QSPE). The QSPE is bankruptcy remote and is
not consolidated with PolyOne, but is accounted for on an equity basis. The
financial operations and position of PolyOne's unconsolidated affiliates,
excluding PolyOne Funding Corporation, are disclosed in Note H. Transactions
with related parties (including joint ventures) are in the ordinary course of
business.
As described in Note D, PolyOne's 70% ownership interest in So.F.teR S.p.A.
(Softer), an operating entity in Italy whose operations were included in the
Performance Plastics business segment, was sold to the
POLYONE CORPORATION 23
Notes: TO CONSOLIDATED FINANCIAL STATEMENTS
minority interest holder. Consequently, the operating results and cash flows of
Softer are reported separately as discontinued operations. Reference to PolyOne
signifies our continuing operations, with the exception of the discussions
regarding discontinued operations in Note D.
CASH AND CASH EQUIVALENTS PolyOne 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 PolyOne to credit risk are trade accounts receivable, foreign exchange
contracts and interest rate swap agreements. Concentration of credit risk with
respect to trade accounts receivable is limited due to the large number of
customers constituting our customer base and their distribution among many
industries and geographic locations. PolyOne is exposed to credit risk with
respect to forward foreign exchange contracts in the event of non-performance by
the counter-parties to these financial instruments. Management believes the risk
of incurring material losses related to this credit risk is remote.
INVENTORIES Inventories are stated at the lower of cost or market.
Approximately 42% of our inventories at December 31, 2002 are 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 expense was $67.6 million in 2002, $65.4 million in 2001 and
$45.1 million in 2000.
IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for
impairment when circumstances indicate the carrying value of an asset may not be
recoverable. For assets that are to be held and used, an impairment is
recognized when the estimated undiscounted cash flows associated with the asset
or group of assets are less than their carrying value. If impairment exists, an
adjustment is made to write the asset down to its fair value, and a loss is
recorded as the difference between the carrying value and the fair value. Fair
values are determined based on quoted market values, discounted cash flows, or
internal and external appraisals, as applicable. Assets to be disposed of are
carried at the lower of carrying value or estimated net realizable value.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill is the excess of the purchase
price paid over the fair value of the net assets of the business acquired. As
discussed in Note B and Note E, PolyOne adopted SFAS No. 142 effective January
1, 2002. Goodwill is no longer amortized but is subject to impairment testing.
Prior to 2002, goodwill was amortized using the straight-line method over a life
of 35 years. Other intangible assets, which consist primarily of non-contractual
customer relationships, sales contracts, patents and technology, continue to be
amortized over their estimated useful lives. The remaining lives range from
three to 20 years.
Total amortization expense of goodwill and other intangibles was $4.9
million in 2002, $23.8 million in 2001 and $11.4 million in 2000. No goodwill
amortization was recorded in 2002.
DERIVATIVE FINANCIAL INSTRUMENTS Effective January 1, 2001, PolyOne 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 our earnings,
financial position or cash flows in fiscal 2001.
In the normal course of business, PolyOne is exposed to changes in foreign
currencies and fluctuations of interest rates. PolyOne has established policies
and procedures that govern the management of these exposures through the use of
financial instruments. By policy, PolyOne does not enter into such instruments
for trading purposes or speculation.
PolyOne 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
Operations. Realized gains and losses on these contracts offset the foreign
exchange gains and losses on the underlying transactions. PolyOne's forward
contracts have original maturities ranging from one to three months.
From time to time, PolyOne also enters into interest rate swap agreements.
The interest rate swap agreements effectively modify our exposure to interest
risk by converting our 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 PolyOne's operating results is that interest
expense on the portion of
24 POLYONE CORPORATION
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 2002 and 2001, PolyOne terminated interest rate swap contracts
and received cash of $8.3 million in 2002 and $4.3 million in 2001. The deferred
gain has been classified as long-term debt and is being amortized over the
remaining life of the related debt instrument. See Note V for a further
description of our financial instruments.
REVENUE RECOGNITION PolyOne recognizes revenues at the point of passage of
title, which is based on shipping terms for product sales or when service is
performed.
SHIPPING AND HANDLING COSTS Shipping and handling costs are reflected in
cost of sales.
EQUITY AFFILIATES PolyOne recognizes its proportionate share of the income
of equity affiliates. Losses of equity affiliates are recognized to the extent
of our investment, advances, financial guarantees and other commitments to
provide financial support to the investee. Any losses in excess of this amount
are deferred, and reduce the amount of future earnings of the equity investee
recognized by PolyOne. At December 31, 2002 and 2001, there were no deferred
losses related to equity investees.
PolyOne accounts for 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
H for further information on our equity affiliates.
ENVIRONMENTAL COSTS PolyOne 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 our
proportionate share of the amount can be reasonably estimated.
RESEARCH AND DEVELOPMENT EXPENSE Research and development costs, which were
$19.4 million in 2002, $18.8 million in 2001 and $21.4 million in 2000, 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. PolyOne's share of the resulting
translation adjustment is recorded as accumulated other non-owner equity
changes. The cumulative unrecognized translation adjustment loss was $45.3
million at December 31, 2002, $42.5 million at December 31, 2001 and $32.5
million at December 31, 2000. Gains and losses resulting from foreign currency
transactions, including inter-company transactions that are not considered
permanently invested, 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. At December 31, 2002, PolyOne recognized an
other-than-temporary impairment loss of $0.8 million on its marketable
securities, effectively writing the investment down to the December 31, 2002
market value. There were no cumulative unrealized gains or losses at December
31, 2002.
STOCK-BASED COMPENSATION As provided under SFAS No. 123, "Accounting for
Stock-Based Compensation," PolyOne has elected to account for stock-based
compensation under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the PolyOne stock at the date of
the grant over the amount an employee must pay to acquire the stock.
The following pro forma information regarding net (loss) income and net
(loss) income per share is required by SFAS No.123, and has been determined as
if PolyOne had accounted for its share options under the fair value method of
that statement. The weighted-average fair value per share of stock options
granted was $6.52 for 2002, $3.28 for 2001 and $3.90 for 2000. The fair value
for these options was estimated at the grant date using a Black-Scholes
option-pricing model with the following weighted-average assumptions:
2002 2001 2000
--------------------------------
Risk-free interest rate 5.2% 4.8% 5.2%
Expected dividend yield 0.0% 2.5% 2.0%
Expected lives 7 years 7 years 7 years
Expected volatility 43.3% 41.2% 36.7%
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected share price volatility. Because
PolyOne's share options have characteristics significantly different from traded
options, and because
POLYONE CORPORATION 25
Notes: TO CONSOLIDATED FINANCIAL STATEMENTS
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of our share options.
The following table illustrates the effect on net (loss) income and (loss)
income per share if PolyOne had applied the fair value recognition provisions
of SFAS No. 123 to stock-based employee compensation, using the fair value
estimate computed by the Black-Scholes option-pricing model.
For the years ended December 31,
(In millions, except per share data) 2002 2001 2000
--------------------------------
Net (loss) income, as reported $(58.9) $(46.1) $15.9
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method
for all awards 4.6 4.1 4.0
- --------------------------------------------------------------------------------
Pro forma net (loss) income $(63.5) $(50.2) $11.9
================================================================================
Net (loss) income per share:
Basic and diluted - as reported $(0.65) $(0.51) $0.26
Basic and diluted - pro forma $(0.70) $(0.56) $0.19
NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has
issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
requires companies to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The amount recorded
as a liability will be capitalized by increasing the carrying amount of the
related long-lived asset, which is then depreciated over its useful life. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002. PolyOne
does not believe the adoption of SFAS No. 143 will have a material impact on its
results of operations, financial position or liquidity.
The Financial Accounting Standards Board has issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires a cost associated with an exit or disposal activity, such as the sale
or termination of a line of business, the closing of business activities in a
particular location or a change in management structure, to be recorded as a
liability at fair value when it becomes probable the cost will be incurred and
no future economic benefit will be gained by the Company for such cost.
Applicable costs include employee termination benefits, contract termination
costs and costs to consolidate facilities or relocate employees. SFAS No. 146
supersedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity," which in some cases
required certain costs to be recognized before a liability was actually
incurred. The provisions of SFAS No. 146 are effective for exit or disposal
activities initiated after December 31, 2002.
The Financial Accounting Standards Board has issued Interpretation No. 45
(FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
disclosures by guarantors about the nature of, and maximum potential payments
under, contracts that contingently require the guarantor to make payments to the
guaranteed party under certain circumstances (such as financial guarantees and
product warranties). FIN 45 also requires the recognition by guarantors of a
liability, at fair value, for the obligation to stand ready to perform under the
terms of the contract. The recognition provisions of FIN 45 do not apply to
product warranties. The disclosure provisions of FIN 45 are effective for
periods ending after December 15, 2002. The recognition provisions are effective
on a prospective basis to guarantees issued or modified after December 31, 2002.
PolyOne does not expect the adoption of FIN 45 to have a material impact on its
results of operations, financial position or liquidity. See Note P for further
information.
The Financial Accounting Standards Board has issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS
No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition when a company voluntarily changes to
the fair value-based method of recognizing expense in the income statement for
stock-based employee compensation, including stock options granted to employees.
As allowed by SFAS No. 123, PolyOne has adopted the disclosure-only provisions
of the standard and does not recognize expense for stock options granted to
employees.
USE OF ESTIMATES The preparation of Consolidated Financial Statements in
conformity with generally accepted accounting principles (GAAP) 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 liabilities 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 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 2001 and 2000 have been reclassified
to conform with the 2002 presentation.
26 POLYONE CORPORATION
NOTE D - BUSINESS ACQUISITIONS AND DIVESTMENTS
In December 2002, PolyOne acquired all shares of Transformacion de Pigmentos y
Colorantes, S.A. (Transcolor) and divested its 70% ownership interest in Softer.
On December 19, 2002, PolyOne acquired Transcolor, a color concentrates
manufacturer with annual sales of approximately $36 million. Transcolor is
located in northern Spain. Due to the timing of the acquisition, Transcolor's
contribution to operating results was minimal. The 2002 year-end purchase
balance sheet was consolidated and contained a preliminary allocation to
goodwill of approximately $12.5 million.
On December 4, 2002, PolyOne announced the sale of its 70% ownership
interest in Softer, a leading Italian compounder of thermoplastic materials,
while licensing certain technologies. With the sale, all historical operating
results of this business have been reported separately as discontinued
operations. The business was previously included within PolyOne's Performance
Plastics segment.
A summary of the Softer historical operating results constituting the
discontinued operations in the Consolidated Statements of Operations follows.
11 Months Four Months
Ended Year Ended
November 30, Ended December 31,
(In millions) 2002 2001 2000
-------------------------------------------
Net sales $70.0 $73.5 $26.4
Income from operations before
income tax expense 2.9 2.5 1.5
Income tax expense 1.4 1.5 0.8
- --------------------------------------------------------------------------------
Income from discontinued
operations 1.5 1.0 0.7
Loss on disposal (0.1) -- --
- --------------------------------------------------------------------------------
Income from operations and loss
on sale, net of income taxes $ 1.4 $ 1.0 $ 0.7
================================================================================
As of December 31, 2001, the Softer amounts included in the Consolidated
Balance Sheet were as follows:
(In millions)
Net current assets:
Accounts receivables, net $ 25.4
Inventories 10.1
Other current assets 3.2
Short-term notes payable (8.1)
Trade payables (16.6)
Other current liabilities (11.7)
- --------------------------------------------------------------------------------
$ 2.3
================================================================================
Net non-current assets:
Property, net $ 17.2
Goodwill, net 9.2
Other intangible assets, net 0.2
Long-term debt (6.8)
Other non-current liabilities (6.1)
- --------------------------------------------------------------------------------
$ 13.7
================================================================================
NOTE E - GOOD WILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the year ended December 31, 2002
and by business segment are as follows:
Elastomers
and
Performance Performance
(In millions) Plastics Additives Distribution Other Total
- --------------------------------------------------------------------------------------------------------------------
January 1, 2002 $370.1 $106.2 $ -- $ -- $476.3
Reclassification of workforce, net of deferred taxes 9.7 5.7 1.1 1.3 17.8
Business acquisition 12.5 -- -- -- 12.5
Business divestiture (6.3) -- -- -- (6.3)
Other (1.6) -- -- -- (1.6)
Impairment (54.7) -- -- -- (54.7)
- --------------------------------------------------------------------------------------------------------------------
December 31, 2002 $329.7 $111.9 $1.1 $1.3 $444.0
====================================================================================================================
POLYONE CORPORATION 27
Notes: TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding PolyOne's other intangible assets follows:
As of December 31, 2002
-------------------------------------------------
Acquisition Accumulated Currency
(In millions) Cost Amortization Translation Net
-------------------------------------------------
Non-contractual customer
relationships $16.7 $ (3.0) $ -- $ 13.7
Sales contract 12.9 (4.1) -- 8.8
Patents, technology and other 15.5 (5.6) 0.4 10.3
- --------------------------------------------------------------------------------
Total $45.1 $(12.7) $ 0.4 $ 32.8
================================================================================
As of December 31, 2001
-------------------------------------------------
Acquisition Accumulated Currency
(In millions) Cost Amortization Translation Net
-------------------------------------------------
Non-contractual customer
relationships $16.4 $ (2.0) $ -- $14.4
Sales contract 12.9 (2.3) -- 10.6
Patents, technology and other 14.4 (3.6) -- 10.8
Assembled workforce 30.7 (5.5) -- 25.2
- --------------------------------------------------------------------------------
Total $74.4 $(13.4) $ -- $61.0
================================================================================
Amortization of other intangible assets was $4.8 million for the year ended
December 31, 2002. Excluding amortization of the assembled workforce intangible
in 2001, amortization of other intangible assets was $5.8 million for the year
ended December 31, 2001. Amortization expense for each of the five succeeding
fiscal years is expected to be approximately $5 million per year.
NOTE F - FORMATION OF POLYONE
On August 31, 2000, PolyOne was formed as a result of the consolidation of Geon
and Hanna, with Geon as the acquiring entity. As a result of the acquisition of
Hanna, PolyOne announced plans to incur employee separation and plant phaseout
costs for incremental expenditures to exit and consolidate activities at former
Hanna locations, to sever employees involuntarily, and to integrate operating
locations and other activities of the newly formed PolyOne.
In 2001, PolyOne announced the closing of 12 former Hanna manufacturing
plants. Of the announced sites for closing, nine were in the Performance
Plastics business segment and three were in the Elastomers and Performance
Additives segment. In 2001, one Performance Plastics and all designated
Elastomers and Performance Additives plants were closed. In 2002, five
Performance Plastics manufacturing sites closed. As of December 31, 2002, one
plant was to close at the end of the first quarter of 2003 and another plant was
scheduled to close early in the third quarter of 2003. In January 2003, PolyOne
committed to a refinement to the original 2001 plan and decided to continue
operating the remaining facility. Accordingly, in the first quarter of 2003, the
reserve of approximately $1 million associated with this facility (which relates
to an acquired business) will be reversed and recognized as a reduction to
goodwill of the acquired business. As of December 31, 2002, the net property
carrying value to be realized for the plants closed or to be closed was $9.4
million (some assets will be transferred to other locations as production
ceases). In addition, PolyOne projects that cash spending for this
restructuring initiative will approximate $5.5 million during 2003.
The components of the acquisition integration liabilities are as follows:
Employee Separation Plant Phaseout Costs
-------------------------------------------------------------------
Number of Asset
(In millions, except employee numbers) Employees Costs Cash Closing Writedowns Total
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 108 $ 10.7 $ -- $ -- $ 10.7
2001 plan 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
Utilized in 2002 (245) (6.8) (5.1) (0.1) (12.0)
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 159 $ 5.0 $ 1.5 $ 0.3 $ 6.8
============================================================================================================
28 POLYONE CORPORATION
NOTE G - EMPLOYEE SEPARATION AND PLANT PHASEOUT
PolyOne has undertaken various restructuring initiatives and incurred various
employee separation and plant phaseout costs. These costs include 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 phaseout costs have been accrued and recognized as expense
in the Consolidated Statements of Operations.
2002 CHARGES Operating income in 2002 was reduced by charges of $1.1
million ($0.6 million after tax) for costs associated with the consolidation of
certain activities related to the Formulator operations in the Performance
Plastics segment. The costs were for employee separation, which consisted of
severance and other employee benefits. All 43 employees were terminated in 2002.
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 included the projected
termination of approximately 400 employees. Approximately 40 employees remain to
be terminated in 2003 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, PolyOne reassessed the value of the facility that was closed and
recorded an impairment charge of $3.8 million.
In 2001, PolyOne announced the closing of five former Geon manufacturing
plants within the Performance Plastics segment. Two plants were closed in 2001
and two additional plants were closed in 2002. As of December 31, 2002, one
plant remained open and was projected to close in the second quarter of 2003.
As of December 31, 2002, the net property carrying value to be realized for
the plants closed or to be closed was $7.3 million (some assets will be
transferred to other locations as production ceases). In addition, PolyOne
projects that cash spending for restructuring initiatives accrued as of December
31, 2002 in relation to employee separation and plant phaseout costs will
approximate $14.6 million during 2003.
The following table summarizes the provisions, payments and remaining
reserves associated with these initiatives:
Employee Separation Plant Phaseout Costs
-------------------------------------------------------------------
Number of Asset
(In millions, except employee numbers) Employees Costs Cash Closing Writedowns Total
- ------------------------------------------------------------------------------------------------------------
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
2002 charges 43 1.1 -- -- 1.1
Utilized in 2002 (303) (4.6) (0.8) -- (5.4)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 40 $13.5 $ 1.1 $ -- $ 14.6
=============================================================================================================
The employee separation costs remaining to be paid at December 31, 2002
consisted of severance costs for employees related to plants closed in December
2002 and paid in January 2003 (approximately $2.8 million), separation costs for
the 40 employees still to be terminated, continuing severance costs of
previously terminated employees and continuing health care and other benefits
due to terminated employees.
POLYONE CORPORATION 29
Notes: TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - FINANCIAL INFORMATION OF EQUITY AFFILIATES
PolyOne's Resin and Intermediates (R&I) segment consists primarily of
investments in equity affiliates. We own 24% 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. Summarized financial
information for OxyVinyls follows:
(In millions) 2002 2001
-------------------------
OxyVinyls:
Net sales $1,377.1 $1,546.3
Employee severance, liabilities associated
with the temporary idling of a plant, facility
asset writeoff and decommissioning costs (20.6) (18.2)
Operating income (loss) 91.9 (14.7)
Partnership income (loss) as reported
by OxyVinyls 88.4 (13.9)
PolyOne's ownership of OxyVinyls 24% 24%
- --------------------------------------------------------------------------------
PolyOne's proportionate share of OxyVinyls'
earnings (loss) 21.2 (3.3)
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 $ 21.8 $ (2.7)
================================================================================
Current assets $ 275.1 $ 287.2
Non-current assets 979.1 1,006.1
- --------------------------------------------------------------------------------
Total assets 1,254.2 1,293.3
- --------------------------------------------------------------------------------
Current liabilities 164.0 178.7
Non-current liabilities 81.3 81.6
- --------------------------------------------------------------------------------
Total liabilities 245.3 260.3
Partnership capital $1,008.9 $1,033.0
================================================================================
OxyVinyls' income during the year ended December 31, 2002 includes special
pre-tax charges of $20.6 million. The 2002 special charges relate to the asset
writeoff and decommissioning cost associated with the permanent closing of
specific production assets included in an idled plant, plus employee severance
and costs associated with the temporary idling of a plant. Our proportionate
share of the 2002 special items was $4.9 million. OxyVinyls' special charges for
the year ended December 31, 2001 included a fourth-quarter pre-tax charge of
$13.8 million for employee severance and liabilities associated with the
temporary idling of a plant, and a first-quarter pre-tax charge of $4.4 million,
all of which related to involuntary severance, outplacement costs and other
employee-related separation benefits. PolyOne's proportionate share of the 2001
special items was $4.3 million.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 requires a company to
consolidate a variable interest entity if it is designated as the primary
beneficiary of that entity, even if the company does not have a majority of
voting interests. A variable interest entity is generally defined as an entity
of which its equity is unable to finance its activities, or the owners of the
entity lack the risk and rewards of ownership. The provisions of this
interpretation apply at inception for any entity created after January 31, 2003.
For an entity created before February 1, 2003, the provisions of this
interpretation must be applied at the beginning of the first interim or annual
period beginning after June 15, 2003. OxyVinyls will adopt the provisions of FIN
46 in the third quarter of 2003 for existing entities that are within the scope
of this interpretation. On a preliminary basis, OxyVinyls believes that FIN 46
will result in the consolidation of certain variable interest entities that are
owners of plants and equipment OxyVinyls leases from them. The probable
consolidation will affect the LaPorte, Texas, vinyl chloride monomer (VCM) plant
lease and railcars under the terms of a related lease agreement dated April 30,
1999 (collectively, the "LaPorte Lease"). If consolidation of the LaPorte Lease
were to take place, OxyVinyls' financial condition would result in an increase
in assets of approximately $132 million and in liabilities of $180 million, with
a pre-tax charge of approximately $48 million in the third quarter of 2003.
OxyVinyls expects to record this change as a cumulative effect of a change in
accounting principles. Annual expense for depreciation would increase by
approximately $12 million. If OxyVinyls chose to terminate the leases prior to
adoption, there would be no cumulative effect of a change in accounting
principles. Additionally, FIN 46 may require the consolidation of OxyMar in the
third quarter of 2003. If OxyMar were to be consolidated at December 31, 2002,
both assets and liabilities would increase by approximately $354 million. The
consolidation of OxyMar would not change OxyVinyls' results of operations. The
potential 2003 impact on PolyOne's financial statements should the LaPorte Lease
not be terminated is (1) a third-quarter pre-tax charge from the cumulative
effect of a change in accounting of approximately $11.5 million and (2) lower
second-half equity earnings of approximately $1.4 million.
PolyOne's R&I segment also includes the SunBelt Chlor-Alkali (owned 50%)
and Welvic Australia Pty Ltd. (owned 37.4%) equity affiliates. The Performance
Plastics segment includes the DH Compounding Company (owned 50%), Geon/Polimeros
Andinos (owned 50%) and Techmer, PM, LLC (owned 51%) equity affiliates. Further,
for the year ended December 31, 2001 and the two-month period ended February 28,
2002, the R&I segment included the results of Australian Vinyls Corporation, an
equity affiliate (owned 37.4%) and the Performance Plastics segment included SPC
Geon PTE Limited (owned 50%). In
30 POLYONE CORPORATION
February 2002, SPC Geon PTE Limited was dissolved. 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 operations
are named Welvic Australia Pty Ltd.
On December 20, 2002, we announced that we had entered into an agreement
with TPM Holdings, LP, a limited partnership, for the future sale of PolyOne's
unconsolidated equity ownership interest in Techmer. Under terms of the
agreement, PolyOne recognized in its 2002 earnings from equity affiliates a
pre-tax impairment loss on its investment of $3.6 million, reported separately
as a component of operating income in the line "Loss on divestiture of equity
investment." The sale transaction closed in January 2003, with PolyOne receiving
cash in exchange for its shares of Techmer.
Combined summarized financial information for these equity affiliates,
excluding PolyOne Funding Corporation, follows. The amounts shown represent the
entire operations of these businesses, rather than PolyOne's proportionate
share.
(In millions) 2002 2001
---------------------------
Net sales $253.1 $359.0
Operating income (loss) 15.9 (17.9)
- --------------------------------------------------------------
Net income (loss) $ 1.5 $(34.1)
==============================================================
Current assets $ 76.4 $ 96.4
Non-current assets 201.1 220.5
- --------------------------------------------------------------
Total assets $277.5 $316.9
==============================================================
Current liabilities $ 41.0 $ 55.3
Non-current liabilities 180.8 196.6
- --------------------------------------------------------------
Total liabilities $221.8 $251.9
==============================================================
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 $30.5 million in 2002
and $9.8 million in 2001.
NOTE I - FINANCING ARRANGEMENTS
Long-term debt, including capital lease obligations, at December 31 consisted of
the following:
(In millions) 2002 2001
---------------
9.375% senior notes due 2003 $ 90.0 $ 91.5
6.875% debentures due 2005 78.7 75.2
7.500% debentures due 2015 50.0 50.0
8.875% senior notes due 2012 198.3 --
Medium-term notes - interest rates from 6.52%
to 7.16% with a weighted-average rate of
6.85% - due between 2004 and 2011 155.6 151.1
Deutsche mark denominated note,
interest rate at 5.1% -- 40.5
Colombian peso denominated notes, interest
rates at 11.10% to 11.85%, due 2004-2005 8.9 11.4
Italian lira denominated notes, interest rates
at 2% to 5.1% -- 6.5
Bank borrowings 1.7 5.2
- -----------------------------------------------------------------------
583.2 431.4
Less current portion 91.0 4.6
- -----------------------------------------------------------------------
$492.2 $426.8
=======================================================================
Aggregate maturities of long-term debt for the next five years are: 2003 -
$91.0 million; 2004 - $23.8 million; 2005 - $104.9 million; 2006 - $20.1
million; 2007 - $20.0 million; and thereafter - $323.4 million.
During April 2002, PolyOne completed a private placement of $200 million of
8.875% senior notes to certain institutional investors in an offering exempt
from the registration requirements of the Securities Act of 1933. Subsequently,
PolyOne registered with the Securities and Exchange Commission an offer to
exchange the senior notes for registered senior notes, which became effective in
July 2002. In part, we used the proceeds from the offering to repay a loan held
by one of our German subsidiaries. The senior notes rank equally with all of
PolyOne's other senior unsecured indebtedness.
In December 2002, PolyOne amended its revolving credit facility, which
expires in October 2004. The amendment reduced the existing facility from $150
million to $125 million and established new future compliance financial ratios.
The amendment waived the compliance of financial ratio covenants for the fourth
quarter of 2002. 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. Additionally, our obligations under the revolving credit facility
are guaranteed by some of our domestic subsidiaries. There were no borrowings
under this agreement at December 31, 2002.
POLYONE CORPORATION 31
Notes: TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average interest on short-term borrowings was 4.4% at December
31, 2002 and 4.0% at December 31, 2001. Interest paid amounted to $41.4 million
in 2002, $42.5 million in 2001 and $38.6 million in 2000. PolyOne capitalized
$0.7 million of interest costs during 2002 in connection with the implementation
of a common management business information systems platform.
From time to time, PolyOne enters into interest rate swap agreements. The
interest rate swap agreements effectively modify PolyOne's exposure to interest
risk by converting our fixed-rate debt to a floating rate. PolyOne terminated
interest rate swap contracts and received cash of $8.3 million in 2002 and $4.3
million in 2001. The deferred gain has been classified as long-term debt, and is
being amortized over the remaining life of the related debt instrument. As a
result of the swap agreements in 2002 and 2001, the 9.375% interest rate on the
senior notes due in 2003 was converted to a rate of 6.70% at December 31, 2002
and 7.96% at December 31, 2001. The 6.875% interest rate on the debentures due
in 2005 was converted to 5.33% at December 31, 2002 and 4.5675% at December 31,
2001. At December 31, 2002, $100.0 million of medium-term notes with a
weighted-average interest rate of 6.96% was converted to an average weighted
interest rate of 5.77%. At December 31, 2001, $20.0 million of medium-term notes
with an interest rate of 6.875% was converted to an interest rate of 5.0825%.
PolyOne's bank agreements require, among other things, that PolyOne comply
with interest coverage, borrowed debt-to-EBITDA earnings and tangible
assets-to-indebtedness ratios. Further, the amended revolving credit agreement
limits capital expenditures, acquisitions and dividends.
Each indenture governing our public debt and our guarantee of the SunBelt
note allows for a specific level of secured debt, above which security must be
provided on each such indenture. The receivables sale facility does not
constitute debt under the public debt indentures. In March 2002, security was
granted under the terms of the amended and restated revolving credit agreement;
however, as of December 31, 2002, PolyOne had no borrowings under the revolving
credit agreement and had not triggered any security being provided to the
outstanding public unsecured debt. In February 2003, PolyOne made borrowings on
the revolving credit agreement at levels that triggered the security on the
public indentures. Security on the revolving credit agreement and public debt
will terminate when the borrowed debt-to-EBITDA ratio is less than 3.50 to 1.0
for any two consecutive fiscal quarters.
NOTE J - LEASING ARRANGEMENTS
PolyOne leases certain manufacturing facilities, warehouse space, machinery and
equipment, automobiles and railcars under operating leases. Rent expense
amounted to $20.9 million in 2002, $25.7 million in 2001 and $21.3 million in
2000.
The future minimum lease payments under non-cancelable operating leases
with initial lease terms in excess of one year at December 31, 2002 were as
follows: 2003 - $16.6 million; 2004 - $12.2 million; 2005 - $6.3 million; 2006 -
$4.5 million; 2007 - $2.8 million; and thereafter - $7.7 million.
NOTE K - SALE OF ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
(In millions) 2002 2001
-----------------------
Trade accounts receivable $120.1 $145.1
Retained interest in securitized
accounts receivable 56.5 --
Allowance for doubtful accounts (12.3) (9.5)
------------------------
$164.3 $135.6
========================
PolyOne participates in a receivables sale program to provide up to $250
million in liquidity through the sale of certain domestic trade accounts
receivable at a cost similar to high-grade commercial paper. This program was
amended and restated in April 2002. In the future, the program could be
terminated should PolyOne's senior unsecured debt receive a public debt rating
below BB- by Standard & Poor's or a rating below Ba3 by Moody's Investors
Service.
Under the terms of the amended and restated agreement, PolyOne sells
undivided interests in certain domestic accounts receivable through PolyOne
Funding Corporation (PFC), without recourse, to a third-party financial conduit.
PFC is a wholly owned subsidiary and a qualifying special-purpose entity (QSPE)
that is bankruptcy remote and accounted for on an equity basis. At December 31,
2002, accounts receivable totaling $216.4 million were sold by PolyOne to PFC,
and are included as a reduction of trade accounts receivable within accounts
receivable on the PolyOne Consolidated Balance Sheet. Further, at December 31,
2002, PFC had sold undivided interests in accounts receivable totaling $159.9
million to a third-party financial conduit, a decrease of $57.6 million from
December 31, 2001. PolyOne retains an interest in the $56.5 million difference
between the amount of trade receivables sold by PolyOne to PFC and the undivided
interests sold by PFC to the third-party financial conduit. This interest
retained by PolyOne is included in accounts receivable in the PolyOne
Consolidated Balance Sheet at December 31, 2002. The third-party financial
conduit has a security interest in the unsold accounts receivable held by PFC.
PolyOne records the net change in the undivided interests sold under this
program as operating cash flows in the Consolidated Statements of Cash Flows.
32 POLYONE CORPORATION
The accounts receivable are sold at a discount from the face amount to pay
investor yield (30-day LIBOR based) on the undivided interests sold to the
conduit, for utilization fees (0.25% of the undivided interests sold) and for
program fees (0.50% of the total commitment). The discount from the face amount
for accounts receivable sold, net of a servicing fee, is $3.9 million for the
year ended December 31, 2002, and is included in other expense, net, in the
Consolidated Statements of Operations.
The arrangement provides that PolyOne remain responsible for servicing the
underlying accounts receivable. We receive an annualized service fee from PFC
approximating 1/4 of 1% of the undivided interests sold. As PolyOne collects
payments from the undivided interests sold, PFC reinvests the collected payments
in new accounts receivable for the conduit. PolyOne, through PFC, retains the
risk of credit loss on the receivables and, accordingly, the full amount of the
allowance for doubtful accounts has been retained in the PolyOne Condensed
Consolidated Balance Sheet. The conduit has collection rights to recover
payments from the receivables in the designated pool.
NOTE L - INVENTORIES
December 31,
(In millions) 2002 2001
-------------------
At FIFO or average cost, which approximates
current costs:
Finished products and in process $159.1 $154.8
Raw materials and supplies 118.5 117.0
- -------------------------------------------------------------------------
277.6 271.8
Reserve to reduce certain inventories to
LIFO cost basis (23.9) (16.5)
- -------------------------------------------------------------------------
$253.7 $255.3
=========================================================================
Approximately 42% of PolyOne's inventory had been valued by the LIFO method
at December 31, 2002 and 44% at December 31, 2001.
NOTE M - PROPERTY
(In millions) 2002 2001
----------------------
Land and land improvements $ 59.6 $ 62.0
Buildings 292.3 287.2
Machinery and equipment 941.1 864.3
- ---------------------------------------------------------------
1,293.0 1,213.5
Less accumulated depreciation
and amortization (610.9) (529.9)
- ---------------------------------------------------------------
$ 682.1 $ 683.6
===============================================================
NOTE N - OTHER BALANCE SHEET LIABILITIES
Non-current
Accrued Expenses Liabilities
------------------------------------
December 31, December 31,
(In millions) 2002 2001 2002 2001
------------------------------------
Employment costs $ 63.0 $ 68.5 $ 25.6 $ 21.1
Environmental 7.7 4.1 44.6 52.1
Taxes 12.6 11.7 -- --
Post-retirement benefits 12.3 12.5 -- --
Interest payable 6.6 4.2 -- --
Pension -- -- 163.5 95.6
Employee separation and
plant phaseout 21.3 36.5 0.1 1.2
Insurance accruals 0.8 0.6 5.3 4.7
Other 35.9 22.9 22.1 39.8
- ----------------------------------------------------------------
$160.2 $161.0 $261.2 $214.5
================================================================
NOTE O - EMPLOYEE BENEFIT PLANS
PolyOne has four defined benefit pension plans under which benefits are accruing
for certain U.S. employees. Two of the pension plans are unfunded non-qualified
pension plans that provide supplemental pension benefits for senior executives.
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
PolyOne stock. PolyOne's salaried plan closed participation to employees after
December 31, 1999, and for all active participants the service component of the
benefit was frozen as of December 31, 2002. In connection with the acquisitions
of Hanna and O'Sullivan Corporation (O'Sullivan), PolyOne 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.
PolyOne recorded an intangible asset of $4.3 million related to both funded
and unfunded pension plans as of December 31, 2002, and of $1.4 million as of
December 31, 2001. PolyOne's accumulated other non-owner equity changes included
$120.0 million after tax at December 31, 2002 and $59.5 million at December 31,
2001 related to the accumulated minimum pension liability. PolyOne reports other
non-owner equity changes, net of the related income tax expense or benefit, in
the Consolidated Statements of Shareholders' Equity. The income tax benefit
related to the adjustment of the minimum pension liability was $2.9 million in
2002, $20.8 million in 2001 and $15.2 million in 2000.
POLYONE CORPORATION 33
Notes: TO CONSOLIDATED FINANCIAL STATEMENTS
PolyOne 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.
(In millions) Pension Benefits Health Care Benefits
2002 2001 2002 2001
-------------------------------------------------
Change in benefit obligation
Benefit obligation - beginning of year $ 442.4 $ 415.3 $ 145.5 $ 155.0
Service cost 5.0 5.0 0.8 0.8
Interest cost 30.0 30.7 9.9 10.2
Participant contributions -- -- 2.8 2.0
Benefits paid (32.5) (34.2) (17.4) (16.8)
Acquired businesses and plan amendments 3.8 0.1 0.4 --
Change in discount rate and other 16.8 25.5 13.6 (5.7)
- ------------------------------------------------------------------------------------------------------------
Benefit obligation - end of year 465.5 442.4 155.6 145.5
Projected salary increases 31.2 31.4 -- --
- ------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $434.3 $ 411.0 $ 155.6 $ 145.5
============================================================================================================
Change in plan assets
Plan assets - beginning of year $ 312.1 $ 353.2 $ -- $ --
Actual return on plan assets (25.2) (11.4) -- --
Company contributions 13.3 4.5 -- --
Benefits paid (32.5) (34.2) -- --
- ------------------------------------------------------------------------------------------------------------
Plan assets - end of year $ 267.7 $ 312.1 $ -- $ --
============================================================================================================
Funded status
Projected benefit obligation in excess of plan assets $ 197.7 $ 130.3 $ 155.6 $ 145.5
Unamortized transition liability -- (0.7) -- --
Prior service cost (4.3) (0.7) (0.8) (0.9)
Net actuarial gain (loss) (189.1) (126.2) (20.0) (5.9)
Cumulative pre-tax adjustment to recognized minimum 159.2 92.9 -- --
liability
- ------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ 163.5 $ 95.6 $ 134.8 $ 138.7
============================================================================================================
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
2002 2001 2000 2002 2001 2000
------------------------------------------------------------
Assumptions
Discount rate 6.75% 7.25% 7.5% 6.75% 7.25% 7.5%
Future compensation 4.0-7.0% 4.0-7.0% 4.0-7.0% -- -- --
Expected long-term return on plan assets,
beginning of year (2003 - 8.75%) 9.0% 9.0% 9.0% -- -- --
Components of net periodic benefit costs
Service cost $ 5.0 $ 5.0 $ 4.2 $ 0.8 $ 0.8 $0.8
Interest cost 30.0 30.7 25.0 9.9 10.2 7.9
Expected return on plan assets (27.4) (29.9) (26.8) -- -- --
Amortization of unrecognized losses,
transition obligation and prior
service cost 6.9 3.7 1.9 (0.2) (0.1) --
- -------------------------------------------------------------------------------------------------------------
$ 14.5 $ 9.5 $ 4.3 $10.5 $10.9 $8.7
=============================================================================================================
34 POLYONE CORPORATION
The combined projected benefit obligation (PBO) included the PBO of
unfunded plans of $36.9 million at December 31, 2002 and $34.3 million at
December 31, 2001. The accumulated benefit obligation (ABO) of these unfunded
plans was $33.5 million at December 31, 2002 and $32.6 million at December 31,
2001. The remaining PBO relates to PolyOne's funded pension plans, including the
acquired Hanna and O'Sullivan plans. At December 31, 2002, PolyOne had six plans
with a PBO and an ABO in excess of the related plan assets. These included
PolyOne's salaried and wage plans, two plans acquired with O'Sullivan and two
plans acquired with Hanna. For these plans, at December 31, 2002, the PBO was
$422.2 million, the ABO was $394.4 million and the fair value of plan assets was
$258.5 million.
For measurement purposes, PolyOne assumed an average annual rate of
increase in the per capita cost of health care benefits (health care cost trend
rates) of 11.0% for 2003 declining gradually to 5.25% in 2009 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, 2002 by
approximately $12 million, and the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost for 2002 by
approximately $1 million.
PolyOne 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,
PolyOne may make discretionary profit-sharing contributions to these plans for
eligible employees. PolyOne made no profit-sharing contribution in 2002, 2001 or
2000. Also, PolyOne 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 PolyOne's
contributions to the RSP:
(In millions) 2002 2001 2000
---------------------------------
Retirement savings match $ 8.9 $ 8.9 $ 9.2
Profit sharing -- -- --
Defined retirement benefit 5.6 6.7 1.4
- ------------------------------------------------------------------
$14.5 $15.6 $10.6
==================================================================
NOTE P - COMMITMENTS AND RELATED-PARTY INFORMATION
ENVIRONMENTAL PolyOne has been notified by federal and state environmental
agencies and by private parties that it may be a potentially responsible party
(PRP) in connection with several environmental sites. While government agencies
frequently claim PRPs are jointly and severally liable at these sites, in our
experience, interim and final allocation of liability costs are generally made
based on the relative contribution of waste. PolyOne believes that its potential
continuing liability with respect to such sites will not have a material adverse
effect on its consolidated financial position, results of operations or cash
flows. In addition, PolyOne initiates corrective and preventive environmental
projects of its own to ensure safe and lawful activities at its operations.
PolyOne believes that compliance with current governmental regulations at all
levels will not have a material adverse effect on its financial condition. Based
on estimates prepared by our environmental engineers and consultants, PolyOne,
at December 31, 2002, had accruals totaling $52.3 million to cover probable
future environmental expenditures relating to previously contaminated sites. The
accrual represents our best estimate for the remaining probable remediation
costs, based upon information and technology currently available. PolyOne's
estimate of the liability may be revised as new regulations, technologies or
additional information is obtained. Environmental expense incurred was $3.7
million in 2002, $3.9 million in 2001 and $2.2 million in 2000.
GUARANTEES In connection with the formation of OxyVinyls, PolyOne has
guaranteed $42.3 million of OxyVinyls' borrowings from Occidental Petroleum
Corporation. This guarantee terminates when OxyVinyls attains a defined amount
of cumulative earnings before income taxes, depreciation and amortization.
PolyOne also has guaranteed $91.4 million of SunBelt's outstanding senior
secured notes in connection with the construction of the chlor-alkali facility
in Macintosh, Alabama. The debt and guarantee thereon mature in 2017.
RELATED-PARTY TRANSACTIONS PolyOne 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. PolyOne also has
entered into various service agreements with OxyVinyls. Net amounts owed to
OxyVinyls, primarily for raw material purchases, totaled $15.5 million at
December 31, 2002 and $14.2 million at December 31, 2001. PolyOne's purchases of
raw materials from OxyVinyls totaled approximately $179 million during 2002 and
$184 million during 2001.
NOTE Q - OTHER EXPENSE, NET
(In millions) 2002 2001 2000
---------------------------------
Currency exchange gain (loss),
net of foreign exchange contracts $(0.6) $(0.8) $ 2.8
Discount on sale of trade (4.8) (8.1) (5.8)
receivables
Investment writedown (0.8) (0.6) --
Litigation settlement gain -- 3.1 --
Other income (expense), net (3.0) 0.1 (1.6)
- -----------------------------------------------------------------------------
$(9.2) $(6.3) $(4.6)
=============================================================================
POLYONE CORPORATION 35
Notes: TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - INCOME TAXES
Income (loss) before income taxes, discontinued operations and cumulative effect
of a change in accounting consists of the following:
(In millions) 2002 2001 2000
-----------------------------------
Domestic $(22.1) $(81.2) $23.8
Foreign 10.3 7.0 0.8
- ------------------------------------------------------------
$(11.8) $(74.2) $24.6
============================================================
A summary of income tax expense (benefit) follows:
(In millions) 2002 2001 2000
---------------------------------
Current:
Federal $ -- $ -- $ 0.1
State -- (0.5) 1.0
Foreign 7.5 2.6 --
- --------------------------------------------------------------------
Total current 7.5 2.1 1.1
Deferred:
Federal (7.5) (26.1) 8.7
State (2.8) (4.3) (1.2)
Foreign (2.4) 1.2 0.8
- --------------------------------------------------------------------
Total deferred (12.7) (29.2) 8.3
- --------------------------------------------------------------------
Total tax expense (benefit) $ (5.2) $(27.1) $ 9.4
====================================================================
The income tax rate (benefit) for financial reporting purposes varied
from the federal statutory rate as follows:
2002 2001 2000
---------------------------------
Federal statutory income tax rate (35.0%) (35.0%) 35.0%
State tax, net of federal benefit (15.6) (4.3) (0.4)
Goodwill -- 3.2 7.7
Differences in rates of
foreign operations 12.8 0.6 2.5
Enacted tax rate reduction -- -- (5.4)
Other, net (6.3) (1.0) (1.2)
- --------------------------------------------------------------------
Effective income tax rate (44.1%) (36.5%) 38.2%
====================================================================
Significant components of PolyOne's deferred tax liabilities and assets at
December 31 were as follows:
(In millions) 2002 2001
--------------------
Deferred tax liabilities:
Tax over book depreciation $ 72.8 $ 72.2
Intangibles 10.7 23.0
Equity investments 149.9 140.9
State taxes 1.1 4.9
Other, net 30.3 36.4
- --------------------------------------------------------------------------
Total deferred tax liabilities $264.8 $277.4
==========================================================================
Deferred tax assets:
Post-retirement benefits other than pensions 49.7 51.7
Employment cost and pension 64.9 44.4
Employee separation and plant phaseout 12.0 17.4
Environmental 19.0 18.8
Net operating loss carryforward 109.2 82.3
LIFO inventory -- 2.5
Alternative minimum tax credit carryforward 5.8 5.8
Foreign net operating losses and
tax credit carryforward 13.1 10.7
Valuation allowance (32.4) (10.7)
Other, net 26.6 31.5
- --------------------------------------------------------------------------
Total deferred tax assets 267.9 254.4
- --------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 3.1 $(23.0)
==========================================================================
SFAS No. 109, "Accounting for Income Taxes," requires deferred tax assets
to be determined for each tax-paying component of an enterprise within each tax
jurisdiction. The deferred tax assets indicated in the table are attributable
primarily to tax jurisdictions where a recent history of losses has occurred.
Therefore, PolyOne believes a valuation allowance is needed to reduce the
deferred tax asset to an amount that is more likely than not to be realized. In
addition, PolyOne has established a valuation allowance for deferred income tax
benefits related to foreign subsidiary loss carryforwards and foreign tax credit
carryforwards.
PolyOne 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, 2002. 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 practicable to determine the amount of income tax
liability that would result had such earnings actually been repatriated.
36 POLYONE CORPORATION
PolyOne paid income taxes net of refunds of $1.6 million in 2002 and $4.2
million in 2000. PolyOne received income tax refunds net of taxes paid of $4.1
million in 2001. PolyOne has a net operating loss carryforward of approximately
$311.9 million, of which $11.9 million will expire in 2011, $22.2 million will
expire in 2012, $66.6 million will expire in 2018, $3.5 million will expire in
2019, $9.5 million will expire in 2020, $104.8 million will expire in 2021 and
the remaining $93.4 million will expire in 2022. In addition, PolyOne has an
alternative minimum tax credit carryforward of $5.8 million.
NOTE S - SHAREHOLDERS' EQUITY
PolyOne's incentive stock plans provide for the awarding or granting of options
to purchase PolyOne common stock. Generally, options granted become exercisable
at the rate of 35% after one year, 70% after two years and 100% after three
years. For 2002 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 2002, 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. PolyOne
also has a stock plan for non-employee directors under which options are
granted.
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 PolyOne'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, 2000 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
Issued 1,505 12.23
Exercised (782) 9.11
Forfeited (2,199) 10.11
- -----------------------------------------------------------------
Outstanding at December 31, 2002 13,054 12.16
Exercisable at December 31, 2002 10,648 12.47
Exercisable at December 31, 2001 10,258 12.73
Exercisable at December 31, 2000 10,099 12.46
At December 31, 2002:
Exercisable options:
Exercise price: $8.38 - $13.00 6,633 10.11
Exercise price: $13.01 - $26.82 4,015 16.37
Unexercisable options:
Exercise price: $8.38 - $13.00 2,406 10.80
Exercise price: $13.01 - $26.82 -- --
=================================================================
At December 31, 2002, the weighted-average remaining life for options with
an exercise price of $13.00 or less was 5.9 years. Options with an exercise
price of more than $13.00 had a remaining life of 3.7 years.
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 $1.4 million in 2002, $1.3 million in 2001 and $10.3
million in 2000. The weighted-average fair value per share of restricted stock
and stock awards under the long-term incentive plan on the grant date was $12.22
for 2002, $7.34 for 2001 and $14.95 for 2000.
At December 31, 2002, approximately 13.1 million shares were reserved for
future issuance upon exercise of stock options previously granted, and
approximately 3.9 million shares were available for future grants under
PolyOne's incentive plans.
POLYONE CORPORATION 37
Notes: TO CONSOLIDATED FINANCIAL STATEMENTS
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. During 2002, 3,000 shares were issued. The 2002 shares were valued at
$12.22 per share and were issued from shares held in treasury. Shares vest and
restrictions lapse three years from the date of grant. Accordingly, PolyOne has
recorded the grants as unearned compensation to be recognized as compensation
expense over the three-year vesting period.
NOTE T - SEGMENT INFORMATION
PolyOne operates in four business segments: Performance Plastics, Elastomers and
Performance Additives (E&A), Distribution, and Resin and Intermediates (R&I).
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 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.
Senior management uses operating income before special items and EBITDA
(defined as operating income plus depreciation and amortization before special
items) to assess performance and allocate resources to business segments. Senior
management believes such metrics are useful in its assessment of the underlying
earnings power and operating cash flow of each business segment. EBITDA is a
metric used by stock market analysts, financial institutions and investors.
Special items include gains and losses associated with specific strategic
initiatives such as restructuring or consolidation of operations, gains and
losses attributable to divestment of joint ventures, and certain one-time items.
Operating income before special items and EBITDA before special items are
non-GAAP measures, and may not be comparable to financial performance measures
presented by other companies.
Elastomers
and
Performance Performance Resin and
(In millions) Total Plastics Additives Distribution Intermediates Other
---------------------------------------------------------------------------------
Year ended December 31, 2002:
Sales to external customers $2,498.2 $1,621.6 $363.8 $512.8 $ -- $ --
Inter-segment sales -- 97.2 0.1 6.9 -- (104.2)
- ----------------------------------------------------------------------------------------------------------------------------------
2,498.2 1,718.8 363.9 519.7 -- (104.2)
==================================================================================================================================
Operating income (loss) 38.9 37.5 11.4 7.0 0.6 (17.6)
Employee separation and plant phaseout 1.1 1.1 -- -- -- --
Period plant phaseout costs incurred 1.1 1.1 -- -- -- --
Plant phaseout accelerated depreciation 1.8 1.8 -- -- -- --
Restructuring and plant idling costs
incurred by equity affiliates (1) 4.9 -- -- -- 4.9 --
Loss on divestiture of equity investments 5.1 -- -- -- 5.1 --
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) before employee
separation, plant phaseout costs, plant
idling and investment divestiture costs 52.9 41.5 11.4 7.0 10.6 (17.6)
Depreciation and amortization 70.7 55.7 11.7 1.8 0.8 0.7
- ----------------------------------------------------------------------------------------------------------------------------------
EBITDA before employee separation, plant
phaseout costs, plant idling and
investment divestiture costs 123.6 97.2 23.1 8.8 11.4 (16.9)
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 1,997.5 1,389.2 252.2 140.6 231.1 (15.6)
Capital expenditures 75.1 58.3 4.7 1.0 -- 11.1
==================================================================================================================================
(1) PolyOne's share of OxyVinyls' employee severance and liabilities associated
with the temporary idling of a plant in December 2001 and the 2002 asset
writeoff and decommissioning costs related to the permanent closing of
specific production assets included in the idled plant.
38 POLYONE CORPORATION
Elastomers
and
Performance Performance Resin and
(In millions) Total Plastics Additives Distribution Intermediates Other
---------------------------------------------------------------------------------
Year ended December 31, 2001:
Sales to external customers $2,581.1 $1,724.7 $402.2 $454.2 $ -- $ --
Inter-segment sales -- 39.9 0.4 8.4 -- (48.7)
- ----------------------------------------------------------------------------------------------------------------------------------
2,581.1 1,764.6 402.6 462.6 -- (48.7)
==================================================================================================================================
Operating income (loss) (29.5) 14.6 10.2 (0.4) (31.5) (22.4)
Employee separation and plant phaseout 36.1 36.1 -- -- -- --
Merger and integration costs 5.9 0.1 -- -- -- 5.8
Period cost of closed facilities 0.2 0.2 -- -- -- --
Restructuring and plant idling costs
incurred by equity affiliates (2) 9.4 -- -- -- 9.4 --
Loss on divestiture of equity investments 9.5 -- -- -- 9.5 --
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) before restructuring
costs, merger and integration costs, and
executive separation costs 31.6 51.0 10.2 (0.4) (12.6) (16.6)
Depreciation and amortization 89.2 68.2 16.6 2.9 -- 1.5
- ----------------------------------------------------------------------------------------------------------------------------------
EBITDA before restructuring costs, merger
and integration costs, and executive
separation costs 120.8 119.2 26.8 2.5 (12.6) (15.1)
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 2,051.5 1,543.0 445.1 176.2 239.7 (352.5)
Capital expenditures 78.1 31.0 10.0 1.9 -- 35.2
==================================================================================================================================
Year ended December 31, 2000:
Sales to external customers $1,861.3 $1,559.3 $145.5 $156.5 $ -- $ --
Inter-segment sales -- 8.8 0.3 2.4 -- (11.5)
- ----------------------------------------------------------------------------------------------------------------------------------
1,861.3 1,568.1 145.8 158.9 -- (11.5)
==================================================================================================================================
Operating income (loss) 63.9 51.6 7.6 2.1 27.9 (25.3)
Employee separation and plant phaseout 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 80.6 56.7 8.1 2.1 27.9 (14.2)
Depreciation and amortization 56.6 48.7 5.8 2.1 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
EBITDA before restructuring costs, acquired
profit in inventory, merger and integration
costs, and pension termination and debt
placement costs 137.2 105.4 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 60.7 40.9 7.1 0.6 -- 12.1
==================================================================================================================================
(2) PolyOne's share of OxyVinyls' employee severance costs and liabilities
associated with the temporary idling of a plant and Australian Vinyls
Corporation's employee severance and restructuring costs.
POLYONE CORPORATION 39
Notes: TO CONSOLIDATED FINANCIAL STATEMENTS
A breakdown of the Performance Plastics segment's sales for the years ended
December 31, 2002 and 2001 and the changes versus the respective prior-year
periods, by primary product group, is as follows:
Year Ended December 31, Year Ended December 31,
2002 vs. 2001 2001 vs. 2000
------------------------------------------------------------------
2002 2002 2002 2001 2001 2001
Sales $ Sales $ Shipment Lbs. Sales $ Sales $ Shipment Lbs.
------------------------------------------------------------------
% of % Change % Change % of % Change % Change
Total vs. 2001 vs. 2001 Total vs. 2000 vs. 2000
------------------------------------------------------------------
North American PCC 56% -9% -4% 57% -20% -19%
International PCC 20% 15% 7% 20% -7% -3%
Specialty Resins and Formulators 15% 3% 4% 14% -11% -12%
Engineered Films 9% -4% -3% 9% -15% -16%
- -------------------------------------------------------------------------------------------------------
Total Performance Plastics 100% -3% -1% 100% -16% -16%
=======================================================================================================
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, excluding amounts related to losses on
divestitures of equity investments, are as follows:
(In millions) 2002 2001 2000
------------------------------------
Earnings (loss) of equity affiliates:
Performance Plastics $ 6.8 $ 7.2 $ 1.2
R&I 15.3 (14.7) 37.9
Other -- (0.4) --
- -------------------------------------------------------------------------------
Subtotal 22.1 (7.9) 39.1
Minority interest (1.9) (1.9) (1.4)
- -------------------------------------------------------------------------------
Total $ 20.2 $ (9.8) $37.7
===============================================================================
Investment in equity affiliates:
Performance Plastics $ 51.9 $ 59.7 $ 60.0
R&I 219.9 228.2 251.6
- -------------------------------------------------------------------------------
Total $271.8 $287.9 $311.6
===============================================================================
PolyOne's sales are principally to customers in the United States, Europe,
Canada and Asia/Pacific, and the majority of its 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) 2002 2001 2000
--------------------------------------
Net sales:
United States $1,915.5 $2,031.4 $1,502.9
Europe 291.9 271.9 105.7
Canada 168.1 180.3 215.4
Other 122.7 97.5 37.3
- -------------------------------------------------------------------
Long-lived assets:
United States $ 893.0 $ 982.5 $1,009.1
Europe 215.7 199.3 195.2
Canada 50.0 50.7 61.8
Other 52.8 53.9 55.4
===================================================================
40 POLYONE CORPORATION
NOTE U - WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE
(In millions) 2002 2001 2000
--------------------------
Weighted-average shares - basic:
Weighted-average
shares outstanding 91.3 90.3 61.8
Less unearned portion of
restricted stock awards
included in outstanding shares (0.5) (0.5) (0.4)
- -------------------------------------------------------------
90.8 89.8 61.4
=============================================================
Weighted-average shares - diluted:
Weighted-average shares
outstanding - basic 90.8 89.8 61.4
Plus unearned portion of
restricted stock awards
included in outstanding shares -- -- 0.4
Plus dilutive impact of stock
options and stock awards -- -- 0.2
- -------------------------------------------------------------
90.8 89.8 62.0
=============================================================
The historical 2000 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, 2002 and December 31, 2001, PolyOne had excluded all
outstanding options from the calculation of diluted loss per share because they
would have had an anti-dilutive effect (0.4 million shares in 2002 and 0.1
million shares in 2001).
NOTE V - FINANCIAL INSTRUMENTS
PolyOne 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, PolyOne 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, PolyOne enters into inter-company lending transactions. PolyOne
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. PolyOne does not hold or issue financial
instruments for trading purposes.
The following table summarizes by currency the contractual amounts of
PolyOne's foreign exchange contracts at December 31, 2002 (in millions). Foreign
currency amounts are translated at exchange rates as of December 31, 2002. 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 $59.4 $ 0.6
Euro -- 112.6
British pound sterling -- 12.3
Canadian dollar 48.1 --
Other 14.8 2.9
The following methods and assumptions were used by PolyOne 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 PolyOne's short-term
borrowings approximates fair value. The fair value of PolyOne's senior notes,
debentures and medium-term notes is based on quoted market prices. The carrying
amount of PolyOne'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, 2002. 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 PolyOne's financial instruments at
December 31 for the years 2002 and 2001 are as follows:
2002 2001
-------------------------------------------
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- ------------------------------------------------------------------------
Cash and cash equivalents $ 41.4 $ 41.4 $ 18.2 $ 18.2
Long-term debt
9.375% senior notes 90.0 88.0 91.5 91.3
6.875% debentures 78.7 67.5 75.2 72.4
7.500% debentures 50.0 33.8 50.0 43.1
8.875% senior notes 198.3 173.0 -- --
Medium-term notes 155.6 134.0 151.1 148.0
Bank borrowings 10.6 10.6 63.6 63.6
Foreign exchange contracts (5.4) (5.4) (0.9) (0.9)
Interest rate swaps -- -- (1.6) (1.6)
POLYONE CORPORATION 41
Other Data: QUARTERLY DATA (UNAUDITED)
2002 Quarters 2001 Quarters
(In millions) Fourth Third Second First Fourth Third Second First
-----------------------------------------------------------------------------------
Sales $580.3 $650.7 $670.9 $596.3 $573.2 $642.8 $676.3 $688.8
Employee separation and plant
phaseout -- 0.2 -- 0.9 26.3 -- 0.9 8.9
Operating income (loss) (13.4) 26.3 21.6 4.4 (35.9) 14.8 15.7 (24.1)
Income (loss) before
discontinued operations
and cumulative effect
of a change in accounting (17.6) 9.6 5.3 (3.9) (30.1) 2.6 2.1 (21.7)
Income from discontinued
operations, net of taxes 0.1 0.2 0.8 0.3 -- 0.3 0.4 0.3
Cumulative effect of change in
accounting, net of taxes -- -- -- (53.7) -- -- -- --
Net income (loss) (17.5) 9.8 6.1 (57.3) (30.1) 2.9 2.5 (21.4)
Earnings (loss) per share:
Basic earnings (loss)
per share:
Before discontinued operations
and change in method of
accounting $(0.19) $ 0.11 $ 0.06 $(0.04) $(0.33) $ 0.03 $ 0.03 $(0.24)
Discontinued operations -- -- 0.01 -- -- -- -- --
Change in method of accounting -- -- -- (0.60) -- -- -- --
Net income (loss) $(0.19) $ 0.11 $ 0.07 $(0.64) $(0.33) $ 0.03 $ 0.03 $(0.24)
Diluted earnings (loss)
per share:
Before discontinued operations
and change in method of
accounting $(0.19) $ 0.11 $ 0.06 $(0.04) $(0.33) $ 0.03 $ 0.03 $(0.24)
Discontinued operations -- -- 0.01 -- -- -- -- --
Change in method of accounting -- -- -- (0.60) -- -- -- --
Net income (loss) $(0.19) $ 0.11 $ 0.07 $(0.64) $(0.33) $ 0.03 $ 0.03 $(0.24)
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 $ 9.30 $12.30 $13.40 $12.74 $10.55 $10.70 $10.65 $ 9.49
Low 3.03 8.11 10.49 9.55 7.50 7.00 8.00 5.69
Below is a table of special items included in the 2002 and 2001 quarterly
operating results. The special items include gains and losses associated with
specific strategic initiatives such as restructuring or consolidation of
operations, gains and losses associated with the divestment of joint ventures
and certain one-time items.
2002 Quarters 2001 Quarters
(In millions) Fourth Third Second First Fourth Third Second First
----------------------------------------------------------------------------
Employee separation and plant phaseout costs $ -- $(0.2) $ -- $(0.9) $(26.3) $ -- $(0.9) $(8.9)
Period plant phaseout costs incurred (0.4) (0.5) (0.1) (0.1) -- -- (0.2) --
Plant phaseout accelerated depreciation (0.3) (0.5) (0.5) (0.5) -- -- -- --
Equity investment restructuring and
plant idling costs (1)(2) -- (4.1) (0.1) (0.7) (3.3) (5.1) -- (1.0)
Merger and integration costs -- -- -- -- -- (0.1) (0.5) (5.3)
Loss on divestiture of equity investment (3.6) -- -- (1.5) (9.5) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal - operating loss (4.3) (5.3) (0.7) (3.7) (39.1) (5.2) (1.6) (15.2)
Investment writedown (0.8) -- -- -- -- -- -- (0.6)
Litigation settlement gain -- -- -- -- -- -- 4.1 --
- ------------------------------------------------------------------------------------------------------------------------------
Total - pre-tax (expense) income (5.1) (5.3) (0.7) (3.7) (39.1) (5.2) 2.5 (15.8)
Income tax benefit (expense) 2.0 1.9 0.2 1.4 14.5 2.0 (1.0) 6.2
- ------------------------------------------------------------------------------------------------------------------------------
Total - after-tax (expense) income $(3.1) $(3.4) $(0.5) $(2.3) $(24.6) $(3.2) $ 1.5 $(9.6)
==============================================================================================================================
(1) 2002 - PolyOne's share of OxyVinyls' employee severance and liabilities
associated with the temporary idling of a plant in December 2001 and the
2002 asset writeoff and decommissioning costs related to the permanent
closing of specific production assets included in the idled plant.
(2) 2001 - PolyOne's share of OxyVinyls' employee severance costs and
liabilities associated with the temporary idling of a plant and Australian
Vinyls Corporation's employee severance and restructuring costs.
42 POLYONE CORPORATION
- - SELECTED FINANCIAL DATA
(In millions, except per share data) 2002 2001 2000 1999 1998
------------------------------------------------------------
Sales $2,498.2 $2,581.1 $1,861.3 $1,261.2 $1,284.4
Employee separation and plant phaseout 1.1 36.1 2.8 0.5 14.6
Operating income (loss) 38.9 (29.5) 63.9 99.7 41.0
Income (loss) before discontinued
operations and cumulative effect
of a change in accounting (6.6) (47.1) 15.2 106.2 13.8
Discontinued operations 1.4 1.0 0.7 -- --
Cumulative effect of change in method
of accounting (53.7) -- -- (1.5) --
Net income (loss) (58.9) (46.1) 15.9 104.7 13.8
- -------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Before discontinued operations and change
in method of accounting $ (0.07) $ (0.52) $ 0.25 $ 2.28 $ 0.30
Discontinued operations 0.01 0.01 0.01 -- --
Change in method of accounting (0.59) -- -- (0.03) --
Net income (loss) (0.65) (0.51) 0.26 2.25 0.30
- -------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Before discontinued operations and change
in method of accounting $ (0.07) $ (0.52) $ 0.25 $ 2.18 $ 0.29
Discontinued operations 0.01 0.01 0.01 -- --
Change in method of accounting (0.59) -- -- (0.03) --
Net income (loss) (0.65) (0.51) 0.26 2.15 0.29
- -------------------------------------------------------------------------------------------------------------
Dividends per common share $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25
Total assets $1,997.5 $2,051.5 $2,430.6 $1,162.6 $ 802.0
Long-term debt 492.2 426.8 430.5 130.9 135.4
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, PolyOne acquired businesses from Occidental Chemical
Corporation and formed a powder compounding joint venture, all of which are
included in PolyOne's Consolidated Results of Operations from May 1, 1999.
In December 2002, PolyOne acquired Transcolor and sold its 70% ownership
interest in Softer. With the sale of Softer, all its historical operating
results have been reported separately as a discontinued operation.
POLYONE CORPORATION 43
Reports: OF INDEPENDENT AUDITORS AND MANAGEMENT
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, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2002, appearing on
pages 13, 14, 18 and 22 through 41. 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 as of and for the year ended December 31, 2002 (a
limited partnership in which the Company has a 24% interest) have been audited
by other auditors whose report has been furnished to us, and our opinion insofar
as it relates to 2002 data included for Oxy Vinyls, LP is based solely on their
report. The financial statements of Oxy Vinyls, LP as of December 31, 2001 and
for the two years then ended were audited by other auditors who have ceased
operations and whose report dated January 28, 2002 expressed an unqualified
opinion on those financial statements. This report was previously furnished
to us and our opinion, insofar as it relates to 2001 and 2000 data included
for Oxy Vinyls, LP, is based solely on their report.
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, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note B to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," in 2002.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 28, 2003
MANAGEMENT'S REPORT
Management of PolyOne Corporation is responsible for the preparation of the
consolidated financial statements and other information included in the annual
report. The financial statements, and other information included in the annual
report, fairly present in all material respects the financial condition, results
of operations and cash flows of PolyOne Corporation for the year ended December
31, 2002. Where necessary, this information reflects management's estimates and
judgments based upon information that is currently available.
Management is also responsible for maintaining a system of internal
controls and procedures for financial reporting that is designed to provide
reasonable assurance that the Company's transactions are properly authorized,
that its assets are safeguarded against unauthorized or improper use, and that
the Company's transactions are properly recorded and reported to permit the
preparation of the financial statements in conformity with generally accepted
accounting principles. In addition, management is responsible for maintaining
disclosure controls and procedures that are designed to ensure that information
required to be disclosed by the Company is captured and reported in a timely
manner.
Management has evaluated the effectiveness of the design and operation of
our disclosure controls and procedures at December 31, 2002 and found them to be
adequate to accomplish the objectives described above. Further, management
believes PolyOne's financial reporting internal controls as of December 31, 2002
were effective and adequate to provide the assurance described above.
Thomas A. Waltermire
Chairman of the Board, President and Chief Executive Officer
W. David Wilson
Vice President and Chief Financial Officer
January 28, 2003
44 POLYONE CORPORATION
- - 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. Forward-looking
statements give our current expectations or forecasts of future events, and 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. You can identify these statements by
the fact that they do not relate strictly to historic or current facts. They use
words such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to future actions, prospective changes in raw
material costs or product pricing or product demand, future performance or
results of current and anticipated market conditions and market strategies,
sales efforts, expenses, the outcome of contingencies such as legal proceedings,
and financial results. Among the factors that could cause actual results to
differ materially are the following:
- - An inability to achieve or delays in achieving estimated and actual savings
related to consolidation and restructuring programs
- - Delays in achieving or inability to achieve our strategic value capture
initiatives, including cost reduction and employee productivity goals, or
achievement of less than the anticipated financial benefit from the
initiatives
- - The effect on foreign operations of currency fluctuations, tariffs,
nationalization, exchange controls, limitations on foreign investment in local
businesses and other political, economic and regulatory risks
- - Changes in U.S., regional or world polymer and/or rubber consumption growth
rates affecting our markets
- - Changes in global industry capacity or in the rate at which anticipated
changes in industry capacity come online in the polyvinyl chloride (PVC),
chlor-alkali, vinyl chloride monomer (VCM) or other industries in which we
participate
- - Fluctuations in raw material prices, quality and supply and in energy prices
and supply; in particular, fluctuations outside the normal range of industry
cycles
- - Production outages or material costs associated with scheduled or unscheduled
maintenance programs
- - Costs or difficulties and delays related to the operation of joint venture
entities
- - Lack of day-to-day operating control, including procurement of raw materials,
of equity or joint venture affiliates
- - Partial control over investment decisions and dividend distribution policy of
the OxyVinyls partnership and our other minority equity holdings
- - An inability to launch new products and/or services that strategically fit our
businesses
- - The possibility of goodwill impairment
- - An inability to maintain any required licenses or permits
- - An inability to comply with any environmental laws and regulations
- - A delay or inability to achieve targeted debt levels through divestitures or
other means.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected. Investors should bear
this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange
Commission. You should understand that it is not possible to predict or identify
all such factors. Consequently, you should not consider any such list to be a
complete set of all potential risks or uncertainties.
POLYONE CORPORATION 45
Corporate Information:
Executive Officers
THOMAS A. WALTERMIRE
Chairman of the Board, President
and Chief Executive Officer
V. LANCE MITCHELL
Group Vice President, Global Plastics
JOHN E. QUINN
Vice President and General Manager,
Elastomers and Performance Additives
WENDY C. SHIBA
Chief Legal Officer and Secretary
KENNETH M. SMITH
Chief Information and
Human Resources Officer
W. DAVID WILSON
Chief Financial Officer
Other Officers
ROGER W. AVAKIAN
Chief Technology Officer
BERNARD BAERT
Vice President and General Manager,
International Compounds and Colors
DENIS L. BELZILE
Vice President and General Manager,
Specialty Resins and Formulators
THOMAS G. BOLGER
Vice President and General Manager,
Color and Additives
DENNIS A. COCCO
Vice President,
Investor Relations and Communications
JAMES C. GRAY
Vice President and General Manager,
North American Engineered Materials
DANIEL L. KICKEL
Vice President, Sourcing
DAVID D. QUESTER
Vice President and General Manager,
Engineered Films
MICHAEL L. RADEMACHER
Vice President and General Manager,
Distribution
JOHN L. RASTETTER
Treasurer
ROBERT M. ROSENAU
Vice President and General Manager,
North American Vinyl Compounds
GREGORY P. SMITH
Controller
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.
46 POLYONE CORPORATION
Board of Directors
THOMAS A. WALTERMIRE, 53
Chairman of the Board, President and Chief Executive Officer
J. DOUGLAS CAMPBELL, 61
Retired President and Chief Executive Officer, Arcadian Corporation - a
chemicals and fertilizer manufacturer
Committees: 1, 4*
DR. CAROL A. CARTWRIGHT, 61
President, Kent State University - a public higher education institution
Committees: 1, 4
GALE DUFF-BLOOM, 63
Retired President, Company Communications and Corporate Image, J. C. Penney
Company, Inc. - a major retailer
Committees: 2*
WAYNE R. EMBRY, 65
Retired President and Chief Operating Officer, Team Division, Cleveland
Cavaliers - a professional basketball team
Committees: 2, 3
ROBERT A. GARDA, 64
Executive-in-Residence, The Fuqua School of Business, Duke University - a
private higher education institution
Committees: 2, 4
GORDON D. HARNETT, 60
Chairman, President and Chief Executive Officer, Brush Engineered Materials Inc.
- - a supplier and producer of engineered materials
Committees: 1*, 3
DAVID H. HOAG, 63
Retired Chairman, LTV Corporation - a steel manufacturer
Committees: 2, 4
D. LARRY MOORE, 66
Retired President and Chief Operating Officer, Honeywell, Inc. - a manufacturer
of control systems for home, industry and aviation
Committees: 1, 3*
FARAH M. WALTERS, 58
Retired 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 and Governance
3 Environmental, Health and Safety
4 Financial Policy
* Denotes Chairperson
Corporation 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 15,
2003 at 9:00 a.m. at The Forum Conference and Education Center, One Cleveland
Center, 1375 East 9th Street, Cleveland, Ohio.
The meeting notice and proxy materials were mailed to stockholders with this
report. PolyOne Corporation urges all stockholders to vote their proxies so that
they can participate in the decisions at the annual meeting.
Financial Information
Security analysts and representatives of financial institutions are invited to
contact:
W. David Wilson
Chief Financial Officer
Phone: (216) 589-4038
Fax: (216) 589-4280
E-mail: wdavid.wilson@polyone.com
Financial Information and Media Contact
Dennis A. Cocco
Vice President, Investor Relations and Communications
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
POLYONE CORPORATION 47
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